The Foundation and Trust in Liechtenstein – their use in the international field

General

Liechtenstein law acknowledges the private law (privatrechtliche) and public law (öffentlichrechtliche) Foundation. This overview deals with the (private law) Family Foundation.

The following definitions may be found in law and literature:

Art. 552 al. 1 of the Law concerning Persons and Companies ("PGR code"): "For a Foundation to be formed by natural persons or legal entities or firms, it is necessary for an endowment (Foundation property) to be made for a certain specific purpose."

Definitions of the Foundation in legal scholarship include the following: The Foundation is a legal entity without members and with its own organisation, the object of which is to achieve a certain specific purpose by means of the endowment made. OR: A Foundation must be understood as a legal entity embodying an endowment fund. The endowment made for a given purpose becomes an independent legal person with its own rights and obligations.

The provisions of the PGR concerning Foundations derive largely from the Swiss Civil Law, having been freely adapted to the circumstances of Liechtenstein as long as ago as 1926. Liechtenstein introduced a new and much more flexible legislation in order to allow maximum flexibility. The legislation on the Foundation is being improved now although this process is in the beginning and we do not expect changes pertaining to the flexible use.

Austria enacted the private Foundation into its law a few years ago. Other countries (like Panama, The Netherlands Antilles) followed suit and others will follow.

The Foundation acts through its governing bodies, which are bound by the wishes of the founder.

Family Foundations are versatile instruments which can be used:

• for enhanced anonymity;
• for protection of the Foundation’s assets in general;
• for planning for a period of several generations;
• for protection of separate family members;
• for protection against the claims of creditors (segregation);
• for tax planning.

With regard to succession planning, for example, the Family Foundation offers a number of advantages as compared to a bank account held directly by a natural person. If the account-holder dies, his heirs can dispose of the assets held on the account in Switzerland, Liechtenstein and elsewhere only collectively, while the bank will require a death certificate, inheritance certificate, executor's certificate and other documentation. If, on the other hand, a Foundation is used to hold assets (cash, securities) at a bank, continuity is assured. The Foundation will remain the contracting party of the bank. The foundation assets at the bank are not automatically transferred to the heirs/next beneficiaries according to the By-Laws as the Foundation is the owner and not the beneficiaries (nor the foundation board compared to the Trust where the owner is the trustee).

The formation of a Foundation takes the form of a deed on which the signatures of the founders are certified, by testamentary disposition or by deed of inheritance (Art. 555 al. 1 PGR code).

The constitution is based on three principles:

1. The will to establish a Foundation with legal personality.
2. Endowment of property specified (at least CHF 30'000.00 according to Art. 122 al. 1 PGR code).
3. Specified purpose.

The Foundation deed or the articles (statutes) must contain the name and domicile of the Foundation, its purpose or objective, the designation of the Foundation council members and the method for appointing another Foundation council as well as a provision concerning the application of the assets in the event of the dissolution of the Foundation (Art. 555 al. 2 PGR code). The amount of the Foundation fund is normally stipulated in the statutes. The Foundation deed can be a separate document or be integrated into the statutes.

According to Art. 557 al. 2 PGR code, ecclesiastical Foundations, pure and mixed Family Foundations and Foundations whose entitled beneficiaries are specifically designated or definable (a family to be named as potential beneficiaries is sufficient) acquire legal personality without being entered in the Public Register. This provision is important for non Family Foundations who may have no definable beneficiaries: Non-profit Foundations (Foundations in the public interest; purpose Foundations) without defined beneficiaries must register in order they acquire legal personality.

The same could apply to Family Foundations which leave much discretionary room to the foundation board and the beneficiaries are broadly defined as for example "the directors of a family owned company". Such Foundations should be registered.

Foundations which acquire legal personality without registration in the Public Register must deposit the Foundation deed as well as the articles with the Public Register. The deposit of the foundation deed is a regulatory requirement in order the authority can fullfill its supervisory obligations (Art. 554 PGR code), however, failure to deposit will not invalidate the constitution of the Foundation.

An obligation to register exists for those foundations which, for the attainment of their non-economic purpose, pursue a trade conducted in a commercial manner or if the nature and scope of the participations held involve a commercial operation.

The statutes will mention the rules for the nomination of beneficiaries, but not mention any names as the statutes are handed over to the Office of the Land and Public Registry. The By-Laws (or sometimes also called Regulations) contain the special wishes of the founder as to the beneficiaries and their beneficial rights. Such By-Laws which are not submitted to any authority form part of the statutes/articles. They complete the statutes.

Foundations can have the following characteristics:

• Family Foundations (with the purpose of defraying the expenses for the upbringing and education or support of the relatives and the like);
• mixed Family Foundation with additional purposes;
• ecclesiastical Foundations;
• charitable Foundations;
• "purpose" Foundations (eventually with commercial activity according to Art. 552 al. 1 and Art. 557 al. 3 PGR code);
• Foundations for pension funds.

