Tax Guide for US Expats Living and Working in Liechtenstein
Who Is Liable For Income Taxes in Liechtenstein
Under Liechtenstein’s tax system, the national government and regional communities levy income and net worth taxes. The regional communities levy surcharges on the taxes of the national government. Income tax is levied on all forms of income. As a result of the tax reform that entered into force on 1 January 2011, the net worth tax is no longer calculated separately but is integrated into the income tax.
All resident or domiciled individuals are subject to income tax on worldwide income, with the exception of income from real estate located abroad and income from either a fixed place of business or a permanent establishment located abroad. In addition, all resident or domiciled individuals are subject to income tax based on the standardized return level of worldwide net assets other than real estate and business premises located abroad.
Nonresidents are subject to tax if they are employed in Liechtenstein, if they own real property in Liechtenstein or if they have business premises in Liechtenstein. Nonresidents are subject to tax on income derived from Liechtenstein sources including Liechtenstein real estate, owned or leased, and business premises. In addition, nonresidents are taxed on income from self-employment and business activities carried out in Liechtenstein.
Individuals are considered resident or domiciled in Liechtenstein if they meet any of the following conditions:
- They maintain a legal residence in Liechtenstein.
- They have a “customary place of abode” in Liechtenstein. This means that they are present in Liechtenstein for at least six consecutive months.
Income subject to tax
Employment income. Taxable income includes compensation from employment, self-employment and income from secondary employment.
In general, retirement benefits in Liechtenstein are also included in taxable income. Retirement benefits are derived from the following sources:
- Mandatory social security system (old-age and survivors’ insurance). Pensions are based on premiums paid and on the number of years employed. Benefits generally satisfy minimum cost-of-living requirements.
- Company pension plans.
- Individual savings.
At least 30% of old-age and survivors’ pension benefits and disability insurance benefits is taxable. The taxation of other pensions depends on the manner in which the pensions are financed. At least 70% of pension benefits is taxable if the taxpayer paid half of the contributions. Benefits are subject to a higher tax rate if the taxpayer contributed less than half of the contribution amounts.
Self-employment and business income. In general, income taxes are levied on individuals who earn self-employment or business income in Liechtenstein. However, for nonresident partners of companies domiciled in Liechtenstein, the companies are subject to taxes on profits.
Self-employment and business income is taxed with other income at the rates.
Investment income. Rental income and investment income from dividends, interest, royalties and licenses are not taxed based on the amount of effective income. Instead, they are taxed based on the application of the standardized return rate to the net market value of all movable and immovable assets (see Section B).
Directors’ fees. Resident directors are subject to tax on directors’ fees from companies in Liechtenstein together with other income at the rates.
Capital gains and losses
Movable assets. Capital gains derived from transfers of business and personal movable assets are generally exempt from income tax.
Immovable assets. Capital gains derived from transfers of personal and business immovable assets are subject to a separate capital gains tax on real estate. The gains are taxed at the same rates as the income tax rates applicable to unmarried persons, which are progressive rates with a maximum rate of 21%. Recapture of depreciation of immovable business assets is treated as ordinary income and taxed at the ordinary tax rates (not at the rates applicable to capital gains).
Deductions
Deductible expenses. Employees may deduct necessary expenses incurred in connection with their employment, including travel expenses, meals and education.
Premiums for old-age and survivors’ insurance, disability insurance and unemployment insurance are fully deductible from taxable income. Contributions and premiums payable to pension funds are deductible, up to a maximum of 12% of taxable income.
Personal deductions and allowances. A limited amount may be deducted for premiums paid for life, accident and health insurance, for expenditure for medical and dental treatment, and for costs related to children’s education.
No specific personal allowances are granted to individual taxpayers.
Business deductions. Individuals may deduct all business expenses and 4% (standardized return rate) of the amount of their business working capital. Income taxes and net worth taxes are not deductible.
Rates
Income tax. The progressive income tax rates for 2011 range from 3% to 21% (for a commune applying a communal multiplier of 200). Income from foreign assets, including real property and business premises, and other foreign income is considered in calculating the progressive tax rate.
The tax levied by the state consists of income tax and the surcharge. Communities impose an additional surcharge on the state tax at rates ranging from 150% to 200% (in 2010), resulting in a maximum income tax rate of 21%.
Lump-sum taxation. Instead of net worth and income tax, lump-sum taxation may apply to individuals who meet all of the following conditions:
- They are domiciled or reside in Liechtenstein and they are not citizens of Liechtenstein.
- They are not employed in Liechtenstein.
- They live on income from assets or other payments received from sources abroad.
Lump-sum tax is assessed on the living costs of the taxpayer. For the sake of convenience, the living costs are usually a multiple of the annual rent. The taxable amount results from multiplying the living costs by the applicable tax rate. The maximum applicable tax rate is 15% (5% plus 2 times 5%). According to the practice of the tax administration of Liechtenstein, the lump-sum tax must be a substantial amount. Otherwise, the regular tax regime applies.
Relief from losses. Business losses of self-employed individuals may be carried forward for five years. No carrybacks are allowed.
B. Other taxes
Net worth tax. Because the net worth tax is now integrated into the income tax through the calculation of the standardized return, wealth is not taxed separately. The determination of the amount of the taxable assets is relevant only for the purpose of determining the standardized income that is subject to income tax. The annually determined standardized return rate, which is applied to the net market value of all moveable and immoveable assets, is 4% in 2011. In addition, the surcharges described in Rates may apply. Real estate and business premises abroad are not subject to taxation. Liabilities and any increase in assets during the year may be deducted.
Inheritance and gift taxes. As part of the tax reform the inheritance and gift tax was abolished.
C. Social security
Contributions
Employees. Liechtenstein’s contribution rate for old-age and survivors’ insurance and for family pension funds for 2011 is 11.6% of total (unlimited) salary. The employer pays 7.05%, and the employee pays 4.55%. The employer withholds the employee’s share monthly. In addition, contributions of 1%, on annual salary of up to CHF 126,000, must be made to the unemployment insurance fund. The cost is divided equally between the employer and the employee.
All employees who pay into the Liechtenstein social security system must contribute to a pension plan. The employer’s contribution must equal at least the employee’s mandatory 5% contribution, resulting in total contributions of at least 10% for each employee.
Self-employed. In 2011, self-employed individuals must make social security contributions at a rate of 11.6% of their income from a business or profession. The 11.6% rate also applies to partnership profits. Self-employed persons are not required to be members of a pension plan.
Totalization agreements. Liechtenstein has adopted European Regulation 1408/71 concerning the application of social security schemes. The regulation applies to all European Union (EU) and European Free Trade Association (EFTA) countries. Liechtenstein has not entered into social security agreements with other countries.
Tax treaties
Liechtenstein has entered into comprehensive double tax treaties with Austria and Luxembourg. It has signed double tax treaties with Hong Kong, San Marino and Uruguay, which are subject to ratification. The treaties follow the draft model of the Organization for Economic Cooperation and Development (OECD). Liechtenstein has also entered into limited double tax treaties with Switzerland and with two cantons of Switzerland.
To learn more about the history, culture, economy and other information about Liechtenstein
We have been preparing US income tax returns for US Citizens and permanent residents living in Liechtenstein for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Liechtenstein and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Liechtenstein.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email