Far-reaching consequences of disruptive innovations for the Liechtenstein financial market

The Liechtenstein financial market has demonstrated its ability to adapt in recent years by keeping pace with changing framework conditions. Financial industry stakeholders manage more assets today than before the outbreak of the financial crisis. Liechtenstein remains as attractive as ever as a location for private banking and wealth management. The Principality of Liechtenstein is not the only country in which the financial sector is undergoing fundamental change. Digitisation is the main driver of this transformation, and banks are the hardest hit. More and more so-called “digital disruptors” are offering banking services without actually choosing to adopt a banking model themselves.

The challenge of digitisation

Customer behaviour and expectations have evolved. New competitors (e.g. FinTechs) and new technologies (e.g. blockchain) are provoking a fundamental shift in the business model of banks. Digitisation offers new opportunities, but also generates risks. Traditionally structured banks operate an integrated business. They sell products that they have developed themselves via their own distribution channels. All transaction and support services are provided internally. In contrast, new technologies enable a high degree of standardisation to be achieved, leading to a fragmentation of the value chain. According to the PwC Global FinTech Report 2017, 82% of the study participants questioned want to enter into partnerships with FinTech companies within the next three to five years. 77% expect blockchain technology to have become a part of their company’s productive system environment by 2020. Banks in Liechtenstein will not be able to escape this development. They need to carefully analyse the strategic options for action before putting appropriate measures into practice.

Attractive framework conditions

The government is supporting technological change by means of its “Impuls Liechtenstein” programme and the “Regulatory Laboratory” set up within the Financial Market Authority Liechtenstein (FMA). The FMA pursues a forward-looking regulation policy in line with European law. The team of experts from the Regulatory Laboratory advises financial intermediaries at the interface between regulations and the market. At statutory level, modifications have been made to banking legislation which permit the needs-based approval of service providers. Furthermore, there are specific statutory provisions applicable to payment and electronic money institutions. In addition, service providers and organisations benefit from private initiatives which help to establish extensive networking within the FinTech industry in Liechtenstein.

Healthy prospects

There are healthy prospects for overcoming the technological transformation. Liechtenstein as a financial centre has significant expertise in the field of finance, responds rapidly thanks to its short decision-making channels, and is capable of implementing practical solutions. This creates stability and legal certainty. These are good basic conditions to ensure its continued survival in a competitive environment in such fast-moving times. In the future, financial intermediaries will however be required to prove their ability to adapt more than ever before.

Contact

Martin_Meyer_09723
Claudio Tettamanti
PwC | Partner | Market Leader Liechtenstein
Office: +423 233 10 02
Mobile: +41 79 696 45 89
Email
PricewaterhouseCoopers GmbH
Austrasse 52 | Postfach | FL-9490 Vaduz

U.S. tax reform includes important information reporting and withholding changes

The 2017 tax reform and reconciliation act (the Act), enacted on December 22, 2017, makes important changes to information reporting and withholding tax rules, including:

  • A change in the backup withholding rate from 28% to 24%;
  • A new federal tax withholding requirement relating to certain transfers of partnership interests;
  • New reporting requirements relating to:
    • the sale of certain life insurance contracts, and
    • the receipt of fines, penalties, and other amounts from certain taxpayers; and
  • Changes to various non-payroll withholding tax rates that are tied to individual and corporate income tax rates.

Observations: Taxpayers may need to implement changes immediately to their policies and procedures to conform to the new rules. Also, taxpayers reorganizing or restructuring in light of US tax reform should consider the impact the tax reform changes have on their tax withholding and reporting profile. Restructuring could cause changes in the source of income being paid or the status of a taxpayer (e.g., from non-US payor to US payor, or vice versa). Taxpayers should determine whether they are subject to new or additional tax withholding or information reporting obligations as a result of restructuring efforts due to US tax reform.

For more information on these updates, please see our recently published Tax Insight.

EU and the OECD considering TRACE / withholding tax simplification

On 30 January 2018, the European Commission held a public session to discuss the code of conduct issued by the Commission in late 2017 regarding increasing the efficiency of withholding tax (“WHT”) procedures. The code of conduct contains a list of measures for E.U. Member States to consider in terms of simplifying WHT procedures as regarding cross border income such as dividends, interest, and royalties. The code is a non-binding document which allows for voluntary commitment by E.U. Member States.

