LIECHTENSTEIN: OFFSHORE BUSINESS SECTORS

Banking, especially private banking, is Liechtenstein's flagship financial service, although its trust regime, modelled on common law precedents, is unique among civil law jurisdictions, and is widely used. The variety and great flexibility of the corporate forms available in Liechtenstein, coupled with excellent tax-saving possibilities, has encouraged an inflow of holding and investment management companies. See Offshore Legal and Tax Regimes for details.

Early figures suggested that the EU's Savings Tax Directive, which forced Liechtenstein to impose a withholding tax on returns from savings paid to citizens of EU Member States, has had little impact on the country's highly successful private banking sector.

The administration has recently been developing legislation for captive insurance and collective investment sectors.

By the end of the third quarter 2007 (the most recent figures available at the time of writing), a total of 35 insurance undertakings were domiciled in Liechtenstein. The direct insurance companies operate almost exclusively pursuant to the free movement of services in the EEA area and Switzerland.

A Law on Asset Management (Asset Management Act, AMA) entered into force on 1 January 2006. This Act lays the foundation for asset management companies as new, internationally recognized financial intermediaries. The Financial Markets Authority supervises implementation of the Asset Management Act and related ordinances as well as compliance with regulations.

At the end of the third quarter 2007 there were 63 fund management companies and 379 investment funds operating in Liechtenstein. At the end of 2006 assets under management in Liechtenstein stood at CHF 219.4 billion, 20% higher than a year earlier.

This section of the site describes the most important types of offshore business activity carried out from the island.

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Liechtenstein International Holding Companies

In Liechtenstein, a holding company is recognised as such, but does not have a special legal form: it can take any of the forms permitted under the Law on persons and Companies 1926 (PGR Code), including a company limited by shares, a private limited company, a foundation, a trust enterprise (not a trust) or an establishment (see Types of Company).

The objects of holding companies are described in the tax legislation as 'exclusively or predominantly the management of assets, participation in other enterprises, or the permanent management of holdings in other enterprises'. Holding companies are permitted to own and manage movable and immovable property whether inside or outside Liechtenstein, including real estate and the various types of intellectual property.

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Liechtenstein Trade Marketing and Distribution

Situated in the centre of the EU, but not being part of it, and with a well-developed banking sector, not to mention the presence of Switzerland alongside, Liechtenstein's offshore taxation regime is very inviting to companies with cross-border European trading, marketing and distribution operations.

The 'domiciliary' entity is suited to external trading operations. It is not a separate corporate form as such, but is a status that can be adopted by any of the corporate forms permitted by the PGR Code, including the company limited by shares, the private limited company, the foundation, the trust enterprise (not the trust) and the establishment (see Forms of Company).

Domiciliary companies are defined as 'juridical persons. . . . . which have only their domicile in Liechtenstein whether an office is kept or not and carrying on no commercial or trading activities in the country'. They are largely exempt from local taxes. See Offshore Legal and Tax Regimes for further details of their taxation.

In practice, the tax authorities intepret the legislation very flexibly, as long as a domiciliary company doesn't use its tax advantages to compete against local, more highly taxed companies. Thus, the domiciliary company can have an office from which it manages import/export operations, purchase services, employ free-lance agents who act as local sales-people for foreign customers, etc.

Along with other offshore jurisdictions, Liechtenstein is a suitable place in which to base e-commerce services for retail or wholesale distribution of material or non-material goods: see Offshore-e-com.com for extended descriptions of how such businesses can take advantage of the combination of offshore and e-commerce.

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Liechtenstein Banking

A substantial banking sector has developed in Liechtenstein, particularly in private banking, due to a combination of factors, including a relatively relaxed but still highly respected regulatory regime, the very flexible company legislation, and strict banking privacy.

The Liechtenstein banking sector is regulated under the Law on Banks and Finance Companies 1993; this law was substantially amended following Liechtenstein's entry into the EEA in 1995, through the Law on Banks and Finance Companies 1998. The Act concerning Banks and Savings Funds 1960 imposes heavy penalties for breaches of professional secrecy. Other recent legislation dealt with due diligence on the part of bankers accepting deposits or assets, installing 'know your customer' rules.

The "know your customer" system is legally compulsory (and has been since October 2000) for all banks that belong to the Liechtenstein Bankers' Association. This means that banks in Liechtenstein, previously known as one of Europe's most secretive tax havens, can no longer guarantee anonymity for new and existing account holders, although further account details will remain under normal banking secrecy agreements.

Liechtenstein private banks are able to offer highly tax-efficient asset management services to clients, using one or other of the forms available under the PGR Code, so that income received in Liechtenstein from international assets can be forwarded or reinvested with minimal or no local taxation.

According to the most recent figures available at the time of writing, Liechtenstein's banks managed some SFr171.5bn in clients assets (which equates to a staggering SFr5m for every man, woman and child in the principality).

In March, 2006, Prince Alois, ruler of the Principality, stated that Liechtenstein was unlikely to dispense with its coveted banking secrecy laws any time soon because such a measure would probably not be approved if put to a referendum.

In 2008, the banking sector became the centre of an international row over tax evasion, which was sparked by the use by German taxpayers of Liechtenstein entities to duck their tax liabilities in their home country.

