Liechtenstein – New Opportunities For Compliant Tax Planning

The Principality of Liechtenstein is currently in a transformation process. Progressively moving away from the cornerstone of absolute banking secrecy, embracing the new regulatory world order with a fresh attitude and new, fully tax compliant, client-orientated solutions. This article summarises the current situation and briefly highlights these new opportunities for the benefit of the tax planning community.

In a time of economic turmoil and insecurity, the stability of a banking centre and its banks is in focus again. The Principality of Liechtenstein has a number of advantages which stand out clearly in times like these:

Healthy state finances and financial assets of the principality
with a triple A rating and no foreign debt
stable currency – the Swiss Franc
stable constitution and regulatory environment, protecting the private sphere
long standing experience in taking care of financial assets of third parties
vehicles protecting the safety of financial assets and the justified privacy of investors
long standing experience in tax compliant estate- and succession planning
solution-orientated spirit especially for Swiss, European and Russian clients

The recent changes in law established relatively unknown opportunities for example with the introduction of cross-border pension funds. After the introduction of the EU Directive on pension funds, e.g. companies can pool the pension assets of their employees from various locations in one cross-border pension fund.

The advantage is that the local pension fund schemes remain untouched whilst cost saving investment management of the pooled assets can be done in one overarching fund. The principality has already long standing experience in the management of such funds.

Further the recent adaptions in tax law of Liechtenstein and a revision of the attitude of the country towards a strategy named “Futuro” – often referred to in the media as the “New Liechtenstein Strategy” – offer interesting opportunities to use vehicles for tax compliant planning, which we shall discuss in this article.

Currently Liechtenstein negotiated 25 new Tax Information Exchange Agreements and Double Taxation Treaties (DBAs), whereof one with Luxembourg. This is of interest because the Grand Duchy itself has 62 DBAs and a further 19 pending as of June 2011. This means the DBA between Liechtenstein and Luxembourg can potentially be used to access the Luxembourg treaty network and thereby offer clients a number of permutations which make the use of the combination of Luxembourg and Liechtenstein structures appealing. This also means that “New Liechtenstein” has created the foundation on which to continue to build tax compliant offshore wealth management.

One of the more known agreements is the one between the United Kingdom and Liechtenstein, which especially since the Swiss-UK agreement has got more attention in the tax planning industry, the Liechtenstein Disclosure Facility (LDF). In line with the Futuro Strategy of Liechtenstein, this treaty permits UK tax residents who have not done so yet to regulate their tax affairs without fearing consequences under civil or criminal law. Many experts of the tax planning community have written extensively about the LDF and its advantages so that in this article we shall not expand on the subject further.

The government of Liechtenstein works relentlessly to further adapt and improve the current regulations to make the financial centre more attractive within Europe and further afar. For example, the new investment fund (mutual fund) law is a gateway for investors into the EU.

Thanks to its membership with the European Economic Area (EEA), Liechtenstein has more access to Europe product- and service-wise than for example Switzerland would have per se. Especially for Family Offices and independent external asset managers, the mutual fund offering out of Liechtenstein is an alternative to the existing solutions for example from Luxembourg or Cayman.

Private Label Funds offer a way of investment which permits even large families and entrepreneurs to pool their assets and nevertheless distribute the claim to a share of the asset within the family, and then to be taxed according to place of residence in the appropriate structure.

Of course, Liechtenstein offers a wide range of structures which can be put to use, for example the limited company, company with limited liability, Establishment, the Foundation, the Liechtenstein Trust Reg. and proper Trusts as incorporated under any law and in any language thanks to the fact that Liechtenstein is a signatory to the Hague Convention on Trusts. These structures permit also in the 21st century a tax compliant way to obtain asset protection in certain instances, as per the individual requirements of the client.

A not too much known fact is that for example for succession planning purposes or reasons of asset protection a Trust can be established by a Liechtenstein trustee under any foreign law, e.g. Guernsey, and that it can be managed out of Liechtenstein as a place of management. This is possible due to the fact that trusts are usually considered to be non-commercial entities and therefore taxed at a flat rate of 1,200 francs per annum. This is a worthwhile solution sought by many wealthy families and wealth owners.

The new course of New Liechtenstein means also that the country focuses on niches. Sustainable investing, Philanthropy and Charities play an ever increasing role. This new initiative is seen with interest by many responsible investors and is used by the country to differentiate vis-à-vis competitors. New Liechtenstein alludes to the thinking of many wealthy families and entrepreneurs who also want to give something back to society or to invest responsibly. This leads to accentuated interest in climate protection, e.g. in forestry, and microfinance.

All of the above demonstrates, that the Principality of Liechtenstein understood the signals from the market and offers solutions which are attractive to wealthy families, entrepreneurs and corporate investors in many fields.

The cross-border pension fund for corporates together with the mutual fund which can also be used by these and family offices of institutional investor size as well as entrepreneurs wishing to pool their assets, the Liechtenstein vehicles, the trust law which incorporated into civil law, the new treaties and the long-standing experience and reputation of the country clearly show that there is an earnest will and desire to put Liechtenstein on the map for international cross-border wealth management.

The sustainable solutions which come with this speak a clear language: the mentality of Liechtenstein is client-focused and tax compliant, but offers at the same time many flexible solutions.