Before the present financial crisis, we were concerned with a fiscal crisis centered on Liechtenstein. It was reported that the German secret service paid a Liechtenstein bank employee to reveal the identity of the bank's customers. Germany apparently shared this information with the tax authorities of a number of other countries. Until then, tiny Liechtenstein was considered one of the more secretive "offshore" locations, even though it is far from offshore; it is landlocked between Switzerland and Austria. Now, for good measure, the United States and Liechtenstein have signed a "tax information exchange agreement" that may affect you even if you do not reside in either country. The agreement establishes the means by which the tax authorities of the US (the Internal Revenue Service) and Liechtenstein may exchange information that is "foreseeably relevant to the administration and enforcement or collection of tax with respect to persons subject to such taxes, or the investigation or prosecution of criminal tax matters." When does the agreement begin? The agreement was signed on December 8, 2008, and will enter into force when each country has notified the other of the completion of necessary internal procedures. It will have effect for information requests made on or after the date of entry into force with regard to tax years beginning on or after January 1, 2009. The internal procedures in the US will not take too long; unlike income-tax treaties, information-exchange agreements do not need to be approved by the US Senate or ratified. Which information can be accessed? The agreement obligates each country to provide assistance through the exchange of information upon request that might be relevant to the administration and enforcement of the tax laws of the other. The agreement will provide the US with access to information it needs to enforce US tax laws, in both civil and criminal matters, including information related to bank accounts in Liechtenstein. However, it allows the US to request information only for 2009 and years following. Documents or other information created before 2009 can only be obtained from Liechtenstein if the request relates to an investigation of a post-2008 year. With respect to pre-2009 years, the US can currently obtain information regarding criminal tax matters under the US-Liechtenstein Mutual Legal Assistance Treaty. Which taxes are covered? The taxes covered by the agreement include all US federal income taxes and all Liechtenstein taxes imposed on the countrywide level. Who is affected? Under the agreement, the US can obtain information regardless of whether the person to whom the information relates is not a resident of either country. For example, if an Israeli (or Canadian or Australian) resident fails to pay US tax on US real-estate income and hides the income in a Liechtenstein bank, the IRS will apparently be able to obtain that information from the Liechtenstein tax authority. This is the case even if Liechtenstein does not need the information for its own tax purposes or does not consider the matter a crime under Liechtenstein law. If the information in the possession of the requested tax authority (for example, the Liechtenstein tax authority) is not sufficient, it must take all relevant information-gathering measures to provide the requested information. Liechtenstein must receive visitors from the IRS: it shall allow officials of the requesting country to enter its territory, to the extent permitted under its domestic laws, to interview individuals and examine records, with the prior written consent of the individuals concerned, and to attend tax examinations in its territory. When can Liechtenstein turn down information requests? 1. If the IRS goes on a "fishing expedition" and asks general questions. All requests must be made with "the greatest degree of specificity," only in the event the requested information cannot be obtained by other means without a disproportionately high level of difficulty. 2. If the IRS would be unable to obtain the information in similar circumstances under US laws. 3. If disclosure of the information requested would be contrary to the public policy of Liechtenstein. 4. Information that under Liechtenstein law is subject to legal privilege or contains any trade, business, industrial, commercial or professional secrets, or trade process. The converse would apply if Liechtenstein requests information from the US. Is the information obtained confidential? Any information received shall be treated as confidential and may only be disclosed to authorities of the requesting country concerned with the assessment, collection, enforcement or prosecution of taxes covered in the agreement. The information may be disclosed in public court proceedings or judicial decisions. It remains to be seen whether this prevents the IRS from passing on information so received to another tax authority, such as the Israel Tax Authority. Implications In the past, Liechtenstein has been criticized for its tradition of banking secrecy; it is currently included on the list of "uncooperative tax havens" of the Organization for Economic Cooperation and Development (OECD). The agreement with the US is the first such agreement entered into by Liechtenstein. It purports to make Liechtenstein's banking system more transparent and to assist in the administration and enforcement of US taxes. Parallel to the agreement, the US is extending Liechtenstein's treatment as an eligible Qualified Intermediary jurisdiction by one year until the end of 2009. This means Liechtenstein financial institutions can continue to apply US tax treaties on behalf of their investors without generally disclosing the investors' names. This one-year extension is intended to provide Liechtenstein with time to enact the legislation necessary for full implementation of the agreement - i.e. a one-year probation period for Liechtenstein. What's next? It is assumed the EU might want a similar agreement with Liechtenstein. As always, consult experienced tax advisors in each country at an early stage in specific cases. email@example.com Leon Harris is an international tax specialist.