Article Tools

Country Analysis: The Tax Haven of Liechtenstein

Published: July 1, 2014; 19:15 · (Vindobona)

Liechtenstein has the highest gross domestic product per person in the world when adjusted by purchasing power parity. Liechtenstein is the smallest yet the richest (by measure of GDP per capita) German-speaking country and the only country to lie entirely in the Alps. Since the late 1970s it used its low corporate tax rates to draw many companies to the country becoming one of the wealthiest countries in the world.

The Tax Haven of Liechtenstein / Picture: © Wikipedia / Added ramos

Liechtenstein, officially the Principality of Liechtenstein, is a doubly landlocked alpine country in Central Europe, bordered by Switzerland to the west and south and by Austria to the east and north.

Its area is just over 160 square kilometres (62 square miles), and it has an estimated population of 35,000. Its capital is Vaduz. The biggest town is Schaan.

Liechtenstein has the highest gross domestic product per person in the world when adjusted by purchasing power parity. Liechtenstein also has one of the lowest unemployment rates in the world at 1.5%.

Liechtenstein is the smallest yet the richest (by measure of GDP per capita) German-speaking country and the only country to lie entirely in the Alps.

It is known as a principality as it is a constitutional monarchy headed by a prince.

Liechtenstein is divided into 11 municipalities.

Much of its terrain is mountainous, making it a winter sports destination.

Many cultivated fields and small farms characterize its landscape both in the south (Oberland, upper land) and in the north (Unterland, lower land).

The country has a strong financial sector located in the capital, Vaduz, and has been identified as a tax haven.

It is a member of the European Free Trade Association and part of the European Economic Area and the Schengen Area, but not of the European Union.

History

Early history

The oldest traces of hominid existence in Liechtenstein date back to the Middle Paleolithic era. Neolithic farming settlements were founded in the valleys around 5300 BC.

Hallstatt and La Tène cultures flourished during the late Iron Age from around 450 BC possibly under some influence from the Greek and Etruscan civilisations. One of the most important tribal groups in the Alpine region were the Helvetii. In 58 BC, at the Battle of Bibracte, Julius Caesar, defeated the Alpine tribes bringing the region under closer control of the Roman Empire. By 15 BC, Tiberius, who was destined to be the second Roman emperor and his brother, Drusus, conquered the entire Alpine area. Lichtenstein was integrated into the Roman province of Raetia. The area was maintained by the Roman military, which maintained a large legionary camp called Brigantium (Austria) near Lake Constance and at Magia (Swiss). A roman road ran through the territory. In 259/60 Brigantium was destroyed by the Alemanni, a Germanic people who settled in the area in around 450.

In the Early Middle Ages, the Alemanni had settled the eastern Swiss plateau by the 5th century and the valleys of the Alps by the end of the 8th century. Lichtenstein formed part of eastern edge of Alemannia. The entire region became part of Frankish Empire in the 6th century following Clovis I's victory over the Alemanni at Tolbiac in 504. 

Liechtenstein remained under Frankish hegemony (Merovingian and Carolingian dynasties) until the empire was divided by the Treaty of Verdun in 843 AD following the death of Charlemagne. The territory of present day Liechtenstein belonged to East Francia until it was reunified with Middle Francia under the Holy Roman Empire around 1000 AD.

Foundation of a dynasty

By 1200, dominions across the Alpine plateau were controlled by the Houses of Savoy, Zähringer, Habsburg, and Kyburg. Other regions were accorded the Imperial immediacy that granted the empire with direct control over the mountain passes. When the Kyburg dynasty fell in 1264 AD, the Habsburgs under King Rudolph I (Holy Roman Emperor in 1273) extended their territory to the eastern Alpine plateau that included the territory of Lichtenstein. This region was enfeoffed to the Counts of Hohenems prior to the creation of the Liechtenstein dynasty.

