JCSM Shareware Collection 1993 November

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Liechtenstein: A Bit of Utopia in Old Europe The reader may wonder what else there is to discuss, what other categories of tax havens can exist apart from those already covered. Liechtenstein logically falls in the category of foreign-source-income havens, but it has certain features that merit special attention. In addition to "standard" corporate entities, it offers certain other possibilities. These can provide many of the benefits of corporations and trusts in flexible combination, almost "to order," without many of the disadvantages of both usual forms. There is one important caveat to keep in mind however: tax officials have a very deeply entrenched conditioned reflex of vast suspicion toward any business related to Liechtenstein. They "know" tax evasion is involved. Thus, it is better to use a Liechtensteinian entity indirectly, through at least one intermediary entity. Another preliminary point about Liechtenstein that must be mentioned is that it is a civil law country, not a common law one. Its legal tradition has considerable Swiss-German ancestry. Thus, one would not expect trust-like entities to be possible. But, surprisingly, they are. Unlike most other tax havens, Liechtenstein is not geographically isolated. It is a tiny principality on the banks of the Rhine, sandwiched between Austria and Switzerland. It is 16 miles long and, on the average, 3.7 miles wide. It is indirectly accessible by air. One can fly to Zurich and drive from there, or fly to any other European capital and go from there by train. The telecommunication and airmail services are excellent. Satellite direct-dialing makes telephone communication extremely easy. Politically, Liechtenstein is a constitutional monarchy. Legal sovereignty is exercised cooperatively and wisely by a hereditary prince and a democratically elected parliament. The tiny nation is very stable and prosperous, economically and socially. Liechtenstein is now heavily industrialized, though not long ago it was mainly agricultural. It is economically united with Switzerland. There are no customs barriers separating the two countries, and their joint currency is the rock-solid Swiss franc. The legal code has an interesting history. It originated in Austro-Hungarian law. In 1914, local legislation amending this basic law began to be enacted, influenced by both the German legal tradition and Swiss property law. In 1926 a unique, locally originated code dealing with property of both "physical" and "juridical" persons was drawn up. This code is the third chapter of a more general locally developed code of civil law. It defines various forms of available legal personalities--the "establishment," the "foundation," the company limited by shares, and the trust--and relates the defined entities to tax law. The most important feature of this law from a tax haven point of view is that a holding company, a company whose main purpose is the management of property and participation in other business organizations or the permanent management of holdings in other business organizations, is exempt from capital and earnings (income) taxes. Such a company pays a minimal annual tax on its total paid-up capital and reserve. A similar tax immunity is granted to "domiciled" companies, companies defined not by reference to the specific nature of their business activities but by reference to their noninvolvement in local business. Again, a minimal tax on total paid-up capital plus reserves is payable by such companies. Even better tax treatment is granted to "foundations," which, as against companies limited by shares (essentially standard corporations), are unique local creations. Foundations enjoy special sliding tax rates on capital. They are also exempt from the requirement of registration in the commercial register, thereby combining the advantages of privacy with that of virtually no taxes. There are two basic kinds of foundations. Family foundations are granted the tax benefits of the sliding rate scale on all capital over 10 million Swiss francs. Ordinary foundations enjoy these benefits on everything above 2 million francs. Another advantage of Liechtenstein is its bank secrecy. In fact, Liechtenstein preserves the Swiss tradition better than Switzerland. It enforces bank secrecy laws with great severity and is in no way committed internationally to relax these laws. This, combined with its lack of exchange controls, the world's strongest currency, unique corporate and tax laws, and excellent professional services, make Liechtenstein very attractive indeed. What merits it a special place in our considerations are the unique legal entities, the foundation and the establishment. The best way to understand the former is as a variation of the trust. It can be set up to allocate future property, generated by the investment of an original endowment, to family members or other beneficiaries. Instead of a trustee, there is a board (usually provided by a local trust company) that manages the principal fund (the endowment) and makes grants to the intended beneficiaries out of the returns on the investment, out of the principal invested, or both. A foundation need not be limited to such trustlike functions. It can, in principle, simply manage one's estate with the distinct advantage of untaxable returns derived by a separate legal person. A foundation is not locally taxable if it is mainly involved in investment in other companies or if it has no local business involvements apart from its own management. To return to the nature of foundations, the most prominent type of the straight family foundation, designed to support family members, provide for their education, etc. A mixed family foundation is similar, only it serves to provide for members of other families as well. The establishment of a foundation requires the separation of the endowment, constituting the foundation's property, from the estate of the settler and giving it a special name, purpose, and internal organization. It is these legal acts that give the foundation its "legal personality." Because this legal personality is not constituted by state registration, a foundation can be validly constituted in a private manner. Apart from the foundation's property (its endowment), a basic document signed by the settler, called the memorandum of settlement, is required. It is here that privacy may be compromised because