Tax information exchange agreements
Liechtenstein decided to adopt a financial centre strategy that is geared towards tax compliance of foreign clients. Bilateral and long-term cooperation agreements with foreign financial authorities form the basis of Liechtenstein’s policies on its financial market. At the same time, the Principality wants to strengthen its profile as a professional centre for internationally oriented, innovative and sustainable banking transactions.
Through the «Liechtenstein Declaration» of 12 March 2009, the Principality of Liechtenstein committed itself to the global standards on administrative assistance in tax matters as developed by the OECD. Liechtenstein had signed tax information exchange agreements (TIEA) or double taxation agreements (DTA) on bilateral mutual administrative assistance in tax matters with 25 countries by the end of 2012. These agreements are in accordance with the OECD Model Tax Convention. As of 1 January 2013, 24 of them are in force, including a DTA with Germany. In 2012, DTAs were signed or TIEAs were drafted with six other countries. On 29 January 2013, Liechtenstein and Austria signed a withholding tax agreement to regularize hitherto untaxed assets. The DTA was simultaneously revised and brought into line with international standards. In addition, negotiations about the revision of the existing DTA with Switzerland as well as exploratory talks for concluding a mutual withholding tax agreement are planned for 2013.
As early as 11 August 2009, the problem of untaxed offshore assets was solved with the United Kingdom of Great Britain and Northern Ireland in a manner that was exemplary. The agreement with the UK also includes a bilateral disclosure programme that only applies to the financial centre of Liechtenstein. The «Liechtenstein Disclosure Facility» (LDF), as it is known, offers persons with undeclared financial assets who are liable to taxation in the UK the possibility of regularizing their tax affairs quickly and on favourable terms. On 11 June 2012, Liechtenstein and Great Britain also signed a double taxation agreement, which came into effect on 1 January 2013. Furthermore, the agreement to legalize the financial assets of British citizens in Liechtenstein was extended in London to 5 April 2016.
In accordance with the new commentary on Art. 26 of the OECD Model Tax Convention, group requests have also been included in the OECD standards since mid-July 2012. This means that states must also offer administrative assistance if a request concerns a group of persons not individually identified. Group requests between the USA and Liechtenstein have been possible since 1 May 2012. On 21 March 2012, the Parliament of the Principality of Liechtenstein had passed the corresponding revised law on administrative assistance in tax matters with the USA (AHG-USA). A working group is now examining how group requests can be implemented with other states.
The LLB Group actively supports the financial centre strategy of tax compliance. The LLB Group has played a pioneering role in Liechtenstein since 1 October 2012 when it declared a risk-based approach and no mandatory self-declaration of tax compliance by new foreign clients as the standard. This new regulation is closely related to recent developments that pose a challenge to cross-border private banking, the key business of the Liechtenstein banking centre. The principle applies whereby customers are individually responsible for meeting their tax obligations and complying with applicable provisions. In the event of indications to the contrary, LLB requires new foreign clients to declare that tax on their deposits has been paid.
If, after clarification of the matter, evidence or doubts still remain that the financial assets to be deposited present a case of undeclared wealth, the LLB Group will decline to continue the business relationship. The only exceptions are clients participating in the LDF programme that Liechtenstein entered into with the UK.
As early as in October 2011, LLB established a competence centre for tax matters («Kompetenzzentrum Steuern») in order to keep pace with the constant changes in the tax legislation of its target markets. The competence centre was expanded in 2012. The aim of the centre is to provide LLB clients with fundamental information about after-tax performance and thus improve the Bank’s level of investment counselling. The centre also maintains the Group-wide knowledge of international tax systems through an internal database, country fact-sheets and training.
The decision of the financial centre Liechtenstein to pursue a strategy of comprehensive client tax conformity entails a complex of cross-border private banking regulations. Depending on the circumstances, institutes providing cross-border financial services that are supervised by the Liechtenstein Financial Market Authority (FMA) are obliged to meet the FMA’s requirements and to act in accordance with the regulatory provisions of the country in which the client is domiciled. In 2012, the LLB Group took extensive measures to limit tax as well as regulatory and supervisory risks resulting from cross-border business activities, whereby the Group adopts a risk-based approach.
The revised Group-wide directive «Legal Compliance in Cross-Border Banking» has been in force since 30 June 2012. The minimum standards set in 2010 still apply to the LLB parent bank, LLB Switzerland, LLB Österreich and Bank Linth; they were recently extended to cover Jura Trust AG. The standards are intended to protect LLB employees and clients.
