The Principality of Liechtenstein - A Pinnacle of Financial Stability and Regulatory Excellence in the Heart of Europe

Josef Bergt
2023

Introduction

In the realm of global finance, the Principality of Liechtenstein stands as a paragon of specialized, internationally connected, and stable financial services. The second-largest contributor to the nation's economy, following the industrial sector, financial services in Liechtenstein are predominantly characterized by the banking sector. This sector, inclusive of its foreign corporate entities, manages customer assets approximating CHF 424 billion, with a primary focus on wealth management and private banking. The principality also boasts a conducive environment for the insurance industry, asset management, fund industry, and fiduciary services. Approximately 17.2% of the total workforce, equating to 7,346 individuals, are employed within the financial sector, underscoring its significance within the national economy.

Liechtenstein's financial intermediaries benefit from direct market access to two lucrative economic areas. Since 1995, as a member of the European Economic Area (EEA), Liechtenstein enjoys full freedom to provide services within all European Union (EU) and EEA countries and has full access to the European single market. Additionally, the principality's traditionally close economic ties and customs and currency treaties with Switzerland afford privileged access to the Swiss economic space. For Swiss entities, Liechtenstein serves as a proximate hub to the EU and EEA states.

The state of Liechtenstein offers a stable legal and social order within the Franc area, boasting high living standards for its residents. The principality's solid financial policy for public budgets, short administrative pathways, and predictable tax and legal frameworks contribute to its attractiveness as a business location. This is further underscored by Liechtenstein's AAA rating from Standard & Poor’s, highlighting its reliability.

Liechtenstein is an exceptional location for business establishments, nestled between Austria and Switzerland, offering a diversified and stable economic environment with over 4,800 active companies.

Liechtenstein offers high living standards with its safety, intact nature, rich cultural offerings, diverse recreational opportunities, and a top-tier education system.

The state form of Liechtenstein is a constitutional hereditary monarchy based on democratic and parliamentary principles. The direct democracy divides state power between the reigning Prince Hans-Adam II of Liechtenstein and the people. The eleven municipalities form the sixth smallest country in the world. The parliament, called the Landtag, consists of 25 deputies elected by the people, who appoint a five-member government confirmed by the Prince.

Financial Market Regulation & Supervision

The principality's financial market oversight is robust and globally recognized. The Financial Market Authority Liechtenstein (FMA) of Liechtenstein enforces international standards in supervising financial market participants and is represented in all European financial supervisory authorities and key global organizations concerned with financial market oversight and regulation.

Liechtenstein's financial market regulation is harmonized with EU standards due to its EEA membership, meaning financial market participants in Liechtenstein are subject to the same legal requirements as those in EU countries. The principality's timely and market-appropriate implementation of EU directives enhances the competitiveness and appeal of its financial center. Liechtenstein adheres to high standards and an effective system in combating money laundering and terrorism financing. It also implements global standards of transparency and information exchange in tax matters developed by the OECD.

Adherence to recognized international standards in financial market supervision is crucial for the global recognition of a financial center, a primary objective for the FMA. The equivalence of supervisory standards is essential for maintaining access for Liechtenstein's financial intermediaries to international financial markets. Compliance with these standards is regularly assessed by international bodies.

In September 2021, MONEYVAL, the Council of Europe's Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism, evaluated Liechtenstein's adherence to international standards in combating money laundering. The assessment commended the FMA's supervisory system as well-suited and efficient, noting the authority's consistent risk-based supervision. Liechtenstein was also favorably compared to its peers.

Renowned Business Hub

The principality's political continuity, solid financial policy, and the public sector's capital strength allow entrepreneurs to focus on core business activities. Liechtenstein is one of the few countries free of national debt. The stability of its social and economic order, legal certainty, and the Swiss Franc as legal tender ensure a stable environment.

Liechtenstein's specialized, internationally connected, and stable financial center is well-known, but the country also has a high degree of industrialization. The industry is the largest economic sector, employing about 40% of the workforce.

The principality's business-friendly environment is reflected in its liberal economic policies, evident in labor and corporate law. Low ancillary wage costs and a high weekly working time compared to Europe enhance the attractiveness of the business location. The country's manageable size brings flexibility and short decision-making processes in all matters.

Since 1995, Liechtenstein has been a member of the EEA, enjoying full freedom to provide services within all EEA countries. The principality also benefits from privileged access to the Swiss economic space due to its close economic relationships and treaties with Switzerland. As a member of the European Free Trade Association (EFTA), the country also benefits from one of the world's largest networks of concluded free trade agreements.

Liechtenstein's tax system is simple and fair, with a uniform corporate income tax rate of 12.5%. This flat tax covers all dues, as the country does not levy capital or coupon taxes. There are no additional charges on dividends, capital gains, or liquidation profits from participations. 

Various double taxation and tax information agreements, including with Germany, Switzerland, Austria, and the USA, regulate international cooperation. As of June 2022, 55 international tax agreements were in force. The customs union with Switzerland also has tax implications, with a shared value-added tax rate of a mere 7.7% (8.1% as of January 01, 2024).

