International Tax Planning and Transfer Pricing Planning: Liechtenstein from a US perspective

Autor:Professor Dr. Rainer Zielke
Cargo del Autor:Professor in business economics at Østfold University College, Halden, Norway
Actualizado a:April 2017
 
EXTRACTO GRATUITO

Professor Dr Rainer Zielke[1]

Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The low tax country Liechtenstein in the OECD context
    • 2.3 Transfer pricing rules of Liechtenstein
      • 2.3.1 Country-per-Country (CbC) reporting
      • 2.3.2 Transfer Pricing
      • 2.3.3 4. Calculation of the case studies in international tax planning between Liechtenstein and the USA
      • 2.3.4 Design of the tables
      • 2.3.5 The treaty Liechtenstein-USA in brief
      • 2.3.6 BEPS Project progress
      • 2.3.7 Liechtenstein in brief
      • 2.3.8 The USA in brief
      • 2.3.9 Design of case studies
      • 2.3.10 Case study 1: Dividends from Liechtenstein to the US
      • 2.3.11 Case study 2: Interests from Liechtenstein to the US
      • 2.3.12 Case study 3: Royalties from Liechtenstein to the US
      • 2.3.13 Case study 4: Management and technical service fees from Liechtenstein to the US
      • 2.3.14 Case study 5: Capital gains with Liechtenstein as asset country to the US as seller country
      • 2.3.15 Case study 6: Dividends from the US to Liechtenstein
      • 2.3.16 Case study 7: Interests from the US to Liechtenstein
      • 2.3.17 Case study 8: Royalties from the US to Liechtenstein
      • 2.3.18 Case study 9: Management and technical service fees from the US to Liechtenstein
      • 2.3.19 Case study 10: Capital gains with the US as asset country and Liechtenstein as seller country
    • 2.4 Concluding remarks
  • 3 Notes
Abstract tax planning

Liechtenstein participates in a customs union with Switzerland and employs the Swiss franc as the national currency. The country imports about 85.00% of its energy. Liechtenstein has been a member of the European Economic Area (an organization serving as a bridge between the European Free Trade Association (EFTA) and the European Union) since May 1995. The government is working to harmonize its economic policies with those of an integrated Europe. Since 2002, Liechtenstein's rate of unemployment has doubled. In 2008, it stood at 1.5%. The gross domestic product (GDP) on a purchasing power parity basis is $5.028 billion, or $89,400 per capita, which is the second highest in the world. In Liechtenstein, corporate tax is levied at a flat rate of 12.50%, which is the lowest in Europe. There is no withholding tax on dividend, interest and royalty payments. Resident corporations carrying on activities in Liechtenstein are generally taxed on their worldwide income. However, dividends and capital gains from domestic and foreign participations are tax exempt irrespective of the capital percentage and the holding period. According to the OECD, Liechtenstein today deposited its instrument of ratification for the Convention on Mutual Administrative Assistance in Tax Matters ("the Convention"). By doing so, Liechtenstein underlines its commitment to fighting tax evasion and avoidance and takes another important step in implementing the Standard for Automatic Exchange of Financial Account Information in Tax Matters developed by the OECD and G20 countries as well as automatic exchange of Country-by-Country Reports under the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project. Liechtenstein committed to implement automatic exchange of financial account information in time to commence exchanges in 2017 and was amongst the first signatories of the CRS Multilateral Competent Authority Agreement (the "CRS MCAA") and the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (the "CbC MCAA"), which are both based on Article 6 of the Convention. The Convention will enter into force for Liechtenstein on 1 December 2016. This chapter provides a survey on the actual tax law frame conditions in Iceland and provides practical support in international tax planning and transfer pricing planning between Liechtenstein and the US based on cross border case studies.

Abstract transfer pricing planning

Until 1 January 2017, Liechtenstein did not have specific transfer pricing rules apart from the rule that intra-group transactions are carried out at arm’s-length terms. [2] However, since the tax law amendments entered into force on 1 January 2017, all companies will be obligated to provide, upon request by the tax authorities (i.e. no periodical filing), documentation regarding the adequacy of transfer prices of transactions with related companies or PEs. Large companies have to prepare the transfer pricing documentation based on an internationally accepted standard. If a company exceeds at least two of the following three criteria, it qualifies as a large company (based on Liechtenstein company law): Total assets of CHF 25.9 million; Net revenue of CHF 51.8 million; Annual average of 250 full time employees. Small companies (i.e. not exceeding two of the above criteria) are not required to prepare transfer pricing documentation in accordance with an international accepted standard.

Introduction

International tax planning and transfer pricing planning between Liechtenstein, as one of the few countries in the world with more registered companies than citizens and which has developed and prosperous, highly industrialized free-enterprise economy and boasts a financial service sector as well as a living standard that compares favorably with those of the urban areas of Liechtenstein's much larger European neighbors, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2017 3rd place of the most populous countries in the world (4.40% of the world population).

Liechtenstein participates in a customs union with Switzerland and employs the Swiss franc as the national currency. The country imports about 85.00% of its energy. Liechtenstein has been a member of the European Economic Area (an organization serving as a bridge between the European Free Trade Association (EFTA) and the European Union) since May 1995. The government is working to harmonize its economic policies with those of an integrated Europe. Since 2002, Liechtenstein's rate of unemployment has doubled. In 2008, it stood at 1.5%. The gross domestic product (GDP) on a purchasing power parity basis is $5.028 billion, or $89,400 per capita, which is the second highest in the world. In Liechtenstein, corporate tax is levied at a flat rate of 12.50%, which is the lowest in Europe. There is no withholding tax on dividend, interest and royalty payments. Resident corporations carrying on activities in Liechtenstein are generally taxed on their worldwide income. However, dividends and capital gains from domestic and foreign participations are tax exempt irrespective of the capital percentage and the holding period. Thus, Liechtenstein is a low tax country.

