It is proposed to implement a total revision of Liechtenstein's tax law. The aim is to modernise the present legal order with regard to taxation, to take account of international developments. This should ensure that Liechtenstein continues to have a tax system which is attractive both nationally and internationally in future, while complying with the European requirements (especially fundamental freedoms and the regulations prohibiting state aid, including ring-fencing).
Under the Tax Bill, legal persons which are taxable in Liechtenstein and engaged in economic activity will, in future, only be subject to corporate income tax and the supplementary tax on gains from the transfer of real property. The "capital tax", hitherto applicable to the net worth of companies, will no longer be levied. The proposal is to set a uniform rate of corporate income tax of 12.5 % of a company's net income/profit, irrespective of the size of that profit and its distribution. Under the proposal, income and capital gains from participating interests would be exempted, and losses carried forward would be usable without time limit. Furthermore, an equity capital interest deduction will be introduced. Other innovations will also be important for Liechtenstein's future development as an economic centre: group taxation for associated undertakings, and conditions for handling revenue from intangible property rights. The Bill also contains conditions for the tax treatment of national and cross-border restructurings.
The Tax Bill envisages the abolition of the special capital contribution duties for holding companies or domicile companies, given the latent risk of infringement of the prohibition of state aid under the EEA Agreement.
Moreover, modern taxation in groups will be introduced for associated undertakings, which will allow worldwide set-off of intra-group losses within the same period. This will give Liechtenstein an internationally competitive system of taxation of undertakings carrying on business, commerce or trade, of financial and other service companies, and of holding companies. However, a reduction of foreign tax deductions at source on dividends, interest and royalties is only achievable by means of double taxation conventions and by appl cation to Liechtenstein of the Parent- Subsidiary and Interest and Royalties Directives.
The tax act will enter into force as of 1 January 2011.
The specific corporation tax taking the form of a capital tax will remain applicable, for a further five years, to legal persons and special dedications of assets which were subject to this special tax before 1 January 2011. The minimum amount is CHF 1'200.
Legal persons classifiable as private asset structures (PVS – see below) will generally remain eligible for the CHF 1'200 minimum corporate income tax after entry into force of the new tax act. The EFTA Surveillance Authority (ESA) is examining the conditions for private asset structures. If the ESA has issued no decision by the time of entry into force of the new tax act, the previous special tax regime (the former Articles 82–88) will remain in force even for new legal persons founded after 1 January 2011. This means that, pending an ESA ruling, this tax will rise to CHF 1'200 from 1 January 2011. Otherwise, for the time being, there will be no alteration for holding and domicile companies. The maximum interim period is five years.
On request, legal persons will be duly taxed before expiry of that period.
The former 4 % coupon tax is being abolished, though "old" reserves will still attract this tax. It will be reduced from 4 to 2 %, provided that distribution takes place within two years of entry into force. At the taxpayer's request, a coupon tax can be levied on "old" reserves, even if no distribution is made. The portfolio of old reserves must be carried forward, minus the amount of tax levied by request.
Reduced coupon tax is also open to associations wishing to remain under the previous tax regime.
Below we explain the repercussions of the new tax act on the various types of legal person and dedication of assets. We limit ourselves to the most frequently asked questions to date, which will be the most important in daily practice.
2. Basic information on the tax amount
The following deals with all structures which will be subject to the new provisions from 1 January 2011.
One innovation is that liability to tax is limited to net taxable income. Capital tax is being abolished or, at least, replaced with a minimum corporate income tax which will amount to at least CHF 1'200. This is conditional upon the structure remaining subject to the old regime for a further five years. Alternatively, if it becomes subject to the new conditions, the corporate income tax (at 12.5 %) on its net income must not exceed this sum of CHF 1'200. The minimum income tax forms part of corporate income tax, and the actual minimum amount can be offset against it.
Taxable persons whose sole object is to engage in business1 on a commercial basis and whose average balance-sheet total over the past three financial years has not exceeded CHF 500'000 are charged no minimum corporate income tax. Article 62.3 of the Liechtenstein Tax Act is designed not to overburden small businesses which have legal personality but earn consistently low income, with minimum corporate income tax. Thus there is no minimum corporate income tax on an average balance-sheet total which has not exceeded CHF 500'000 over the preceding three years.
