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20 March 2018 Liechtenstein releases consultation report on implementation of anti-avoidance rules into tax law On 20 February 2018, the Liechtenstein Government released a consultation report on proposed amendments to the Income and Municipal Tax Act. The new regulations are driven by the review of international tax practices by the European Union (EU) Code of Conduct Group and are intended to ensure that Liechtenstein's tax law is in line with EU-accepted tax standards.
Furthermore, Liechtenstein's Government proposes additional amendments of the Income and Municipal Tax Act with respect to specific definitions of tax terms and the assessment of source taxation. The EU Code of Conduct Group has confirmed that Liechtenstein tax law is generally in compliance with the EU's criteria on tax transparency, fair taxation and Base Erosion and Profit Shifting minimum requirements but the group also identified some remaining issues with respect to Liechtenstein's corporate taxation regime. In a letter dated 24 October 2017, the EU asked Liechtenstein to add specific anti-avoidance rules and to amend the Income and Municipal Tax Act respectively by the end of 2018. In November 2017, Liechtenstein's Government committed to implement the requested amendments and to revise Liechtenstein's tax law in order to comply with the EU's request. Political parties and interested parties are invited to comment on the proposed amendments by 9 April 2018. Implementation of anti-avoidance rules in connection with dividends and capital gains derived from participations in foreign entities Under current Liechtenstein tax law, dividends are generally tax-exempt. However, dividends from participations exceeding 25% of the voting rights or capital which are tax deductible at the level of the distributing entity are excluded from this tax exemption. Capital gains derived from the sale, liquidation or unrealized appreciations of participations are generally tax-exempt. Under the proposed anti-avoidance rules, dividends from participations of foreign entities will not be tax-exempt if the following requirements are met cumulatively:
This anti-avoidance rules only apply to dividends received from foreign participations. Possible revenues from passive sources include interest income, royalties as well as dividends and capital gains derived from passive sources. Entities, in which the participation quota amounts to less than 25% of the voting rights or capital, are considered low taxed if they are subject to an effective tax rate of half or less of the Liechtenstein effective tax rate, i.e., 6.25%. If the participation quota is 25% or more, an entity is considered as low taxed if the effective tax burden of that entity under foreign tax law is half or less of the tax burden calculated according to Liechtenstein tax law for equivalent circumstances. Analogously, capital gains derived from sales, liquidations or unrealized appreciations of participations in foreign entities, which meet the requirements as stated above, are not tax-exempt. The current Liechtenstein tax law permits the deduction of deemed interest on equity from the taxable profit (so-called notional interest deduction, NID). Besides the existing general anti-avoidance rule contained in the Liechtenstein tax law, further anti-avoidance rules regarding transactions with related parties are proposed with respect to the NID. In its review, the EU Code of Conduct Group concluded that the existing anti-avoidance rules are not sufficient and may not cover specific intercompany transactions which would lead to an abusive application of the NID. Therefore, the proposed amendments of the Income and Municipal Tax Act introduce additional anti-avoidance rules which deny the additionally resulting NID for specific intercompany transactions if their main purpose is to increase the NID. The listed intercompany transactions include the following:
Currently, losses resulting from the revaluation of participations are tax deductible under Liechtenstein tax law (the recapture of such revaluation losses which were tax deductible would on the other hand be taxable). The asymmetric treatment of profits such as dividends and capital gains – which are tax-exempt – and of losses resulting from participations – which are tax deductible – was criticized by the EU Code of Conduct Group. As a result, the Liechtenstein Government proposes elimination of tax deductions on participation losses. On the other hand, a future recapture of such losses should be qualified as tax-exempt capital gain. Losses on participation which were already declared as tax deductible under the current law, however, in the case of a recapture would still be subject to tax under the proposed regulation based on a transitional provision. Besides the above-mentioned adaptions, the proposed revision sets forth additional (minor) amendments of the Tax Act in particular regarding definitions of certain tax terms and changes regarding source taxation. The consultation phase for the proposed tax law amendments will run until 9 April 2018. Following the consultation period, the draft tax law will be submitted to Parliament for approval. The debates and respective voting should take place by the end of 2018. It is expected that the new rules will apply for the tax year 2019 (for entities the tax year 2019 is the reporting period ending in calendar year 2019). Document ID: 2018-5437 |