According to the OECD, [3] Liechtenstein today deposited its instrument of ratification for the Convention on Mutual Administrative Assistance in Tax Matters ("the Convention"). By doing so, Liechtenstein underlines its commitment to fighting tax evasion and avoidance and takes another important step in implementing the Standard for Automatic Exchange of Financial Account Information in Tax Matters developed by the OECD and G20 countries as well as automatic exchange of Country-by-Country Reports under the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project. Liechtenstein committed to implement automatic exchange of financial account information in time to commence exchanges in 2017 and was amongst the first signatories of the CRS Multilateral Competent Authority Agreement (the "CRS MCAA") and the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (the "CbC MCAA"), which are both based on Article 6 of the Convention. The Convention will enter into force for Liechtenstein on 1 December 2016.

The pivotal question is therefore, how groups of affiliated companies with group companies in Liechtenstein and in the US can – before the background of anti-avoidance legislation and other tax law frame conditions – optimize their strategies of international tax planning based on cross-border case studies.

Therefore and first of all the low tax country Liechtenstein is to be reviewed in the OECD context (see section 2) – also with respect to the transfer pricing rules of Liechtenstein (see section 3), and constructive hereon 10 case studies in international tax planning between Liechtenstein and the US are to be calculated (see section 4). Finally the results of this survey are to be compiled in concluding remarks (see section 5), especially with respect to the deduction of strategies in international tax planning between Liechtenstein and the US.

This chapter had been written based on the following sources:

  • Orbitax[4], Orbitax Country Analysis Liechtenstein and USA, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool,
  • the Liechtenstein Corporate Income Tax Act, [5]
  • the Liechtenstein tax reform 2017, [6]
  • Liechtenstein Transfer Pricing 2017, [7]
  • the US Internal Revenue Code, [8] and
  • the US tax reform 2017. [9]
The low tax country Liechtenstein in the OECD context

International tax planning and transfer pricing planning between Liechtenstein and the US based on cross-border case studies is of central importance. In Liechtenstein, corporate tax is levied at a flat rate of 12.50%, which is the lowest in Europe. There is no withholding tax on dividend, interest and royalty payments. Resident corporations carrying on activities in Liechtenstein are generally taxed on their worldwide income. However, dividends and capital gains from domestic and foreign participations are tax exempt irrespective of the capital percentage and the holding period. Thus, Liechtenstein is a low tax country.

Between OECD Member States, also Liechtenstein, that is no OECD Member country, the US, and other countries and also within the OECD there exists – also in 2016 – a considerable tax differential. Here from there results the incentive to international tax planning and to shift the taxable basis into lower taxing OECD Member States and other countries outside the OECD. Primary parameters of the corporate income tax burden of any country are the statutory corporate income tax rates. [10] Furthermore in many OECD Member States there are – in addition to the statutory corporate income tax rates – further corporate income taxes, especially on the level of subordinated regional administration bodies. Consequential and following the concept of Gerd Rose[11] there can be calculated combined tax rates for any country, that applied to one (uniform) taxable basis, result in the tax burden of the related country. The combined corporate income tax rates of countries with several taxes can then be compared with countries that just apply a single corporate income tax rate. In addition, an average rate for the whole OECD can be calculated.

In 2016, Liechtenstein has a combined tax rate of 12.50%, which is the lowest in Europe. Within the OECD, the corporate income tax rates range between 12.50% in case of Ireland (distribution rate) und 40.00% in case of France (distribution rate). The average corporate income tax rate in the OECD in 2016 is 24.95%. The margin is 27.50 percentage points. It attracts attention that OECD Member States with the highest tax burden also apply surtaxes, as the US. 21 of the OECD Member States are also EU Member States.

Liechtenstein is 12.45 percentage points beneath and the US 14.65 percentage points above the OECD average. High corporate income tax rates form the incentive to reduce the taxable basis by cross-border tax planning measures.

Transfer pricing rules of Liechtenstein Country-per-Country (CbC) reporting

According to Orbitax, [12] (Daily Tax News Digest of 5 January 2017), Liechtenstein has published the Law on the International Automatic Exchange of Country-by-Country (CbC) reports (CbC Act) [13] as definitively adopted, which entered into force on 1 January 2017. The Liechtenstein CbC reporting requirements are in line with BEPS Action 13 and include:

  • A consolidated group revenue reporting threshold of CHF 900 million in the previous year;
  • The primary requirement is for ultimate parent entities resident in Liechtenstein to file the report, although non-parent constituent entities may be required to file when:
  • The ultimate parent is not required to file in its state of residence;
  • The ultimate parent's state of residence is not a "partner state" (see below); or
  • The ultimate parent's state of residence is a "partner state", but a systemic failure for exchange has occurred;
  • The CbC reporting requirement may be met by a surrogate parent entity resident in a foreign jurisdiction, subject to certain conditions, including that the foreign jurisdiction requires CbC reports, the jurisdiction is a "partner state", the jurisdiction has been notified, and no systemic failure has occurred;
  • The CbC report may be submitted in German or English language;
  • Notification (registration) of the reporting entity must be made by the end of the fiscal year;
  • Penalties of up to CHF 250,000 will apply for intentional failure to comply with the CbC requirements, and up to CHF 100,000 for negligence; and
  • CbC Reports may be voluntarily filed in Liechtenstein for fiscal years beginning before 1 January 2017 and will be exchanged with the "partner states" in which constituent entities of the group are resident.

Also published is the implementing CbC regulation for the exchange of CbC reports. [14] The regulation includes the list of "partner states" referred to in the main legislation, which are the countries with which Liechtenstein will automatically exchange CbC reports.

Lastly, Liechtenstein has published the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (CbC MCAA), [15]which entered into force for Liechtenstein on 1 January 2017.

