An overview of the jurisdiction's tax, legal and trust system.

History and Background
In 1719 Emperor Charles VI of the Austro-Hungarian Empire united the Barony of Schellenberg and the County of Vaduz, creating an Imperial Principality. In 1806, the Principality obtained complete sovereignty acceding to the Rhine Confederation. Since 1921, Liechtenstein has been a constitutional hereditary monarchy with a democratically elected Parliament. Since 1989, the reigning Prince was Hans-Adam II, but with effect from 15 August 2004 his heir apparent, Prince Alois, was officially appointed as his deputy.

The Principality has 11 separate and somewhat autonomous communities. The population is approximately 35,000, most of whom are Roman Catholic. The official language is (high) German, although locals speak an Alemannic dialect resembling ‘Schweizer-Deutsch’.

The Parliament consists of 25 members who are directly elected under a system of proportional representation. The government, elected for a period of four years, comprises Prime Minister, Deputy Prime Minister and three other Ministers. The most recent elections in March 2005 returned the incumbent government to power.

Liechtenstein is a member of the Council of Europe, the United Nations, the European Free Trade Association (EFTA), the World Trade Organisation, and the European Economic Area.

The currency is the Swiss Franc (CHF).

Legal System
Liechtenstein has a civil law system, based in part on Austrian law and in part on Swiss law, the major exception being the Law on Persons and Companies 1926 (PGR), which was drafted in Liechtenstein.

There is a distinction between civil and criminal matters (private law) on the one hand, and administrative and constitutional matters (public law) on the other. Courts dealing with private law are the District Court, the Upper Court and the Supreme Court. Civil cases are dealt with at first instance by a single judge and criminal cases are dealt with by one or more judges, depending on the seriousness of the crime. Appeals are heard by Upper and Supreme Courts.

Public law courts are the Court for Administrative Complaints (VBI) and the State Court. The VBI hears appeals from governmental or local authorities, and its decision is final. The State Court monitors the decisions of the VBI and the Supreme Court to determine compliance with the Constitution. It can overturn what would otherwise have been final judgments of those courts.
The EFTA Court in Luxembourg and the European Court of Human Rights in Strasbourg have certain jurisdiction in Liechtenstein.

Recent Developments
• Law on Investment Companies and Investment Companies Ordinance came into force on 1 September 2005, regulating investment companies and investment company managers and implementing EU Directive 85/611 of 20 December 1985 as amended.
• Law governing Asset Management and Asset Management Ordinance came into force on 1 January 2006, for the first time expressly regulating the asset management profession.
• Law on the Statute of the European Company made provision as from 10 February 2006 for the incorporation and recognition of the Societas Europaeae in Liechtenstein.
• Law amending the Law governing Persons and Companies came into force on 10 February 2006, dealing, inter alia, with re-domiciliation of Liechtenstein companies.
• Various amendments to the Public Register Ordinance were made, including procedures to be followed and fees to be paid.
• Entry in force on 1 April 2006 of the Hague Convention on the Law Applicable to Trusts and on their Recognition, 1 July 1985.

Trusts

Introduction
Being a civil law country, Liechtenstein was unfamiliar with concepts of common law trusts until introduced into Liechtenstein by the PGR in 1926. Liechtenstein trusts are now used and accepted the world over as effective, efficient vehicles for a myriad of purposes.

Liechtenstein trust law seeks to codify common law trust principles. A Liechtenstein trust is indistinguishable from and interchangeable with trusts set up in other trust jurisdictions. However, the trust instrument can override provisions in the PGR ‘if the trust instrument so provides’. Further, the settlor continues to have certain rights and liabilities even after the trust has been set up (unless the trust instrument provides otherwise).

The fully discretionary trust is the most popular type. The trustee has overriding discretion as to the appointment of beneficiaries and as to distribution of trust assets. It is not unusual for trusts to have a protector without whose consent the trustee may not appoint or remove beneficiaries or make distributions. Often, the initial settlor will be a nominee. Thus, the protector is often given the power to appoint and remove trustees. There is no perpetuity period in Liechtenstein, so trusts can be of unlimited duration. However, it is usual to provide in the trust deed for a maximum of, say, 100 years, in case the trust should ever migrate to another jurisdiction which does have a rule against perpetuities.

