Liechtenstein – Transitioning from a Tax Haven09/08/17
Liechtenstein is a small nation in Europe bordering Austria and Switzerland. Having the approximate area of Brisbane and a population of less than 40,000, it’s no surprise that this country rarely comes up in conversation. But Liechtenstein does have a large financial services sector, remains one of the wealthiest nations in the world per capita, and remains a steady and stable economy despite changing banking rules which once saw it as one of the largest and most popular tax havens globally.
Unlike other European countries, the monarchy of Lichtenstein still holds significant power in governance, with a 2003 change to the constitution supporting the monarch’s powers to veto laws, dissolve the parliament, or dismiss any minister, among other fairly far-reaching powers for a modern European state. Interestingly, it appears the majority of Liechtenstein’s citizens support the monarchy, as a referendum to revoke some of these powers was rejected by over 70% of the population in 2012. The country also has very close ties to Switzerland, who handles the majority of their national security, diplomatic relations and who they share a currency, the Swiss Franc, with.
Being such a small nation, much of their economy is based on service provisions, finance, tourism and banking. There are several reasons for this, one of the major drivers being the historical tax haven status of the country. With a low corporate tax rate and relative ease of setting up businesses in the country without having to physically operate there, the country was able to flourish on global corporations and wealthy individuals attempting to avoid paying higher tax rates in other countries. As recently as 2009, the country has made some moderate tax reforms to improve transparency and have itself removed from the OECD ‘tax haven blacklist’, as its involvement, whether direct or indirect, in tax avoidance and money laundering put severe strains on relationships between Liechtenstein, Germany and the United States. Since then, financial services, banking and tourism still remain the largest drivers of the economy.
The maximum personal income tax rate is just under 30%, while the corporate rate is a mere 12.5%.
Like most European countries, inflation has been reasonably weak over 2016, however the country has now returned to some slightly stronger inflation figures in 2017, sitting at around 0.5% inflation per month. Large bursts of inflation have never been an issue in Liechtenstein due to the nature of the country. The smaller size of the country, both in area and population, appear to provide it with numerous benefits with respect to tracking and improving problems in the economy.
Another such example of this is unemployment, which is easier to track and to solve in the nation due to size. The unemployment rate is has been recorded as low as 1.5%, while wages have been steady, growing at approximately 3-5% annually. Coupled with Liechtenstein’s low inflation, the population generally enjoys a very high average wage.
Despite the many positives of the economy in Liechtenstein, the country does face some challenges. From a self-sufficiency standpoint, the country imports a great deal of its food, electricity and water needs from other countries, and has very strong economic links to neighboring Switzerland. Instability in Switzerland, or a breakdown of relations could produce a massive hit to the nation’s economy.
As global regulatory, government and accounting bodies make efforts to crack down on international tax evasion, Lichtenstein may find itself in a difficult position. While the changes to their banking privacy regulations surprisingly had little effect on their overall economy, further global regulatory changes could continue to put diplomatic pressure on the nation.
Although Lichtenstein has enjoyed relative growth and stability as a small nation, particularly since moving on from being famous as a tax haven, going forward it must consider ways to continue expanding and diversifying its economy. Where the nation will move to from here could be anyone’s guess.