The Liechtenstein Foundation Law Reform 2008

By Stefan Mätzler and Andrew Baker, Miselva Etablissement, Liechtenstein (06/01/2009)

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: 

  1.    As under the old law, the founder can in principle freely choose the purpose of the   foundation. The founder may pursue charitable or non-charitable purposes and, for instance, establish the foundation to provide for his or her family members. As under the old law, unconditional distributions will continue to be possible.
  2.    The founder must henceforth lay down the purpose of the foundation at least in outline and determine the circle of beneficiaries in the foundation documents. The founder may not delegate this task to the foundation board. This is intended to strengthen the founder's responsibility for his or her own foundation. 
  3.    Where foundations are formed through professional trustees, the trustor (‘economicfounder’) will continue to be deemed the founder in a legal sense. All rights reserved by the founder (e.g. right of amendment or revocation) are vested in the founder on a personal basis. The founder's rights cannot be transferred or bequeathed. This does not entail any dilution of confidentiality, since the identity of the founder does not have to be disclosed externally. In external relations, the founder can exercise his or her rights through the professional trustee. 
  4.    Charitable foundations are henceforth subject to supervision by a newly establishedfoundation supervisory authority. Charitable foundations must also establish an auditor responsible for annual verification that the foundation assets are managed with care and conform to the foundation purpose.
  5.    Non-charitable foundations, especially family foundations, are as a rule not subject tosupervision by the foundation supervisory authority. To monitor the foundation board, the beneficiaries have rights of disclosure and information at their disposal. Alternatively, however, the founder may also restrict or exclude these rights of the beneficiaries by establishing an internal controlling body, such as an auditor, or by voluntarily placing the foundation under supervision by the foundation supervisory authority. 
  6.    Charitable foundations must be entered into the Public Registry. 
  7.    Non-charitable foundations, especially family foundations, are not subject to entry intothe Public Registry. Unlike under the old law, the foundation deed now no longer needs to be presented to the Office of Land and Public Registration for review. Instead, a notice of formation by the foundation board suffices, the content of which must be confirmed by an appropriate professional (preferably a lawyer or a professional trustee). 
  8.    The organisational structure of the foundation remains flexible. As a rule, the foundation need only have a foundation board to manage the foundation assets. To ensure realisation of the founder's intent even more effectively, the foundation board must have at least two members (corresponding to current widespread practice). Only charitable foundations need establish an auditor as a second governing body. Beyond this, the founder is free to create or refrain from creating other governing bodies.
  9.    As under the old law, the founder may belong to the foundation board and/or be a beneficiary himself or herself. 
  10.    Under the old law governing foundations, adjudication turned out to be the engine of further development and specification of the legal situation. The new foundation law incorporates many of the ideas developed by the courts, thus ensuring legal clarity and certainty.

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.