(* the following description about Liechtenstein Tax Privilege is
from publication of Alexander T. Skreiner - "The Advantages of
Liechtenstein Annuities and Life Insurance")
Unlike capital investments, investments in fund-linked annuity or life insurance policies are associated in most European countries with tax benefits, which may be considerable. As a rule, such fiscal advantages are linked to specific criteria, such as minimum terms or assurance payable at death. A distinction should be made between tax benefits that refer to the beginning of the insurance term (parts of the premium are tax-deductible or are promoted) or to its duration (tax-free saving phase or earnings retention) and those granted in connection with payments (tax-free or reduced-tax treatment).
The various national systems cannot be treated in detail here, but the potential of such tax compliant solutions will be shown on the basis of specific examples from Germany, Italy, and the United States.
For clients from Germany, annuity and life insurance policies represent one of the few remaining ways of tax optimization. The premiums are paid tax-free into the policy and earnings retention is completely tax-free during the saving phase. Various requirements must be observed at payout: In principle, differential taxation is applied (payout sum minus pay-in sum), although in the case of an endowment, where payment is made after a term of at least 12 years and after the beneficiary’s sixtieth birthday, only half the difference sum is taxed. Annuity payments are also particularly attractive, as they allow very interesting yield taxation (tax on a low percentage of the annuities payment at the applicable personal tax rate).
For Italian clients, the life insurance solution offers the advantages of tax-free inclusion of premiums and tax-free earnings retention during the entire term as well as allowing all bankable investments (including hedge funds, private equity funds, and real estate funds). In the case of payment during life, there is 12.5 percent differential taxation on the value growth, whereas at payment upon death, the entire insurance benefit is available to the beneficiaries free of tax (neither income tax nor inheritance tax is payable).
Taking out an annuity policy - better known as a deferred variable annuity (DVA)- or a life insurance policy - usually designated as a private placement life insurance (PPLI) - abroad can be very attractive for persons liable to tax in the United States. Recognition of these products in the United States depends not on where the insurance company is based but on whether the U.S. product specifications can be fulfilled. Such product structuring is possible in Liechtenstein and is offered by at least one company. In addition to the advantages of a free choice of investment already mentioned, a DVA is very attractive from a tax standpoint. Apart from 1 percent excise tax payable on premiums by the policy holder, no tax is liable during the term of the policy. In the event of payment during life, 35 percent income tax is liable when the policy holder is older than 59 ½ years of age.
The DVA is an interesting planning instrument for optimizing ongoing income tax on investments. Tax on the PPLI is even more attractive during the term of the policy, because in addition to the 1 percent excise tax also payable on premiums by the policy holder, tax-free earnings retention applies as long as the assets are held in the policy. If the benefit is paid at the death of the insured person, the beneficiaries receive the sum free of income tax. Inheritance tax depends on the degree of relationship, the value of the policy, and the residence of the beneficiary.
Advantages quite apart from products adapted to national rules, Liechtenstein policies can be used even more frequently within the scope of international solutions. Special reference should be made at this point to relief from EU withholding tax that has been payable since 2005 by EU nonresidents who hold accounts or deposits at banks in Switzerland, the principality of Liechtenstein, Austria, Luxemburg, Belgium, Monaco, San Marino, or Andorra. This EU withholding tax is in the first place applied to interest income and currently stands at 15 percent (since July 1, 2005), but will rise to 20 percent on July 1, 2008 and to 35 percent on July 1, 2011. The term “interest” used in the relevant agreement is in general defined very broadly. Thus it comprises interest paid into or credited to an account from debt claims of any kind (especially earnings from government securities, loans, and debt certificates), interest accrued or capitalized at the sale or repayment of debts or on periodic interest as well as interest payments on payouts from investment funds or realized at the sale or repayment of shares in investment funds as long as certain limits of interest-bearing investments are exceeded within the investment fund. However, the term “interest” used here excludes payments such as dividends and other payments from equities as well as interest income from insurance policies and benefits from provident facilities. As a rule, this advantage alone already covers the extra annual costs associated with the conclusion of a Liechtenstein life or annuity insurance policy. Neither is any tax paid on the earnings or value growth within the premium reserve account of the insurance policies offered by Liechtenstein insurance companies, so the profit retention on earnings within the policy is in fact tax-free.