the settler must sign and the signature must be officially certified. This can be taken care of by establishing a foundation through another legal person (such as a tax haven corporation) or through a lawyer with power of attorney, thus maintaining privacy. The memorandum of foundation must specify: (1) name of the foundation, (2) domicile of the foundation, (3) objects and purposes of the foundation, which can be quite vague and general, (4) specification of the nature and amount of the endowment, (5) organization of the foundation, and (6) how the property of the foundation is to be finally distributed, to what beneficiaries, in what manner, under what conditions, and when the foundation is to be dissolved. Clearly, this is quite similar to a trust deed. But there is a special local flexibility: the document, apart from meeting these requirements, can contain anything one wishes. Moreover, the discussion of the constitution of the foundation can be set forth in a separate document that also specifies the articles of settlement. Such a separate document would require another certified signature of the settler. Still another legal possibility is to have a letter of settlement, specifying the terms of the settlement and empowering the foundation board or any third party to specify details about benefits, modes of distribution, and so on. This approach is advisable only for a testamentary foundation, applying after the settler's death, for it means foregoing the power to make decisions and changes on such issues. One can specify the beneficiaries in extreme detail, or be quite general. It is also possible to have separate by laws supplementary to the memorandum and the articles of settlement added at any time after the foundation is set up, specifying beneficiaries and benefits. Moreover--and this is the major advantage of a foundation--the founder can at any later time change his mind about any specific provision. Unlike a trust, under which one can only send a "memorandum of wishes" to the trustees which they can follow or ignore as they choose, a foundation allows one continued control without liability for foundation debts or taxes. The various items that must be included in the basic document defining a foundation are as follows: Name. The name of the foundation can be virtually whatever one chooses, provided it includes no national designations and does include either Stiftung ("foundation") or Familienstiftung ("family foundation") as its last word. Moreover, the name must involve nothing illegal or immoral and should not conflict with the name of any other existing foundation. Similarly, if one wants to set up a business foundation, it is impermissible to call it a family foundation, and vice versa. It is possible to establish a family foundation with business involvements as a subsidiary function if one so chooses, but the original and principal purpose of a foundation whose name includes "family foundation" must be the support of one's family. Still, if unforeseen circumstances make the primary purpose obsolete, no change of name is required. The Purpose of the Foundation. This is generally similar for all: the administration of property and the distribution of income derived from that property. It can involve accumulation of property by self-insurance. The statement of purpose cannot include profit making as an independent objective. This does not mean that a foundation is barred from making, accumulating, and reinvesting profits for a given time--but this is the means, not the end. The end of a foundation, its proper and legitimate purpose, is to support beneficiaries. The point is that the foundation is trustlike in having a limited perpetuity period, at the end of which money must be distributed. It cannot go on making money indefinitely. Apart from this general consideration, the statement of purpose can be as vague and general or as specific as desired. The details can be left to the foundation board, and when it comes to investment policies, the wisest course is to leave this to the managers. To formulate a business policy for decisions that may take place twenty-five years after the settler's death would be extremely unwise. What is important is to have some basic guidelines and competent managers. The distribution of the foundation proceeds should be as specific as possible. If one wants to take care of his great-grandchildren yet unborn, a general description of this category of individuals is needed. One simple possibility is having a maintenance foundation paying a specified portion of its income to specified individuals without any extra set conditions or purposes. If, however, conditions or purposes are spelled out, they must be both legal and moral. The Capital Requirement. This is the strictest requirement of all. Capital must be irreversibly transferred to the foundation. If the assets do not consist of cash, one must provide proof by competent and independent assessment that their total value does not fall below the minimum paid-in capital limit. Moreover, if the assets include IOUs, these IOUs can later be legally enforced on the settler by the beneficiaries. There is a bright side to the irreversible alienation. The foundation's capital is not any longer the settler's, and his creditors cannot make claims against it. Nor can the creditors of the foundation make claims against the settler. This may be important if one is the sole beneficiary of his foundation and he goes bankrupt. He can still enjoy the fruits of the foundation without any creditor access to the property; at most, they could make claims against benefits from the foundation, but not the foundation's assets. The Organization of the Foundation. This constitutes the specification of foundation governing bodies. The settler can appoint them directly or appoint someone, such as the executor of his will, to appoint them. The first element is the "supreme authority." This is the settler. He determines the use and ultimate allocation of the foundation property. He appoints the original board members and can retain the right of dismissing them at will and appointing replacements. He establishes the beneficiaries, decides the distribution of benefits, etc. He can even maintain the right to revoke the foundation, amend its memorandum, add or delete new by-laws, or finally liquidate, dissolve, or merge the foundation with remaining property reverting to himself, to the beneficiaries, or to whomever