Liechtenstein: Liechtenstein And The European Union (EU) Savings Tax Directive

Last Updated: 6 September 2006
Article by Roger Frick

Liechtenstein has come to an agreement with the European Union on the EU Savings Tax and will therefore retain the same withholding tax as Switzerland. As everybody expected, Liechtenstein developed within the frame according to what Switzerland has already worked out. Therefore a short look to what has happened in Switzerland is important to understand the treaty and the differences to Switzerland. Switzerland has finished its negotiations on the nine treaties called "Bilaterals II". This article will only focus on the cooperation pertaining to the EU (European Community) savings tax (tax on interest of savings accounts of physical persons living in the European Community).

Instead of an automatic exchange of information between national tax authorities within the EU and relevant states being participants to this directive, Switzerland will withhold a 15 % tax on interest during 3 years. This percentage will be increased to 20 % for another 3 years, and after this period to 35 %. This tax is due thereafter for any interest payments by a so-called paying agent to a physical person with tax relevant domicile in the European Community. 75 % of the retained tax will be distributed by Switzerland to the EU member states.

Liechtenstein will accept these percentages. However it is still not clear, either in the EU or here in Liechtenstein, what exactly a paying agent is. There is much interpretative room left.

It is highly probable that the return on such a savings tax is smaller than the EU expects.

It has to be noted that Switzerland has to all intents and purposes practically given up bank secrecy whenever we talk about indirect taxes like subsidies, duties, VAT, excise tax on tabacco, alcohol or mineral oils. Switzerland already disclosed information before this treaty and has co-operated whenever there has been a fraud or falsification of documents involved (documents, deeds; tax evasion in conjunction with forged documents, money laundering or issuing false invoices). The practice of court rulings in the last years in Switzerland or in Liechtenstein has shown that attempts to avoid indirect taxation was usually accompanied with fraud or falsification, which led to co-operation with the foreign authority and remittance of documents abroad.

However Swiss – and especially Liechtenstein – privacy laws do not accept that foreign tax authorities can move in freely on bank accounts of physical or juridical persons. Here such rights should not be touched and it should be the person's right to decide upon the moment to disclose transactions. It is fully understood that the taxable person reports income and balances on his tax return in full and accurately.

It has to be noted that Liechtenstein is bound to a customs treaty with Switzerland since 1923, and therefore many aspects of indirect taxation and co-operation stipulated by Switzerland have direct consequences on Liechtenstein as well.

Switzerland has amongst others received the right to benefit from the EU directive on interest and licences and the parent-subsidiary directive. Liechtenstein cannot benefit from these two directives.

As counterbalance, Switzerland has accepted the need to improve its bilateral treaties with the EU step by step which leads to the fact that the administrative assistance between competent authorities on tax fraud and similar facts will be extended beyond the clauses in the treaty on EU savings tax. As Liechtenstein has not signed similar treaties, there will be no administrative assistance in the same direction.

It is clear that the EU will request a certain level of assistance from Liechtenstein relating to the EU savings withholding tax. As Liechtenstein only knows legal assistance in criminal matters which involves the court and excludes taxes – apart from that which was said above – this kind of legal assistance will be subject to Liechtenstein internal regulations which means that has also to be a criminal offence in Liechtenstein and that the information is supplied with "limitations on use" (speciality) i.e. that any information or evidence obtained under the treaty may not be used in any investigation, prosecution, or proceeding other than that described in the request without prior written consent. Whatever the contractual arrangements, the Liechtenstein internal law must be respected.

The Liechtenstein Government released in a press communiqué that interest income of Liechtenstein foundations will only fall within the treaty if they are paying agents. They could only be paying agents if they accept, hold, manage or transfer assets of third parties or merely pay interest or secure such interest payments. Interest income on the foundation's assets held and managed on the foundation's own account and in its own name is excluded from the treaty. The interpretation of a foundation to be a juridical person is subject to Liechtenstein legislation.

Liechtenstein as member of the European Economic Area (EEA) will be a solid partner of the EU within the legal context of its privacy laws, and this should also be respected by the EU member states. Liechtenstein cooperates in combatting fraud of any kind, and the numbers and positive results of legal assistance in criminal matters have shown that the EU can count on this support.

Liechtenstein entities open mainly bank accounts in Liechtenstein or Switzerland or Luxembourg or Austria, and all these countries benefit from the option to withhold tax instead of disclosing information between tax authorities. This withholding tax is only applicable if – and only if – payments go to physical persons living in the EU, hence payments to juridical persons are not affected by the EU savings tax directive.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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