Photo/Illutration The flag of Liechtenstein. Tax authorities worldwide have upped demands for the small nation between Austria and Switzerland to share financial information to help with tax evasion cases. (Captured from the Japanese Foreign Ministry's website)

Japanese tax authorities have blocked a tax-saving scheme involving a foundation in the small European nation of Liechtenstein.

A Japanese resident established a foundation in Liechtenstein with a capital of 30,000 Swiss francs (around $35,000, or 5.1 million yen), according to sources.

While the foundation claimed its purpose was to make charitable donations to people in need of financial assistance, it also owned a company in the Bahamas, southeast of Florida, roughly 8,000 kilometers from Liechtenstein.

This Bahamian company held bonds worth around 2.2 billion yen.

In March 2023, the National Tax Agency noted that the Japanese resident should have reported the interest and redemption gains from the bonds. It accordingly charged the resident additional income tax, including penalties for underreporting.

The case sheds light on why Liechtenstein, a country of fewer than 40,000 people, is a draw for wealthy schemers around the world, Japan included.

LOOPHOLES IN THE LAW

The Bahamas exempts foreign companies from corporate taxes to attract business.

However, Japan's tax law requires that income generated in such low-tax countries or regions, commonly referred to as tax havens, be reported together with domestic earnings.

This so-called tax haven countermeasure applies when an individual directly or indirectly owns a corporation in a tax haven.

The National Tax Agency argued that the resident indirectly owned the Bahamian company through the foundation in Liechtenstein that had been established.

However, Liechtenstein corporate law does not include provisions regarding a foundation’s right to own shares or other companies.

The resident claimed no ownership of the foundation and therefore does not indirectly own the Bahamian company.

According to the foundation’s bylaws, the resident not only provided all the capital for the foundation but also had the sole right to receive its assets and income.

The National Tax Agency determined that this made the resident equivalent to a shareholder or investor under Japan’s corporate law and concluded that the resident effectively owned the foundation.

TREATY ENABLES DATA EXCHANGE

“This case involves the National Tax Agency attempting to impose taxes on a scheme intended to evade tax haven countermeasures by using Liechtenstein,” said tax accountant Yukiyasu Nakata, who is well-versed in international taxation.

Nakata highlighted that Liechtenstein’s tax authorities complied with Japan’s request for information sharing.

Liechtenstein, known for its political stability and strong financial secrecy, has attracted numerous affluent foreigners to hold assets within its borders.

However, tax authorities around the world have ramped up pressure to disclose information.

A key moment came in 2008, when the German government purchased leaked bank account data from a Liechtenstein bank, leading to raids on more than 150 wealthy Germans suspected of tax evasion.

In 2012, Japan signed a tax treaty with Liechtenstein to facilitate the exchange of information related to taxation.

This treaty allows for a broad range of data to be shared, including information on banks and foundations, and it came into play for this case.

Nakata said, “The level of secrecy once associated with Liechtenstein has significantly diminished.”

The resident appealed the tax decision to the National Tax Tribunal in April last year.

However, the tribunal largely upheld the National Tax Agency’s claims this March.

Similar tax-dodging schemes have since been thwarted by the revised tax haven countermeasures.

Related News