he chooses. These extreme powers of "legislation" allow him to maintain day-to-day control over both the use of the money and its ultimate enjoyment, spared from the liabilities inherent in the normal management of personal property. He can make all investment decisions himself, make himself sole beneficiary, and still not be personally liable for taxes on the income the foundation earns or for whatever debts it may incur. Thus, one can have the advantages of a corporation coupled with those of a trust, and with complete privacy. The second element of foundation organization is the board. The terms of settlement of the foundation must specify how the board is appointed, how its members are dismissed, how a vacated position of a resigned board member is refilled. These decisions can be transferred to the board itself, reserved to the settler, or vested in whatever third party the settler chooses, including the beneficiaries. In the latter case, one must be specific about whether or not one of the beneficiaries can be appointed or elected a member of the board by other beneficiaries, if this is permitted, the method of doing so must be spelled out. There is a legal presumption in foundation law that if authority to nominate board members and the authority to dismiss them are not explicitly separated, these two powers are united in one person or body, but the settler can leave to himself the right of dismissal and allow the board (including the dismissed member in his last act of involvement with the foundation) to elect the replacement member. Obviously, board members cannot be nominated without their consent, and they can resign at any time. However, their initial consent to serve implies that they have to continue on the board until replaced. Alternatively, one can allow the board to act in the absence of a resigned member. The functions of the board are similar to those of a trustee of a trust or, more accurately, to that of a corporate board of directors. They decide on the administration of investments and the distribution of benefits. The settler can, however, restrict the board's range of powers as he thinks best. Board decisions are put into effect by majority vote, binding the minority, but even this "normal" feature can be altered in the terms of settlement. Any way one does it, though, the board's functions are administration and management. Any employee empowered to manage any part of the foundation's activities is considered to be acting on powers delegated to him by the board, which can be revoked at any time by dismissing and, possibly, replacing him. Members of the board are bound by "proper business practice," and they are liable for any default on this practice or any breach of responsibility. They must act to the best of their knowledge and ability in their efforts to implement the settler's instructions concerning distribution of benefits. It is normally presumed that the board does not nominate beneficiaries. But one can give them this right, or, as is more common, designate beneficiaries on a group basis (e.g., "all my grandsons"), with the board specifying the individual beneficiaries. This power of designation becomes larger if the original specification is vague. Does one's "family" include an illegitimate son? The illegitimate daughter of the cousin of one's mother-in law? If a settler were to be so unfortunately inexplicit as to what he meant by "family," and he is no longer around to ask, the board will have to decide to the best of its knowledge. The board's primary responsibility is to the settler. But he can transfer to it his power of supreme authority, transfer it to someone else, or simply die. In the latter case, it is the public supervisory authorities of Liechtenstein and the foundation's beneficiaries to whom the board becomes responsible. If one so wishes, the terms of settlement may allow the beneficiaries to sue the board collectively, or its individual members, for not respecting the rights and benefits granted them by the terms of settlement. Similarly, anyone who can prove a legitimate interest in the foundation's property can lodge a complaint with the authorities against the board for failing to act on the settlement terms or for violating the purposes of the foundation. A third foundation official that may but need not be appointed by the settler is a custodian. He can be given the power, say, of supervising payments of benefits as to amount, type, and recipients. Or he can be appointed to take care of the money due untraceable beneficiaries, in which case it is his duty to manage the money properly. A fourth body, optimal for board supervision, is a body of auditors. They, too, are not legally required. One can decide if such a body should exist, how its members are to be selected, what its range of responsibility should be, and so on. Another optional body is that of collators. They can handle the function of nominating beneficiaries within the limited range the settler prescribes. They can also be empowered to implement the settler's general instructions concerning mode, time, and conditions of benefit payments. In this case, the board is left only with the duty of management and administration. Of course, the more optional bodies employed, the greater the defense provided for the beneficiaries--and the larger the operating costs of the foundation. Thus, one's choice in these matters should balance up the risks to beneficiaries against the costs of maintenance. There are some fixed statutory requirements a foundation board must satisfy: keeping normal accounts and issuing statements of liabilities and assets and of profits and losses on fixed specific dates. This duty can be transferred to an accountancy firm the board nominates. If one so decides, he can retain the power to inspect the accounts and to make decisions based on them. Alternatively, some independent party may supervise the board to guarantee due performance. Thus, the beneficiaries or any subgroup of them could be granted the right to audit the accounts and act on the basis of the audit. A foundation can be revoked before registration (if such is necessary) or before documentation is completed, and if it is testamentary, any time before the settler's death. If the terms of settlement so specify, one can leave the right of revocation to himself, in the same way he can explicitly empower himself to modify the terms of settlement. The right of revocation can also be left to one