Martin A. Meyer
The Liechtenstein private law establishment with divided or undivided capital
The Liechtenstein private law establishment is a very versatile and flexible legal form which is unknown under Swiss company law and cannot generally be assigned to corporations or foundations. The article deals with the "establishment" as a special feature of Liechtenstein company law.
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The establishment is a special feature of Liechtenstein company law. The basic principles are regulated in the Liechtenstein Persons and Companies Law (PGR) of 20 January 1926. The establishment under private law has legal personality and can be set up either as a corporation or as an organisation similar to a foundation. Due to its flexible form, the Liechtenstein establishment is suitable both for commercial and idealistic purposes and for pure asset management. The so-called "traffic-typical establishment" is the most frequently used form in practice. It has neither members nor shareholders and therefore has no capital divided into shares.02 The establishment typical of the transport sector is a one-man company in which the holder of the founder's rights directly or indirectly exercises all executive functions. Due to its flexibility, this form of establishment is an extremely popular legal form among traders in Liechtenstein. The establishment, which is typical of the business world, must be distinguished from the establishment similar to a foundation, in which the establishment is not equipped with founder's rights. In this case, the administration assumes the function of the supreme body and manages the establishment similar to a foundation.
2. corporate law principles of the establishment in the PGR
2.1 General information
The 4th title of the PGR regulates the corporations under Liechtenstein law. The private-law establishment is described at the beginning of Title 5 of the PGR under the title "The Establishments and Foundations" (Art. 534 ff. PGR). The legal form of the establishment is thus systematically classified in the PGR under the foundations and not under the corporations. Nevertheless, the systematic legal positioning directly after the title of the corporations and before the foundations shows that the establishment is placed between the corporations and foundations and that in the concrete case a foundation-like or corporation-like structure is possible. In simple terms, one speaks of a foundation-like structure if no so-called founder's rights have been issued, i.e. the founders have not taken special rights vis-à-vis the establishment. In the case of a structure similar to a corporation - and this applies to the vast majority of Liechtenstein establishments - these are cases in which the founders have taken certain rights vis-à-vis the establishment at the time of formation.
By definition, the establishment is a legally independent and organised enterprise dedicated to permanent economic or other purposes.03 The private-law institution does not have a public-law character.04 The establishment has its own legal personality, which it acquires by registration in the Commercial Register pursuant to Art. 106 para. 1 PGR.05
Due to the freedom of form, the design possibilities of a Liechtenstein establishment are versatile and can meet economic as well as entrepreneurial needs in different ways. The flexible legal structure enables the pursuit of economic as well as idealistic purposes.06 Examples include trade in goods, acquisition of shareholdings, financing, property management, patent exploitation, leasing or asset management. However, it must be expressly stated in the purpose of the establishment whether the establishment conducts a commercial business. In particular, there is no commercial business if the purpose of the Liechtenstein establishment is merely to manage or invest assets or to hold participations and other rights.07
In principle, the formation of a foundation does not differ from other Liechtenstein legal forms. Both natural persons and legal entities may act as founders, whereby in the case of the establishment only one person is required for the formation.08 After submission of the establishment documents to the Office of Justice, the establishment acquires legal personality by registration in the Commercial Register.09 In addition to the purpose of the establishment, the statutes must also specify the name or the company name including the designation as "establishment", the registered office, the powers of the supreme body, the bodies for administration and any auditors, the manner of exercising representation and the establishment's capital.10
2.3 Founder's Rights
The founder's rights describe the entirety of the powers to which the founder is entitled. In an establishment typical of the transport sector, a single person is the holder of the founder's rights and thus has permanent influence on the activities of the establishment.11 This person constitutes the supreme body of the establishment.12 In this function, he/she determines the administration, issues and adapts the statutes and by-laws and determines the recipients of the institutional assets.13 The founder's rights may be assigned, inherited or otherwise transferred at any time, but may not be pledged or otherwise encumbered.14
The supreme body of the establishment is formed by the holder or holders of the founder's rights.15 However, the terms "holder of the founder's rights" and "supreme body" should not be used synonymously in dogmatic terms. The supreme body is understood to be the decision-making body as a whole, whereas the holder of the founder's rights is the member of this body.16 With regard to the adoption of resolutions, unanimity of the ownership of the founder's rights is stipulated, unless the statutes provide otherwise.17
With regard to competencies, the PGR does not define a catalogue of competencies of the supreme body. Art. 536 para. 2 no. 4 PGR states that the powers of the supreme body must be defined in the statutes. In concrete terms, this means that the supreme body, which also determines the content of the statutes, gives itself its own powers.18 Particularly important in this respect is the authority to determine beneficiaries.
