The Swiss Federation has recognized foreign trusts under the Hague Trustees Convention since 2007. Although in the past there have been attempts to introduce into the Swiss legal system provisions introducing the legal possibility of establishing trusts, such a law has never been finally adopted. It follows that Swiss law did not provide for specific provisions regulating the matter relating to trusts, and therefore there was no formal and legal possibility to appoint trusts in accordance with Swiss law. A significant breakthrough in this regard took place on January 12, 2022. when the Swiss Federal Council published a bill intended to establish the legal possibility of establishing trusts under Swiss law. Our article contains the most important conclusions regarding the legal and tax perspective.
The Swiss Federal Council, by introducing a trust, aims to establish a completely new legal institution in the Swiss legal system. The most important features of a Swiss trust are the following:
- A trust under Swiss law will be a characteristic legal instrument. It is symptomatic that the trust will not be classified as a contract or entity with legal personality.
- The maximum period for which the trust will be allowed will be 100 years.
- The analysis of the bill issued in January 2022 by the Federal Council clearly does not allow for the creation of charity and other trusts aimed at a similar concept. The Federal Council argues this as follows that a trust should not compete with a foundation that is permissible under Swiss law.
- Apart from the limitations indicated above, the draft law no longer provides for any other formal obstacles to the purpose for which the trust is to be appointed. In particular, in accordance with the regulations presented in the draft, it is permissible to create trusts of a commercial nature. For this reason too. The Federal Council presents the view that a trust may in the future become a certain alternative to partnerships and even capital companies.
- The draft law does not mention any exceptions to the provisions of the Civil Code regarding property rights. Under the draft by the Federal Council, the trustee will have certain specific rights over the trust property. The beneficiaries of the trust will have only personal rights.
- Swiss trusts will be obliged to comply with international regulations related to reporting and obligations regarding the keeping of operational documentation. In particular, emphasis is placed on the trustees' obligation to identify trust beneficiaries in order to prevent money laundering and not to hinder tax claims. In order to ensure the effective implementation of transparency rules, the draft bill provides for a new criminal provision which punishes the breach of identification and documentation duties by the trustee.
So far, the Swiss legal system has not distinguished any dedicated tax provisions on foreign trusts. The trust tax model was outlined in a non-binding ocular letter from the Swiss Tax Conference (which letter was subsequently adopted by the Swiss Tax Administration). In principle, the trust itself and the trustees have not been subject to taxation in respect of the trust, but rather its beneficiaries and/or its settlor, if resident in Switzerland. Thus, obtaining an advance tax ruling for the Swiss-resident individuals related to the trust has been and will remain a must.
The main objective of the draft law of the Federal Council of Switzerland is to introduce dedicated legal regulations aimed at the taxation of trusts. As already the Circular Letter did, the draft bill distinguishes between revocable and irrevocable fixed interest as well as irrevocable discretionary trusts. The taxation of the first two shall remain the same as it has been under the Circular Letter. However, the draft bill introduces the following new rules on the taxation of irrevocable discretionary trusts:
- Cantonal inheritance and donation taxes (in certain cases) will be payable when creating a trust. The question to be decided here will be whether the cantons will apply the tax rate for unrelated persons here, which may even be as high as 55%.
- From then on, if the trust has a beneficiary who is a resident of the Swiss Federation, it will be taxed as if it were a foundation (i.e. a legal entity). The portion of the income and assets associated with the trust attributable to the beneficiary who is resident in the Swiss Federation will be subject to reduced corporation tax and capital gains tax respectively. Payments to beneficiaries provided that such persons are residents of the Swiss Federation are moreover, be subject to income tax. We anticipate that this will also apply to the division of the initial capital of the trust, which, on the basis of the currently applicable regulations, is not subject to income tax.
- If it is not possible to identify the beneficiaries ( resident in Switzerland ), such trust will be taxable in Switzerland if the settler is resident in Switzerland at the time of settlement. If the trust is deemed to be resident abroad under a tax treaty, its assets and income will continue to be taxed at the level of the Swiss resident (if any).
The above rules apply to foreign trusts when persons who are settlers in Switzerland participate in such trusts. The same is true if the participant in the foreign trust is a beneficiary who is resident in Switzerland. Taking into account the solutions presented in the draft act, which contain the refreshed tax regulations for irrevocable discretionary trusts, a transitional period should be proposed before the new regulations enter into force. So far, the transition period is unknown.
The issue of consultations on the draft law regulating the trusts in Switzerland lasted until April 30, 2022. The final bill should be prepared soon and put to the vote in the Swiss Parliament. The lapse of time will tell you whether the Swiss legal system will finally see a law that will comprehensively regulate the domestic trust market. It is promising that the Swiss Federal Council has expressed the view that it is open to the idea that Swiss family foundations will be able to provide financial benefits for the immediate and temporal living needs of family members. Such a regulation would bring the legal status of Swiss family foundations very similar to that of family foundations in the Principality of Liechtenstein.
Should the taxation of trusts remain unchanged in the final draft, trustees, their settlors and beneficiaries are well advised to carefully examine the tax implications for their trust structures. While the taxation of revocable and irrevocable fixed trusts should not be affected by the draft bill, irrevocable discretionary trusts will most likely face a higher overall tax burden as their income and assets will now be taxed twice: at the level of the trust itself and once the income is distributed, again at the level of the Swiss-resident beneficiary. At this stage, it is not yet clear whether the final draft will have any impact on the taxation of foundations registered in the Principality of Liechtenstein.
We recommend that you follow the further developments with regard to the final version of the draft law on the establishment of trusts in Switzerland. The Eberhard Advisory team provides you with professional legal assistance in the field of consulting related to the establishment and operation of trusts in Switzerland and abroad. We look forward to hearing from you.