The endowment by the founder must be accompanied by a determined purpose. The main purpose has always to be ideal, however for the attainment of the Foundation's non-economic purpose, the Foundation may pursue a trade conducted in a commercial manner (maintenance of a youth hostal, holding of a larger amount of active participations, administration of a large real estate which requests a commercial acitivity). The investment into and administration of e.g. participations not requiring an intensive management and administration do not represent a commercial activity.

The founder loses his rights at the Foundation. The founder can however make sure that he keeps certain rights like beneficial rights (being the first beneficiary) or having the right of revocation according to the statutes. A Foundation used in the international field will however be unrevocable and leave much discretionary rights to the foundation board within the original expressed will.

The Foundation's net equity (foundation capital) must amount to at least CHF 30'000.00 (cash, stocks, rights etc.). The founder normally pays this fund into a bank account (in Liechtenstein or Switzerland) blocked for incorporation. In the case of deposited Foundations a commitment to endow the statutory foundation capital (CHF 30'000.00 or more), thus no capital proof by a bank for incorporation purposes shall be required, is acceptable on a "good relationship basis". The Foundation has a legal and enforceable claim against the founder in case he does not endow/pay in the capital promised.

Creditors can only claim the Foundation`s net equity. The foundation board is responsible for management and representation of the Foundation with the restrictions set forth in the statutes. The board acts on behalf of the beneficiaries and is fully responsible for any neglect and/or wrongful doing. If the foundation board consists of several members, they all are jointly responsible and liable. If one member votes against any decision which could lead to a liability, this member would not be exposed to this liability. It is necessary that the foundation board writes down decisions taken.

According to Art. 560 al. 1 PGR code the heirs or creditors of the founder may challenge the validity of a Foundation in the same way as a donation. The founder and his heirs can challenge the Foundation by reason of lack of intent in accordance with the same provisions as for defects in contractual agreements, even after the establishment of the Foundation.

Only the Foundation's assets shall be liable for the Foundation's debts to the creditors (Art. 563 al. 1 PGR code). Except for the extensive provisions in the case of Family Foundations, the income which a person receives from a Foundation without valuable consideration may be withdrawn by injunction, levy of execution and writ or bankruptcy proceedings only when the said income is not required for the defrayal of the essential living expenses of the beneficiary, his spouse and his children without means (Art. 563 al.2 PGR code).

In the case of Family Foundation, the founder may determine also in the statutes that the creditors of the specifically designated beneficiaries shall not withdraw from these their beneficial interest acquired without valuable consideration by way of injunction, levy of execution and writ or bankruptcy proceedings (Art. 567 al. 3 PGR code).

If the founder makes donations, the creditors may demand that the funds be restored. An action to this effect is time-barred after five years. In most cases, however, an action to dispute a donation must be brought within one year.

The Liechtenstein law on rescission (art. 75 RSO) establishes international private law provisions which must be heeded (applicable law, admissibility of the rescission, application of milder provisions in case of variety of applicable law, material ruling of the legal action, possibility of dismissal). In practice, the judge will have to deal in most cases with foreign rules on rescission (conditional upon application of the milder law for the challenging petitioner).

Therefore the Foundation should be constituted at a time where no potential or possible creditor claims exist and the standard of living of the donor is unaffected by the donation to the Foundation.

Gifts and endowments (inter vivos capital donations) to a Foundation have hereditary relevance if the founder or person who makes a gift is treated as the Foundation's first beneficiary. If the first beneficiary passes away, the Foundation's assets will be added to the estate of the testator in order to decide if forced heirship rules have been violated. Family members protected by forced heirship rules (children and spouse in Liechtenstein) can take legal steps against the Foundation and the latter will be forced to satisfy the claims by handing out funds until the provisions of the law are met.

Forced heirship rules do not apply:

1. to donations for charitable purpose;
2. to endowments (at least partially) of current income (thus without reducing the basic capital (fortune);
3. to donations to persons (endowments to Foundation for beneficiaries respectively) not entitled to a compuslory portion of the estate made by the testator two years before his death (in principle, the Foundation per se is not a forced heir);
4. if there were no persons entitled to a compulsory portion of the estate at the time of the donation/endowment;
5. generally after three years after the founder's/first beneficiary's death (claims statute-barred).

The Liechtenstein international private law (gazette 1996 Nr. 194) sets forth the following rules:

1. According to Art. 9 IPR a natural person is domiciled in the jurisdiction of his (or her) habitual permanent residence. The habitual residence is the place where the person has lived for a long time, even if this time may be limited from the outset.
2. The personal status of a natural person is governed by his or her nationality (Art. 10 al. 1 IPR). If a person has several nationalities including that of Liechtenstein, the Liechtenstein nationality will be the connecting factor. In other cases where a person has more than one nationality the nationality with the strongest tie is the connecting factor.
3. The personal status, at the time of the death, will have relevance in determining the applicable law for the succession (rights) of the testator (Art. 29 al. 1 IPR).
4. If Liechtenstein has jurisdiction (e.g. in case of Liechtenstein real estate; if the founder and/or first beneficiary of foreign nationality has domicile or residence in Liechtenstein) and if the Liechtenstein courts are to hear the succession case, Liechtenstein law will be applied (Art. 29 al. 2 IPR). There are two exceptions:

1. The testator of foreign nationality (if the domicile/residence is different from nationality) can provide by means of a testamentary dispostion (the last will) or deed of inheritance that the inheritance law of the country of his nationality or of his last permanent residence should govern the succession issue (Art. 29 al. 3 IPR).
2. The Liechtenstein testator living outside of Liechtenstein can set up by means of a testamentary disposition (last will) or deed of inheritance that that the inheritance law of the country of his nationality or of his last permanent residence should govern the succession issue (Art. 29 al. 4 IPR).

