Liechtenstein: Use Of Liechtenstein Companies For Tax Planning

Originally publishedn on 24 July 1999

As opposed to resident companies which can have an effective tax rate of up to 23 %, offshore companies are virtually tax free. They are merely subject to an annual tax on their capital calculated as 0,1 % of their equity.

Offshore holding companies are widely used to shelter assets from taxes and to permit a maximum of discretion in the management of such assets. Liechtenstein companies are used to defer or eliminate tax on corporate profits. Company profits are not subject to tax in the entrepreneur's home country until they are repatriated in the form of dividends. Profits may be accumulated in Liechtenstein and remain entirely unencumbered by taxation until they are repatriated.

AVOID TAXATION OF CAPITAL GAINS AND SUCCESSION DUTIES

Liechtenstein entities are ideal for the purpose of effecting an estate freeze. Direct and indirect holdings in a Liechtenstein company may easily be transferred. Tangibles and intangibles can easily be transferred to a Liechtenstein company at cost (minus depreciation). Through a sale of the company shares (which sale is not registered or disclosed to any person or authority) profits realized upon a disposition may be made free of taxes in the Liechtenstein company. Assets held in a Liechtenstein Family Trust or Foundation may be used to benefit successive generations in perpetuity without incurring succession duties.

INTERNATIONAL TRADING/SERVICE COMPANIES

Offshore companies may maintain an office with employees in Liechtenstein. The offshore privilege is available to service companies who realize their turnover exclusively with clients, companies or operations residing outside of the Principality of Liechtenstein. Preferential tax treatment will be extended to the administrative activities carried out by coordination companies which offer their pooled services to a group of companies located abroad. Such companies are in fact resident multi-nationals whose corporate purposes are limited to administrative activities performed on behalf of foreign operations such as centralized organisational and secretarial services, advertising, the monitoring of international markets, marketing and market studies, supplies, collecting and processing of technical or administrative data, the responsibility for international business contacts and public relations work, centralized accounting, financial and administrative operations, research and development, computer aided data processing, as well as any services directly or indirectly related to the above activities. Such activities may however only be performed for the exclusive benefit of operations and enterprises abroad. Services billed by such companies to companies abroad are not subject to income, turnover or value-added taxes in Liechtenstein.

It is possible through principal and agency agreements to channel international trading activities over an offshore company. Other purposes to which an offshore company may be put without incurring taxation as a domestic company in Liechtenstein or abroad (provided always that all activities originate from the Liechtenstein office) are the establishment and management of subsidiaries as well as film production and distribution provided that the filming occurs beyond Liechtenstein. Some further interesting applications for the offshore company are the licensing of intellectual property, franchising, inter-company financing and inter-company transfer pricing.

CONSTRUCTION COMPANIES

Interesting possibilities are available to the construction industry. In all those cases where considerable time (3 to 6 months) may be spent on a construction site installing equipment or a building, the interposition of an offshore Liechtenstein company may be considered. Construction, installation and on-going service can be channelled through the company by way of sub-contracting. The offshore company employs directly or indirectly such employees as are necessary to effect the installation or construction. The company will continue to qualify for the preferential tax treatment accorded to an offshore company for so long as the construction sites are located abroad. Generally speaking, in most OECD countries a company which has no presence beyond a construction site for a limited period of time, which varies from country to country (3 to 12 months), is not subject to tax in the country where the construction occurs.

Lastly, it should be kept in mind that certain types of business transactions which have a multi-national aspect are not tied to any specific jurisdiction and it is thus possible to channel them through an offshore corporation.

LOW-TAX LIMITED PARTNERSHIPS WITH HIGH-TAX ENTITIES

Interest in this tax structure has resulted from a resistance in many jurisdictions to allowing a tax deduction for payments made to tax-haven entities. Through the use of a limited partnership with a corporate entity in a high-tax jurisdiction the necessary commercial credibility can be given to business arrangements at the same time permitting 90 % and more of the partnership profits to be exclusively taxed in Liechtenstein.

JUDGEMENT-PROOF PENSION FUNDS

In many jurisdictions problems arise when a beneficiary of a private employer pension plan files in bankruptcy. Often the fruits of many years hard toil - namely the vested interest in the pension plan - devolve upon the trustee-in-bankruptcy for the benefit of the creditors.

With the use of a Liechtenstein Trust such hardship may drastically be mitigated or entirely avoided. Generally speaking through the exercise of a power of appointment it is possible to substitute the dependants of the beneficiary in lieu of the beneficiary. It is also possible to greatly restrict and in some cases entirely deny creditors of the beneficiary a right to realize upon pension fund assets. Moreover, such a pension plan trust must not be registered.

DOUBLE TAX-TREATIES

Austria is the only country with which Liechtenstein has concluded a double tax treaty. Whenever effective tax planning calls for maximum asset protection or the use of an offshore zero-tax jurisdiction which effectively has absolutely no double-treaty tax network, a Liechtenstein corporate vehicle should be considered.

CONCLUSION

As always the key to success in the effective use of Liechtenstein companies is the ability to design a corporate structure to meet individual needs taking into account estate planning, cross-border tax planning, commercial exigencies, geo-political risks and wealth transfers to the next generation.

Please contact Arcomm Trust directly for an update on the subject matter.