Liechtenstein Disclosure Facility

Much has been written about the Liechtenstein Disclosure Facility (LDF) but some of it has been surprisingly wide of the mark. As the United Kingdom (UK) tax expert on the Liechtenstein Government team which negotiated its terms with Her Majesty’s Revenue and Customs (HMRC), I would like to explain how it actually works – and in doing so puncture some myths. I will start by recapping the main features of the Memorandum of Understanding (MOU) of 9 August 2009 which contains the LDF.

The MOU: What Liechtenstein Has to Do

The Government of Liechtenstein will enact legislation (expected early in 2010) requiring their banks and trust companies to write to their UK account holders and investors, giving them a choice to either:

• Show that they are UK tax compliant; or
• Take up the LDF.

If they do neither, the Liechtenstein bank/intermediary will have to cease acting for them. In the case of bank accounts, these will have to be closed and the funds transferred to another jurisdiction. I shall refer to this letter in this article as the ‘ultimatum’.

What is still not widely appreciated is that the ultimatum does not only apply to Liechtenstein bank accounts but also to Liechtenstein legal entities such as:

• stiftungs (foundations);
• anstalts (establishments);
• trusts (including the Liechtenstein trust reg).

The number of UK individuals who have bank accounts with Liechtenstein banks is probably nowhere near the “5,000” that is always quoted in the press. But a very large number will have bank accounts in Switzerland, say, which are held through Liechtenstein foundations – usually for succession reasons. They too will be receiving the ultimatum. If they do not satisfy the Liechtenstein intermediary that they are UK tax compliant or are taking up the LDF, they will have to cease to act. For example, if they are a member of the board of the foundation, they will have to resign – and the foundation may have to be closed down or migrated from Liechtenstein in consequence.

The LDF

HMRC on its side is providing a disclosure facility (the LDF) to those with bank accounts/legal entities in Liechtenstein which is more favourable than they could otherwise expect. A taxpayer coming forward in the ordinary way to put his affairs in order would be liable for back-tax going back up to twenty years, as well as interest and a penalty. The penalty would be a substantial percentage of that back-tax. Someone coming forward under the UK’s current general tax ‘amnesty’ (the New Disclosure Opportunity (NDO), which has just been extended to 4 January 2010), has their penalty capped at 10 per cent but HMRC can still go back as far as 20 years.

The LDF also has a 10 per cent penalty cap but HMRC can only go back ten years to April 1999. Moreover, there is a cast-iron guarantee that there will be no criminal proceedings. The LDF is also attractive because it contains what is called a ‘composite rate option’. This has not received much attention in the press to date. It is an option to pay tax at 40 per cent in respect of all liabilities in a given year. At first sight this may not seem particularly attractive but suppose that someone has been diverting profits from a UK trading company to his bank account in Switzerland. Not only would there be tax on the income in the account itself but also tax on both the company and the individual in respect of the diverted profits. Together these taxes could total appreciably more than 40 per cent of the additions to the account in that year. The composite rate option is something that I discussed at some length with HMRC on the basis of worked examples. In many cases it would not be interesting but in some it will produce a big tax saving.

The perceived generosity of the LDF has provoked controversy in the UK. HMRC has been accused of rewarding those fortunate enough to have their undeclared accounts in Liechtenstein!

The Notification Process

Once the legislation has been enacted, the Liechtenstein intermediary will need first to identify UK individuals who have bank accounts or legal entities. Within three months of making the identification, they have to send out the ultimatum letter. (There is no time limit in the MOU for making the identification, although one may be incorporated in the Liechtenstein legislation.) Board members of Liechtenstein foundations will often not have dealt directly with the individuals or family behind the foundation – it may well be a Swiss bank or Swiss trust company that has had the relationship with the client. In drafting the MOU, we took this into account and tried to make it as simple as practicably possible for the Liechtenstein intermediary to identify:

1. who the individuals and families were; and
2. whether they lived in the UK.

Schedule 2 (definition of “beneficial interest”) was deliberately kept short (barely more than a page), as was the definition of “relevant person” in Schedule 1. It was accepted that some fish might slip through the net as a result of having these fairly simple tests but the priority was to have something workable and not too bureaucratic.

Those receiving the ultimatum have 18 months in which to reply. This is a generous time limit to allow families in particular to agree between themselves on a course of action. If they are tax compliant, the simplest way of showing this is to provide a letter from their (professionally qualified) UK tax advisers to the effect that the Liechtenstein account/entity has been properly dealt with in their tax returns.

If they are non-domiciled and claiming the remittance basis of taxation, the Liechtenstein bank account may not have been reported at all on their tax returns. This will have been entirely correct providing they made no remittances to the UK from that account.

If they are not tax compliant and they have taken up the LDF, they will have received a registration certificate from HMRC which they should provide to the Liechtenstein intermediary.