or more heirs. There is a legal distinction between the two basic types of revocation. A foundation revoked before full documentation or registration has taken place is revoked "on the grounds of insufficiency of intention" as a special case of "insufficiency of contract." This is known as revocation ex tunc, or retroactive revocation. It legally cancels the existence of the foundation before its inception. In this case, no claims can be made against the foundation; all liabilities incurred by it become the settler's personal liabilities. The second type of revocation is that of a fully constituted foundation. This is known as ex nunc ("from now") revocation. All rights and liabilities incurred by the foundation are then valid, and it cannot properly be liquidated without full discharge, to the extent of its existing assets, of all liabilities. The only exception here is that in the terms of settlement one can provide for an automatic and immediate and even retroactive expiry of the benefits granted to beneficiaries. Thus, a foundation can cease to exist because it is revoked by whoever has the right under its terms to revoke it. Of course, it can be liquidated once it has accumulated money for its perpetuity period, distributed all of it, and discharged all its debts. It can also be annulled by the government if the object of the foundation becomes unattainable or unworthy of pursuit (e.g., the beneficiaries have all died); if the foundation cannot act any more to achieve these aims due to insolvency; or if the terms of settlement are legally defective beyond cure. The state supervisory authorities impose and execute annulment, but have no further right to supervise or inspect in any way the day-to-day activities of the foundation unless the settler specifically grants them this right. The concept of "beneficiary" is further refinable. One can separate beneficiaries in law--those granted the right to legally enforce on the board the benefits they are due--from the beneficiaries in fact, those not granted enforcement rights. Similarly, one can nominate conditional beneficiaries, those entitled to benefits only if certain conditions obtained as spelled out in the terms of settlement (e.g., other beneficiaries are dropped, a certain age is reached). Conditional beneficiaries have to agree in writing to accept the status of beneficiaries and, when the time comes, provide proper proof that whatever conditions were stipulated for benefits have been fulfilled. Unconditional beneficiaries are assumed to have agreed to receive benefits. One can empower the board to revoke beneficiary status if certain conditions are fulfilled. But the board has to exercise this power within five years of the event that constitutes satisfaction of the condition. Alternatively, one can set as a condition that, say, a beneficiary must have no criminal record of a certain kind, in which case the time limitation does not apply. As for oneself being a beneficiary, there can be circumstances under which a court may order a foundation to support the settler when it is proved that due to the establishment of the foundation he became incapable of paying his own debts. This implies, in effect, that one cannot abuse the foundation's status as a legal person and his power as supreme authority to establish a foundation from borrowed money, name himself sole beneficiary, and then declare bankruptcy. If the mode of paying benefits is not specified, then they are assumed to be in cash. If they are supposed to amount to a specified fixed sum per year without specifying that this sum actually will be given each year, it is possible to discharge them in one lump payment that can be proved to be equal to the purchase of an annuity that would yield the specified annual sum. Beneficiaries can go into court to defend their rights, as in a case where the board treats differently beneficiaries that are not differently treated in the terms of settlement. There is a legal presumption that equal benefits are to be given to all beneficiaries unless the settler has explicitly indicated otherwise. Also, the board cannot nominate beneficiaries if not explicitly given the right to do so, or if they have a closed list of beneficiaries, or if a body of collators exists for the purpose. If no specification of either beneficiaries or of a way to nominate them exists, the settler and his legal heirs after him are legally assumed to be sole beneficiaries according to the following rules: If one's children are appointed beneficiaries, the law considers them all to be his issue otherwise entitled to be his heirs. If his spouse is nominated as beneficiary, his surviving wife is deemed legally to be beneficiary if she has not remarried. (Remember, this happens when one does not stipulate to the contrary.) When no beneficiaries have been nominated and the settler is dead, the Liechtensteinian inheritance law applying to heirs when there is no will would specify beneficiaries. It is important to understand the way Liechtensteinian foundation law works as exemplified by the second rule. It is primarily a system of presumptions, not rigid restrictions. These presumptions apply when one does not specify something explicitly and do not apply when one's specific formulation excludes them. Where no presumptions exist, one must make a specification; otherwise, the foundation will be inoperative. For instance, one must spell out for each beneficiary (or for all of them as a group) whether or not benefit claims are to be made against the foundation investment returns or the original endowment. Otherwise, the board makes the decision, however arbitrarily. To avoid the abuse of foundations there exist some statutory requirements that are inflexible. Among them is the rule that creditors take precedence over beneficiaries. A foundation cannot legally pay benefits and avoid paying debts. Creditors, naturally, have the right to sue the board for failing to comply with this requirement. Also, there exists a legal requirement that whoever is granted by the terms of settlement the power to dissolve the foundation also has the power to make a partial distribution to the beneficiaries and, thereby, reduce their rights. It is easy to see that this system of presumptions and rules, combined with a settler's very wide powers and the fact that board powers are, essentially, residual, make the foundation much more flexible than corporations and trusts. One can reserve all powers