date | theme

23. February 2021 | Management of a foundation in Liechtenstein – using organs sensibly

18. February 2021 | Asset management of banking assets of a foundation in Liechtenstein

17. February 2021 | Foundation in Liechtenstein: 6 advantages over a German foundation (this contribution)

11. February 2021 | Establishing a foundation in Liechtenstein: Requirements & Procedure

20. January 2021 | Family Foundation in Liechtenstein: no income tax in Germany

For a long time, foundations in Liechtenstein had the image of a secret depot for tax evaders from the German point of view. In the meantime, foundation law has been adapted there. A foundation in Liechtenstein is now compliant with European law and also internationally transparent.

In addition, a foundation in Liechtenstein has many other advantages over a German foundation. For example, you can set up a foundation in Liechtenstein relatively quickly, because there is no need for recognition by an authority. Even in the case of subsequent changes, one can partly act independently of official supervision. Furthermore, in a Liechtenstein family foundation you can also insert elements that have a non-profit nature. In Germany, two different foundations would have to be set up, a strict family foundation and a charitable foundation. In addition, the Foundation is subject to a taxation of only 12.5% in Liechtenstein. In comparison, a foundation in Germany accrues 15% corporate tax, but usually also a comparable amount of business tax. The foundation in Liechtenstein also has the advantage that Liechtenstein has a territorial tax regime. Therefore, for example, income from Germany is taxed at most to a limited extent.

Foundation in Liechtenstein: Establishment and construction

1. The old image of the foundation in Liechtenstein

Some time ago – and many of our readers certainly remember this – early in the morning investigators of the public prosecutor’s office were at the door of the then head of Deutsche Post, Klaus Zumwinkel. The background to the tax crackdown was that there was information showing that Mr Zumwinkel evaded taxes through a foundation in Liechtenstein. In fact, Zumwinkel was also convicted of tax evasion.

So Liechtenstein was suddenly in the spotlight of the German public, because it apparently opened the possibility that wealthy Germans could evade taxes in this country by transferring the taxable assets to a foundation in Liechtenstein. The damage to Liechtenstein’s image was so enormous that after a short time Liechtenstein changed course with regard to its tax regime, in particular with regard to transparency and alignment with the corresponding standards in the EU/EEA and the OECD. In the meantime, the Principality of Liechtenstein complies with all relevant standards and is internationally recognized as a trustworthy partner in the exchange of information with a tax reference.

Differences between a foundation in Liechtenstein and Germany

Although the Principality of Liechtenstein underwent a reform of its tax legislation and foundation law with a focus on alignment with international standards, a number of differences remain that a foundation in Liechtenstein has compared to one in Germany.

2.1. Family foundation in Liechtenstein can be combined with optional non-profit

On the one hand, in Liechtenstein as in Germany, it is possible to choose between setting up a family foundation and a charitable foundation. But in Germany this is always subject to a strict separation. In Liechtenstein, on the other hand, it is possible to set up a family foundation which, in addition to benefiting certain persons, also opens up the option of using it for charitable purposes if a surplus is generated which exceeds the fulfilment of the services to the destinataries. This may be one reason why the Family Foundation in Liechtenstein accounts for a high percentage of foundations (90-95%), while in Germany it is statistically the opposite (about 5%).

2.2. No official approval is required to establish a foundation in Liechtenstein

Another reason is certainly the circumstances that are necessary to establish a foundation in Liechtenstein and Germany. While one does not need a notary appointment to set up a foundation in Germany, but a permit from the competent foundation authority of the federal state in which the foundation is based (§ 81 BGB), this is much easier in Liechtenstein. Because there is no need for official approval to establish a foundation in Liechtenstein.

2.3. Often no consent to amendments to the Statutes of a foundation in Liechtenstein is required

After the foundation has been set up in Germany, all operations concerning the statutes of the foundation are subject to approval by the respective supervising foundation authority. A similar regulation also knows the foundation law in Liechtenstein. But unlike in Germany, there is a restriction on charitable foundations. Family foundations, on the other hand, can voluntarily take into account the expertise of the competent supervisory authority.

2.4 Minimum capitalisation of a foundation in Liechtenstein

The Foundation Act in Liechtenstein provides for a minimum capital of CHF 30,000 for the establishment of a foundation. Alternatively, you can set up the foundation in Liechtenstein with the same amount in EUR or USD. If you transfer the assets from abroad (for example Germany) to the foundation in Liechtenstein and this causes a gift tax abroad, which the foundation should then pay, then you have to transfer a higher amount, so that the foundation assets the minimum amount is maintained.

