Legislation and supervisory authorities in Liechtenstein
Verwaltungs- und Privat-Bank Aktiengesellschaft (VP Bank), Vaduz, is constituted as a joint-stock company under Liechtenstein law. It is the parent company of VP Bank Group. The competent supervisory body in its country of domicile is therefore the Financial Market Authority Liechtenstein (FMA). Because the bearer shares of the parent company are listed on SIX Swiss Exchange Ltd, VP Bank is also subject to the rules laid down by SIX on the basis of the Swiss Federal Act on Stock Exchanges and Securities Trading of 1995 and the related implementing ordinances. The business activities of VP Bank Group are supervised by the competent authorities of each country in which the Group has subsidiary companies or representative offices.
In Liechtenstein the activities of VP Bank are subject primarily to the Act on Banks and Finance Companies (Banking Act, BankA) of 21 October 1992, as well as the Ordinance on Banks and Finance Companies (Banking Ordinance, FL-BankV) of 22 February 1994. Since January 2008, the Bank has also been subject to the Ordinance on Capital Adequacy and Risk Diversification for Banks and Finance Companies (Capital Adequacy Ordinance, CAO) of 5 December 2006. The Banking Act also lays down the general conditions for the supervisory duties of the FMA. The latter – together with the statutory auditors, who must possess a licence from the FMA and are also under its supervision – constitutes the main pillar of the Liechtenstein system of supervision.
Under the Banking Act, banks and securities firms in Liechtenstein can offer a broad array of financial services. The Law on Professional Due Diligence to Combat Money Laundering, Organised Crime and Terrorist Financing (Due Diligence Act, DDA) of 11 December 2008 and its related ordinance (Due Diligence Ordinance, DDO) of 17 February 2009 – in conjunction with the money-laundering article of the Liechtenstein Penal Code – constitute the legal foundation for due diligence that must be observed by each liable individual in Liechtenstein’s financial services sector. The DDO corresponds to international requirements and was revised especially in early 2009 to reflect the implementation of the EC Directive of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (3rd Money Laundering Directive), the EC Directive of 1 August 2006 (Politically Exposed Persons, PEP Directive) as well as the recommendations of the International Monetary Fund.
Within the scope of its business activities, i.e. the provision of financial services, VP Bank must, among other things, observe the following additional laws and related ordinances:
- Payment Services Act (PSA);
- Law on Undertakings for Collective Investment in Transferable Securities (UCITSA);
- Law on Investment Undertakings for Other Assets or Real Estate (Investment Undertakings Act, IUA);
- Law Governing Supplemental Services of Companies of a Financial Conglomerate (Financial Conglomerate Act, FCA);
- Law Governing the Disclosure of Information Relating to Issuers of Securities (Disclosure Act, DA);
- Securities Prospectus Act (SPA);
- Law Against Market Abuse in the Trading of Financial Instruments (Market Abuse Act, MAA);
- Law Governing Takeover Offers (Takeover Act, TOA);
- Persons and Companies Act (PCA).
The following discusses a number of developments and legal foundations of relevance to financial market regulation which have been revised or put into effect during the past financial year or are likely to be of relevance in the future.
EBA, EIOPA and ESMA guidelines
Already in September 2010, the European Parliament approved a new supervisory system that took effect as of 1 January 2011. The previous committees, which merely acted in an advisory capacity, were replaced by three new EU authorities:
- European Banking Authority (EBA)
- European Insurance and Occupational Pensions Authority (EIOPA)
- European Securities and Markets Authority (ESMA)
Ever since the establishment of these three new European supervisory bodies, the FMA has been participating in their meetings. The EBA, EIOPA and ESMA have meanwhile commenced their operative activities. Amongst the competencies of the aforementioned authorities is the power to issue guidelines and recommendations that must be bindingly implemented within the EU.
The first guidelines, in this instance on the topic of internal governance, have already been issued, and it is expected from all national supervisory authorities that the financial services companies within their jurisdiction adopt the guidelines in due time.
This is of interest to Liechtenstein mainly because its financial centre is closely interlinked with the EU member states and therefore relies on being recognised as equivalent in terms of financial market supervision; otherwise, market access under the EU passport could be threatened.
