Liechtenstein: Incorporation Of Companies In Liechtenstein - With Special Focus On Holding Companies

The Principality of Liechtenstein has developed high-technology industries (fastening systems, high-vacuum equipment, thin coatings, foodstuffs, extrusion mouldings, dentures, boilers, etc.) (employing around 46 % of the total work force of around 20'000 people). Liechtenstein offers tax advantages for any company incorporated in Liechtenstein and having an activity in Liechtenstein or not.

Liechtenstein as a member of the European Economic Area (EEA) but not of the European Union, is obliged to implement the EU Directives and has implemented nearly all of them into its own law. Liechtenstein like Switzerland, Austria and Luxembourg takes pride in its privacy laws which have existed since the beginning of last century. The new law on due diligence enacted on 1 January 2001 has already included any of the possible issues/amendments forthcoming in the future EU Directive on money laundering now being discussed in Brussels.

The company code (PGR) sets the very same rules whether a company set up under a chosen legal form be used for activities within Liechtenstein or outside of Liechtenstein. The rules on financial reports, filing the accounts to the tax authorities or the public registry, directors' liability towards shareholders and third party creditors are basically the same for all companies.

The Liechtenstein tax system stems from 1961 and has not seen major changes. This provides planning assurance to the local economy.

Taking into account the purpose for setting up a legal structure, the companies may be classified for simplification purposes as follows (and a certain formally different treatment relates to this classification):

1. local activity (production, sale, import for local use, warehouse) with business licence (Gewerbeschein)

2. financial institutions like banks, insurance companies and mutual funds

3. holding companies

4. trading offshore companies (domiciliary companies (Sitzunternehmen)).

Only the last class of companies have access to additional privileges if the trade is not done in Liechtenstein, e.g. no special business licence required in Liechtenstein, no proof of product knowledge, special tax treatment. However, there are some products/services where even offshore companies will be regulated like local trading companies, e.g. banking, insurance, medical field.

The above classification shows that Liechtenstein does basically not offer privileges to financial institutions, insurance companies, mutual funds or holding companies. All these entities are treated in the same way regardless of where the business is done. Real differences depend on the business plan and the effective activity of such entities.

Liechtenstein has implemented the EU Directives on banks, insurance and mutual funds.

The tax system is regulated in such a way that double tax treaties with other countries are not of great importance. Profits are either taxed abroad or in Liechtenstein, and if the profits carry withholding tax on dividends or interests, these incoming profits will normally not be taxed if the appropriate structure is set up in Liechtenstein. The exemption is applied on the basis of legal provisions or application by the tax authority on reciprocity.

1. For holding companies in the broadest sense (structured under any of the Liechtenstein legal entities including Foundations), dividends received, foreign-source interest, foreign-source royalties and capital gains on foreign subsidiaries are exempt from income tax but the company's net capital (net equity) is subject to tax at a rate of 0.1%. Distributed dividends are subject to the 4% coupon tax (if capital is divided into shares). Art. 83 tax law (LTL) sets forth that the local tax is due for that portion of capital and income derived from domestic businesses/permanent establishments (not juridically separated businesses).

2. The formation (emission) stamp duty (note: being the same for all companies, holding or not) levied (on capital incl. reserves) on the Company Limited by Shares, the Private Company Limited by Shares and the Partnership with a Share Capital of under CHF 250'000 is 0 % and of over an amount of CHF 250,000 is 1%. This same criteria applies (however excluding the reserves) to the typical Liechtenstein legal forms and entities (Establishment, Trust reg. and the Foundation); but the stamp duty is gradually reduced for capital of CHF 5 mio and more to 0.5% (the part below remains taxable with 1 %) and for capital exceeding CHF 10 mio to 0.3%. For a Family Foundation the formation duty remains at 0.2% of the Foundation capital, with a minimum of CHF 200.--, and again gradually reduced for a capital exceeding CHF 5 mio to 0.1% and for the part exceeding CHF 10 mio to 0.06%.

