Dividends and capital gains from participations in legal entities are generally tax-free income for legal entities that are subject to ordinary Liechtenstein income tax. The income tax exemption applies both to income from qualifying investments and to income from portfolio investments. However, since the “new” Liechtenstein Tax Act 2011 came into force, various anti-abuse provisions have been included in the law:
According to the correspondence principle, dividends do not qualify as tax-free income, but are classified as ordinary taxable income if the distribution can be claimed as a tax-deductible expense by the paying company. The legal provision is applicable for a shareholding of at least 25%. If the requirements are met, the corresponding dividends are subject to ordinary income tax at a rate of 12.5%.
As a further anti-abuse provision, the so-called “switch-over provision” was enshrined in law in the 2019 tax year, with a three-year transitional period until December 31, 2021 applying to existing structures. From the 2022 tax year, the provision will therefore apply to all structures.
This provision only applies to participations in foreign legal entities. The provision therefore does not apply to participations domiciled in Liechtenstein. Legal entities with their registered office abroad, but which are subject to Liechtenstein income tax due to their place of management, are deemed to be domestic participations for the purposes of the switch-over provision. In addition, participations with an actual economic activity are not affected, but only those that generate the majority of passive income.
Passive income includes interest or other income from financial assets, license fees or other income from intellectual property and income from finance leases, as well as profit shares and capital gains from investments in foreign legal entities that meet the requirements as low-taxed companies.
If an investment meets the aforementioned requirements, the next step is to check whether low taxation applies at the level of the investment. In principle, both direct tax burdens and indirect prior tax burdens – e.g. tax on the income statement – are included non-recoverable foreign withholding taxes – must be taken into account, whereby the following rules are applicable based on the shareholding ratio:
- In the case of a shareholding of less than 25%, low taxation is deemed to exist if the nominal tax rate abroad is less than half the domestic tax rate. Currently therefore in the case of less than 6.25%.
- If the participation rate is at least 25%, the effective tax burden in the comparable domestic case must be compared. Low taxation is given if the comparative calculation results in an effective tax burden of less than 50% of the domestic case.
If the requirements are met and a low-taxed participation exists, the tax-free income from the corresponding participation is reclassified. Dividends and capital gains are counted as taxable net income and are subject to ordinary income tax of 12.5%.
If tax-free income is claimed, the taxpayer has the burden of proof. Corresponding evidence must be submitted with the tax return. In this context, it should be noted that the place of actual management of foreign subsidiaries is increasingly being questioned and must be proven to the Liechtenstein tax administration.