At the beginning of 2015 the scope of Liechtenstein company law was expanded with the introduction of the protected cell company (PCC), also known as the segregated portfolio company (SPC). This means that, when structuring their assets, economic players will in future have recourse to a legal entity which gives enhanced flexibility and legal certainty with regard to the allocation of liability. The PCC is not so much a new legal entity as a legal arrangement that allows additional organizational structures within existing legal entities. Normally you find this type of organization in the fund industry.
It is already customary for companies to be structured as parent or subsidiary entities which pursue the same economic objectives, although this currently involves a great deal of administrative, bureaucratic and, therefore, financial resources. In practice, moreover, combinations consisting of an umbrella foundation and multiple sub-foundations often carry statutory liability risks. The optimal, most cost-effective way to achieve this structure is by means of a PCC.
Thus, in many cases, the PCC can fulfill the same purpose more elegantly and with less cost than the standard parent or subsidiary structure. Many other jurisdictions permit segregation in one form or other. In essence its purpose is to improve risk management, more specifically by spreading risks appropriately, cost-effectively and with maximum efficiency.
An important feature of the PCC is that, because it is a corporate structure formed by the combining of cells, it can acquire corporate substance and be endowed with the required volume of material assets (infrastructure, personnel, technical expertise) at a modest level of expenditure that is compatible with having the domicile in a small country. In certain jurisdictions at least this makes it possible to meet specific minimum asset volume requirements for affiliated companies. It is worth noting here that, in the case of Liechtenstein, generating corporate substance by arranging for specialist personnel to take up residence in the country – a practice that is relatively common and poses no particular problems in other countries – is subject to very tight restrictions. Accordingly, the introduction of the PCC solution into Liechtenstein company law is a sensible and proportionate adjustment which potentially counteracts the competitive disadvantage imposed by the Principality’s restrictive policy on residence. At best, therefore, it may succeed in turning a distinctive local disadvantage into a modest local advantage. Our assumption is that the proposed amendment to company law will achieve this objective.
A PCC consists of:
One distinctive feature of the PCC is that the assets of the individual cells and the assets of the core are always kept separate from each other. Nevertheless, it is one company with one financial report, one tax declaration, and one director which has the responsibility for the core and cells.
A PCC may be set up by a Liechtenstein resident who contributes the core capital. This person may be the owner and have the voting and capital rights. An investor facing Controlled Foreign Company restrictions in his home country, or anti-abuse provisions etc. might have an interest in a PCC through contribution of reserves or funds into a cell. A cell may have beneficial rights in the usual sense or not. A cell may even be organized in such a way that the benefits lie in a purpose trust. This enables asset protection and maximum confidentiality for an investor or contributor.
A Liechtenstein legal entity can take advantage of the free movement of capital and the freedom of establishment within the EEA providing it does actually engage in some form of economic activity, such as a holding function through a PCC. For this to apply the entity must have some form of physical presence (such as an office) in the EEA at which a person conducts business by providing a service (such as management of group affiliates or holdings) against remuneration for an indefinite duration of time specifically through that fixed physical location.
Such business is to be conducted at the entity’s headquarters as defined in its articles of association or, alternatively, at its administrative head office. Depending on the size of the business concerned, an appropriate number of employees must be recruited. If the entity lacks an appropriate level of resources in terms of premises, personnel and equipment within the EEA, it probably will not count as providing an economic service. If the legal entity is involved in managing a group of companies or in other group activities (e.g. resource management) and if the way in which it is currently incorporated reflects those activities, it will be presumed that there is actual economic activity because a physical presence is thereby established within the EEA. In this way, a Liechtenstein legal entity can benefit from the free movement of capital and the freedom of establishment. Hence the corporate substance requirement can be fulfilled faster and more cost-effectively by means of a PCC.
The Liechtenstein PCC will be ordinarily taxable in Liechtenstein with a profit tax of 12.5 %. Dividends and capital gains on shares are not taxable income in Liechtenstein. The interest margin on financing positions is taxable at 12.5 %. A PCC may apply for double tax treaties with countries like Luxembourg, Austria, United Kingdom, Singapore, Hong Kong, and Malta. The tax treaty with Germany may normally not be available as the requests on the availability of physical presence and product knowledge are difficult to fulfill.
Insofar as US FATCA and OECD Automatic Exchange of Information (AEoI) is concerned, such an entity will typically qualify as passive NFFE.
A PCC is typically organized as an Establishment which is a highly versatile form of legal entity, specific to Liechtenstein. It is normally structured like a corporation (for commercial purposes) or may have features similar to those of a foundation (private and/or charitable elements for non-commercial purposes). The ownership is documented in a document of proof (deed of assignment) and not in the form of shares. Therefore, the present problems on the bearer and registered shares do not arise as the deed is not a tradable certificate for corporations.
