The mouse that roared

As a financial services provider Liechtenstein is fully regulated in Europe and can offer big benefits for such a small country. Andrew Watters highlights the latest developments

Liechtenstein has been attracting rather more attention than usual in the UK news, receiving mention in the daily as well as the professional press. The publicity has generally been negative rather than positive, including when it was identified as one of the ‘tax haven’ states by the G20 conference in April, with the implication that these states were linked to the dire economic situation that formed the backdrop to that meeting.

For many Liechtenstein is a little-known, far-away country, but people may be wondering whether it merits the bad press it has been receiving and whether they should consider it a jurisdiction with which to start a relationship. So, is it worth serious consideration?

Let us start from a point of general agreement. Liechtenstein is very small. Tucked between Switzerland and Austria, hugging the Alps, it has done well to survive the collapse of the Austro-Hungarian Empire and subsequent Central European upheavals. Since World War II it has been developing a reputation as a financial centre.

Pots and kettles

Of course, the difference between being a financial centre and a tax haven is rather like the difference between being a freedom fighter and a terrorist. The distinction is often in the eye of the beholder.

It is certainly true that when the US or the UK, for example, level accusations that the principality is a ‘tax haven’ there is an element of hypocrisy, with the large imposing standards on the small that they themselves fail to match. Both have significant tax advantages within their own territories, including the fact that in Delaware the US tolerates an opaqueness for tax filing purposes that it harangues in less starry jurisdictions, while the UK’s non-domicile arrangements are widely recognised as a tax-efficient encouragement to attract wealth producers.

Small comforts

People will in any event not go to Liechtenstein simply because of low tax rates, or even because of strict rules of confidentiality, as a number of small and large jurisdictions offer these. The principality argues that it can distinguish itself on its established reputation for financial probity, for high standards in asset protection, for expertise in banking, fiduciary services and insurance, and for its developing standards of governance regulation. It is proud of its membership of the European Economic Area and the standards of governance that membership requires.

Being small, and not having a customer base that goes to it automatically, it is aware of the need to offer the highest standards of customer care. For example, apart from the need to offer prompt, reliable and efficient customer service, services are offered in a number of languages.

This level of service is particularly important, since a lot of people have reasons unrelated to tax for seeking cross-border specialist financial services. Citizens in some countries simply do not trust the state. This lack of trust can reflect a breakdown in the rule of law, or endemic corruption, or suspicion or distaste for the way their government is moving. For some, family membership is spread across borders and generations and family wealth management and protection are sought.

However, Liechtenstein is not the only authority offering such services. It is an extremely competitive marketplace, so in the context of moving to the sort of tax-transparent world advocated by the Organisation for Economic Cooperation and Development, it must combine an increasingly high level of international standardisation with customer demands for confidentiality and reliability.

Proactive principality

Liechtenstein is reacting to this with a range of cross-border treaties and ongoing developments in governance regimes.

For example, it attracted attention in August with the groundbreaking Tax Information Exchange Agreement signed with the UK and the accompanying Liechtenstein Disclosure Facility (LDF), which runs for a six-year ‘window’ until 2015. Even in doing this there have been murmurs that Liechtenstein has somehow achieved an unfair preferential treatment for those coming forward in the LDF relative to those disclosing offshore accounts via the standard New Disclosure Opportunity (NDO).

The LDF has several advantages over the NDO, but the primary one is the agreement by HM Revenue & Customs that the disclosure is limited to the 10 years preceding 2009. By contrast, the NDO can go back 20 years and, in certain circumstances, such as where death duties are involved, it can go back even further. Interestingly, in certain circumstances, persons who do not have a current relationship with Liechtenstein can create one and thus ‘opt in’ to the LDF.

The UK-Liechtenstein agreement also brings clarity to how some structures unique to Liechtenstein law should be treated for UK tax purposes, creating a degree of certainty to an area where there has traditionally been uncertainty, which most would see as a major advantage for all parties.

So will such agreements with overseas tax authorities enable Liechtenstein to succeed in continuing to be a major international financial centre? Well, Liechtenstein saw off the Austro-Hungarian Empire, so I for one would not want to bet against it achieving its ambitions. n

Andrew Watters is director of Berwin Leighton Paisner