Liechtenstein: Private Foundations - an Overview of the Law and Practice

Liechtenstein was the first jurisdiction to introduce private foundations. The success of these has encouraged other countries to introduce them. Liechtenstein foundations, however, remain the classic form. The characteristics are fully explained in this article.

1. What is the source of the law on foundations (name and date of law and date it became effective if different) ? - combined with an overview of the latest legal developments in Liechtenstein

Liechtenstein company law is regulated entirely by a single act, namely the Liechtenstein Law on Persons and Companies (Personen und Gesellschaftsrecht, "PGR"), which became law on 20th January 1926 and has since been subject to amendments. It is supplemented by the provisions of the Liechtenstein Law on Trust Enterprises, dated 10th April 1928 ("TrUG"), which were integrated into the PGR. Regulations contain provisions on taxes, fees and public permits to be obtained for carrying out a commercial activity in Liechtenstein.

The provisions regulating foundations are set out in the section "Corporate Bodies" in part II, title 5 of the PGR. Articles 552 to 570 regulate the endowment of property for a specific purpose and as such regulate the legal institution of foundations. So far two major amendments of the PGR have been passed:

The first amendment became law on 14th June 1980 and mainly focused on the prevention and the elimination of abuses in the field of company law. However, neither the system nor the liberal characteristics of the PGR were changed by this first amendment.

The second amendment was enacted on 26th October 2000 and entered into force on 1st January 2001. The new amendment was a response from the Principality of Liechtenstein to the legal harmonisation efforts carried out in the European Union (EU) and the European Economic Area (EEA) of which Liechtenstein has been a member since 1995. This introduced new accounting regulations as well as material changes in Liechtenstein company law.

The new provisions concerning companies which were incorporated in the PGR can be divided into two categories:

The first category comprises legal entities that are also known in the EU and the EEA, eg, the company limited by shares, the partnership limited by shares, the limited partnership and the private limited company. All of these company types have been targeted by the harmonisation efforts of the EU.

The other category of legal entities was not subject to any significant changes. Those entities are the foundation, the establishment, and the trust enterprise (trust reg.). The same applies to the Liechtenstein trust which is based on the common law model found in Anglo-Saxon legal systems.

The one amendment of the PGR that affects every legal entity regardless of its character is Art. 180a PGR. This article is currently being amended in order to comply with EU Law. As it stands, it provides that at least one member of the board of a legal entity must be citizen of a member state of the EEA who has a permanent residence permit in Liechtenstein and who is an attorney admitted in Liechtenstein, a legal counsel, trustee or auditor. Art 180a PGR accords equal status to persons residing in Liechtenstein, who dispose of a proof of qualification corresponding to the professions already mentioned, which is also recognised by the Liechtenstein government pursuant to law and who are fully-employed by an attorney, legal counsel, trustee, auditor, auditing company, trust company or bank, and who pursue their activity as a "qualified member of the board" within the framework of that employment. Citizens of non EEA member states have to hold a permission to settle.

In addition to the changes affecting the PGR, the Liechtenstein Law on Due Diligence of 22^nd May 1996 was also replaced by new provisions. These oblige not only Liechtenstein trustees but also Liechtenstein banks to know the ultimate beneficiaries of any structure. Liechtenstein trustees have always been under an obligation to identify their clients and their respective business activities. However, with respect to foreign regulated professionals, it has been the understanding so far that whenever the Liechtenstein trustee had a foreign professional advisor as mandator, who himself was regulated by money laundering laws in his own country, then the Liechtenstein trustee could rely on that advisor and reduce his own scrutiny regarding the respective transactions.

The changes introduced by the new Law on Due Diligence with effect as from January 1^st, 2001, now treat any professional advisor in the same way as a direct individual client. This means that the ultimate beneficiary as well as the nature, background and logic of any transaction has to be ascertained and scrutinised by the Liechtenstein trustee, professional advisor and the bank where the account is kept.

Furthermore, Liechtenstein trustees themselves are now audited every year as to compliance by auditors appointed by the Financial Supervisory Authority. The audit will involve a verification of compliance by the trustee as to formal identification of the client and the ultimate beneficiary, the business profile, the permanent supervision by the trustee regarding the observance of the activity in question (material plausibility check), any respective measures taken by the trustee and any internal controls. Although such audits have been in place since 1997, they have mainly been concentrated on the formal fulfilment of the due diligence requirements. This has nowadays been extended to include the above-mentioned material plausibility check. The verification takes place in a limited environment and falls under professional secrecy laws.

