What is a Foundation?

A Foundation is a legally and economically independent special-purpose fund which is formed as a legal entity (legal person) by a unilateral declaration of will from the founder. The founder specifies the foundation purpose and the beneficiaries.

What means discretionary?

Discretionary means, that the beneficiaries and/or their entitlements to the foundations are not fixed, but are determined by the criteria set out in the regulations (by-laws) by the settlor (founder of the foundation).

It is common for the settlor to leave a letter of wishes for the foundation council members to guide them as to the settlor's wishes in the exercise of their discretion. Letters of wishes are not legally binding documents.

This set-up provides a very high level of asset protection.

Foundation with fixed beneficiaries

The Foundation will be incorporated by the founder (settlor). The Foundation will have namely known (fixed) beneficiaries who have direct access to the assets within the Foundation. In contrast to the discretionary Foundation, the fixed defined beneficiaries have legal rights and are able to decide about the use of the assets (if desired by the settlor).

Another possibility would be, that the founder (settlor) himself becomes the first beneficiary during his lifetime. He has full control of the Foundation’s assets and has also the right to revoke the Foundation at any time.

Further body of control - Protector

The situation for a founder to separate himself from assets is not an easy step and needs a lot of trust in the involved parties (foundation council members). To provide a further protection of the assets within the foundation, the founder can implement a Protector. Normally this is an independent person, who controls and authorizes the activities and actions of the foundation council members. WITHOUT the authorization of the protector, the foundation council members are not obliged to act in the name of the foundation.

Why Liechtenstein?

Liechtenstein is globally recognized as one of the leading centers for wealth management and the establishment of foundations. This is due to several factors:

Stability and Security: Liechtenstein offers political and economic stability, making it a safe haven for international capital.

Discretion and Data Protection: Data protection in Liechtenstein is strictly regulated, ensuring the privacy and confidentiality of your financial affairs.

Flexible Foundation Law: Liechtenstein's foundation law is particularly flexible, allowing founders to tailor the foundation to their specific needs. It also provides strong legal frameworks to protect assets from unauthorized claims.

Tax Advantages: Liechtenstein offers attractive tax conditions, allowing for efficient asset management with minimal tax burden.

Tax Situation in Liechtenstein

For foundations, there are two types of taxation:

lump sum taxation CHF 1,800.00 (Private Asset Structure - PAS)

Income taxation of 12.5% on net profit

In order for a foundation to receive the lump sum taxation status, it must meet some requirements of the tax authorities. The chance to obtain this status is very likely.

However, there are some issues such as loans, holding of active companies (commercially active companies) that would be detrimental to this status. Generally, depending on the structuring, the probability of obtaining this status is very high. I will gladly come back to this in more detail if necessary.

If the lump sum tax status is not applicable, the foundation is taxed in Liechtenstein with 12.5% on the net profit. However, it is important to mention that capital gains, dividends and rental income are tax free in Liechtenstein.

Depending on the structuring, no tax (except for the minimum income tax of CHF 1,800.00) is due on the above-mentioned tax-free income.

However, the taxation of the foundation abroad is different. It is important to mention here that a foundation can be set up in a fiscally transparent or non-transparent manner.

Fiscally Transparent

Fiscally transparent means that the assets contributed are no longer attributable to the founder from a civil law point of view, but are still privately attributable to the founder from a tax point of view.

This arrangement is suitable if the reason for setting up the foundation is merely the aspect of asset protection. If a transparent foundation generates income such as capital gains, financial income, dividends, etc., these are to be credited to the founder for tax purposes in his country of residence and taxed privately.

Withdrawals from a transparent foundation are therefore not taxable privately either, since the foundation is fully attributable to the founder for tax purposes. The contribution to such a foundation is also tax-free.

Fiscally Non-transparent

The complete opposite of the Transparent Set-up is the Non-Transparent Set-up.

With this variant, in addition to the civil law protection of the assets, we also achieve a tax shielding effect from the perspective of the founder. This means that also the tax consideration is no longer imputed to the founder at his country of residence (tax domicile).

If the foundation generates financial income, capital gains or similar, these are not privately attributable to the founder and are therefore not taxable.

However, if a withdrawal is made from a non-transparent foundation, this is taxable as income (distribution) at the founder's respective place of residence.

The main difference for the founder is that, depending on the country, the contribution of assets to a non-transparent foundation is considered as a gift and is subject to gift tax

It is important to check whether the foreign tax law levies a gift tax on the contribution of assets to a non-transparent foundation. This should be clarified with a local tax advisor.

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