Financial Services in Liechtenstein

A) General

Looking back on successful economic results during the last decades, Liechtenstein, as a small sovereign country, has managed to discard its impoverished agrarian past by its readiness to innovate. The willingness of the Liechtenstein population to high performance made it possible for Liechtenstein to transform itself into a modern state with well developed industrial and services rendering sectors. The progress is also owed to its central location in Europe, the close ties with Switzerland (common Swiss franc economic area), the political stability, the reasonable level of taxation of individuals and corporations, the banking secrecy, the skilled labour force and an attractive social welfare environment.

Today, less than 1% of the gainfully employed persons are working in agriculture, whereas in the industrial sector are 45% and in the services rendering sector are 54%.

It may be less well-known that Liechtenstein has developed high-technology industries (fastening systems, high-vacuum equipment, thin coatings, heating equipment, precision devices for the automobile industry, foodstuffs, extrusion mouldings, dentures, boilers, etc.). Liechtenstein's industry exported in 2002 products worth approx. CHF 4.3 billion.

There exist 17 banks in Liechtenstein with a balance sheet total of CHF 32.7 billion (2002). Clients assets under administration by these banks were CHF 96.2 billion in 2002. In Liechtenstein 54 % of the gainfully employed persons are working in the tertiary sector (services rendering sector), embracing the banking, fiduciary and other services, compared to 67 % in Switzerland, 61 % in Austria and 59 % in Germany.

In the official statistics the following figures are shown:

Country's total area: 160 sq. km

Permanent population: 33'526 persons, out of which 35% are foreigners

Total gainfully employed persons: 28'783, out of which 12'908 (44.8 %) are commuters from Austria and Switzerland crossing daily the Liechtenstein frontier. The great potential of daily commuters from abroad allows the local labour market to quickly react to new circumstances.

Liechtenstein as a member of the European Economic Area (EEA) but not of the European Union (EU), is obliged to implement the EU Directives and has implemented nearly all of them into its own law. As Liechtenstein is not fully integrated into the EU, there is no tax harmonization and no tax information agreement, neither does the "Schengen Agreement" apply. Liechtenstein uses the Swiss currency as legal tender. Liechtenstein has long standing tradition in its constitution and laws to protect the private concerns of its citizens and all persons who are engaged in Liechtenstein's business life. Liechtenstein stands with this not alone, also other countries like Switzerland, Austria and Luxembourg have anchored the protection of privacy as an important right in their laws.

The new Liechtenstein law on due diligence enacted on 1 January 2001 has already included the main due diligence provisions fixed in the EU Directive on money laundering (15 June 2003) which has to be implemented by the EEA countries.

Liechtenstein underwent an assessment of the supervision and regulation of its financial sector by the International Monetary Fund (IMF). The government of Liechtenstein invited the IMF to carry out an assessment of compliance with internationally-accepted standards regarding the regulatory and supervisory arrangements for the financial sector. The assessment took place in Oct./Nov. 2002. The mission was conducted under Module 2 of the OFC initiative as described in the Board paper "Offshore Financial Centers: the Role of the IMF".

Under Module 2, the mission team carried out assessments of Liechtenstein's implementation of four international supervisory and regulatory standards:

1. The Basel Core Principles for effective banking supervision;
2. The International Association of Insurance Supervisors (IAIS) core principles for insurance supervision;
3. The International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation;
4. The Financial Action Task Force (FATF) 40+8 Recommendations for anti-money laundering and combating the financing of terrorism (based on the October 2002 final methodology that was endorsed by the FATF in Oct. 2002).

Regarding the compliance with the Basel Core Principles and the level of implementation of the "IOSCO" principles for regulation of securities activities, the assessment showed that there exists a high level of dedication among the Liechtenstein supervisory staff. The financial sector supervision and regulation is underpinned by a good foundation of modern laws and regulations that derive also from Liechtenstein's membership in the European Economic Area (EEA).

The IMF assessment showed that the Financial Services Authority (FSA) was not adequately staffed to properly analyze the financial reports and audit results. Increased staff should help to better carry out the offsite monitoring requirement and to improve the FSA's ability to develop policy that fits with the needs of the Liechtenstein financial sector.

The assessment showed a high level of compliance with international standards for anti-money laundering and combating the financing of terrorism (AML/CFT), particularly the standard issued by the FATF.

The IMF assessment shows that Liechtenstein fulfills the international standards and there are only minor deficiencies to report.

The Liechtenstein company code (PGR code) sets the very same rules whether a company set up under a chosen legal form is being used for activities within Liechtenstein or outside of Liechtenstein. The rules on financial reporting, filing the accounts to the tax authorities or the public registry, directors' liability towards shareholders and third party creditors are basically the same for all companies.

