Over the last 20 years foundation law has been developed mainly by court decisions. On April 1, 2009 however a new Liechtenstein foundation law has been implemented. Basically the existing foundation practice has become law since then. Aim of the new legislation was to be more transparent and to implement a survey especially on foundations with common-profit purposes. A minimum of two board members (directors) is required since then. A special authority, the foundation-surveillance-authority has been implemented, too.
The Foundation (Art. 552 PGR)
The foundation is an independent special-purpose fund, which has legal personality and is separate from the private assets of the settlor. The minimum capital of a foundation is CHF 30,000.00.
The formation of a foundation takes place through the dedication of a fund (the assets of the foundation) for a certain specified purpose. The settlor is usually completely free to choose the purpose. Thus, under Liechtenstein law, in contrast to most other states of continental Europe, even the so-called maintenance foundation is permissible, the exclusive purpose of which is the payment of the living expenses of a family. One can even find a sole purpose foundation.
Art. 552 § 2 PGR lists common-purpose and private purpose foundations. In practice the family foundation, a private purpose foundation (in its various forms) is the most common, its purpose being to safeguard manage and conserve the funds of a family, and to maintain and support family members and often charitable activities as well.
A foundation can only carry on commercial trade when it serves the attainment of its non-economic purpose or where the nature and extent of the holding of interests requires a commercial enterprise. In this case an audit board must be appointed and a balance sheet audited by it is submitted annually to the Liechtenstein's tax authority. Audited accounts must also be prepared for most common-purpose foundations.
Foundations which do not carry on a trade pursued on a commercial basis are not required to submit a balance sheet. An internal documentation of the financial situation and transactions of such a foundation has to be made anyhow.
As a rule, the foundation document contains only a general description of the purpose, whereas the nature and extent of the beneficiary rights or the exact designation of the beneficiaries are specified in the bylaws or internal regulations. This assures the flexibility of the foundation and sometimes helps protecting privacy of the beneficiaries.
A common-purpose foundation normally only attains the status of a legal personality when it is entered in the Public Register. Most of the private-purpose foundations are not entered in the Public Register, since they acquire legal personality as soon as they are formed. These foundations only need to send a notification of the formation to the Public Register which guarantees a high degree of confidentiality.
Also in the "new" foundation law, there is a provision for the settlor to reserve the right to cancel the foundation or to amend the statutes. This is a personal right of the settlor which may not be transferred or inherited.
Most Liechtenstein private-purpose foundations are taxed with 0.1 % of their capital and the reserves. The minimum tax is CHF 1,000, which has to be paid in advance.
For foundations, whose assets plus reserves exceed CHF 2 million, capital tax is reduced to 3/4 0, and if assets plus reserves exceed CHF 10 million, it is 1/2 0 (Art. 85 (1) Tax Act in the wording of LGBl. 1996 no. 88).
The Trust (Art. 897-932 PGR)
Uniquely in continental Europe, Liechtenstein has defined the institution of the trust in positive law, following the English common law model (Art. 897-932 PGR).
A trust is formed when a third party (the settlor) assigns a trust property to a trustee and imposes on the latter the obligation to administer or use this trust property in his own name in relation to any person in favour of one or more beneficiaries. It corresponds to the English law private express trust.
However, unlike the English law trust, Liechtenstein law neither prohibits the accumulation of earnings, nor does it have a "rule against perpetuities" in the sense of a limitation to a certain time. Furthermore, pure special-purpose trusts are also allowed.
The liberal Liechtenstein law also allows the formation of trusts according to foreign, e.g., English or American, law. Pursuant to Art. 931 PGR, the foreign trust regulations to be applied must be expressly listed in the trust document. The ability to form a trust in accordance with the familiar law of their own country is especially convenient for foreign settlers, because already prepared statutory provisions can simply be adopted.
A trust is usually not registered with the public registry, but simply deposited with it. In this case a third party gets information from the public registry only when proving a justified interest, such as where it is a potential beneficiary or a protector.
Usually also the trust is taxed with 0.1% of the assets, with a minimum tax of CHF 1,000 per year, payable in advance.
