The Impending Reform of Foundation Law

in Liechtenstein

[July 18, 2007]

 

Introduction

For decades, the civil law Foundation has existed in Liechtenstein as a Continental European counterpart to the Anglo-Saxon trust (which is also available in Liechtenstein and has been able to gain a foothold).

 

The Foundation has been particularly (but not at all exclusively) successful in Liechtenstein in the Family Foundation variant. As such, it takes basically the form of either a maintenance or a discretionary Foundation and may serve the current generation of family members as well as the future generations for maintenance or merely as a discretionary Foundation with regular or sporadic grants. The other group of Foundation is mainly used to achieve non-profit (mostly charitable) purposes. Overlaps between family Foundations and charitable Foundations occur very frequently and are mostly about the appointment of a charitable institution as the ultimate beneficiary in case the appointed beneficiaries die without offspring[1]. Sometimes, the provisions of a family Foundation also permit grants to non-profit (in particular charitable) institutions or to individuals apart from the members of a certain family.

 

In Liechtenstein law, the founder has extensive liberties and is able to make his own rules on the class of beneficiaries as well as on the amount of their benefits[2]. In particular, he is allowed to appoint himself as a beneficiary.

 

This makes it possible to organise even the preservation of assets in a family Foundation. One of the great advantages of the Foundation is that it is a separate legal entity, so that no transfer of assets to a physical person is necessary; experience tells that some individuals (in particular from Continental Europe) have something of an instinctive aversion against transferring assets to a physical person (which is necessary e.g. with a trust[3]).

 

The great success of the Foundation in general and the family Foundation in particular is probably due to its flexibility and to the high amount of confidentiality with which the founder's will is implemented. In fact, under applicable law it is only necessary for a family Foundation to deposit the general provisions on the Foundation [proper articles of association/ Foundation deed] with the Register[4]. The supplementary Foundation document [by-laws or regulations] need not be submitted to the Register Office. Since the beneficiaries are typically listed by name in the by-laws or regulations, the degree of confidentiality is naturally higher than if those names were deposited with the Register Office, although information on deposited Foundations can be obtained from the Register Office only under very difficult circumstances.

 

The PGR (Personen- und Gesellschaftsrecht, Persons and Companies Act) contains only very rudimentary rules on the Foundation, and the already brief wording of the law refers (as a legislatorial technique) to the provisions on the (Anglo-Saxon type) trusts and on trust enterprises in important fields such as the position and the rights of beneficiaries.

 

Consequently, the liberal wording of the law on the one hand and the numerous references to other provisions of the law on the other have provided room for interpretation, giving rise to ample and partly controversial court practice.

 

Finally, a reform of the law suggested itself. This was started several years ago, and a first consultation in 2004 came to nothing. Currently, a new reform with the character of a total revision is in the consultation phase which ended during the first half of July 2007; it is planned to submit a final draft to the legislator still in 2007.

 

 

The Draft Reform

 

The draft of law has not been enacted, which prevents an all too specific description. This is why this article will only give an overview of important parts of the draft, since despite lacking enactment, the approaches taken in the new act are worth mentioning, documenting a general tendency of evolution.

 

The reform of the law will in particular process and reorient or integrate the court practice that has piled up over the decades under the aspect of legal policy, so that clarity and simplicity ensure legal certainty. Contradictions in current court practice shall also be removed[5].

 

In addition, proven rules shall be strengthened and supplemented by implementing provisions; open legal questions such as the definition of the founder, questions concerning the legal position of the beneficiaries, the details of the Foundation's purpose, the supervision of Foundations, and the legal quality of the founder's rights shall be answered, and legal certainty shall be strengthened in general[6].

 

Not least, it shall be possible to restructure the numerous Foundations that do not meet the requirements of the new reform work in a way that ensures that the founder's wishes are observed and respected. This shall be done in extensive and detailed transitional provisions.

 

The System

From the technical point of view, the current draft for a new Foundation law will be fully integrated as a complete work into the existing law as an insert. Insofar, the new work will do away with the numerous references of the old law and will quote the parts to be taken over from other legal provisions mutatis mutandis by integrating them into its own text. Thus, it is planned to regulate Foundation law under Article 552 PGR, as §§ 1 to 38[7].

