Taxi Taxation of trusts
Trusts managed from Liechtenstein are subject to an annual tax of 1,800 Swiss francs. No tax filings are necessary.ii Regular taxation of legal entitiesCorporate tax rate and tax base
Legal entities that are taxable in Liechtenstein are subject to corporate tax on their net income at a rate of 12.5 per cent under regular taxation rules.
The net income is reduced by income from foreign permanent establishments, rental and lease income from foreign real estate, gains from selling real estate, distributions from foundations or trusts, dividends and capital gains on the sale of shares and unrealised capital gains on shareholding in companies both in Liechtenstein and abroad. In general, dividend income and capital gains from the sale of shares are tax-exempt. As a result, not only income and capital gains from interests in partly or wholly owned subsidiaries, but also income and capital gains from shares held as part of a securities portfolio, are in principle tax-free.
However, in 2016, a number of the Organisation for Economic Co-operation and Development (OECD)'s Base Erosion and Profit Shifting (BEPS) measures were implemented in the Liechtenstein Tax Act. As a result, dividend income is no longer tax exempt if: (1) the shareholding in the respective subsidiary amounts to at least 25 per cent of the capital or voting rights; and (2) the share of profits are treated as expenses deductible for tax purposes by the subsidiary. This means that if a Liechtenstein entity receives dividend income which for some reason is classified as tax deductible interest payment in the country where the dividend was declared, Liechtenstein will be forced to tax the dividend if the 25 per cent holding threshold is met.
In addition, the Liechtenstein Tax Act was further amended in 2018, based on a further analysis of BEPS standards. Losses resulting from a sale or impairment of participations will no longer be tax-deductible as of 2019 in order to terminate the asymmetric treatment of (tax-free) profits and tax-deductible losses.
Further, a 'switchover' rule was introduced to ensure that taxable income resulting from a shareholding in a foreign entity, which has predominantly passive income and is subject to low (or no) taxation in its home state, will be additionally taxed in Liechtenstein. This 'switchover' from a tax-free dividend to taxable income applies if a Liechtenstein entity receives a dividend from a foreign tax-resident entity that has more than 50 per cent passive income over a multi-year period, if the foreign taxation, directly or indirectly, amounts to less than 50 per cent of the Liechtenstein tax. With regard to taxation at less than 50 per cent of the Liechtenstein tax, a distinction is made depending on the percentage of the shareholding in the foreign entity. Lower taxation is assumed if the shareholding is:
- lower than 25 per cent and the local tax rate is less than 6.25 per cent; or
- more than 25 per cent and the effective taxation is less than 50 per cent in a comparable domestic case.
For the purpose of determining whether a foreign tax-resident entity that has more than 50 per cent passive income, 'passive income' means:
- interest or other income from financial assets; royalties or other income from intellectual property; and income from finance leases;
- profit shares or distributions from foreign legal entities whose total income consists of more than 50 per cent of low-taxed passive income pursuant to (a) above, provided that this income was not generated in the course of an actual economic activity; and
- realised and unrealised capital gains in the value of participations in foreign legal entities, provided these fulfil the conditions set out in (b).
If dividends from participations are not tax-exempt owing to fulfilment of the above criteria, capital gains (realised and unrealised) and liquidation proceeds from such shareholdings are not tax-exempt either.
Dividends and capital gains from participations will continue to be tax exempt as long as the criteria set out above are not met. However, Liechtenstein entities have to prove that these criteria are not met in order to claim tax exemption.
This 'switchover' rule will also apply as of 2019, but shareholdings in foreign legal entities that were acquired prior to 1 January 2019 will only become subject to the new regime in 2022.Notional interest deduction
The new tax law introduced a notional interest deduction, which is currently 4 per cent of the modified equity as a deemed expense to ensure equal treatment of debt and equity.
The modified equity is calculated by deducting the following items from the net equity:
- own equity;
- shares in legal entities;
- assets not required for the company's purposes; and
- a deduction of 6 per cent of all assets, under exclusion of items (a) to (c).
The reason for the first three deductions is that they produce tax-exempt income and capital gains and, therefore, cannot be used to create a notional interest deduction. The term 'all assets' refers to the balance sheet total. In case of 100 per cent equity funding, the effective notional interest deduction is reduced from 4 per cent to 3.76 per cent because of the deduction of 6 per cent of the total of all assets (100 per cent – 6 per cent = 94; 94 x 4 per cent = 3.76 per cent).
