Global Tax Alert | 8 February 2018
Liechtenstein issues guidance on BEPS measures
On 22 December 2017, an amendment of the Income and Municipal Tax Ordinance as well as an amendment of the Tax Administrative Assistance Act and the respective Ordinance were published in the Official Liechtenstein Gazette. The new regulations clarify various points regarding the measures enacted in 2017 against base erosion and profit shifting (BEPS).1 Furthermore, application of the tax credit system has been clarified. Both amendments entered into force effective on 1 January 2018.
The following measures were introduced in the new regulations:
- Application of the current version of the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TPG) when determining the transfer prices of transactions with related parties and permanent establishments (PEs) to ensure compliance with the arm’s-length principle.
- Documentation requirements (filing upon request) in the form of the Master File and Local File for taxpayers which are part of a group with consolidated turnover greater than CHF900 million (approx. US$2961 million).
- Specific documentation requirements (filing upon request) on intercompany transactions for large entities not required to file the Master File and Local File.
- Establishment of the legal basis for the spontaneous exchange of ruling information.
- Details on the requirements to apply for a tax ruling and on the form, content, binding effect and cost.
- Detailed definitions regarding the tax credit system for individuals and companies for foreign-sourced income which is subject to foreign withholding tax, provided that a double tax treaty was concluded with the other state which provides respective rules for tax credits or that the respective other state guarantees reciprocity.
The new regulations, published on 22 December 2017, reflect Liechtenstein’s commitment to comply with the OECD standards in the area of corporate taxation. The now published regulations include the following amendments:
Transfer pricing rules (BEPS Action 13 – Transfer Pricing Documentation and Country-by-Country Reporting)
Taxpayers are required to apply the current version of the OECD TPG when determining the transfer prices of transactions with related parties and PEs. When selecting the most appropriate transfer pricing method, actual facts and circumstances of the relevant transactions are taken into account. The following methods are acceptable:
- Comparable uncontrolled price method
- Resale price method
- Cost plus method
- Transactional net margin method
- Transactional profit split method
- Any other method if none of the aforementioned methods is suitable for properly applying the principle of external comparison at arm’s length
Taxpayers who are part of a group of companies with consolidated revenue greater than CHF900 million are required to document the appropriateness of the transfer prices by means of a master file and local file in accordance with the OECD-guidelines. Accordingly, cross-border transactions must be documented if the amount of purchases and sales of goods in a year exceeds CHF1 million per related person or PE. In the case of other expenses and income, cross-border transactions must be documented for an amount of CHF250,000 per year per expense or income category.
Taxpayers who are not part of a group of companies with consolidated revenue of more than CHF900 million but are still considered as a large companies, also have to meet certain less complex documentation requirements. A company qualifies as large (under Liechtenstein company law) if the following three criteria are exceeded: total assets of CHF25.9 million, net revenue of CHF51.8 million and annual average of 250 FTE. If all three thresholds are exceeded, the taxpayer has to document the appropriateness of the transfer prices. In this case, cross-border transactions must be documented if the amount exceeds CHF500,000 for purchases and sales of goods or CHF125,000 for other expenses and income. Furthermore, the documentation has to cover the following items:
- Description of the company, its business model and the legal and organizational structure
- The nature and scope of all business relationships with related parties and PEs
- Allocation of the relevant functions, risks and assets between the individual parties involved in business relationships with related parties or PEs
- Description of the transfer pricing method(s) selected for relevant transactions and the reasons why the method was selected
- Documents and/or analyses on the specific calculation of transfer prices and on the appropriateness of the transfer prices applied
The transfer pricing documentation (master file and local file as well as the less complex documentation for large companies) has to be submitted to the tax administration within a period of 60 days upon request (no general filing obligation). The documentation requirements regarding transactions with related parties only apply if their participation or benefit amount to at least 25%.