2. Who may form a foundation (individuals, groups of individuals, partnerships, companies, trustees)?

A foundation may be set up by private individuals, legal persons or other legal entities, public bodies and any other corporate body regardless of nationality, domicile or seat. A foundation may also be constituted by licensed fiduciary agents, if the founder himself wishes to remain anonymous. The use of a nominee founder guarantees the absolute confidentiality of the economical founder. A foundation can be set up so as to comply with the criteria required for a "complex trust". Many existing foundations can be modified to comply with these criteria.

3. Method of formation of a foundation (execution of charter, notarial act, appointment of council)

Since the formation of a foundation mandatorily requires the donation of assets for a specific purpose, this donation of assets can be accomplished in the following ways:

• in the form of a foundation document (deed) to which the legalised signature of the founder is attached (unilateral legal act inter vivos);
• by last will;
• by contract (deed) of inheritance.

The foundation deed shall provide at least the following information:

• name and domicile of the foundation;
• purpose or object;
• nature and amount of the foundation capital and use of the capital in the event of the liquidation of the foundation;
• members of the foundation board;
• signature rights of the board members (individual/collective signature);
• modalities for appointing additional board members; and
• audit authority, which is obligatory when a foundation carries out a commercial activity.

The external form of a foundation deed is not specified by law. However, the document must fully comply with the requirements as to the specification of the foundation. The act of the constitution of a foundation can therefore be embodied in a separate instrument to which the articles of endowment are appended as an integral part thereof. In this case, however, the legalised signature of the founder must also be attached to the articles. Since the foundation deed does not have to specify the beneficiaries, this can be done in a separate document, ie, the by-laws or regulations.

4. Costs and fees of setting up (professional fees, minimum capital or assets required, fee to regulatory body on setting up and annually).

A minimum capital of CHF 30,000 or the equivalent value in any desired legal currency is required to set up a foundation. The capital must be fully paid up to that amount and shall be transferred at the time of the formation of the foundation.

The foundation capital need not necessarily consist of cash. It may be of any type of property, provided that its value can be determined and expressed in terms of money. To meet the statutory requirements, the value of such rights, which has to be properly assessed, must constitute the equivalent of CHF 30,000 as the minimum capital required by law. However, if such rights are beyond doubt as to their existence and value, they need not be valued by third parties or experts.

As far as the formation fees are concerned, a minimal formation duty of CHF 200 is levied in the case of a deposited (non-commercial) foundation, even if it is voluntarily registered. Only in the case of a registered foundation, which pursues a commercial activity, no formation duty is levied if the statutory capital lies below CHF 250,000. If the statutory capital exceeds CHF 250,000, a formation duty in the amount of one per cent is collected, with lower duties for larger amounts (gradually reduced).

The registration of a foundation amounts to CHF 800, the deposit with the Public Register to CHF 500. Apart from the formation and representation fees of the legal representative which vary, a public allowance of CHF 20 as well as a mailing registration of CHF 12 are charged. Upon formation a minimum capital tax of CHF 1,000 is charged for all foundations.

5. Time required to set up

Approximately one week is required to set up a registered foundation. It takes a little less (one to three days) in the case of a deposited foundation. The formation is quite often carried out on a fiduciary basis.

6. Are foundations registered on formation (what details, if any, have to be registered, who effects the registration and is the register open to inspection

Liechtenstein law distinguishes between two kinds of foundations: foundations which are registered in the Public Register and foundations the deeds of which are merely deposited with the Public Register.

When a foundation is entered in the Public Register, which in this case functions as a Register of Foundations, it is at this point that it acquires legal personality. The registration has constitutive character, since the foundation as a legal person only comes into existence upon registration (with the exception of family foundations which are voluntarily registered).

Foundations which must be registered with the Public Register are foundations conducting a commercial activity for the achievement of their non-commercial purpose. In any case, trade in goods is not permitted for any foundation. Also foundations whose beneficiaries cannot be defined must be registered with the Public Register.

In order to register a foundation the following documents must be presented:

• foundation deed (the signatures on the deed must be legalised);
• copies of the articles;
• proof of endowed capital;
• declarations of acceptance and of signature of the board members. The signatures on these declarations have to be legalised and have to state the place of personal residence of the respective board member;
• authorisation for publication granted by the Liechtenstein Tax Authority.

