The Liechtenstein Foundation – an instrument for international asset management, asset protection and asset succession planning
Legal, tax and international aspects
A strategy paper by LCG TREUHAND AG Liechtenstein on Liechtenstein as a foundation location for founders, beneficiaries and advisors
Brief overview
Liechtenstein Foundation: Legal definition and recognition
The Liechtenstein Foundation is a legally and economically independent special-purpose asset, i.e. the Foundation belongs to itself.
Liechtenstein foundation law distinguishes between private-benefit and charitable foundations.
The family foundation, maintenance foundation and corporate foundation are private-benefit foundations.
Depending on the structure of the founder’s rights, a distinction is made between transparent control foundations and non-transparent discretionary foundations.
The Liechtenstein Foundation is internationally recognised. Liechtenstein is a member state of the European Economic Area EEA. All EU directives, regulations and resolutions therefore have legal force in Liechtenstein.
Liechtenstein has concluded all agreements on the automatic exchange of information with the EU and the US FATCA regulations.
Alternatives to and distinction of the Liechtenstein Foundation
As an alternative to the Liechtenstein Foundation, the following vehicles can be considered in Liechtenstein for asset management, asset succession and asset protection:
Fiduciary trust FL-Trust FL-Anstalt Trust company (Trust reg)
English trust (Anglo-American trust) Offshore foundation
Advantages of a foundation in Liechtenstein
The Liechtenstein family foundation can be set up within a week without a notary or state involvement. There is no state authorisation requirement.
Founders and beneficiaries have extensive rights of influence and control. The foundation’s assets are effectively protected against external attacks by beneficiaries of compulsory portions, spouses and creditors.
Liechtenstein has no substitute inheritance tax or withholding tax on the distribution of profits. The family foundation benefits from comprehensive tax exemptions and low tax rates.
Establishment of a foundation in Liechtenstein
A family foundation / private-benefit foundation can be established in Liechtenstein by one or more natural persons or legal entities – domestic or foreign. The foundation is established by means of a written declaration of foundation or by testamentary disposition of the founder. As a rule, the foundation is established in trust by a trustee licensed in Liechtenstein. The family foundation acquires its own legal personality when the notification of formation is deposited with the Office of Justice.
The foundation deed (articles of association) contains the foundation declaration and provisions of the family foundation, such as the dedication of assets, the purpose of the foundation, the duration and dissolution of the foundation and regulations on the Board of Trustees.
The foundation deed must also refer to any by-laws, regulations and other bodies such as the protector.
The foundation deed must also include any references to reservations of revocation and reservations of amendment.
Anything that is not part of the mandatory content of the foundation deed – such as the designation of beneficiaries – can be regulated separately by the founder in by-laws.
The formation costs for simple foundations with a minimum capital amount to CHF 6000 plus 7.7% VAT (including preparation of the articles of association and by-laws).
Management of a foundation in Liechtenstein
The founder defines the internal organisation and purpose/objective of the foundation in the articles of association and appoints the foundation administration and independent supervisory bodies. The founder may reserve the right to revoke the foundation and amend the articles of association.
The Board of Trustees manages the day-to-day business. It represents the foundation externally. It is bound by the founder’s instructions, both with regard to the purpose of the foundation and its practical implementation.
The Board of Trustees consists of at least two persons, whereby one member of the Board of Trustees must be a trustee licensed in Liechtenstein.
In addition, the foundation requires a representative/authorised representative for service of process based in Liechtenstein.
Liechtenstein Foundation: Revocation, amendment of articles of association
When the foundation is set up, the founder’s will is generally established.
However, the founder may reserve the right to revoke the foundation and amend the articles of association in the foundation deed.
The founder runs the risk of being regarded as the beneficial owner of the foundation, with the result that the independent legal personality of the foundation is not recognised abroad.
The conclusion of mandate agreements also harbours the risk for the founder that he will be regarded as a de facto organ of the foundation with possible negative consequences in the third country.
Dissolution of a foundation in Liechtenstein
The Foundation in Liechtenstein is dissolved in the event of bankruptcy by court order or by resolution of the Board of Trustees. After liquidation of the foundation’s assets, the assets are distributed to the ultimate beneficiaries and cancelled.
Alternatively, the foundation can be converted or relocated abroad.
Control of a foundation in Liechtenstein
The founder has a comprehensive, efficient range of instruments at his disposal for administrative supervision and control over the actions of the foundation’s bodies:
The founder can set up an auditor and appoint a Supervisory Board, protector, Advisory Board, collator or trustee as an additional foundation body. In addition to a supervisory function, these bodies may also have decision-making powers and approval or veto rights.
Liability of the Liechtenstein Foundation
Only the foundation’s assets are liable for the foundation’s debts.
The foundation’s bodies are liable in accordance with the general liability provisions.
The founder’s heirs are liable for any taxes evaded by the founder.
Asset protection by means of a foundation in Liechtenstein
The Liechtenstein family foundation and corporate foundation are the preferred instrument for wealthy private individuals and entrepreneurs to protect themselves against political risks and the risk of tax changes abroad, to minimise entrepreneurial liability risks and to prevent claims to compulsory portions or marital property settlement claims.
Liability risks are minimised by skilfully drafting contracts for the transfer of assets to the Liechtenstein foundation as a gift or against payment, taking advantage of the short limitation periods in Liechtenstein and special Liechtenstein regulations.