When calculating the modified equity, increases and decreases of the equity during the financial year are taken into account pro rata. However, increases and decreases within the same tax quarter are netted off and are considered to have taken place mid-quarter. The modified equity is calculated separately for each tax quarter; the average modified equity during the quarter is also calculated.
The table below shows the effects of the notional interest deduction, assuming 100 per cent equity financing for various return-on-equity (ROE) scenarios and the resulting earnings before interest and taxation (EBIT). It is evident that the notional interest deduction can result in a substantial reduction of the effective tax rate. Obviously, the effect is higher the closer the ROE is to the 3.76 per cent effective notional interest deduction. However, even in the case of a highly profitable company yielding a 20 per cent ROE, the notional interest deduction results in a decrease of the effective tax rate from 12.5 per cent to 10.15 per cent.
|Equity (before deduction of 6% of all assets)||1 million||1 million||1 million||1 million||1 million|
|Equity (after deduction of 6% of all assets)||940,000||940,000||940,000||940,000||940,000|
|Notional interest deduction (3.76%)||37.600||37.600||37.600||37.600||37.600|
|Profit before taxes||0||12,400||62,400||112,400||162,400|
|12.5% corporate tax||0||1,550||7,800||14,050||20,300|
|Effective tax rate||0||3.10%||7.80%||9.37%||10.15%|
Since the revision of the Tax Act in December 2014, in cases of receivables from shareholders, founders, beneficiaries or related persons carrying an interest rate of less than 4 per cent, the interest rate differential between the interest paid to the legal entity by the related person and the notional interest deduction will generally be excluded in the calculation of the notional interest (except if such receivables from related person result from the main activity of the entity).IP box
In 2011, Liechtenstein introduced a notional expense, which may be deducted from any income from intellectual property (IP) rights. The notional expense amounts to 80 per cent of the respective net income. This IP box regime was approved by the European Free Trade Association (EFTA) Surveillance Agency (ESA) in its decision of 1 June 2011. However, in the course of the BEPS action plan, the OECD has defined new taxation standards for IP box regimes, referred to as the modified nexus approach. Like many other countries, Liechtenstein is now implementing the measures of the OECD BEPS action plan. Liechtenstein's government therefore abolished the IP box regime after the 2016 tax year. However, taxpayers who already take advantage of the Liechtenstein IP box regime will be allowed to benefit from it until 2020.iii Taxation as a private asset structure
As an alternative to regular company taxation and inspired by Luxembourg's private asset management company, the Liechtenstein legislature devised a new tax privilege for legal entities that are only engaged in the management of their own assets and do not perform any commercial activity. A PAS is only subject to the minimum corporate income tax of 1,800 Swiss francs annually without having to file any tax returns. Taxation as a PAS was approved by the ESA as being compliant with the European competition law on 15 February 2011.
The main feature with regard to the tax privilege is the lack of commercial activity. Article 64, Paragraph 1(a) of the Tax Act exemplifies, by reference to the Asset Management Act, what is not considered a commercial activity. This includes the acquisition, possession, management and sale of transferable securities such as bonds, stocks, money market instruments, shares in investment undertakings and derivatives.
Likewise, buying, holding and selling of precious metals, artwork and similar assets is generally possible. In its decision approving the provisions on the PAS, however, the ESA indicates that transactions in securities when effected 'as part of a commercial share dealing activity' constitute economic activity. Regular and active trading of securities (and other assets) is therefore not considered permissible for a PAS unless decisions are delegated to an independent asset manager. The purchase and sale of securities as part of a long-term investment strategy is, however, allowed in any event.
As the mere exercise of ownership and the granting of benefits by the entity to its shareholders or beneficiaries are not considered commercial activities, the holding of a property does not constitute a commercial activity as long as the property is used by the PAS or its shareholders and beneficiaries and no rent is charged.
When a PAS holds shares in a subsidiary that exercises a commercial activity, neither the PAS nor its shareholders or beneficiaries are allowed to exercise any control over the management of the subsidiary through direct or indirect influence, otherwise the PAS itself will be regarded as commercially active and lose its status as a PAS.
When comparing regular taxation with PAS taxation, it turns out that in some cases there may be only a small difference in the tax burden because, even in cases of regular taxation, the income from the management of the legal entity's own assets tends to be tax-exempt anyway.