The measures considered includes, inter alia, (1) increased digitalization of WHT procedures, (2) provisions of refunds in a short period, and (3) relief at source. The tax relief at source suggestion includes the use of “authorized information agents and withholding agents” to facilitate the verification of entitlement to treaty relief, provision of pooled withholding tax rate information, and reporting of relevant information.

Such a tax relief at source solution resembles the OECD’s Treaty Relief and Compliance Enhancement (“TRACE”) project which started in 2009. TRACE envisages the use of Authorised Intermediaries to facilitate a more efficient and simpler application of treaty relief on cross border investments in a similar manner to the U.S. Qualified Intermediary regime. Although TRACE has not been implemented in any country as of yet, we understand that it may be reactivated soon especially given the work done at European Commission level in terms of the WHT topic.

Please refer to the following link for access to the European Commission Code of Conduct.

Contact

Bruno Hollenstein
Partner, Operational Tax
+41 58 792 43 72
bruno.hollenstein@ch.pwc.com

OECD Publishes Public Comments on Mandatory Disclosure Model

On 18 January 2018, the Organisation for Economic Co-operation and Development (“OECD”) published the public comments on the discussion draft on Mandatory Disclosure Rules for Addressing OECD Common Reporting Standard (“CRS”) avoidance arrangements and offshore structures (“Discussion Draft”). The OECD had published the Discussion Draft on 11 December 2017, requesting comments from interested parties and stakeholders by 15 January 2018. The Discussion Draft outlined a proposed model requiring mandatory disclosure rules, which ultimately intends to target promoters and service providers with a material involvement in the design, marketing or implementation of CRS avoidance arrangements and opaque offshore structures.

The public comments on the Discussion Draft came from numerous sources, including all of the Big 4 firm networks. In terms of input from Swiss sources, the Swiss Banking Association, Swiss Association of Asset Managers, Association of Swiss Private Banks, and the Swiss Insurance Association all provided comments to the OECD. The general feedback highlights the potential practical difficulties in the application of the model, mainly due to retrospective application of rules and definitions that are too broad at present for practical application. As a next step, the OECD will take these comments into account and present a report on the topic to the G7 Finance Ministers in mid-2018.

Please refer to the link for access to the public comments on the OECD’s Discussion Draft.

Contact

Bruno Hollenstein
Partner, Operational Tax
+41 58 792 43 72
bruno.hollenstein@ch.pwc.com

UPDATE: FinSA and FinIA: Commission for economy and taxes concluded its debation

The Commission for economy and taxes (WAK-S) concluded the debation relating to the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA). This information has been released in the press today.

Thereby the WAK-S endorsed almost all proposals made by the National Council (Nationalrat). In particular, WAK-S has unanimously approved the possibility for the early entry into force of the Fintech provisions, and has also largely agreed with the National Council on the material provisions relating to Fintech. Thus, there is a good chance that the Banking Act will create a new license category for enterprises that accept public deposits of up to 100 million francs without investing or paying interest. For the new category of companies, simplified approval and operating requirements in the areas of accounting, auditing and deposit securities are to be applied.

However, the following outlines the most significant amendments and changes made to the resolution of the National Council:

  • As opposed to the proposal made by the National Council, WAK-S resolved that the threshold for the obligation to publish a prospectus for public offers of securities shall be increase from 2.5 million francs to 8 million francs.
  • Regarding the „door-to-door selling” (Haustürgeschäft) which is stated in the Swiss Code of obligations, the WAK-S endorsed by the majority to the proposal made by the National Council that the door-to-door selling of banking and financial services shall be exempted. However, the exception shall only be applicable to offers which have been made to existent clients of the financial institution or the bank.
  • The grand-fathering clause which is stipulated in the FinIA shall not be cancelled according to the WAK-S, as opposed to the proposal made by the National Council.
  • Regarding the financial market supervisory act, as opposed to the proposal made by the National Council, the WAK-S resolved that also persons and entities holding a qualified or substantial participation in a supervised institute shall provide the supervisory organization with all information and documents necessary for the performance of its duties.

The Council of States will now take over and could already be debating the topics in its spring 2018 session. Subsequently, the Commission for economy and taxes (WAK-N) as well as the National Council will deliberate, so that the bill has to pass the final hurdle before becoming enacted.

