Liechtenstein may be known around the world mostly as a financial centre, but the largest contributor to its economy is manufacturing. Industry (manufacturing and construction) accounts for 41.6% of the gross domestic product (GDP). The largest branches in Liechtenstein’s strongly export-oriented industrial sector are machine and tool engineering, plant construction, precision instruments, and the dental and food sectors.
Most people in Liechtenstein work in the services sector (around 55 percent of GDP). It is largely Liechtenstein’s banks and trusts that have helped the country achieve a high standard of living. The country´s reputation as a low-tax jurisdiction dates back to the 1920s.
The country’s minimal taxation of foreigners, its strict bank secrecy, and its long history of political stability have been attracting wealthy individuals seeking to reduce their tax liabilities for more than a century. However, unlike some offshore tax havens, Liechtenstein is a well-regulated and transparent jurisdiction. The standard tax rates for individuals and corporate profits are 8% and 12.5%, respectively, making it an attractive destination for businesses and HNWIs.
The Power of Royals
The country has come through a lengthy political wrangle over the role and power of the hereditary monarchy. After an often bitter campaign, the people voted in March 2003 in a constitutional referendum to give Prince Hans-Adam, a successful banker, new political powers, which gave the royals the power to veto parliamentary decisions and to sack the government. The following year, he handed over practical power to his son, Crown Prince Alois, while remaining titular head of state.
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The Swiss influence is part of Liechtenstein’s existence. After the Habsburg monarchy of Austria was abolished, Switzerland replaced Austria as the representative of Liechtenstein’s interests abroad in 1919. Two years later, Liechtenstein adopts the Swiss franc as its currency and, in 1923, enters a customs union with Switzerland. After the outbreak of World War II, the country remained neutral. The principality of Liechtenstein may not be a member of the European Union, but it has close ties to the EU through its participation in the European Economic Area (EEA) and the Schengen Area.
Let´s talk about Tax
In 2002, the country had to face the threat of sanctions after the OECD included it on a list of seven states failing to meet financial transparency and information exchange standards. The situation has calmed down after agreements on the sharing of financial information with a number of countries, including the US, UK, and Germany. In 2009, the OECD removed Liechtenstein from a blacklist of countries that were uncooperative on tax matters.
Six years later, the EU and Liechtenstein sign an agreement to automatically exchange financial information in cases of tax disputes. The EU excluded Liechtenstein from its roster of tax havens after the country adopted legislation aligning its financial transparency requirements with EU norms to demonstrate a commitment to combating tax evasion and illicit financial activities. Nonetheless, its reputation as a low-tax, a.k.a. midshore jurisdiction, remains intact.
In Liechtenstein, taxation is impressively favorable. The jurisdiction has a progressive income tax system that is both lenient and efficient. If an individual earns an annual income below CHF 15,000, they are exempt from paying any taxes. If their earnings are above that threshold, a maximum tax rate of 8% is applied only to profits exceeding CHF 200,000. In addition to this, a communal tax is imposed as a surcharge on the tax rate. Depending on the individual’s income level, the latter ranges from 2.5% to 22.4%. Overall, Liechtenstein’s status as a tax haven makes it an attractive destination for businesses and HNWIs looking to optimise their tax obligations.
Liechtenstein’s corporate law offers some interesting forms of ownership, namely “Anstalt” and “Stiftung”. An “Anstalt” is a unique legal entity type that has no shareholders or board members. If an “Anstalt” is solely involved in investment activities, it is not subject to taxes. On the other hand, a “Stiftung” is a type of foundation in Liechtenstein that provides a high level of confidentiality to its beneficiaries. This is why it is popular among wealthy foreign individuals seeking to protect their assets.