Taking into account the purpose for setting up a Liechtenstein legal structure, the entities may be classified for simplification purposes as follows (and a certain formally different treatment relates to this classification):

1. companies with local activity (production, sale, import for local use, warehouse) with Liechtenstein business licence (Gewerbeschein)
2. financial institutions like banks, insurance companies and mutual funds
3. holding companies
4. trading offshore companies [domiciliary companies (Sitzunternehmen)]
5. foundation and trusts

Only the domiciliary companies have access to additional privileges if their trade is not done in Liechtenstein, e.g. no special business licence required in Liechtenstein, no proof of product knowledge required, special tax treatment. However, there are some products/services where even domiciliary companies will be regulated like local trading companies, e.g. banking, insurance, medical field.

The above classification shows that Liechtenstein does basically not offer privileges to financial institutions, insurance companies, mutual funds or holding companies. All these entities are treated in the same way regardless of where the business is done. Real differences depend on the business plan and the effective activity of such entities.

Liechtenstein has implemented the EU Directives on banks, insurance and mutual funds. The single-licence principles between the EU/EEA-states apply.

The Liechtenstein tax system stems from 1961 and has not seen major changes since then. This provides planning assurance for local and international businessmen.

The Liechtenstein tax system is regulated in such a way that double tax treaties¹ with other countries are not of great importance. Profits are either taxed abroad or in Liechtenstein, and if the profits carry withholding tax on dividends or interests, these incoming profits will normally not be taxed if the appropriate structure is set up in Liechtenstein. The exemption is applied on the basis of legal provisions or application by the tax authority on reciprocity.

The foundation may be formed as a pure family foundation, as a non-profit foundation (e.g. to support and promote charitable, artistic, scientific and social purposes) or also as an ecclesiastical foundation. Another purpose can be to function as an enterpreneurial foundation in order to safeguard the holding of an active company through generations. The foundation may be set up by an individual or by a corporate entity. No prescriptions in respect of nationality or domicile apply to the founder. If the founder and the beneficiaries do not live in Liechtenstein, there are no Liechtenstein taxes relevant apart from the annual flat tax of CHF 1'000.00 that the foundation has to pay.

The Asset Protection Trust (APT) is not a new invention, and each trust, foundation or offshore corporation is designed to protect assets for the client who seeks shelter for a variety of reasons. Everyone has the right to chose a scheme that fits best for his purpose, to shelter his fortune from spendthrift family members, from unnecessary interference by third parties and also from possible future creditors. In addition, legal tax planning goes along with sound and acceptable family asset protection.

Trusts are rather for families living in Common Law jurisdictions. They follow the same purpose as foundations. Liechtenstein law allows for both forms of structures.

1. For holding companies in the broadest sense (structured under any of the Liechtenstein legal entities including Foundations), dividends received, foreign-source interest, foreign-source royalties and capital gains on foreign subsidiaries are exempt from income tax but the company's net capital (net equity) is subject to capital tax at a rate of 0.1%. Distributed dividends are subject to 4% coupon tax (if the company's capital is divided into shares). Furthermore, art. 83 of the Liechtenstein Tax Law (LTL) sets forth that the local tax (capital tax and tax on profits) is due for that portion of capital and income derived from domestic businesses/permanent establishments (not juridically separated businesses).
2. The formation (emission) stamp duty (note: being the same for all companies, holding or not) levied (on capital incl. reserves of under CHF 250'000) on the Company Limited by Shares, the Private Company Limited by Shares and the Partnership with a Share Capital is 0 % and of over an amount of CHF 250,000 is 1%. This same criteria applies (however excluding the reserves) to the typical Liechtenstein legal forms and entities (Establishment, Trust reg. and the Foundation); but the stamp duty is gradually reduced for capital of CHF 5 mio and more to 0.5% (the part below remains taxable with 1 %) and for capital exceeding CHF 10 mio to 0.3%. For a Family Foundation the formation duty remains at 0.2% of the Foundation capital, with a minimum of CHF 200.00, and again gradually reduced for a capital exceeding CHF 5 mio to 0.1% and for the part exceeding CHF 10 mio to 0.06%.
3. In Liechtenstein there are no anti-abuse regulations and no thin capital provisions.
4. Taxation of income from and value of real estate abroad: The Liechtenstein tax law does not contain any specific provisions for taxation of real estate situated abroad which is owned by Liechtenstein legal entities. However, upon application by the taxpayer, the tax administration grants also for companies with business licence an exemption from income tax if the taxpayer can prove that foreign tax has been imposed on the real estate's income (therefore such assets are treated like tax-free foreign permanent establishments as in the case for physical persons). Holding companies are exempt from such an income tax anyway.

General note: The tax treaty with Austria provides that income from and the value of real estate is only taxable in the country where it is situated, irrespective of whether the owner is an individual or a legal entity. The double tax agreement struck with Switzerland does not deal with this issue, but international rules apply (taxed in the country where the real estate lies).

