Liechtenstein Structures Will Be Within European Union Savings Tax Directive
April 25th, 2011
April 25th, 2011
The following is for all serious offshore aficionados. It comes form the person I think the foremost expert on the European Union Savings Tax Directive – Mark Morris, and is from his blog, with permission.
What it says is at the end of the day simple, but vitally important, and that is that iof the European Union Savings Tax Directive is amended as the EU desires then Liechtenstein’s secrecy is cracked open. Which is very welcome indeed. Over to Mark:
“Liechtenstein is home to nearly 100,000 entities and legal arrangements which are effectively untaxed. These structure are used for succession planning, creditor protection, family support and confidentiality. Considering there are onshore taxable facilities that do these tasks equally well, one assumes the following Liechtenstein structures are chosen because tax efficiency is a prime motivator.
How Liechtenstein structures avoid tax:
Liechtenstein foundations, establishments and trusts have to date successfully avoided international taxes as they are crafted to present an image that no party involved can have a tax liability. This is done in seven stages:
|1. Separate ownership of assets from the principal contributor:
The principal contributorgives away their assets to someone else to manage on behalf of named or unnamed beneficiaries.
|2. Disguise the source of assets:
Utilise an agent /nominee to contribute the assets on behalf of the principal contributor. The only name on public record as the provider of funds is the nominee / agent, e.g. the lawyer who founds the foundation.
|3. Utilise a temporary holder/ manager of the assets:
The management cannot be taxed as they are not beneficial owners of the assets, but merely look after it for named or unnamed beneficiaries.
|4. Disguise control of the assets:
If the principal contributor is seen to be controlling the assets after giving it away, he may be liable for tax. Therefore the principal contributor manages the assets indirectly via an undisclosed letter of wishes / bylaws, appointment of protector, etc.
|5. No beneficiary is immediately entitled to any payment received:
No specific beneficiaries are named. Therefore no income tax payable.
|6. Alchemy on income received:
Convert the character of income into a tax efficient payment at a later date, such as charity, capital gain, wage, loan, etc.
|7. Present a restricted view of structure to bank:
The bank holding the structure’s account is the Paying Agent responsible for applying the savings tax. However, with a restricted view presented to the bank, a beneficial owner cannot be identified. As no-one supposedly owns the assets, the bank cannot apply the savings tax.
How the EU savings tax amendments will tackle Liechtenstein tax avoidance structures:
|I. Structure becomes the Paying Agent Upon Receipt:
To circumvent the bank’s limited view of the structure, the savings tax directive amendment moves the Paying Agent responsibility away the bank and onto the structure itself. The logic being the structure has an unimpeded true view of all parties involved.
|II. The Principal Contributor is the beneficial owner :
The amendment takes into consideration that it will be highly unlikely to identify a beneficiary immediately entitled to the payment received. In this case, the principal contributor of assets will be deemed the beneficial owner. The logic being that tax liability remains yours until transferred to someone else with a tax liability. In limbo doesn’t qualify for exemption.
|III. Agent / Nominee is transparent:
The savings tax directive looks through the nominee settlor / shareholder. A lawyer used to establish a foundation is merely an agent founder acting on behalf of the principal founder. The beneficial owner is deemed to be the individual who initially contributes the assets, directly or indirectly. According to the EU directive on money laundering and anti-terrorist financing, a nominee is a trust and company providing service and sand is therefore a candidate for Paying Agent Upon Receipt responsibilities.
|IV. Paying Agent Upon Distribution if no contributor identifiable:
In the event that a principal contributor is not identifiable, e.g. for a deceased settlor, then the structure becomes a Paying Agent Upon Distribution and must apply the savings tax to any individual who become entitled to the payment within 10 years
|V. No more dummy charities:
Trusts or foundations set up for charitable purposes will only be exempt from Paying Agent Upon Receipt responsibilities if they serve:-
Mixed purpose or private charity foundations will thus be in scope.
|VI. Bank accounts in Singapore / Dubai / Bahamas, etc also in scope:
A knee-jerk reaction to move the structure’s bank account to beyond the savings tax territory will not avoid the savings tax provisions. The Paying Agent Upon Receipt must apply the savings taxirrespective of where the assets are held. This is similar to am economic operator securing interest from anywhere in the world.
|VII. Run but you can’t hide:
A fiduciary structure fleeing to outside the savings tax territory, e.g. to a Singapore trust, will not help the trust and company providers based within the savings tax jurisdiction.
If the new structure is still effectively managed from within the savings tax territory, e.g. trustee, council or director is based in Liechtenstein, then the management will be a Paying Agent Upon Receipt, and consequently the structure will be in scope.
In summary, the EU savings tax amendment should end opportunities for tax avoidance using Liechtenstein structures for EU residents, as described in this guideline on Paying Agents Upon Receipt.”
Now you know why I am so keen on reform.
And why every honest taxpayer in Europe should share that enthusiasm.