Liechtenstein commits to, and will and has implemented, global standards of transparency and exchange of information as developed by the OECD and will advance its participation in international efforts in order to counteract non-compliance with foreign tax laws.
Liechtenstein negotiates on tax information exchange and other agreements with a view to having a network of such arrangements in place as soon as reasonably possible in order to address the global issue of tax fraud and tax evasion as well as double taxation. In this process, Liechtenstein will emphasise its responsibilities to address both the tax claims of other jurisdictions and the trust of its clients.
With this respect, Liechtenstein will combat for the international acceptance of trusts and foundations what is a principal basis in order to reach the target of international cooperation and reputation. It is interesting to see that clients from certain countries have it much easier within this new environment of tax cooperation. No wonder that financial intermediaries travel more and more to jurisdictions like Russia and China where there is no inheritance and gift tax, and the income tax rate is very moderate. The burden to shift fortune from one person to the other is not the same outside of the European Union, what automatically translates into a more «sympathetic» tax environment. The entrepreneurs have much more room to plan the proper situation to run their business. In the European Union, it is more and more the tax man who drives the business of the entrepreneurs, and the results of this are clearly seen with a rather negative result ("Depardieu effect?").
For example, in Russia foundations and trusts are positively treated as follows:
- No gift or inheritance tax on endowments into foundations/trusts since 1 January 2006 for Russian individuals.
- Distributions to Russian individuals by foundations or trusts generate a 13 % income tax for the Russian individual.
- Therefore amounts received by a foundation or trust do not have to be declared by the Russian beneficiary until he/she receives it personally.
There might be an obligation to declare a beneficial interest in trusts or foundations. If a trust/foundation is properly structured as a discretionary structure, there is no beneficial interest. If control by settlor can also be avoided, it may also be a "anti-monopoly" planning instrument?
Foundations can be used for purely private-benefit purposes (e.g. to cover the costs of education, learning, equipment and support, etc.) or for purely common-benefit purposes (e.g. to support and promote charitable, artistic, scientific and social work) or to control the management and the successor directors of a company. They can also be used for partly private-benefit and partly common-benefit purposes. Where it is not exactly clear from the statutes or the supplementary by-laws what the foundation's purpose is, the foundation will be classified as a common-benefit foundation. Foundations are not suitable for pursuing purposes that are purely commercial in nature (here Liechtenstein trusts are more flexible). They may only carry on a business run along commercial lines if this serves to achieve their common-benefit purpose or if the scope and nature of the shares they hold make a commercial business necessary. The object of a foundation in the form of a private asset structure (PVS) must preclude business activity (e.g. the exercise of control over participating interests).
Trusts can be used in a similar way and benefit from more flexibility. It is even possible that the trustees are no longer resident in Liechtenstein. In order such a Liechtenstein trust is registered, a legal agent is needed.
Asset protection:
Creditors of the founder/settlor
The collective person or special endowment must be set up at a time when the founder/settlor can provide economic backing for the foundation/endowment. Creditors may assert their claims for a maximum of five years.
Founder's/settlor's heirs
The set-up for asset protection is promoted by private international law (Liechtenstein Act on Private International Law, IPRG). Claims by a person entitled to a compulsory portion in the estate to supplement that portion, brought against a Liechtenstein collective person or special endowment, must be eligible under the applicable law of succession; they must also be admissible under the law applicable to acquisition of the assets. The law of Liechtenstein can often be chosen to govern the acquisition of assets by the collective person or special endowment. Under the law of Liechtenstein, claims to supplement a compulsory portion of an estate can only apply against gifts made in the two years prior to the death of the testator. This weakens foreign claims to supplement a compulsory portion of the estate, which are brought against Liechtenstein collective persons and special endowments. What counts is that the founder/settlor has not reserved all rights of set-up, and that the bodies are not contractually bound to obey instructions.
Beneficiaries' creditors
Founders of family foundations may provide that the creditors of beneficiaries may not remove their freely acquired benefit entitlement or justified expectation, or individual claims deriving from these, by means of security proceedings, debt enforcement or bankruptcy. Such provision can only be made for mixed family foundations where the respective entitlement serves the objects of the foundation.
Set up
There are several possibilities to transfer assets to family members or business partners. You can do it during your life as a lifetime gift, upon death as an estate with or without a will (handwritten or not) or through the establishment of a foreign trust from countries like Liechtenstein.
The documents (foundation statutes or trust deeds) are not really very much of difference from country to country. So the document is not the key issue to which country to shop around for the right document. There must be other questions and answers to take out the proper structure.
Possible questions are:
- Where will my assets be which should be brought into the foundation/trust?
- How many people have to decide/resolve the transfer of assets into the trust?
- Where will I and my family members live now and in future?
- Will the place of living be important as to the structuring of the trust deed?
- If yes, how important is it to have an independent trustworthy trustee having a long track history?
- How internationally focused should my trustee be?
- Will the set up of a trust be a part of (pre-)nuptial agreements, and if yes, how flexible should the respective country be on this?
- Should my business be continued if I can no longer decide, and if yes, do I want to plan who continues the business? Do I want to make sure that the right directors of the business are appointed?
- How important is it to me to have trustees with international knowledge, who are responsive, who have a certain distance from my home country for independence, who take a global approach considering my ideas?
- How important is it to have trustees who have knowledge on estate transfers for more than just one generation?
These are some important questions which a potential client raises? And the more the client needs consultancy and a globalized approach for the set up, the more this speaks for trustees from regulated places like Liechtenstein where trustees must be licensed and are supervised by the Financial Market Authority.
Why use of a foundation/trust?
An investment or management of a structure, will, in basic terms, involve an individual (founder) holding, directly or indirectly, the majority of the shares in a company. The first observation to make is that individuals, being human beings, are not well-suited to owning assets because of what may happen to them. For example, they may die, lose capacity, be affected by human relationships and emotions or be the victim of blackmail or kidnapping in certain countries. Where an individual holds most of the shares of a company, the consequences of any of these events can be severe, ranging from chaos and uncertainty to complete paralysis of the management of a company.
Such possibilities are often overlooked, and, as the timeline for the management of a company is rather a long-term one, there is a significant period during which the company is at risk. For example, despite popular misconception, on the death of the founder, the founder's shares in companies of certain countries will not pass automatically to the deceased's surviving spouse or to the founder's eldest son or to whomever's name is inserted into the stock transfer form. Only those with the authority of the respective court can instruct the directors of company in respect of the shares – such as where to transfer them or how to exercise votes attaching to them. Until such a time, the shares (i.e. the controlling interest in the company) are paralysed. Administration can easily take six or nine months (longer if contentious) – a critical time in the proper management of a company where directors should be integrated.
In addition, following such a court process, it is likely that, as part of the administration of the founder's assets, the shareholding will be broken up and placed in the hands of more than one person – none of whom will have control. If these persons are family members, there may be family infighting, which can only damage.
Incapacity of the founder may result in even greater uncertainty, as there may be heated debate about whether the founder lost capacity and when. Or, in certain cases, the loss of capacity may only be temporary and the founder will recover. What happens during this time? Again, until the court has stepped in, there will be uncertainty and paralysis relating to the shares of the company.
Of course, there are countries where such elements are of less preoccupation, but in certain countries – more eastwards from Liechtenstein – such thoughts might be quite important. And as the tax situation in such countries is much more relaxed, there is much more flexibility to set up the proper structure and be tax compliant. So there is a real economic advantage, for the individual, but also for the state, as both look for the long-term management of the company which saves working places.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
