Tucked away neatly in the mountain valley between the Swiss canton of St. Gaul on the south and west and Austria on the east and north is tiny Liechtenstein, one of the smallest countries in the world. While small in size (just 65 square miles), Liechtenstein is a giant as far as offshore financial centers and tax havens are concerned, and is reputed to be the third richest country in the world. Liechtenstein's fame doesn't stem from the mere selling of postage stamps, although a sheet of pre-war agricultural designed stamps with a face value of SFr 5 is now worth some SFr 3,000. It's Liechtenstein's celebrated tax and political systems, celebrated for its minimal taxation of foreigners, its strict bank secrecy (more impregnable than Switzerland's), and its long history of political stability that make her a powerhouse among the financial centers.
Principality of Liechtenstein
comprises the former territories of the County of Vaduz and the Lordship of Schellenberg. These were first united by inheritance in 1434 with the status of fiefs of the Holy Roman Empire. As you would expect, Liechtenstein today is predominantly Roman Catholic. At the beginning of the eighteenth century the two territories were purchased separately by Prince John Adam Andrew of Liechtenstein, whose name was taken from Liechtenstein's Castle, a former family possession south of Vienna. In 1719, the two >territories were formerly reunited as the "Principality of Liechtenstein".
The head of state today is Prince Franz Joseph II whose Gutenberg castle overlooks the capital of Vaduz. Inside Prince Franz' castle is a vast fortune in paintings, sculptures and tapestries, many bought directly from the great masters themselves. The royal family is also the principal owner of one of only three banks doing business in Liechtenstein, i.e.,
LGT Bank In Liechtenstein
As a sovereign state since 1806, Liechtenstein has developed strong ties with both Austria and Switzerland. The official currency is the Swiss Franc, which is freely convertible into any other currency at prevailing market rates. Because Liechtenstein maintains no standing army (the frontier defense is furnished by the Swiss), there is no military budget to appropriate. This little haven boasts inflation of only 1.4%, a budget surplus, and no national debt. As if all this wasn't enough to be proud about, Liechtenstein levies no income taxes against any company that is domiciled there, provided the company does not receive Liechtenstein source income.
Anstalts, Stiftungs, Holding and Domiciliary Companies
For a country of just 28,000 people, pint sized Liechtenstein boasts more nonresident business entities than population. It is said there are between 30,000 and 60,000 trusts (called
), although the exact number appears to be a well-kept state secret. In Vaduz the lawyers outnumber the bankers. Moreover, with some 330 firms specializing in consulting, management and insurance, employing over 1,600 people, you don't have to look long for advice. A nonresident can form an anstalt (English translation is establishment), which must have a minimum paid-in capital of SFr 30,000 (about US$18,000), or a joint stock company (or AG) with a minimum capital of SFr 50,000 divided into either registered or bearer shares. There are two types of joint stock companies permitted, i.e., holding and domiciliary. Another unique entity called a Stiftung (foundation) is also popular in Liechtenstein.
An anstalt is a separate entity much like a corporation. Like a corporation, it can have a business purpose. The original founder of an anstalt is generally a Liechtenstein lawyer of trust company, but he commonly resigns after the registration and transfers all rights on a "declaration of cession" to an unnamed successor (the real investor). This document is often held in a Swiss or Austrian bank vault, keeping the identity of the client doubly obscured. An anstalt may elect to divide its capital into shares like a holding company, but if it so elects it will be subject to Liechtenstein's 4% coupon tax (a type of dividend withholding tax), as are all holding and domiciliary companies. Other than this coupon tax, an anstalt would not be subject to any income taxes in Liechtenstein. Its tax liability would be limited to Liechtenstein's annual capital tax, calculated as 0.1% of all capital and reserves.
Aristotle Onassis is said to have kept over half his wealth in a Liechtenstein "public wealth foundation", the purpose and activity of which was, and still is, a well-kept secret.
There is some doubt among professionals whether the IRS will recognize an anstalt as a legal entity, and some European courts (namely the Belgium and Italian) have held that they are not. U.S. Professor Marshall J. Langer believes the IRS might categorize an anstalt as either a trust or an alter ego of the current holder of the founder's rights. Revenue Ruling 77-214 and several letter rulings published in 1977 (and later revoked) requires every company to have associates if it is to be classed as a company for tax purposes. Since an anstalt has no associates, Langer believes Americans and other nonresidents might do best to steer clear of exploiting the anstalt, and opt instead for a domiciliary or holding company.
According to Professor Langer…
"A nonresident alien should avoid using an anstalt to invest in U.S. property or securities, otherwise he runs the risk that he will be taxed personally on its income and, even worse that the Anstalt's U.S. stock and real estate will be taxable U.S. property for estate tax purposes upon his death."
Holding and Domiciliary Companies
A holding company is a corporate body having its registered seat in Liechtenstein with a purpose of entirely or mainly administering or managing assets and investments. The domiciliary company is a legal entity incorporated in any of the forms governed by the Persons and Companies Code that has its registered seat in Liechtenstein, but carries out no commercial activities within the country. The status for the qualification as domiciliary or holding company is therefore merely a question of the company's purpose. Business entities having the status of domiciliary or holding companies are:
Exempt from any income tax, property tax (with exception for real estate in Liechtenstein) and capital gains tax
Not required to file a tax return, but merely furnish audited financial statements to the tax authorities
Must maintain an office in Liechtenstein, but the registered seat need be nothing more than a mailing address
- Afforded absolute secrecy regarding tax matters.
