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Liechtenstein Stiftung: US Tax Classification | Foreign Trust Tax Lawyer

This article continues a series of articles on foreign trust classification with respect to various foreign entities. Today’s topic is the US tax treatment of a Liechtenstein Stiftung.

Liechtenstein Stiftung: Formation

A Liechtenstein Stiftung, or Foundation, is a legal entity under Liechtenstein law. It may be formed by filing a foundation charter or by will or testamentary disposition. A Stiftung is entered into the Register in Liechtenstein and must have a minimum amount of initial capital.

Liechtenstein Stiftung: Purpose

A Stiftung may be a family foundation established to provide benefits to members of a designated family or a charitable or religious foundation. A Stiftung cannot be organized to engage in the active conduct of a business, but Liechtenstein law provides that, in certain cases, commercial activities may be undertaken by a Stiftung if such activities serve its noncommercial purposes.

Liechtenstein Stiftung: Beneficiaries

A Stiftung exists for the benefit of those persons who are named as beneficiaries in its formation documents. The Founder transfers specific assets to the Stiftung that are then endowed for specific purposes. The assets pass from the personal estate of the Founder to the Stiftung.

Liechtenstein Stiftung: Governance

The Founder sets the objectives of a Stiftung and appoints its administrators which are organized into a Council of Members. The Founder may appoint himself as an administrator.

The duties and obligations of the administrators are set forth in the Stiftung’s articles and includes the conduct of the Stiftung’s affairs. This includes the investment and management of its assets and the distribution of income and/or capital to the beneficiaries as per the provisions of the Stiftung’s articles. Under Liechtenstein law, the administrators are responsible for the proper management and conservation of the Stiftung’s assets. The Founder may reserve for himself the right to discharge and appoint administrators.

Liechtenstein Stiftung: Limited Liability

A Stiftung only has legal liability up to the amount of its contributed capital and net assets and it cannot be made liable for liabilities in excess of them.

Liechtenstein Stiftung: Legal Background Under US Tax Law

26 CFR §301.7701-1(a) provides that the Internal Revenue Code (“Code”) prescribes the classification of various organizations for federal tax purposes. Whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend upon whether the organization is recognized as an entity under local law.

26 CFR §301.7701-1(b) of the regulations provides that the classification of organizations that are recognized as separate entities is determined under §§301.7701-2, 301.7701-3, and 301.7701-4 unless a provision of the Code provides for special treatment of that organization.

26 CFR §301.7701-4(a) of the regulations provides that, in general, the term “trust” as used in the Code refers to an arrangement created by will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules provided in chancery or probate courts. Usually the beneficiaries of such a trust do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement. However, the beneficiaries of such a trust may be the persons who create it and it will be recognized as a trust under the Code if it was created for the purposes of protecting or conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them. Generally, an arrangement will be treated as a trust under the Code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit.

Furthermore, 26 CFR §301.7701-4(a) provides that there are other arrangements which are known as trusts because the legal title to property is conveyed to trustees for the benefit of beneficiaries, but which are not classified as trusts for purposes of the Code, because they are not simply arrangements to protect or conserve the property for the beneficiaries. These trusts, which are often known as business or commercial trusts, generally are created by the beneficiaries simply as a device to carry on a profit-making business which normally would have been carried on through business organizations that are classified as corporations or partnerships under the Code. However, the fact that the corpus of the trust is not supplied by the beneficiaries is not sufficient reason in itself for classifying the arrangement as an ordinary trust rather than as an association or partnership.

Thus, the fact that any organization is technically cast in the trust form, by conveying title to property to trustees for the benefit of persons designated as beneficiaries, will not change the real character of the organization if the organization is more properly classified as a business entity under §301.7701-2. Hence, foreign entities must be analyzed on a case-by-case basis to determine their true classification under US tax law.

Liechtenstein Stiftung: US Tax Treatment

The IRS has determined that, generally (and it is important to emphasize the word “generally”), a Liechtenstein Stiftung should be classified as a trust under US tax law. IRS Chief Counsel Advice Memorandum, AM 2009-012. The IRS believes that, in most cases, “the Stiftung’s primary purpose is to protect or conserve the property transferred to the Stiftung for the Stiftung’s beneficiaries and is usually not established primarily for actively carrying on business activities.” Id.