The family, from which the principality takes its name, originally came from Castle Liechtenstein in Lower Austria which they had possessed from at least 1140 AD until the 13th century (and again from 1807 onwards). Liechtenstein's acquired land, predominantly in Moravia, Lower Austria, Silesia, and Styria. As these territories were all held in feudal tenure for more senior feudal lords, particularly various branches of the Habsburgs, the Liechtenstein dynasty was unable to meet a primary requirement to qualify for a seat in the Imperial diet (parliament), the Reichstag. Even though several Liechtenstein princes served several Habsburg rulers as close advisers, without any territory held directly for the Imperial throne, they held little power in the Holy Roman Empire.

It was for this reason, the family sought to acquire lands that would be classed as unmittelbar, or held without any feudal tenure to the Holy Roman Emperor. During the early 17th century Karl I of Liechtenstein was made a prince by the Holy Roman Emperor Matthias after siding with him in a political battle. By 1699 Hans-Adam I had been allowed to purchase the minuscule Herrschaft ("Lordship") of Schellenberg and county of Vaduz (in 1699 and 1712 respectively) from the Hohenems. Tiny Schellenberg and Vaduz had exactly the political status required: no feudal lord other than their comital sovereign and the suzerain Emperor.

Principality

On 23 January 1719, after the lands had been purchased, Charles VI, Holy Roman Emperor, decreed that Vaduz and Schellenberg were united and elevated the newly formed territory to the dignity of Fürstentum (principality) with the name "Liechtenstein" in honour of "[his] true servant, Anton Florian of Liechtenstein". It was on this date that Liechtenstein became a sovereign member state of the Holy Roman Empire. It is a testament to the pure political expediency of the purchase that the Princes of Liechtenstein never visited their new principality for almost 100 years.

By early 19th century, as a result of the Napoleonic Wars in Europe, the Holy Roman Empire came under the effective control of France following the crushing defeat at Austerlitz by Napoleon in 1806. Emperor Francis II abdicated ending more than 850 years of feudal government. Napoleon reorganized much of the Empire into the Confederation of the Rhine. This political restructuring had broad consequences for Liechtenstein: the historical imperial, legal and political institutions had been dissolved. The state ceased to owe obligations to any feudal lord beyond its borders.

Modern publications generally attribute Liechtenstein's sovereignty to these events. Its prince ceased to owe obligations to any suzerain. From 25 July 1806 when the Confederation of the Rhine was founded, the Prince of Liechtenstein was a member, in fact a vassal of its hegemon, styled protector, the French Emperor Napoleon I, until the dissolution of the confederation on 19 October 1813.

Soon afterward, Liechtenstein joined the German Confederation (20 June 1815 – 24 August 1866) which was presided over by the Emperor of Austria.

In 1818, Johann I granted the territory a limited constitution. It was in the same year that Aloys became the first member of the House of Liechtenstein to step foot in the principality that bore their name. The next visit would not occur until 1842.

Developments during the 19th century included:

1836, the first factory, for making ceramics, was opened.
1861, the Savings and Loans Bank was founded along with the first cotton-weaving mill.
1868, the Liechtenstein Army was disbanded for financial reasons.
1886, two bridges over the Rhine to Switzerland were built.
1872, a railway line between Switzerland and the Austro-Hungarian Empire was constructed through Liechtenstein.

20th century

Until the end of World War I, Liechtenstein was closely tied first to the Austrian Empire and later to Austria-Hungary; the ruling princes continued to derive much of their wealth from estates in the Habsburg territories, and they spent much of their time at their two palaces in Vienna. The economic devastation caused by this war forced the country to conclude a customs and monetary union with its other neighbour, Switzerland.

At the time of the dissolution of the Austro-Hungarian Empire, it was argued that Liechtenstein, as a fief of the Holy Roman Empire, was no longer bound to the emerging independent state of Austria, since the latter did not consider itself as the legal successor to the empire. This is partly contradicted by the Liechtenstein perception that the dethroned Austro-Hungarian Emperor still maintained an abstract heritage of the Holy Roman Empire.

