What benefits do Liechtenstein foundations and trusts offer for asset protection and wealth preservation?
Some of us are in a fortunate position where asset protection and wealth preservation are not much of a concern because we live in countries where corruption is rare, governments are relatively stable and creditworthy, courts and governmental authorities are efficient, crime rates are low and chances that illegitimate claims will be enforced against our assets are remote.
For people living in a country where one or more of these factors are missing, however, the danger to their assets may be real and the fear that their wealth may fall into the hands of others without justification may be well-founded. For those who are legitimately concerned about asset protection and wealth preservation, Liechtenstein foundations and trusts offer distinct advantages which will be described below.
Let there be no mistake: Liechtenstein provides legal assistance in criminal matters to other countries and has entered into treaties allowing the exchange of information in tax matters with an increasing number of jurisdictions. Furthermore, the creditors of a founder or settlor of a Liechtenstein foundations or trust are not without protection under Liechtenstein law: any gratuitous transfers to a trust or foundation may be challenged by creditors of the founder/settlor within one year from the transfer. If such creditors can prove intent of the founder/settlor to defraud creditors, the statute of limitations is five years.
However, for those who are looking for a safe haven for their assets without any pressure from existing creditors and want to structure their wealth in a tax-compliant way, Liechtenstein foundations and trusts offer the following advantages:
(1) Protection of privacy
In case of Liechtenstein (private) foundations, registration in the trade registry is voluntary. Even if a private foundation is registered, the identity of the founder or the beneficiaries is not disclosed. The names of the foundation council, however, are mentioned.
In case of Liechtenstein trusts, there is a registration requirement (mainly to ensure the payment of the annual tax of CHF 1,200), but this registration does not include the names of the settlor or beneficiaries.
(2) No pre-trial discovery proceedings
In contrast to a number of jurisdictions, in case of pending or threatened litigation there is no duty to disclose documents to the adversary. The only documents that may need to be disclosed upon a court order in the course of litigation are documents so-called “common documents” of the plaintiff and defendant, such as written contracts between them, or other contracts where there is a preexisting obligation to disclose them.
(3) No enforcement of foreign judgments
Liechtenstein does not enforce foreign judgments without a re-litigation on the merits unless there is an enforcement treaty (or other binding declaration) in place with the country whose courts rendered the judgment. This distinguishes Liechtenstein from a large number of jurisdictions, in particular those influenced by common-law, which often enforce foreign judgments if they were rendered in fair proceedings. Other jurisdictions only enforce foreign judgments if the other country would do the same, but have a presumption of such reciprocity.
So far Liechtenstein has only concluded enforcement treaties with Switzerland and Austria and a multilateral convention on the mutual enforcement of certain child support judgments. Liechtenstein is not a member to the Lugano Convention on Jurisdiction and the Enforcement of Judgments, and EC Regulation 44/2001 on jurisdiction and the recognition and enforcement of judgments does not apply.
In the absence of an enforcement treaty, foreign judgments may be used by a plaintiff to obtain a preliminary court order in Liechtenstein. However, the defendant may bring legal action against such a preliminary order so that the dispute will need to be re-litigated in Liechtenstein in any event.
(4) Short statute of limitations for a challenge of the transfer of assets to the foundation
In order to protect creditors, any gratuitous transfers to a trust or foundation may be challenged by creditors of the founder/settlor within one year from the transfer. The statute of limitations for transfers to the foundation/trust is five years from the transfer of assets to the trust or foundation if creditors can prove intent of the founder/settlor to defraud them.
After the expiry of these deadlines, no challenges of the transfer of assets to the foundation or trust are possible under Liechtenstein law, provided that the Liechtenstein foundation/trust is structured appropriately. In particular, decisions must be taken by the foundation council/trustee, and the foundation should not be seen as the alter ego of the settlor/founder or the beneficiaries.
(5) No attachment of the interest of beneficiaries
Both, Liechtenstein foundation and trust law, grant considerable flexibility when it comes to the determination of the rights of the beneficiaries in the trust or foundation documents. However, when asset protection is a concern, in many cases a discretionary structure with several possible beneficiaries is preferable where distributions of the capital or income of the foundation or trust are left to the discretion of the foundation council/trustee. This will ensure that there are no legal claims of the beneficiaries that can be attached by third parties.
Taxation of Liechtenstein trusts and foundations
Liechtenstein trusts are subject to an annual tax of CHF 1,200. Liechtenstein foundations may apply for the tax status of a “Private Asset Structure”, provided that they only hold private wealth and do not engage in economic activities. A foundation taxes as such a Private Asset Structure is only liable to pay the minimum annual profit tax of CHF 1,200, and no tax filing needs to be made.
However, even without this special tax status, certain types of income, including all dividends and capital gains from participations and any revenue from foreign real estate are exempt from the otherwise applicable 12.5% profit tax. In case of a foundation which only holds the shares of a holding company, it may therefore not be worthwhile to seek the status of a Private Asset Structure because any dividends and capital gains from the participation will be tax exempt even under regular taxation.
Besides the taxation in Liechtenstein, in each case the tax consequences of the establishment of the trust/foundation and any distributions from the trust/ foundation in the jurisdictions of the settlor and the beneficiaries need to be considered carefully with the assistance of local advisers. https://www.marxerpartner.com/