and not be bound by the inflexible powers of a trustee or board of directors. Moreover, one can enjoy the "alter ego" of a legal entity without any public scrutiny such as that resulting from incorporation. A corporation must be registered; a foundation, like a trust, can be constituted with complete privacy and can operate with truly confidential, impenetrable numbered bank accounts. As good as it is, the foundation is not the optimal Liechtensteinian profit-making entity. The prize in this category goes to the establishment. Unlike the foundation, the establishment exists for economic purposes and not family or other "supporting" ends. It is a corporate body, with its own assets serving as sole backing for its own liabilities. It has its own internal organization and its own basic initial capital, allowing it to pursue lasting economic aims with no perpetuity period. An establishment has a founder, similar to a foundation settler. The founder is a legal personality, not necessarily a physical one. He can be one's agent or attorney. He can also be the owner of a certificate on which there is no name, like a bearer share. The founder must sign the articles of incorporation, and his signature must be authenticated by a notary. The articles of incorporation must specify: Name of the Establishment. This can be any fancy designation that includes no national names or references to Liechtenstein or any sort of subtitle. It must include the word Anstalt ("establishment"), and it must not be misleading as to the nature of the foundation or immoral or illegal. The name may include two parts, one of general application, which can be used by many establishments simultaneously (such as "establishment for timber processing"), the other specific, original, or descriptive. This second part can be used only by the originating establishment, which thereby gains exclusive right to it. The limitations on names implies, of course, that establishments, as against foundations and trusts, and like corporations, must be registered. It is up to the registrar to guarantee that the name satisfies all legal requirements and does not violate any prior right of use. Failure to register may incur serious penalties under the law. Purpose of the Establishment. This can be, but need not be, private profit, as well as public utility. It can be stated narrowly or broadly. Any later change in purpose requires an amendment of the articles. Of course, the purpose must be both legal and moral; failing that, it is assumed that the establishment never existed as a legal person. If it becomes legally established, it has all the legal rights of a person to property, name, and honor (i.e., it can sue for libel and slander). Dissolution on the grounds of immoral or illegal purpose, however, is a retroactive annihilation of this status of legal personality. It requires the decision of an administrative tribunal following an administrative complaint or a trial. When such an unhappy event occurs, the court is empowered to suspend all the activities of the establishment, to confiscate all its property, and to use it to pay the establishment's creditors. Any remaining assets can be confiscated by the government. Dissolution can also take place when the original goals of an establishment were not illegal or immoral but the establishment operates outside its allowed zone of activity as delimited by its articles. In this case, the state can take over the management of the establishment to pursue the original goals, and it can also, in the case of serious trouble, confiscate whatever remains of the establishment's property after debts have been paid. Capitalization. There is a minimum paid-in capital requirement of 30,000 Swiss francs if there are no participation shares or associates' rights. Otherwise, the minimum is 50,000 Swiss francs. The appropriate minimum can, if cash, be proved by bank certificate. If the minimum is not met by a cash deposit in a bank but is in other forms, evidence of its assessed value by recognized competent assessors must be provided. If participation shares are included, these can have a par value or represent a proportion of ownership. In the latter case, a specific, explicit statement to that effect must be included in the articles. Also, all shares must be fully paid-in, registered in a special ledger, and a specific body, as indicated in the articles, must be authorized to allow or disallow their transfer. All these complications can be avoided if the establishment has a single owner, the founder. Then he has the right to allocate profits as he likes, as well as the rights to change the articles when he sees fit, appoint and dismiss directors, etc. His legal heir inherits his founder's rights. When ownership is divided among shareholders, founder's rights are conferred upon the general meeting of shareholders. Alternatively, the articles may specify that the board of directors inherits from the general meeting part or all of its powers. Again, it is assumed, unless specifically excluded by the articles, that only beneficiaries of the establishment are members of the general meeting and that they all have equal voting rights. But the articles may explicitly allow for nonbeneficiary founders with voting rights, or for unequal voting rights. Organization. The articles must specify the operating organs of the establishment. The founder, as supreme authority, or alternatively, in the case of several founders and divided ownership, the general assembly, has already been discussed. Another indispensable organ is the board of directors. This can include any number of legal persons having the right to represent the establishment to third parties and sign contracts and commitments in its name, either individually, collectively, or in any combination provided by the articles. The assumption is that the term of appointment is three years, but the articles can specify any period and can allow for the firing and replacement of any director at any time by the supreme authority. There is a presumption that when the number of directors has been reduced by firing, resignation, or mortality, the board can continue business as usual with a reduced number. There is one inflexible requirement: There must be at least one Liechtensteinian citizen resident director. He can, however, be a proxy supplied by a local representative. The names and addresses of all directors, managers, and those proxies allowed to sign for the