In the spotlight: trust in the Principalty of Liechtenstein

In Liechtenstein we Trust

Martin A. Meyer
Partner and Leader Tax, PwC Liechtenstein

In the Principality of Liechtenstein the word ‘trust’ has a double meaning. On the one hand it stands for a long fiduciary tradition of holding people’s wealth in trust. On the other hand a trust is the name of a legal entity under Liechtenstein company law. Few countries have worked harder than the Principality to build trust in their integrity – because trust isn’t just in Liechtenstein’s DNA, it’s also the key to its future success.

Since 1926 trusts have been embodied in Liechtenstein law in the Persons and Companies Act (PGR). Switzerland, by contrast, despite recognising foreign trusts, does not have its own law on trusts. Trustees in Liechtenstein have more comprehensive responsibilities than their counterparts in Switzerland. They must have a licence to operate as a trustee and are subject to the FMA, the Liechtenstein financial market supervisory authority.

Based on trust

In a trust arrangement, a settlor transfers the trust property (trust fund) to a trustee. The trustee undertakes to administer or use the property in their own name as an independent legal owner for the benefit of one or more beneficiaries. A trust is a contractual legal relationship rather than a legal entity, and has no legal personality. Settlors transfer their assets to the trustee on the basis of trust in their abilities and integrity – hence the name.

Trusts can be set up for charitable, social, cultural or similar purposes. Similar to foundations, they follow global trends and international standards. A Liechtenstein trust is especially suited for the long-term preservation of business or family assets, for example to safeguard owners of assets in countries where there’s a risk of expropriation, to maintain group structures over generations, or for sustainable succession arrangements. What makes trusts particularly interesting is the individual room for manoeuvre they provide: a trust agreement can be set up to cover just about any arrangement.

Trust is in the DNA

Wealth and asset management, and the requisite legal set-ups, have a venerable tradition in Liechtenstein. The Princely Family itself embodies a dynasty philosophy, and has invested most of its wealth in foundations and trusts. Liechtenstein banks have also specialised in wealth and asset management for private clients and institutional investors. The Principality’s first bank, Liechtensteinische Landesbank (LLB), was established in 1861. The goal back then was to cover the savings and loans needs of a population of small farmers and artisans. LGT Bank, founded in 1920 and taken over by the Princely Family in 1930, concentrated from the outset on managing foreign assets. Verwaltungs- und Privat-Bank (VP Bank), which goes back to 1956, is also closely associated with the trust business. Liechtenstein has positioned itself as a centre of wealth and asset management, establishing trust as a fundamental value. Now the financial services sector is an important pillar of the Liechtenstein economy, accounting for 23% of economic output (see Figure 1).

Figure 1: Almost a quarter of Liechtenstein’s economic output comes from the financial industry.

Economic globalisation has led to close dependencies between the international financial markets and has created a need for greater transparency all over the world. Liechtenstein’s trust and financial services industry has also had to confront this change. In the last 15 years the Principality has ushered in comprehensive changes. The country pursues a consistent white-money strategy and in the 2009 Liechtenstein Declaration set down its commitment to the OECD standards on transparency and the exchange of information in tax matters. Since then the country has been steadily strengthening the regulatory framework governing the trust and financial industry by way of an extensive web of bilateral and multilateral agreements on double taxation and the exchange of information.

Every trick in the book

Trust remains the basis of any successful relationship in the trust business. And in any business that revolves around trust, you’re also sure to find criminal energy and fraudulent intentions. One of Liechtenstein’s strengths lies in its ability to defend this trust as its most precious asset. In June 2019, H.S.H. Hereditary Prince Alois announced the intention of consolidating the legal foundations of the trust business even further. The Ministry for General Government Affairs and Finance intends to amend the law to safeguard quality in the trust business, strengthen trust in the industry, and counter potential fraud and abuse. The motion is currently in consultation. Added to this, the FMA is to be given a more pronounced supervisory role.

In recent years international regulations have also become drastically tighter in an attempt to create transparency and prevent abuse (see Figure 2). For years Liechtenstein has taken a zero-tolerance approach to money laundering and the financing of terrorism. As a member of the European Economic Area (EEA), it has implemented the EU’s 4th Anti-Money Laundering Directive and the Regulation on information accompanying transfers of funds. The relevant implementing provisions are to be found in the Due Diligence Act and Ordinance. In 2013/14 the International Monetary Fund (IMF) and Moneyval attested to Liechtenstein’s high standards in combating money laundering and the financing of terrorism.

Figure 2: Liechtenstein has systematically transformed itself into a nation of trust.

Offshore to onshore

As part of its code of conduct for business taxation, the EU is cracking down on tax evasion at offshore centres such as the British Virgin Islands, the Bahamas, Bermuda and the Channel Islands. Now companies based in these centres need to have sufficient economic substance, and are subject to comprehensive disclosure requirements. In the wake of these obligations many offshore structures are no longer tenable because they do not reflect real economic activity. A global shift in assets from offshore to onshore has thus begun. Current offshore wealth structures are returning to the domicile of the actual economic beneficiaries, and will presumably be spread over the whole world. In the German-speaking world in particular, Liechtenstein enjoys international recognition as an agile jurisdiction with a modern legal system.

Small, but oh my!

Liechtenstein may be a small country, but it does offer a whole range of interesting advantages, all of which create the ideal foundation for sustainable wealth structures:

  • The constitutional hereditary monarchy is built on parliamentary and democratic foundations going back to 1719. The Princely Family thinks in generations and avoids short-term changes of direction. This guarantees political stability.
  • As a member of the European Economic Area (EEA) and a partner to Switzerland in a customs union, Liechtenstein is a gateway to two internationally established domestic markets.
  • The Liechtenstein banking system is very stable, with high Tier 1 ratios and solid equity funding ratios.
  • Every year without fail, Standard & Poor’s gives Liechtenstein a triple-A rating. Thanks to strict budgetary discipline, Liechtenstein is one of the few countries without government debt.
  • The production of goods accounts for around 43% of gross value added, one of the highest figures in the world.
  • The completely revised law on companies, trusts and foundations is modern and flexible, responding to the needs of our times and providing many different options, especially when it comes to succession arrangements.
  • After a complete revision of tax law in 2011, it now meets all the international standards set by the EU and OECD.
  • Around 38,000 people live in Liechtenstein. Added to this are more than 20,000 people who commute there to work every day. Liechtenstein has access to a rich pool of talent and qualified workers, especially in Austria and Switzerland.

Trust as an opportunity for neighbouring countries

Liechtenstein has recognised the needs of the globalised economy and is transforming its trust business into one of the most modern in the world. Trust is one of the most important factors underlying this transformation.

Liechtenstein and Switzerland aren’t just bound together in a customs union. In many respects they also complement each other in the trust and financial services industry. For one thing, Liechtenstein provides more than 10,000 Swiss people with jobs. Switzerland can also take advantage of the Principality’s modern, flexible company law. This allows for alternative succession arrangements for wealthy families. Liechtenstein also has access to the EU market. In combination, Switzerland and Liechtenstein can offer the ideal solution to meet global needs – a solution that can even withstand the pressure of the international community’s expectations.

Contact us

Martin A. Meyer

Partner, Leader Tax, PwC Liechtenstein

Tel: +41 58 792 42 96