Difficult choices and the limits of setting salaries for company owners in Liechtenstein
As is the case in other countries, owners employed in their own company in Liechtenstein have the privilege of setting their salaries autonomously. As a rule, they tend to set the lowest possible salary and the highest possible dividend, since no social insurance contributions such as Old Age and Survivors' Insurance, Disability Insurance, and Family Compensation (AHV-IV-FAK) are owed on capital income such as dividends. But the Fiscal Authority does set limits in this regard.
At least in Liechtenstein, the aim of setting a low salary has less to do with taxes than with optimising other levies, especially for AHV-IV-FAK. Interestingly, it's the Fiscal Authority that tends to act as a white knight in combating low salaries for the purpose of minimising AHV-IV-FAK contributions. For historical reasons, the Fiscal Authority is the body that in practice sets appropriate salaries and enforces them before the competent courts if necessary.
The underlying provision can be found in the Liechtenstein Tax Act. According to that provision, if the owner of a company is employed in that company, the owner must declare an appropriate salary. The scope of the work, the position held and the associated responsibility, the professional skills, the size of the operation, and the other salary arrangements in the company must be taken into account.
Case law creates a benchmark relevant to practice
In practice, the determination of an appropriate salary is always based on the individual case. Although the Tax Act contains a provision to that effect, it is often difficult to set an appropriate salary. In its case law, the Administrative Court (VGH) has created a demanding benchmark that is relevant to practice for assessing individual cases. This benchmark has been upheld by a judgment of the Constitutional Court.
Calculation scheme for a tax-appropriate salary according to the VGH
The calculation scheme likely represents a demanding and accordingly strict benchmark for smaller companies when setting an appropriate wage. In the example shown, the salary of CHF 195,000 posted and received by the owner is corrected to a tax-appropriate salary of no less than CHF 515,000 in accordance with the calculation scheme.
In particular for medium-sized and larger companies, additional criteria such as the scope of work, the size of the operation, and the other salary arrangements in the company must be taken into account when determining an appropriate wage. Otherwise, the calculation scheme regularly leads to considerable misjudgements. Irrespective of the size of the company, the consideration of additional criteria requires that their influence on the determination of an appropriate salary that is proper for tax purposes be explained by the taxpayer.
Conclusion
Due to its inadequacies, the calculation basis established by the Administrative Court (VGH) to determine an appropriate wage is subject to criticism. Especially for smaller companies with a high share of work performance, comparatively high wages result. Irrespective of the size of the company, however, additional criteria may be taken into account, the influence of which on the determination of an appropriate salary that is proper for tax purposes must be presented with adequate justification by the taxpayer or tax advisor.
In cases of doubt, it is therefore worth involving the Fiscal Authority or a tax advisor at an early stage when setting an appropriate salary. FS+P is happy to support you in this regard.
The detailed article is available only in German.