Liechtenstein Regrets EFTA Captives Ruling


Liechtenstein’s government has acknowledged the recent ruling by the European Free Trade Association (EFTA) Court of Justice that its 1998-2010 taxation of captive insurance companies (captives) constituted unlawful state aid.

Commenting on the decision, Liechtenstein’s Prime Minister and Finance Minister Klaus Tschütscher declared that the court had simply not accepted the arguments put forward by both the government and the companies concerned. Tschütscher also expressed his grave disappointment that the confidence of the captives in the regularity of Liechtenstein’s objective tax provisions had only partly been recognized in the ruling.

On March 24 last year, EFTA’s surveillance body ESA found that the Principality’s 1998-2010 provisions on the taxation of captive insurance companies was incompatible with European law and that it represented unlawful state aid under Article 61 of the European Economic Area (EEA) agreement.

Under the tax rules which ESA assessed in the contested decision, captive insurance companies paid a capital tax of 0.1% on their own capital instead of the regular 0.2% capital tax. For capital exceeding CHF50m the tax rate was further reduced to 0.075% and for capital in excess of CHF100m to 0.05%. In addition to paying lower amounts of capital tax, captive insurance companies were also exempt from the duty to pay coupon tax. Moreover, Liechtenstein tax law considered captive insurance not to constitute economic activity and accordingly did not subject it to business income tax.

The Principality of Liechtenstein filed an application against this decision with the EFTA Court, which was later followed by the applications of Reassur Aktiengesellschaft and Swisscom Re, both captive insurance companies registered in Liechtenstein.

In its judgment, the Court found that captive insurance companies were, at least to some extent, exercising an “economic activity”, thereby qualifying as “undertakings” under Article 61(1) EEA. The Court also held that the contested measures fulfilled the criteria of selectivity inherent in Article 61(1) EEA as only captive insurance companies benefitted from the tax measures. In the Court’s view, it has not been demonstrated that this selective advantage is justified by the inherent logic of the Liechtenstein tax scheme. The measures had been expressly adopted by the national authorities as a means of attracting certain undertakings to take up activities in Liechtenstein and improve their competitiveness. The Court also found that the aid granted was liable to distort competition and to affect trade between the EEA States and dismissed the applicants’ arguments that the contested measures should, in the alternative, be regarded as “existing aid”.

As a result of the decision, Liechtenstein was asked to amend the provisions to bring the fiscal treatment of its captive insurance companies in line with European law and to recover the state aid from the beneficiaries.

In light of ESA’s ruling, Liechtenstein submitted an action for annulment of the decision to the EFTA court on May 21 last year. Defending its provisions, Liechtenstein argued at the time that they did not constitute unlawful state aid given that captives only insure risks that are not otherwise insurable on the markets. Liechtenstein also argued that recovering the aid breached the principle of protection of confidence.

Liechtenstein’s new law pertaining to the taxation of captives, which entered into force in 2011, is in accordance with the EEA agreement, the government says. Tschütscher therefore emphasized that the judgement has no bearing the Principality’s current tax law.