Both the Liechtenstein and Swiss banks have a primary interest in their compliance with cross-border banking regulations. This interest is shared by the FMA and the Swiss Financial Market Supervisory Authority (FINMA). In October 2010, FINMA published a position paper arguing that a financial institute that does not control the risks related to cross-border financial services does not comply with the requirements that are central to adequate risk management and cannot vouch for the proper conduct of its business. FINMA calls for risks to be assessed, limited and controlled. This involves corresponding examinations in the form of regulatory meetings or on-site inspections.
The banks in Liechtenstein are geared towards cross-border financial services because of the limited local market. The FMA regularly points out the risks of cross-border banking to the banks, communicates its requirements in this regard and takes action subject to its duties and responsibilities as required. Customer protection and the stability of the financial centre Liechtenstein are top priority for the FMA.
FATCA: two options
The US «Foreign Account Tax Compliance Act» (FATCA) obliges financial institutions worldwide to identify US clients and to disclose their assets and revenues to the Internal Revenue Service (IRS) of the United States. The information goes beyond the applicable provisions of the «Qualified Intermediary Regime» (QI). The US Treasury Department and the IRS have postponed the introduction of the law to 1 January 2014. In order to facilitate the implementation of the FATCA regime and in order to create legal certainty, countries have the option of concluding bilateral agreements with the USA, of which the USA has developed two different models.
Model 1 (EU 5 model) – information exchange between two states – foresees a treaty and the automatic exchange of information between tax authorities. For this purpose, FATCA is adopted into national law by each of the partner countries of the USA. Liechtenstein decided in February 2013 to use the EU 5 pilot model as a basis for implementing the FATCA legal provisions. To date, Great Britain, Germany, France, Spain, Denmark and Mexico have also opted for this model, which includes a limited reciprocal legal agreement.
In the case of Model 2 (Switzerland/Japan model) – reporting of data by the bank and client consent – the state entering into the agreement with the USA accompanies the implementation of FATCA by its financial intermediaries. The direct implementation of FATCA is done through the conclusion of agreements between the US tax authorities (IRS) and individual institutes in the partner state. This model does not foresee an automatic exchange of information if the client concerned does not consent. The identity of this client can, however, be determined in the context of administrative assistance procedures (group requests). Switzerland opted for Model 2. The treaty has still to be ratified by the Swiss Federal Assembly and pursuant to the optional referendum on treaties. Austria also intends to adopt Model 2 and take up negotiations soon.
The main challenge posed by the FATCA regulations is the screening of customer databases. The LLB Group began addressing this problem well ahead of time. Systems and processes have already been adapted, guaranteeing the timely implementation of FATCA.
Withholding tax agreements
The strategy of the financial centre Liechtenstein, like that of Switzerland, is based on three pillars: improved mutual administrative assistance in accordance with OECD standards, increased due diligence obligations on the part of banks and agreements regulating international taxation at the source, withholding tax agreements. It is about shaping the future and regularizing the past.
Switzerland negotiated such a tax treaty both with Great Britain and Austria. Both treaties came into force on 1 January 2013. The central element of these treaties is the introduction of a tax withholding system that, on the one hand, ensures the implementation of partner states’ tax claims, while safeguarding bank clients’ privacy. In principle, these agreements provide that persons domiciled in partner states can regularize their existing banking relationships in Switzerland from a tax point of view: in future, capital gains will be subject to a withholding tax at the source or disclosed to foreign tax authorities upon client consent. Furthermore, the agreements provide for the regularization of previously untaxed client assets through a one-off payment. Similar agreements are being negotiated with Greece and Italy. The planned agreement with Germany failed because of opposition to it in the German Parliament.
The Swiss model serves Liechtenstein as a prototype for agreements with select states. In order to address the specific conditions in Liechtenstein, the Liechtenstein model should not only cover bank accounts and similar deposits but also asset structures, such as foundations. At the end of 2011, Liechtenstein and Germany had already initiated exploratory talks about a withholding tax agreement. After the failure of the German-Swiss agreement it is doubtful whether Germany will enter into concrete negotiations with Liechtenstein. The negotiations between Liechtenstein and Austria resulted in a withholding tax agreement that will enter into force on 1 January 2014 and make possible the regularization of untaxed assets from the period of 31 December 2003 to 31 December 2013. The agreement covers financial assets held by Austrians in Liechtenstein banks as well as capital assets that are administered through capital structures in Liechtenstein. This particularly affects foundations, for which both the entry tax charge and the taxation of allocations are regulated in the agreement.