Another body is the administration, which consists of one or more natural or legal persons.19 Ownership of the founder's rights can also be a member of the administration itself.20 At least one member of the administration must be resident in a state of the EU/EEA or Switzerland and must have certain qualifications, i.e. a permit in accordance with the Liechtenstein Trustee Act.21 Establishments which must have a managing director on the basis of the Trade Licensing Act or another special law are exempt from the above obligation.22 The administration assumes the tasks which are not assigned by the statutes to the ownership of the founder's rights.23 In the case of institutions without founder's rights, the administration is the supreme body.24 In principle, the board of directors is responsible for the management and representation of the establishment in its external relations.25 According to Art. 543 para. 1 PGR, the administration may also be entrusted with the powers of the supreme body. According to law, the administration is the only mandatory body of a Liechtenstein establishment.26 If an establishment carries on a commercial business, an audit office must be appointed.27
The Liechtenstein establishment is liable for obligations towards third parties only with the assets of the establishment.28
Finally, there is the question of the beneficiaries (or also beneficiaries, prudents) of a Liechtenstein establishment. The articles or by-laws of the establishment may provide for natural or legal persons as beneficiaries, to whom the income from the establishment's assets or the assets themselves are to be allocated. If no beneficiaries are named in the articles or by-laws, the ownership of the founder's rights is itself deemed to be the beneficiary.29 In practice, the holder of the founder's rights and the beneficiaries are often identical in terms of personnel.30 Nevertheless, due to the wording of the law, the legal positions must be considered separately and the question arises in particular as to what extent the Founder's Rights contain an asset component.31
2.6 Subdivision into institutional shares
The statutes of the establishment determine whether and to what extent there are establishment shares and whether or not they have the character of securities.
2.6.1 Establishment with undivided capital
The minimum capital of the establishment with undivided capital is CHF/EUR/USD 30,000.32 The capital contribution can be made in cash, but also by contribution in kind or a combination of cash and contribution in kind. After the establishment, the capital is at the free disposal of the establishment and can be increased at any time. In general, it is often assumed that a typical establishment does not have a subdivision of the capital into shares.33
2.6.2 Institution with divided capital
Pursuant to Art. 540 PGR, an establishment may be endowed with establishment shares. The form of the establishment shares as securities must be laid down in the articles of association. They are subject to the provisions governing registered shares unless the articles of association provide for more restrictive provisions regarding their transferability.34 In the case of an establishment with divided capital, the minimum capital must be CHF/EUR/USD 50,000, analogous to the Liechtenstein stock corporation.35 The administration must keep accounts of the establishment's shares in accordance with the provisions applicable to a limited liability company.36
3. tax assessment of the Liechtenstein private law establishment from a Swiss perspective
Legal entities can be divided into corporations and foundations. In terms of organisation, the two forms differ in that in the case of corporations, the governing body has a continuous say, whereas in the case of foundations, the will of the founder is determined once and in principle irrevocably.37 As shown, the Liechtenstein establishment cannot generally be assigned to corporations or foundations due to the flexible structuring possibilities. Due to the wide scope for structuring the establishment, it is possible to set up a corporation as well as a foundation-like structure. These circumstances have implications for the tax treatment in Switzerland, which are described below.
3.1 Foreign legal entities
From a Swiss perspective, the qualification of a foreign legal entity is relevant for assessing the existence of a tax liability in Switzerland. For example, the qualification of a foreign company can be decisive in determining whether it is taxed for Swiss profit tax purposes as a corporation under Art. 68 DBG or as a foundation under Art. 71 DBG. In addition, there are numerous areas of application for provisions of Swiss tax law which are only applicable to foreign legal entities. For example, with regard to the qualification of income for purposes of investment deduction or the applicability of double taxation agreements with regard to the reclaiming of withholding taxes. Thus, the qualification of foreign legal entities from a Swiss tax perspective must be carried out in a wide variety of constellations.
The Liechtenstein establishment cannot therefore be transferred into the Swiss legal system without further ado and a qualification from a Swiss tax perspective must be made. The law states that the taxation of foreign legal persons and foreign groups of persons without legal personality is analogous to that of domestic legal persons with whom the legal or factual situation is most similar.38 In order to determine with which domestic legal entity there is the greatest similarity, the first step is to compare the legal characteristics ("comparison of legal types"). In a second step, it is examined whether the actual design and activity are contrary to the result of step 1 ("discrepancy check"). By carrying out these two steps, a solution for the qualification of the foreign legal form that is fair to the individual case should be achieved.
