Liechtenstein Adopts Tax Reform Law


Liechtenstein’s government has approved plans for creating a new tax act, designed to modernize the existing Liechtenstein Tax Act of 1961.

The government considers that the current tax law no longer meets demands for a simple, transparent and competitive system. Changes are also needed to make Liechtenstein's tax legislation compatible with European law. The new tax act – significantly – introduces a 12.5% flat rate corporate tax.

According to Liechtenstein’s Prime Minister Klaus Tschütscher: “The new Tax Act is an important step toward enhancing the attractiveness of our location".

He added that: "Through rapid implementation of this tax reform, we will give more transparency to our citizens and a framework for sustainable growth to our business location."

Regarding simplification of the taxation of natural persons, the new Tax Act continues to provide a combination of a tax on assets and a tax on income. Instead of the existing asset exemption limit and the household deduction, a new increased tax exemption from overall income will be granted.

According to the government, the existing progressive tax schedule will be replaced by a seven bracket schedule. Dividends and other income on capital such as interest, leases, and rents will no longer be taxed separately, but rather via the taxation of assets. Under the proposal, taxation of capital gains as well as the estate, inheritance and gift tax will be eliminated.

Legal persons taxable in Liechtenstein and engaged in economic activities will only be subject to a 12.5% tax on income and the existing capital tax will be eliminated under the new law. In addition, loss carryforwards will no longer be subject to a time limit, and an equity interest deduction will be introduced.

Other important innovations outlined by the government include group taxation for affiliated companies and provisions for the treatment of patent income. The proposal also contains provisions on the tax treatment of national and cross-border restructurings.

The tax reform also provides for the elimination of the "special company taxes" for domiciliary companies, since this special tax type threatens to violate the European Economic Area Agreement with respect to the prohibition of state aid. The proposed reform suggests replacing it with a private asset structure, which facilitates taxation of asset management companies that is attractive yet compatible with European law and thus further strengthens Liechtenstein as an attractive location for asset management.

The proposal provides for elimination of the coupon tax, with the exception of old reserves, which can be distributed in the first two years after entry into force of the new Tax Act at a lower tax rate of 2%. Afterwards, the tax on distributed old reserves will again be 4%.

The proposed Tax Act introduces a new endowment tax for transferring assets to legal persons and for special asset endowments, to the extent these assets are not subject to ordinary taxation of assets. The provisions of the formation tax, which previously was governed by the annual Finance Act, have been incorporated into the Tax Act without any significant changes. The proposal also introduces a new tax on insurance premiums.

With respect to the tax based on expenditure as well as the property gains tax, only small changes are proposed compared with the current provisions. Various adjustments are also made to procedural law, but no significant substantive changes compared to current practice are planned.

The government points out that the future tax revenue and financial impact cannot be predicted with precision, given that, in addition to structural changes arising from the tax reform, international, fiscal policy, and economic factors will have an impact. According to the government, based on the existing estimates, additional revenue of CHF66m (USD59.5m) and CHF54m will be generated in 2011 and 2012, respectively, compared with the current budget plan, but revenues will fall by CHF4m and CHF8m in 2013 and 2014, respectively.