Liechtenstein decided on new rules regarding the tax-exemption of dividends and capital gains. The new rules entered into force as from January 1, 2019. The changes affect the tax exemption of dividends and capital gains as well as the tax deductibility of depreciations and capital losses resulting from the sale of participations. According to the new rules, dividends and capital gains are treated as taxable income if they result from a “passive business activity” and the dividend-distributing company is “low taxed”. Further, depreciations on participations and capital losses are added back to the taxable income.
Tax exemption on dividend income and capital gains
To avoid that Liechtenstein is mentioned on the list of “uncooperative jurisdictions” the EU and its Code of Conduct on Business Taxation Group (“COC group”) obliged Liechtenstein to restrict its tax exemption on dividend income and capital gains. Liechtenstein agreed to make the necessary changes in its tax law by December 31, 2018.
Up to the end of 2018, dividend income was tax exempt in Liechtenstein as long as on the level of the dividend-distributing company (for participations ≥25%) the dividend payment was not deductible from the taxable income. Since January 1, 2019, the tax exemption of dividend income is further limited irrespective of the amount of interest in a company. According to Liechtenstein‘s new tax law, the tax exemption for dividends will not apply, if the following requirements are met:
- Participation in a foreign company;
- More than 50% of the income of the foreign company results from a “passive business activity”, which does not result from an actual economic activity;
- The income of the dividend-distributing company is low taxed.
For participations, which existed in 2018, the new anti-avoidance regulation will apply as of 2022. For such participations, it is recommended to distribute all income and retained earnings by end of 2021 at the latest.
In addition, from January 1, 2019 capital gains will also be subject to tax if according to the new rules dividend distributions from the respective company were not be subject to a tax exemption.
Losses resulting from participations
Depriciations on participations and capital losses resulting from the sale of participations were tax deductible in Liechtenstein in the past. As of January 1, 2019, depriciations on participations and capital losses are added back to the taxable income. As a result, such depriciations do not decrease the tax base anymore.