International Financial Market

The FMA of Liechtenstein is integrated into the European financial supervisory system, which consists of the European Systemic Risk Board (ESRB) and three European Financial Supervisory Authorities: the European Banking Authority (EBA) based in Paris, the European Insurance and Occupational Pensions Authority (EIOPA) in Frankfurt, and the European Securities and Markets Authority (ESMA) in Paris.

The European financial supervisory structure is based on two pillars: macro-prudential supervision by the ESRB and micro-prudential supervision by a network of European and national supervisory authorities.

The three European Financial Supervisory Authorities work in a network and in agreement with national supervisory authorities to ensure financial solidity at the level of individual financial institutions and consumer protection. These authorities are endowed with specific powers, including:

• Developing binding technical standards;
• Issuing guidelines and recommendations;
• Direct supervisory powers over national authorities (or secondarily over financial market participants) in cases of:
  • Breach of Union law (including technical standards)
  • Crisis situations (to be determined by the Council)
  • Disagreements between national authorities in cross-border cases
  • Issuing warnings and temporarily prohibiting certain financial activities if the integrity of the financial markets or the stability of the financial system is at risk;
• Collecting necessary information from financial market participants;
• Direct supervisory powers for ESMA regarding credit rating agencies.

As a non-EU member, Liechtenstein, or rather the FMA, does not have voting rights in the committees of these financial supervisory authorities. Under the two-pillar structure of the EEA Agreement, the competence to adopt binding measures against national supervisory authorities of the EEA/EFTA States and against financial intermediaries based in the EEA/EFTA States lies with the EFTA Surveillance Authority. The competence for adopting non-binding measures, both against national supervisory authorities and financial intermediaries of the EU and against the EEA/EFTA States, remains with the European financial supervisory authorities. In certain cases, such as extreme crisis situations, the EFTA Surveillance Authority can take direct action against financial intermediaries based in an EEA/EFTA State, based on draft decisions prepared independently by the European financial supervisory authorities or upon request of the EFTA Surveillance Authority. In the case of the EEA/EFTA States, legal recourse does not go to the Court of Justice of the European Union (CJEU) but directly to the EFTA Court.

The ESRB is responsible for the macro-prudential oversight of the EU financial system and for preventing and mitigating systemic risk. Its activities cover a wide range of economic actors (banks, insurers, asset managers, shadow banks, financial market infrastructures, and other financial institutions and markets). Within its mandate, the ESRB monitors and assesses systemic risks and, if necessary, issues warnings and recommendations. Liechtenstein participates in the work of the ESRB. However, the EEA/EFTA States have not conferred any competence on the ESRB to set binding measures.

International Supervisory Cooperation

Globally, the FMA of Liechtenstein is a member of the most important global supervisory bodies, including the International Organization of Securities Commissions (IOSCO), the International Association of Insurance Supervisors (IAIS), and the International Organisation of Pension Supervisors (IOPS). Relations with the Basel Committee on Banking Supervision (BCBS) are maintained, particularly within the biennial International Conference of Banking Supervisors (ICBS).

Bilaterally, in addition to multilateral cooperation in European and global forums, the FMA also maintains contacts with various foreign partner authorities. The bilateral relations with Switzerland are particularly close due to the currency treaty and the shared economic space.

Liechtenstein's international cooperation through the FMA is significantly shaped by its membership in the EEA. As an EEA member, Liechtenstein is obliged to transpose all EU legal acts in the field of financial services into national law. Thus, Liechtenstein essentially operates under the same legal framework as other EU countries, allowing Liechtenstein's financial institutions direct access to the EEA internal market. They benefit from the EU passport, a system that allows providers of financial services already authorized within the EEA to offer their services in other EEA states without further authorization requirements.

Due to its EEA membership, the FMA of Liechtenstein is also closely involved in the European supervisory structure. The FMA of Liechtenstein has the status of a non-voting member in all three European Financial Supervisory Authorities: the EBA, EIOPA, and ESMA.

Source: FMA Liechtenstein facts about the financial sector Liechtenstein

Executive Summary:

• Liechtenstein's financial sector is a significant part of its economy, with banking as the focal point, managing substantial customer assets.
• The principality enjoys direct market access to the EU and EEA, as well as a privileged relationship with Switzerland, enhancing its financial intermediaries' reach.
• The Financial Market Authority (FMA) enforces international supervisory standards, ensuring Liechtenstein's financial market oversight is globally recognized and respected.
• Liechtenstein's financial market regulation is EU-compatible, promoting competitiveness and attractiveness as well as access to the EU single market.
• The principality maintains a stable and reliable state with a AAA rating, reflecting its solid financial policy and favorable business environment.
• International assessments by bodies like MONEYVAL affirm Liechtenstein's adherence to anti-money laundering standards and efficient supervisory practices.
• Liechtenstein offers a stable social and economic order, a debt-free status, and a high industrialization level, making it an attractive business location.
• The principality's liberal economic policies, simple and fair tax system, and high living standards make it a favorable environment for business and living.
• Liechtenstein's integration into the European financial supervisory system ensures a harmonized regulatory framework with the EU, despite its non-EU status.
• The FMA's membership in global supervisory bodies and bilateral relations, particularly with Switzerland, underscores its commitment to international cooperation and compliance.