During the past two years, the business environment for Liechtenstein’s financial sector has seen significant and permanent changes. The pressure, in connection with the European Union (EU) Savings Directive, mounted as the EU came to the realization that it does not generate the tax income it had hoped for. Furthermore, Liechtenstein’s LGT Group, its largest wealth and asset management firm, suffered major damage to its reputation in a high-profile whistleblower case brought by German prosecutors, which came to be known as the “Zumwinkel Case”.

In August 2008, the Hereditary Prince Alois von Liechtenstein declared in his state-holiday speech that Liechtenstein would change its attitude regarding its offshore financial center. This announcement led to a tax information exchange agreement (TIEA) with the United States in December 2008, which is scheduled to take effect 1 January 2010.

As a follow-on to the TIEA with the United States, Liechtenstein's government announced on 12 March 2009 that Liechtenstein is ready to commit and implement global standards of transparency and exchange of information according to the standards of the Organisation for Economic Co-operation and Development (OECD). The Liechtenstein government has also proposed a new tax law that complies with the principle of nondiscrimination as stipulated in the Agreement on the European Economic Area, to which Liechtenstein is a party.

In this article, I will give an overview of the effect of the Zumwinkel Case, the Liechtenstein government’s willingness to comply with regional and global standards of transparency, and the reform of Liechtenstein’s laws to comply with those standards.

Background
During the past year, Liechtenstein’s offshore industry has seen substantial changes in its business environment. The Zumwinkel Case in February 2008 was the “big bang” for Liechtenstein. In this case, a former employee of LGT Group sold DVDs containing confidential client data to the German intelligence service, Bundesnachrichtendienst. Although it had been under pressure from high-taxation countries to disclose information for quite some time, Liechtenstein experienced mounting international pressure following these events.

Privacy was and remains an important matter for Liechtenstein financial services providers. Professional trustees and their employees, banks and their employees, as well as lawyers and their employees are subject to a strict rule of confidentiality; infringements of this rule are severely punished.

Liechtenstein, however, cannot ignore the worldwide trend toward transparency, and it is currently undergoing a shift in its business priorities. In particular, a client’s tax situation has increasingly become an issue.

Since the beginning of 2005, Liechtenstein has had an independent and integrated regulatory authority for all financial services providers. The Financial Market Authority oversees and regulates Liechtenstein banks, asset managers, fund managers, investment funds, professional trustees, and auditors. In addition, Liechtenstein has recently concluded the TIEA on tax issues with the United States, and it is also in talks with the EU on assistance in tax matters. All this will entail a paradigm shift in the years to come.

Transparency and Exchange of Information Standards
The Liechtenstein government issued a statement on 12 March 2009 in which it announced its commitment to implement global standards of transparency and exchange of information as stipulated by the OECD. Clearly, the Liechtenstein government recognizes the challenges the current global financial crises have brought and is ready to take Liechtenstein a step ahead. For good reason, Liechtenstein is proud of its diversified economy and of the fact that it is home to a number of highly renowned companies in all sectors in the global business community. Thus, it is no surprise that Liechtenstein takes seriously its responsibilities in safeguarding clients’ trust, which has been the hallmark for Liechtenstein’s success in the past.

The new strategy of the Liechtenstein government has the following elements:

• Enhance cooperation with taxation issues by executing agreements on the exchange of information with other countries, or by means of double taxation agreements, while in principle maintaining aspects of privacy and banking secrecy laws.
• Go beyond the global standards of transparency and exchange of information developed by the OECD.
• Continue negotiations with the EU on an antifraud agreement and renegotiate the agreement on the taxation of savings income so as to extend the scope of its application.
• Insist on bilateral negotiations to agree on procedures aimed at helping Liechtenstein’s clients address their tax concerns in their home jurisdictions. Consequently, Liechtenstein wants OECD member states, such as Germany, France, and Britain, to implement procedures that take into account the legitimate interest of its clients. In this context, the Liechtenstein government is looking for voluntary disclosure procedures offered in connection which each bilateral tax information exchange agreement.

The Liechtenstein government has stressed that its declaration is the result of ongoing discussions in Liechtenstein that were initiated by Prince Alois’ state-holiday speech of last year.

Foundation Law
Since 2001, the Liechtenstein government had intended to revise Liechtenstein’s Foundation Law. A first attempt was made in 2004, when the government presented a draft of the legislation. The new law took effect on 1 April 2009.

The previous Foundation Law in Liechtenstein was regulated by articles 552–570 of the Liechtenstein Company Law (PGR, Personen- und Gesellschaftsrecht). The last major amendment of Liechtenstein’s Foundation Law took place in 1980. In the meantime, jurisprudence, in particular, evolved. With Liechtenstein’s original Foundation Law being set out in only 18 articles, it was clear that many questions in legal practice could not be answered by simply referring to the statutory law. These circumstances contributed to initiating the new statutory basis of Liechtenstein Foundation Law.

The goals of the revised Liechtenstein Foundation Law are as follows:

• Create more detailed provisions of Foundation Law in addition to those that already exist.
• Clarify existing discrepancies between practice and jurisprudence.
• Clarify questions relating to the setup of a Liechtenstein foundation by trustees, the legal position of the beneficiaries, the importance of the foundation’s purpose, the regulatory framework, and the legal quality of the founder’s rights.

TIEA with the United States

A TIEA between the Principality of Liechtenstein and the United States was signed on 8 December 2008. The TIEA will take effect on 1 January 2010 and will apply to tax years beginning on or after 1 January 2009.

Liechtenstein’s economic relations demand far-reaching cooperation regarding questions of taxation. The mutual legal assistance treaty signed in 2002 between the United States and Liechtenstein and the agreement regarding taxation of savings income between the EU and Liechtenstein (which has been in effect since 1 July 2005) are examples of such cooperation. The TIEA is oriented to similar agreements between the United States and other countries.

The main points of the TIEA are as follows:

• The exchange of information can be requested without regard to whether the person of interest is a resident of Liechtenstein or the United States.
• The TIEA covers information relating to all U.S. federal taxes.
• Any request shall be framed with the greatest degree of specificity possible (“John Doe Summons” shall not be possible).
• The exchange of information has to be the only avenue for the tax authorities to obtain the information.
• No party shall be under an obligation to provide information that under the laws of the requested party is considered as subject to legal privilege or containing trade, business, or professional secrets (banking and trustee secrecy laws do not constitute a reason to decline an information request).
• The statute of limitations of the requesting party shall govern the request for information.
• The information exchanged is strictly confidential, and its use in the prosecution of any other crime is forbidden.

The regulation of cooperation in tax matters is also one of the goals of the antifraud agreement between the EU and Liechtenstein, which has been in negotiations since mid-2007 and which follows closely the 2004 antifraud agreement between the EU and Switzerland.

Christoph Bruckschweiger is a partner with Ritter & Wohlwend Advokaturbureau in Vaduz, Liechtenstein.