Transfer Pricing

Until 1 January 2017, Liechtenstein did not have specific transfer pricing rules apart from the rule that intra-group transactions are carried out at arm’s-length terms. [16] However, since the tax law amendments entered into force on 1 January 2017, all companies will be obligated to provide, upon request by the tax authorities (i.e. no periodical filing), documentation regarding the adequacy of transfer prices of transactions with related companies or PEs. Large companies have to prepare the transfer pricing documentation based on an internationally accepted standard. If a company exceeds at least two of the following three criteria, it qualifies as a large company (based on Liechtenstein company law):

  • Total assets of CHF 25.9 million.
  • Net revenue of CHF 51.8 million.
  • Annual average of 250 full time employees.

Small companies (i.e. not exceeding two of the above criteria) are not required to prepare transfer pricing documentation in accordance with an international accepted standard.

4. Calculation of the case studies in international tax planning between Liechtenstein and the USA

For 10 case studies on the taxation of cross-border payments between Liechtenstein and the US see the following tables 1 and 2:

Table 1: Payments from Liechtenstein to the US

Case study

1

2

3

4

5

Kind of payment

Dividend

Interest

Royalty

Fees

Capital Gains

Subsidiary in

FL

FL

FL

FL

FL

Parent company in

US

US

US

US

US

Treaty concluded on

n/a

n/a

n/a

n/a

n/a

Treaty effective since

n/a

n/a

n/a

n/a

n/a

Protocol signed

n/a

n/a

n/a

n/a

n/a

Holding period

24 months

n/a

n/a

n/a

24 months

Level of subsidiary

[million $]

[million $]

[million $]

[million $]

[million $]

Profit before expenses and taxes

10.00

10.00

10.00

10.00

10.00

- Expenses

0.00

-10.00

-10.00

-10.00

0.00

= Taxable income

10.00

0.00

0.00

0.00

0.00

x CIT rate

12.50%

12.50%

12.50%

12.50%

12.50%

= CIT

-1.25

0.00

0.00

0.00

0.00

Payment before WHT

8.75

10.00

10.00

10.00

10.00

WHT Rate

0.00%

0.00%

0.00%

0.00%

0.00%

WHT

0.00

0.00

0.00

0.00

0.00

= Net payment

8.75

10.00

10.00

10.00

10.00

Case study

1

2

3

4

5

Level of parent company

[million $]

[million $]

[million $]

[million $]

[million $]

= Income from foreign sources

8.75

10.00

10.00

10.00

10.00

Double taxation relief

Indirect credit

Ordinary credit

Ordinary credit

Ordinary credit

Ordinary credit

Credit of WHT

0.00

0.00

0.00

0.00

0.00

Credit of CIT

1.25

n/a

n/a

n/a

n/a

Total tax credit

1.25

0.00

0.00

0.00

0.00

= Taxable percentage

100.00%

100.00%

100.00%

100.00%

0.00%

= Taxable income

10.00

10.00

10.00

10.00

0.00

x CIT rate

39.60%

39.60%

39.60%

39.60%

39.60%

= CIT

-3.96

-3.96

-3.96

-3.96

0.00

- Tax credit

1.25

0.00

0.00

0.00

0.00

 Results

[million $]

[million $]

[million $]

[million $]

[million $]

= Return after tax

6.04

6.04

6.04

6.04

10.00

Group tax ratio

39.60%

39.60%

39.60%

39.60%

0.00%

Legend: CIT = corporate income tax   fees = management and technical   FL = Liechtenstein   service fees   n/a = not applicable   US = United States of America   WHT = withholding tax  

Sources:

Orbitax, Orbitax Country Analysis, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool, USA, 2017, www.orbitax.com, www.fag.hiof.no/~rainerz.

 

Table 2: Payments from the US to Liechtenstein

Case study

6

7

8

9

10

Kind of payment

Dividend

Interest

Royalty

Fees

Capital gains

Subsidiary in

US

US

US

US

US

Parent company in

FL

FL

FL

FL

FL

Treaty concluded on

n/a

n/a

n/a

n/a

n/a

Treaty effective since

n/a

n/a

n/a

n/a

n/a

Protocol signed

n/a

n/a

n/a

n/a

n/a

Holding period

24 months

n/a

n/a

n/a

24 months

Level of subsidiary

[million $]

[million $]

[million $]

[million $]

[million $]

Profit before expenses and taxes

10.00

10.00

10.00

10.00

10.00

- Expenses

0.00

-10.00

-10.00

-10.00

0.00

= Taxable income

10.00

0.00

0.00

0.00

10.00

x CIT rate

39.60%

39.60%

39.60%

39.60%

39.60%

= CIT

-3.96

0.00

0.00

0.00

-3.96

Payment before WHT

6.04

10.00

10.00

10.00

6.04

WHT Rate

30.00%

30.00%

30.00%

0.00%

0.00%

WHT

-1.81

-3.00

-3.00

0.00

0.00

= Net payment

4.23

7.00

7.00

10.00

6.04

Case study

6

7

8

9

10

Level of parent company

[million $]

[million $]

[million $]

[million $]

[million $]

= Income from foreign sources

4.23

7.00

7.00

10.00

6.04

Double taxation relief

Exemption

Ordinary credit

Ordinary credit

Ordinary credit

Ordinary credit

Credit of WHT

n/a

3.00

3.00

0.00

0.00

Credit of CIT

n/a

n/a

n/a

n/a

n/a

Total tax credit

n/a

3.00

3.00

0.00

0.00

= Taxable percentage

0.00%

100.00%

100.00%

100.00%

0.00%

= Taxable income

0.00

10.00

10.00

10.00

0.00

= CIT rate

12.50%

12.50%

12.50%

12.50%

12.50%

= CIT

0.00

-1.25

-1.25

-1.25

0.00

- Tax credit

n/a

3.00

3.00

0.00

0.00

Results

[million $]

[million $]

[million $]

[million $]

[million $]

= Return after tax

4.23

8.75

8.75

8.75

6.04

Group tax ratio

57.72%

12.50%

12.50%

12.50%

39.60%

Legend: CIT = corporate income tax   cost all. = cost allowance   fees = management and technical service fees   FL = Liechtenstein   n/a = not applicable   US = United States of America   WHT = withholding tax  

Sources:

Orbitax, Orbitax Country Analysis, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool, USA, 2017, www.orbitax.com, www.fag.hiof.no/~rainerz.

