The draft to the agreement is already available in English and German, although there have to be made some adaptations relating to the meaning of certain wordings. Liechtenstein which will pay attention to the further steps taken by Switzerland and which drafted its agreement with the European Community on the basis of the Swiss agreement, will also use the implementation guidelines issued by Switzerland on 19 October 2004 on this EU savings tax directive. Liechtenstein will issue an own implementation guideline, but the Swiss draft will show in the most important parts where the final result will be. There will not be important differences when it comes to define the paying agent, interests, physical and juridical persons etc. Differences between Liechtenstein and Switzerland will surely be found when it comes to register paying agents and to regulate the exchange of information. Interests will surely be defined in both countries in the same way, as Liechtenstein banks depend on the electronic registration of bonds etc. in Switzerland. Liechtenstein will hardly be in a position to apply a different standard to define interests.
The agreement and the implementation guidelines should enter into force on 1 July 2005.
This article will highlight some points of major importance to the Liechtenstein trustee services providers and their clients living in the European Union (EU).
Purpose of the Agreement
The agreement introduces a system in favour of the EU member states that guarantees them the levy of a tax on interest payments to physical persons living in EU member states, if and only if such interest payments will be done by paying agents resident or established in Liechtenstein (or Switzerland for the Swiss agreement with the EU). For example a payment of interest on bonds by a Liechtenstein bank (or Swiss bank) to an account holder being a physical person living in the EU, is subject to the agreement. The taxation can be done by a retention (withholding) from the amount of the interest payment or by a report of the interest payments to the competent authority of the EU member state where the physical person lives. Interest payments under the agreement also include interest payments from debtors established outside of the EU territory.
The system of EU taxation on interest payments should be valid as from 1 July 2005 and is not limited. The amounts of retention (withholding savings tax rate) will be the following:
- 15 %, for interest payments from 1 July 2005 to 30 June 2008;
- 20 %, for interest payments from 1 July 2008 to 30 June 2011;
- 35 %, for interest payments from 1 July 2011 onwards.
Persons falling below the Agreement
Individual beneficial owners (only physical persons) who are residents of a EU member state and who receive interest payments from a paying agent resident or established on the territory of Liechtenstein are subject to the taxation.
Beneficial owner is a person who receives or secures an interest payment for his or her own benefit. The following provisions must therefore be fulfilled (together):
- It must be a physical person.
- This person must be resident in a EU member state.
- The payment must be qualified as an interest payment in the meaning of the agreement.
- This person must receive or secure the interest payment for his or her own benefit.
If one of the criteria is missing, the payment to the physical person is not subject to the agreement.
Juridical persons are for example the corporation, the foundation, the establishment (Anstalt) in Liechtenstein. These entities will be explicitly mentioned as entities / persons not subject to the agreement in that respect (in the implementation guidelines).
The identity and residence of the beneficial owner is taken from the data which a paying agent has recorded. Further investigation is not needed by the paying agent. A material investigation on the living address on the basis of documents is not necessary. For example the mailing address is not necessarily the residence in the meaning of the agreement. However a physical person showing an EU passport and indicating that he or she does not live in the EU might be required to supply further confirmation on his or her private living address.
(Contracting party of the paying agent:) Individual is a physical person: In practice the records according to the legal provisions against money laundering may represent the basis to identify the individual as beneficial owner. For the purposes of the agreement, the fiduciary contracting party (mandator) and not the nominee is the beneficial owner in the understanding of the agreement.
Contracting party of the paying agent is a juridical entity: Juridical entities are principally not covered by the agreement. The owner (shareholder, beneficiary etc.) of a juridical person is not relevant for the agreement. This is also the case if the identification or determination of the ultimate beneficiary according to the money laundering law is done and recorded with the paying agent. However, if the paying agent has indications that the physical person acts as a fiduciary nominee or on the basis of an usufruct, the provisions on the physical persons apply. This is above all the case if the identity between the individual contracting party of the paying agent and the beneficiary is different.