Stamp taxes & 4% Coupon tax
Liechtenstein has a thriving industrial base in addition to its tax haven styled economy. Normal tax rates range from 7.5% to 15% for companies manufacturing within the country, with an innocuous 4% coupon tax (another name for dividend withholding tax) on cash (or in kind) distributions to shareholders. The withholding tax applies to holding and domiciliary companies and anstalts limited by shares. It is also applicable to certain loans with durations over two years.
Other hidden Liechtenstein taxes to consider are a stamp duty due on the transfer of shares or bonds in foreign (0.3%) or domestic issuers (0.15%), and a 3% formation stamp tax due on the creation of shares or participation rights in a company. To understand better how a typical anstalt domiciliary or holding company might be started-up and taxed under the Liechtenstein tax system, let's look at an unpretentious example.
Example # 1:
Nonresident international businessman X claims Campione in the nearby Swiss Alps his tax home. X invests $50,000 as paid-in capital in his Liechtenstein holding company Y, and lends an additional $950,000 short-term for two years to company Y. In 1989, holding company Y re-invests the entire proceeds in U.S. Treasury bonds issued after July 18, 1984 paying 10% interest pa.
The annual interest earned on the T. bonds would amount to $100,000 pa. No U.S. withholding tax will be withheld by the U.S. Treasury on payments of interest to Y, because the Tax Reform Act of 1984 repeals all interest withholding taxes on "portfolio" type bond interest. Since company Y does not carry-on any business within Liechtenstein, no income taxes will be levied on Y. However, a capital tax equal to 1/10th of 1% of the paid-up capital and reserves of Y (but excluding the 1st year profits of Y) will be payable annually to the Liechtenstein tax administration. This computes to a capital tax of $50. However, a minimum capital tax of SFr 1,000 (about US$620) is payable by every company, so the actual first year capital tax paid will equal $620. This equates into a 0.62% profits tax rate, so far.
Assuming no dividends are paid to non-resident shareholder X, the 4% coupon tax could be avoided, leaving no further taxes to be levied against company Y. To secure a tax free capital gain, X might sell the shares in Liechtenstein holding company Y to a friend in Campione. It should be pointed-out that when holding company Y purchases or sells the $1,000,000 in U.S. treasury bonds a stamp transfer tax equal to 0.3% (or $3,000) will be payable to the tax administration. In addition, a0.15% stamp tax on the face value of the $950,000 Liechtenstein corporate loan (or $1,425) will be payable upon its culmination with X. A one time formation stamp tax of 3% (or $1,500) of the $50,000 paid-up share capital of Y would also be payable. Effectively, the overall tax rate of nonresident X's holding company would equal about 7% in start-up year 1989. In 1990 the taxes payable would drop to only $620, for an effective tax rate of only 0.62%, assuming no additional stamp transfer taxes were incurred.
Bank in Liechtenstein (BIL)
Liechtenstein's banks are smallish by international standards, and tend to be overshadowed by the Principality's specialized business in trusts and domiciliary companies. Outside the small National Bank there are just three banks in Liechtenstein you can contact. The oldest is Lichtensteinische Landesbank founded in 1861. Landesbank, however was recently acquired by the Bank in Liechtenstein - or BIL for short. BIL was founded in 1920.
BIL has approximately US$3.8 billion dollars on its balance sheet. Top management is cosmopolitan, consisting of board members from First Austrian Bank and Bank Leu in Zurich. Chairman of the Board Christian Norgren is from the Wallenberg Empire in Sweden. BIL's Paris branch boasts Prince Phillip of Liechtenstein as the vice-chairman. Prince Phillip's presence highlights the fact that BIL has one voting shareholder - a Foundation for the Royal Family's assets.
According to Reinhard Schmolz, chief executive officer of BIL (UK), there is a grand total of SFr 340 billion (or US$210 billion dollars) in funds being managed by BIL. The true figure has never been made public. BIL has offices in Hong Kong, Cayman, New York, Rio de Janeiro, Frankfurt, Lugano, Zurich, Geneva and London. Its overseas staff has increased by about 320 in the past three years.
BIL is a subsidiary of the Prince Franz Joseph II Von und zu Liechtenstein Foundation. Guided by a formidable board of trustees, including Dr. Alfred Herrhausen of Deutsche Bank (Germany's largest). BIL has convinced many of Europe's millionaires to invest their money with them, making BIL's private client portfolio management department one of the largest in the world.
Bank secrecy and confidentiality of one's financial affairs are so guarded in this community that Professor Naylor publisher of "Hot Money" has alleged that various foreign secret services and criminal groups are using the tiny territory for their money laundering. While screening out spies and undesirables may be a difficult task for Liechtenstein's little government, legitimate tax planners financiers can rest assured that Liechtenstein's landlords aim to keep a respectable image. According to Prince Hans Adam, Liechtenstein's Regent, a 1980 revised company law now requires that "any commercial enterprise administering trusts or investments funds, to have qualified mangers and auditors which requires a government license to operate."
For Americans, landlocked Liechtenstein is only slightly less accessible than the Bahamas, Bermuda and Cayman Islands. The northern border touches the international railway between Basel and Innsbruck while the highway from Switzerland to Austria leads right through Vaduz. Zurich's airport is only one hour away by highway.
If you travel by train you should depart at the Swiss border town of Buchs and take one of the frequent yellow PYY coaches to Vaduz. The journey takes about 20 minutes less than if you go through the other Swiss station at Sargans, or Feldkirch in Austria. Vaduz has no taxicabs and no major hotels, but there are about 200 first-class beds available, including 30 at the grand old Vaduzer Hof. If you're looking for a place to put your money where taxes are low, you should take a trip to pint sized Liechtenstein and explore the possibilities.
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