Trusts (settlement) are dedications of assets without personality, and pay only the minimum corporate income tax (CHF 1'200). Under Article 65 of the tax act, they are not assessed for tax. Nevertheless, under Article 44, they still have a limited tax liability on their inland income.
Foundations (in this context, private benefit foundations) are deemed legal persons in tax law. Accordingly, they remain under the previous regime unless they are founded on or after 1 January 2011 or voluntarily submit to the new regime, in which cases they are covered by the new system of tax law. This means that they are subject to ordinary corporation tax on net income, like Establishments, Trust Enterprises (Trust reg.), GmbHs and Aktiengesellschaften.
As stated, income tax amounts to 12.5 % of taxable net income. It is important to note that an equity capital interest deduction is also claimable as a justified business expense. Hence the actual income tax will normally be lower. A foundation may well incur no tax liability apart from the minimum income tax if it only holds fixed-term deposits and bonds plus a participating interest, all of which are equity-financed. This is because dividends and capital gains are exempt from the tax, and the fixed-interest deposits only yield income of 3 %, for example.
3. Equity capital interest deduction
The actual tax amount depends not only on the 12.5 % rate of corporate income tax, but also on the deductible interest on equity capital, claimable as a justified business expense.
The target rate of interest on income is set annually. It should amount to 4 % for 2011. This interest payment, justified as a business expense, is then calculated on
- Paid-up share capital;
- plus taxed reserves (reserves constituting equity);
- minus own shares;
- minus participating interests in legal persons;
- minus foreign net real estate assets;
- minus permanent establishments abroad representing net assets;
- minus non-operating assets.
Thus everything on the assets side which is not liable to income taxation is deductible. As dividends and capital gains are exempted, this means that participating interests, for example, are deductible. Permanent establishments abroad pay no tax in Liechtenstein, and those parts of the business are, therefore, not considered.
Valuation takes place as of the beginning of the financial year. It must count acquisitions and disposals (equity and deductibles) of the current financial year. If the modified equity capital is negative, the equity interest deduction amounts to CHF 0.
Thus the modified equity capital is based on annual averages (weighted values). Depending on the accounting obligation, the weighting is applied monthly (the case of banks). Mostly accounts are only drawn up once a year. Then the sum of the initial and final values, divided by two, gives the weighted average.
The result of these calculations leads to a "modified" equity capital, from which the interest paid is worked out.
This rule suggests that mixed income amounts and administrative costs, which count as taxable and non-taxable income, must be allocated to the cost centres in quotas or by cause. This would mean that only the expenditure attributable to taxable income would be deductible from the income, as business expenses. Alternatively, a debt/equity ratio may be introduced for the different activities, as in Switzerland.
The tax act merely refers to a modification of equity capital. Therefore a complex amendment of these problem areas, broached above, cannot be expected. The Tax Administration has ruled this out, on the grounds that the act does not leave this room for manoeuvre. Nevertheless, income and expenditure clearly attributable to net property assets and business branches will be separable.
Tax costs cannot be offset against profit.
4. Taxable and tax-exempt income
Taxable net income consists of the totality of income minus justified business expenditure. In particular, taxable net income includes:
a) The balance of the profit and loss account;
b) All parts of the trading result segregated for calculation of the balance which are not used to meet justified business expenses;
c) Depreciation, amortisation, writedowns and provisions not justified for business purposes;
d) Transfers to the reserve funds, not justified for business purposes, except any provisions enjoying tax relief;
e) Profits distributed to the company's members or shareholders or to holders of non-members' rights to profit share (participation certificates or founders' shares) or to persons related to them;
f ) Tax costs;
g) Remuneration for the relinquishment of foreign capital to associated undertakings and shareholders, or persons related to them, provided that its level is compatible, not least, with the arm's length comparison principle;
h) Voluntary payments of money to legal persons and special asset dedications based in Liechtenstein which are exempted from the tax liability, because their purposes are exclusively and irrevocably non-profit-making, where these payments exceed 10 % of the taxable net income before application of Articles 57 and 58 of the tax act; the same applies to legal persons and special asset dedications based in another Member State of the European Economic Area or in Switzerland which are exempted from the tax liability in their country of establishment, because their purposes are exclusively and irrevocably non-profit-making and provided, also, that they meet the conditions for an application for tax relief;
i) Penalties, money fines and similar legal consequences of a pecuniary nature, where punishment is the main feature;
j) Repayments under § 307 of the Criminal Code (= corruption of public officials and similar offences).
