Stefan Mätzler and Andrew Baker assess the objectives and principles of the new reform.
The So-called ‘Tax Evasion Scandal’
In the last few months, Liechtenstein – a small, wealthy, well-governed country with sound legal institutions, a very low level of corruption and proper checks and balances on government – was at the centre of a tax evasion scandal that has reverberated around Europe. A former employee of a Liechtenstein bank was paid by German intelligence to turn over a stolen disk with data apparently containing evidence of widespread tax fraud by residents of Germany and elsewhere by using, inter alia, Liechtenstein Foundations. Liechtenstein received most of the bad press, although some journalists did stop to consider whether Germany and the other countries involved do not, in fact, have themselves in large part to blame, with their ridiculously high tax rates and over-complicated tax systems. It is still too early to predict what exactly the fallout from this scandal will be, but one can assume that the international pressure (the financial system being modern warfare’s newest front) will force Liechtenstein to change its strong principles of banking secrecy and to co-operate on tax matters, to a limited extent at least.
How Does the Foundation Law Reform Fit into this Picture?
Liechtenstein Foundations – often used for tax planning – are of the utmost importance for the Liechtenstein financial centre and its ability to remain competitive. Nevertheless it is important to point out that the Liechtenstein Foundation Law Reform had already commenced in 2001 as a reaction by the Liechtenstein Government to the 2000/2001 crisis connected with the jurisdiction’s temporary blacklisting by the Financial Action Task Force (FATF). Therefore the Foundation Law Reform has to be seen as entirely detached from the above-described tax evasion scandal. However, since the tax policy and the tax climate have become more political than ever in Europe, it is no surprise that the Liechtenstein Foundation Law Reform is being watched very closely by other (European) countries. In this article I would like to give an overview of the main parameters of the Liechtenstein Foundation Law Reform, which will come into force on 1 April 2009.
Motive, Objectives and Principles of the Reform
Until recently the foundation law was regulated in the Law on Persons and Companies (PGR) in just 18 rudimentary articles. These provisions also required onward reference in certain cases to the law on trusts and to the complicated provisions of the law on trust enterprises (TrUG). The last major revision of the foundation law took place in 1980 and it is no surprise that since then both professional practice and court jurisprudence have developed and, indeed, diverged, thus leading to a degree of legal uncertainty.
Basically, the Liechtenstein Foundation Law Reform now aims to harmonise foundation law (and practice) with the relevant jurisprudence, in particular providing a new systematic structure and greater differentiation between the key issues. These changes are intended to give increased clarity to those applying the law and to strengthen the institution of the the Liechtenstein Foundations in general.
The main principles of the new foundation law are:
(a) New systematic concept
The new foundation law presents itself as a self-contained body of law embedded in the PGR and comprising 41 articles; there are no more references to the law on trusts or the TrUG.
(b) New systematic structure
The new law redefines the concept of the foundation and creates two categories of foundations with different legal consequences. On one side there are private-use foundations such as family foundations and on the other are charitable foundations. Charitable foundations need to be entered in the Public Register, but private-use foundations do not.
(c) Enhanced responsibility of the founder
The new foundation law provides that the basic terms of the foundation must be defined by the founder himself. Furthermore, existing legal uncertainties related to the fiduciary formation of foundations, the description of the foundation’s purpose, or the legal nature of the founder’s rights are substituted with clear provisions.
There is a new stipulation that only the person on whose behalf the foundation is set up (the economic settlor) is to be treated as the founder and that the founder’s rights (e.g. the right of amendment or revocation and the right to change the foundation documents) are not assignable and not inheritable.
(d) New rules on foundation governance, different options for structuring the information rights of beneficiaries
A new legal and practical framework has been introduced for monitoring the activities of the foundation, aimed at protecting the foundation from misconduct and providing greater legal certainty. It permits the founder to leave monitoring either in the hands of the beneficiaries or to shift its emphasis to other executive bodies of the foundation (e.g. towards a protector).
(e) New rules governing public foundation supervision, including establishment of a foundation supervision authority
A new central foundation supervisory authority is to be created as a competence centre. Its main task will be to supervise charitable foundations to ensure compliance with the founder’s wishes. Private-use foundations, whose supervision is fundamentally carried out internally by the beneficiaries, can choose voluntarily to be subject to external, public supervision by the new supervisory authority.
(f) Clear accounting provisions
Foundations subject to public supervision (i.e. charitable foundations) are obliged to appoint an auditor who will be responsible for carrying out comprehensive audits each year. Private-use foundations do not need to appoint an auditor but are themselves responsible for setting up an appropriate accounting system.
(g) Clear transitional provisions
Basically the new foundation law is only applicable to new foundations. Existing foundations are subject to the old rules unless expressly stated otherwise in the law. Note here, in particular, that the new provisions concerning foundation governance and foundation supervision also apply to existing foundations.
The main differences between the old and the new foundation law are:
The above wording is based on an information sheet published by the Liechtenstein Government in 2008.
Liechtenstein’s New Foundation Law and the Future
There is no doubt that the primary intention of the new foundation law is to reinforce the position of the private-use foundation as the cornerstone of Liechtenstein’s financial centre. In doing so, the new law seeks to give clarity in areas where, over the years, professional practice has perhaps developed beyond tolerable bounds. Much time was taken in considering the reform and many different views and opinions were given. Of particular interest were the discussions as to whether a private-use family foundation should be able to be structured as a discretionary vehicle. The end product goes too far for some and not far enough for others. However, as the saying goes, the proof of the pudding is in the eating; only time will tell if the right balance has been found.
Stefan Mätzler and Andrew Baker, Miselva Etablissement, Liechtenstein