 

 

Main Points of the Draft Revision

 

THE CONCEPT OF THE FOUNDATION

The draft reform redefines the concept of the Foundation [Art 552 § 1 (1) PGR] and in particular creates two categories of Foundations that have different legal consequences. These are the charitable[8] and the non-charitable Foundation, family Foundations being non-charitable Foundations even if they pursue charitable purposes in part[9].

 

Non-charitable Foundations[10] need n o t be entered in the Public Register; deposition of the Foundation deed will suffice. Charitable Foundations, however, must be entered in the Public Register.

 

Ecclesiastical Foundations are removed as a separate category (special group). In future, ecclesiastical Foundation will be considered to be "charitable"[11].

 

SUPERVISION OF FOUNDATIONS

The supervision of Foundations is one of the major control mechanisms of charitable Foundations for compliance with the founder's wishes. The planned new regulations makes non-charitable Foundations generally not subject to official supervision, i.e. supervision by the government. However, these Foundations are free to subject themselves to official supervision voluntarily[12]. For charitable Foundations, however, government supervision will be compulsory as mentioned above. A recognised neutral audit authority will be appointed by the government for Foundations that are subject to government supervision[13].

 

 

 

PURPOSE OF THE FOUNDATION

 

Probably one of the most contested points of discussion in and around the Foundation reform was the requirements to be adhered to in the Foundation's purpose. The draft maintains the concept of so-called "distribution without requirement", meaning that distributions may be made to beneficiaries even without a specific situation of need on the part of the beneficiaries. The mere and exclusive accumulation of assets without ever making distributions will not be recognised as a (legitimate) purpose.

 

It will not be possible for Foundations to conduct a commercial trade; however, conducting a commercial trade to reach the Foundation's purpose shall not be prohibited as such. This is not a contradiction; what is meant is that the extensive management of assets with a number of participants and the like will justify the employment of personnel and the existence of office facilities without this constituting a commercial trade in itself[14].

 

In contrast to e.g. the Foundation under Austrian law, the Liechtenstein Foundation shall be expressly allowed to function as the company heading a group[15].

 

THE FOUNDER AND THE FOUNDER'S RIGHTS

Under current law supported by court practice, it is possible to have a Foundation formed fiduciarily. This means that a founder who wants to form a Foundation under Liechtenstein law can contact a lawyer or trustee to have a Foundation formed through such person without the name of the genuine founder becoming apparent.

 

As is evident from the above description, the concept of "founder" is detailed by terms such as "genuine founder" or "fiduciary founder" or "beneficial founder" or the like. However, this has led to confusion in practice as well as in jurisprudence, and the solutions presently offered are practicable but not optimal in all aspects[16]. Accordingly, the description of the founder's rights is a significant point, for it includes – together with the question of the extent of such rights – the question of whether or not they can be assigned.

 

The planned reform offers solutions in this context. The proven fiduciary forming of Foundations shall still be possible. At the same time, this legal transaction is qualified as indirect representation[17]. Accordingly, the rights reserved for the founder in the Foundation deed occur directly with the (beneficial) founder, which not only simplifies understanding but also increases legal certainty. At the same time, the problems surrounding the assignability of the founder's rights are dropped because the legal consequences anyhow occur directly with the beneficial founder, and the assignment of the founder's rights becomes in any case superfluous[18].

 

The planned reform strengthens the position of the founder and creates better legal certainty here, too.

 

In addition, the founder may reserve the right to cancel the Foundation just as so far[19].

 

 

THE FORMALITIES

The planned new formalities include the founder directly.

 

The requirement of confidentiality is met by the possibility of fiduciary formation; in addition, it is planned for deposited Foundations that the current deposition of the Foundation's documents shall be replaced by a formation report[20]. The formation report includes general information on the Foundation and its governing bodies and in particular includes the confirmation that beneficiaries have been appointed and that the legal minimum assets are at the Foundation's free disposal[21].

 

Although the draft reform uses some new terms, current terms such as e.g. "by-laws" are also given in brackets for better understanding. While the Foundation deed (also known as Statut or "statutes") and the supplementary Foundation deed (also known as Beistatuten or "by-laws") must in all cases be issued by the founder, regulations (in particular organisational regulations) may also be issued by another governing body, preferably the Foundation board (Stiftungsvorstand vs. Stiftungsrat in current terminology).