The scandal first broke after it emerged that the home of Klaus Zumwinkel, Chief Executive of Deutsche Post, one of Germany's largest companies, had been raided by police as part of a tax evasion investigation. He was accused of hiding about EUR1 million from German tax collectors in Liechtenstein.

Zumwinkel was subsequently forced to resign by Deutsche Post, but the affair did not end there. On Monday, it was reported that several more homes and offices in the Frankfurt area and in southern Germany have been raided, after the intelligence services received information from a former employee of a Liechtenstein bank about hundreds of wealthy German clients.

The informant, an ex-employee of LGT, Liechtenstein's largest bank, was said to have handed over a disc to the German intelligence service, the BND, containing confidential information on more than 1,000 clients. The BND was believed to have paid the informant a sum of between EUR4 and EUR5 million for the disc.

Following the revelation, Prince Alois reiterated his message that the jurisdiction would continue to improve its financial sector regulation, but that this would not come at the expense of an erosion in individual privacy.

"The Liechtenstein financial centre has already undertaken considerable reform efforts in recent years, but more reforms will be necessary, not only to ensure the competitiveness of the financial centre for the future, but also to enhance it," the Hereditary Prince told Parliament.

"Other financial centres have caught up by creating new, attractive business environments, while the international pressure has risen on locations offering a high level of protection of privacy," he observed.

The scandal had repercussions throughout the world, and in February 2008, US Senator Carl Levin (D-MI), announced that he intended to investigate whether US citizens may have had dealings with the Liechtenstein bank at the centre of the row over tax evasion and offshore secrecy laws.

Levin, who had long campaigned for legislation to prevent Americans from moving money offshore, recently revealed that the Senate Permanent Committee on Investigations, which he chairs, would launch a probe into reports that the stolen computer disc containing details of clients of Liechtenstein's LGT Bank also included several American names.

It also emerged that month that the Internal Revenue Service had initiated enforcement action involving more than 100 US taxpayers, to ensure proper income reporting and tax payment in connection with accounts in Liechtenstein.

The national tax administrations of Australia, Canada, France, Italy, New Zealand, Sweden, United Kingdom, and the United States of America, all member countries of the OECD's Forum on Tax Administration (FTA), had also announced that they were working together, following revelations that Liechtenstein accounts were being used for tax avoidance and evasion.

"Combating off-shore tax avoidance and evasion are high priorities for the IRS," explained then IRS Acting Commissioner Linda Stiff.

“We are determined to protect the United States tax system from abuse and ensure that taxpayers pay what they owe. We will use all our authority to fairly and effectively enforce our tax laws. It should be clear from recent events that there is no safe hiding place for the proceeds of tax avoidance and evasion. Anyone with hidden income and gains would be well-advised to make a prompt and complete disclosure to the Internal Revenue Service," she added.

The arrival of President Obama in the White House has seen the proposal of several anti-offshore intiaitives, including the Foreign Account Tax Compliance Act, which has given the US Internal Revenue Service new tools to "detect, deter and discourage offshore tax abuses." The legislation, approved by Congress in March 2010: imposes a 30% withholding on US source payments to foreign financial institutions, foreign trusts, and foreign corporations that do not agree to disclose their US account holders and owners to the IRS; requires taxpayers to disclose their foreign accounts on their US tax returns; increases the statute of limitations to six years for failure to report certain offshore transactions and income; clarifies when a foreign trust is considered to have a US beneficiary; and treats substitute dividend and dividend equivalent payments to foreign persons as dividends for purposes of US withholding.

In August 2009, the UK government announced details of the “groundbreaking” disclosure agreement with Liechtenstein that gives UK taxpayers with undisclosed accounts in the Alpine jurisdiction the opportunity to disclose income at a reduced penalty, or face having their accounts shut down.

The so-called Liechtenstein Disclosure Facility (LDF) agreement, signed by the two governments on August 11 along with a broader Tax and Information Exchange Agreement, will allow penalties on unpaid tax to be capped at 10% of tax evaded over the last 10 years providing that the account holder makes a full disclosure to HM Revenue and Customs (HMRC).

However, those who do not make a full disclosure by the end of the program, which runs from September 1, 2009 to March 31, 2015, will find their Liechtenstein accounts closed down. They may also face penalties on any unpaid tax of up to 100%.

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Liechtenstein Trust Management

As a civil law jurisdiction, Liechtenstein did not have trust legislation, until it was included in the PGR Code in 1926. This far-sighted action has led to the development of a thriving business in trust management; although other local corporate forms offer partial substitutes for the trust, it remains a highly effective means of asset protection, and non-anglo-saxon clients are often more comfortable with Liechtenstein as a jurisdiction than they might be with, for instance, an ex-British colony. Unlike common law trusts, Liechtenstein trusts can accumulate income, and are subject to no rule against perpetuities. The trust law generally is extremely flexible as regards the powers of settlors (trustors).

As long as the original trust documentation is deposited with the Registrar of Trusts within 12 months, there is no public information about the trust, and later trust documention, eg naming beneficiaries, does not have to be deposited; the level of confidentiality is therefore very good. Trust documents can be in any language.

See Law of Offshore for details of the legal regime for trusts, and see Offshore Law and Taxation Regime for details of their taxation.

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