Spontaneous exchange of tax rulings (BEPS Action 5 – Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance)
With its accession to the Convention on Mutual Administrative Assistance in Tax Matters, Liechtenstein committed itself to spontaneously exchange ruling information. With the current amendment of the Tax Act on Administrative Assistance, Liechtenstein has established the legal basis for such exchange in the national legislation. The amendment of the tax act is consistent with the OECD report on BEPS Action 5. In addition to the amended tax act, the tax authorities published a respective ordinance in which the conditions for the ruling exchange and the procedure is further specified.
A ruling is generally subject to the spontaneous exchange of ruling information with foreign tax authorities, if it falls into one (or more) of the following categories:
- Preferential regime ruling
- Unilateral advance pricing arrangement or other transfer pricing ruling
- Downward adjustment ruling
- PE ruling
- Conduit ruling
Prior to the transfer of information, the companies concerned will be informed by the tax administration about the intended spontaneous exchange of information and the company’s right to participate in the domestic legal procedure. If the notification of any persons concerned would prevent the success of the foreign investigation procedure, an exception procedure with subsequent information of the person concerned may be applied.
The provisions on the spontaneous exchange of ruling information apply to tax rulings issued after 1 January 2012 that are still valid on 1 January 2017 as well as those tax rulings issued after 1 January 2017. The respective rulings will be exchanged with foreign tax administrations for the first time in 2018.
Furthermore, with the amendment of the Income and Municipal Tax Ordinance, Liechtenstein specified the formal requirements to apply for a tax ruling and on the necessary content and binding effect of such rulings. Basically, the tax administration may issue upon request a binding statement concerning the fiscal consequences of a specific, not already materialized fact or transaction. If the legal basis for the tax ruling is subsequently amended, the binding effect of the tax ruling is null and void as of entry into force of the amendment. Furthermore, if the statement issued was not correct, the tax administration may repeal or amend the tax ruling with effect for the future. The cost for a tax ruling request will be determined by applying the general regulation on administrative fees.
Tax credit of foreign taxes
Liechtenstein taxpayers may request a tax credit of foreign withholding taxes provided that a double tax treaty was concluded with the other state providing the respective rules for such tax credits or that the respective other state guarantees reciprocity (reciprocity principle).
To apply for a tax credit, the respective income must be subject to taxation in Liechtenstein. Lump-sum taxed individuals may not apply for a tax credit. The maximum credit generally equals the foreign withholding tax or the Liechtenstein tax on the respective income, if lower. For individuals, the new ordinance clarifies that for the calculation of the maximum tax credit not only Liechtenstein income tax but also Liechtenstein net wealth tax is considered. For corporations it should be noted that participation income is generally tax exempt in Liechtenstein and, as a result, no tax credit may be claimed on dividend income which is subject to foreign withholding taxes.
In the foreign state, every possible measure must be taken to reduce foreign taxes on this income for individuals and companies, i.e., a tax credit may only be received for non-refundable withholding taxes. The tax credit is granted only upon application, which can be filed at the earliest after the end of the tax year in which the income has become due but must be requested at the latest within three years after the end of the calendar year in which the foreign income has been received. For minor amounts (foreign tax of CHF50 or less), no tax credit will be granted.
The new regulations entered into force on 1 January 2018. A tax credit may be requested for the first time for the tax year 2018 (for individuals the tax year 2018 is the calendar year 2018, for companies the tax year 2018 is the reporting period ending in calendar year 2018). The transfer pricing documentation has to be prepared for the tax year 2018.
1. See EY Global Tax Alert, Liechtenstein releases consultation report on implementation of BEPS measures into tax law, dated 19 May 2016.
2. Represents an exchange rate of US$1.07 to CHF1 on 5 February 2018 (data from Morningstar).
For additional information with respect to this Alert, please contact the following:
Ernst & Young AG, St. Gallen
- Roger Krapf
- Christian Schwarzwälder
Ernst & Young AG, Geneva
- Markus Koch
Ernst & Young AG, Transfer Pricing Services, Zurich
- Hubert Stadler
- Christian Jergen
Ernst & Young LLP, Swiss Tax Desk, New York
- Conradin Mosimann
EYG no. 00670-181Gbl