Liechtenstein – New tax structure

Determined to increase the attractiveness of Liechtenstein as a finance centre, the principality’s state parliament has adopted the government’s bill for a comprehensive reform of taxation, and has given the green light for the law to enter into force as planned on January 1, 2011. According to the government, the modern, competitive new tax system fulfils current requirements for legislation that is both internationally compatible and in accordance with European law.

Designed to be more transparent, the new simplified tax law retains the traditionally low tax rates to prevent an increased fiscal burden on individuals, excepting those with particularly high income. Indeed, as a result of the new tax structure, the tax burden will be reduced for families and taxpayers on low income.

Following the state parliament’s meeting, Liechtenstein’s Prime Minister Klaus Tschütscher welcomed the decision to adopt the historic reform of the country’s taxation after almost 50 years of the existing law. According to Tschütscher, the adoption of the modern tax law once again reinforces Liechtenstein’s political credibility and its ability to reform. The new law will serve to strengthen the principality in the current drive towards globalization and to improve the attractiveness and stability of Liechtenstein’s financial centre, he added.

An attractive system of personal income taxation

The reforms usher in a simplified system for individuals calculating their own taxes. As regards the taxation of real estate and land, this will follow the same practice as before.

Abolition of inheritance and gift tax

Inheritance and gift tax will be abolished for individuals to avoid multiple taxation. Currently, inherited or donated money is already subject to wealth and acquisitions tax. In general, however, the principle is that acquired income should basically only be taxed once during the course of an individual’s lifetime.

Benefits for companies in Liechtenstein

The government’s tax reform aims to strengthen Liechtenstein’s position in terms of international competition, as it is all too aware that tax rates are one of the key factors in business location.

Consequently, the new tax law, which was developed in close cooperation with industry, is designed to provide companies located in Liechtenstein with better opportunities to structure themselves and to adapt to global competition. The introduction of the new flat rate tax of 12.5% for all companies will ensure that all companies are taxed equally. With only a few exceptions, all businesses will be required to pay a minimum income tax of CHF 1,200 (EUR 908).

According to the government, the unequal treatment of foreign and own-capital will also be removed thanks to the introduction of the company own-capital interest deduction. Provisions on group taxation will also be included in the new law. As a result of these changes, the government believes that it will be even more attractive to set up a new company in Liechtenstein.

Abolition of coupon and capital tax

As regards legal entities, coupon tax and capital tax will be abolished, although coupon tax will still apply to any reserves as at December 31, 2010. However, in the first two years following entry into force of the new law, there will be the possibility to calculate this tax at a reduced rate of 2%. Thereafter, the tax will be calculated at a rate of 4%. The government’s decision is designed to enable a company to re-invest its capital and will serve to further increase Liechtenstein as a business location.

Measures to strengthen Liechtenstein as a centre for philanthropy

As under the existing law, legal persons that exclusively pursue charitable goals, will be exempt from tax. In the areas of both civil and tax law, the same concept of charitable status will also apply.

Attractive taxation for private asset structures

The tax law provides that legal persons can be used to manage wealth as an independent legal person and indeed as a private asset structure (Privatvermögensstruktur – PVS), provided that the PVS is exclusively active in wealth management and does not engage in any other economic activity.

Modern and compatible law

The government maintains that by making the new tax law compatible with European law, this has increased legal certainty, in particular for financial intermediaries and for their customers. The tax policy now complies with European standards.

Commenting on the reform, Prime Minister Tschütscher stated that it is a big step towards a successful future and has served to dramatically increase the economic location of Liechtenstein as a result.