3.2 Comparison of legal types
The comparison of legal types with a foreign legal form is based on their civil law characteristics. In order to determine whether a company has legal capacity from a Swiss perspective, the so-called incorporation theory must be applied on the basis of Art. 154 (1) IPRG.39 The theory of incorporation states that a company is subject to the law under whose provisions it was founded and organised.40 Fulfilment of the foundation regulations, above all the registration and publication regulations, is therefore sufficient to acquire legal capacity.41 The domicile designated in the articles of association or in the articles of association is decisive.42 It must therefore be checked whether the Liechtenstein establishment has been validly founded according to the Liechtenstein foundation regulations. If this is the case, the Liechtenstein establishment is in principle recognised as a tax subject. Subsequently, the legal characteristics of the Liechtenstein establishment must be compared with domestic legal forms. Due to the flexible structuring possibilities of the establishment, a foundation-like or corporation-like structure is possible.
3.3 Case law
In its decision of 11 September 1981, the Federal Court had to qualify a Liechtenstein establishment to assess the applicability of the participation deduction.43 The Federal Supreme Court rulings on the qualification of Liechtenstein institutions with undivided capital from the Swiss perspective are based on this ruling. In terms of content, it concerns the equal treatment of participations in foreign legal entities and participations in domestic corporations and cooperatives. For this purpose, the legal nature and the actual structure of the foreign legal entity are compared with domestic corporations and cooperatives. In order for comparisons to be made, the foreign legal entity must have its common characteristics in addition to the specific features of this legal entity. This means that, apart from the legal personality, it must have at least one independent organisation with a corporate will that guarantees the permanent pursuit of a regular economic purpose independent of the persons of the partners.44
In the case of a Liechtenstein establishment with undivided capital, the Federal Supreme Court assumes that there is no such independent body for corporate decision-making. The reason given for this is the paramount position of the holder of the founding rights, who has enormous freedom of action due to the largely dispositive design of the articles. It is further added that through the design as a domiciliary company45which does not need to develop any activities in the Principality of Liechtenstein, the uncomplicated independence of assets and business transactions is permitted. Thus, the Federal Supreme Court assumes that Liechtenstein establishments with undivided capital have no similarity with a corporation.46
In its ruling of 4 April 2019, the Federal Supreme Court considers that when qualifying a foreign legal entity, the criterion of legal form or the formal structure of the legal personality must be given priority (comparison of legal types). However, when assessing foreign groups of persons without legal personality, the criterion of the actual structure and activity must be taken into account. However, this approach was not to be understood rigidly and it was also necessary to examine whether the actual structure would not lead to the opposite result if a foreign legal personality was present (discrepancy check). If there is a clear discrepancy, a solution that is fair to the individual case should be chosen with regard to the purpose of the analogous treatment to the most similar domestic legal form.47
Nevertheless, the practice of the 1981 ruling is continued in the current ruling of 4 April 2019. It is considered that if a foreign legal personality is present, a comparison of legal types and a discrepancy check with the actual form would have to be carried out.48 However, the Federal Supreme Court subsequently makes only an inadequate comparison of legal types. In order to establish the similarity of the foundations, the only basis is the undivided capital of the Liechtenstein establishment.49 This does not correspond to a comprehensive examination of a comparison of legal types, especially since a Swiss limited liability company can also be founded with only one share and thus, like an establishment, has undivided capital.
In order to carry out a comprehensive examination when comparing legal types, characteristics must be identified by which a Liechtenstein establishment can be compared with domestic legal forms. The division of the capital into shares can be an indication of this. However, the following list shows that further criteria are also relevant for such a qualification and that a similarity to a foundation cannot be concluded solely on the basis of undivided capital. At least the following characteristics must therefore be taken into account when determining whether a Liechtenstein establishment is similar to a corporation or a foundation:
The above-mentioned features make it clear that a Liechtenstein establishment with undivided capital can be structured in a manner similar to a capital company. The blanket assumption of the Federal Court that a Liechtenstein establishment with undivided capital cannot be structured similarly to a corporation is therefore unfounded and it must be examined in each individual case with which domestic legal form there is the greatest similarity in law and in fact. This procedure is also described in the current decision of 4 April 2019, but is not applied subsequently.
3.5 Participation deduction
On the basis of the above criteria, it is possible to qualify a Liechtenstein establishment as similar to a corporation. This has an influence on the qualification of the participation rights in terms of the applicability of the participation deduction according to Art. 69 DBG.
In order to assess the applicability of the participation deduction, Art. 49, para. 3 DBG is applicable by analogy.50 However, the tax treatment abroad must be included as a further criterion.51 If a Swiss corporation holds the founder's rights in a Liechtenstein establishment, it would accordingly have to be examined whether the establishment qualifies as a participation. For this purpose, the procedure described above would have to be followed analogously and, in a first step, a comparison of legal types would have to be carried out. In a second step, it would have to be examined whether there was a clear discrepancy between the result of the comparison of legal types and the actual structure and activity. Based on this, it would have to be decided whether the founder's right qualifies as a participation within the meaning of Art. 69 DBG. However, circular letter 27 of the FTA expressly states that founder's rights of a Liechtenstein establishment with undivided capital do not constitute participation rights within the meaning of Articles 69 and 70 DBG.52
This procedure is not effective. The participation deduction aims to avoid multiple taxation at different participation levels. The decisive criterion for the applicability of the participation deduction should therefore be the question of whether taxation has already taken place at the level of the Liechtenstein establishment. Insofar as taxation has already taken place, the participation deduction should also be permitted from a systematic point of view. The examination of whether the shares of the establishment actually represent participations would accordingly be obsolete.