company, must be entered in the government company register. The board may act within the limits determined by the founder in the establishment articles and usually is assumed to have the right to hire employees for the establishment. The board is presumed, unless otherwise stated in the articles, to act collectively, and if individual directors are allowed to act individually under certain circumstances, the validity of such action is lost if objected to by another director. On the other hand, once the board signs a contract with the intention of binding the establishment, such legal binding exists, even if the establishment is not explicitly mentioned. The board is bound by standard business practice and responsible to the supreme authority. Its normal responsibilities include appointment and dismissal of staff, implementation of the founder's instructions, organization and expansion of the activities of the establishment within the limits set by the articles and by law, keeping complete accounts and records, and submission of annual reports to the supreme authority to permit it to reach independent conclusions. Being a member of the board imposes certain duties on an individual. He cannot start a business competing with the establishment or be involved with one unless already so involved when he took his office, this fact being known to the establishment founder at the time. In this case, it is presumed that he is free of the normal obligation not to work for the competition by virtue of special permission from the founder. In case of violation of this conflict-of interest principle, both immediate dismissal by the founder, without compensation, as well as a legal case for damages against the offending director is possible. It is possible, for instance, to demand that he transfer the advantages of a deal he made for himself to the establishment or give it whatever benefits he received from such a deal. But such action can be taken only within a year of discovery of the improper behavior of the offending board member. The right to represent the company is transferable from the board to specific managers, each within the domain allocated to him as his responsibility by the board. The board's method of operation, meeting, reaching decisions, and signing in the name of the establishment has to be specified in the articles. Methods of Accounting, Handling Balance Sheets, and Giving Notices to Relevant Parties. A body of auditors can be included in the organization, authorized to ascertain that the balance sheets, inventories, and profit and loss accounts agree with the books, that the books are properly kept, and that the information in them is accurate. It is their duty to report to the supreme authority (founder) any discrepancy or irregularity. Bookkeeping, annual balance sheets, annual statements of assets and liabilities, and copies of correspondence are required by law for all corporations and corporate-like business organizations, including establishments. The auditors may, additionally, represent the establishment to third parties unless they are explicitly denied this right in the articles. They can be appointed, for only one year at a time, and reappointed only twice, a maximum of three years altogether. The articles must also comply with statutory requirements for giving notices. If the establishment deals locally, all communications must be published in the official gazette. If not, a legal representative (a Liechtensteinian citizen and resident) has to post them on a court notice board. Provisions for Liquidation and Dissolution of the Establishment. These are restricted by law and must involve giving notice to creditors through a public notice in the publication organ specified in the articles. Within six months, if all liabilities have been duly discharged, the name of the establishment is struck off the books. If the liquidator finds out that liabilities exceed assets, all activities must be suspended and the courts informed about the bankruptcy. In the period of liquidation, the establishment is still a legal person, but the words "in liquidation" must be included in its name. Its liquidators gain the rights of directors and are bound with respect to the founder, his heirs, and creditors in the same way normal board members are, though they are exempted from the prohibition against working for competing firms or competing with the establishment that is imposed on board members. Liquidation also involves its accounting counterpart. Liquidation balance sheets, indicating all liabilities discharged, debts paid, assets sold, and cancellation of registration effected must be submitted to the founder. During the period of liquidation, no dividends to shareholders are payable. The books of the liquidated establishment must be preserved for ten years, and anybody with valid claims after liquidation is completed will be granted permission to inspect them. Such claims become valid against the legal successors of the establishment, those who collected what was left of the assets after all preceding debts have been repaid. An establishment must be registered by the state. Costs for this are information duty, registration fees, and variable stamp duties. If an establishment trades locally, it must pay a capital tax plus a profits tax. The profits tax ranges from 5 percent to 12 percent, and within these limits the rate is one-half the ratio of the net profit to the total capital. For example, if the profits are 10 percent of capital, a 5 percent profits tax is due. If an establishment trades only outside Liechtenstein, its sole liability is an annual capital tax. If ownership is divided into shares, 3 percent of dividends paid is taken as a coupon tax--another good reason to set up an establishment without shares. The possibility of taxes because of either local involvement or divided ownership implies the general necessity of annual tax returns of profit and loss to show whether or not an establishment has any tax liabilities apart from the basic standard capital taxes. All these monies are official payments. It is hard to establish general figures for annual maintenance and management because there are so many variables. Individual circumstances will dictate whether or not a Liechtensteinian establishment is worth setting up. Apart from the foundation and the establishment, simple incorporation in Liechtenstein may offer benefits similar to those that can be obtained in other