Dr Markus Wanger examines the economic and legal developments in Liechtenstein throughout 2010.
Liechtenstein’s economy has begun to recover from the crisis of 2008/2009. Slowly the order-books are filling up again and qualified personnel are once more needed.
A budget deficit of CHF 36 Mio has passed through parliament with the expressed objective of creating a stable household by 2015. Savings are scheduled in practically every part of the Liechtenstein government and state household. Although Liechtenstein industry is still healthy, savings are a theme there too.
However the industry is growing, but the latest changes in the financial sector have had a huge impact for the trustees. Liechtenstein is no longer an offshore center: all offshore companies and domiciliary companies are now onshore. This is due to the new tax law, which came into force on January 1, 2011.
This is reflected in the continuous task to transform the financial sector into an attractive on-shore financial center. This process began in 2009 and will be going on for at least another five to six years.
What is new on the legal side in Liechtenstein? On 1 January 2010 a new Liechtenstein VAT law came in to force. Due to the Customs Treaty 1923, Liechtenstein and Switzerland share the same VAT system, and so this legislation applies to Switzerland too.
The basic change is that every commercial unit or entity is subject to the VAT law, except for those companies the turnover of which is under CHF 100,000 – such companies need not apply for a VAT number or charge VAT to customers.
THE VAT legislation is quite complicate and there are a lot of exemptions, however, the administrative burden for a medium sized entrepreneur and has not been lessened by this reform.
As of 1 January 2011 the VAT rates increased as follows: The ordinary rate increased from 7.6 per cent to eight per cent, the rate for basic products increased from 2.4 per cent to 2.5 per cent and the rate for those in the tourist industry increased from 3.6 per cent to 3.8 per cent. The period when the activity is performed is relevant. If it is performed in 2010, the rate will be 7.6 per cent, if it is performed in 2011, the rate will be eight per cent.
The most important development in the Liechtenstein legal system is the incorporation of the TIEAs, concluded in 2009, into the Liechtenstein law. Additionally on 30 June 2010 the legislation on international administrative assistance in tax matters and the law governing the administrative assistance in tax matters with the UK and Northern Ireland went into force.
These developments had their roots a year earlier in 2009. It was then that the era of Liechtenstein tax secrecy ended when on 12 March in the build-up to the G20 summit in London, Liechtenstein made a declaration to be cooperative in the matter of exchanging tax data and preventing people from tax crimes and offences, the so called ‘Liechtenstein declaration’. Liechtenstein committed itself to implementing global standards of transparency and exchange of information as developed by the Organisation for Economic Co-operation and Development (OECD).
Liechtenstein has since concluded 12 tax information exchange agreements (TIEA) with the USA, UK, Germany, San Marino, Monaco, France, St. Vincent and the Grenadines, Ireland, the Netherlands, Antigua and Barbuda, Belgium, St. Kitts and Nevis, and four double tax treaties (DTA) with an information exchange clause with Luxemburg , Andorra, Uruguay and Hong Kong.
Information will be exchanged from as early as 1 January 2010. The most favourable agreement has been reached with the United Kingdom, which requires compliance by 31 March 2015. Requests concerning tax fraud have been made from 1 January 2010.
Together with the treaty, a Memorandum of Understanding (MoU) has been signed with the English tax authorities and a joint declaration of both governments completes the package. The MoU offers an interesting possibility of tax disclosure for persons with a connection to Liechtenstein (which started in September 2009 for persons that had a Liechtenstein connection then). Even those without an existing connection to Liechtenstein could make use of this disclosure procedure from December 2009, simply by transferring part of their structures to Liechtenstein.
There will be a tax on the last 10 years (respectively on all years after and including 1999) together with interests and (in most cases) a 10 per cent fine of the tax payable. There is also the possibility of paying a composite tax rate of 40 per cent for all possible taxes together for a UK tax year, if several taxes (like income tax and inheritance tax etc.) are involved. This disclosure facility might be very interesting for several clients. In our opinion it is a good opportunity because it means there is a chance that some assets will remain in Europe and not be moved to far-away jurisdictions.
On October 11, 2010 the second Joint Declaration concerning the MOU relating to taxes between Liechtenstein and HMRC was signed, which clarified a lot of details. Also it has been specified that until September 11, 2011 all clients with an English tax background must be identified by the Liechtenstein financial intermediaries. The goal of these agreements is to have no undeclared funds deriving from taxable sources in GB remaining in Liechtenstein by 2015. These agreements offer a lot of opportunities to both countries and may be a chance for some interesting developments and new relationships.
The most important legal development of 2010 came into force on 1 January 2011, when Liechtenstein’s new tax regime was implemented.
The most important changes are as follows: There is a flat tax of 12.5 per cent of the profits for all legal entities. No difference shall be made as to the point of which activity these entities have and were these activities take place. There shall be a minimum tax for all legal entities of CHF 1,200 a year. Very small commercial entities will be exempt from this minimum tax. The capital tax is abolished completely.
Losses may be carried forward against future profits for an unlimited period of time. Of course this provision only applies to losses still existed on 1 January 1 2011, which means that in 2011 the period of losses to be carried forward still will not exceed five years. It will be one year more each of the following years.
There will be a deduction of four per cent (which may be changed yearly) of the modified capital (special definition in the law). This deduction will be available for legal entities and for persons or partnerships equally, due to the principle of the “neutrality of decision”. The modified capital consists of the capital paid in and the reserves which represent own assets. Participations, foreign real estate or permanent establishments as well as assets, which are not necessary for conducting the scope of the entity, shall be deducted. The valuation will take place as at the start of each business year.
There will be a deduction for license fees of 80 per cent of the income deriving from immaterial rights, which seems to be an interesting opportunity for some companies. Restructuring legal entities should be possible without adverse tax implications due to the new law.
Group taxation will be the possible if there is a group of entities with a Liechtenstein major participant. Losses of foreign participations may be deducted in Liechtenstein if they are not deducted elsewhere.
All special tax regimes will cease to exist within the next five years. Entities qualifying as Private Asset Structures (PAS) will be taxed with a tax of 1200 Swiss Francs.
Such Private Asset Structures (PAS) are allowed to hold only hold bankable assets and the “Owners” must not have a direct or indirect influence on the administration of any companies held by the PAS. However this type of “tax subject” has to be accepted by the ESA, the European Surveillance authority. This is expected in due course.
The Coupon tax, a tax of four per cent on the reserves of a company will be abolished completely. There will be a special tax regime for old reserves. If they are taxed deliberately within the two years 2011 and 2012, the coupon tax will only be two per cent. It shall be four per cent from then on.
What’s new for natural persons? The inheritance tax and other corresponding taxes will be abolished completely. There will be a new tax system for natural persons, too, but the changes will be very moderate. There will also be modifications regarding the taxation of profits connected to the sale of real estate.
In the context of trying to get a modern double tax treaty system and taking into consideration that Liechtenstein is a member of the EEA (and thus has to follow the respective rules) the new Liechtenstein tax law is modern and offers one of the lowest tax regimes (12,5% Flat Tax Rate) worldwide.
There were some modifications in the criminal law regarding money laundering - the falsification of documents is regarded as a preliminary act to money laundering.
More local changes include several changes in the Liechtenstein trade law, regarding the education of trainees and so called ‘declarations of common binding character of agreements’ between the associations of Liechtenstein employees and employers regarding model working contracts. As not every employer has to be member of such an association these declarations were necessary to hinder the dumping of wages of the employees.
Dr Markus H Wanger Wanger Law & Trust, Liechtenstein