3. There are no anti abuse regulations and no thin capital provisions.

4. Taxation of income from and value of real property abroad: The law does not contain any specific provisions for taxation of real property situated abroad which is owned by legal entities. However, upon application by the taxpayer, the tax administration grants also for companies with business licence an exemption from income tax if the taxpayer can prove that foreign tax has been imposed on the property's income (therefore such assets are treated like tax-free foreign permanent establishments as in the case for physical persons). Holding companies are exempt from such an income tax anyway.
   General note: The tax treaty with Austria provides that income from and the value of real property is only taxable in the country where it is situated, irrespective of whether the owner is an individual or a legal entity. The double tax agreement struck with Switzerland does not deal with this issue, but international rules apply (taxed in the country where the real estate lies).

5. Taxation of dividends, interest and royalties from abroad: Art. 83 LTL offers holding companies as set forth in the first clause a complete tax exemption on dividends with respect to payments from domestic and foreign subsidiaries having independent legal status. Liechtenstein holding companies are liable to income tax on interest, royalties and other income from Liechtenstein businesses / permanent establishments. In practice, payments of this nature from abroad would be tax-free in Liechtenstein if taxed abroad (this is basically always the case).
   For a Liechtenstein company with local activity and business licence and which is not only a pure holding company, the Liechtenstein tax administration follows the Swiss federal tax rules.

A holding company can be set up by any person living in Liechtenstein or not. A 100 % foreign shareholdership is possible. The holding company does not need a special permit for being set up. At least one member of the board of directors must be of Liechtenstein, EEA or Swiss nationality and have residence in Liechtenstein and prove a certain professional qualification.

A holding company can also rent offices and easily engage working force living in Liechtenstein or in Switzerland and EEA countries and who return every evening to their country (normally Switzerland and Austria).

There are some issues which have not been clarified so far, and these will be treated below separately:

1. On principle, it should be possible that the only member of the board of directors resides outside of Liechtenstein and has an EEA nationality. In such a case, he has to apply for a local business licence for the company even if the company is a mere holding company. Then it will be taxed as follows: There is a tax on profits imposed progressively from 7.5% to 15%. Between these percentages, the tax is equal to half that percentage which is the ratio of profits to taxable net capital. An additional tax (surcharge) is levied on the company's profits if the dividends exceed 8% of taxable net capital. This additional tax is levied at rates varying from 1% to 5% and the maximum rate is levied if the distributed amount exceeds 24% of the taxable net capital. The company's net capital is taxed at 0.2%.
   However, in order to avoid that such a Liechtenstein holding company might be taxed abroad because the place of administration is deemed to be the place of residence of this single EEA resident member of the board of directors, it is necessary to have at least one professionally qualified member living in Liechtenstein and demonstrate that all major management decisions are taken in Liechtenstein.

2. A holding company should also be able to buy offices if it demonstrates adequate local activity. Eventually, the right of buying such offices is only granted if it has applied for a business licence (see point 1 above).

Liechtenstein has implemented the first, fourth, seventh and eighth EU Directives which subject the Company Limited by Shares, the Private Company Limited by Shares and the Partnership with a Share Capital to these EU Directive accounting principles. The financial statements are audited (even for small companies) and filed with the tax authority and the public registry for public inspection. Information on shareholders is not open to public inspection. Holding companies are usually small companies which means that only the abbreviated balance sheet without audit report and the abbreviated annexes to the balance sheet are open to public inspection. A list of participations should be available if applied for.

The typical Liechtenstein legal entities like the Anstalt, Trust reg. and Foundation are not subject to such obligations apart from filing the financial statements to the tax authorities if the purpose allows for any commercial activity. A holding activity is not a commercial activity. However, if such legal entities are considered as active holding companies - perhaps with office space - , they file their financial statements with the tax authorities.