Liechtenstein is a country that does not require a vast network of double tax treaties (DTA) mostly because of its advantageous fiscal system which grants no withholding taxes on interests, dividends, and royalties paid to non-residents and a reduced corporate tax.
The following list of questions highlights the most important aspects regarding double taxation relief in Liechtenstein. For detailed information and answers to other questions, we invite you to reach out to our tax lawyers in Liechtenstein.
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What is the purpose of the DTA?
Companies that engage in business in more than one jurisdictions may be subject to double or even more tax rates, as per the local tax laws in the locations in which they have opened permanent establishments. This can hinder the development of the business and even discourage investments. The double taxation agreements, drawn up as per the OECD model, are a solution to this problem. The treaties are a manner of making sure that no companies or individuals that derive income from multiple sources are subject to discriminatory taxation. On the other hand, the treaties also serve the purpose of information exchange, so as to avoid taking advantage of the beneficial rates.
The double tax treaty allows for the avoidance of double taxation when an individual or corporation derives income both from Liechtenstein and another jurisdiction with which a DTA is in force. Under the agreement, the foreign taxes can be offset against domestic taxes when the agreement allows for the existence of a tax credit or under the principle of reciprocity.
For the purpose of the agreement, the legal entity must be treated as a resident establishment, as per the definitions set forth in the document. Other types of income, such as pensions, director’s fees, income from movable and immovable property can be subject to double taxation relief.
Our team of tax attorneys in Liechtenstein can provide investors with complete information about the types of income treated in such an agreement.
With what countries has Liechtenstein signed DTAs?
The first treaty ever signed was with Austria in 1969, followed in 1995 by the treaty signed with Switzerland. Two more treaties were signed in 2009, with Luxembourg and San Marino. The year 2010 has brought two treaties with Uruguay and Hong Kong. Another double tax treaty (DDT) was signed with Malta in 2013. Also, in 2013, Liechtenstein has signed various updates of the treaties, such as the one with Switzerland (DTA Treaty Update), Austria (to add Organization for Economic Cooperation and Development model tax provisions on tax information exchange to their existing DTA), with UK and Germany (a new DTA effective in 2013). Other counties with which Liechtenstein has signed double tax treaties include Singapore, Hungary, the Czech Republic, the United Arab Emirates. As of November 2019, Liechtenstein has signed 20 double taxation agreements and a number of Tax Information Exchange Agreements. In some cases, only the latter applies.
Our team of lawyers in Liechtenstein can give you complete information about the provisions of these treaties if you are a foreign investor from one of the signatory states.
What are the taxes covered by the DTAs and the conditions for double tax relief?
The taxes covered by the double tax treaties in case of Liechtenstein will, in most cases, refer to the following types of taxes:
- the personal income tax;
- the corporate income tax;
- the wealth tax;
- the corporation taxes;
- the coupon tax;
- the real estate capital gains tax.
In order to benefit from these provisions, the applicant must deliver to the Liechtenstein tax authorities a tax certificate from the country of residence for proving that the taxes are already paid in that country.
In order to prevent the tax frauds, the treaties contain provisions on the tax information exchange, if they are elaborated under the OECD model. According to it, the Liechtenstein tax authorities may require information related to taxpayers from the partner countries and reverse.
Below, our tax lawyers in Liechtenstein highlight the ley provisions of the reductions available under the double taxation agreement signed with the United Kingdom:
- Property income dividends: taxed at a 15% rate.
- Interest and royalties: subject to full tax relief.
- Government pensions and other pensions or annuities: not subject to relief.
- Other income: subject to double taxation relief.
- Personal allowances: not subject to the scope of the treaty.
Liechtenstein has also signed tax information exchange agreements with the same purposes of avoiding tax frauds with: USA (2008), United Kingdom (2009), Germany (2009), Andorra (2009), Monaco (2009), France (2009), St. Vincent and the Grenadines (2009), Ireland (2009), Belgium(2009), Netherlands (2009), Antigua and Barbuda(2009) and St. Kitts and Nevis (2009). In 2013, tax information exchange protocols were updated with India, Canada, and Japan.
Tax residency under Liechtenstein double tax treaties
In order to determine how a double tax treaty applies, tax residency is one of the main aspects that need to be considered when it comes to the levies Liechtenstein citizens and companies must pay in another country. The same principle applies to foreign citizens and businesses with which Liechtenstein has double tax agreements in place.
Tax residency is essential in order to avoid the imposition of similar taxes on taxpayers conducting activities in the two countries.
Liechtenstein’s double tax treaties cover individuals and companies and their business or employment incomes for the purpose of taxation. In the case of natural persons, tax residency implies the countries they are citizens of. However, there can also be exceptions to this rule and an individual can also be considered a tax resident of a country where most of activities are completed or he or she has stronger ties with. For those with dual citizenship, the main country of residence will be the one in which the person has stronger relations in.
When it comes to businesses, tax residency establishment follows simple rules and there are three scenarios that may apply:
- the first implies the country in which the company is registered;
- the second refers to the country in which the company has the management;
- the third cover companies with fixed places of business.
Exceptions in the case of natural persons where tax residency is not cleared implies specific agreements reached by Liechtenstein and the other contracting party. In the case of companies, separate regulations apply to permanent establishments and associated enterprises.
