Tax reform Liechtenstein

The FL Tax Roadmap which was submitted by the working group in January 2007 includes the essential basic principles and guidelines for a reform of fiscal law in Liechtenstein, which specifically comprise the following criteria, aims and basic conditions:
» Conformity with constitutional law
» Tax equity and tax tradition
» Tax revenue neutrality
» Neutrality of decisions
» Competition and performance capability as well as attractiveness
» Simplicity and transparency
» International compatibility
» Conformity with European law.

(by clicking one of the following headings with the mouse you can go to the corresponding paragraph)

1. Mission statement of the tax reform concept
2. Further development of the existing fiscal law
3. Taxation of commercially operating legal entities
4. Taxation of communities under the law concerning persons
5. Taxation of asset-managing legal entities
6. Taxation of investment companies
7. Taxation of natural persons

1. Mission statement of the tax reform concepts

The tax reform concept orientates itself to the mission statement of the taxation of citizens, as transparent and simple as possible, in line with the knowledge of international tax studies, in which the income which is generated on markets should only be encumbered one time over the life cycle as far as possible, and that natural persons and legal entities should be treated equally as far as possible.

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2. Further development of the existing fiscal law

The tax reform concept follows on from the existing fiscal laws in Liechtenstein. This is further developed above all under the aspects of the international competitiveness and attractiveness as well as the conformity with European law, however also constitutional law and the international compatibility, tax equity, tax tradition and the neutrality of decisions and tax revenues. Based on the previous tax tradition in Liechtenstein the future-compatibility and attractiveness of the tax location Liechtenstein is thus to be essentially secured in the long-term and in addition legal security increased and the fiscal law simplified.

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3. Taxation of commercially operating legal entities

Legal entities which are liable to tax in Liechtenstein and which operate commercially, should in future only be subject to income tax still and in addition to the property gains tax. The levying of the capital tax should also be waived in future as well as the levying of the coupon tax; a transitional solution can be expected for the latter with regard to previously formed profit reserves.
The capital tax and the coupon tax both breach the principle of the one-time burden on the market income, can have an unwanted influence on business management decisions and significantly impair the attractiveness of Liechtenstein as a tax location.

The income tax obligation of legal entities should in future follow on from the criteria of a registered seat or place of management in Liechtenstein (unlimited tax obligation) or on the existence of a plant in Liechtenstein (limited tax obligation). This way the international compatibility of the fiscal laws in Liechtenstein is essentially increased. Reference is also made as in the past to the tax-modified determination of profits under commercial law according to the provisions of the law concerning persons and company law in order to determine the income. In addition, the internationally recognised taxation principle of dealing at arm’s length is to be observed.

In order to avoid a national and international double burden an exemption from income tax is envisaged for dividends and capital and liquidation gains for participations (with the exception of the trading assets of banks, insurances and other regulated financial companies), for property gains (these are subject to property gains tax in a domestic case), for foreign plant results as well as for rental and leasehold income on foreign property assets. As in the past with natural persons with self-employed occupation, a standardised equity interest deduction in the amount of e.g. 3% based on modified equity should now also be granted on the level of legal entities. This way investment and financing decisions can be decoupled from the fiscal factors to a large extent.
It should be possible to carry negative income which is liable to tax forward for an unlimited period of time and offset this against positive income. In addition, it is currently being examined whether a group taxation with domestic and foreign group participations, which is limited to the EEA, should be envisaged as an option for the depreciation of participations.
A uniform proportional tax rate in the amount of e.g. 15% should be applied as a tax tariff – irrespective of possible profit distributions. By taking the equity interest deduction in the amount of e.g. 3% into consideration the effective tax rate based on a 10% yield is accordingly uniform at a rate of 10.5%. It is therefore generally lower than the previous tax burden of legal entities by including the capital, income and coupon tax.

This way the tax attractiveness and competitiveness of Liechtenstein can also be improved in the long-term based on an international comparison. This appears to be urgently required owing to the very active tax competition in the field of legal entities in particular in the relationship to the European states, however also in the regional environment.
In the end the internationally-oriented business location and financial centre Liechtenstein should this way continue to also have an internationally competitive and attractive tax system, that is equally attractive from a fiscal point of view both for commercially operating companies as well as for holding companies and based on an international comparison satisfies maximum demands; nevertheless a reduction in foreign withholding taxes on dividends, interest and licences can in future also only be achieved by concluding double taxation agreements and by also applying the parent-subsidiary and the interest-licences directive in the relationship to Liechtenstein. Thus, a general corporate tax system should be created that in particular also bears up against the changed basic fiscal conditions of other locations not least in the enlarged EU and Switzerland.