Franz I, Prince of Liechtenstein from 1929 to 1938.

In 1929, 75-year-old Prince Franz I succeeded to the throne. Franz had just married Elisabeth von Gutmann, a wealthy Jewish woman from Vienna. Although Liechtenstein had no official Nazi party, a Nazi sympathy movement arose within its National Union party. Local Liechtenstein Nazis identified Elizabeth as their Jewish "problem".

In March 1938, just after the annexation of Austria by Nazi Germany, Prince Franz named as regent his 31-year-old first cousin twice removed and heir-presumptive, Prince Franz Joseph. Franz died in July that year, and Franz Joseph succeeded to the throne.

During World War II, Liechtenstein remained officially neutral, looking to neighboring Switzerland for assistance and guidance, while family treasures within the war zone were taken to Liechtenstein for safekeeping. At the close of the conflict, Czechoslovakia and Poland, acting to seize what they considered to be German possessions, expropriated the entirety of the Liechtenstein dynasty's hereditary lands and possessions in Bohemia, Moravia, and Silesia. The expropriations (subject to modern legal dispute at the International Court of Justice) included over 1,600 km2 (618 sq mi) of agricultural and forest land, and several family castles and palaces.

Liechtenstein gave asylum to about 500 soldiers of the First Russian National Army (a collaborationist Russian force within the German Wehrmacht) at the close of World War II. About 200 of the group somewhat voluntarily agreed to return to the USSR. They departed in a train to Vienna and nothing was ever heard of them again. The remainder stayed in Liechtenstein for another year, resisting, with support from Liechtenstein, further pressure by the Soviet government to participate in the repatriation programme. (In contrast, due to agreements made during the Yalta Conference, the western Allies repatriated Soviet citizens.) Eventually the government of Argentina offered asylum and about a hundred people left. This is commemorated by a monument at the border town of Hinterschellenberg. It is also the theme of the French television documentary Le dernier secret de Yalta (Yalta's last secret) by Nicolas Jallot.

Citizens of Liechtenstein were forbidden to enter Czechoslovakia during the Cold War. More recently the diplomatic conflict revolving around the controversial post-war Beneš decrees resulted in Liechtenstein not sharing international relations with the Czech Republic or Slovakia. Diplomatic relations were established between Liechtenstein and the Czech Republic on 13 July 2009, and with Slovakia on 9 December 2009.

Financial center

Liechtenstein was in dire financial straits following the end of the war in Europe. The Liechtenstein dynasty often resorted to selling family artistic treasures, including the priceless portrait "Ginevra de' Benci" by Leonardo da Vinci, which was purchased by the National Gallery of Art of the United States in 1967. However by the late 1970s it used its low corporate tax rates to draw many companies to the country becoming one of the wealthiest countries in the world.

The Prince of Liechtenstein is the world's sixth wealthiest monarch with an estimated wealth of USD $5 billion. The country's population enjoys one of the world's highest standards of living.

Government

Liechtenstein has a constitutional monarch as Head of State, and an elected parliament which enacts law. It is also a direct democracy, where voters can propose and enact constitutional amendments and legislation independent of the legislature. The Constitution of Liechtenstein was adopted in March 2003, replacing the previous 1921 constitution which had established Liechtenstein as a constitutional monarchy headed by the reigning prince of the Princely House of Liechtenstein. A parliamentary system had been established, although the reigning Prince retained substantial political authority.

The reigning Prince is the head of state and represents Liechtenstein in its international relations (although Switzerland has taken responsibility for much of Liechtenstein's diplomatic relations). The Prince may veto laws adopted by parliament. The Prince can call referenda, propose new legislation, and dissolve parliament, although dissolution of parliament may be subject to a referendum.