The following table shows where PAS taxation has advantages over regular taxation:
|Investment||Revenues||Regular taxation(12.5% corporate tax)||Possible advantage of PAS|
|Realised capital gains||Tax-free||–|
|Bonds||Interest||Taxable if net profit exceeds the 4% notional interest deduction||Yes|
|Realised capital gains||Taxable if net profit exceeds the 4% notional interest deduction||Yes|
|Commodities (physical, e.g., gold in a safe)||Realised capital gains||Taxable if net profit exceeds the 4% notional interest deduction||Yes|
|Real estate (non-Liechtenstein)||Rent||Tax-free||–|
|Realised capital gains||Tax-free||–|
|Derivatives||All income||Taxable if net profit exceeds the 4% notional interest deduction||Yes|
|Investment funds||Treated as transparent; investments of the fund are treated as being held directly by the legal entity||Yes (except pure stock or property funds)|
The table shows that a Liechtenstein legal entity that is taxed as a PAS generally does not have any tax advantage over a regularly taxed company if it only holds shares, or real estate outside Liechtenstein. The reason is that even under regular taxation any income or capital gains produced by these asset classes will generally be tax-free anyway, provided that the anti-avoidance rule and switchover rule set out above in Section II.ii do not apply. In the case of the other asset classes, whether taxation as a private asset structure is preferable over regular taxation depends on whether the asset classes yield more than the 4 per cent notional interest deduction applying in case of regular taxation.iv Taxation of individualsIncome and wealth taxPersonal tax liability
The Liechtenstein tax regime for the taxation of individuals combines income and wealth tax. The wealth tax is based on the notional income of currently 4 per cent on the taxpayer's assets, which is then subject to income tax in lieu of the real income from such assets (which is tax-free). There is an eight-stage scale for determining the income tax.
Individuals having their residence or habitual abode in Liechtenstein are taxable on their entire wealth and income. While residence means the place where a person lives with the intent of staying permanently, habitual abode refers to the place or area in which a person dwells not only temporarily. The Liechtenstein Tax Act considers a temporary continuous abode of more than six months as habitual abode, whereby short-term interruptions are not taken into account.
Limited tax liability applies to individuals whose residence and habitual abode is not in Liechtenstein. Such individuals are taxable in respect of their Liechtenstein wealth and income.Subject of income tax
All income in money and money's worth is subject to income tax such as:
- any income from self-employment;
- any income from employment relationship under private or public law;
- any income of board members, foundation council members and members of similar bodies of legal entities and trusts that they receive for their respective functions; and
- contributions received by the taxpayer as beneficiary, unless this is subject to wealth tax.
Tax-exempt income includes income from wealth for which the taxpayer pays wealth tax, recurring benefits to the taxpayer, which are considered as taxable wealth, and income from permanent establishments abroad.Subject of wealth tax
The entire movable and immovable wealth of the taxpayer is subject to wealth tax. Individuals with limited tax liability are only taxable in respect of their domestic wealth that is real estate and permanent establishments in Liechtenstein.
The Tax Act provides for certain exemptions from wealth tax. In particular, real estate and permanent establishments abroad are exempted from wealth tax. Taxpayers are also entitled to make certain deductions, such as reducing assets by debts and other liabilities, provided that the taxpayer is liable as principal debtor.Trusts or foundations with Liechtenstein-resident settlors or beneficiaries
With regard to trusts, foundations and similar vehicles with Liechtenstein residents as settlors or beneficiaries, the following rules apply.
The wealth of revocable foundations, trusts and establishments with a foundation-like structure is attributed to the founder and wealth tax is paid by the founder. However, it is possible to opt for taxation at the level of the trust, foundation or similar structure instead.
In the case of irrevocable trusts, foundations and establishments with a foundation-like structure, a distinction is made between entities with determinable beneficiaries that benefit from a certain quota and entities where this is not the case.
In the case of trusts, foundations or establishments with a foundation-like structure with determinable beneficiaries entitled to a certain quota, wealth tax is levied at the level of the beneficiaries. However, the beneficiaries may apply for taxation at the level of these structures but require the consent of the body responsible for distributions. Such a structure will not become the taxpayer itself but rather must meet the wealth or personal tax liability in lieu of the beneficiaries.