The following do not count as taxable net income:
a) Income from the cultivation of foreign land used for agriculture and forestry, and from any other agricultural and forestry production abroad;
b) Profits from permanent establishments abroad;
c) Lease and rental income from real estate located abroad;
d) Capital gains from real estate in Liechtenstein, where subject to capital gains tax on property in Liechtenstein, and capital gains from the disposal of real estate abroad;
e) Shares of profit due to participating interests in legal persons in Liechtenstein or abroad;
f ) Capital gains from the disposal or liquidation of participating interests in legal persons at home or abroad;
g) Income from assets under management of investment companies under the Investment Companies Act;
h) Income from the net assets of legal persons governed by the Pension Funds Act, provided that such assets are exclusively and irrevocably dedicated to occupational old-age pension provision;
i) Capital contributions of members of corporations and cooperatives, including extra pay and non-returnable payments;
j) Capital growth.
Note that every investment is defined as a participating interest, irrespective of amount and/or length of time held.
Fund units which generate both interest income and capital income must be analysed accordingly for tax purposes (using the transparency approach). Fund units do not count as equity securities, even when they are in the form of SICAVs or SICAFs.
An amount of 80 % of total positive revenues from intangible property rights counts as a justified business expense. The Government will regulate the details by ordinance.
5. Tax liability of Establishments, Trust Enterprises, Aktiengesellschaften, GmbHs and foundations (= legal persons)
The distinction known to date between a non-commercial business (e.g. holding activity) and a commercial business (e.g. trading in goods) will cease to exist in this form. The provisions will have to follow the requirements of the ESA (EFTA Surveillance Authority). However, the legislation has included private asset structures (PVS – see below).
In short, a legal person will only match the required characteristics of a private asset structure if it pursues no economic activity. One example is the investment of assets at banks (fixed-interest deposits, bonds and equities) without trading for commercial gain; another is the holding of gold, paintings and similar valuables, likewise without trading. Investments by a legal person in participating interests which are actually under the influence of one of the stakeholders (including beneficiaries) should be incompatible with the law on the private asset structures.
In principle, therefore, legal persons have an unlimited tax liability on their world net income. The rate of taxation of this income is 12.5 %.
The liability of legal persons to pay income tax will, in future, be associated with the criteria of registration in Liechtenstein (certain planning room given of only foreign permanent establishment exists) or place of effective management (unlimited tax liability) or to the existence of a permanent establishment in Liechtenstein (limited tax liability). This enhances international compatibility.
The place of effective management means the centre of the senior business management. The place where strategic managerial decisions which have a decisive effect on the respective undertaking are taken is the place of effective management. The exact delimitation of this criterion is a matter for practice and legal precedent. The condition should be applied reasonably and appropriately. In construing in the place of effective management, it must be noted that senior management does not exist if a site is bound, from within, by the instructions of a business owner.
6. Private asset structures (PVS)
A private asset structure can claim tax privilege if it pursues no business activity. In this context the term "business activity" is very broadly construed. The text of the Bill is drafted as follows on this point:
1) All legal persons meeting the following conditions shall be deemed private asset structures:
a) Those which, pursuant to their objects, engage in no economic activity, especially if they only acquire, hold, manage and dispose of financial instruments as per the Asset Management Act Article 4.1.g2 and participating interest in legal persons;
b) Those whose shares or units are not publicly listed, not traded on a stock market and which are reserved to be held by the investors as per paragraph 3, or which favour no investors other than those listed in paragraph 3 of this Article of the tax act;
c) Those which neither advertise for shareholders or investors nor receive remuneration or reimbursement of expenses from them or from third parties for their activity as per a) above; and
d) Those whose Articles of Association state that they shall be bound by the restrictions on private asset structures.