The document regarding comparison of the resolutions of the WAK-S is now available under the following Link.

Contact Us

Dr. Guenther Dobrauz
Partner
Leader PwC Legal Switzerland
+41 58 792 14 97
guenther.dobrauz@ch.pwc.com

Tina Balzli
Head Banking
Director
Legal FS Regulatory & Compliance Services
+41 58 792 15 54
tina.balzli@ch.pwc.com

Dr. Jean-Claude Spillmann
Head Wealth Management
Senior Manager
Legal FS Regulatory & Compliance Services
+41 58 792 43 94
jean-claude.spillmann@ch.pwc.com

Claudia Thalmann
Assistant Manager
Legal FS Regulatory & Compliance Services
+41 58 792 16 69
claudia.thalmann@ch.pwc.com

Identifying and managing step-in risk

In October 2017 the Basel Committee on Banking Supervision (BCBS) issued guidelines on the identification and mitigation of step-in risk.

The guidelines are designed to mitigate potential spill-over effects from the shadow banking system to banks, and will have to be implemented by 2020 at the latest.

Implementing the requirements to comply with the BCBS step-in risk guidelines is complex, and banks with global operations will have to launch their implementation projects well ahead of the final implementation date.

PwC is available to discuss the guidelines with you and walk you through our approach, which addresses the requirements of step-in risk through potential amendments to terms and conditions (T&Cs) and the suitability of products for investors. Additionally, you will need to make changes to your risk governance and policies so that step-in risk can be reduced ahead of the go live date.

Find out more

Your PwC contacts

Andrin Bernet
Partner
andrin.bernet@ch.pwc.com
+41 58 792 24 44

Andrea Schnoz
Director
andrea.schnoz@ch.pwc.com
+41 58 792 23 35

Yousuf Khan
Director
yousuf.khan@ch.pwc.com
+41 58 792 15 62

Vandana Shah
Senior Manager
shah.vandana@ch.pwc.com
+41 58 792 20 14

Swiss CRS Updates – January 2018

During December 2017, the Swiss Federal Tax Administration (“Swiss FTA”) and the Swiss State Secretariat for International Financial Matters (“SIF”) provided important updates regarding the Automatic Exchange of Information on financial accounts (“AEOI”) under the OECD’s Common Reporting Standard (“CRS”). Upon the completion of ongoing parliamentary work, the SIF updated the list of jurisdictions and territories with which Switzerland has agreed to exchange information under the CRS. In addition to containing Switzerland’s AEOI partner jurisdictions, the list also includes additional information, such as the date of entry into force of the various CRS agreements as well as specific distinctions between the different partner jurisdictions. The updated list distinguishes between states that:

  • have not yet submitted their partner state notifications. The AEOI will thus be activated at a later date;
  • have declared themselves to be “permanent non-reciprocal jurisdictions”, i.e. they will supply account information to the partner states on a permanent basis but will not receive such data;
  • do not meet the requirements of the global AEOI standard at present and have postponed the introduction of the AEOI.

Please refer to the following links for the updated list of Switzerland’s AEOI partner jurisdictions in German / English.

In addition to the above-mentioned updates, the “Questions and Answers to CRS” on the Swiss FTA website and the OECD “FAQs” were also updated in December 2017.

Contact

Bruno Hollenstein
Partner, Operational Tax
+41 58 792 43 72
bruno.hollenstein@ch.pwc.com

Equivalence decision about Swiss share trading venues

On December 21, 2017 the European-Commission adopted its decision about trading venues in Switzerland.

According to this decision, trading venues in Switzerland (i.e. SIX Swiss Exchange and BX Swiss) are recognized as equivalent to trading venues in the EU.

Article 23 of the new EU Markets in Financial Instruments Regulation (MiFIR), which will apply in the EU as of 3 January 2018, obliges European investment firms to trade shares on a trading venue in the EU or on an equivalent third-country venue. Therefore, such a ruling was necessary to enable investment firms domiciled in the EU to continue to trade shares on one of the Swiss exchanges.

It must be noted that this equivalence decision applies only to trading venues and not to the rest of the requirements under MiFID II/MiFIR. Furthermore, this equivalence decision about trading venues has been limited to one year, until 31 December 2018.