In the past 15 years these changes have partly led to a substantial reduction in the general tax burden and to a substantial simplification of the taxation of companies in numerous states. Estonia, Ireland, Luxembourg, Austria, Slovakia and Cyprus and from 2008 partly even Germany can be named as examples. On the other the special corporation taxes of commercially operating offshore companies will no longer be levied. Their fiscal treatment should in future be integrated into the general income taxation of legal entities, which accordingly also has an attractive fiscal structure as well as according to the internationally recognised principle of dealing at arm’s length.

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4. Taxation of communities under the law concerning persons

Communities, under the law concerning persons, should in future generally be treated transparent from a fiscal point of view – as is customary on an international level - i.e., that there is no taxation on the level of the communities, under the law concerning persons, this can only be carried out on the level of the shareholders in their respective state of residence or in the source state (principle of transparency). There will consequently always be taxation in the domestic country insofar as a community, under the law concerning persons, maintains a domestic plant, has domestic property assets, the shares in the community, under the law concerning persons, are to be allocated to a domestic plant and/or the shareholders are based in Liechtenstein from a fiscal point of view. Communities, under the law concerning persons, should in addition be granted the possibility to opt for income taxation (check the box).

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5. Taxation of asset-managing legal entities

Special attention should be given to the taxation of various forms of asset-managing structures including foundations, institutions and trusts. The special corporation taxes which were insofar partly levied are to be replaced by a fundamentally revised taxation concept, which conforms with European law and is to have a uniform structure on a national and international level, for private asset companies which do not operate commercially on the one hand as well as for the various forms of investment companies on the other hand and are placed on a basis which continues to be attractive from a fiscal point of view.
This way the internationally-oriented financial centre Liechtenstein should also continue to have an internationally competitive and attractive tax system which is recognised under European law. A tax system, that accordingly can also comprehensively take into account the needs of the market for legal security and based on an international comparison satisfies maximum demands (best in class comparison).
Legal entities are to be defined as qualified private asset companies, which exclusively manage the assets for private persons with regard to the possession, the management and the sale of financial assets and do not perform any commercial activity; trust settlements are to be treated accordingly. The taxation of these so-called private asset companies should be carried out uniform through a minimum income tax.

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6. Taxation of investment companies

The internationally recognised principle of fiscal transparency should continue to apply to all collective capital investments with a contractual or corporate body fund structure as well as special funds for qualified investors. According to this funds which retain profits as well as those which distribute are not liable to tax themselves. A taxation is rather only carried out on the level of the shareholders in their respective state of residence.
The principle of the fiscal transparency should apply to Private Equity companies in the form of a limited partnership the same as to all communities, under the law concerning persons. From this it can be derived that there can only be taxation on the level of the shareholders in their respective state of residence or source state.
Private Equity companies in the legal form of a legal entity are subject either to the income taxation or they are taxed as private asset companies in case they satisfy the pre-requisites in this respect.

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7. Taxation of natural persons

The taxation of natural persons based in Liechtenstein continues to orientate itself to the existing and tried and tested taxation concept of the tax on assets and earnings; natural persons are further if applicable subject to the property gains and the unchanged pensioner’s tax.
This concept should be further developed and newly oriented to the extent that it is also designed in future to be competitive and attractive on an international level as well as that it conforms with European law in the interaction with the taxation of legal entities. Finally, tax on assets and earnings should however continue to also only be considered together as general income taxation. To be precise, the assets should on the other hand be recorded based on standardised asset income with a plan income in the amount of e.g. 3-4%, in future however be taxed together with the income on earnings through a transition.

In addition, a full abolition of the tax on assets and the exclusive levying of an interest-adjusted income tax on all asset income in line with the mission statement of the tax reform concept are to be aimed at in the long-term.
This way all income of a natural person should in future be encumbered equally as far as possible and only one time over the life cycle.
In order to compensate for the so far comparably complex designed progression surcharge increased deduction and tax allowances and a multi-level tariff with a state and municipal tax burden, which is generally lower than the previous burden, should be introduced on the other hand. This way there should be no winners or losers due to the system compared with the applicable fiscal law, however it should lead to a substantial simplification and also relief of the burden.
In addition, the separate levying of estate, inheritance, and gift tax in the area of families should be waived in future. These types of tax in particular breach the principle of the one-time burden of the market income of a person as they are based on transfer and no market income. The levying of these taxes will also increasingly be waived in numerous other states.

(Source: Homepage government of the principality of Liechtenstein)

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