OTC derivatives (European Market Infrastructure Regulation – EMIR)
In September 2009, the G20 heads of state agreed at the summit meeting held in Pittsburgh, USA, that at the latest by the end of 2012 all standardised OTC derivatives contracts are to be processed via a central counterparty and that all such contracts must be recorded in a transaction register. This effort was confirmed at the Toronto meeting in June 2010 and the G20 also committed to implementing far-reaching measures aimed at increasing the transparency and supervision of OTC derivatives trading.
The EU Commission paid heed to this matter by issuing an ordinance (EU No. 648/2012 of 4 July 2012) pertaining to OTC derivatives, central counterparties and a transaction registry (“European Market Infrastructure Regulation, EMIR”). The ordinance was published in the trade register and took effect immediately in the EU region. It is foreseen that, as of 2013, standardised OTC derivatives contracts will no longer be concluded bilaterally but instead via a central counterparty and must be reported to a transaction registrar. To that purpose, both the central counterparty and the transaction registrar need to be licenced in the EEA region by the European Securities and Markets Authority (ESMA). As an EEA member, Liechtenstein must adopt EEA-relevant EU ordinances once they have become recognised in the EEA treaty.
Revision of the Persons and Companies Act (introduction of general accounting obligations)
In its Report and Petition No. 134/2011, the Liechtenstein government wrote that, during the course of the audit procedure that became necessary for determining implementation of international standards relating to the fight against money laundering (“Moneyval” evaluation) and the tax area (Global Forum Peer Review), the implementation of certain measures took priority, especially in terms of introducing accounting obligations for all corporate and legal forms that are also recognised as private wealth entities. In consequence, accounting obligations that correspond to the international standards are to be legally prescribed in particular for trusts, foundations and fiduciary companies that are not run along commercial lines.
It was also expressly determined that the provisions of the Persons and Companies Act governing the keeping and preservation of business records also apply analogously to such legal entities and that their business records must be made available within a reasonable time at the main office of the entity. The goal of the petition was to eliminate one of the most significant weak points in Liechtenstein law identified during the examination process and prevent a new listing or another downgrading of Liechtenstein by the relevant international bodies. Following a second reading and debate at its March session, parliament adopted this revision.
Revision of the Securities Prospectus Act (SPA), Disclosure Act (DA) and Asset Management Act (AMA)
The Report and Petition No. 2/2012 as well as the related Po-sition Statement No. 28/2012 were addressed and approved by parliament after a second reading at its April session.
The Report and Petition (RaP) relates to Directive 2010/73/EU of the European Parliament and Council of 24 November 2010 on the revision of Directive RL 2003/71/EC regarding the prospectus which must be published upon the public offering of securities or the admission to trading thereof, as well as Directive 2004/109/EC on Harmonisation of Transparency Requirements relating to information on issuers whose financial instruments are admitted to trading on a regulated market. The RaP states that these Directives essentially pursue the goal of heightening the legal certainty and efficiency of the prospectus regulations as well as taking some of the administrative burden off of issuers and financial intermediaries. They also have the aim of reinforcing investor protection, ensuring reasonable information that meets the needs of small investors and adapting to the legislative powers of the EU Commission.
Through implementation of the aforementioned Directives it became necessary to adapt the Securities Prospectus Act (SPA) and the Disclosure Act (DA) in order to make the rules more comprehensible and thereby achieve greater efficiency in the issuance of securities. The ultimate aim was to ease the administrative burden on issuers and financial intermediaries, provide the employees of issuers with a complete spectrum of investment possibilities, and enable small investors to analyse more effectively the prospectuses and related risks of securities prior to making an investment decision. In addition, a minor adjustment was made to the Asset Management Act (AMA).
Amendment to the Persons and Companies Act (responsibility of corporate bodies)
In April, parliament approved the government’s proposal (RaP No. 4/2012) for reinforcing the legal foundation for liability on the part of corporate bodies. In this regard, the joint and several liability previously provided for had led in practice to repeated instances of legal uncertainty. The draft proposal had the purpose of curing that problem and bringing the legal situation in line with modern precepts by adopting the principle of differentiated joint and several liability as applied in Switzerland as well as improving and fine-tuning the prevailing rules on the joint and several liability of corporate bodies. The Act prescribes that the personal culpability of a given corporate officer must form the basis for determining liability. This change has led to more legal certainty for corporate bodies and greater predictability in terms of liability law.
