The treaty between the Principality of Liechtenstein and the Federal Republic of Germany for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and fortune (DTT), including the minutes, was signed in Berlin on 17 November 2011. The DTT will pass through the appropriate legislative instances and should enter into force on 1 January 2013.

The signature of the DTT represents a milestone for Liechtenstein since it is the first time that the small country has succeeded in entering into a treaty with a large industrial nation where the treaty is based on the OECD model convention. This should pave the way for the signature of further DTTs with important industrial partners.

We would like to emphasise the zero rate for taxes at source on dividends, interest and royalties in those cases in which the appropriate standards are fulfilled.

The German anti-abuse regulations were made somewhat more transparent by the inclusion of certain articles in the DTT and in the minutes that clarify "the application of the agreement in certain cases" so that the taxpayer can understand whether and how treaty benefits can be used.

Unfortunately, Liechtenstein was unable to assert its wish to have the interpretations of the ECJ judges in the Cadbury Schweppes judgment of 12 September 2006 (C-196/04) embedded openly in the DTT. This will mean a less economically focused DTT for the financial industry. Instead it will be necessary to try and cope with the stricter and more difficult interpretations of the German anti-abuse regulations.

If enterprises move, however, within those limits, the DTT will provide them with sufficient certainty that the Liechtenstein industry will no longer be obstructed arbitrarily in gainful occupation with Germany.

It is to be hoped that Liechtenstein will create appropriate internal conditions so that the industrial and holding companies can benefit from suitable substance (having less restrictions for working forces etc.) locally to fulfil the provisions of the DTT.

It will be a challenge for the Liechtenstein financial industry to be able to recognise the niches and to react with appropriate planning opportunities. This will definitely not be easy.

Germany will have the advantage of having found a reliable partner through the appropriate clauses on information exchange and legal assistance.

The DTT will help the two partners to become closer overall and not only within the industrial sphere.

The aforegoing is, however, subject to the reservation that it will be necessary to remodel existing relationships. This is likely to be in and of itself a huge and burdensome task for the financial industry.

One example:

A Liechtenstein-based holding company could only be used successfully to hold investments in subsidiaries in Germany if the activity of such a holding company integrated management decisions in relation to at least two commercially-active, controlled companies, and if the Liechtenstein-based holding company largely had its own business premises, own personnel and infrastructure. Management decisions would have to be characterised by their durability, fundamentalness and significance for the existence of the subsidiaries. The management decisions would have to differ from decisions which were short-term and execution-oriented (dependent). The execution of individual business functions only would not be sufficient for their classification as management decisions.

An active commercial activity only exists where the activity is exercised by the company with its own organisation and own personnel which are appropriate to the business purpose and where related management and operational activities are performed with more than 25 per cent of the entire gross yields for a financial year and if these yields stem from this activity needing organisation and personnel.

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