Liechtenstein: Executive Summary

Liechtenstein Executive Summary

Liechtenstein is in the EEA but Not In the EU

Liechtenstein is a constitutional monarchy, has a land area of about 160 sq km (60 sq m), a population of just over 34,500 (July 2009 est), and is sandwiched between Switzerland and Austria. It has a customs union and a monetary union with Switzerland. Liechtenstein belongs to EFTA, and since 1995 to the EEA; it is member of the UN. The official language is German; English and French are also spoken, with a local dialect used in everyday life.

A referendum held in March, 2003, gave the ruling Prince Hans-Adam II sweeping new powers, including the right to veto parliamentary bills, sack the entire government and introduce emergency rule.

Economy Buoyant Based on Industry and Financial Services

Liechtenstein was primarily an agrarian country until its economic union with Switzerland (1922 and reinforced in 1980) propelled it into rapid industrial and financial development. The princely family is highly active in leading the country economically. GDP per capita is $121,000, inflation and unemployment are around 1.5%. The currency is the Swiss Franc, and there are no exchange controls. Membership of the EEA gives Liechtenstein access to the single market of the EU in most respects.

In October, 2003, in a dramatic development, Liechtenstein refused to sign an agreement to expand the EEA to incorporate the ten nations due to accede to the EU in 2004, apparently in order to get back at the Czech Republic and Slovakia for the 'Benes' decree in the 1940s which resulted in the expulsion of Liechtenstein nationals and the expropriation of their property. But at the end of November Liechtenstein gave in and signed up.

Liechtenstein's Lowtax Specialisations

Liechtenstein has moderate domestic taxes, but has specialised and very flexible types of 'holding' and 'domiciliary' company as well as 'establishments' and 'foundations' which are tax-exempt, but cannot usually trade inside the country. There are more than 30,000 of these 'offshore' entities, which provide around 30% of state revenues. There is also a trust regime based on common law, although Liechtenstein is a civil law jurisdiction. The headline Liechtenstein product is private banking, although holding companies must run it close in terms of asset value; trusts have also been successful.

After the EU reached final agreement on its Savings Tax Directive, under which an information-sharing regime was initiated by 12 out of 15 existing member states in 2005, Liechtenstein chose, like Switzerland, to impose a withholding tax on returns on savings paid to citizens of EU member states, rather than compromise banking secrecy.

FAFT Blacklist

In June 2000, Liechtenstein was identified by the FATF as a non-cooperative and harmful tax haven. The result of this is that Liechtenstein was one of fifteen tax jurisdictions placed on an FATF blacklist. Each 'harmful' tax haven had a year in which to correct its tax regulations and legislation, once it has done so the tax haven will be removed from the list. Liechtenstein was removed from the list in 2001 after tightening up its money laundering legislation.

By mid-2002, the FATF was able to say that Liechtenstein was 'off its radar screen'.

The OECD

In 2009, Liechtenstein was identified as a territory which had committed to, but not substantially implemented the internationally agreed standard on tax transparency. In the intervening months Liechtenstein has concluded 15 Tax Information Exchange Agreements, including with France, Germany, the UK and the US, and has subsequently been elevated to the OECD's 'white list of compliance jurisdictions.

Plenty of Lowish Taxes in Liechtenstein!

Profits tax on business and income tax on individuals, both at 18% on higher incomes, don't sound too bad, but the net worth tax at 2% for business and around 1% for indivduals can be expensive. There is no separate capital gains tax (they are taken into income) but there is a moderate tax on real estate gains. Estate and gift taxes vary but are low within the family; VAT is 6.5%. There is only one tax treaty, with Austria, but withholding tax on dividends and some other payments is only 4%.

In May 2010, Liechtenstein’s government has approved plans for creating a new tax act, designed to modernize the existing Liechtenstein Tax Act of 1961 and including a 12.5% flat rate of corporate tax.

Immigration Controlled by Residence and Work Permits

EEA nationals have some qualified freedom of movement in Liechtenstein, but in practice non-nationals need residence and work permits. There is a substantial commuting population from Austria and Switzerland.

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