Differences and similarities between foundations and trusts
The settlement of the trust is a legal act, by means of which a person, the settlor, transfers assets to a person, the trustee. The trustee will manage or dispose of them in favour of the beneficiaries. The settlor may be one of the beneficiaries.
The trustee is often a natural person or a firm or trust company engaged professionally in the business of administering companies, foundations or trusts or managing assets, which are legally under the ownership of the entrusted trustee, but subject to the provision of the trust deed or within the guidelines of a letter of intent.
Setting up a Liechtenstein foundation and registering the foundation with the public registry or depositing the foundation documents, grants legal personality to the Liechtenstein foundation. As a result, the foundation may purchase and hold assets of any kinds and may enter into any agreements in its own name.
Unlike trusts it is the foundation itself who owns the assets, which are managed by the foundation council. The assets of a trust are under the ownership of the entrusted trustee.
The foundation council has the function and duty to fulfil the objects and purposes of a foundation.
The foundation may be used in a legal structure, or as a vehicle for the ownership of any assets, whether they are moveable or real estate.
In the trust system, the settlor transfers the assets to the trustees, which are based on executed formal documents.
The control and administration of the assets given in trust is in the sole power of the trustee, whereas in the Liechtenstein foundation this power of control and administration is in the hands of a foundation council. However, the Liechtenstein foundation as the common law trust benefits the system of a protector or advisory board, which can protect the interests of the settlor and of the beneficiaries and can advise the foundation council. All of the discretionary foundations should have such a protector.
The trust allows the appointment of one or more trustees without a minimum or maximum, as do foundations.
A Trust can be set up according to foreign Trust law in Liechtenstein, whereas a Liechtenstein foundation can only be set up according to Liechtenstein law.
Foundations provide provisions limiting legal claims against the settler, and are therefore often used for asset protection.
Foundation and likewise the trust are often used to substitute wills. However, trusts and foundations can be challenged by heirs, based on their legal portion, if their home country grants such rights.
Many Trusts are named after the settlor, and are used to execute commercial transactions such as purchases of release estate, administration of assets, investments and entering into international agreements.
Foundations are widely used as a discrete vehicle to protect the interests of the settlor and can be formed as family foundations, philanthropic/charitable or ecclesiastical foundations or as a mixed-purpose foundation, and are often also used as holding entities.
One of the main advantages of a foundation is that a foundation is not subject to the rules against perpetuities and accumulations. These rules would apply for Liechtenstein trust set up according foreign law, but not for Liechtenstein law trusts.
Who uses a Foundation rather than a Trust
Principally settlors from civil law countries rather choose the foundation, whereas settlors from common law countries tend to choose the trust. It is more a question of domicile and the legal system why to set up a foundation or a trust, rather than a decision based on legal or rational grounds.
Why are Foundation and Trust formed?
Foundations and Trusts have been set up to the advantage of the settlers since decades and the reason for setting up a Foundation has been the same as now.
Here are some reasons:
Foundations and trusts may preserve property and capital for generations.
A foundation or trust may be set up to make regular payments to family members granting education, maintenance or housing, even when the settlor no longer lives.
If children or grand children are young, there is a risk that they will receive or inherit too much too soon. It is advisable setting up a foundation to hold the assets until the children or grand children are older and wiser.
Foundations and trusts often held art collections, so that the collection is kept together and not sold.
Foundations and trusts may grant that a friend or an aged dependant receives care and assistance during lifetime. The foundation is funded with enough capital and upon the death of the person; the funds could be contributed to the family of the settlor.
If a child or a grand child is handicapped, has an unstable marriage, is involved in insolvency proceedings, or if there are other reasons that they may be incapable of managing their own affairs, a foundation may support them until the potential risks for the child or grand child have ended.
In a case a person loses her mental capacity, the assets and affairs of such a person are handled by the Courts or Government Agencies. If the assets have been placed into a foundation or trust only the entrusted foundation board members or trustees administer the assets according the letter of wishes and By-laws, so that the standard of living is granted also in future.
A foundation or a trust is a perfect vehicle to carry on scientific, philanthropic, religious, or humanitarian purposes or to manage assets or funds to grant such activities.
It is very common to set up a foundation or trust to protect the assets of a settlor against political and other instabilities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.