 

Download tables 1 and 2 in Xls format

Design of the tables

Tables 1 and 2 provide an overview on 10 case studies in the taxation of cross-border payments between Iceman and the US. For that matter the columns 1 to 5 show payments of dividends, interests, royalties, management and technical service fees and capital gains from Liechtenstein to the US, whereas the columns 6 to 10 show payments of the same kind from the US to Liechtenstein.

Any column begins with a payment of $ 10 million before expenses and taxes and ends with the respective return after tax and the group tax ratio. The payment of dividends and capital gains does not represent expenses, as it is allocation of profits, whereas all other payments represent expenses, which will be discussed as follows relative to every single case study.

The treaty Liechtenstein-USA in brief

There is no Double Taxation Convention concluded between Liechtenstein and the USA.

BEPS Project progress

According to Orbitax[17] (Daily Tax News Digest of 25 November 2016) on 24 November 2016, the OECD announced that negotiations have concluded for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The MLI was developed by an ad hoc group of over 100 countries as part of BEPS Action 15. More than 100 jurisdictions have concluded negotiations on a multilateral instrument that will swiftly implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises. The new instrument will transpose results from the OECD/G20 Base Erosion and Profit Shifting Project (BEPS) into more than 2,000 tax treaties worldwide. A signing ceremony will be held in June 2017 in Paris. The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS[18] will implement minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies. It will also allow governments to strengthen their tax treaties with other tax treaty measures developed in the OECD/G20 BEPS Project. The OECD/G20 BEPS Project[19] delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to « disappear » or be artificially shifted to low or no tax environments, where companies have little or no economic activity. Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or the equivalent of 4-10% of global corporate income tax revenues. Over 100 countries and jurisdictions are currently working in the Inclusive Framework on BEPS to implement BEPS measures in their domestic legislation and treaties. The sheer number of bilateral treaties makes updates to the treaty network on a bilateral basis burdensome and time-consuming. The new multilateral convention helps solve this.

Liechtenstein in brief

CIT rate: In Liechtenstein, corporate tax is levied at a flat rate of 12.50%, which is the lowest in Europe. [20] Withholding taxes are as follows:

  • There is no withholding tax on dividend, interest and royalty payments.
  • There are no special provisions regarding withholding tax on fees in Liechtenstein.
  • With effect from 1 January 2011, the 4.00% withholding tax levied on dividend payments is abolished. However, old reserves remain subject to withholding tax. The tax will be levied at the rate of 2% in 2011 and 2012. Thereafter the tax will again be levied at the rate of 4.00%.

CIT system: Dividends and capital gains from domestic and foreign participations are tax exempt irrespective of the capital percentage and the holding period.

Taxable basis: Resident corporations carrying on activities in Liechtenstein are generally taxed on their worldwide income. However, dividends and capital gains from domestic and foreign participations are tax exempt irrespective of the capital percentage and the holding period.

Deductible Payments: Expenses incurred in the production of taxable income are deductible if normal requirements for such deductions are met.

Notional Interest Deduction: The notional interest deduction is granted as a percentage of the company's capital. For the tax year 2014, the rate of notional interest is 4.00%. The estimation of assets for the calculation of the deduction is made at the beginning of each tax year.

Patent Income Tax Deduction / Patent Box: A deemed deduction of 80.00% on any qualifying income from intellectual property, referred to as patent income, is granted in Liechtenstein. The deemed deduction applies to any patent and trademark provided they are registered in a domestic, foreign or international register and the rights were created or acquired on or after 1 January 2011. The deduction is calculated on the gross income less related expenses.

Thin capitalization: There are no thin capitalization rules o\in Liechtenstein.

Anti-avoidance rules: According to the general anti-avoidance rules in Liechtenstein, any structure or transaction that is not proper for the economic conditions and has a sole purpose of attaining tax benefits may be disregarded for tax purposes. Until 1 January 2017, Liechtenstein did not have specific transfer pricing rules apart from the rule that intra-group transactions are carried out at arm’s-length terms. [21] However, since the tax law amendments entered into force on 1 January 2017, all companies will be obligated to provide, upon request by the tax authorities (i.e. no periodical filing), documentation regarding the adequacy of transfer prices of transactions with related companies or PEs. Large companies have to prepare the transfer pricing documentation based on an internationally accepted standard. If a company exceeds at least two of the following three criteria, it qualifies as a large company (based on Liechtenstein company law): Total assets of CHF 25.9 million; Net revenue of CHF 51.8 million; Annual average of 250 full time employees. Small companies (i.e. not exceeding two of the above criteria) are not required to prepare transfer pricing documentation in accordance with an international accepted standard.

Capital gains taxation – non resident companies: Non-resident companies are only taxed on income attributable to a permanent establishment or real property situated in Liechtenstein.

Capital gains taxation – resident companies: Capital gains derived by resident companies from the sale of shares are exempt from income tax.

Double taxation relief: Foreign-source income is included in taxable income of resident companies. However, dividends are tax exempt irrespective of the capital percentage and the holding period. Neither Liechtenstein law nor the practice of the tax authorities provides for the avoidance of double taxation of foreign income taxed abroad. Under tax treaties, Liechtenstein provides for the ordinary credit method to avoid double taxation.

