Image source: Crossed Flag Pins
If you ask people about perceptions of low-tax jurisdictions in Europe, Luxembourg and Liechtenstein are often two of the first countries mentioned. However, this perception isn’t universally accurate and, before setting up an entity in either nation, it’s important to know what each offers in your circumstances.
When it comes to comparing Liechtenstein and Luxembourg directly, Luxembourg is the better option if you’re setting up a holding or investment company that will primarily own EU assets. If you want to establish a vehicle that holds and manages family assets, then both offer world-class solutions. If you’re starting a commercial company that will trade internationally, Liechtenstein has the lower tax rate but you should look elsewhere.
Companies in Luxembourg enjoy beneficial tax treatment on their passive income, but not on their active trading income. You can incorporate a SARL or an SA under the Companies Law of 1915 and give it what is known as “Soparfi” status, which states that the company’s main purpose is buying and holding stakes in other businesses. The benefit of this is that dividend income is legally exempt from corporation tax. Luxembourg also has favourable treatment for intellectual property royalties, taxing them at an effective rate of ~5%. It is companies like these that are famed for being used by multinationals like Google and Amazon in their controversial tax structuring.
Thanks to the EU’s Parent-Subsidiary Directive, dividends payments to Luxembourg from all EU countries are exempt from withholding tax, allowing the a Luxembourg holding company to receive this income completely tax-free. However, as Liechtenstein is part of the EEA and not the EU, it does not have this advantage unless it has a tax treaty with that country removing such a tax. Here’s a good article on Liechtenstein’s relationship to the European Union. To its credit, Liechtenstein has no tax on foreign dividends for any type of entity, with no need to restrict the entity’s activities to holding and investment to enjoy this treatment.
Luxembourg’s extensive network of tax treaties extends outside the EU to an impressive 60 countries, including China. This opens up opportunities for tax-efficient investing in many more places than through Liechtenstein, which only started building its network of tax treaties in 2009 and must make agreements with each EU state individually.
Family wealth vehicles
If your family is fortunate enough to have significant wealth that you would like to invest through a private wealth vehicle, both Luxembourg and Liechtenstein have attractive options. In fact, Liechtenstein has two: the foundation (Stiftung) and the establishment (also known as an Anstalt). The Anstalt is an interesting and rather unique private wealth vehicle that is worth researching, as it can conduct commercial business as well as holding stakes in other companies, etc. Here’s a quick summary of what a Liechtenstein establishment can do: The Anstalt
Luxembourg’s private wealth structure is the SPF, which allows the owners to manage their own wealth on their own behalf and for other beneficiaries. It is, however, only passive and cannot carry out a direct business of its own. On the other hand, it can start wholly-owned operating subsidiaries to fulfil this purpose if so wished. There’s more information on the SPF at the bottom of this page: types of company in Luxembourg.
Unlike the passive vehicles for which Luxembourg and Liechtenstein are so well-known, their commercial companies are less attractive. For a start, any Luxembourg company that wants to carry out a business of its own requires a business permit. In order to obtain a business permit, the company must have a managing director resident in Luxembourg to control the firm’s daily operations, and the company must have physical premises instead of the simple mailing address permissible for holding companies. In addition, the effective corporate tax rate for business income in Luxembourg is around 29% – hardly in line with the Grand-Duchy’s reputation as a low-tax state!
Liechtenstein’s corporate tax rate is 12.5%, which is far more reasonable. However, this is the same rate as applied in Ireland, which is part of the EU. Although both countries are part of Europe’s Single Market, Ireland’s EU membership streamlines many things, including VAT in cross-border trading. The other blog post that I linked to above, about Liechtenstein’s relationship to the European Union, has more information on why Liechtenstein isn’t so great for commercial companies.
Even if you did want to start a commercial company in Liechtenstein, the requirements are similar to those in Luxembourg: there must be a managing director in Liechtenstein, and the government must grant permission for you to start the business. Liechtenstein is very restrictive in granting residence to foreigners (including Swiss and EU citizens), granting only around 100 residence permits each year. It is therefore unlikely that you would be able to run your own business if you set it up in Liechtenstein.
Both countries are great jurisdictions for certain purposes, but not for all. If you would like to learn more about other company options for your needs or to move ahead with registering your business in Luxembourg or Liechtenstein, contact Healy Consultants Group PLC today.