The taxation of foreign companies in Liechtenstein can be explained by our lawyers with competence in tax legislation.
Permanent establishments and associated enterprises under Liechtenstein’s DTAs
Liechtenstein’s double tax conventions contain specific provisions on companies operating here and the other contracting state through branch offices and subsidiaries. While the subsidiary is treated as a domestic enterprise and will not pose any tax difficulty as it will be treated as a tax resident of the country it operates in, branch offices will be deemed as permanent establishments. However, there are also other activities that can fall under the scope of permanent establishments. Among these, we mention the following:
- fixed places of business through which a foreign enterprise completes activities partially or wholly;
- places of management;
- offices established for specific periods can also be considered permanent establishments;
- factories, workshops, gas wells, quarries, and mines.
Liechtenstein and another contracting country can decide on how these permanent establishments are taxed. Usually, these are taxed only in the state they operate in order to avoid double taxation. A condition for an operation to be considered a permanent resident is for it to be maintained for a specific period of time in the other country (the period can range between a few months and a calendar year).
Our lawyers in Liechtenstein can offer more information on the taxation of companies in the Principality. You can also rely on us if you need assistance in setting up a business and registering it for taxation and VAT purposes with the local tax authorities.
Taxation of various assets under Liechtenstein’s DTTs
Foreign citizens and companies can hold various assets in two countries that have double taxation treaties in place. As a matter of fact, such an agreement can benefit them to avoid double taxation.
Some of these valuable assets are real estate property. No matter if these are held for commercial or residential purposes, such properties are taxed in the country they are located. So, properties located in Liechtenstein and owned by foreign private individuals or corporations will be taxed in the Principality.
It should be noted the income derived from real estate ownership, such as rental or lease can be subject to different tax regulations according to the double taxation agreements signed by Liechtenstein.
How to benefit from Liechtenstein’s double tax treaties
The simple fact that a country has a double tax agreement with Liechtenstein does not mean that a natural person or company resident of the respective state will automatically benefit from its provisions. In order to obtain tax reliefs, the foreign person or company must register with the Liechtenstein tax authority or present a tax certificate issued in the home country through which the Principality’s tax agency will not impose a similar tax here.
What is the tax regime in Liechtenstein?
Liechtenstein has a low tax regime. This is one of the reasons there are fewer double taxation agreements compared to the agreements for tax information exchange.
The withholding taxes paid by entities of the local Liechtenstein companies are exempt or minimized by the provisions of the DTAs. The interests, royalties, and dividends paid to the foreign entities by the Liechtenstein companies are exempt by law.
Our tax lawyers in Liechtenstein highlight the main taxes below:
- 12.5%: this is the value of the corporate income tax in Liechtenstein.
- 1,800 CHF: this is the alternative minimum tax, applicable to some types of companies (except for small businesses).
- 0%: there is no withholding tax rate on dividends, interest or royalties; there is also no capital duty.
- 12%: this is a tax levied on the remuneration received by the Board members of Liechtenstein companies.
- 1%: this is the value of the stamp duty levied on contributions to equity.
- 7.7%: this is the standard VAT rate in Liechtenstein; lower rates of 2.5% and 3.7% apply to certain types of goods and services.
Investors should note that for stamp duty purposes Liechtenstein is considered part of Switzerland. As far as VAT registration is concerned, companies are required to register if they have an annual turnover in excess of 100,000 CHF.
In Liechtenstein, the tax year is the same as the accounting year and companies are expected to file the tax return by the first of July the year following the tax year for which the assessment is made. In some cases, it is possible to extend this term. The actual payments are to be made by the end of August (August 31) following the tax year. Failure to file or late filing results in penalties.
The double tax treaties can also apply to income derived by individuals, not only by corporations. For example, an individual who derives a type of income from Liechtenstein may derive another form of income from his or her country of origin. In this case, the provisions of a double tax treaty between Liechtenstein and the taxpayer’s country of origin may prove beneficial for the purpose of a single point of taxation for a given type of income (as specifically stated in the text of the treaty).
As far as the income of individuals is concerned, Liechtenstein imposes a progressive rate of up to 8%. To these, municipal multipliers apply that can range between 1.5 to 2.5%. In practice, these have a value of 1.5 to 1.8%. The maximum rate is calculated at 22.4%. Net wealth is subject to income tax – the value of net wealth is multiplied by 4% in order to calculation notional income from wealth, to which the income tax is applied. As noted above, a 12% tax applies to the income received by Board members of Liechtenstein companies. Those who occupy this position have unrestricted tax liability when the remuneration derived in such a manner is higher than 200,000 CHF. Our lawyers can provide additional details.
Entrepreneurs who have additional questions about the taxation regime or the manner in which double taxation avoidance is applied can reach out to the tax experts at our law firm in Liechtenstein. Our agents can help investors understand the current tax law, the VAT law as well as the compliance requirements. Moreover, we can help with representation in front of the tax authorities, the National Tax Administration.
Liechtenstein offers a favorable taxation regime as well as a good business climate. A stable economic and legal system, as well as a high degree of political stability, also contribute to the favorable conditions.
If you are interested in more information about how you can avoid double taxation for your company you may contact our law firm in Liechtenstein.