Why is Liechtenstein a tax haven?

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Journalists have been asking this question, so it seems important to answer it. The OECD in 1998 defined a tax haven as a place that offered the following:

a) No or only nominal taxes

b) Lack of effective exchange of information

c) Lack of transparency

d) No substantial activities take place in the location that records a transaction.

Thinking has, admittedly, moved on since 1998 in this area, but these definitions remain relevant. It is important to note that none of these things by themselves create a tax haven; two or more have to exist in combination to make a tax haven.

Using this criteria Liechtenstein is a tax haven:

1) Liechtenstein does charges taxes on its resident population, albeit at moderate rates. This is commonplace in a tax haven. What defines a tax haven is the fact that these rates are not extended to legal entities registered in the location that are owned by people not resident there. This practice of charging tax to the local population bet excluding those from elsewhere from tax is called 'ring fencing' and is defined as a harmful tax practice by the OECD and by the European Union in its Code of Conduct on Business Taxation. Since the Liechtenstein foundation is not taxed only if it does not operate in Liechtenstein the ring fence that identifies a tax haven is in place and a no or nominal tax regime exists.

2) Liechtenstein refuses to participate in tax information exchange. Of the 35 tax havens originally identified by the OECD in 2000 it is just one of three now left that have refused to make any progress towards entering into even limited information exchange arrangement. The others are Andorra and Monaco. It has agreed to be part of the EU Savings Tax Directive (it is believed under pressure from Switzerland) but it is stressed that this does not require any information exchange.

Liechtenstein only has one double tax avoidance treaty, with neighbouring Austria. There is also a partial tax agreement in place with Switzerland. Both have limited scope. It is normal for the Liechtenstein tax authorities to reject requests for information concerning alleged tax evasion. This is because tax evasion is not a criminal offence in Liechtenstein (like Switzerland) and as such normal cooperation agreements on criminal matters do not apply to tax offences taking place in Liechtenstein, unlike the vast majority of countries in the world. Despite this in July, 2002, the United States and Liechtenstein signed a mutual legal assistance treaty designed to combat money laundering and terrorist financing. The agreement does not extend to tax evasion. Ironically the only other similar agreement it has concluded is with Monaco.

The consequence is that it is almost impossible to obtain any information form Liechtenstein with regard to tax evasion. This makes it one of the most secretive tax jurisdictions in the world.

3) The Liechtenstein foundation, which is its main tax haven product, has existed since 1926. There is almost no official record of the activities of a foundation so long as it is set up for personal or family use by a person not normally resident in Liechtenstein. The name of the person creating the foundation is not recorded. The foundation must have a constitution, or deed. In some cases this must be registered with the authorities, but this is not universal and many of the foundations used for tax evasion will not require any form of registration at all to acquire their legal identity. Their existence is known only to the lawyers and bankers supplying services to them. They are bound by absolute secrecy by law. If registration is required no information of any sort concerning the foundation, including even its name is available to the public.

Foundations that do not trade in Liechtenstein do not keep to keep accounting records if they do not wish to do so. No accounts ever have to be sent to any authority. A tax charge of between 1/2% and 1% of the value of the foundation capital assets is paid annually, although without records being required this is presumably not policed. Despite this 30% of Liechtenstein's state income comes from this source.

In combination this absolute secrecy backed by some of the strictest banking secrecy laws in the world mean that Liechtenstein offers no transparency at all.

4) By definition those who seek to take advantage of the tax free status of the Liechtenstein foundation cannot undertake their activities in Liechtenstein itself. If they did they would pay taxes on income there. This means no substantial activities are undertaken by these Liechtenstein foundations in Liechtenstein itself.

This does of course lead to the reasonable question of 'if they are not in Liechtenstein, where are they?'. Liechtenstein does not ask that question. This is normal of a tax haven. All that they seek to determine is that they are 'not here'. Even that though is a fiction. They are only not in Liechtenstein because the law deems the not to be so because their owners are elsewhere. In practice the entire activity of the foundation will take place in Liechtenstein. That is where the foundation is registered, where its managers are, where its bankers might well be, and where all its transactions take place. And yet Liechtenstein can still deem it to be 'elsewhere' because its owners are in another place. This is of course a fiction, and what the Liechtenstein authorities and those who provide professional services in Liechtenstein (and other tax havens) fail to do is ask where the foundation might be if it is not in their domain. As such they ignore the possibility that the owner might be money laundering in their place of residence by using the foundation to hide their income. In so doing they ignore the fact that by assisting that person to evade tax in another state they are facilitating money laundering in that other location, and that this is illegal under all acceptable money laundering legislation.

What this means is that by providing absolute secrecy with regard to the entities that can operate from Liechtenstein and with regard to banking operations located there Liechtenstein provides an environment in which professional firms located in its domain can provide services that facilitate tax evasion by those who live in other states. This is deliberate. There is no other conceivable reason for the secrecy that pervades all its activities, its refusal to make tax evasion a criminal offence even though it is clearly theft and its refusal to engage in any form of effective information exchange.

As such the business of Liechtenstein is to supply the mechanisms through which corruption can take place. That most definitely makes it both a tax haven and a secrecy jurisdiction. But please don't call it an offshore financial centre. That would simply whitewash its crimes.