Tax compliance strategy
Tax issues are of high priority for the financial centres Liechtenstein and Switzerland. Liechtenstein pursues a financial centre strategy that is based on client tax compliance. The Government Declaration of 14 November 2013 signalled Liechtenstein’s commitment to its long-established tax compliance strategy heralded by the Liechtenstein Declaration of 12 March 2009. Liechtenstein thereby confirms its endorsement of the applicable standards on information exchange on tax matters of the Organisation for Economic Co-operation and Development (OECD). While accepting the legitimate tax claims of partner states Liechtenstein simultaneously protects the legitimate interests of the financial centre’s clients, particularly their right to confidentiality and privacy.
On 21 November 2013, Liechtenstein signed the Joint Council of Europe / OECD Convention on Mutual Administrative Assistance in Tax Matters at the Global Forum on Transparency and Exchange of Information for Tax Purposes in Jakarta, Indonesia. The Convention provides the legal basis for agreements on automatic exchange of information (AEI). Liechtenstein unambiguously commits itself to helping shape and enacting international standards for information exchange on tax matters.
On 13 February 2014, the OECD released the standard for automatic cross-border exchange of financial information. Known as the Common Reporting Standard (CRS), the Paper, on the one hand, establishes guidelines for collecting information for the national tax authorities and, on the other hand, determines what, when and in what form such information is passed on to the tax authorities of other countries. The CRS supplements the Competent Authority Agreement (CAA), which forms the framework for the exchange.
Bilateral, long-term cooperation agreements form the basis of Liechtenstein’s financial policy. By the end of 2013, Tax Information Exchange Agreements (TIEA) or Double Taxation Agreements (DTA) for cross-border administrative assistance in accordance with the OECD regulations were concluded with 36 countries. As at 1 January 2014, 28 of these have come into force, including a DTA with Germany.
On 29 January 2013, Liechtenstein and Austria signed a withholding tax agreement to regulate previously untaxed assets. At the same time, the existing DTA was amended and aligned with the international standard. Both agreements came into force on 1 January 2014. The withholding tax agreement goes further than the one between Switzerland and Austria, which has been in force since 1 January 2013 and served as a model. Accordingly, Austrian clients of Liechtenstein banks now have the possibility to regularize their assets without any limitation on the amount. The tax agreement provides for the subsequent taxation of previously untaxed assets, on the one hand, and a withholding tax on future capital gains, on the other hand.
The topic of untaxed offshore assets had already been treated in an exemplary fashion with the United Kingdom of Great Britain and Northern Ireland (UK) as early as 11 August 2009. This agreement also includes a bilateral disclosure facility that only applies to the Liechtenstein financial centre. The «Liechtenstein Disclosure Facility» (LDF) has been in force since 1 January 2010 and offers persons with undeclared assets who are liable to taxation in the United Kingdom the opportunity to regularize their tax affairs in relation to the UK quickly and on favourable terms. Liechtenstein and Great Britain also signed a double taxation agreement on 11 June 2012, which came into force 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 are further required to offer administrative assistance if a request concerns a group of persons not individually identified. These standards have been transposed into Liechtenstein law in relation to the USA. Group requests between the USA and Liechtenstein have been possible since 1 May 2012. On 21 March 2012, the Landtag (Parliament) of the Principality of Liechtenstein had passed the corresponding revised law on administrative assistance in tax matters with the USA (AHG-USA).
The Liechtenstein banks and Bankers Association expressly and actively support the financial centre’s tax compliance strategy. On 1 September 2013, they passed guidelines setting minimum standards.
The LLB Group plays a pioneering role in this and has taken measures to achieve the strategic goal of a tax compliant financial centre. As early as 1 October 2012, it declared a risk-based approach with voluntary tax disclosure as the standard and, as of 1 July 2013, began applying a comprehensive regulation governing the due diligence obligation in regard to its clients’ tax compliance. The LLB Group is consistently gearing itself towards managing assets that have been declared for tax purposes and has made provisions against untaxed assets.
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 international orientation of the financial centre Liechtenstein entails a complex of cross-border private banking regulations. 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 2013, the LLB Group optimized measures to limit risks related to civil law, tax law and banking supervisory law resulting from cross-border business activities.
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 Liechtenstein and the Swiss Financial Market Supervisory Authority (FINMA). In October 2010, FINMA published its «Position paper on legal risks», in which it urges financial service providers to identify, limit and control risks. FINMA expects supervised institutions to comply, in particular, with foreign supervisory laws and to define an appropriate service model for every target market. Supervision involves corresponding examinations in the form of regulatory meetings or on-site inspections.
The LLB Group’s internal rulings ensure that employees employing a risk-oriented approach when engaging in cross-border activities comply with the regulations of the respective target country.
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 postponed the introduction of the law to 1 January 2014. If banks do not want to be excluded de facto from the US-American capital market, they will have to implement FATCA. 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 – provides for a treaty and automatic exchange of information between tax authorities. For this purpose, FATCA has to be adopted into national law by each of the partner countries of the USA. In February 2013, the Principality of Liechtenstein decided to use the EU 5 pilot model as a basis for implementing the FATCA legal provisions. To date, Great Britain as well as Germany, France, Spain, Denmark and Mexico have also opted for this model, which includes a limited reciprocal legal agreement. On 2 July 2013, Liechtenstein negotiated the Model 1 «Intergovernmental Agreement» (IGA). This Agreement should be signed in 2014. Liechtenstein began drawing up implementing legislation in November 2013.
Model 1 IGA contains a version with or without reciprocity. The foreign financial institution (FFI) has to provide the national tax authorities with information about certain account holders. The national tax authorities then pass it on to the American tax authorities on the basis of automatic exchange of information. The reciprocal version of Model 1 IGA involves the USA providing the tax authorities of the respective FATCA partner state with information about the accounts held by its respective nationals in the USA. The non-reciprocal agreement does not provide for such an exchange of information.
In the case of Model 2 (Switzerland / Japan model) – reporting of data by the bank with 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. In future, Switzerland will afford the USA almost automatic information transfer. Following the Ständerat (Council of States), the Nationalrat (National Council) passed the agreement to enact FATCA. Besides Switzerland and Japan, Austria has also opted for Model 2.
The main challenge posed by the FATCA regulations is the screening of client 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. LLB is participating in various FATCA working groups including that of the Office for International Financial Affairs (SIFA).
Governmental authorities, central banks and international organizations as well as particular pension plan accounts and products are exempt from the new requirements. Under certain conditions, banks with a predominantly local clientele are considered to be in compliance with FATCA and are only required to register. Bank Linth does not fall into this category since it is part of the LLB Group. The same holds true for LLB (Österreich) AG.