Avoidance of double taxation in the bilateral relationship between Liechtenstein and Ireland based on the international OECD standards.
On Thursday, February 22, 2024, the media relations office of the Liechtenstein Government announced in a press release the initialing of the Double Taxation Agreement (DTA) between Liechtenstein and Ireland. The initialed DTA is based on the international OECD standard and takes into account the requirements of the OECD/G20 BEPS project (Base Erosion and Profit Shifting) to prevent tax avoidance and tax evasion in a cross-border context.
When a person is a resident of one state and receives income from another state, one of the main issues is which state has the taxation right in respect of this income. Domestic tax provisions of most jurisdictions are generally not harmonized with those of other countries. While cross-border tax matters have generally been taken into account in the legal systems of Liechtenstein and Ireland on a purely national level, complex questions of recognition and exemption of foreign taxes are common to arise in individual cases. One of the most serious disadvantages of unregulated scenarios in cross border tax matters between these countries is double taxation, which might result in a negative impact on the economic relationships.
The lack of a DTA and resulting double tax burden was a reason for Ireland and Liechtenstein companies to prefer growth markets where the risk of potential double taxation did not exist. Private asset structures are also preferentially located where agreements against double taxation are effectively in force. It is precisely this problem of double taxation that the DTA Liechtenstein – Ireland is intended to counteract. Whether a national right of taxation exists in cross boarder situations has to be assessed according to domestic tax law in the first place. If a tax liability arises due to cross-border circumstances, the second step is to assess whether the right of taxation is restricted by a DTA. A detailed discussion of the distribution rules of the agreement cannot be done at this point, as the final text of the agreement between Liechtenstein and Ireland will only be published after the domestic ratification process has been completed.
However, it has already been announced on the government's press portal that no withholding tax is levied on dividends (with the exception of real estate investment trusts), interest and royalties in order to promote cross-border investments. It has also been announced that the DTA will regulate the treatment of pension funds, investment funds, asset structures and charitable organizations. According to the press release, the DTA also contains provisions for arbitration to resolve difficult double taxation cases and regulations on the joint exchange of information in tax matters in line with modern international standards.
The importance of the trade relationship between the two treaty parties is reflected in the economic figures: In 2021, bilateral trade amounted to 125 million Euros, of which Liechtenstein exported goods worth 23 million Euros to Ireland and imported goods worth 102 million Euros. The most important sectors for Liechtenstein investments in Ireland are financial services, mechanical engineering and chemicals. The DTA with Ireland that contributes significantly to the attractiveness of the economic location and favor reciprocal investments, will enter into force after completion of the domestic legislative process. The extent to which the objective of the agreement will be realized, namely the elimination of double taxation in cross-border situations, remains to be seen due to the still pending publication.
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