The Liechtenstein private law establishment is a very versatile and flexible legal form which is unknown in Swiss company law. A general allocation of the establishment to corporations or foundations is not possible. Based on the theory of incorporation, Liechtenstein establishments are generally recognised as tax subjects. With the help of the comparison of legal types, it must be clarified whether the establishment is structured in a similar way to a foundation or a corporation. For this purpose the Federal Supreme Court only uses the criterion of divided or undivided capital. This does not correspond to a comprehensive examination and therefore further criteria have been shown here which are relevant for the assessment of an establishment. These include the existence of founder's rights and beneficiaries, the decision on the distribution of profits and losses, the representation of the company, the transferability of membership rights, the type of resolution, the pursuit of objectives, the beneficial owners, the supreme body, the dissolution and the amendment of the articles of association. By taking a holistic view of at least these criteria, it should be possible to qualify and classify Liechtenstein private law institutions more appropriately as corporations or foundations in the Swiss tax system.
01 The authors would like to thank Fabio Sonderegger, B.A. HSG in Law and Economics, PwC St. Gallen, Associate (Tax and Law) for his active support in the preparation of this article.
02 Office of Justice of the Principality of Liechtenstein, information sheet on the new registration of an establishment (Art. 534 - 551 PGR), point 1.
04 The statements in this article deal exclusively with the Liechtenstein establishment under private law.
05 Cf. also the first sentence of Art. 538 para. 2 PGR.
09 Art. 106(1) PBR.
11 Morocco Graziella: The Institution under the Law of Persons and Companies, Contributions Liechtenstein Institute Research and Teaching, No. 9/1996, p. 7.
12 Art. 543 (1) PGR.
13 Morocco, FN 10, p. 9.
14 Article 541 PGR.
15 Art. 543 (1) PGR.
16 Morocco, FN 10, p. 9.
17 Art. 543 (3) PGR.
18 Morocco, FN 10, p. 9.
20 Office of Justice of the Principality of Liechtenstein, FN 1, point 6.
24 Office of Justice of the Principality of Liechtenstein, FN 1, point 6.
25 Office of Justice of the Principality of Liechtenstein, FN 1, point 6.
27 Article 192(8) PGR; Office of Justice of the Principality of Liechtenstein, FN 1, point 6.
30 Morocco, FN 10, p. 11.
31 Cf. the comments from Morocco, FN 10, p. 13 et seq.
33 However, Morocco, FN 10, p. 16 et seq., states that a certain structuring of the establishment's capital must also be assumed in the case of an establishment typical of the transport sector, with regard to the assignment and inheritance of founder's rights and the determination of the beneficiaries.
37 Morocco, FN 10, p. 8.
39 Oesterhelt, Stefan/Schreiber, Susanne, in: Zweifel/Beusch (eds.), Commentary on Swiss Tax Law, Federal Law on Direct Federal Taxation (DBG), 3rd ed., Art. 49 DBG, no. 42.
40 Eberhard, Stefan/Von Planta, Andrea, in: Honsell/Vogt/Schnyder/Berti (eds.), Basler Kommentar Internationales Privatrecht, 3rd ed., Art. 154, para. 3.
41 Vischer, Frank, in: Girsberger/Heini/Keller et. al. (ed.), Zurich Commentary on the IPRG, 2nd ed., Art. 154 IPRG, no. 2.
42 Vischer, Frank, in: Girsberger/Heini/Keller et. al. (ed.), Zurich Commentary on the IPRG, 2nd ed., Art. 154 IPRG, no. 2.
43 BGE 107 Ib 309.
44 BGE 107 Ib 309, E. 3. b).
45 The tax statute of the domiciliary company was abolished in the revision of the Liechtenstein Tax Act, which came into force on 1 January 2011. The transitional period ended on 31 December 2013.
46 BGE 107 Ib 309, E. 3. c).
48 Federal Supreme Court ruling 2C_564/2017 of 4 April 2019, E. 5.4.2.
50 Duss, Fabian/Altorfer Jürg, in: Commentary on Swiss Tax Law, Federal Law on Direct Federal Tax (DBG), 3rd ed., Art. 69, para. 8a.
51 Duss, Fabian/Altorfer Jürg, FN 49, para. 8a.