LDF and DTA – a guarantee for a successful future?
On 7 February 2012, Liechtenstein and the UK initialled a Double Taxation Agreement (DTA) in Vaduz and also extended operation of the sole disclosure programme currently in place, the Liechtenstein Disclosure Facility (LDF), by a further year up to 2016. As a result, the two countries have expanded and perfected cooperation in the area of taxation by adding another major element and, at the same time, reinforcing the status of the LDF.
The agreement between the two governments signed in August 2009 (Memorandum of Understanding [MoU]) and the Tax Information Exchange Agreement (TIEA) that, apart from two exceptions, will enter into force on 1 April 2015 will make it possible for Liechtenstein's financial intermediaries to maintain business relationships with individuals subject to UK law and enter into such relationships with new clients if they know that these clients have become compliant with respect to all previously undisclosed UK tax liabilities by 31 March 2015 or that such clients are already compliant with their UK tax obligations in relation to their Liechtenstein connected affairs. Both the Taxpayer Assistance and Compliance Programme (TACP) and the LDF are now available for this purpose.
The DTA, on the other hand, now paves the way for persons who are subject to and compliant with UK tax law to benefit from promising possibilities in the future by investing in Liechtenstein and creating optimal asset structures within the framework of permissible asset, estate and tax planning.
This will create legal certainty not only at an individual level, but also in terms of recognition of Liechtenstein's structures and in general reinforce the attractiveness of Liechtenstein as a financial and business centre. At the very latest, when the new tax law entered into force on 1 January 2011, this legislation combined with the DTA to make Liechtenstein –at least and in any case as with regard to the UK – an equal "onshore" partner.
These agreements are indicative of the steady increase in confidence in Liechtenstein on the part of the UK in recent months and represent a pragmatic and sustainable partnership that is not limited to the official level, but also extends to and encompasses the private sector. Liechtenstein's financial intermediaries have recognised the sign of the times, and what at first still seemed unimaginable in 2009 has turned out to be a stroke of good luck. Of course, the question arises as to why.
The LDF, which offers unique and advantageous conditions in every respect, can be briefly described as follows (non-conclusive list):
- Only disclosure programme for natural AND legal persons subject to UK taxation that covers all undeclared income and assets located outside the UK;
- Covers ALL types of taxation (in particular inheritance tax);
- Possibility of a composite rate tax of 40% for all past tax liabilities up to 2009/2010;
- Available to NEW as well as existing clients;
- Assessment limited to the 10 accounting periods preceding the MoU (from 1999);
- Low average tax rate (approximately 18%) and low penalties (10% up to 2009/2010, approximately 20% from 2010 onwards);
- No publication of details ("no naming and shaming");
- Comprehensive and unlimited protection against criminal prosecution for UK taxpayers and financial intermediaries;
- Absolute security: FINAL settlement of past tax liabilities in the UK.
It is not necessary to transfer all relevant property to Liechtenstein to qualify for the LDF. The "only" requirement is that there is a connection between the relevant property and Liechtenstein and that the relevant property is managed from Liechtenstein. The decision as to whether a meaningful client relationship exists and whether or not a confirmation of relevance can be issued, which has been a prerequisite for qualification for the LDF since 1 December 2011, lies at the discretion of each individual Liechtenstein financial intermediary at the moment. In particular because of impending changes in the overall legal situation in Singapore and Hong Kong, which have expanded already resp. will in the future expand the term money laundering to include violations of tax laws (referred to as the "all-crime-approach"), it is also conceivable that minimum requirements will apply in the future (minimum amount or minimum percentage of the relevant property). Relevance has to be determined both in cases of existing and new client relationships. However, any client relationship in existence prior to 1 December 2011 qualifies as meaningful.
Finally, UK taxpayers can also themselves provide Liechtenstein financial intermediaries with proof to the effect that they are compliant with UK tax law in respect of relevant property or have in the past fully complied with UK tax law in respect of such property (self-certificate of tax compliance). Such self-certification simplifies the procedure and does not automatically entail the necessity of using the services of a qualified UK agent. However, taxpayers should be absolutely certain as to their tax situation and be aware of the consequences under fiscal and criminal law in the event this information should prove to be incorrect.
To date, more than 2,200 (!) voluntary disclosures have been made under the LDF. It has already been possible to achieve sustainable improvement and gain valuable experience both in terms of content through direct involvement of the private sector in Liechtenstein as well as at the organisational level through the creation of a central unit (offshore co-ordination unit) within HMRC in Birmingham.
As compared with the MoU and the LDF, the entry into force and effect of the tax agreement between Switzerland and the UK is still subject to approval by the parliamentary bodies of the two countries as well as by the EC - in respect of this tax agreement, compatibility with the provisions of European law will be assessed - and is planned for 1 January 2013.
Besides this, the agreement between Switzerland and the UK is far more restrictive in terms of time limits, substantive content and geographical application: Whereas only assets located in Switzerland (geographic restriction) as on 31 December 2010 fall into the scope of the agreement and new client relationships will therefore not qualify (time limit), only such natural persons are eligible as are not – even without their knowledge – under civil or criminal investigation by HMRC and can provide proof of compliance, in which case such persons must avail themselves of the services of qualified UK agents for this purpose. Anonymity stands in the way of clearance, in particular in respect of inheritance tax, and creates a situation in which tax clearance is limited exclusively to UK tax liabilities in connection with assets in existence as of this date. Finally, payment of taxes on liabilities from the past is basically due from the year 2003 onwards at normal tax rates (substantive restrictions).
This realignment of cross-border asset planning and wealth management gives financial intermediaries in the UK, Liechtenstein and Switzerland a unique opportunity to intensify cooperation in the best interest of existing and new clients. For example, UK taxpayers can, among other things, maintain their relationships with a trusted financial intermediary in Switzerland that date back many years and at the same time benefit from the advantages of the LDF in particular for the past and from Liechtenstein as an "onshore jurisdiction" for the future in general. The involvement of a Liechtenstein financial intermediary therefore represents a comprehensive and sustainable solution that protects the privacy of the client provided that the services of the financial intermediaries involved are aligned and coordinated accordingly.
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.