In 2016 Liechtenstein has introduced the automatic exchange of information on financial accounts (“AEoI”) in accordance with the Common Reporting Standard (“CRS”) of the OECD. With the implementation of the AEoI, Liechtenstein also introduced a provision, allowing entities, foundations and trusts a voluntary classification as a Financial Institution (“opt-in”).
Under the CRS, foundations, trusts and companies must classify themselves either as so-called financial institutions (“FI”) or as passive/active non-financial entities (“NFE”). When classified as FI, the structure itself or, in the case of foundations and trusts, its governing bodies (foundation board or trustee) must fulfil the reporting obligations to the tax authorities. In contrary, when classified as a passive non-financial entity (“pNFE”), the reporting obligations (usually) are fulfilled by the bank.
Since the classification as a FI is subject to several conditions, not all entities meet the relevant prerequisites in order to be classified as a FI and therefore would generally be categorised as a pNFE, which means that the bank would be subject to the reporting obligations. For this reason, Liechtenstein stipulated the possibility to opt-in as a FI (Art. 4 para. 2 AEoI Act). This provision made it possible for foundations and trusts in particular to voluntarily self-classify as FIs and thus fulfil the reporting obligations themselves or through the foundation board or trustee.
Liechtenstein, as all other participating countries with regard to the AEoI, is subject to the peer review process of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum). The review ultimately will result in a country rating (2022). The draft of the respective country rating explicitly now calls for the abolition of the “opt-in” possibility. If Liechtenstein does not implement the recommendation, the “Comprehensive Review” will evaluate the legal implementation of the CRS as “needs improvement“. This would of course have a negative impact on the overall assessment. In view of this clear position and after balancing all the consequences, the government considered it necessary to abolish the “opt-in” provision.
The Abolition of the “opt-in” possibility will have the following consequences:
- Those entities (and foundations or trusts) that have made use of the “opt-in” possibility and therefore were classified as a Financial Institution according to this provision, must re-classify themselves. If the criteria of a FI are not met – which most likely will be the case for many of the above mentioned entities, foundations and trusts – the respective entity (or foundation/trust) must classify as a passive NFE.
- As a consequence, any future reporting will be carried out by the involved banks (for the 2021 reporting period).
- All files must be reviewed and the entities (resp. foundations/trusts) must be re-classified (if necessary) until 31 December 2021 the latest.
Compared to the classification as a FI (reporting obligation of the company or the trustee), the change of the classification to a pNFE will lead to significant deviations from the CRS reporting in the past (class of persons to be reported, other amounts etc.). These deviations from the previous reporting years may presumably lead to inquiries by tax authorities with regard to the respective taxpayers (founders, beneficiaries, etc.)
For example, in the case of foundations and trusts with foreign bank accounts, the change to a classification as a pNFE may result in all discretionary beneficiaries of discretionary foundations (or trusts) being reported to their tax domicile – even if such beneficiaries are not (yet) aware of the respective foundation/trust and/or their potential position as a beneficiary. In addition, in contrast to the classification as a FI, the foundation councils (or trustees) will henceforth also be reported to their tax domicile – with the balance of the bank account of the respective foundation/trust, although they are (usually) not entitled to the assets of such foundation/trust of course. Understandably, this can lead to inquiries by the tax administration in the state of residence of the foundation council/trustee.
In many cases, it will therefore be advisable to contact the relevant tax authorities in advance. Depending on the structure of the foundation or trust, the possibility remains that the respective entity still may classify as a FI.This, however, must be verified in a case by case analysis.
We are happy to assist foundation councils/trustees and clients as well as affected founders or beneficiaries in this regard. Should you have any questions or need any further information, please do not hesitate to contact us at any time.