The USA in brief

CIT rate: Due to the nature of the United States as a federal union, income and other taxes are imposed by both the Federal Government and the State Government and, in some cases, by municipalities. [22] Federal corporate income tax is at progressive rates of 15.00% to 35.00%. The effective tax rate is 35.00% for income above $ 10 million. To the federal corporate tax, state taxes are to be added. State corporate income taxes are deductible from gross income for federal income tax purposes. In this survey, the value of 7.10% for the state New York is used. The withholding taxes are as follows:

  • Dividends paid by US corporations to foreign corporations are subject to withholding tax at a rate of 30.00% or the lower rate under an applicable tax treaty. Dividends paid by a US corporation are exempt from US withholding tax as long as 80.00% or more of a US corporation's gross income (measured over the three year period preceding the year of payment), is from foreign sources and is attributable to an active trade or business conducted in one or more foreign jurisdictions (including US possessions). However, dividends emanating from domestic source earnings of a US corporation that meets the 80.00% active foreign business requirement will continue to be subject to US withholding if paid to foreign shareholders.
  • Interest paid from US sources is subject to withholding tax at the rate of 30.00% or the lower rate under an applicable tax treaty. Interest paid on 'portfolio obligations' of US issuers is exempt from withholding tax under US domestic law provided that the recipient owns less than 10.00% of the equity of the issuer and certain other requirements are met. Under the 1993 Tax Act interest that is contingent, for example, on income, receipts, sales or change in asset value of the debtor, is not eligible for the portfolio withholding exemption. Interest paid by a US corporation is exempt from withholding tax if the corporation meets the 80.00% active foreign business requirement discussed above.
  • Royalty payments from US sources are subject to withholding tax at a rate of 30.00% or the lower rate under an applicable tax treaty.
  • There are no special provisions regarding withholding tax on fees in the United States.

CIT system: The United States uses the classical system of corporate taxation. Profits are taxed at corporate income tax rates in the year earned and are taxed again when received by shareholders.

Taxable basis: Domestic corporations are taxable on their worldwide income.

Deductible expenses: Expenses incurred in the production of taxable income are deductible if normal requirements for such deductions are met. However, the deductibility of interest payments is limited in certain situations, i.e. thin capitalization. The United States does not have a debt/equity ratio that can be used as a safe harbor to ensure debt treatment. Instead, the debt/equity ratio is merely one factor taken into account by the IRS and the courts, although it is generally believed that the IRS will not challenge a ratio of 3:1 or less on debt instruments that do not have equity features.

Research and development expenses: Companies who have incurred R&D expenses exceeding a base period amount may receive a tax credit equal to 20.00% of the exceeding amount (IRC § 41; Reg. §§ 1.41-0 to -9). The total tax credit can amount to 20.00% tax credit for increased qualified research expenses and a 20.00% tax credit for increased qualified basic research expenses. The tax credit is scheduled to expire for expenses incurred after 31 December 2014.

Anti-avoidance rules: With respect to anti-avoidance rules the USA do not apply a general anti-avoidance rule, but apply CFC legislation, thin capitalization rules and and transfer pricing rules. With respect to the transfer pricing methods the USA apply the following rules: the transfer pricing method depends on the type of the transaction, for the definition of related companies the relevant parameters are legal control and factual control, the are no reporting requirements and documentation requirements, cost sharing is allowed, with respect to business restructuring no rules apply, there is a conection between customs valuation and transfer pricing and with respect to dispute resolution advance pricing agreements are available.

Capital gains taxation - non-resident companies: Capital gains derived by a foreign company from the sale of shares in US companies and from the sale of other securities are not subject to tax in the United States if not effectively connected to a US trade or business. An exception applies if the US Company is a real property holding company (generally more than 50.00% of assets are US real property interests), in which case the FIRPTA tax applies (Foreign Investment in Real Property Tax Act) and the seller must treat the gain on shares as US business income subject to maximum 35.00% tax. The US purchaser must withhold 10.00% of purchase price and remit to IRS.

Capital gains taxation - resident companies: The United States taxes worldwide capital gains derived by resident companies at the same rate as for ordinary income.

Double taxation relief: The United States relieves international double taxation unilaterally by granting a foreign tax credit. In lieu of the credit, a tax deduction may be claimed. The foreign tax credit may only be claimed for foreign taxes imposed on foreign-source income. Foreign taxes imposed on US-source income may not be credited. In addition, the foreign tax for which a credit is claimed must meet the definition of an income tax in the US sense of the term.

Double taxation relief - Foreign dividends: When a US corporation owning more than 10.00% of the foreign payer receives dividends, the direct withholding tax and the underlying indirect tax on the profits out of which the dividends are paid may be credited against the US tax liability.

Multi-tier tax credit: The indirect credit can be claimed for foreign taxes paid by subsidiaries down to the level of six tiers. A subsidiary must be a member of a 'qualifying group' in order for the foreign taxes paid by it to be creditable. This entails the following stock ownership requirements:

  • the US parent corporation must own at least 10.00% of the voting stock of the first-tier foreign corporation;
  • each foreign corporation in the chain must own at least 10.00% of the voting stock of the foreign corporation immediately below it; and
  • the indirect ownership of the US parent corporation in each foreign subsidiary (from the second tier down to the sixth tier) must be at least 5.00%. The indirect ownership of the US parent is determined by multiplying together the percentage ownership at each level.

In addition, the subsidiaries in the fourth, fifth and sixth tiers must each be classified as a CFC and the US parent corporation must be treated as a 'US shareholder' for each subsidiary (i.e. as an owner directly, indirectly or constructively of 10.00% or more of the subsidiary's voting stock).

Double taxation relief - Foreign tax credit rules: The foreign tax credit (FTC) may only be claimed for foreign taxes imposed on foreign-source income. The amount of foreign tax claimed as a credit may not exceed the amount of US federal income tax that would have been imposed on the same income. For purpose of calculating the FTC limitation, a basket system is used. Under the basket system, income must be assigned to one of nine separate baskets. The basket system prevents income that is subject to foreign taxes that exceed the maximum US rate from being combined with income of a different type that is subject to lower foreign taxes, and thereby producing an overall average within the US limitation. The number of FTC limitation baskets is reduced to two for taxable years beginning after 31 December 2006. The two remaining baskets are the passive category income basket and the general category income basket.

