WEB EXCLUSIVE: The Liechtenstein connection

15 August 2012

Dawn Register explains the amendment to the UK tax information exchange agreement that signifies the latest change in the Liechtenstein Disclosure Facility

The amendment to the UK tax information exchange agreement, passed by the Liechtenstein government on 10 July 2012, signifies the latest change in the Liechtenstein Disclosure Facility (LDF), the partial tax amnesty that allows those with undeclared offshore tax liabilities to come forward and legitimise their past and future tax affairs.

The amendment provides a clear definition of exactly what the necessary ‘meaningful relationship’ with the principality is. The change followed the extension of the LDF, which will now run until March 2016 due to the success and popularity of the facility; the LDF has to date seen over 2,000 registrations and is expected to bring in up to GBP3 billion by 2016.

The amendment will come into effect on 1 September 2012. Driven by financial institutions in Liechtenstein, it brings changes to the new deposit requirements for people who want to qualify for the special terms of the LDF. The main change of the amendment is that at least 20 per cent of the account holders worldwide bankable assets (or a minimum of CHF3 million, whichever is the lesser amount) must be held in Liechtenstein.

The calculation of worldwide bankable assets only includes previously undeclared funds, i.e. the monies that are the subject to the tax disclosure. What evidence a Liechtenstein institution will ask for to prove the total worldwide undeclared assets is not defined, but one would expect a recent bank statement or portfolio valuation to be sufficient. ‘Bankable assets’ is also not defined so it remains to be seen whether less liquid investments will be included in the 20 per cent calculation, for example existing life insurance bonds or fixed term structured products.

Defining the ‘meaningful relationship’

The need for a meaningful connection with Liechtenstein is outlined in the Memorandum of Understanding between the UK and Liechtenstein, and qualifies that you must hold ‘relevant property’ or have an interest in relevant property. Broadly this can be outlined as:

· A bank account in Liechtenstein, or

· A company, partnership, foundation, establishment, trust, trust enterprise or other fiduciary entity, estate, or insurance policy that is issued, formed, founded, settled, incorporated, administered or managed in Liechtenstein

Alongside the 20 per cent of assets (or CHF3 million, minimum) required to be in Liechtenstein from 1 September, the below three points are further ways to establish the required ‘meaningful relationship’:

· a legal entity is founded or formed in Liechtenstein or a trust is managed by at least one trustee in Liechtenstein and at least 10 per cent of their assets or a minimum of CHF1 million (again whichever is the lower amount) are in an account of the legal entity or trust with a Liechtenstein bank, or

· a foreign legal entity is managed mainly by a Board of Directors in Liechtenstein and at least 15 per cent of their assets or a minimum of CHF1 million (as above – whichever is the lower amount) are in a Liechtenstein bank account in the name of this legal entity, or

· an insurance policy with a minimum premium of CHF150,000 issued by a Liechtenstein insurance company.

Although many Liechtenstein account holders already satisfy the 20 per cent requirement, this change may result in those with smaller accounts needing to redistribute their funds accordingly. The change in requirements also shows that Liechtenstein is following HMRC’s lead ensuring that revenue continues to flow to the respective government. The July 2012 Ordinance clearly sets out two ways of obtaining the Confirmation of Relevance from Liechtenstein, this is the necessary certificate to register for the LDF.

The first is when the following three conditions are met cumulatively: personal contact exists between the financial intermediary and the client, the client relationship is long term, and the services provided are not merely of secondary importance. The second possibility is that a substantial part of the assets affected by the disclosure is invested or managed in Liechtenstein, as detailed above. The changes brought in in September do not come as a surprise as they continue to follow Liechtenstein’s inclinations towards ensuring long-term relationships are established alongside a personal connection with the principality, although in a more quantifiable manner.

It must be remembered that the ‘meaningful relationship’ step, which is changing from 1 September, is only one part of the qualification test. To qualify for all special terms of the LDF it must be established what account, asset or property the person held at 1 September 2009. If the person does not meet the 1 September 2009 test then they so can still make a disclosure under the LDF, but would not benefit from the special terms such as amnesty for taxes prior to April 1999 and fixed 10 per cent penalty. Providing a relevant person held a non-UK account, asset or property at 1 September 2009, the person will be eligible for the full terms of the LDF. For avoidance of doubt, a non-UK account, asset or property for the purposes of the LDF is fully defined in the Second Joint Declaration available on the HMRC website.

Act now

The LDF remains the most favourable option for those who need to disclose an offshore account, however, it may now mean that those with offshore accounts will have to transfer more money to Liechtenstein than they would have done previously. It is important that professional investment and tax advice is sought where necessary, especially if investments need to be sold or transferred. Those with issues to disclose who do not wish to be bound by the ‘meaningful relationship’ requirements that will be brought in on 1 September must act before 31 August 2012.

Dawn Register is a Director in the Tax Investigations team at BDO LLP

The LDF runs from 1 September 2009 until 5 April 2016 to help UK taxpayers with undeclared offshore tax liabilities to come forward and get their past and future UK tax affairs on the right footing. By coming forward under the LDF, people can take advantage of a number of special terms:

  • · a 10 per cent fixed penalty on the underpaid liabilities to 5 April 2009 (full interest will have to be paid)
  • · no penalty where an innocent error has been made
  • · assessment period limited to accounting periods/tax years commencing on or after 1 April 1999
  • · the option to choose whether to use a single composite rate of 40 per cent or to calculate actual liability on an annual basis to 5 April 2009
  • · assurance that they will not be prosecuted if a full disclosure is made
  • · single point of contact at HMRC for disclosures
  • · a defined process with a contract settlement to agree tax affairs with HMRC.

 


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