Liechtenstein Anstalt: US Tax Treatment | Foreign Trust Lawyer & Attorney

Over the years, the IRS has made a number of rulings with respect to whether certain foreign entities should be considered trusts for US tax purposes. In this article, I would like to discuss the US tax classification of Liechtenstein Anstalt based on the 2009 IRS Chief Counsel Advice Memorandum, AM 2009-012.

Liechtenstein Anstalt: Creation of the Entity

The word “anstalt” means “establishment”. Any natural and legal person can form an Anstalt. Such a person is called a “Founder”.

A person may form an Anstalt for himself or for another party pursuant to a power of attorney or through a fiduciary arrangement. In most cases, Founders are Liechtenstein attorneys or trust companies that protect the anonymity of the actual owner or beneficiary of the Anstalt.

In order to create an Anstalt, the Founder signs Anstalt’s articles. The legal personality of Anstalt is created once the Founder submits to the government registry its articles, the constitutive declaration, proof that capital has been paid in and evidence that the official registration fees have been paid.

Liechtenstein Anstalt: Founder’s Powers

The Founder has the same powers with respect to an Anstalt that are generally attributed to shareholders in a company. Additionally, the Founder possesses “Founder’s rights”, which provide unlimited control and powers of administration (including the power to dismiss directors, distribute profits and liquidate the Anstalt). The Founder may transfer the rights given to him by law and by the articles, in whole or in part, to one or more assignees or successors. The Founder’s rights may also pass through inheritance.

Liechtenstein Anstalt: Board of Directors

An Anstalt must have a Board of Directors (called a Board of Management or Administration) to represent it in its dealings with third parties. In most cases, the Founder will be a member of the Board. The Founder usually appoints the members of the Board for a term of three years, but may appoint for lesser or longer terms. The Board may consist of one or more natural or legal persons. At least one member of the Board authorized to represent the Anstalt and conduct business on its behalf must have a registered office in Liechtenstein. This member must also be authorized to practice as a lawyer, trustee or auditor, or have other qualifications recognized by the government.

The Board has power with respect to all matters that are not specifically reserved to the Founder. The Founder may give authority to the Board to exercise some or all of the Founder’s rights. The Board may give signatory or agency authority to its own members or to others on behalf of the Anstalt. The Board may assign its management and executive responsibilities partially or completely to one or more of its members or to third persons. In carrying out its management and representation functions, the Board must observe all limitations on its authority contained in the articles in instructions and/or regulations issued by the Founder.

Liechtenstein Anstalt: Beneficiaries and Power of Appointment

The Anstalt’s beneficiaries are those natural or legal persons designated by the Founder, or the person holding the Founder’s rights, as entitled to receive the profits and/or liquidation proceeds of the Anstalt. The right to appoint beneficiaries is usually set forth in the articles and may be reserved to the Founder or granted to the Board or to third persons. If no beneficiaries are appointed, the Founder or his successors are presumed to be the beneficiaries.

Liechtenstein Anstalt: No Shares

The capital of an Anstalt is usually not divided into shares.

Liechtenstein Anstalt: Limited Liability

The liability of an Anstalt is limited to the extent of its assets. No personal liability extends to the Founder, the Anstalt’s Board or the beneficiaries.

Liechtenstein Anstalt: Ability to Conduct Business

Anstalts may hold patents and trademarks, hold interests in other companies and may conduct any type of business except banking. If the articles permit the Anstalt to engage in commercial or industrial activities or a trade, the Anstalt is required to keep proper books and records as well as prepare annual financial statements.

In fact, in most cases, the primary purpose for the establishment of an Anstalt is to conduct an active trade or business and to distribute the income and profits therefrom to the beneficiaries of the Anstalt. The beneficiaries of an Anstalt are usually the previous owners of the business assets contributed to the Anstalt and, in most situations, the Founder acts as a nominee or agent of the beneficiaries in conducting the active trade or business of the Anstalt.

Liechtenstein Anstalt: US Tax Treatment

Based on this description of Liechtenstein Anstalts, the IRS held that a Liechtenstein Anstalt is generally not a trust, but a business entity under Treas. Reg.§301.7701-2(a). This decision would apply in a majority of cases where the primary purpose of a Liechtenstein Anstalt is to actively carry on business activities.

This decision, however, should not be applied automatically to all Liechtenstein Anstalts. Rather, the IRS stated that, in cases where the facts and circumstances indicate that a Liechtenstein Anstalt was created “for the primary purpose of protecting or conserving the property of the Anstalt on behalf of beneficiaries, the Anstalt in such a case may be properly classified as a trust under §301.7701-4.” IRS, Chief Counsel Advice Memorandum, AM 2009-012 – Section 7701 – Definitions. Thus, the critical issue in the analysis of whether a Liechtenstein Anstalt should be treated as a trust is whether it was established primarily to conduct a trade or business or to protect and conserve assets for the designated beneficiaries of the Anstalt.

Moreover, in order for a Liechtenstein Anstalt to qualify for trust classification, all elements of a trust must be present: (1) a grantor, (2) a trustee that has legal title and a legal duty to protect and conserve the assets for the designated beneficiaries, (3) assets, and (4) designated beneficiaries. See Swan v. Commissioner, 24 T.C. 829 (1955), aff’d and rev’d on other grounds, 247 F 2d 144 (2d Cir. 1957).