In the case of a registered foundation any person is entitled to request an extract from the Public Register, which contains the following information: date of the registration, name, domicile, date of the articles, purpose, capital, members of the board, right of signature, publications, representative office. Other details, such as the name of the economical founder and the beneficiaries are not published.

The PGR also recognises foundations which acquire legal personality at the moment of their formation and do not have to be registered with the Public Register (but a voluntary registration is an option).

These are:

• ecclesiastical foundations;
• pure and mixed family foundations (family maintenance foundations); and
• foundations whose beneficiaries are defined or at least definable.

Such foundations, nevertheless, are only exempted from the requirement of registration if they do not carry out any commercial activity for the achievement of their non-commercial purpose.

These foundations have to deposit their foundation deed with the Public Register. This deposit aims at a supervision of the observation of the legal registration requirement as well as at a prevention of foundations which pursue an illegal or immoral purpose.

The deposited documents are not accessible to the public. However, upon the express request of the members of the board or of the representative office, the Public Register issues an official certification which contains the date of the formation of the foundation, the name and the place of residence, respectively the seat of the members of the foundation board and any other information which can be derived from the deposited documents.

7. Structure of Council (number, can nominees, founder or beneficiaries be members, residence requirements)

The executive bodies of the foundation as well as the administration of the foundation are laid down in the foundation deed or in the articles. In most cases a foundation has only one executive organ, namely the foundation council (board). When a foundation carries out a commercial activity for the achievement of its non-commercial purpose, it must have an audit authority, which verifies the financial statements.

The foundation board, therefore, is as a rule the supreme authority of the foundation. Its duty is the conduct of the business of the foundation in accordance with the articles, by-laws and regulations. As such the foundation board enjoys administration, representation and disposition rights.

Members of the foundation board may be natural or legal persons and may be Liechtenstein nationals as well as foreign persons with domicile in Liechtenstein or abroad. However, at least one natural member of the foundation board must be domiciled in Liechtenstein and must have professional qualifications. One board member suffices, as long as he/she is domiciled in Liechtenstein.

Each board member is personally liable for the compliance with the articles, by-laws and regulations. The method of appointment of the board members and the conduct of the business activities is regulated in the foundation deed or in the articles. The first board members are mostly appointed by the founder himself in the foundation deed. The decision requirements are also regulated in the foundation deed or the articles. Co-optation rights are, in most instances, also granted to the board members.

The founder relinquishes his rights once the formation of the foundation is established. However, the founder may exercise his rights as member of the board, as protector or as a member of any other supervisory board, or he may be granted special rights by means of the foundation deed, the articles or by-laws.

8. Registered Office

The legal representative constitutes a further body of the foundation and acts as the official addressee and the connecting link with the local authorities (eg, Post Office, Tax Authority, Public Register): It therefore operates as the registered office.

By virtue of the law the legal representative enjoys the right to accept all declarations and communications by national courts and administrative authorities in all matters.

The legal representative may only bind the foundation if he is specifically empowered for this purpose. The articles may vest the legal representative with additional competences, such as, for example, the appointment of the members of the foundation board should there be no further members of the foundation board in office.

9. What can a foundation do (hold investments, family assets, share in private companies)

A foundation may be formed as a pure family foundation for the support of the members of a family, or of a class of beneficiaries, and for the defrayment of expenses, maintenance and education purposes, and/or as a non-profit making foundation for the support and promotion of charitable, artistic, scientific or social objects.

Commercial activities may only be undertaken when such activity serves to achieve the non-commercial purpose of the foundation or if the type and scope of the objects of the foundation requires facilities provided by a commercial undertaking. It is possible for a foundation to hold investments and shares in public and private companies.

The purpose of a foundation is determined by the founder. Purposes are prohibited if they are illegal or immoral. But within the scope of these barriers a foundation is fully capable of holding legal rights and capable of including legal transactions of all kinds.

10. Taxation: liability and tax rates

The endowment of a foundation with rights or property is treated as a donation for tax purposes. Consequently, a founder must pay donation tax under Liechtenstein law, provided however, that he falls under the fiscal jurisdiction of the Principality of Liechtenstein. Consequently, a foreigner, who does not fall under the fiscal jurisdiction of the Principality of Liechtenstein, does not have to pay donation tax in Liechtenstein. Any acquisition of property by donation transacted in the country is subject to donation tax. Such an acquisition of property by donation is then deemed to be transacted in Liechtenstein, when it involves real estate situated in Liechtenstein or when the founder at the time of the donation was legally domiciled in the country. Endowments which serve the general well-being and have no gainful purpose are exempt from donation tax. The tax rate applied in any single case is that which would apply in the case of succession.

