1. Characteristic of a Liechtenstein Foundation
The Liechtenstein Foundation is governed by the Liechtenstein Company Law (Personen- und Gesellschaftsrecht vom 20. Januar 1926, LGBl 1926/4 LR 216.0 [PGR]). A foundation constitutes a legal entity being eligible by virtue of the law of all rights and obligations in the same manner as natural persons insofar as these rights or obligations do not have the natural circumstances or characteristics of man (e.g. sex or age) as a necessary precondition. A foundation can be understood as assets endowed by a natural or legal person (founder) for a specific purpose in accordance with the will of that person, whereby said assets are rendered legally independent and are accorded their own legal personality. Accordingly, the elements which characterize a foundation are the following:
- The assets endowed by the founder become a legal entity,
- Such a legal entity, a foundation is capable of having rights and duties and of entering into legally binding transactions through its organs (i.e. Board of Foundation, )
- The assets pass into legal ownership of the foundation, thus are completely segregated from the founder’s own estate,
- The beneficiaries of a foundation have not equitable ownership of the foundation property, but merely a claim against the foundation to extent of their respective benefits.
In order to validly set up a foundation, the foundation’s statutes should contain: the name and domicile of the foundation, its purpose or object, the designation of the members of the board of foundation and the method of appointing another board of foundation and provisions concerning the use of the foundation property in the case of the foundation’s dissolution.
In principle, a foundation must be registered with the Liechtenstein Public Register in order to come into existence. This is particularly true for a foundation which are engaged in commercial activities. However, more liberal concepts apply with regard ecclesiastical foundations, pure and mixed family foundations and foundations whose beneficiaries are ascertained or ascertainable in that. The foundation deed of these types of foundations must only deposited with the Public Register. This means, the Public Register does not give any information about such foundations to third parties. The precise rules regarding the beneficiaries of the foundation (specification of names, specification of entitlements, etc.) are not usually set down in the statutes, but rather in the so called by-laws, which do not need to be deposited.
2. Enterprise foundation in its form of a so called “holding foundation”
The holding and the administration of participations in companies operating in enterprises, in particular with the objective to maximize the funds for the support and development of these companies, is an admissible purpose of a Liechtenstein foundation (B. 8. Januar 2004, 10 HG2002.58-39, LES 2005, S. 174 ff)
A foundation used in this area is an “enterprise foundation” in its form of a “holding
foundation”. The foundation holds a considerable interest in a company operating an
enterprise, and exercise a controlling influence on basic business decision of the
company.
3. Commercial activities of a foundation
Commercial activities may be undertaken by a foundation only provided such activity serves its non-commercial purpose or the type and scope of the participations held require the facilities of a commercial business. A foundation cannot be formed to pursue commercial objects. Commercial activities may only be undertaken by the foundation if such activities are pursuance of its non-commercial objects, or the type and scope of interest held require the facilities of a commercial business.
Pursuant to Art. 557 PGR foundations which engage in commercial activities are under the obligation to register and acquire legal personality only when entered in the Public Register.
4. The beneficiaries of a foundation
A beneficiary is a person who derives any current or future benefit from the foundation’s assets or/and income. The beneficiaries or the class of beneficiaries, the nature and the extent of their beneficial interests are stipulated in the so called by-laws, mostly by the founder of a Foundation. There is no obligation to deposit the by-laws with the Public Register.
5. The Board of Foundation
The supreme authority of the foundation is the board of foundation, which conducts the foundation’s business within the intendment of the statutes, by-laws and regulations. The board of foundation has powers of administration, representation and disposition.
The foundation board consists of one or more members. The members may be natural or juridical persons. At least one member of the foundation board must have a license to practice as a fiduciary in Liechtenstein.
The founder may designate other bodies, for example the auditor, to investigate the activities of the board of foundation or limit these activities by means of the rights of protectors.
6. Liability of the Board of Foundation
It may be stated as a basic rule of Liechtenstein Foundation Law that the foundation’s assets are liable in respect of the foundation’s creditors’ claims (Art. 563 Abs. 1 PGR). The founder, endowing assets to the foundation, is exclusively held liable to transfer such assets, which are guaranteed in the Foundation Deed in the process of establishing a foundation (Art. 558 Abs. 1 PGR). This is notwithstanding some specific exceptions i.e. misuse of rights or evasion of law.
Furthermore, there does not exist a much more poignant liability for the executives of a foundation, though said liability is not explicitly stated in the Liechtenstein Foundation Law. According to Art. 561 Abs. 3 PGR rights and obligation of a foundation’s executives are subject to those provisions applying to the executives of an Establishment.
The board of foundation of a Liechtenstein Foundation basically is liable subject to Liechtenstein Law and a Liechtenstein Court would serve as formally competent.
The board of the foundation must exercise the “due diligence” of prudent and conscientious manager when undertaking its duties. In principle the board of foundation’s liability exists toward the foundation, said liability being a joint and several as well as unrestricted one, if more than one individual constitute the board.
Nevertheless, direct liability towards the foundation’s creditors could be possible in cases of direct damages, caused first of all be infringement of particular protective provisions, such as default, omission or inaction with regard to filing for bankruptcy.
In case of a fiduciary “setting-up” of a Liechtenstein foundation and acting as Board of the foundation on a “fiduciary basis” for the economic founder, it is not clear, whether an exclusion of liability for gross negligence and intent set down in the foundation (Administration) contract concluded between fiduciary (Board of Foundation) and the agent (founder and/or beneficiaries) is valid. However, there are justified doubts, that such an exclusion is not permitted by law. Thus, exclusion could be contestable or even null and void.
7. Conflict of interest of the Board of Foundation
It is essential for the management of an enterprise that commercial decisions are within the “power of discretion” of the manager (LES 2005, S. 174 ff).
Most of the holdings foundations are not subject to the supervision by the Government, which shall be notified by the Register Authority of every foundation under obligation to register.
Permanent or temporary judicial supervisions with respect to the regulation of the Board of Foundation and the purpose of foundations not subject to supervision, upon application of participants, pronounced by the judge in extrajudicial proceedings deem to be an “extraordinary” measure.
Thus, the recent jurisdiction demands a board of foundation which does not have a problem with its independence and does not have a conflict of interests. Specially, the board of foundation of a holding foundation has to be independent and unbiased regarding its commercial decisions, free from any conflict of interests.
A conflict of interest of the board of foundation, between its fiduciary duties towards the agent (founder, beneficiary) and its commercial decisions, justifies a temporary judicial supervision (LES 2005, S. 174 ff)
8. Liechtenstein Due Diligence Law
The Due Diligence Act regulates the application of due diligence of financial transactions upon entering in such a transaction and during the entire business relationship and helps to combat money laundering and organized crime. A financial transaction is defined as a transaction where third party assets are professionally accepted or kept in custody.
The person, subject to the Due Diligence Law (e.g. Liechtenstein fiduciaries, banks and finance companies), has the obligation to fulfil among others the following duties according to the Due Diligence Act and the Due Diligence Ordinance:
- Identification of the contracting partner (person enters into a financial transaction, formation order for a Liechtenstein foundation)
- Declaration of the beneficial owner (the ultimate beneficial owner, e.g. person entitled to the foundation’s assets)
- Draw up a profile of the business relationship
- Make special clarification efforts and notify the authorities where there is a suspicion of money laundering or organized crime.
- Document transactions and keep records.
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