In Liechtenstein we Trust

In Liechtenstein We Trust

Martin A. Meyer
Partner und Leader Tax, PwC Liechtenstein

In Liechtenstein, the word ‘trust’ has two meanings. On the one hand, it stands for a long tradition of fiduciary business activity. On the other hand, it refers to Liechtenstein trusteeship as a legal form under company law. Liechtenstein is more committed than most countries to ensuring trust in its integrity. That’s because trust is not only part of its DNA, it is part of its success.

Trusteeship has been enshrined in Liechtenstein’s Persons and Companies Act (PGR) since 1926. Switzerland recognises foreign trusts, but does not have a trust law of its own. A trustee in Liechtenstein therefore holds more responsibility than a trustee in Switzerland. They must obtain a licence to operate, and are subject to the Liechtenstein Financial Market Authority (FMA).

In trusted hands

In a trusteeship, the trust assets (trust property) are transferred by the settlor to a trustee. The latter undertakes to manage or use the trust property as an independent legal entity in its own name for the benefit of one or more beneficiaries. Trusteeship is not a legal entity, but a contractual legal relationship without legal personality. Accordingly, when the settlor hands over their assets to the trustee, they are placing their trust in the trustee’s abilities and probity – hence the name.

Trusteeships are intended for charitable, social, cultural or related purposes. They are guided by global trends and international standards in a similar way to foundations. A Liechtenstein trusteeship is particularly suitable for the long-term safeguarding of a company’s or a family’s assets, for example to protect property in countries with a risk of expropriation, to keep corporate structures together over generations or for sustainable succession solutions. Trusteeships are particularly attractive because of their individual scope: almost anything can be arranged with a trust agreement.

Trust in the DNA

Management of assets with corresponding legal forms has a long tradition in Liechtenstein. The Princely Family itself embodies dynastic thinking, and has invested the majority of its wealth in foundations and trusts. Liechtenstein banks have also specialised in asset management for private clients and institutional investors. The Liechtensteinische Landesbank (LLB), Liechtenstein’s first bank, was founded in 1861. Its aim at the time was to meet the savings and credit needs of a population consisting of smallholders and artisans. LGT Bank, which was founded in 1920 and taken over by the Princely House of Liechtenstein in 1930, has focused on managing foreign assets from the very beginning. VP Bank (Verwaltungs- und Privat-Bank), founded in 1956, is also closely associated with the fiduciary business. Liechtenstein has positioned itself as a country of wealth management, and has established trust as a fundamental value. Today, the financial services sector is an important pillar of the Liechtenstein economy, accounting for around 23% of economic output (see Figure 1).

Figure 1: Almost a quarter of Liechtenstein's economic output comes from the financial industry.

The globalisation of the world economy has led to financial markets around the world becoming closely interlinked, and brought with it a need for greater transparency worldwide. Liechtenstein’s trust and finance industry has also had to deal with this change. Liechtenstein has undergone a comprehensive transformation in the last 15 years. The country pursues a consistent white money strategy and, with the ‘Liechtenstein Declaration’ of 2009, has committed itself to the OECD standard for transparency and exchange of information in tax matters. Since then, Liechtenstein has continuously strengthened regulatory measures to improve its standing as a trust and financial centre, and now has a dense network of bilateral and multilateral agreements on double taxation and the exchange of information in tax matters.

A state-of-the-art approach

In the fiduciary sector, trust forms the basis of a successful business relationship. And wherever trust plays a central role, criminal energy and fraudulent intentions cannot be avoided. One of Liechtenstein’s strengths is protecting this trust as its highest asset. In June 2019, H.S.H. Alois, Hereditary Prince of Liechtenstein, announced a further consolidation of the fiduciary industry’s legal foundations. With an amendment to the Trustees Act, the Ministry of Presidential Affairs and Finance wants to ensure quality in the trustee sector, strengthen confidence in the industry and counter the potential for abuse and fraud. The proposal is currently in the consultation phase. Furthermore, the FMA is to be given a more distinct supervisory function.

International regulation has also been tightened up dramatically over the last few years in order to create transparency and prevent abuse (see Figure 2). Liechtenstein has been pursuing a zero-tolerance policy for years in the battle against money laundering and terrorist financing. As an EEA member, the country has implemented the Fourth EU Anti-Money-Laundering Directive and the regulation on information accompanying transfers of funds. The implementation provisions are contained in the Due Diligence Act and the Due Diligence Ordinance. Liechtenstein’s high standards in combatting money laundering and terrorist financing were certified by the International Monetary Fund (IMF) and Moneyval in 2013/2014.

Figure 2: Liechtenstein has systematically transformed itself into a nation of trust.

From Off to On

Under its Code of Conduct for Business Taxation, the EU tackles tax evasion in offshore locations such as the British Virgin Islands, the Bahamas, Bermuda or the Channel Islands. Companies domiciled in such locations are now required to have sufficient local economic substance, and are subject to comprehensive disclosure obligations. As a result of this requirement, many offshore structures are no longer maintained as they do not reflect real economic activity. The trend towards a global shift of assets from offshore to onshore is already under way. Today’s offshore wealth structures are returning to the location of the effective economic beneficiaries, and are expected to spread around the world. Especially in German-speaking countries, Liechtenstein presents itself as an agile jurisdiction with a modern legal system and international recognition.

Small but mighty

Although Liechtenstein is a small country, it has a number of interesting advantages thanks to its location – all of which provide ideal conditions for sustainable asset structures:

The constitutional hereditary monarchy is based on a democratic parliamentary foundation dating from 1719. The Princely Family thinks in terms of generations, and prevents short-term changes of direction. This guarantees political stability.
As a member of the European Economic Area (EEA) and a customs union partner of Switzerland, Liechtenstein opens up access to two internationally established internal markets.
The Liechtenstein banking system is highly stable. It has high tier 1 ratios and solid equity funding ratios.
Standard & Poor’s awards Liechtenstein an AAA rating on an annual basis. Thanks to its high degree of budgetary discipline, Liechtenstein is one of the few states with no national debt.
Liechtenstein enjoys the highest industrial ratio in the world, with around 43% of gross value added.
The country’s totally revised company, trust and foundation law is modern and flexible. It addresses the needs of today and offers a variety of options, especially for succession solutions.
A total revision of the tax law took place in 2011. Today’s tax legislation meets all international standards of the EU and OECD.
Around 38,000 people live in Liechtenstein. In addition, over 20,000 workers commute to Liechtenstein from neighbouring countries every day. With Austria and Switzerland in particular, Liechtenstein has a large pool of talent and qualified workers at its disposal.

Trust as an opportunity for neighbours

Liechtenstein has recognised the needs of the globalised world economy, and is transforming its fiduciary sector into one of the most modern in the world. At the heart of this change, trust is one of the most important success factors.

It is not just a common customs union that links Liechtenstein and Switzerland. The two countries also complement each other in the trust and finance industry in a number of ways. Firstly, Liechtenstein provides employment to over 10,000 Swiss nationals. And Switzerland, for its part, has access to Liechtenstein’s modern and flexible company law. This enables wealthy families to find alternative succession solutions. In addition, Liechtenstein has market access to the EU. Switzerland and Liechtenstein in combination offer an ideal solution for global needs: one that can withstand even the high pressure of expectations from the international community.

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