Corporate and private creditors must challenge asset transfers to an FL foundation within one year. Once the limitation period for a challenge has expired, the dedicated assets are no longer part of the founder’s personal liability assets.
Claims by those entitled to a compulsory portion lapse within two years.
Spouses‘ claims to equalisation of gains enforceable abroad are not recognised in Liechtenstein – there is no possibility of a challenge under Liechtenstein law.
Beneficiaries of a foundation in Liechtenstein
The „foundation beneficiaries“ of a foundation in Liechtenstein are its economic beneficiaries. The term includes beneficiaries, prospective beneficiaries, discretionary beneficiaries and ultimate beneficiaries.
In principle, the beneficiaries have their own right to information, disclosure and control vis-à-vis the foundation and can enforce these rights in court.
Beneficiaries are usually individualised in the by-laws.
Taxation of the Liechtenstein Foundation
Foundations pay a foundation levy of 0.2 per cent of the statutory capital when they are established. Subsequent foundations are tax-free. Donations are not subject to dedication tax in Liechtenstein.
Income from the family foundation, maintenance foundation and corporate foundation is taxable at an income tax rate of 12.5% of the net income (flat rate). Liechtenstein also grants extensive tax exemptions from income tax. Distributions to beneficiaries and upon dissolution of the foundation are exempt from withholding tax.
Liechtenstein does not levy substitute inheritance tax, capital tax, estate tax, inheritance tax, gift tax and exit tax.
The Liechtenstein Foundation as a private asset structure PAS
Private-benefit foundations such as the family foundation can apply in Liechtenstein to be treated as a private asset structure PAS for tax purposes. The special PAS status means that the foundation is exempt from ordinary income tax. The disadvantage of the PAS are the restrictions that the special status for foundations entails, such as the prohibition on carrying out commercial activities.
The segmented PCC foundation in Liechtenstein
The segmented foundation consists of a core (non-cellular part) and one or more separate segments. The assets of the individual segments remain separate from each other and from the assets of the core. The segments do not have their own legal personality. Only the foundation has legal personality. The PCC foundation is only liable to third parties with the assets of the segment on which the legal relationship between the Foundation and third parties is based.
The charitable foundation in Liechtenstein
Liechtenstein foundation law recognises both the purely charitable foundation and the mixed charitable foundation, which is only predominantly charitable.
An activity is categorised as charitable or benevolent if it benefits the common good in charitable, religious, humanitarian, scientific, cultural, moral, social, sporting or ecological terms.
In principle, the general provisions of Liechtenstein foundation law apply to the formation/establishment, with the special feature that the charitable foundation must be entered in the Liechtenstein commercial register. The name of the founder and the identity of the beneficiaries are not entered.
Both the charitable and the mixed charitable foundation are subject to Liechtenstein foundation supervision (STIVA) and must set up an auditor as the foundation’s governing body.
The founder himself is entitled to extensive founder rights. However, exerting too much influence harbours risks when it comes to having the foundation recognised, particularly abroad.
Purely charitable foundations can be exempted from personal tax liability on application.
Tax burden of a founder resident in Germany
The assets invested at the time of the establishment of a Liechtenstein foundation by a founder resident in Germany may, among other things, result in German income tax, VAT, inheritance tax and gift tax charges for the founder. The founder resident in Germany does not receive a special expense or donation deduction for the transfer of assets in Germany.
Taxation of a beneficiary resident in Germany
Distributions from the private-benefit Liechtenstein family foundation remain tax-free in Liechtenstein. No withholding tax is levied either.
Beneficiaries resident in Germany (beneficiaries) are subject to a 25 per cent final withholding tax in Germany on distributions from the FL Foundation.
The distribution of assets to the beneficiary upon dissolution of the foundation is subject to 25 per cent German capital gains tax or gift tax.
Taxation of foundation assets of a Liechtenstein foundation in Germany
German dividends and interest are taxed exclusively in Liechtenstein. Dividends are distributed free of withholding tax or at a significantly reduced rate.
Capital gains from the sale of significant participations in a German corporation are generally tax-free in both Germany and Liechtenstein.
German permanent establishment profits of the FL Foundation are tax-free in Liechtenstein. In Germany, they are subject to a limited corporation tax liability of 15%.
The acquisition of real estate located in Germany is generally subject to real estate transfer tax (exception in the case of a transfer transaction subject to gift tax).
In Liechtenstein, foreign rental and lease agreements and property sales proceeds are exempt from income tax. This leaves a tax burden of 15%.
Realised capital gains are tax-free in Germany and Liechtenstein after a holding period of 10 years.
Checklist of international structuring options
The following fundamental considerations and decision-making criteria must be taken into account when structuring a foundation in an international context:
What are the founder’s structuring objectives?
Which legal system offers the appropriate structuring tools for realising the objectives?
Does the domestic legal system recognise the Liechtenstein structure?
The checklist shows the diversity and complexity of the issues to be considered and the key decision-making criteria for the founder.
Checklist
- Is the foundation the appropriate legal form?
- Development of the foundation’s purpose and setting the course
- Practical and strategic considerations for setting up a foundation
- What legal status should founders, governing bodies and beneficiaries have?
- Influence of the founder on the organisational structure
- What specifications can the founder make for the management of the foundation’s assets
- External and internal control of the foundation’s activities
- Avoidance of structuring errors from a tax perspective
- Liability of the foundation towards external parties Asset Protection
- Change of purpose and termination of a foundation
- What other framework conditions in the foundation country may be relevant to the decision?