The Importance of this decision for Switzerland

For the SIX Swiss Exchange, roughly 50% of their CHF 850bn yearly trading volume stems from EU domiciled investment firms, therefore the equivalence decision is essential to the health of the Swiss financial market.

While equivalence has been granted until the end of 2018, legal certainty regarding the future of the Swiss trading industry is being undermined.

Equivalence decision and outlook

Equivalence of a third-country framework is generally granted by the European-Commission if three principles are met:

  1. the requirements are legally binding;
  2. they are subject to effective supervision by local authorities; and
  3. the results achieved are the same as EU rules.

An equivalence decision according to Article 46 et seqq. MiFIR granting Swiss investment firms the access to the European market is outstanding. It is not expected that such an equivalence decision will be taken in the near future, due to the fact that EU regulators are at the moment heavily involved with the realization of Brexit and are therefore not prioritizing this topic.

Contact Us

Günther Dobrauz
Partner
Leader PwC Legal Switzerland
+41 58 792 14 97
guenther.dobrauz@ch.pwc.com

Martin Liebi
Director
Legal FS Regulatory & Compliance Services
+41 58 792 28 86
martin.liebi@ch.pwc.com

Jean-Claude Spillmann
Senior Manager
Legal FS Regulatory & Compliance Services
+41 58 792 43 94
jean-claude.spillmann@ch.pwc.com

Stephanie Kok
Manager
Legal FS Regulatory & Compliance Services
+41 58 792 48 94
stephanie.kok@ch.pwc.com

Alexandra G. Balmer
Senior
Legal FS Regulatory & Compliance Services
+41 58 792 14 24
alexandra.balmer@ch.pwc.com

Discontinuation of LIBOR – are you ready?

In July 2017 it was announced that LIBOR will be phased out by 2021. Because globally securities of more than $350 trillion are based on the LIBOR reference rate, its discontinuation will be a paradigm shift in the financial industry impacting the whole value chain of banks from retail to treasury to trading. Market participants should adapt to those upcoming changes in an early stage to be prepared and benefit from the new market environment.

 

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Do you have any questions? Please get in contact with us:

Christian Schmitt
Advisory Partner
christian.schmitt@ch.pwc.com

Manuel Plattner
Advisory Director
manuel.plattner@ch.pwc.com

Sebastian Gerigk
Senior Manager Advisory
sebastian.gerigk@ch.pwc.com

The EU’s Anti-Money Laundering Directive will in the future also include “virtual currencies”

In its press release of 21 December 2017, the Austrian Financial Market Authority (FMA) announced that it welcomed the European Union’s agreement to include “virtual currencies” in the provisions on the fight against money laundering. According to the FMA, this is “an important step so that in the future, these online service providers will also have to identify, check and monitor their customers in the same way as the financial institutions in accordance with the usual due diligence obligations and monitor the transactions on an ongoing basis”.

In accordance with the provisions of the new EU Anti-Money Laundering Directive, exchanges for “virtual currencies” and so-called “wallet providers” (electronic wallets) will henceforth also be subject to the provisions of the Anti-Money Laundering Directive. The changes are to be implemented as followed:

  • The Anti-Money Laundering Directive applies to virtual currency swap exchanges where they offer the exchange of virtual currencies for legal currency. However, the Directive does not cover the exchange of different virtual currencies.
  • Providers of electronic wallets (so-called “Wallet Providers”), which manage the respective cryptographic keys of the holders of virtual currencies, are without exception subject to the provisions of the Anti-Money Laundering Directive. Wallet providers are also obliged to register.
  • The Anti Money Laundering Directive introduces for the first time a legal definition of virtual currencies.

As soon as the European process is finalised, legislators are required to implement and transpose the new Anti-Money Laundering Directive into national laws within 18 months.

Contact Us

Guenther Dobrauz
Partner
Leader PwC Legal Switzerland
+41 58 792 14 97
guenther.dobrauz@ch.pwc.com

Tina Balzli
Director
Head Banking, Legal FS Regulatory & Compliance Services
+41 58 792 15 54
tina.balzli@ch.pwc.com

Mark A. Schrackmann
Assistant Manager
Legal FS Regulatory and Compliance Services
+41 58 792 25 60
mark.schrackmann@ch.pwc.com