Liechtenstein tax reform
Walch & Schurti
The current Liechtenstein Tax Act dates back to 1961. It shall be completely revised and come into force at the beginning of 2011 (following Tax Reform).
The ratio between the overall tax revenues in Liechtenstein and the GDP is 16.9% (2008). Liechtenstein has no debts; on the contrary, its government sits on a cushion which exceeds its one-year spending.
Against this background it is no surprise that the Tax Reform has a highly competitive edge. In addition the government was keen to bring the Liechtenstein tax rules in line with modern international trends and in conformity with European law in order to prevent future attacks from other countries. The Tax Reform shall facilitate the conclusion of bilateral tax agreements. For example corporations shall be subject to tax based on their legal or effective place of management and their transactions shall be considered on an arm's length basis. Uncommon and complicated provisions of the current law shall be replaced by new rules which match with the OECD model treaty.
Taxation of legal entities
Abolition of Capital Tax and Coupon Tax
The existing capital tax and the coupon tax of 4% on certain distributions and interest payments will be eliminated.
Old reserves can be distributed in the first two years after entering into force of the Tax Reform at a lower rate of 2%. Afterwards, the current rate of 4% will apply again to distributions of old reserves.
Abolition of Special Company Taxes
The Tax Reform provides for the elimination of "Special Company Taxes" for domiciliary and holding companies, which shall prevent future reproaches of ring-fencing. However, legal entities might qualify as Private Asset Structures.
Existing entities benefiting from the current Special Company Taxes have a five-year transitional period to adapt to the new rules. The minimum capital tax will be increased during that period to an amount between SFr1,200 and SFr1,800.
Private Asset Structure (Privatvermögensstruktur - PVS)
In the future any Liechtenstein legal entity can qualify as a PVS upon application, if it holds "bankable assets" as defined by the EU Markets in Financial Instruments Directive, liquid funds, and participations only and if its shares are not publicly offered or traded.
A Private Asset Structure is subject to the minimum annual tax of 6% on the minimum registered capital, however, at least SFr1,800.
Trusts will be subject to the minimum tax of SFr1,800, if they are domiciled or actually administered in Liechtenstein or receive earnings in Liechtenstein.
12.5% Flat Rate Tax
All legal entities (including companies limited by shares, establishments and foundations) will be subject to a flat rate tax of 12.5% on taxable net profit if they did not apply for taxation as a Private Asset Structure.
Deductions and Loss Carry-Forwards
Numerous changes are proposed that aim to prevent the double taxation of corporate profits. Dividends received from domestic or foreign entities and capital gains from the disposal of shares or real estate, proceeds from foreign operations, and rent income from foreign real estate are deductible.
Further, 4% on the invested and needed capital can be deducted. The current five year loss carry-forward is replaced by an unlimited loss carry-forward.
International Group Taxation
Domestic and foreign subsidiaries of a Liechtenstein parent entity will be allowed to apply for group taxation. Losses of group entities shall be attributed to the parent company, subject to recapture rules.
Depreciation of Shares of Subsidiaries
The Tax Reform provides for a tax effective depreciation of subsidiaries in the event of a permanent decrease in value, subject to a recapture rule.
80% of the patent income shall be deductible.
Investment Funds / Private Equity Vehicles
Investment funds shall not be taxed; instead their unit holders shall be taxed in their countries of residence.
Private equity companies can apply for taxation as a Private Asset Structure if they are legal entities. If they are structured as a partnership ("Kommanditgesellschaft") their partners shall be taxed only.
Taxation of Natural Persons
Abolition of Inheritance, Estate and Gift Taxes
The current inheritance, estate and gift taxes shall be abolished.
Abolition of Capital Gains Taxation
Capital gains are no longer relevant income for income tax purposes.
Partnerships and similar entities shall be taxed based on the concept of fiscal transparency. The partners, but not the partnership, shall have to pay the taxes.
Combination of Wealth Tax and Income Tax
Individuals will continue to be taxed based on a combination of wealth and income tax. However, the taxable net wealth will be integrated into the income tax for taxation purposes. The net wealth will be multiplied by a standard rate, and the product of such calculation becomes a part of the taxable income.
Combined income shall be subject to seven different tax brackets (replacing the current progressive scale). Marginal rates will start at 1% (for income exceeding SFr30,000) and end with the top marginal rate of 21% (for taxable income exceeding SFr255,000), based on a municipal surcharge of 200% (which is currently, in practice, mostly lower).