Double taxation agreement with Germany
In keeping with the government’s strategy of concluding bilateral treaties, an agreement (Tax Information Exchange Agreement – TIEA) was signed with Germany on 2 September 2009 and entered into force in October 2010. At the signing, both sides expressed the desire to intensify their future collaboration and, in the area of cooperating on tax matters, to conduct further negotiations on the conclusion of a double taxation agreement (DTA). A corresponding DTA was signed on 17 November 2011 in Berlin. The intent of the agreement is to avoid double taxation of income and wealth.
This treaty sets the OECD standard in terms of the exchange of information (extended administrative assistance clause) and the area of enforcement. At the same time, it fully takes into account the very close economic ties between the two countries and creates an advantageous framework for the tax recognition of cross-border investments. However, it does not include any provisions for “ex post facto” taxation of the previously untaxed capital investments of German citizens in Liechtenstein or any potential procedure for the future taxation of capital income on a flat-rate withholding basis. Here, separate talks and negotiations are being conducted.
Parliament approved the corresponding RaP No. 25/2012 on the DTA in April 2012. Following the ratification process in both countries, the DTA entered into force on 1 January 2013.
Double taxation agreement with the United Kingdom of Great Britain and Northern Ireland, as well as revisions to the terms of the “Liechtenstein Disclosure Facility”
Also in keeping with the government’s strategy of concluding bilateral treaties, a TIEA was signed with Great Britain on 11 August 2009 as well as a memorandum of understanding (MOU) which, apart from a Tax and Compliance Programme (TACP), regulates a special disclosure programme in the United Kingdom – the “Liechtenstein Disclosure Facility” (LDF). At the same time, negotiations were initiated with regard to the conclusion of an agreement on the avoidance of double taxation (DTA).The corresponding DTA was signed in London on 11 June 2012. The intent of the agreement is to avoid double taxation of income and wealth in line with the OECD standard. Parliament addressed the corresponding RaP No. 109/2012 at its October session.
Owing to the success of the LDF, representatives of Great Britain and Liechtenstein agreed in a “Third Joint Declaration” dated 11 June 2012 to prolong the MOU until 5 April 2016. This prolongation also affects the availability of LDF as a limited-time opportunity for UK taxpayers to get their worldwide tax matters in order under once-only conditions. Also prolonged was the term of applicability of the disclosure obligations imposed on financial intermediaries in Liechtenstein, which were adopted within the framework of the TACP as a means of identifying new “relevant persons” and ensuring the tax conformity of British clients of the Liechtenstein financial centre.
In addition, Liechtenstein and the British tax authority HMRC (Her Majesty’s Revenue & Customs) agreed that proof of the tax conformity of new clients who deposit relevant assets with a Liechtenstein-based financial intermediary after 31 March 2012 is possible in the form of a “Self-certification of Tax Compliance”, which attests to either the fulfilment or non-existence of tax obligations in Great Britain.
Existing uncertainties in actual practice about the term “meaningful relationship” with a Liechtenstein financial intermediary, which must exist or be justified for partici- pation in the LDF, were eliminated by the Liechtenstein government in an ordinance dated 10 July 2012 as a supplement to the Tax Administrative Assistance Ordinance for the United Kingdom (TAAO-UK). In an amendment to the previously law, it adopted Art. 3 Par. 3 TAAO-UK, under which a “meaningful relationship” is presumed to exist if the following conditions are met:
- for banks, if at least 20 per cent of the relevant person’s worldwide bankable assets, which must be registered in order to participate in the disclosure facility, are held in a bank account or safekeeping account in Liechtenstein, whereas the percentage threshold is no longer relevant for amounts in excess of CHF 3 million;
- for fiduciary companies if:
- an associated party has its statutory domicile in Liechtenstein or a special endowment of assets is administered by at least one domestic fiduciary and at least 10 per cent of the relevant person’s worldwide bankable assets, which must be registered in order to participate in the disclosure facility, are held in a bank account or safekeeping account of that associated party or special endowment in Liechtenstein, whereas the percentage threshold is no longer relevant for amounts in excess of CHF 1 million;
- a legal entity with a statutory domicile abroad is predominantly administered by domestic corporate bodies and at least 15 per cent of the relevant person’s worldwide bankable assets, which must be registered in order to participate in the disclosure facility, are held in a bank account or safekeeping account that legal entity in Liechtenstein, whereas the percentage threshold is no longer relevant for amounts in excess of CHF 1 million;
- for insurance companies if the relevant person concludes an insurance policy with a minimum premium of CHF 150,000 which is issued by an insurance company in the Principality of Liechtenstein or otherwise from the Principality of Liechtenstein.