 

THE BENEFICIARIES AND THEIR RIGHTS

Just like the Foundation's governing bodies (Foundation board, audit authority, and any other executive organs), the beneficiaries are participants of the Foundation. A very large part of the planned total revision of Foundation law concerns the position of the beneficiaries and their rights.

 

Under current law, the legal position of beneficiaries and their rights are mainly regulated by referring to trust law [trust and trust enterprise]. Over the years, court practice started considering certain topics in a more differentiated way, which had the consequence that the applicability of the legal provisions referred to was limited, and that they were partly declared inapplicable. This was bound to lead to various uncertainties, which shall be removed by the subject draft.

 

An important novelty is the subdivision of the beneficiaries into 4 groups. The draft distinguishes between

• entitled beneficiaries (Begünstigungsberechtigte),
• discretionary beneficiaries (Ermessensbegünstigte),
• prospective beneficiaries (Anwartschaftsberechtigte), and
• ultimate beneficiaries (Letztbegünstigte).

While beneficiaries whose claim consists of an advantage (specific or determinable in its amount) from the Foundation's assets[22] are called ENTITLED BENEFICIARIES, the other categories are not necessarily (yet) beneficiaries; rather, an additional event or legal act is required to trigger the benefit[23]. This leads to differentiation in the right to receive information. For what is new in the draft is more comprehensive and unalienable rights of information (also in order to control compliance with the founder's wishes).

 

The draft distinguishes between various hypotheses according to which the right of information can be limited depending on the type of benefit and as a result of a balancing of interests. It is evident already today that the wording will create room for interpretation, which might in an unfavourable turn of events once again create the need for court decisions[24]. In any case this part and all proposed changes thereto are to be followed carefully.

 

The extensive rights of information of the various groups of beneficiaries meet the requirement for control and for the protection of the legitimate interests of such beneficiaries; the right to receive information is more or less based on the criteria that have been elaborated by court practice so far[25].

 

THE FOUNDATION BOARD

The central duty of the Foundation board (Stiftungsvorstand under the new terminology, Stiftungsrat under the old) is to implement the founder's wishes. It is still in charge of management and of representing the Foundation towards the outside. Under the new rules, certain duties are not only due to the Foundation board as a collective body but to each member individually. For example, each member of the Foundation board is obliged to apply for the registration of a Foundation that must be registered[26].

 

What is also new is that the Foundation board must consist of a minimum of two members; while this provision is mandatory, the Foundation board's term of office - which is limited to 3 years - can be extended by the founder in the deed.

 

ADDITIONAL EXECUTIVE ORGANS

In practice, a protector is often appointed to exercise certain function of supervision and to ensure minimum guarantees for the benefit of the beneficiaries. The protector is very frequently considered to be the connection between the Foundation board and the beneficiaries. The draft speaks of "additional executive organs" of the Foundation; however, the term "protector"[27] is still possible to be used.

 

What is new is that these executive organs have no authority whatsoever to give instructions to the Foundation board, which is why special attention will have to be paid to the wording of the Foundation deed and of the supplementary Foundation deed. A special role of these additional executive organs of the Foundation is to contribute to the protection of the Foundation's assets, given that the validity of legal transactions implementing important pecuniary decisions can be made subject to the approval of such an organ[28].

 

TRANSITIONAL PROVISIONS

One of the greatest concerns in the discussions around the amendment / total revision of Foundation law was the question how the existing Foundations should be dealt with. The proposed solution is that the new rules are basically only applicable to new Foundations. Existing Foundations are subject to the current rules unless expressly stated otherwise in the law.

 

Where an existing Foundation does not meet the mandatory requirements of the legal reform as to the minimum specifications of Art 552 § 13, the option of restructuring under detailed[29] rules is provided[30]; where at all possible, existing Foundations are given the option to adjust[31].

 

FINAL NOTES

To conclude, it can be noted that even if the planned reform will not be implemented in all its points and not always in the proposed form, the simple fact of the Government to point out the existing problems as having to be resolved by legislation rather than by court-practice is very positive and surely will bring more clarity and legal certainty into Foundation law. The reform will mainly influence the day-to-day work of the local lawyers and trustees; the beneficiaries and founders of Foundations should only feel the planned changes in that they are given more (and in particular, more clearly defined) rights.