Liechtenstein: Domestic Corporate Taxation
Calculation of Taxable Base
The new Tax Act provides for the taxation of all net corporate income. Net corporate income is to be determined on the basis of annual accounts, among other points, the accounts must include the following provisions:
- The balance of the profit and loss statement;
- All parts of the operating result separated out in the calculation of the balance of the profit and loss statement that are not used to cover commercially justified expenses;
- Write-downs, value adjustments and provisions, to the extent they are not commercially justified;
- Either straight-line or declining balance depreciation methods are allowed. Higher rates may be permitted on occasion. There are detailed schedules of depreciation rates applicable to various types of asset;
- Gains on realisation of assets are taken to taxable income;
- Capital gains derived from real estate situated in Liechtenstein are considered taxable income;
- Allocations to the reserve fund, to the extent they are not commercially justified, subject to any tax-privileged provisions previously exempted by Government ordinance and earmarked for the purpose of establishing reserves for the provision of employment and research and development funds;
- Profits distributed to the members or partners of the undertaking or to holders of non-membership dividend rights (participation certificates, founder's shares) or to persons with a close relationship to them as well as hidden profit distributions;
- Trading losses may be carried forward, but not backwards;
- Group taxation is permitted
Not to be included in the calculation of taxable net corporate income are:
- Capital brought in by members of capital companies including premiums and payments for which no return is expected;
- Capital growth due to inheritance, bequest or gift.
The summary below describes the situation as it was under the previous Tax Act:
Profits tax (and capital tax, see below) were levied only on the proportion of income (or capital) that the Liechtenstein operation beared to the company's world-wide operations; plus, in the case of profits tax, any profits remitted to Liechtenstein. The interpretation of this rule was complex.
The following were some of the main provisions affecting calculation of the taxable base for the profits tax:
- Inventories were to be stated at the lower of cost or market value; FIFO was usually applied. General reserves up to one third of value were usually accepted without demur.
- Capital gains, otherwise than from real estate, were treated as taxable income.
- Capital gains from real estate were taxed at between a minimum of 1.2% and a maximum of 35.64% (sic) depending on the amount of the gain, the length of time the property was held, etc etc.
- Foreign dividends after taxation were included in taxable income (but in the case of foreign subsidiaries, this interacted in a complicated way with the 'proportion' rule stated above, especially because there was no group relief in Liechtenstein).
- Companies could capitalise reserves or undistributed profits, but any resulting increase in the carrying value of shareholders' interests would be counted as taxable income for the company.
- Either straight-line or declining balance depreciation methods were allowed. Higher rates were permitted on occasion. There were detailed schedules of depreciation rates applicable to various types of asset. Goodwill could be depreciated at 25% per annum (declining balance) or 12.5% (straight-line).
- Gains on realisation of assets were taken to taxable income.
- Trading losses could be carried forwards for two years, but not backwards.
- There was no group relief.
- All taxes paid, including profits tax, were deductible from income in the accounting period in which they were paid (the year after the fiscal year, usually).