These changes took effect as of 1 September 2012.
In future, representatives of the governments and tax authorities of Liechtenstein and the United Kingdom will continue to meet on a regular basis in order to expand the LDF further and coordinate practice-related issues.
Further developments in the tax area
In its Declaration of 12 March 2009, Liechtenstein committed to implementing the OECD standard on transparency and the exchange of information in tax matters. Since then, Liechtenstein has concluded an array of international tax treaties, including agreements on the avoidance of double taxation (DTA) as well as the OECD-consistent exchange of information in tax matters (TIEA).
In 2012, Liechtenstein ratified or put into effect the following international tax agreements:
- The TIEA and MOU concluded with Australia entered into force on 21 June 2011.
- The TIEAs concluded on 17 December 2010 with Denmark, Sweden, Finland, Norway, Iceland and the Faroe Islands entered into force on in 2012.
- The DTA concluded with Uruguay on 18 October 2010 entered into force on 3 September 2012.
- On 5 July 2012, the governments of Japan and the Principality of Liechtenstein concluded a TIEA in accordance with the OECD standard.
- As previously mentioned, the double taxation agreement between Germany and the Principality of Liechtenstein signed on 17 November 2011 was ratified by Liechtenstein’s parliament on 25 April 2012.
- And also as previously mentioned, the DTA between the United Kingdom and the Principality of Liechtenstein signed on 11 June 2012 was addressed at the 24 October 2012 session of parliament.
Apart from impending treaties, Liechtenstein initialled further agreements in 2012, e.g. with Singapore, China, South Africa and Bahrain. The Liechtenstein government wants to press ahead with the negotiation and conclusion of bilateral tax treaties. At its December 2012 meeting, it set the priorities for 2013 in terms of DTAs with countries of economic and strategic importance to Liechtenstein. The talks and negotiations on DTAs and TIEAs already under way are to be continued and finalised. In addition, Liechtenstein has entered into discussions with individual partner states, e.g. Germany and Austria, on tax agreements that would regularise the past and regulate the future taxation of capital income.
The legal and reputational risks inherent to the cross-border financial services business have increased noticeably in recent years. The supervisory authorities in various countries expect from banks that they observe and also comply with foreign law in the conduct of their transnational financial services activities (see e.g. the Swiss Financial Market Supervisory Authority FINMA position paper dated 22 October 2010 on the risks involved in the cross-border financial services business).
The banks must adapt their business processes and service models for the cross-border business so there is assurance that market cultivation activities can be conducted abroad in a legally compliant manner. This requires a comprehensive analysis of the legal and reputational risks that can arise from their cross-border business activities. Once those risks are identified, the banks must introduce suitable measures to mitigate them. Furthermore, in view of the increased supervisory requirements, the banks must enact appropriate internal rules that are to be strictly controlled and complied with and any violations sanctioned. Also, those employees involved in the cross-border business must be thoroughly trained in the supervisory regulations of the foreign markets they service.
Implementation of the Moneyval package of measures
With the 2009 revision of the Due Diligence Act (DDA) in connection with the adoption of the 3rd EU Money Laundering Directive, the lion’s share of the International Monetary Fund (IMF) assessments from 2007 had already been implemented. The remaining recommendations are integral parts of the present revision, which includes DDA, the related ordinance (Due Diligence Ordinance, DDO) and the Criminal Proceedings Ordinance (CPO).