Coming Forward Under the LDF

Those with Liechtenstein bank accounts or legal entities do not have to wait until they receive the ultimatum next year – they can take up the LDF now.

There is a good reason for acting straightaway as to do so will minimise penalties. For example, someone who has not yet submitted their tax return for 2008/9 should now include the income from the undeclared account from that year and, by submitting the return by 31 January 2010, avoid the interest and the 10 per cent penalty. At the same time they would register for the LDF for the period prior to 6 April 2008 only – a maximum of nine years.

It goes without saying that anyone taking up the LDF has, of course, to disclose all their undeclared accounts, not just the ones in Liechtenstein or those held through Liechtenstein entities!

I am often asked what would happen if Liechtenstein does not enact the necessary legislation. Does this mean that the LDF becomes void and of no effect? My answer is no. The MOU only sets out what will be HMRC’s practice; it is not a treaty between two countries which relies on both sides enacting the necessary legislation. HMRC may well suspend the LDF if the Liechtenstein parliament votes against the legislation, but those who have already come forward under the LDF are entitled to rely on its terms.

Anyone already under investigation by HMRC cannot take up the LDF. The term “under investigation” is limited to cases where there has been a suspicion of serious tax fraud and the person has been formally notified by HMRC that an investigation has commenced or where they have been arrested for a criminal tax offence.

Any person previously under investigation by HMRC and who did not disclose the Liechtenstein account or Liechtenstein entity at the time, can take up the facility but will not have their penalty capped at 10 per cent. They can, however, benefit from the 10 year time limit.

Finally, anyone contacted by HMRC under the first Offshore Disclosure Facility (in 2007) or the NDO, and who did not make disclosure, can take up the LDF, but their penalty cap will be raised from 10 per cent to 20 per cent.

How Can Someone with No Present Links to Liechtenstein Become Eligible for the LDF?

They can do so by establishing the necessary links now. To do this they can either:

1)    Open a Liechtenstein bank account and transfer some funds there; or

2)   Set up a Liechtenstein foundation or other Liechtenstein legal entity to hold funds abroad.

This is all they have to do. It is a widespread myth that they must transfer all funds in undeclared offshore accounts to Liechtenstein if they are all to benefit from the LDF. Providing they establish the necessary links, as set out above, all undeclared funds – wherever they may be – will qualify for the LDF terms.

This is subject to one important exception. An offshore account will not qualify if it was:

1. held in his own name and
2. opened through a UK branch of the bank in question.

This is best illustrated by some examples.

Example 1

X, who until now had no links with Liechtenstein, opened an account in his own name with a Swiss bank in Geneva through its London branch 18 years ago. The income and gains on the account were never declared for tax. Although X may be eligible for the LDF benefits in relation to other undisclosed accounts he may have, he will not be eligible for those benefits in relation to this account. Tax is payable for the full 18 years and there will be no 10 per cent penalty cap.

Example 2

The facts are as in Example 1, but the account was opened in the name of X’s BVI company. The account will qualify for the LDF benefits.

Example 3                  

The facts are as in Example 1, but the account was opened by X going directly to the bank in Geneva. The account will qualify for the LDF benefits.

The reason for excluding the bank accounts in Example 1, is that HMRC could have found out about them through information disclosure notices that they have been serving in recent months on over three hundred banks with UK branches.

Another widespread myth is that being able to climb on the LDF bandwagon in the way I have described is a ‘loophole’ of which HMRC was unaware. This is not so. Throughout negotiations, the UK and HMRC were happy that new business should flow to Liechtenstein banks and intermediaries in order to take advantage of the favourable LDF terms. This was to compensate Liechtenstein for the loss of undeclared funds which might leave the Principality. Dave Hartnett of HMRC was quoted recently (in the 19 November issue of Taxation) as saying:

   “We certainly went into it with our eyes open on that issue. What it was really about was trying to play fair by Liechtenstein. They were going a million miles beyond the OECD standard, they were losing customers, they wanted this as part of a design so that they might get some new customers. Interestingly, they are being phenomenally selective about who they are taking on – you can’t just hop in from the Caymans and get them to take you on; we were already seeing that they are refusing to take some people.”

Conclusion: the Outcome for Liechtenstein

As Dave Hartnett has stated, the Principality of Liechtenstein has positioned itself well ahead of offshore financial centres which have just been executing Tax Information Exchange Agreements (TIEAs). And it has done so without betraying banking and professional secrecy (unlike a neighbouring jurisdiction). It is not providing any information on UK taxpayers’ accounts to HMRC and nor are its banks and professional intermediaries doing so. On the day it signed the MOU it also signed a TIEA with the UK, but the TIEA protects those with undeclared money in Liechtenstein – at any rate until 2015, by which time they should have left the Principality.