If such structures have no determinable beneficiaries entitled to a certain quota, no wealth tax is payable because the wealth cannot be attributed to any natural persons; however, if such structures are established by Liechtenstein tax residents, the set-up itself triggers a special tax as follows.
Such transfers to a discretionary structure are subject to taxation to the extent that: this wealth is no longer subject to wealth tax; and benefits or shares do not become liable to wealth tax. For example, the first prerequisite is not met if real estate abroad is transferred as this is exempted from wealth tax.
The taxation of transfers to a fiduciary structure also applies in the event of changing circumstances after the establishment of a fiduciary structure that led to a shortfall of the wealth tax liability. As a result, the conversion of a determinable benefit into a discretionary benefit also leads to taxation.
The transferor shall pay a tax in the amount of 3.5 per cent of the wealth tax value of the contribution plus the applicable municipal surcharge. If a tax resident of Vaduz (where the municipal surcharge is 150 per cent) establishes a foundation or trust where no quota can be attributed to the beneficiaries and, therefore, the assets are no longer subject to wealth tax, the set-up is therefore taxed at a rate of 8.75 per cent. The assets will then no longer be subject to wealth tax. However, any distributions from such a foundation or trust to a beneficiary who is a Liechtenstein tax resident will be subject to income tax.Tax calculation
The taxation of individuals is based on a combination of wealth and income tax: the wealth tax is integrated into the income tax by transforming a part of the wealth into an additional category of income. This transformation is based on a notional income. To determine the taxable base, wealth and income are calculated separately and then a notional income from the wealth is assumed. The interest rate for determining the notional income from wealth is determined annually in the Finance Act, being 4 per cent for 2019. This notional income from taxable wealth is then considered income (instead of the real income) and added to the total taxable income.
After basic exemptions up to 15,000 Swiss francs (and up to 22,500 Swiss francs in the case of single parents within the meaning of the Family Allowance Act and up to 30,000 Swiss francs for jointly assessed married couples), taxable income (including the notional income resulting from wealth tax) is then taxed at different rates for eight income brackets, with the highest rate for the national income tax being 8 per cent. Additionally, the Liechtenstein communities may levy a municipal surcharge of between 150 per cent and 250 per cent on the national tax. Currently, all Liechtenstein communities levy a surcharge of between 150 per cent and 200 per cent on the national income tax, with the rate in Vaduz being 150 per cent. The top tax rate for a resident of Vaduz therefore amounts to 20 per cent and applies in the case of a non-married taxpayer without children if his or her annual income exceeds 200,000 Swiss francs.No inheritance or gift tax
Inheritance tax and gift tax have been abolished in the course of the revision of the Liechtenstein Tax Act. Under the new Liechtenstein tax regime, just a disclosure of donations to the fiscal authority is required. Liechtenstein-resident donors and recipients of gifts must therefore include gifts in their tax returns. The purpose of this notification is to enable comprehensibility of declarations of wealth set out in the tax returns of these individuals (i.e., the information is only declaratory). The disclosure requirement applies only to gifts, inheritances and bequests exceeding 10,000 Swiss francs.Lump-sum taxation
Individuals can apply to the fiscal authority for lump-sum taxation (i.e., apply for taxation on expenditure instead of income and wealth tax). The latter does not apply to real estate in Liechtenstein, which remains subject to wealth tax.
Liechtenstein citizens are not entitled to apply for such lump-sum taxation. Another prerequisite for the application is that the individual takes residence or habitual abode in Liechtenstein for the first time or after an absence of 10 years or more from Liechtenstein. The individual must not be entitled to work in Liechtenstein but shall live on income from his or her wealth or other receipts from abroad.
The discretionary decision regarding the lump-sum taxation is up to the Liechtenstein fiscal authority. The lump-sum taxation considers the total expenditure of the taxpayer, and the tax based on the expenditure amounts to 25 per cent of the expenditure. The tax may be determined for several years depending on the regularity of the amount of the expenditure.
Individuals intending to apply for lump-sum taxation must also take into account the applicable provisions in conjunction with the permission to reside in Liechtenstein. Currently, residence permits are quite restricted, although there is a lottery open to citizens of the European Economic Area. Furthermore, several times in the political process there have been discussions to issue more resident permits to wealthy or highly qualified foreigners but no final conclusion has been reached.