Taxation of Liechtenstein foundations

  • Author : Roland A. Pfister
  • Author : Patrick Knörzer
  • Date : April 2011
ABOUT THE AUTHORS: Roland A. Pfister is lecturer at the University of Liechtenstein, Vaduz, and a tax advisor at Tavernier Tschanz, Geneva; Patrick Knörzer is assistant professor at the University of Liechtenstein, Vaduz, and member of the Liechtenstein tax reform group

According to the statistics of the Public Registry, as of 31 December 2009, 1,618 registered foundations as well as over 42,000 foundations and trusts have been identified in Liechtenstein, most of which have been established by foreign founders or in favour of foreign beneficiaries. In 2011, Liechtenstein adopted a global revision of its tax law. One particular feature of this regulation is the implementation of a new basis for the taxation of Liechtenstein foundations.

Establishing a foundation

As of 2011, the new revised tax law additionally eliminates the levy of inheritance and gift taxes. Thus, to establish a foundation in Liechtenstein, only the payment of a formation tax (Gründungsabgabe) is now required. The taxable basis is based on the original capital contribution paid into the foundation at creation and, at minimum, corresponds to the statutorily imposed minimum of CHF30,000. Contribution of assets to the foundation’s reserves, however, is not considered part of the tax basis. Subsequent contributions by the founder as well as third party donations will not further subject the foundation to formation tax, so long as they do not substantially modify the original capital contribution.

According to the new tax law, the rate of formation tax imposed on foundations amounts to 0.2 per cent of the original capital contribution, but a minimum of CHF200. Additionally, foundations benefit from a general exemption, limiting taxation to a capital value of CHF1 million. Consequently, for a foundation established with the statutory minimum capital contribution of CHF30,000, the minimum amount of CHF200 will be imposed, not 0.2 per cent of the capital amount. On the other hand, charitable foundations benefit from full exemption from state taxes and will thus not have to pay any formation tax. Besides the formation tax, upon enrolment in the Public Registry (commercial registry), the foundation must also pay a registration fee. The majority of Liechtenstein foundations, most of which are established by foreigners, are deposited foundations, which do not require registration in the Public Registry or, thus, the payment of a registration fee.

The registration and filing (Eintragungs und Hinterlegungsgebühr) fees are determined and levied by Liechtenstein’s tax authorities. Registered foundations pay a registration fee of CHF700; for deposited foundations, the filing fee amounts to CHF300 if they deposit their foundation deed. Some additional fees may be imposed upon confirmation of signature or when requesting register extracts.

The Land and Public Register Office will only proceed to the publication of the enrolment upon proof of payment of the formation tax. The tax, registration and filing fee are due regardless of whether the founder is a Liechtenstein resident or a foreigner and whether the foundation is revocable or irrevocable. From a Liechtenstein perspective, the transfer of assets into the foundation does not generally trigger any additional tax consequences for a foreign founder except in the case where these assets constitute a Liechtenstein permanent establishment or Liechtenstein real estate. In conclusion, no tax consequences will arise if only movable assets are transferred to the foundation. However, if a resident founder transfers movable assets, a Liechtenstein permanent establishment or Liechtenstein real estate to the foundation, a dedication tax (Widmungssteuer) will be levied on the transferred assets.

Ongoing taxation

With regards to ongoing taxation, Liechtenstein tax law differentiates between revocable and irrevocable foundations.

For wealth tax purposes, the Liechtenstein legislator considers revocable foundations as fiscally transparent. The assets, regardless of the civil perspective, will be attributed to and taxed in the hands of the founder. However, the foundation’s governing bodies can opt for an independent taxation, therefore subjecting the foundation’s assets to wealth tax. But in order to determine the tax rate, the assets of the resident founder have to be pooled together with the assets of the foundation. A priori, foreign founders are not subject to Liechtenstein wealth tax except where they own a permanent establishment or real estate in Liechtenstein, the independent taxation option is irrelevant in their case.

On the other hand, revocable and irrevocable foundations are recognised as tax subjects based on their legal seat in Liechtenstein and are therefore subject to corporate income tax. However, particular tax regimes exist for non-economically active foundations, fiscally qualified as so-called private assets structures (Privatvermögensstrukturen). In this case, the foundation is not subject to ordinary income taxation and will only be imposed a minimum corporate income tax of CHF1,200, payable annually. Following a request of the Liechtenstein government, on 15 February 2011, the European Surveillance Authority issued a notification that Liechtenstein private assets structures do not constitute ‘undertakings’ within the meaning of the state aid rules under the European Economic Area Agreement and therefore do not involve state aid. Conversely, the economically active Liechtenstein foundations cannot be considered as private asset structures and therefore will be subject to a corporate income tax of 12.5 per cent.