5. The law of the jurisdiction where the debtor (of a donation) has his ordinary permanent residence or domicile is applicable in case of donations/endowments (Art. 41 IPR). If a foreign person endows assets to a Liechtenstein Foundation the foreign law will then be applied for any dispute in connection with the endowment. However, the founder and the Foundation can choose another applicable law (and the forum) as the donation is a bilateral action (unilateral contract) with rights and obligations (Art. 39 al. 1 IPR).

Liechtenstein law does not contain rules on the application of inheritance status or donation status. The court has however ruled that donations made inter vivos are subject to the independent donation status which may differ from the inheritance status. Thus, the personal status or the habitual residence of the donor at the time of the donation is relevant as the donation status and cannot be overridden by the inheritance status if this would lead to different interpretations.

Foundations are usually used in the international field, i.e. the Foundation is domiciled in Liechtenstein, the founder and the beneficiaries are subject to another jurisdiction and the assets might be governed by the same or another jurisdiction. And the first beneficiary (who was the earlier founder) of a Liechtenstein Foundation must bear in mind that the testator's estate (part of which is in the Foundation) will internationally most likely be governed by the situation (permanent residence, nationality) at the time of his death and not at the time when the endowment was made. Therefore the effects planned could change during his life and the existence of the Foundation. E.G.: A German citizen living in Germany who sets up a Liechtenstein Foundation and who will be first beneficiary must always bear in mind that Liechtenstein court will consider the German matrimonial and forced heirship rights whenever the spouse and/or children attack the Liechtenstein Foundation via the Liechtenstein court. Here it has also to be taken into account that the Liechtenstein court will not consider foreign court proceeding results with respect to these questions. So the procedure has to be carried through in Liechtenstein, as long as the Foundation's assets are not outside of Liechtenstein.

The Court of Justice of the European Communities (ECJ – EuGH) has confirmed in its judgement on 23 September 2003 (case C-254/01 – M. Ospelt/Schlössle Weissenberg Familienstiftung) that a Liechtenstein Foundation can be the owner of a real estate used for agricultural purposes. This case has special relevance as the ECJ had to decide if the Austrian restrictions on the acquisition of agricultural and real estate for forest exploitation [exploitation by the owner himself; domicile in Austria; approval by the relevant authority (here in Vorarlberg/Austria)] are to be judged within the art. 40 of the annex XII of the EEA-agreement (free move of capital) or not. The Court approved that the acquisition of agricultural real estate can be made dependent upon an approval. The approval can however not be denied based on the fact that the purchaser of the real estate is not exploiting the real estate by himself. According to art. 40 of the EEA-agreement any physical person or any company set up in the EEA can acquire participations and real estate in other EEA member states which also refers to the Liechtenstein Foundation. This case is of special interest for Liechtenstein as this confirms that Liechtenstein entities can be used in the EEA for the acquisition of participations and real estate and fully benefit from the EEA-treaty.

Together with the judgement of the ECJ from 5.11.2000 [C-208/00, Ueberseering BV/Nordic Construction Company Baumanagement GmbH (NCC)] the Liechtenstein entities have seen in the last view months a confirmation for their use in the international field. This judgement C-208/00 does not deal with the Liechtenstein Foundation, however might have enormous relevance as the Liechtenstein Foundation does normally not fulfill the prerequisites as "entrepreneur" in Liechtenstein (no office space; no staff employed by the Foundation itself; no production; only passive investment income), although the only foundation board is domiciled in Liechtenstein and therefore the decision-taking process is performed in Liechtenstein.

The ECJ confirmed that a country "B" cannot deny the legal personality and therefore the rights to be legal party if such a company is set up and registered in the EEA-country "A" but has all its members of the board of directors in the EEA-country "B". Such a behaviour would be against art. 43 EU and art. 48 EU. This judgement shows that countries which base their legislation and jurisdiction on the so-called "registration theory" (Sitztheorie) might have future problems also for tax purposes as the tax law normally is based on the civil law. Also so-called "base" companies (domiciliary companies) will benefit from this judgement, however any structure has to be carefully drafted in order the structure may not be considered as obvious abuse of legal formation rights.

The article does not replace any legal consultancy, it is intended simply to provide general information. The Allgemeines Treuunternehmen offers a comprehensive range of services relating to the formation of companies, the provision of advice on legal and tax matters such as "family office". Supported by around 100 members of staff, our team of professionals ensures that clients receive individual attention. For more information please contact Roger Frick, Allgemeines Treuunternehmen, FL-9490 Vaduz, SF1@ATU.LI, Fax ++423 / 237 34 60, phone ++423 / 237 34 34.