Executive authority is vested in a collegiate government comprising the head of government (prime minister) and four government councilors (ministers). The head of government and the other ministers are appointed by the Prince upon the proposal and concurrence of parliament, thus reflecting the partisan balance of parliament. The constitution stipulates that at least two members of the government be chosen from each of the two regions. The members of the government are collectively and individually responsible to parliament; parliament may ask the Prince to remove an individual minister or the entire government.

Legislative authority is vested in the unicameral Landtag made up of 25 members elected for maximum four-year terms according to a proportional representation formula. Fifteen members are elected from the "Oberland" (Upper Country or region) and ten members are elected from the "Unterland" (Lower Country or region). Parties must receive at least 8% of the national vote to win seats in parliament, i.e. enough for 2 seats in the 25-seat legislature. Parliament proposes and approves a government, which is formally appointed by the Prince. Parliament may also pass votes of no confidence in the entire government or individual members.

Parliament elects from among its members a "Landesausschuss" (National Committee) made up of the president of the parliament and four additional members. The National Committee is charged with performing parliamentary oversight functions. Parliament can call for referenda on proposed legislation. Parliament shares the authority to propose new legislation with the Prince and with the number of citizens required for an initiative referendum.

Judicial authority is vested in the Regional Court at Vaduz, the Princely High Court of Appeal at Vaduz, the Princely Supreme Court, the Administrative Court, and the State Court. The State Court rules on the conformity of laws with the constitution and has five members elected by parliament.

On 1 July 1984, Liechtenstein became the last country in Europe to grant women the right to vote. The referendum on women's suffrage, in which only men were allowed to participate, passed with 51.3% in favor.

New constitution

In a national referendum in March 2003, nearly two-thirds of the electorate voted in support of Hans-Adam II's proposed new constitution to replace the 1921 one. The proposed constitution was criticised by many, including the Council of Europe, as expanding the powers of the monarchy (continuing the power to veto any law, and allowing the Prince to dismiss the government or any minister). The Prince threatened that if the constitution failed, he would, among other things, convert some of the royal property for commercial use and move to Austria. The princely family and the Prince enjoy tremendous public support inside the nation, and the resolution passed with about 64% in favour. A proposal to revoke the Prince's veto powers was rejected by 76% of voters in a 2012 referendum.

Few national constitutions provide a right of secession, but municipalities in Liechtenstein are entitled to secede from the union by majority vote.

Geography

Liechtenstein is situated in the Upper Rhine valley of the European Alps and is bordered to the east by Austria and to the south and west by Switzerland. The entire western border of Liechtenstein is formed by the Rhine. Measured south to north the country is about 24 km (15 mi) long. Its highest point, the Grauspitz, is 2,599 m (8,527 ft). Despite its Alpine location, prevailing southerly winds make the climate of Liechtenstein comparatively mild. In winter, the mountain slopes are well suited to winter sports.

New surveys using more accurate measurements of the country's borders in 2006 have set its area at 160 km2 (61.776 sq mi), with borders of 77.9 km (48.4 mi). Thus, Liechtenstein discovered in 2006 that its borders are 1.9 km (1.2 mi) longer than previously thought.

Liechtenstein is one of only two doubly landlocked countries in the world - being a landlocked country wholly surrounded by other landlocked countries (the other is Uzbekistan). Liechtenstein is the sixth-smallest independent nation in the world by land area.

The principality of Liechtenstein is divided into 11 communes called Gemeinden (singular Gemeinde). The Gemeinden mostly consist only of a single town or village. Five of them (Eschen, Gamprin, Mauren, Ruggell, and Schellenberg) fall within the electoral district Unterland (the lower county), and the remainder (Balzers, Planken, Schaan, Triesen, Triesenberg, and Vaduz) within Oberland (the upper county).

Economy

Despite its limited natural resources, Liechtenstein is one of the few countries in the world with more registered companies than citizens; it has developed a prosperous, highly industrialized free-enterprise economy and boasts a financial service sector as well as a living standard which compares favourably with those of the urban areas of Liechtenstein's large European neighbours.

