Financial centre of Liechtenstein

Liechtenstein as a country

The Principality of Liechtenstein is situated between Switzerland and Austria and is the fourth smallest state in Europe with 160 km2. The form of government is a constitutional monarchy on a democratic and parliamentary basis. Hereditary Prince Alois is the managing head of state in the 14th generation. For decades, the country has been governed by a two-party coalition.

The Liechtenstein fund centre

Liechtenstein is an independent state and a member of many international organisations, such as the European Economic Area (EEA) together with the European Union, the European Free Trade Association (EFTA), the United Nations, the Council of Europe, and the Organisation for Security and Cooperation in Europe (OSCE). Through EEA membership, Liechtenstein benefits from the European passport and from the EU Directive for Alternative Investment Fund Managers (AIFM) for the management of alternative investment funds (AIFs) with a wide range of largely free structuring options.

No tax burden at fund level

Income from investment funds (AIFs, OGAWs/UCITS’ and investment undertakings under Liechtenstein law) is not subject to income tax in Liechtenstein. This means that income from dividends, interest as well as realised and unrealised capital gains are not taxable at fund level. However, the individual investor who has to declare the fund income at the place of his unlimited tax liability may be liable to tax.

Europe-wide distribution through the “European passport ”

Due to Liechtenstein’s membership of the European Economic Area (EEA), simple and equivalent distribution in the European Market can be ensured under certain conditions.

Financial engineering of funds

A fund promoter (initiator) can choose the legal form of its investment fund:

  • Investment fund (contract form; “common contractual fund”, “CCF”, “C.C.F.”, “fonds commun de placement”, “FCP” or “F.C.P.”)
  • Collective trusteeship (“investment fund”, “unit trust”, “authorised unit trust” or “AUT”)
  • Investment company as a joint-stock company, European company, establishment or foundation
    • With variable capital (“open-ended investment company”, “OEIC”, “société d`investissement à capital variable“ or “SICAV”)
    • With fixed capital (“closed-ended investment company”, “CEIC”, “société d`investissement à capital fix” or “SICAF”)
  • Investment limited partnership in the form of a partnership or corporation (“Anlage-KG”, “limited partnership” or “L.P.”, “société en commandite de placements collectives” or “SCPC”)
  • Partnership of limited partners in the form of a partnership or corporation (“Anlage-KommanditärenG”, “limited liability partnership” or “LLP”)

In addition, umbrella structures can be set up for several sub-funds, which simplifies the administration involved and reduces costs. Share classes can be defined at the fund level – in the case of umbrella structures – sub-funds, which allows different variants to be created for the same special assets.

Investor protection

Investor protection in the Liechtenstein fund and financial centre is strong. On the one hand, there are three lines of defence within the company with operational controls by the administrator himself, in the second line of defence by risk management, compliance, and controlling, and in the third line of defence by internal auditing. Additional bodies with control and supervisory functions are the depositary, the external auditor, and the Financial Market Authority (FMA), which provide the best possible protection for investors’ interests.

High customer orientation of the authorities

The Liechtenstein authorities are extremely client-oriented and efficient, which is reflected in a short time-to-market for fund promoters. In addition, the fund laws stipulate maximum deadlines, which simplifies planning.

Key banking figures

At the end of 2016, the client assets under management of the banks in Liechtenstein (including foreign group companies) amounted to CHF 234.8 billion (previous year: CHF 209.5 billion), and reached a new peak. Thus CHF 136.8 billion were managed in Liechtenstein. The core capital ratio (Tier 1 ratio) across all banks amounted to 21.6% at the end of 2016 and thereby is above average in international comparison (FMA Media Release, 12 May 2017).

Professional environment

Due to the state-owned University of Liechtenstein, the domiciliation of Liechtenstein in the three-country corner and corresponding contracts, there is good access to highly qualified personnel. The efficiently organised associations enable the interests of the financial centre to be optimally represented.

Proximity to the Swiss financial centre

Liechtenstein maintains close ties with Switzerland through the customs, economic and monetary union (stable Swiss franc).

Political and economic stability

Standard & Poor’s again confirmed its triple-A rating with a stable outlook as at 28 July 2017. Standard & Poor’s emphasises the positive development of the national accounts and the good financial position of the public sector. In addition, the Liechtenstein economy is broadly diversified and industry and manufacturing industry account for 40% of the gross domestic product (source: Liechtensteiner Bankenverband, 2016). Banks, asset managers, fund managers, trustees, and insurers contribute about 24% of gross value added and generate more than one third of government revenues. The financial services sector employs around 5,000 qualified workers.

Conservative- liberal economic order

Due to the conservative-liberal attitude of the population and the government, the state only intervenes to a limited extent in the economic cycle.

Differences between Liechtenstein and Luxembourg

Liechtenstein is a member of the European Economic Area and therefore enjoys the four so-called “fundamental freedoms” in relation to the EU (free movement of goods, persons, services, capital and payments). Luxembourg is a member of the European Union and thus fully committed to participating in the political structures and transfer mechanisms of the EU. Furthermore, Liechtenstein’s currency is the stable Swiss franc, which is also reflected in the country’s stability. It is also advantageous for an economy if the financial centre is in a reasonable relationship to economic performance and the economic location is broadly diversified. Liechtenstein has a very efficient industry that accounts for 40% of gross value added (source: Liechtensteiner Bankenverband, 2016) with world market leaders such as Hilti (construction technology), Thyssenkrupp Presta (automotive supplier) or Ivoclar Vivadent (dental technology) and others. Luxembourg’s industry accounts for around 13%, the service sector is very pronounced at 87% and thus very one-sidedly focused (Internet portal Luxembourg 2016). As a further characteristic, Luxembourg has around 20% national debt in relation to gross domestic product, whereas Liechtenstein has no national debt but even net assets.

Liechtenstein as a high-quality financial jurisdiction

For more than 30 years, the buzzwords tax havens, financial ports and offshore financial centres have been the basis for controversial discussions in high-tax countries. For about decade now, the measures have become increasingly aggressive. However, the question arises as to which jurisdictions are exactly meant by this. Liechtenstein is not an offshore financial jurisdiction in the narrower sense.

“An offshore financial centre is a country or a jurisdiction that provides financial services to persons residing abroad to an extent that is inappropriate for the size and financing needs of the local economy.” [1]

“The International Monetary Fund document emphasises that the definition of an offshore financial centre would also apply to the United Kingdom and the United States of America, which are usually regarded as onshore financial centres, but due to their large populations and participations in international organisations such as the G20 and the OECD.” [2]

Liechtenstein was one of the first implementers of the OECD standard for automatic information exchange for financial account information and has highly effective financial and regulatory supervision in accordance with the standards of the European Union. Accordingly, Liechtenstein is no longer understood as an offshore financial jurisdiction.

[1] International Monetary Fund, IMF working paper WP/07/87, Ahmed Zoromé: Concept of Offshore Financial Centers: In Search of an Operational Definition; April 2007; http://www.imf.org/external/pubs/ft/wp/2007/wp0787.pdf, retrieved on September 11, 2017.

[2] Wikipedia, https://en.wikipedia.org/wiki/Offshore_financial_centre; retrieved on September 11, 2017