Nuances of Liechtenstein Tax Structure: An Overview of the Taxation of Natural and Legal Entities and International Tax Law 

Josef Bergt
2023

Direct Taxes on Natural Persons

In Liechtenstein, natural persons are subjected to wealth and income taxes. Both state and municipal taxes are imposed, with the state tax rate escalating progressively within an eight-tier rate structure, the highest tariff being 8%. The municipal tax operates by adding a surcharge to the state tax, ranging between 150% and 250%. These regulations on wealth and income taxes can be found in Articles 4 et seqq of the Liechtenstein Tax Act (state tax) and in Articles 75 et seqq of the Tax Act (municipal tax).

Direct Taxes on Legal Entities

Legal entities fall under the realm of income tax. The tax rate for income is set at 12.5%, with a minimum income tax amount of CHF 1,800 imposed.

Private wealth structures, as well as special dedications of assets without personality, are exempt from income tax; they are solely obliged to pay a minimum income tax of CHF 1,800. The regulations regarding income tax are detailed in Articles 44 et seqq of the Tax Act.

Liechtenstein does not levy withholding taxes on distributions from corporations. Accordingly, no withholding taxes are withheld on a dividend payment to a shareholder, regardless of where the shareholder resides. The recipient must then declare the dividends in their tax return and pay tax at their respective tax domicile.

Dividends paid by other companies to the Liechtenstein company are generally tax-free income at the level of the Liechtenstein company. If the dividend-paying company is a foreign, low-taxed subsidiary that generates predominantly passive income on a sustained basis, the dividends are taxable at the income tax rate of 12.5%.

Likewise, capital gains from the sale of shares in corporations are generally exempt from income tax for Liechtenstein companies. If the company, whose shares are sold, is a foreign, low-taxed subsidiary, which sustainably generates predominantly passive income, the dividends are taxable at the income tax rate of 12.5%. Such low taxation is an effective income tax burden of less than 50% of the income tax burden in the comparable domestic case under the Liechtenstein Tax Act.

Interest income that the Liechtenstein company receives from a foreign company is taxable at the level of the Liechtenstein company with 12.5% income tax. In case of interest payments from so-called "related parties", the safe harbor interest rates of the Liechtenstein tax administration have to be considered.

Payroll/Withholding Tax

For residents of the country (unlimited tax liability), a withholding tax is levied on:

• Income from non-independent activity / substitute income as well as
• Attendance fees (e.g., of corporate bodies in meetings related to their board functions).
• For persons residing abroad (limited tax liability), a withholding tax is levied on:
• Income from non-independent activity / substitute income;
• Attendance fees;
• Pension / capital benefits of the 1st and 2nd pillar as well as
• Benefits due to the dissolution of a vested benefits account or a vested benefits policy

Regulations pertaining to withholding tax are detailed in Articles 24 et seqq of the Liechtenstein Tax Act.

Value Added Tax (VAT)

Value-added tax is a consumption tax designed to burden domestic consumption. On the strength of treaty agreements between Liechtenstein and Switzerland, the territories of both states form a common "VAT single market". If the VAT Act refers to the single market, the area of both states is to be considered and understood.

The question of tax liability arises in line with Article 10 of the Liechtenstein VAT Act stating that regardless of the legal form and purpose, anyone operating a business autonomously, independently, and pursuing a sustainable income from services is subject to VAT. Anyone carrying out a professional or commercial activity aimed at the sustainable generation of income from services independently and appearing externally under their name operates a business. The standard VAT rate for Liechtenstein is 7.7 % with several special tariffs applying depending on the types of products and services. 

Natural persons (sole proprietorships), partnerships (such as general and limited partnerships), legal entities under private and public law, dependent public institutions, and personal associations without legal capacity, which, for example, carry out sales under a joint company name in the construction industry, can become liable to tax.

Those not already liable to tax under Article 10 VAT Act become liable to tax if they receive services or supplies from abroad in a calendar year for more than CHF 10’000, which are subject to acquisition tax. The acquisition tax includes:

• Services, the location of which is in the country according to Art. 8 para. 1 VAT Act and which are provided by companies based abroad that are not registered in the register of taxable persons, with the exception of telecommunications or electronic services to non-taxable recipients;
• Import of data carriers without market value with the services and rights contained therein (is not subject to import tax if, according to Article 52 para. 2 of the VAT Act, no market value can be determined);
• Delivery of immovable property in the country, which is not subject to import tax and which is carried out by companies based abroad that are not registered in the register of taxable persons, with the exception of leaving such objects for use;
• Delivery of electricity in lines, gas via the natural gas distribution network and district heating through foreign-based companies to taxable persons in the country.

For those service recipients who are not already liable to tax under Art. 10 VAT Act, the tax liability under Art. 45 VAT Act is limited to the purchase of such services. Persons who are already liable to pay tax must account for each purchase.

Stamp Taxes (Issue Tax, Sales Tax)

Based on the Customs Treaty of March 29, 1923, the territory of the Principality of Liechtenstein is considered to be domestic in terms of the Swiss federal legislation on stamp duties. Unless otherwise determined and other rules are defined in the implementing provisions regarding the implementation of federal legislation on stamp duties, Swiss provisions regarding stamp duties apply in Liechtenstein.

