17 November 2009

Tax Information Exchange Agreement (TIEA) And The Related Memorandum Of Understanding (MoU) Concluded Between The United Kingdom And Liechtenstein On 11 August 2009

Contrary to Switzerland where the Swiss Financial Market Authority (FMA) transferred client data on the basis of “fishing expeditions” (John Doe-summons - UBS case), Liechtenstein has never done this without court order, and only on the basis of sufficient case-by-case specification.
Liechtenstein Wealth Management
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Notes on important developments

  1. Contrary to Switzerland where the Swiss Financial Market Authority (FMA) transferred client data on the basis of "fishing expeditions" (John Doe-summons - UBS case), Liechtenstein has never done this without court order, and only on the basis of sufficient case-by-case specification. The Swiss Federal Court of Administration requalified – in addition to that - tax evasion into tax fraud simply because the beneficial owners of offshore companies kept further control of the companies' bank accounts in disregard of the company's legal personality (corporate veil). The Court considered that to be a fake and therefore a fraudulent construction. The right should be reserved to the board of directors and not somebody else.
  2. Liechtenstein has a TIEA with USA, coming into force on 1 January 2010 (including tax periods in 2009). A second TIEA with far reaching effects through the MOU has been signed with UK on 11.8.09. The next TIEA will be with Germany, which is in line with the OECD standard version (some minor amendments may have been made) and hence will have less impact on the right of the client's privacy. Furthermore, Liechtenstein will sign a Double Tax Treaty with Luxembourg in the end of August. This might be attractive for holding structures in the European Union through Liechtenstein.

Is it attractive?

  1. The TIEA with UK does not allow any tax information exchange until 31 March 2015, only in case of criminal investigations commenced in the UK. The OECD standard will not be implemented before that date. Criminal investigations are criminal tax offences or cautions under the Police and Criminal Evidence Act 1984. If the source of funds constitute "criminal property" within the meaning specified in section 340 of the proceeds of crime act 2002 (excluding property that has arisen solely as a result of illegal tax evasion), the person may be subject to criminal investigation and may therefore not rely on the assurance of the TIEA/MOU. So concrete requests (the identity of persons and the object of the investigation must be specified, also a declaration that all means to obtain more information locally are exhausted or beyond any reasonable effort) triggered off in cases of criminal investigations will be dealt with already in 2010.
  2. It only applies to persons having a domicile or resident status in UK.
  3. Any such person is sure until 31 March 2015 that none of the OECD-status like TIEA, G20-listings, will be applied to her/him if he/she runs bank accounts or has structures in Liechtenstein. It is principally a safe haven until that date.
  4. The treaty gives absolute assurance during that time and the client can plan with the financial intermediary during the coming years how to proceed.
  5. Liechtenstein and UK must settle the various open points left open in the MOU. Many questions are not yet replied, so it is not wise to hurry. This is also one of the main obstacles why the Liechtenstein trustee association is not happy with the present situation. Another point is the disregard of the relationship with Swiss financial intermediaries. It is extremely difficult to give them the necessary assurance in such a short time.
  6. Liechtenstein may be a point of interest for non-compliant clients in other countries who might settle the structure in Liechtenstein and then may become tax-compliant in the coming years.
  7. Negotiations will go on to settle the open questions. The target will be to introduce another option of a special withholding tax and to make the structures attractive for tax-compliant clients.
  8. Ones again it must be pointed out that it is not an automatic exchange of information or something similar. It will be the decision of each client what he/she will do together with the financial intermediary.

The most important aspects of the Tax Information Exchange Agreement (TIEA) concluded with the United Kingdom on 11 August 2009 and the related Memorandum of Understanding (MoU)

Liechtenstein and the UK have on the one hand agreed in this document that the OECD standard on the exchange of information in tax matters should be applied. However, at the same time they agreed that there should be a transition period up to 31.3.2015 to allow clients of Liechtenstein financial services, who are liable to UK taxes, to review and arrange their affairs. There are two ways clients can do this: they can either provide proof of tax conformity, i.e. disclose and settle any open tax matters with the HMRC in the UK, or cease to use Liechtenstein financial services. Liechtenstein will not grant the UK authorities intergovernmental assistance or information prior to 2015.

The UK authorities have agreed that the implementation of the Agreement and the related documents will only cover internal Liechtenstein measures. Liechtenstein will therefore ensure that its financial intermediaries verify which of their clients are liable to UK taxes by about 2013. Financial intermediaries who do not comply with these requirements will most probably be fined. The amount of the fine is still open since the internal implementation rules are not yet known. The clients' situation must be settled by 31.3.2015.