Other forms of trust include:
• life interest or interest in possession trust, where trustees may be required to maintain a fair balance between capital and income beneficiaries
• asset protection trusts (the PGR permits a clause to be inserted into the trust instrument prohibiting a beneficiary’s creditors from claiming against the beneficiary’s beneficial interest), and
• trusts for pension schemes or for collective investment purposes (unit trusts).

Other Forms of legal Entities
The most commonly used entities for offshore purposes are the trust, the private family foundation, the establishment, the trust enterprise, the company limited by shares, the limited company, and the limited partnership. All of these vehicles can be used for onshore purposes too.

Offshore Vehicles
The trust and the foundation are generally used as holding vehicles. The foundation, having its own legal personality, is more popular with clients from civil law countries, whereas clients from common law jurisdictions more often choose trusts. The establishment appears to be unique to Liechtenstein. It is treated as a corporation with legal personality. It is used both as a holding vehicle and for commercial purposes, in which case it must lodge audited accounts with the Commercial Registry. The trust enterprise can, but need not, have legal personality. Based on the Massachusetts trust, it is used principally for commercial transactions, although it can be used as a holding vehicle.

The PGR requires that at least one member of the board of directors or board of foundation or of the trustees must be resident in Liechtenstein and possess the necessary qualifications to obtain what is known locally as the ‘Art. 180a’ permit.

Taxation

Introduction and Developments
Liechtenstein’s current Tax Law (‘SteG’), passed in 1923, was fully revised in 1961. Since then there have been partial revisions. Value added tax (VAT) was introduced in 1995: the present VAT rate is 7.6 per cent.

Each year, a new finance law sets tax rates. Primarily, individuals are subject to wealth tax and income tax. The current rates are 0.054 per cent and 1.08 per cent respectively. These increase depending on wealth and income, and by a local community surcharge which ranges between 180 per cent and 200 per cent.

Assuming a 200 per cent surcharge, the aggregate tax rates in Liechtenstein are between 0.162 per cent and 0.851 per cent for wealth tax, and between 3.24 per cent and 17.01 per cent for income tax. Companies pay capital tax of 0.2 per cent and earnings tax between 7.5 per cent and 15 per cent of net earnings, the latter being subject to a surcharge, which can in certain circumstances increase the maximum rate to 20 per cent.

Tax System: General Concepts of Tax Regime
There is a special tax regime for domiciliary companies and trusts, namely those not carrying on business in Liechtenstein. Arts. 83 and 84 of the SteG set out ‘Special Company Taxes’ that apply. These also apply to trusts. The annual capital tax is 0.1 per cent of the entity’s capital (including reserves), with a minimum of CHF1,000 which is payable in advance. For foundations with assets exceeding CHF2million, the rate is reduced to 0.075 per cent, and again to 0.05 per cent if the assets exceed CHF10 million. In most cases, only the minimum amount of tax (i.e. CHF1,000) is paid each year.

Anti-Money Laundering
The Liechtenstein Due Diligence Law (SPG) was once again overhauled in 2004 to meet ever-increasing requirements in the fight against money laundering. The new law came into effect on 1 February 2005. A new Due Diligence Ordinance (SPV) followed in January 2005 and came into force on 1 February 2005. Suspicious transactions must still be reported to the Financial Intelligence Unit. The SPG covers financial intermediaries, which includes banks, finance companies, fiduciaries, lawyers, investment and insurance companies, the Post Office, and bureaux de change. The SPG requires for each new mandate:

• identity of a contractual partner
• identity of the ultimate beneficial owner(s), and
• a client profile with details as to source of assets being brought into the vehicle, use to which they are to be put, and an estimate as to the amounts and currencies involved.

Bank Client Confidentiality
Bank and professional secrecy is anchored in the Tax Law and law governing savings and loans institutions, both dating from the year 1923, the Due Diligence Law, 2004, the Law Governing Legal Assistance in Criminal Matters 2000, and the Banking Law 2001. A workable compromise has been found between protecting the legitimate interests of bona fide clients and co-operating with relevant authorities in the battle against money laundering and organised crime.