Foundations do not pay income tax in Liechtenstein. However, an annual capital tax of 0.1 per cent of the foundation fund and the reserves is levied; the minimum capital tax amounts to CHF 1,000 p.a. and has to be paid in advance. Where a foundation owns net assets of CHF 2 million or more, a reduced rate is levied (0.075 per cent on the amount exceeding 2 million to 0.05 per cent on the amount exceeding 10 million or more).

The distribution of beneficial interest to recipients living abroad is not subject to local tax. Should the beneficiary at the time of the distribution have domicile and residence in Liechtenstein, then the distribution becomes taxable as a gift inter vivos or as earnings in the case of regular supportive distributions, depending on the structure.

The foundation is liable for any obligations entered into by it to the extent of its assets. Neither the founder nor the board members are personally liable. The articles of a family foundation may stipulate that the benefit of the beneficiaries may not be withdrawn by way of injunction, levy of execution or bankruptcy proceedings.

11. Administration (financial accounts required or registered)

Registered foundations which do not carry out a commercial activity and whose statutes do not provide for such an activity have to prepare a yearly statement of assets and liabilities which sufficiently informs on the assets and liabilities incurred by the foundation. Based on this, the Liechtenstein board member shall confirm to the Public Register (within six months of the close of the financial year) that the statement of assets and liabilities is available and that in the preceding financial year no commercial activities were pursued. The statement of assets and liabilities need not be submitted in the case of deposited foundations and a confirmation to the Public Register is not foreseen. The verification of this statement by the Public Register is permissible within a two-year period, although this is not required if the statement is confirmed by an auditor. Deposited foundations (with no commercial activity) are not subject to bookkeeping and audit, but may voluntarily subject themselves thereto.

Registered foundations which carry out a commercial activity, or whose articles provide for such an activity, are obliged to keep books, inventories and balance sheets as well as profit and loss statements. The yearly financial statements of such foundations have to be audited and have to be submitted to the Liechtenstein Tax Authority within six months from the close of the business year. A qualified disregard of these requirements may lead to the official liquidation of the foundation.

12. Summary of differences and advantages of a foundation over a company

Similar to a company, a foundation is a separate legal entity acting in its own name and right. After its formation a foundation is considered separate from the founder and the foundation board. In no case should a foundation be seen as a relationship between the founder, the foundation board and the beneficiaries. Although a founder can retain a right to revoke the foundation, he/she normally loses all the rights as a founder with regard to the assets of the foundation.

Unlike a company, a foundation has no members or shareholders. The foundation holds its assets in its own name and is bound in its own name vis-à-vis third persons by the foundation board. Neither the board, nor the beneficiaries, enjoy any proprietary interest in the assets of the foundation. A foundation is irrevocable unless the articles provide otherwise.

The foundation board administers the foundation and invests and applies its assets in furtherance of the defined purpose.

Since foundations do not pursue a real commercial activity and the conducting of a commercial activity is only allowed to enable it to achieve its non-commercial purpose, a foundation is the ideal and preferred ultimate holding instrument for international family estate planning having inherent benefits such as legal personality, simplicity of operation, absolute confidentiality and a minimal level of taxation.

13. Summary of the advantages of a foundation over a trust

Trusts - unlike foundations - have existed for hundreds of years and are a creation of common law jurisdictions. Nowadays they are increasingly accepted in civil law jurisdictions, although they conflict with the civil law tradition. Both trusts and foundations are legitimate vehicles for estate planning and generally provide sufficient separation of ownership as well as confidentiality.

The fact that a foundation enjoys legal personality is an advantage over a trust. The foundation exists as an independent legal person with rights and obligations of its own. It is not the trustee, but the foundation which is the owner of the foundation’s assets. This has administrative and planning advantages. The change of the foundation board therefore does not affect the ownership of the assets. Furthermore, bank accounts are held in the name of the foundation and not in the name of the trustee.

A founder can have rights as a body of the foundation in order to exercise more direct control over the assets of the foundation but this needs to be balanced by tax planning and other considerations.

Lastly, the drafting of the articles of a foundation is less time consuming than the drafting of a common law trust deed, since in the latter case the description of the relationship, as well as the rights and duties of the trustee, require more precision and depth. The articles are short, wide ranging and easy to understand, allowing the board more flexibility in meeting the wishes of the founder than would generally be available to trustees. There is no easy solution as to the choice between a trust or a foundation. Each case depends upon its own facts. This said, the foundation should be looked at by the common law advisor as a serious alternative to a trust.