Holding period requirements: Taxpayers must meet certain holding period requirements in order to claim an FTC for foreign withholding taxes imposed on dividends and for the indirect tax credit for foreign taxes imposed on earnings of foreign subsidiaries from which dividends are paid. In the case of common stock and most preferred stock, the holding period requirement is that the stock must be held for at least 16 days during the 30-day period that commences 15 days prior to the date the stock becomes ex-dividend (i.e. the date the stock is tradable without the right to the dividend attached). In the case of preferred stock paying a dividend attributable to periods in excess of 366 days, the required holding period is 46 days during the 90-day period that commences 45 days prior to the date the stock becomes ex-dividend. The shareholder is not permitted to reduce the risk of loss on the common or preferred stock during the required holding period whether by short sale or otherwise. For the indirect tax credit for dividends paid through a chain of foreign subsidiaries, which is permitted for corporate shareholders through six tiers of subsidiaries, the holding period requirement must be met with respect to the stock of each subsidiary in the chain of ownership.

A holding period requirement also applies to foreign withholding taxes imposed on all other items of income or gain, including interest and royalties, effective for amounts paid or credited on or after 22 November 2004. The FTC will be disallowed if the property with respect to which the payment is made is held for 15 days or less during the 31-day period that begins 15 days before the right to receive the payment arises or to the extent that the taxpayer is under an obligation to make related payments with respect to positions in substantially similar or related property.

Foreign tax credit limitation formula: (Total taxable income within the separate category / Total taxable income) x U.S. income tax before credit = Maximum credit for that category

Special restrictions for Mineral/ Oil & Gas Income: Additional restrictions apply on foreign tax credits for Foreign Mineral Income and for Foreign Oil and Gas Extraction Income.

Excess foreign tax credit: If foreign income taxes paid or accrued exceed the amount that may be credited for the tax year, the excess is carried back one year and forward ten years.

Design of case studies

Following, 10 case studies are calculated and discussed separately. Doing so special attention is laid on the withholding tax and the double taxation relief methods according to the double taxation convention as well as the relative return after tax and group tax ratio. All the results of this survey are to be compiled in concluding remarks (see section 5), especially with respect to the deduction of strategies in international tax planning between Liechtenstein and the US.

Case study 1: Dividends from Liechtenstein to the US

First, it is paid by the subsidiary in Liechtenstein in the form of dividends to the parent company in the US.

In Liechtenstein, the income tax rate for companies is 12.50%.

In Liechtenstein, there is no withholding tax on dividend, interest and royalty payments.

The US applies the indirect credit method as double taxation relief. In the US credit is granted for underlying tax paid on received dividend. Credit can be made for tax paid in six tiers under the provision that the ownership between the tiers is at least 10.00% and that the US owns at least 5.00% indirect of each tier. In addition, the subsidiaries in the fourth, fifth and sixth tiers must each be classified as a CFC and the US parent corporation must be treated as a ´US shareholder´ for each subsidiary.

In case study 1 the return after tax is $ 6.04 million and the group tax ratio is 39.60%, equal to the tax level of the receiving country, thus it is locked up to the high US tax burden.

Case study 2: Interests from Liechtenstein to the US

Next, it is paid by the subsidiary in Liechtenstein in the form of interests to the parent company in the US.

In Liechtenstein, there is no withholding tax on dividend, interest and royalty payments.

As double taxation relief the US apply the ordinary credit method on interests. Thus, withholding tax paid in the previous country is to be credited against tax payable in the US. If a matching credit is granted the deemed credit is to be credited against tax payable instead of tax paid in the previous country.

In case study 2 the return after tax is again $ 6.04 million and the group tax ratio is 39.60%, again equal to the tax level of the receiving country, thus the it is taxed at the US tax burden.

Case study 3: Royalties from Liechtenstein to the US

Now it is paid by the subsidiary in Liechtenstein in the form of royalties to the parent company in the US.

In Liechtenstein, There is no withholding tax on dividend, interest and royalty payments.

As double taxation relief the US applies the ordinary credit method on royalties. Thus, withholding tax paid in the previous country is to be credited against tax payable in this country. If a matching credit is granted the deemed credit is to be credited against tax payable instead of tax paid in the previous country.

In case study 3 the return after tax is again $ 6.04 million and the group tax ratio is 39.60%, again equal to the tax level of the receiving country, thus the high US tax burden is realized.

Case study 4: Management and technical service fees from Liechtenstein to the US

Finally, it is paid by the subsidiary in Liechtenstein in the form of management and technical service fees to the parent company in the US.

There are no special provisions regarding withholding tax on fees in Liechtenstein.

As double taxation relief the US applies the ordinary credit method. Thus, withholding tax paid in the previous country is to be credited against tax payable in this country. If a matching credit is granted the deemed credit is to be credited against tax payable instead of tax paid in the previous country.

In case study 4 the return after tax is again $ 6.04 million and the group tax ratio is 39.60%, again equal to the tax level of the receiving country, thus the US tax burden is realized.

Case study 5: Capital gains with Liechtenstein as asset country to the US as seller country

Finally, capital gains are paid with Liechtenstein as asset country and the US as seller country. 100.00% shareholding and 24 months holding time are assumed. No distribution is assumed, as well.

Capital gains made by the seller in the United States are assumed to be $ 10.00 million. For the purpose of calculating the tax on this gain in the country of residence of the company issuing the sold shares, the gain is supposed to be $ 10.00 million also in this country. However, the tax is not payable by the asset country, and neither by the selling country.

In Liechtenstein, the capital gain is taxable with 0.00% and the combined corporate income tax is 12.50%.

In Liechtenstein, the withholding tax rate is 0.00%. Thus, the total tax in Liechtenstein amounts to $ 0.00 million.

