After three years of preparation, the new Liechtenstein tax law came into force on 1 January 2011. The new tax law will amend and improve certain areas while maintaining existing details for the most part. The following information is not intended to be complete. It does, however, address and touch upon issues which we believe may be of interest to you:
1. 1. Basic principles - Preliminary remarks
The Liechtenstein tax system has historically been quite inconsistent and contradictory. The new reform is intended to create a foundation so that the Liechtenstein tax law is internationally compatible, conforms to European law and is neutral in decision making. Neutrality in decision making means that the decision of what type of company is chosen no longer depends on whether the tax law happens to have found a particular solution. This can most easily be observed in the example of the coupon tax, which has now been abolished: Previously, an institution was often chosen as the legal form in order to avoid the coupon tax due when dividends of a public limited company were paid out. This will no longer be necessary in the future.
Another basic decision was that the property tax and income tax will continue to apply to private individuals. At any rate, an approximation of the income tax was found whereby the assets are converted into what is known as a standardised yield on assets. A target yield in the amount of 4% is assumed for this. The assets are converted into income at the end. Conversely, this also means that taxes do not have to be paid for yields on assets – they are already taxed via the assets.
A pure income tax applies to legal entities. The former capital tax has been abolished.
2. Transitional period for various changes
Before moving on to address the individual changes, it should be noted in advance that the transitional and final provisions in article 153 ff. provide sufficient time to adapt existing structures if necessary. Article 158, paragraphs 6 and 7, for example, state that companies which have been treated as a domiciliary until now will continue to be taxed with a minimum sum of 1,200.00 CHF for a transitional period of an estimated five years.
3. Abolishment of domicile statute
Until now, it was always the case that companies which are merely managed in Liechtenstein without actually being active in the country were subject to a so-called domicile tax. In the view of experts, this is a violation of various principles of international tax law. Because of this, every commercially active company will be subject to income tax in the future – apart from the transitional period listed above. This tax will now amount to a flat rate of 12.5 % of the profit. A unique feature of Liechtenstein law is that it enables a standardised interest deduction on equity capital. This means that 4% of the standardised equity capital (meaning equity capital minus accounts payable) can be deducted as an expense.
The so-called coupon tax on dividend payouts has been abolished at the same time. This means that in the future it will no longer matter if a Liechtenstein institution or public limited company makes and distributes profits. An option has been created to tax previous profits which are still hoarded in existing public limited companies at a flat rate of 2%, as long as it occurs within the next two years. This does not mean that a payout must occur, but rather it is intended to be motivation to clean up these 'old profits' with regard to the coupon tax.
4. Private asset structure
International tax law permits structures such as foundations or trusts to be treated favourably in terms of tax if their exclusive purpose is to manage assets for specific families or groups. According to the principles of European law, these may not carry out 'any business activity' in the sense of the case law of the European Court of Justice. Specifically, this means the following: If a foundation only holds securities, shares, bonds or shares in a fund which are traded publicly, for example, the foundation as such would be subject to taxation of 4% of the capital required by law. In other words, this means that a foundation must pay 1,200.00 CHF per year; its capital required by law is 30,000.00 CHF. It is key that this private asset structure adheres to values. As long as they are values that do not involve any business activity, this special taxation is possible.
5. Taxation of business partnerships
Business partnerships such as limited partnerships enjoy considerable significance in the international field. We need only think of the possibilities that a limited partnership brings with it, for example. As in other states, personal law communities are not to be taxed in Liechtenstein. On the contrary, taxation is to occur at the level of the partners in their respective state of residence or state of origin. Domestic taxation only occurs if a domestic place of business exists, domestic landed property exists or if the partners are taxed in Liechtenstein as residents.
6. Taxation of investment companies
There has been no change to the existing tax law has in terms of taxation of investment companies. The funds and securities of the investors will continue to be taxed for the investors themselves, but not for the investment company. The income of the company itself will continue to be taxed in Liechtenstein as before.
7. Abolishment of the gift and inheritance tax
Basically, all income, assets, etc. are only to be taxed once per corresponding cycle. For this reason, the gift and inheritance tax has been abolished in Liechtenstein as of 1 January 2011.
The above details can only provide an initial simplified overview. However, they do demonstrate that the Liechtenstein tax law is becoming more internationally compatible while simultaneously increasing the simplicity and maintaining the appeal of the tax rates.