14. Double tax treaties; recognition of overseas trust settlements

The Principality of Liechtenstein has only concluded tax treaties with its neighbouring countries Austria and Switzerland. The treaties provide for the elimination of double taxation of employees (treaty with Switzerland) and expressly exclude the application of any of its provisions to Liechtenstein domiciliary companies (treaty with Austria).

Liechtenstein law may be applied to a trust settlement established under foreign law if:

• the trustee or where there is more than one trustee half of the trustees, live in Liechtenstein;
• the assets of the trust are situated in Liechtenstein; or
• the settlor has expressly laid down the application of Liechtenstein law in the trust deed.

Liechtenstein also permits the establishment of a trust settlement according to foreign law as well as its relocation to Liechtenstein. The applicable foreign law applies to the relationship between the settlor, the trustee and the beneficiaries. Despite the application of foreign law the trust settlement is regarded as a Liechtenstein trust settlement having its forum of administration in Liechtenstein.

The preconditions for the establishment of such a trust settlement are:

• the explicit reception of the foreign provisions regulating the trust settlement into the trust deed; and
• the application of Liechtenstein law to the relationship between the trust settlement and third parties; and
• the establishment of an obligatory court of arbitration for disputes between the settlor, the trustees and the beneficiaries.

15. Extent that the existence and structure of a foundation is confidential (disclosure to public, tax authorities overseas authorities)

Foundations are as a rule subject to the supervision of the Liechtenstein Government. If the foundation is administered or the assets are applied contrary to the purpose of the foundation, anybody, who can prove a legal interest, may make a complaint to the supervisory authority.

Ecclesiastical foundations, pure and mixed family foundations, as well as foundations whose beneficiaries are specified or otherwise defined, as well as foundations which solely manage assets and distribute proceeds or which hold capital participations, are not subject to any supervision by the Liechtenstein Government. Should the foundation deed so provide, family foundations may also be subject to government supervision. In such cases, the supervisory authority shall ensure that the assets of the foundation are managed and applied in accordance with the objects and purposes of the foundation.

Whereas in the case of registered foundations any person may obtain an extract from the Public Register, the documents held by the Register in the case of a deposited foundation are not accessible to the public. Only upon the express request of the members of the board or of the representative office, does the Pubic Register issue an official certification which contains the formation of the foundation, the name and the place of residence, respectively the domicile if the members of the foundation board and other information which can be derived from the deposited documents.

It is open to the founder to include any important information on the internal structure of the foundation (such as provisions concerning allocations to or appointment of the beneficiaries) in the regulations or by-laws which need not be registered or deposited with the Public Register.

Liechtenstein furthermore offers some of the strictest confidentiality laws in the world. Apart from banking secrecy, trust companies are bound by statutory provisions combined with criminal sanctions to keep information on the client confidential.

16. Typical user of the foundation and purpose

Foundations in Liechtenstein are mostly set up by individuals for the purpose of handing assets over to succeeding generations. The purpose of a family foundation is generally stated to be the investment and management of the assets of the foundation as well as distributions to beneficiaries in accordance with the by-laws and regulations of the foundation.

International clients choose a Liechtenstein foundation to profit from its confidential structure, its flexibility in purpose, (a mix of purposes is allowed), as well as from the flat taxation and the ease of formation and subsequent administration.

While the normally standardised articles are normally only valid in their German wording, by-laws and regulations can be drawn up in any foreign language, which also serves the interest of an international clientele. Liechtenstein also recognises the position of a protector although there are no specific statutory provisions.

As regards litigation in Liechtenstein there are no international precedents as have developed in trust litigation. The only courts competent to rule on Liechtenstein foundations are the Liechtenstein courts, which tend to protect the intentions of the founder and the validity of the foundation to the greatest extent possible.

The fact that distributions to foreign beneficiaries are exempt from Liechtenstein taxation and the lack of any withholding tax has always been a strong incentive for foreign clients to set up a foundation in Liechtenstein. However, any settlor or beneficiary has to consider the tax situation in his country of residence.

To conclude, perhaps the strongest influence on clients using Liechtenstein is the fact that it has been one of the oldest "off-shore" centres with an accessible location and a wealth of experience in the administration and discreet conservation of assets for its clientele for over 70 years.