The Agreement offers clients of Liechtenstein financial services with UK ties who opt for participation in the disclosure programme relatively attractive terms as compared with the terms of disclosure pursuant to the UK's general tax amnesty provisions. On the one hand, the tax arrears owed will be calculated on the basis of 10 years, i.e. as from 1999. This is in contrast to the 20 years laid down in the general UK amnesty provisions. On the other hand, the Agreement between the UK and Liechtenstein provides for the application of a composite rate of 40% on income for the calculation of unpaid tax and a tax penalty of 10%. With the inclusion of interest, this would amount to a tax burden of approximately 50%. Instead of the composite rate, the effective taxes for the respective period can be calculated. The composite rate has the advantage to include all UK taxes like national insurance contributions, UK inheritance income, corporation, capital gains, stamp duties, VAT due and payable in respect of each such UK tax year.

The Liechtenstein government and the Liechtensteinischer Bankenverband (Liechtenstein Bankers' Association) have reacted positively to the Agreement for the reasons given above. The Liechtensteinische Treuhändervereinigung (Liechtenstein Association of Professional Trustees) sees in the Agreement a departure from the long tradition of protection of privacy and thus strongly rejects the Agreement. If no amendments are made to the Agreement such as, for example, the possibility of ensuring tax compliance through the use of a flat rate withholding tax ("Abgeltungs-" or "Anrechnungssteuer"), which would at the same time serve to protect the privacy of investors, the Treuhändervereinigung is seriously contemplating putting the Agreement to a referendum after a positive parliamentary decision. Thus it is not certain whether the signed Agreement will really enter into force in its current form. The Treuhändervereinigung is also rejecting the agreement because of the many questions not yet replied which give the agreement rather the meaning of a one-time settlement amnesty agreement instead of a "win-win-agreement" to continue the services for UK clients. Further talks will eventually settle these obstacles.

Key elements from public sources

A new Tax Information Exchange Agreement (TIEA) will enable the UK and Liechtenstein to exchange information to ensure the right tax is paid in each country in future.

A tax disclosure programme will clear up the tax arrears of UK residents with investments in Liechtenstein and put things right for the future. It will allow penalties on unpaid tax to be capped at 10% of tax evaded over the last ten years providing the taxpayer tells HM Revenue & Customs (HMRC) everything. Those who fail to make a full disclosure by the end of the programme will find their accounts in Liechtenstein closed down.

1. The Liechtenstein Disclosure Facility (LDF) runs from 1 September 2009 to 31 March 2015.

2. All Liechtenstein financial intermediaries will have to review all clients identifying those who need to confirm their tax position with HMRC and advise them to do so within a specific time frame.

3. Where a UK investor confirms to the intermediary that they are cooperating with HMRC the financial intermediary can continue to provide financial services to that person.

4. Where a UK investor cannot confirm that they are cooperating with HMRC the financial intermediary must withdraw financial services in Liechtenstein or apply various sanctions.

5. The Liechtenstein Government will introduce new laws to ensure audit of the process.

6. To take part in the programme, investments must either be held in Liechtenstein on 1 August 2009, in which case the person can participate from the start of the facility on 1 September, or, if the investments or assets are moved into Liechtenstein after that date the person can participate from 1 December 2009, at the end of the registration period for the New Disclosure Opportunity.

7. The penalty on unpaid tax will be limited to 10% in most cases on the same basis as the New Disclosure Opportunity operated by HMRC.

8. The recovery of earlier years' tax lost will be restricted to a maximum of 10 years up to 5 April 2009.

9. The taxpayer can elect to apply a special Composite Rate of 40% to cover all taxes on an annual basis without the benefit of any relief or deduction.

10. Both HMRC and the Liechtenstein authorities expect that by the end of the facility all UK taxpayers holding assets and investments in Liechtenstein will be meeting all their UK tax liabilities.

11. The TIEA was signed by the Rt Hon Stephen Timms MP, the Financial Secretary to the Treasury, and Liechtenstein Prime Minister, Dr. Klaus Tschütscher.

12. The text will in due course be laid as a Schedule to a draft Order in Council for consideration by the House of Commons. It will then also be available from the Stationery Office. The TIEA will enter into force as soon as both governments have completed the legislative procedures needed to give it effect.

13. The Memorandum of Understanding (MoU) setting out the details of the Disclosure Programme was signed by Liechtenstein Prime Minister, Dr. Klaus Tschütscher and Dave Hartnett CB, Permanent Secretary for Tax in HMRC.

14. A joint Declaration was signed by HSH Ambassador Prince Nikolaus von und zu Lichtenstein and Dave Hartnett CB, Permanent Secretary for Tax in HMRC.

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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