In the event of the formation, establishment, relocation to the country, or increase in the capital of legal entities according to Art. 44 Tax Act, a founding tax of 1 % of the capital is levied with a general exemption limit of 1 million Swiss francs. This rate is reduced to 0.5 % for the capital exceeding five million francs and to 0.3 % for a capital exceeding ten million francs. The statutorily determined capital is decisive in any case.

Self Disclosure

If a taxpayer discloses for the first time after 1 January 2011 a tax evasion, tax fraud or misappropriation of taxes to be deducted at source committed by him or her on his or her own initiative, without being prompted to do so by an imminent risk of discovery, he or she shall be exempt from punishment and shall only be required to pay the additional tax. For each subsequent self-disclosure of tax evasion, the fine shall be reduced to one-fifth of the evaded tax. In addition, the additional tax must be paid (Art 142 Tax Act).

Heirs who have voluntarily done everything reasonable to enable the tax authorities to determine a punishable act are exempt from punishment and are obliged only to pay the back tax.

In the case of a first-time voluntary disclosure, the underpaid tax is levied together with interest on arrears for the past five years. In the question of first-time voluntary disclosure, voluntary disclosures made after January 1, 2011 are taken into account. For each subsequent voluntary disclosure, a fine in the amount of 20% of the uncollected tax is owed in addition to the uncollected tax plus interest on arrears.

International Tax Law

1. Automatic Exchange of Information (AIA) / Common Reporting Standard (CRS):

Under the automatic exchange of information, reporting Liechtenstein financial institutions submit reports to the Tax Administration. The Tax Administration then forwards the received information to the competent foreign tax authority.

The deadline for the submission of reports is June 30 of the following year.

1. CBC-Reporting:

For Country-by-Country Reporting (CBC-Reporting), reporting entities of a multinational group (group turnover greater CHF 900 million) submit a country-by-country report to their national tax authority, which then forwards it to the competent authorities of the partner states. Reports must be submitted to the Tax Administration by December 31 of the following year. Reporting entities based in Liechtenstein must register with the Tax Administration by the end of the first reporting tax period, using the existing registration form for tax information exchange purposes and appendices to the registration form.

1. FATCA

On May 16, 2014, Liechtenstein signed a FATCA agreement based on model 1. Reporting model 1 agreement requires financial institutions to submit reports on US person accounts to the Tax Administration, which then forwards this information to the US tax authority (IRS; Internal Revenue Service). Reporting Liechtenstein financial institutions must register with the IRS and obtain a GIIN (Global Intermediary Identification Number).

For reporting Liechtenstein financial institutions to be able to securely submit electronic reports to the Tax Administration, in addition to registering with the IRS, registration with the Tax Administration is required. Registration with the Tax Administration must be done immediately after the classification has been completed and independently from the identification of reportable accounts.

The reporting data must be electronically submitted to the Tax Administration by June 30 of the following year at the latest.

Double Taxation Agreements (DTA)

The international cooperation of the Principality of Liechtenstein with other states in the area of taxation is regulated in various agreements. The List of all Double Taxation Agreements (DTA) and Tax Agreements regarding Exchange of Information may be found under the following link of the Liechtenstein Fiscal Authority: https://archiv.llv.li/files/stv/int-uebersicht-dba-tiea-engl.pdf 

Executive Summary:

• The tax system in Liechtenstein is complex and multifaceted, with different regulations for natural and legal persons.
• Natural persons are subject to wealth and income taxes, whereas legal entities are liable for the income tax of 12.5% with a minimum income tax of CHF 1,800.
• Dividends received by a Liechtenstein company from other companies are generally tax-free. If the dividend-paying company is a foreign, low-taxed subsidiary generating predominantly passive income, the dividends are taxed at 12.5%. Foreign tax laws apply in case of dividend distributions to entities resident in a foreign jurisdiction.
• Capital gains from the sale of shares in corporations are generally tax-free for Liechtenstein companies. If the sold shares belong to a foreign, low-taxed subsidiary generating predominantly passive income, the gains are taxed at 12.5%.
• Interest income received by a Liechtenstein company from a foreign company is taxed at 12.5%. In case of interest payments from "related parties", the safe harbor interest rates of the Liechtenstein tax administration apply.
• Swiss provisions on stamp duties apply in Liechtenstein unless otherwise specified. Under this regime, a founding tax of 1% of the capital is levied on the formation, establishment, relocation to the country, or capital increase of legal entities, with a general exemption limit of 1 million Swiss francs.
• VAT is considered a commonality between Liechtenstein and Switzerland, causing both territories to form a common VAT single market with the VAT standard rate being 7.7 %.
• International tax law encompasses the Automatic Exchange of Information and FATCA, among others, which regulate the information exchange between international parties. Liechtenstein's international tax cooperation is regulated by various agreements, including Double Taxation Agreements (DTA) and Tax Agreements regarding Exchange of Information.