In the US capital gain is taxable with 0.00% (as in case of dividends) and the combined corporate income tax is 39.60% (as in case of dividends).

As double taxation relief the US grant the ordinary credit.

In case study 5 (with Liechtenstein as asset country and the US as seller country) there results a return after tax of $ 10.00 million and a group tax ratio of 0.00% which is the US tax burden. However, the results of capital gains taxation cannot be compared with the results of current taxation.

Case study 6: Dividends from the US to Liechtenstein

Now it is paid by the subsidiary in the US in the form of dividends to the parent company in Liechtenstein.

In the US the combined corporate income tax rate 39.60%.

In the US the statutory withholding tax rate on dividends is 30.00%. There is no treaty.

As double taxation relief, Liechtenstein applies the exemption method, Thus, US withholding tax is not credited against Liechtenstein tax.

In case study 6 the return after tax is $ 4.23 million and the group tax ratio is even 57.72%, which is even higher than the high tax level of the paying country, because of high US corporate income tax and US withholding tax.

Case study 7: Interests from the US to Liechtenstein

Next, it is paid by the subsidiary in the US in the form of interests to the parent company in Liechtenstein.

In the US, the statutory withholding tax rate on interests is 30.00%. There is no treaty.

As double taxation relief, Liechtenstein applies the ordinary credit method. Thus, foreign withholding taxes are credited to the taxes payable.

In case study 7 there results - due to payment of interest - a higher return after tax of $ 8.75 million (in case of dividend it was only $ 4.23 million) and a group tax ratio of only 12.50% - equal to the Liechtenstein combined corporate income tax rate (in case of dividend it was 57.72%). However, these considerations only apply to those interest payments that do not violate the thin capitalization rules of the USA.

Case study 8: Royalties from the US to Liechtenstein

Further, it is paid by the subsidiary in the US in the form of royalties to the parent company in Liechtenstein.

In the US, the statutory withholding tax rate on royalties is 30.00%. The treaty rate is 10.00%.

As double taxation relief, Liechtenstein applies the ordinary credit method. Thus, foreign withholding taxes are credited to the payable corporate income tax.

In case study 8 there results a return after tax of $ 8.75 million (in case of dividend it was only $ 4.23 million) and a group tax ratio of 12.50% (in case of dividend it was even 57.72%). However, these considerations only apply to those royalties that do not violate the anti-avoidance rules of the USA.

Case study 9: Management and technical service fees from the US to Liechtenstein

Finally, it is paid by the subsidiary in the US in the form of management and technical service fees to the parent company in Liechtenstein.

In the US the statutory withholding tax rate on management and technical service fess is 0.00%.

As double taxation relief, Liechtenstein applies the ordinary credit method. Thus, foreign withholding taxes are credited against the payable corporate income tax.

In case study 9 there results - due to payment of fees - a return after tax of $ 8.75 million (in case of dividend it was only $ 4.23 million) and a group tax ratio of 57.72% - equal to the Liechtenstein corporate income tax rate (in case of dividend it was even 57.72%). However, these considerations only apply to those fees that do not violate the anti-avoidance rules of the USA.

Case study 10: Capital gains with the US as asset country and Liechtenstein as seller country

Finally, capital gains taxation is reviewed. Capital gains are paid with the US as asset country and Liechtenstein as seller country. 100.00% shareholding and 24 months holding time are assumed.

Capital gains made by the seller in Liechtenstein are assumed to be $ 10.00 million. For the purpose of calculating the tax on this gain in the country of residence of the company issuing the sold shares, the gain is supposed to be $ 10.00 million also in this country. However, the tax is payable by the asset country, and not by the selling country.

In the US the capital gain is taxable with 100.00% and the combined corporate income tax is 39.60%.

In the US the withholding tax is 0.00%. Thus, the total tax in the US amounts to $ 3.96 million.

Capital gains made by the seller in Liechtenstein on shares in a company resident in the US are assumed to be $ million 10.00.

Liechtenstein applies the ordinary credit method.

In Liechtenstein, capital gains are taxable with 0.00% and the combine corporate income tax is 12.50% (in case of dividends, it was even 57.72%).

In case study 10 (with the US as asset country and Liechtenstein as seller country) there results a return after tax of $ 6.04 million and a group tax ratio of 39.60%. However, the results of capital gains taxation cannot be compared with the results of current taxation.

Concluding remarks

The results of this survey can be summarized in the following theses:

  • International tax planning and transfer pricing planning between Liechtenstein, as one of the few countries in the world with more registered companies than citizens and which has developed and prosperous, highly industrialized free-enterprise economy and boasts a financial service sector as well as a living standard that compares favorably with those of the urban areas of Liechtenstein's much larger European neighbors, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2017 3rd place of the most populous countries in the world (4.40% of the world population).

Liechtenstein participates in a customs union with Switzerland and employs the Swiss franc as the national currency. The country imports about 85.00% of its energy. Liechtenstein has been a member of the European Economic Area (an organization serving as a bridge between the European Free Trade Association (EFTA) and the European Union) since May 1995. The government is working to harmonize its economic policies with those of an integrated Europe. Since 2002, Liechtenstein's rate of unemployment has doubled. In 2008, it stood at 1.5%. The gross domestic product (GDP) on a purchasing power parity basis is $5.028 billion, or $89,400 per capita, which is the second highest in the world. In Liechtenstein, corporate tax is levied at a flat rate of 12.50%, which is the lowest in Europe. There is no withholding tax on dividend, interest and royalty payments. Resident corporations carrying on activities in Liechtenstein are generally taxed on their worldwide income. However, dividends and capital gains from domestic and foreign participations are tax exempt irrespective of the capital percentage and the holding period.