If, however, the facts and circumstances in a particular case indicate that “a Stiftung was established primarily for commercial purposes as opposed to the purpose of protecting or conserving property on behalf of the beneficiaries, the Stiftung in such case may be properly classified as a business entity under §301.7701-2(a).” Id.

Thus, a taxpayer who is a beneficiary or Founder of a Liechtenstein Stiftung must retain a US international tax lawyer to examine the specific facts and circumstances in each case in order to determine the US tax classification of a particular Stiftung.

Contact Sherayzen Law Office for Professional Help Concerning Proper US Tax Classification of a Liechtenstein Stiftung

Determining the proper classification of a Liechtenstein Stiftung is very important for its beneficiaries and Founders who are US tax residents, because such classification will have a direct impact on these taxpayers’ US international tax compliance, including determining whether Form 3520 or Form 5471 has to be filed.

This is why, if you are a beneficiary and/or a Founder of a Liechtenstein Stiftung, contact Sherayzen Law Office for professional help with your US tax compliance. We have successfully helped US taxpayers from over 70 countries with their US international tax compliance issues, including classification of foreign business entities and foreign trusts. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Foreign Trust Classification

This article begins to explore one of the most obscure, yet highly important questions in U.S. international tax law – foreign trust classification and what law is relevant in the determination of such a classification. This area of law is very complex and I cannot hope for more than providing just some general contours of it in this essay.

Foreign Trust Classification: Relevant Law

In order for an entity to be classified as a foreign trust, one must establish that the entity is a “trust” and the entity is “foreign”. In this article, I will only discuss the definition of a trust and leave the subject of determining whether a trust is foreign for future discussion.

Both parts of this definition are determined by federal income tax law. The substantive trust law under which the trust was created, while often determinative of rights and duties of relevant parties (i.e. grantor, trustee and the trust’s beneficiaries), does not establish whether an entity should be treated as a trust. Nevertheless, the substantive trust law is still very important in order to establish the facts and context for federal income tax analysis.

The most important federal income tax law concerning foreign trusts can be found in Section 7701 of the Internal Revenue Code (IRC) and relevant regulations. The IRS decisions and rulings (such as Private Letter Rulings) are also highly important in entity classification.

Foreign Trust Classification: General Definition of a Trust under Federal Law

Generally, at the simplest level, a trust is an arrangement where the title to property is held by a fiduciary – a person with the responsibility to conserve the property for a benefit of another person or person (called beneficiaries). As beneficiaries, these persons should not participate in any fiduciary responsibilities.

IRS Regulations in §301.7701-4(a) provide more details about what entity would be considered as a trust:

In general, the term “trust” as used in the Internal Revenue Code refers to an arrangement created either by a will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts. Usually the beneficiaries of such a trust do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement. However, the beneficiaries of such a trust may be the persons who create it and it will be recognized as a trust under the Internal Revenue Code if it was created for the purpose of protecting or conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them. Generally speaking, an arrangement will be treated as a trust under the Internal Revenue Code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit.

Foreign Trust Classification: Most Important Aspects of this Definition of a Trust

Two aspects of this long definition of a trust are especially relevant for foreign trust classification. First, the title to property has to be held by a fiduciary, not the beneficiary. This means that all arrangements outside of the United States will not fall under the foreign trust classification if the title is preserved by the beneficiary.

Second, for the purposes of foreign trust classification, the most important practical focus of the IRS has been on the separation of management of a foreign trust from the enjoyment of the benefits that the trust provides. Undoubtedly, such inquiry heavily depends on the particular facts of the case and would require a separate exploration beyond the scope of this article. It is worth mentioning, however, that, in situations where the beneficiary preserves the right to dispose of an asset supposedly held by a foreign trust, the IRS may rule that the arrangement does not fall within the boundaries of the foreign trust classification.

Foreign Trust Classification: Exceptions

In another article, I will explore certain exceptions to foreign trust classification. Here, I will simply state that not all trusts are treated as trusts even if the title belongs to the fiduciary. On the other hand, some arrangements will be treated as foreign trusts even in situations where one would not expect such classification (certain foreign pension arrangements, for example).

Contact Sherayzen Law Office for Help With Foreign Trusts

U.S. tax laws concerning foreign trust are highly complex and require substantial tax compliance. If you own a foreign trust or you are a beneficiary of a foreign trust, you need to contact Sherayzen Law Office as soon as possible for professional legal help. We have helped U.S. taxpayers around the world and we can help you!

Contact Us today to Schedule Your Confidential Consultation!