5. Taxation of dividends, interest and royalties from abroad: Art. 83 LTL offers holding companies as set forth in the first clause of this chapter a complete tax exemption on dividends with respect to payments from domestic and foreign subsidiaries having independent legal status. In practice, payments of this nature from abroad would be tax-free in Liechtenstein if taxed abroad (this is basically always the case). On the other hand, Liechtenstein holding companies are liable to income tax on interest, royalties and other income from Liechtenstein businesses / permanent establishments.

For a Liechtenstein company with local activity and business licence and which is not only a pure holding company, the Liechtenstein tax administration follows the Swiss federal tax rules.

6. Foundations/Trusts which do not have founders and beneficiaries resident in Liechtenstein will only be taxed with the 0.1 % capital tax, at least with CHF 1'000.00. Special taxes apply if the assets consist of real estates located in Liechtenstein.

A holding company can be set up by any person living in Liechtenstein or not. A 100 % foreign shareholdership is possible. The holding company does not need a special permit for being set up.

At least one member of the board of directors must be a citizen of an EEA (European Economic Area) Member State and have his permanent place of residence in an EEA member state. A state treaty with Liechtenstein can grant other persons of the respective treaty states the same rights. This sole member must also be authorized to pursue the inland profession of trustee according to the Liechtenstein law on trustees. The same authorization applies to citizens of an EEA Member State resident in a EEA member state (or persons having the same rights due to a state treaty) who possess evidence of a qualification according to art. 2 of the Liechtenstein law on trustees. They have also to be in a at least one year full-time employment in Liechtenstein of a trustee or a trust company and exercise their activities in context of that employment relationship according to the first sentence in this alinea. Nationals who are not citizens of an EEA Member State or who do not have the same rights according to a state treaty must have a Liechtenstein residence permit.

Therefore, Swiss nationals with a residence permit are treated in the same way as Liechtenstein citizens in respect of access to the profession of trustee, pursuant to the legislation of the cantons on the basis of reciprocal recognition of the laws.

A Liechtenstein holding company can also rent offices and easily engage working force living in Liechtenstein or in Switzerland and EEA countries and who return every evening to their country (normally Switzerland and Austria). Due to special arrangements with Brussels the EU Directive on free movement of persons does not apply, and there are every year only around 60 EEA citizens (plus their family members) allowed to move to and take up residency in Liechtenstein (residency and domicile is the same in Liechtenstein). This right is given under special procedures set up in the relevant law.

There are some issues which have not been clarified so far, and these will be treated below separately:

1. On principle, it should be possible that the only member of the board of directors resides outside of Liechtenstein and has an EEA nationality, and without evidencing a qualification according to art. 2 of the law on trustees. In such a case, he has to apply for a local business licence (Gewerbeschein) for the company even if the company is a mere holding company. Then it will be taxed as follows: There is a tax on profits imposed progressively from 7.5% to 15%. Between these percentages, the tax is equal to half that percentage which is the ratio of profits to taxable net capital. An additional tax (surcharge) is levied on the company's profits if the dividends exceed 8% of taxable net capital. This additional tax is levied at rates varying from 1% to 5% and the maximum rate is levied if the distributed amount exceeds 24% of the taxable net capital. The company's net capital is taxed at 0.2%.

However, in order to avoid that such a Liechtenstein holding company might be taxed abroad because the place of administration is deemed to be the place of residence of this single EEA resident member of the board of directors, it is necessary to have at least one professionally qualified member living in Liechtenstein and demonstrate that all major management decisions are taken in Liechtenstein.

2. A holding company should also be able to buy offices if it demonstrates adequate local activity. Eventually, the right of buying such offices is only granted if it has applied for a business licence (see point 1 above).

Liechtenstein has for example implemented the first, fourth, seventh and eighth EU Directives which subject the Company Limited by Shares, the Private Company Limited by Shares and the Partnership with a Share Capital to these EU Directive accounting principles. The financial statements of these company forms are audited (even for small companies) and filed with the tax authority and the public registry for public inspection. Information on shareholders is not open to public inspection. Liechtenstein holding companies are usually small companies which means that only the abbreviated balance sheet without audit report and the abbreviated annexes to the balance sheet are open to public inspection. A list of participations should be available if applied for.

The typical Liechtenstein legal entities like the Anstalt, Trust reg. and Foundation are not subject to such obligations apart from filing the financial statements with the Liechtenstein tax authorities if the purpose allows for any commercial activity. A holding activity is not a commercial activity. However, if such legal entities are considered as active holding companies - perhaps with office space - , they must file their financial statements with the tax authorities.

Liechtenstein's success is based on being open and responsive to changes. Liechtenstein is part of the international community of states and as such is member of the UNO, WTO, Council of Europe, EEA and EFTA. The high-quality financial services and broad range of products make it a respected business centre in the heart of Europe. Liechtenstein has a strong history of privacy protection which plays an important role in the private live, but also in the business through banking and professional secrecy. Liechtenstein provides legal assistance in any criminal cases (through court proceedings) but does not allow for extensive tax information exchange as provided for or committed to by many other jurisdictions.