Very low business taxes (lowest in Europe after Andorra's 10% maximum tax rate)—the corporate tax rate is a flat 12.5% — as well as easy Rules of Incorporation have induced about 73,700 holding (or so-called 'letter box') companies to establish registered offices in Liechtenstein. This provides about 30% of Liechtenstein's state revenue. Liechtenstein also generates revenue from Stiftungen ("foundations"), which are financial entities created to hide the true owner of nonresident foreigners' financial holdings. The foundation is registered in the name of a Liechtensteiner, often a lawyer.

Recently, Liechtenstein has displayed stronger determination to prosecute international money-launderers and has worked to promote the country's image as a legitimate finance center. In February 2008, the country's LGT Bank was implicated in a tax-fraud scandal in Germany, which strained the ruling family's relationship with the German government. Crown Prince Alois has accused the German government of trafficking in stolen goods. This refers to its $7.3 million purchase of private banking information offered by a former employee of LGT Group. However, the United States Senate's subcommittee on tax haven banks said that the LGT bank, which is owned by the princely family, and on whose board they serve, "is a willing partner, and an aider and abettor to clients trying to evade taxes, dodge creditors or defy court orders."

Liechtenstein participates in a customs union with Switzerland and employs the Swiss franc as national currency. The country imports about 85% of its energy. Liechtenstein has been a member of the European Economic Area (an organization serving as a bridge between the European Free Trade Association (EFTA) and the European Union) since May 1995. The government is working to harmonize its economic policies with those of an integrated Europe. Since 2002, Liechtenstein's rate of unemployment has doubled. In 2008, it stood at 1.5%. Currently, there is only one hospital in Liechtenstein, the Liechtensteinisches Landesspital in Vaduz. The gross domestic product (GDP) on a purchasing power parity basis is $5.028 billion, or $141,100 per capita, which is the second highest in the world.

Liechtenstein is a large producer of ceramics and is the world's largest producer of sausage casings and false teeth. Other industries include electronics, textiles, precision instruments, metal manufacturing, power tools, anchor bolts, calculators, pharmaceuticals, and food products. Its most recognizable international company and largest employer is Hilti, a manufacturer of direct fastening systems and other high-end power tools. Liechtenstein produces wheat, barley, corn, potatoes, dairy products, livestock, and wine. Tourism accounts for a large portion of the country's economy.

Taxation

Since 1923 there has been no border control between Liechtenstein and Switzerland

The government of Liechtenstein taxes both personal and business income and principal (wealth). The basic rate of personal income tax is 1.2%. When combined with the additional income tax imposed by the communes, the combined income tax rate is 17.82%. An additional income tax of 4.3% is levied on all employees under the country's social security programme. This rate is higher for the self-employed, up to a maximum of 11%, making the maximum income tax rate about 29% in total. The basic tax rate on wealth is 0.06% per annum, and the combined total rate is 0.89%. The tax rate on corporate profits is 12.5%.

Liechtenstein's gift and estate taxes vary depending on the relationship the recipient has to the giver and the amount of the inheritance. The tax ranges between 0.5% and 0.75% for spouses and children and 18% to 27% for non-related recipients. The estate tax is progressive.

The 2008 Liechtenstein tax affair is a series of tax investigations in numerous countries whose governments suspect that some of their citizens have evaded tax obligations by using banks and trusts in Liechtenstein; the affair broke open with the biggest complex of investigations ever initiated for tax evasion in the Federal Republic of Germany. It was also seen as an attempt to put pressure on Liechtenstein, then one of the remaining uncooperative tax havens—along with Andorra and Monaco—as identified by the Paris-based Organisation for Economic Co-operation and Development in 2007. On 27 May 2009 the OECD removed Liechtenstein from the blacklist of uncooperative countries.

In August 2009, the British Government Department, HM Revenue & Customs, agreed with Liechtenstein to start exchanging information. It is believed that up to 5,000 British investors have roughly £3 billion deposited in accounts and trusts in the country.

Fast News Search
Read More