The major points of this revision:
- regulating the heightened due diligence obligations in connection with transactions and business relationships with persons in or from countries whose due diligence measures do not meet international standards, as well as especially complex transactions and structures;
- rounding out the list of sanctionable offences and decriminalising an array of due diligence violations by making them merely infraction offences in order to ensure the completeness of the sanctioning system and its gradation according to the severity of the given breach;
- adjusting to the valid FATF standard the threshold values prescribed in DDA for fulfilling due diligence obligations in the handling of occasional transactions by reducing the limit amounts from CHF 25,000 to CHF 15,000;
- specifying more precisely the Group-wide application of the legal due diligence standards and the prohibition of notification;
- supplementing the definition “politically exposed person” as per Art. 2 Par. 1 lit. a DDO with the term “important party functionaries”, as well as referring in Art. 23 Par. 1 lit. g DDO also to the qualification of a previously politically exposed person within the context of Art. 2 Par. 1 lit. h DDO as a criterion for business relationships and transactions with heightened risks.
This revision, which is based on Report and Petition 77/2012, entered into force on 1 February 2013.
Total revision of the Trustees Act
Due to the dramatic changes in the international circumstances, the trust sector is in a transition phase which has been taken as an occasion to totally revise the Trustees Act. Until now, fiduciaries have not been subject to prudential supervision but instead are overseen primarily by the FMA in terms of compliance with the Law on Professional Due Diligence to Combat Money Laundering, Organised Crime and Terrorist Financing. The FMA also has the authority to issue the corresponding licences, while the Princely Supreme Court performs disciplinary surveillance.
The objective of this total revision is to enhance international recognition of the fiduciary profession, heighten the trust in this industry and solidify the reputation of the entire Liechtenstein financial centre. To achieve those goals, the effective and efficient supervision of the trust area must be ensured. Accordingly, the planned supervision by the FMA and the restructuring of the disciplinary system are the key aspects of the revision. In future, ongoing compliance with the licensing requirements is to be verified.
In this regard, the draft consultation paper provides for corresponding competencies on the part of the FMA and the creation of an arbitration body – similar to that already known in the banking industry – which will serve clients as a point of contact outside the ordinary judicial procedure in the event of disputes with the fiduciary. The licensing process for fiduciary companies should be formally simplified and thereby streamlined from the standpoint of cost efficiency. It is also foreseen that in future a licence will be granted to only one actual managing director, who will no longer need to be formally approved as long as they fulfil the necessary requirements.
Going forward, the personal integrity of all members of the administration and general management will be verified, and the adaptation of provisions governing the mandatory liability insurance should be emphasised as a further central point of the revision. Also, the rules on administrative assistance are to be reformulated in such a way that they are in line with international standards. A broadening of the penal provisions / criminal acts is foreseen as well. Planned is the designation of new types of violation that are punishable by the Princely Court of Justice or subject to fines by the FMA. Because the new law must take into account the preservation of vested rights, there will be liberal transitional provisions and the possibility to activate “dormant rights”. The consultation period for this total revision ended in early July 2012. As yet, however, no corresponding Report and Proposal is available.
The European Commission proposed already in October 2011 that the Markets in Financial Instruments Directive (MiFID, Directive 2004/39/EC of 21.04.2004) be revised to allow for more extensive regulation of the financial markets and securities-related services. The proposal underscored the need to improve the transparency and supervision of less- regulated markets and address the problem of excessive price volatility in the commodity futures markets. Such broader regulation has the purpose of making the financial markets more efficient, resilient and transparent, as well as reinforcing investor protection. This fundamental revamp of the original Directive is referred to as MiFID II. It should be transposed into national law by 2014/15.
Based on current knowledge, the following new features are planned:
- Broader scope of applicability: The new rules should also apply to the mere safekeeping and administration of financial instruments on behalf of clients. Moreover, emissions certificates and organised trading systems should be included in the broader scope of applicability, and the previous exemptions from being subject to MiFID are to be drastically limited. Furthermore, the requirements for the admission of securities firms from third countries will be increased: for those that render services or perform activities for small investors within the context of MiFID, it will become mandatory that they have a branch office in an EEA member state.
- Reinforced investor protection: Stricter requirements will be placed on asset management, investment advice and the offering of complex financial products. Investment advisors and asset managers are to avoid conflicts of interest and must disclose whether and to what extent they receive payments or other financial benefits (retrocessions) from third parties. The provisions relating to the suitability and purposefulness of financial transactions for clients, as well as to the obligation of “best execution” of those transactions, are to be broadened. In order to be deemed an independent investment advisor, the advisor must take into consideration a sufficiently broad array of financial instruments available in the market (i.e. diversification in terms of product type and issuer) when coming up with investment recommendations – in particular, the selection may not be limited solely to financial instruments from issuers or product providers with which the advisor has close ties.