no-tax-on-foreign-income havens. These advantages should be considered carefully, since Liechtenstein offers Swiss-type bank facilities, monetary freedom, and privacy. On the other hand, one should bear in mind that a Liechtensteinian corporation is much more suspect in the eyes of tax authorities than, say, a Hong Kong corporation. In Liechtenstein, ownership of a corporation can be divided not only into shares but into fractions, or quotas, and the relevant documents must specify the total sum of capital and reserves. Division into fractions or quotas simply means that each certificate represents a percentage of the corporation instead of a fixed number of shares. For example, it may be for 10 percent of the capital, and would simply state on the certificate that it represents 10 percent ownership of the corporation. Shares can be without par value, and bearer shares are also allowed. The articles of incorporation can allow conversion of one kind of share to another, as well as for variable capital, within certain limits. The latter possibility requires the use of shares rather than certificates of ownership of fractions or quotas. Further, Liechtenstein allows the articles of incorporation to specify the proportion of bearer shares to be paid-in, subject to a legal minimum of 50 percent. The articles of incorporation have to specify the usual things: corporate name and registered office address, capitalization (amount of initial capital, division into shares, nature of shares, nature and amount of paid-up capital, and the amount to be paid-up for each share), method of calling the general meeting of shareholders, governing bodies of the corporation and the manner in which members are appointed and dismissed to and from positions on them, and the form of communication of notices to shareholders and third parties. Apart from these standard clauses, one could add extra provisions that may relate to the value of non-cash contributions, special privileges of founding shareholders as against those who buy in later, and provisions relating to special amendments needed to general corporate law in its application to the particular corporation (e.g., how articles can be amended, how changes of authorized capital are to be executed, how mergers are to be performed). Additional restrictions, such as a built-in limitation on the life of the corporation, limits on the transfer of registered shares, differentiation in the voting power of certain kinds of shares, etc., can also be included. An extra flexibility is offered by the fact that local law allows two forms of incorporation, so as to permit appeal to public finance in the process of formation itself. The first mode, "simultaneous" incorporation, involves the standard procedures. The founders sign a memorandum declaring incorporation of the company, sanction the articles, confirm their acceptance of all shares, and pay for them. The second mode is "successive" incorporation. Here the founders need not subscribe to all shares, but merely to some of them. They lay down and sign the articles, subscribe to their part of the share issue, and offer the remaining shares to the public. After all shares have been subscribed to, a general meeting of all shareholders is convened to decide on the appointment of officers and the confirmation of the articles. Successive incorporation requires a prospectus specifying all relevant details concerning the articles, times for subscription and payment, subscription offices, the issue price of shares, and how much has to be paid-in before the first general meeting of shareholders. Under either method, incorporation requires a minimum paid-in capital of 50,000 Swiss francs. Registered shares can be subscribed to by a mere 20 percent premium, as against the already mentioned 50 percent premium on bearer shares. As usual, the difference between the issue price of a share and the premium is a liability of the shareholder to the corporation. In an instance in which the paid-in capital includes noncash assets, or in which some shareholders are granted certain special privileges by the articles, the founders must publish a written report setting forth the cash value of the noncash contributions and/or why privileges have been granted. These reports must be open to public inspection in any subscription office, because when an individual subscribes he is entitled to know why other shareholders will have privileges he will not have, what they are, and how noncash payments are valued. Moreover, any group of shareholders controlling 10 percent of the shares is entitled to enforce expert evaluation of the noncash assets as well as independent evaluation of any special privileges. If this right is invoked, both reports would be discussed in the next general shareholders' meeting, and if they are rejected by majority vote, the shareholders are entitled to a refund. Any such peculiarities as noncash contributions and special privileges to special shareholders require the approval of three-fourths of the shareholders. Only when this sequential process is completed, all shares subscribed, all special features are approved, and officers appointed, is registration in the commercial register effected. Registration cannot be accomplished unless the minimum paid-in capital of 50,000 Swiss francs is fully certified by bank documents or assessment of noncash contributions or both. Sequential incorporation allows one to solicit strangers to participate in a corporation. Another possibility for financing comes from the right Liechtensteinian companies have to float bonds to shareholders and the general public. Bonds may entitle their owner to the right to buy future shares when issued, but they do not carry voting rights. While Liechtensteinian corporations are flexible, the flexibility has its own built-in restrictions. Variable capital is allowed, but it is only allowed with registered shares. Increasing capital requires selling more shares. Decreasing capital requires buying up shares and canceling them. The maximum capital cannot be more than ten times the minimum, as specified in the articles, and must be specified as well. Any act of purchasing and canceling shares requires a liquidation balance sheet showing that after repayment the liabilities of the corporation are still covered by its remaining assets, reserves, and capital. The specific mode of buying shares back must be set forth in the articles. Another possibility for handling