Opportunity knocks

Several tax planning opportunities have opened up since the UK and Liechtenstein aligned their interests last year. By signing their first comprehensive double-taxation convention in June 2012, the two countries reflected an ever-increasing cooperation.

The convention follows the Organisation for Economic Cooperation and Development model, but with a number of notable innovations, including a zero withholding rate for dividends (15 per cent for real estate investment trusts) and zero withholding rates on interest and royalties. The signing of the treaty also provided an occasion for the Liechtenstein government to detail further developments relating to the Liechtenstein Disclosure Facility (LDF).

Many UK tax advisers say the LDF is usually the most efficient way for UK taxpayers to put their tax affairs in order without incurring criminal punishment. Contrary to arrangements between the UK and Switzerland, the LDF allows the declaration of worldwide assets of any sort, be they real estate, art works or bank accounts in any jurisdiction including Singapore. As of summer 2013, Singapore will have tax crimes included as money laundering predicate offences, meaning that undeclared funds located there may become subject to suspicious activity reports.

The LDF can also be used in conjunction with the confidential withholding tax imposed by Switzerland in relation to Swiss financial assets. ?It remains in force until 5 April 2016 ?and requires a Liechtenstein footprint.

Declaration cornerstones

The third joint declaration by the UK and Liechtenstein governments has ?four main features:

• There’s an average tax rate of 40 per cent and a reduced fine of 10 per cent, which means most LDF users today will pay about 20 per cent ?of their capital to regularise their tax situation and have declared assets freely at their disposal.

• The fast-track process should usually take about six months.

• If the applicant wishes to declare assets that were deposited in a foreign account, at least 20 per cent of the amount to be declared must be moved to a Liechtenstein bank account for 24 months. Once SFr3 million is deposited, the percentage threshold ?no longer applies.

• If the applicant is a Liechtenstein vehicle, such as a foundation, establishment or foreign trust managed in Liechtenstein, at least 10 per cent of the amount to be declared must be deposited in a Liechtenstein bank account for 24 months (15 per cent in the case of corporate entities). Once SFr1 million is deposited, the percentage threshold no longer applies. If the applicant is a Liechtenstein insurance company, a minimum premium of SFr150,000 applies.

For UK tax residents, including resident non-doms (RND) who wish to regularise their mixed capital and income funds, the current Swiss agreement is relevant because of the first deduction, which applies in May 2013. It is best to check all available options before this deadline to ensure proper payment of tax due. And it is important to recognise that the LDF can be used instead of or in tandem with the UK-Swiss withholding agreement.

UK resident non-doms

Because of the agreements between the UK and Liechtenstein, UK RND clients who need to book their assets outside the UK will find Liechtenstein a competent option. As their tax situation is clear, proof of paying the ‘remittance basis charge’ to HMRC is usually enough to confirm their remittance status. Alternatively, a competent UK tax adviser can confirm a client’s tax status in writing.

After being resident non-domiciled in the UK for the last seven out of nine years, the applicable remittance basis charge would be £30,000. After 12 years, this rises to £50,000. The RND can choose each year whether to be taxed on a worldwide income basis or on a remittance basis. Whichever option is chosen, after 17 out of 20 years’ residency, the RND falls into the UK inheritance tax net, which means that the RND’s estate has to pay UK inheritance tax on worldwide assets.

There is minimal administration for UK RNDs booking assets in Liechtenstein. If they choose a booking platform that is familiar with UK investment and reporting rules, the banking experience in Liechtenstein is efficient. Top banks offer tax-efficient investing under UK rules, that is they understand the difference between income tax and capital gains tax beyond the segregation of accounts for RNDs (so they will consider the after-tax investment performance before making investments). And they understand the rules for UK situs with regard to RNDs and the rules about reporting funds, for example resident-doms.

Such institutions aim to achieve an optimal investment performance after tax. An additional benefit is that under the UK-Liechtenstein agreements, foundations can be accepted as equivalent to trusts if properly established. Professional Liechtenstein providers will always work with a UK tax expert to ensure proper tax-compliant planning.

Charities and philanthropy

UK residents, whether domiciled or not, and even if non-resident, can use the Liechtenstein core strategy as a hub for charities. The Liechtenstein government has, for example, launched the MIL (microfinance initiative Liechtenstein) and LIFE, an initiative for trading innovative financial market instruments to support climate protection and fight poverty.

All undertakings in this area need careful planning, from both jurisdictions, to ensure that the purpose of the donation is fully achieved. Again, professional providers will work with UK experts on cross-border planning.

Modern wealth planning

Depending on the purpose of the desired structure, the three circles of modern wealth planning (trusts, foundations and insurance) can be used for tax-compliant UK planning. Liechtenstein-based insurers offer offshore investment bonds, which provide the known benefits of an insurance policy: a tax-free 5 per cent annual withdrawal for 20 years, with the residual amount taxed at the applicable income tax rate at pay-out.

Liechtenstein is a member of the European Economic Area, so EU regulations apply. EU consumer protection laws and regulations, including the Markets in Financial Instruments Directive (Mifid), apply. Cross-border rules are clearly established, so UK clients using Liechtenstein services can rest assured that the same legal environment applies as in the EU.

Interestingly, some tax experts have turned their attention to EU article 49, freedom of establishment, and considered it in light of the recent controlled foreign corporation rulings on Cadbury Schweppes and Vodafone. It appears that with proper UK advice, if a Liechtenstein company is established with local management, control and substance, it has to be treated like a UK company established in the UK vis-à-vis the owner of such a company. With different tax rates in the countries, this may offer tax-compliant planning options.

There are many other opportunities, for example international pension fund and captive insurance, or using Liechtenstein as a centre for EU-passported mutual funds, and all options should be considered carefully. When the winds of change are blowing, the anchor for the prudent client continues to be competent and coordinated cross-border advice.

Dr Ariel Sergio Goekmen is a partner, head bank, at Kaiser Partner Privatbank

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LDF: an amnesty for tax liabilities, says Fiona Fernie

“The Liechtenstein Disclosure Facility (LDF) is an attractive option for UK taxpayers with undeclared offshore tax liabilities to ensure their past and future UK tax affairs are on the right footing. It offers special terms including guaranteed immunity from prosecution if a full disclosure is made and a10 per cent fixed penalty on underpaid liabilities to 5 April 2009 (20 per cent thereafter). No penalty is levied where an innocent error has occurred.

“Helpfully, the LDF covers all UK taxes including inheritance tax, providing an ‘amnesty’ for tax liabilities prior to 6 April 1999. Outside the facility, in cases of deliberate default, HMRC can collect outstanding taxes for up to 20 years; in certain circumstances for inheritance tax – indefinitely.

“It is also possible to transfer particular assets into Liechtenstein specifically to take advantage of the LDF. In most cases, the sum payable under the facility is no more than the one-off deduction to be levied by the Swiss banks on Swiss accounts held by UK residents. Significantly, the facility is usually the cheaper option.

“As HMRC continues to crack down on tax evasion and more tax exchange agreements are brokered, the LDF cannot be ignored.”

Fiona Fernie is tax investigations partner at BDO Accountants

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