The provisions on trusts are not yet clear.
For the relationship between Switzerland and Liechtenstein it is noteworthy that payments from a Swiss bank to (e.g.) a Liechtenstein foundation do not fall under the Swiss agreement with the EU (the foundation is outside the EU), but have effects on the Liechtenstein agreement with the EU.
Paying agent for the purposes of the agreement shall mean (only examples):
- banks according to the banking law;
- securities dealers;
- natural and legal persons resident or established in Liechtenstein including economic operators regulated by the Liechtenstein Persons-and-Companies Act (PGR) , partnerships and permanent establishments of foreign companies, which even occasionally, accept, hold, invest or transfer assets of third parties or merely pay or secure the payment of interest in the course of their business.
The Swiss agreement also states that legal persons resident or established in Switzerland, partnerships and permanent establishments of foreign companies which even occasionally, accept, hold, invest or transfer assets of third parties or merely pay interest or secure the payment of interest in the course of their business can be paying agents. The Liechtenstein agreement states the same but explicitly mentions as legal persons the "economic operators regulated by the Liechtenstein Persons-and-Companies Act (PGR)". This clause can be considered as a further explanation but is not necessary. The clause shows that even companies from other jurisdictions than Switzerland or Liechtenstein which have directors with domicile in these two countries could fall within the definition of a paying agent if other criteria is met (in both countries).
Other paying agents for the purposes of the agreement are normally fund administrations, insurance companies, asset managers, trustees, lawyers and notary publics and companies or permanent establishments of foreign companies which regularly or occasionally pay or secure for beneficial owners with EU residence interest earning values or interest on debts, where these paying agents are not debtors.
Juridical persons, like foundations, establishments, corporations, will usually not be paying agents because their usual purpose and activity only includes activity for their own account and not for third parties.
Only paying agents resident or established in Liechtenstein are obliged to make a retention or voluntary disclosure to the competent EU authority for interest payments to physical persons for the purposes of the agreement. Persons who act in the capacity as private persons and not on a commercial basis do not represent paying agents.
The agreement and the implementation guidelines will define them thoroughly. The definition should be identical to that one in Switzerland as Liechtenstein will not be in a position to introduce an own definition on the grounds of electronic data processing performed by banks.
With a few simplified words, interest payments are those payments made to or credited on a bank account or other account related to any debt, furthermore any sale, redemption or remittance of debts in the same meaning of interest accrued or interest capitalised, and income from mutual funds. The domicile of the interest debtor is not relevant. There are some exemptions which are mentioned in the agreement and more detailed in the guidelines. The paying agent will retain the tax on the relevant interest payment or will fulfil the reporting requirement if the EU resident beneficial owner has agreed to do so.
Exchange of Information
Liechtenstein contrary to Switzerland does not know an exchange of information on the administrative level, but only on the way of legal assistance according to its own laws which solely includes the way through court rulings. Exchange of information by legal assistance follows on conduct constituting tax fraud under the laws of Liechtenstein, or the like for income covered by the agreement. "The like" includes only offences with the same level of wrongfulness as is the case for tax fraud under the laws of Liechtenstein. According to Liechtenstein's own procedural laws, it will supply information only with respect to this agreement. This may include civil or criminal matters. The information or the assistance follows within the usual legal court procedure for criminal matters (mutual legal assistance in criminal matters). Any information received by the foreign authority will only be usable for the purposes of the agreement.
The above article does not replace any legal consultancy, it is intended simply to provide general information. The ALLGEMEINES TREUUNTERNEHMEN offers a comprehensive range of services relating to the formation of companies and the provision of advice on legal matters as well as "family office services". Supported by 100 members of staff, our team of professionals ensure that clients receive individual attention. For more information consult Roger Frick at Allgemeines Treuunternehmen, FL-Vaduz, Fax ++423/237 34 60, Tel. ++423/237 34 34.
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.