- Written justification for the investment recommendation: the client must be provided with a written, personal declaration as to why the recommended products are suitable for them.
- More extensive reporting: at least every six months, a capital-market and investor-specific performance report must be generated and made available to the client.
- Heightened transparency in the financial markets: The transparency rules already applicable to stocks are to be extended to include other financial instruments, and the requirements for reporting financial transactions are to be increased. Apart from the national supervisory authorities, the EU financial market supervisors should also be empowered to forbid or limit trading in certain financial instruments.
- And lastly, the specification of far-reaching corporate governance rules is planned, and minimum requirements are to be placed on administrative sanctions. Switzerland intends to adapt its legal substrate accordingly (see e.g. FINMA position paper “Distribution Rules” and message on “Partial Revision of CISA”).
Tax crimes as predicate offence to money laundering
On 16 February 2012, the Financial Action Task Force (FATF) issued its revised recommendations for combating money laundering, the financing of terrorism and the proliferation of weapons of mass destruction. The revised recommendations provide for, amongst other changes, an expansion of the list of predicate offences to also include severe tax crimes. Going forward, this means that banks, insurers and other financial intermediaries will have to notify the national money-laundering reporting office – in Liechtenstein, the Financial Intelligence Unit (FIU) – if they become aware of any suspicious facts in this regard. Under certain circumstances, that organisation will be obliged to forward the information to foreign reporting offices.
In response to the new FATF recommendations, the European Commission announced that the EU legal framework is to be updated accordingly and the necessary changes are to be made.
However, the draft of the 4th EU Money Laundering Directive, which was originally scheduled for publication last autumn, has yet to be released. In Liechtenstein, the government, FMA, Bankers Association and FIU are following the developments closely to determine whether and in which form any need for action exists on the part of the financial centre.
Revision of the Tax Act
With RaP No. 47/2012 regarding the second package of measures for balancing the national budget, the government of Liechtenstein proposed among other things making changes to the Tax Act. This proposal includes a recommendation to decouple the equity capital interest deduction from base income for the income tax purposes of legal persons. Also, in future it should no longer be possible to generate a loss carryover as a result of the equity capital interest deduction. With regard to this revision of the Tax Act, the government on 12 October 2012 presented a corresponding consultation report and a draft law. Parliament addressed portions of the consultation report at its meeting on 19 De-cember 2012.
Group enquiries as per Art. 26 OECD Model Tax Convention
On 18 July 2012, the OECD adopted a new standard pertaining to the exchange of information as per Art. 26 of the OECD Model Tax Convention and published it in connection with its commentary on the Convention. Under the new standard, enquiries made within the framework of a DTA would no longer be limited to individual cases but also include group enquiries. The definition of a “group” in this regard is not based on pre-established terminological characteristics but instead on sample cases that the OECD has compiled and which could be an indication of non-compliant tax behaviour. In future, this new OECD standard will be observed also by Liechtenstein in connection with existing DTAs (and after transposition into the national tax-authority assistance law).
Creation of a new AIFM law
For the purpose of transposing into national law Directive 2011/61/EU on the regulation of alternative investment fund managers (AIFM Directive), parliament of the Principality of Liechtenstein passed a new law pertaining to the managers of alternative investment funds (AIFMD) on 19 December 2012. The new legislation will take effect on 22 July 2013, assuming the referendum period remains unused, and will supersede the existing IUA. Already on 29 January 2013, the government adopted the related ordinance (AIFMO).
As a result, Liechtenstein is moving into uncharted territory. Until now (with the exception of “UCITS funds”) all other investment funds were subject to national and therefore independent regulation (in the Principality of Liechtenstein, in keeping with the IUA). The EU’s AIFM Directive on the regulation of alternative investment fund managers was published in the Official Journal of the European Union on 1 July 2011. With this Directive, the EU wishes to take into account the recent developments and current circumstances in the financial markets. It is establishing a legal and supervisory framework for the managers of alternative investment funds (AIFs) who are not subject to the UCITS Directive and take on considerable risks.