repurchased shares is to "freeze" them for awhile and resell them later. Since such "frozen" shares have neither voting nor dividend rights, this is equivalent to canceling and reissuing the same shares--within the limits of variability of capital allowed by the articles. Another restriction is that if the minimum authorized capital of the corporation is higher than the legal minimum of paid-in capital (more than 50,000 francs), there is a statutory requirement of a yearly accumulation of 10 percent of net profits in a reserve fund until the minimum is reached. This 10 percent is, therefore, not distributable as dividends. Liechtensteinian corporations can be liquidated in a number of ways: by court action due to illegal or immoral operations or bankruptcy; in accordance with specifications in the articles; and by a majority vote to liquidate in a general shareholders' meeting. A corporation must keep books, and its board must submit annual balance sheets to the general meeting within six months of the end of the accounting year. For a corporation with more than one million Swiss francs' capitalization and for any corporation with bonds outstanding, balance sheets and profit and loss accounts must be publicly published. Apart from the minimum capitalization requirement, the cost of incorporation depends on the capital involved. On top of this, there are small stamp duties and certification costs. As for maintenance, there is an annual capital tax on the total capital (with a minimum tax of 1,000 Swiss francs). If a company is either a holding company or a domiciliatory company--that is, if it specializes in holding investment portfolios or if it operates only outside Liechtenstein--no further taxes apply. Local operations, however, involve some additional taxes. There is an earnings tax and a higher capital tax. All companies, including domiciliatory and holding companies, pay a 3 percent coupon tax on dividends and a 3 percent tax on interest paid to bondholders. And every company must annually file with the government a balance sheet, a profit and loss account, and details concerning the coupon tax. Of course, to these taxes must be added the expenses associated with paying board members, company officers, and so on. Liechtenstein is outstanding among civil law countries when it comes to trusts. It is an exception to the rule that civil law nations either do not allow trusts or, if they do, the trusts they allow are less than desirable. In Liechtenstein, trust law considers a trust to be a contract between the trustor and the trustee. It is a private contract that does not require registration with a public registrar and is thus a very private affair. The trust property is whatever estate, funds, or other property one allocates to the trust, and it can be described in the trust instruments in as great or as little detail as one might like. It contains, of course, the principal plus accumulated revenue of investment returns and/or compensation for damages incurred to property. The trust, in view of its private nature, is not a separate legal entity, and does not have limited liability. The trustee is personally or corporatively liable for debts (not including taxes) incurred by the trust property he manages, and he has the right of legal recourse against both the trustor and the beneficiaries, unless the trust instrument explicitly excludes this right. The trust property is managed, legally, under the title of the trustee, in accordance with his appointment by the trustor. The trustee is entitled to a salary for his services and reimbursement of all expenses incurred by him in managing the trust and for damages that might be incurred by his property by the trust property. An advantage of Liechtensteinian trusts is that they can operate under the laws of, say, the Cayman Islands or Hong Kong, to be applied locally by Liechtensteinian courts. The major drawback is the fact that the trust is not a legal person, and thus its income is taxed to the trustor. To avert this, another special Liechtensteinian entity exists: the trust enterprise. The trust enterprise is a legal person, managed by a trustee. It must be registered in the commercial registry as a "registered trust." This is in line with the fact that legal entities can usually be formed only through the state. Private agreements usually cannot create legal entities (Liechtensteinian foundations excluded). The corporate document of the trust enterprise, the trust statement, must specify all that is usual for corporations: the name of the trust, the registered office address, the perpetuity period (not limited by law), the purposes and objects of the trust enterprise, and a statement of limited liability. Apart from the trust statement, trust articles are needed, specifying the amount and nature of funds (with a separate list of items), the number of trustees and the method of appointing and replacing them. The minimum capital required of a trust enterprise must be fully paid-in. As against common law trusts, the purpose of a trust enterprise can be business, family support, or philanthropy. The trustees are legally free to make investment decisions in accordance with whatever provisions are specified in the trust articles. Their expenses and salaries are paid out of the trust enterprise's revenues unless the articles otherwise specify. The trust enterprise, being a legal personality, covers its liabilities through its assets alone. The trustor, trustee(s), and beneficiaries become legally liable only due to some violation of the trust articles or through illegal exploitation of the trust. Trust entities are taxed like other corporate entities in Liechtenstein. If all income comes from abroad, a minimal annual capital tax is due. Local activities are penalized by the local taxes mentioned above. Finally, trust enterprises, like private trusts, can be made subject to any other country's laws, with local courts applying them. The great flexibility of Liechtensteinian corporate and trust laws, the various tax advantages, the absolute privacy available, the monetary freedom, and the soundness of the Swiss franc together explain why 20,000 companies are registered in Liechtenstein. Since each of them pays the government a minimum of 1,000 Swiss francs a year, this adds up to very important revenues for a country with but 20,000 citizens. It is unlikely, to say the least, that this paradise for wise investors will go aglimmering any time soon!