Contact Sherayzen Law Office for Professional Help Concerning Proper US Tax Classification of a Liechtenstein Anstalt as well as Form 5471 and Form 3520 Compliance

Determining the proper classification of a Liechtenstein Anstalt is very important for its beneficiaries and Founders who are US tax residents, because classification of an Anstalt has a direct impact on these taxpayers’ US international tax compliance, including determining whether Form 3520 or Form 5471 has to be filed. Such determination of US tax treatment of a Liechtenstein Anstalt should be done by an experienced international tax law firm.

This is why, if you are a beneficiary and/or a Founder of a Liechtenstein Anstalt, 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!

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Taxation of Investment Trusts

This article on investment trusts continues a series of articles on classification of foreign trusts. In earlier essays, I explored the definition of foreign trusts and some of the exceptions to this definition. In the present writing, I would like to discuss the general circumstances when investment trusts would be treated as corporations or partnerships rather than ordinary foreign trusts (this discussion focuses on foreign trusts, but it is also equally applicable to domestic trusts).

Investment Trusts: Definition and Taxation

Where several individuals, in a voluntary association, create a trust as a means of pooling their capital into investments in which interests are sold, such a trust is considered to be an “investment trust”. The principal law concerning investment trusts can be found in IRS Regs. §301.7701-4(c).

The taxation of investment trusts is a complex and mostly depends on two factors: the number of classes of ownership interests in the trust and the power vested in the trustee under the trust agreement to vary the investment (and reinvestment) of the certificate holders. In certain circumstances, investment trusts are taxed as ordinary trusts while, in other circumstances, they can be taxed as business entities.

One-Class Investment Trusts: Definition and Taxation

One-Class Investment trusts are investment trusts “with a single class of ownership interests, representing undivided beneficial interests in the assets of the trust”. IRS Regs. §301.7701-4(c)(1).

Generally, one-class investment trusts are taxed as ordinary trusts as long as “there is no power under the trust agreement to vary the investment of the certificate holders.” Id. The concept of “power to vary the investment” is highly complicated and requires detailed exploration of relevant case law and PLRs. The focus of the IRS examination will be on the Trust Agreement and related documents.

Multiple-Class Investment Trusts: Definition and Taxation

Multiple-class investment trusts are investment trusts with multiple classes of ownership interest. Generally, it is much harder for a multiple-class investment trust to be taxed as a trust, rather than a business entity.

IRS Regs. §301.7701-4(c)(1) sets forth the legal test which states that multiple-class investment trusts will generally be taxed as business entities unless two conditions are satisfied: (1) “there is no power under the trust agreement to vary the investment of the certificate holders”, and (2) “the trust is formed to facilitate direct investment in the assets of the trust and the existence of multiple classes of ownership interests is incidental to that purpose”. Id.

This is a tough, but not an impossible test to meet.  In fact, one can point to multiple PLRs where the IRS agreed with the taxpayers that this test was met. Nevertheless, a high degree of precision, planning and professionalism is needed to assure that the test is met.

Contact Sherayzen Law Office for Professional Help With Foreign Trusts

If you are a beneficiary or grantor of a foreign trust, secure the help of an experienced international tax lawyer as soon as possible. Contact Sherayzen Law Office for professional help concerning foreign trusts as soon as possible. Attorney Eugene Sherayzen, has developed deep expertise in international tax law in order to help hundreds of U.S. taxpayers around the world. He can help You!

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Exceptions to Foreign Trusts: Business Trusts

As I mentioned in an earlier article, U.S. tax law includes a number of important exceptions to legal definition of a foreign trust – i.e. an entity can be classified as a foreign trust for legal purposes and not as a trust (but as a corporation or a partnership) for U.S. tax purposes. This is also true with respect to domestic trusts, but, in international context, the issues are far more complicated and require detailed exploration of facts and, often, local laws. In this article, I would like to discuss one of the most common exceptions to foreign trusts – business trusts.

Business Trusts Taxed as Corporations or Partnerships

Where an entity is organized as a trust but engages in the active conduct of trade or business, the IRS may re-classify this trust as a “business trust” and tax it as a corporation or partnership. The most relevant primary law on this point can be found in IRS Regs. §301.7701-4(b):

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 Internal Revenue 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 Internal Revenue 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. 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.

Let’s explore these regulations in more depth in order to have a clear idea of the general test for business trusts.

Most Important Features of Business Trusts for Federal Income Tax Purposes

There are two most important factors in determining whether a trust is a business trust. The first and most important distinction between ordinary trusts and business trusts is the conduct of a “profit-making business” which “normally” would have been done by a business entity. It is important to understand that it is not simply the ownership of business assets which re-classifies ordinary trusts in business trusts; rather, while ordinary trusts must be created for the purpose of conservation and preservation of assets for beneficiaries, business trusts should be created for the purpose of the profit-making activities.

How does one determine the purpose for which a trust is created? There are various factors, including the history of the trust. The trust agreement (the document that creates the trust), however, is the key document on which the IRS will focus.

The second important feature of business trusts concerns domestic and foreign trusts which have associates to conduct an active trade or business for their benefit. In such cases, the trusts will be reclassified as business trusts and taxed as corporations or partnerships.

Both of these factors in determining the business nature of a trust rely are highly dependent on facts and require minute analysis of a trust’s history and circumstances. The help of an experienced international tax lawyer is indispensable in this matter.

Contact Sherayzen Law Office for Professional Help With Trust Classification

If you are a beneficiary or grantor of a foreign trust, contact Sherayzen Law Office for professional help in determining the classification of the trust. The founder of our firm, Mr. Eugene Sherayzen, is a highly experienced international tax lawyer who has helped hundreds of taxpayers in and outside of the United States with their U.S. international tax compliance issues.

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