In contrast, German law does not provide for minimum amounts for the establishment of a foundation in this country. However, the assets of a foundation must be sufficient to enable the foundation to fulfil its purpose. Thus, one can generally assume a capital in the order of at least EUR 500,000 to EUR 1,000,000.

2.5. The Foundation in Liechtenstein is not a commercial enterprise

Unlike a German foundation, a foundation in Liechtenstein is unable to operate as a commercial enterprise itself. This therefore also has an impact when considering business tax. However, the tax regime in Liechtenstein knows no trade tax. More important, however, is the consequence that a foundation in Liechtenstein must hold a commercial company in order to generate profits from such income. This can be important, for example, when planning the succession of a family business.

2.6. No substitute tax in Liechtenstein

Every 30 years, a foundation in Germany is subject to the inheritance tax on its assets. Thus, the legislator tries to implement an equivalent to the inheritance tax of a natural person. After all, it is assumed that a natural person also transfers his or her property in the course of his or her life via a gift or inheritance. Why should a legal entity managing assets be treated differently?

A foundation in Liechtenstein, on the other hand, can consider this question to be of a purely academic nature. Because in Liechtenstein, a substitute inheritance tax as in Germany or a similar taxation of the foundation assets, which takes place regularly at longer intervals, is completely unknown.

Saving Taxes in Liechtenstein: IP Box and Foundation

The 6 advantages of a foundation in Liechtenstein

Although the previous chapter implicitly anticipated some details, we now turn to the core of the article: the advantages of a foundation in Liechtenstein over its German counterpart.

3.1. Simpler establishment of a foundation in Liechtenstein

As already mentioned, unlike in Germany, no recognition by an authority is required for the establishment of a foundation in Liechtenstein. Therefore, the procedure for establishing a foundation in Liechtenstein is much easier and faster than in Germany.

3.2. High autonomy of the Foundation

This is accompanied by a high degree of autonomy that a founder can grant his foundation in Liechtenstein when it comes to establishing it when it comes to subsequent changes to the statutes. Unlike in Germany, Liechtenstein only requires approval by the supervisory authority when it comes to a purely charitable foundation.

In the case of a family foundation, this opens up the possibility that the foundation bodies can always supplement or fine-tune the statutes without being dependent on the goodwill of other institutions. Thus, it is also possible to react to economic changes that affect the foundation assets directly or indirectly within a reasonable period of time.

3.3. Tax advantage lower tax rate

A key advantage of a foundation in Liechtenstein over one in Germany is also that the effective tax rate in Liechtenstein is lower. In Liechtenstein, the corporate tax rate is only 12,5 % (Article 61 of the Act). Now one may say that it is only marginally higher in Germany at 15%. However, in Germany there is usually also a trade tax, which usually accrues in a similar amount. And since the foundation is a legal person instead of a natural person, there is also no possibility of applying the trade tax to the income tax in Germany.

Quite different in Liechtenstein. Because, as we have already mentioned, there is no trade tax there. So the difference between the tax that a foundation in Liechtenstein has to pay annually and a comparable foundation in Germany is about 17.5 percentage points.

However, it must also be noted that there is an annual minimum tax of CHF 1,800 in Liechtenstein (Article 62 of the Act). This tax is therefore also relevant if there is no income at all.

3.4. Detachment of the foundation assets from the founder

In the case of a foundation in Liechtenstein, it is possible that the founder is neither a member of the board nor of any other organ or body. This allows him to point out in cases of personal liability that the property with which he would normally be liable is by no means under his control. Thus, there is an effective asset protection at a foundation in Liechtenstein.

3.5. No substitute tax in Liechtenstein

It is rare to use the same heading in two different sections in an article. And of course, in order to provide clarity, this should be avoided if possible. But in this case it makes sense. The fact that there is no substitute inheritance tax in Liechtenstein, unlike in Germany, is both a difference and an advantage that a foundation in Liechtenstein can demonstrate compared to its German equivalent. (besides, we have explicitly pointed out the dual use of the same heading, so that no one can credibly make the argument, it was unclear why this was so)

3.6. compound interest effect on the increase in assets of the Foundation in Liechtenstein

Finally, another advantage that a foundation in Liechtenstein enjoys over one in Germany. Because of the lower tax that a foundation in Liechtenstein has to pay every year, it has comparatively more liquid funds available for reinvestment. Now this difference may only make up a few percent, but already in the course of a few decades an enormous development of financial power takes place, so that this compound interest effect should be regarded as a clear advantage of the Foundation in Liechtenstein. Ultimately, founders would like to see the establishment of their foundation usually understood as a long-term asset management, very often even across generations.