Making a tax-compliant point

In today’s high-octane financial world, the Principality of Liechtenstein knows it has to be agile and move fast. It is steadily adapting its regulatory framework to ensure it stays at the top in terms of tax compliance and international competitiveness. As a result, it remains a stable and trustworthy partner for forward-thinking clients and their advisers.

Liechtenstein’s government took a widely acclaimed step last November by signing the Organisation for Economic Co-operation and Development (OECD)/Council of Europe multilateral Convention on Mutual Administrative Assistance in Tax Matters at the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes in Jakarta. This reaffirmed the clear course set by the Liechtenstein Declaration of 2009 and pursued since then.

Liechtenstein has also continued to negotiate and sign tax information exchange agreements (TIEAs) and double taxation agreements (DTAs) with more than 30 states, the most recent being a TIEA with Mexico and a DTA with Singapore in 2013. Malta and Belgium should be ratified and implemented this year; Canada’s TIEA entered into force on 26 January. And, according to Liechtenstein’s prime minister, Adrian Hasler, the government’s strong intention is to negotiate DTAs with important trading partners like the USA, France, Italy and Brazil.

Trade and investment

Liechtenstein’s AAA rating was confirmed by Standard & Poor’s in 2013, and the country continues to benefit from having no foreign debt at all. It is a member state of the European Economic Area, but not of the European Union, though in 2013 it announced that it had adopted 99.7 per cent of EU directives into its national law, one of the highest rates for any country.

It provides dual access by being a member of the Schengen area, the European Economic Area and the European Free Trade Association on the one hand, while also being in a customs and monetary union with Switzerland. The Swiss Franc has been Liechtenstein’s sole currency since 1924, which means that the country’s economy has been immune from all the turmoil surrounding the euro and the eurozone.

Although it is widely believed that Switzerland and Liechtenstein share many similarities, recent developments have shown that they are two distinct countries, each following its own independent political course. Liechtenstein is a constitutional hereditary monarchy, of course, while Switzerland is a federal republic.

Looking at the banking system, it is perhaps noteworthy that none of Liechtenstein’s 17 banks had to accept state aid during the recent financial crises, no Liechtenstein bank has gone bankrupt since the second world war, and none of them has had to increase its capital.

New tax law

A tax law was recently introduced to accord with OECD and EU standards, stating that a legal entity can be subject either to the regular 12.5 per cent income tax or the minimum tax of SFr1,200 per annum if it qualifies as a private wealth structure (see below). Coupon tax and capital tax have
been abolished.

The new law provides for an attractive group tax regime, the possibility of tax-free restructuring, favourable terms for intellectual property tax and tax exemptions for charities. There are other exemptions, including on dividends and capital gains, as well as an equity interest deduction. All of this creates a beneficial, internationally tax-compliant environment for international holding companies, including foundations and Anstalts.

All legal entities that do not carry out economic activities qualify as private wealth structures. Trusts are considered non-commercial activities and are therefore only subject to the minimum tax rate of SFr1,200 per annum. These can be Guernsey or New Zealand trusts administered from Liechtenstein, or indeed Liechtenstein trusts. There are no uncertainties about management and control, because if entities are administered from Liechtenstein, the Liechtenstein tax applies.

Compliant foundation offering

Compliant international tax planning is a complex business and in the current regulatory environment it is becoming even more demanding. Liechtenstein has honed its foundation offering and the whole issue of charities, micro-finance and philanthropy can now be addressed in a tax-compliant way from Liechtenstein for many neighbouring and global jurisdictions.

Liechtenstein incorporated trust law into its legislation in 1924 and may well be the only civil law country that has had a viable trust law for so long. It has taken great care to revise its foundation law in such a way that it can be used nowadays for tax-compliant planning, even for countries like the UK and Germany.

Thanks to the UK-Liechtenstein tax treaty and the memorandum of understanding and its additions, foundations can even be used as trust equivalents if executed correctly. This is remarkable because it means a civil law vehicle can now be used under a common law regime for tax-compliant planning purposes.

Under the new foundation law, a Liechtenstein foundation can take two forms: the private-benefit foundation familiar from the old law or a charitable foundation, which has been significantly upgraded under the new legislation.

There are two versions of the private benefit foundation: the family foundation and the ‘other private-benefit foundation’, which is already under government supervision under certain circumstances. The family foundation can be a pure version or mixed. For the foundations that are government-supervised if predominantly charitable, there are three variants: the ‘other private-benefit foundation’ as a form of private-benefit foundation, and the two charitable forms, which are the ‘foundation for partly common-benefit purposes’ and the ‘foundation for purely common-benefit purposes’, both of which require governmental supervision.

Funds and insurances

The Liechtenstein Undertakings for Collective Investment in Transferable Securities (UCITS) Act, which entered into force in August 2011, fundamentally strengthens access to the EU market for harmonised, standardised investment funds. Thanks to the country’s EEA membership, Liechtenstein funds have free access to the EU.

Liechtenstein is fully prepared to implement the UCITS IV fund directive, which brings several advantages: short time to market, tax transparency, simple domicile transfers and a flexible regime for fund mergers. It is also possible to create mutual funds around private equity entities, such as those holding real estate or car collections. As a fund marketplace, Liechtenstein is able to offer appropriate solutions.

The country has embraced the new world of tax-compliant insurance solutions and aims to implement a
liberal insurance regime and achieve tax-compliant life insurance. Liechtenstein carriers want to create products that are tax compliant and add value for clients.

Liechtenstein Disclosure Facility

Negotiated with HMRC, the Liechtenstein Disclosure Facility (LDF) is the only solution that permits regularisation of worldwide assets through using a Liechtenstein footprint account, which runs until April 2016. Under normal circumstances, this solution ensures that the person concerned is not criminalised.

It covers relatively simple cases involving, for example, VAT, which might not have been paid correctly, resident non-domiciled persons who have mixed up capital and income, owners of French or Spanish real estate who have previously failed to report their property to HMRC, and individuals who own assets in Singapore or other parts of the world and have not yet come forward to regularise their holdings.

The LDF’s advantage is that it resolves a problem permanently – for current and future generations.

Liechtenstein has created a compliant environment where the best advisers can work from a solid economic and political foundation to build viable solutions for demanding international clients and their families. Now is the time to construct a sustainable solution.

Dr Ariel Sergio Goekmen is a partner at Kaiser Partner Privatbank in Liechtenstein