In return, AIFs should also enjoy the benefits of the EU passport; in other words, alternative investment funds may then be distributed throughout the EEA upon simple notification of the competent authorities.
The Liechtenstein AIFMD will bring an array of significant changes to the business with alternative investment funds and, with the introduction of the EU passport for the managers, should on one hand increase competition while lowering costs and, on the other, contribute to ensuring the stability of the financial system. Thanks to the managers’ (AIFM) stricter disclosure and reporting obligations vis-à-vis investors and supervisors, as well as the organisational requirements the AIFMs must fulfil, even more effective and uniform investor protection should be ensured. The activities and responsibilities of custodian institutions will be comprehensively regulated, whereby in principle no longer just one bank need be the custodian. This new constellation will enable Liechtenstein AIFMs and AIFs – while simultaneously ensuring a high degree of investor protection – to be active or, as it were, issued within the EEA and even beyond in a cross-border manner (EU passport). At the same time, the risks to the financial markets should be mitigated through notification and reporting requirements as well as the close cooperation between the supervisory authorities in the cross-border distribution of these funds.
With this new law and UCITSA which has been in force already since 1 August 2011, the Liechtenstein investment fund centre should become even more attractive to Organisations for Collective Investments in Securities (investment funds) as well as alternative investment funds (AIFs, e.g. private equity funds, hedge funds, real estate funds, etc.) and especially foreign fund initiators and their managers, thereby ensuring the sustainable growth of the fund and financial centre. Hence this proposed law represents a tremendous opportunity for fostering the Liechtenstein investment fund and financial centre.
US tax legislation: Foreign Account Tax Compliance Act (FATCA)
With the Foreign Account Tax Compliance Act (FATCA), the USA has created a law that contractually obligates foreign financial institutions (FFIs) to identify their US clients and disclose to the US tax authorities (Internal Revenue Service, IRS), those clients’ assets and income. The USA is attempting in this way to introduce a gapless system for the global exchange of information on US persons, as well as a high degree of tax transparency. To ensure that, the law provides for the introduction of a 30 per cent withholding tax on all US payment flows (dividends, interest, proceeds from sales of US securities, etc.). The levying of this tax will be waived if the financial institution signs a corresponding agreement and thereby acquires the status of “participating FFI”.
A participating FFI must identify and document all accounts that are held directly or indirectly by US persons. As a part of this, it must be determined in particular who the actual beneficial owner of the account is. Three client categories result from this examination:
- US account holders: here it is a matter of those client relationships with US persons that have already been disclosed under the Qualified Intermediary (QI) rules or are qualified as US persons due to various indicators (e.g. place of birth in the USA).
- Non-US account holders: these are client relationships with persons who, on the basis of the examination, are not designated as US persons. In addition, accounts (also US accounts) with an average monthly balance of less than USD 50,000 (small accounts) also qualify as non-US account holders.
- Recalcitrant account holders: here it is a matter of relationships with clients whose indicators suggest the status of a US account but who do not or refuse to provide the requisite documentation. For these clients, a 30 per cent penalty tax will be charged on practically all transactions in US assets. The USA demands that the participating FFI no longer have business dealings with such clients.
FATCA therefore has a considerably broader reach than the – still applicable – QI regime. The latter mainly focuses on ensuring that US securities are correctly taxed. FATCA, on the other hand, requires that participating FFIs identify their US clients and disclose their total assets and income to the IRS. Affected by this are not only natural persons but also companies and other legal entities.
VP Bank plans to become a “participating FFI”. This way, it can above all maintain the status quo for its non-US client relationships. Also, it can avoid being penalised with the 30 per cent US withholding tax charged by other participating FFIs. Those who work together with uncooperative FFIs run the risk of losing their own status as a participating FFI.
The implementing provisions of FATCA are still not available completely (although the final regulations were published on 17 January 2013) and several countries have already declared their desire to conclude bilateral agreements with the USA that would simplify implementation of the FATCA provisions. Two models for these bilateral agreements (“intergovernmental agreements”, IGA) are known at present (Model 1 or also the EU 5 Model; and Model 2, Switzerland/Japan). The government of the Principality of Liechtenstein is taking steps to conclude such an agreement with the USA, but many issues still have to be clarified before the law enters into force on 1 January 2014.