  • In 2016, Liechtenstein has a combined tax rate of 12.50%, which is the lowest in Europe. Within the OECD, the corporate income tax rates range between 12.50% in case of Ireland (distribution rate) und 40.00% in case of France (distribution rate). The average corporate income tax rate in the OECD in 2016 is 24.95%. The margin is 27.50 percentage points. It attracts attention that OECD Member States with the highest tax burden also apply surtaxes, as the US. 21 of the OECD Member States are also EU Member States. Liechtenstein is 12.45 percentage points beneath and the US 14.65 percentage points above the OECD average. High corporate income tax rates form the incentive to reduce the taxable basis by cross-border tax planning measures.
  • According to the general anti-avoidance rules in Liechtenstein, any structure or transaction that is not proper for the economic conditions and has a sole purpose of attaining tax benefits may be disregarded for tax purposes. Until 1 January 2017, Liechtenstein did not have specific transfer pricing rules apart from the rule that intra-group transactions are carried out at arm’s-length terms. However, since the tax law amendments entered into force on 1 January 2017, all companies will be obligated to provide, upon request by the tax authorities (i.e. no periodical filing), documentation regarding the adequacy of transfer prices of transactions with related companies or PEs. Large companies have to prepare the transfer pricing documentation based on an internationally accepted standard. If a company exceeds at least two of the following three criteria, it qualifies as a large company (based on Liechtenstein company law): Total assets of CHF 25.9 million; Net revenue of CHF 51.8 million; Annual average of 250 full time employees. Small companies (i.e. not exceeding two of the above criteria) are not required to prepare transfer pricing documentation in accordance with an international accepted standard.
  • In this survey eight current taxation case studies in international tax planning between Liechtenstein and the United States had been calculated and discussed separately. Particular emphasis is placed here on the withholding tax according the double taxation convention between Liechtenstein and the US, the double taxation relief, the return after tax and the group tax ratio.
  • In the four case studies with payments from Liechtenstein, there results the same tax burden – the high tax level of the USA. The return after tax always amounts to 6.04 million $ and the group tax ratio is 39.60%, always equal to the tax level of the receiving country USA. In all three expenses cases, as expenses cannot reduce the tax burden, it is needless in the two-stage participation model to think about special management and technical service fee agreements.
  • In the four case studies with payments from the USA to Liechtenstein, the payment of dividends is the most expensive alternative and it results taxation even higher than the high US tax level. In the three expenses alternatives the group tax ratio is equal to the tax level of the receiving country, Liechtenstein. It is therefore to be examined separately in any case, in which form shareholder debt financing, license agreements or management and technical service fees may be integrated into the group organization, that would not offend against anti-avoidance legislation of the USA.
  • In addition, two capital gains case studies in international tax planning between Lechtenstein and the United States are reviewed. In the case study with the US as asset country and Liechtenstein as seller country there results a return after tax of $ 10.00 million and a group tax ratio of 0.00%. In addition, in the case study with Liechtenstein as asset country and the US as seller country there results a return after tax of $ 6.04 million and a group tax ratio of 39.60%. However, the results of capital gains taxation cannot be compared with the results of current taxation.
  • However, the tax planning opportunities are limited when considering only 10 case studies in a two-layered corporate structure. Much larger tax planning opportunities are there, if one inserts intermediate holding companies, considered a consolidated structure of many levels of participation and the respective transactions between any two levels of participation aligns with tax criteria. The best strategy of international tax planning is to perform a computerized total optimization taking into account all affected tax treaties and anti-avoidance rules of all participating jurisdictions for minimizing the group tax ratio.
  • It had been shown, how groups of affiliated companies with group companies in Liechtenstein and the US can – before the background of anti-avoidance legislation and other tax law frame conditions – optimize their strategies of international tax planning and transfer pricing planning based on cross-border case studies.
Notes
  1. ↑ Prof. Dr Rainer Zielke is Professor in business economics with special reference to Norwegian and international taxation at Østfold University College in Halden, Norway FAG. His special research interests are worldwide tax planning, transfer pricing planning and Scandinavian taxation with focus on Norwegian tax and petroleum tax law and related cross-border tax planning. The author can be reached at rainer.zielke@hiof.no.
  2. ↑ See (Link) (as of 16 March 2017).
  3. ↑ See OECD, August 2016, (as of 16 March 2017).
  4. ↑ See Orbitax, Orbitax Country Analysis, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool, USA, 2017, Orbitax, FAG
  5. ↑ For the Liechtenstein Corporate Income Tax Act see (Link) (as of 16 March 2017).
  6. ↑ For the Liechtenstein tax reform 2017 see (Link) (as of 16 March 2017).
  7. ↑ For Liechtenstein Transfer Pricing see (Link) (as of 16 March 2017).
  8. ↑ For the US Internal Revenue Code see (Link) (Link) (as of 16 March 2017).
  9. ↑ For the US tax reform 2017 see (Link) (as of 16 March 2017).
  10. ↑ Tax base differences are not reviewed in this survey, as they can be very different depending on the industry, the kind of income, and the kind of the foreign element. Within the EU they are of subordinate importance.
  11. ↑ See Watrin, C., Ertragsteuern, 20th edition, Berlin, Erich Schmidt Verlag, 2013, p. 120.
  12. ↑ See Orbitax Country Analysis, 2017, Orbitax, FAG
  13. ↑ See (in German language) (as of 16 March 2017).
  14. ↑ See (in German language) (as of 16 March 2017).
  15. ↑ See (in German language) (as of 16 March 2017).
  16. ↑ See (Link) (as of 16 March 2017).
  17. ↑ See Orbitax Country Analysis, 2017, Orbitax, FAG
  18. ↑ See (Link) (as of 16 March 2017).
  19. ↑ See (Link) (as of 16 March 2017).
  20. ↑ For the tax law see Comtax AB, Helsingborg, Sweden
  21. ↑ See (Link) (as of 16 March 2017).
  22. ↑ For the tax law see Comtax AB, Helsingborg, Sweden

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