For a regularly taxed foundation, the effective tax rate, dependent upon the equity return, is substantially reduced by a notional interest deduction of 4 per cent of the foundation’s average equity. Thus, financing with equity becomes fiscally equivalent to financing with debt, so that the choice of financing can be made exclusively on the basis of business criteria. If the foundation is financed with equity, only interest yields over 4 per cent will be taxable because of the notional interest deduction. Furthermore, the taxable basis for purposes of corporate income tax is lowered by a favourable holding regime. Specifically, dividends and capital gains deriving from shares in domestic and foreign entities are fully tax-exempt in Liechtenstein and, consequently, depreciation of participations allows for fiscal write-downs and value adjustments. Likewise, income deriving from foreign permanent establishments and foreign real estate is exonerated. With regards to income deriving from intellectual property rights, 80 per cent of the positive income is considered as a commercially justified expense. If the foundation obtains foreign interest payments, which are subject to a source tax in the other state, this tax can be credited against the Liechtenstein income tax, based on the relevant double tax convention, or in the case of reciprocity.

Taxation of the beneficiaries

Within an irrevocable foundation, if the value of the beneficiary’s privileges can be determined, the beneficial interest will be subject to wealth tax only in cases where the beneficiary is a resident and therefore subject to unlimited tax liability. If the value of the beneficiary’s privileges cannot be determined, or if the beneficiary is a legal entity or a non-resident, the beneficial interest will not be subject to wealth tax.

However, with regards to distributions, a difference is made between revocable and irrevocable foundations: distributions by a revocable foundation are considered fiscally as direct contributions on behalf of the founder to the beneficiaries since the assets of the foundation are assimilated to those of the founder. As a result of the suppression of the inheritance and gift tax in the 2011 tax reform, these distributions are no longer subject to such tax. Additionally, distributions made to an individual will not be considered as taxable income. In conclusion, there are no tax consequences for contributions made within revocable foundations in Liechtenstein.

Distributions from irrevocable foundations paid out to Liechtenstein residents are subject to personal income tax, unless the foundation’s assets are subject to wealth tax. Frequently, however, the beneficiary of the foundation does not have his domicile or habitual abode in Liechtenstein and hence is not subject to taxation. In such a case, the taxation of the contribution will be dependent upon the beneficiary’s resident state. In Liechtenstein, no source taxation is levied on contributions. This applies even if the distributing foundation holds a Liechtenstein permanent establishment or real estate.

Dissolution of the foundation

Dissolution does not trigger any tax consequences on the level of the foundation, with the exception of a permanent establishment in Liechtenstein. Liechtenstein tax law does not differentiate between contributions made during the life of the foundation and those paid at the time of the dissolution. The source tax exemption equally applies to distributions made at dissolution. Likewise, the origin of the distributions, whether paid from equity or capital gains, is irrelevant.

Relation to the resident state of the beneficiary

According to a few states’ tax legislation, the Liechtenstein foundation can be considered as fiscally transparent if the founder has a dominant influence upon the commercial activity of the foundation and this control is based on a mandate contract. The Liechtenstein foundation loses its shielding effectiveness in the country of the beneficiary. The tax veil is pierced and, as a result, the foundation’s assets will be attributed to the founder and may be taxed in his state of residence. Additionally, contributions paid out from a transparent foundation will be considered as transferred directly from the founder to the beneficiary and, as such, may give rise to a gift tax in the beneficiary’s state of residence.

Recently, following pressure from the international community, Liechtenstein has adopted several bilateral tax information exchange agreements (TIEAs). These agreements are based on the OECD Model and purport to enable the exchanging of relevant tax information upon the other state’s request. As the time of writing, Liechtenstein has concluded TIEAs with the US, the UK, Germany and 20 other countries, this number continuously increasing. From this agreement derives a commitment to administrative assistance, which may also be applied to foreign beneficiaries of a Liechtenstein foundation.

Accordingly, a foreign tax authority can receive a request based on the TIEA to provide information on the ownership structure of entities, including information about all persons involved in the structure. With regards to a foundation, Liechtenstein must provide information on the founder, the members of the board and the beneficiaries. The application of the TIEA provides a possibility to lift bank and trust secrecy in Liechtenstein.

Summary

Liechtenstein continues to be an interesting jurisdiction for foundations. The regular taxation is extraordinarily advantageous, especially for international investments; a lump-sum taxation of foundations is still possible under certain conditions. In international relations, Liechtenstein is progressively losing its former reputation as a tax oasis in consideration of the increasing number of TIEAs it has concluded. A stable political environment, a solid tax framework, and superior quality of services present Liechtenstein as an attractive location for financial planning.


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