On 3 May 2016 the government of the Principality of Liechtenstein published a consultation report on the amendment of the tax law. The proposed changes are expected to enter into force as of 1 January 2017.
With the changes Liechtenstein intends to implement the minimum standards by the OECD and G20 on Base Erosion and Profit Shifting (BEPS). The proposed changes include measures to avoid double non-taxation (Action 2), measures to avoid harmful tax practices, including the exchange of tax rulings (Action 5) and measures to improve tax transparency through the introduction of a mandatory transfer pricing documentation (Action 13).
Additional minimum standards such as Country-by-Country reporting (also Action 13) and the introduction of anti-abuse measures in double tax treaties (Action 6) shall be implemented in autumn 2016 in a separate law and the revision of double tax treaties, respectively.
Please read below how the proposed changes may affect our clients:
Introduction of the correspondence principle for dividends to avoid double non-taxation (Action 2)
Dividend income from domestic and foreign participations in corporations as well as capital gains on such participations are generally tax exempt in Liechtenstein. Under certain conditions, also income received from indirect participations in corporations (i.e. fund investments and investments in partnerships) may be tax exempt.
With the proposed changes, investors in Liechtenstein (shareholders or beneficiaries) shall only benefit from the participation exemption on dividend income if the payment is not tax deductible in the source country.
The introduction of the correspondence principle leads to a number of implementation issues for our clients (e.g. burden of proof regarding taxation in source country) that are currently discussed in the consultation process.
Abolishment of IP-box regime (Action 5)
In 2011 Liechtenstein introduced an IP-box regime in connection with the complete revision of its tax law. The current IP-box regime does not comply with the modified nexus approach by the OECD. Therefore, the Liechtenstein government decided to abolish the current IP-box regime with a phasing-out period of 4 years (i.e. until end of tax period 2020).
Whether a new (BEPS-compliant) IP-box regime shall be introduced subsequently is subject to further analysis by the government and not yet clear.
Spontaneous exchange of tax rulings (Action 5)
The draft legislation introduces the definition of the term “tax rulings” and describes the process of obtaining and the effect of a tax ruling.
The legal basis for the exchange of tax rulings will be article 7 of the Convention on Mutual Administrative Assistance in Tax Matters (MAC) which is currently subject to the national ratification procedure in Liechtenstein. The exchange of the tax rulings as such shall be regulated in the Act on International Administrative Assistance in Tax Matters or a separate law. Based on the current state of knowledge, we understand that the following categories of tax rulings may be exchanged:
- Rulings related to preferential tax regimes;
- Unilateral advance pricing agreements or other unilateral cross-border rulings in respect of transfer pricing;
- Cross-border rulings providing for a downward adjustment of taxable profits;
- PE (permanent establishments) rulings;
- Related party conduit rulings;
- Any other type of ruling agreed by the Forum on Harmful tax practices giving rise to BEPS concerns.
The consultation report does not specify whether tax rulings issued on or after 1 January 2010 that were still in force at 1 January 2014 will be subject to the ruling exchange (as foreseen in the OECD Report on Action 5). Practical questions affecting our clients are currently discussed in the consultation process (e.g. based on which criteria Liechtenstein will judge whether a tax ruling is still in force).
Mandatory transfer pricing documentation (Action 13)
Until now companies in Liechtenstein were not obliged to prepare a transfer pricing documentation. Based on the draft legislation, in future all companies will be obliged to provide upon request by the tax authority (i.e. no periodical filing) documentation regarding the adequacy of transfer prices of transactions with related companies or permanent establishments.
Large companies have to prepare the transfer pricing documentation based on an internationally accepted standard. If a company exceeds the following three criteria, it qualifies as a large company (based on Liechtenstein company law):
- Total assets CHF 25.9 Mio.
- Net revenue CHF 51.8 Mio. and
- Annual average of 250 full time employees.
The draft legislation also contains other changes that are not linked to the implementation of BEPS. In particular, compensations paid to foreign corporations in accordance with their role as a member of the board of directors or management of a Liechtenstein entity shall be subject to withholding tax (i.e. foreign corporations will be subject to limited tax liability in Liechtenstein).
Draft consulation report
Click here to see the draft consultation report.
If you have any questions, please contact me.