2) A private asset structure shall only hold participating interests in the terms of paragraph 1a) on condition that it, or its shareholders or beneficiaries, shall exercise no actual control, by direct or indirect influence, over the management of such companies.
3) An investor in the terms of this Article shall be:
a) A natural person acting in the context of the management of his/her private assets;
b) An asset structure acting solely in the interest of the private assets of one or more natural persons; or
c) An intermediary acting on behalf of investors as per a) or b) above.
4) The taxpayer shall confirm to the Tax Administration on formation, and thereafter in case of major changes, that the conditions of paragraphs 1 to 3 are met. An auditor may issue such confirmation in the case of private asset structures which are required, under the provisions of the law governing companies and private individuals, to arrange for an auditor to audit their annual accounts.
5) After submission of the confirmations required under paragraph 4, the Tax Administration shall decide on status as a private asset structure. The taxpayer may lodge an appeal in the terms of Article 117 against this ruling within 30 days.
6) The Tax Administration shall be bound to check status as a private asset structure. It shall in particular be entitled and bound to check compliance with the conditions of paragraph 1 to 3. The Tax Administration may delegate the checking of the conditions of paragraphs 1 and 3 to third parties.
7) The Government shall regulate the details by ordinance. This shall include the times and forms of submission of confirmation as per paragraph 4, procedure for implementing checks as per paragraph 6, and the charging of fees.
8) Private asset structures shall be liable exclusively to minimum income tax.
Thus, beyond the scope of items listed in Article 4.1.g of the Asset Management Act, a private asset structure may hold investment items not pertaining to a business activity in the terms of European aid law. Therefore the permitted field of activity of a private asset structure must remain very narrow, in order to remain in conformity with the rules of European law on aid. In principle, it is possible to hold portfolios of gold, paintings and similar valuables. The exercise of property rights as such by the owner is not deemed an economic activity. The same applies to disposal. However, this must not constitute trading in holdings of gold or similar valuables on a commercial basis. A private asset structure is also permitted to use real estate for its own purposes, since this does not constitute economic activity offered on the market. However, if the private asset structure does not use the property, but makes it available free or for paid consideration, that may possibly be deemed economic activity. The same applies to granting loans and holding private equity interests.
There is also a group-wide aspect to aid law. Therefore, when holding participating interests, it is necessary to check whether economic activity benefiting from the tax advantage granted to the private asset structure is taking place at shareholder level. The EU Commission does tend to attribute an indirectly conferred advantage to the last person to profit from it. A beneficiary/shareholder of the private asset structure who then exerts influence over the companies held by the private asset structure thereby engages in economic activity. Any advantage conferred by the private asset structure would then be attributed to the beneficiary/shareholder, not as enduser, but in the capacity of an economically active entity (a business).
In our opinion, if the law is passed in this form, the private asset structure will tend to play a minor role, especially as the EU Interest Taxation Directive, as possibly amended, tends not to favour the use of a private asset structure. Moreover, clever administration of assets in a foundation will anyway lead to a low incidence of taxation – for example, keeping the assets by means of an "underlying" arrangement. Firstly, this is commonplace nowadays. Secondly, it means that only tax-exempt dividends and capital gains are transferred to the foundation. Besides, a foundation must still generate more than 4 % net from fixed-interest deposits and bonds.
1. Persons and Companies Code Article 107.3: ... The investment and management of assets or the holding of participating interests or other rights shall not constitute a commercially run business, unless the nature and scope of the undertaking necessitate commercial operation and orderly accounting.
2. Article 4.1.g) Financial instruments: the instruments named below: 1. negotiable securities; 2. money market instruments; 3. shares in investment undertakings (shares in collective investment undertakings; CIU); 4. options, futures, swaps, OTC forward rate agreements and all other derivatives contracts relating to securities, currencies, interest rates or interest income or other derivative instruments, financial indices or measured quantities which can actually be delivered or paid in cash.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.