1. Trusts under Swiss Law
1.1. Lack of Substantial Swiss Law on Trusts
The anglo-saxon trust law has not (yet1) been adopted into the Swiss legislation. There is no Swiss substantial law on trusts and no such thing as a Swiss domestic trust. Therefore, a trust can only be established according to foreign law, whereby the settlor may choose the governing law. However, despite the lack of substantial trust provisions, Swiss courts have been dealing with trusts for many years. Until June 2007 the trust structure was not recognized in Switzerland and therefore was partly attributed to contractual law and partly to corporate law. The leading case of that time is the Harrison Trust case of 19700 2, whereby a family trust was classified as a contractual relationship in favour of a third party combined with a donation, and was subject to the private international law rules on contracts. Once the Swiss Private International Law Act (SPILA) came into force in 1989 trusts were, as a general rule, attributed to the rules of corporations, foundations and similar entities, such as so-called "organised units of assets". This new regime was quite favourable for the recognition of trusts, but still left quite many questions unresolved.
1.2. Recognition of Trusts
Switzerland being one of the largest trust administration centers in the world recognized eventually the Hague Convention on the Law Applicable to Trusts and on their Recognition of 1st of July 1985 with effect as of 1st of July 2007 (the "Hague Convention"), resulting in the recognition of trusts as a legal structure sui generis and in the enforcement of foreign trusts.
2. Ratification of the Hague Convention
2.1. Choice of Trust Law (art. 6 HTC)
Pursuant to art. 6 HTC and art. 149c SPILA the trust shall be governed by the law chosen by the settlor. It is highly recommendable to provide for such a choice of law rule in the trust deed, where the trust is closely connected to Switzerland (residence of trustee, location of assets, etc.), because if there is no choice of law rule the trust shall be governed by the law with which the trust is most closely connected (art. 7 HTC). Again, under Swiss law there is no trust law and therefore, the trust would not be recognized.
2.2. Preliminary Issues (art. 4 HTC)
Preliminary issues relating to the validity of wills or of other acts by virtue of which assets are transferred to the trustee are excluded from the scope of the Hague Convention and consequently from the law chosen by the parties in the trust deed (art. 4 HTC). Preliminary issues are governed by the law designated by the conflict of law rules of the respective forum. Hence, the acts by which property was transferred need to be valid under the law applicable to those transfers. The asset transfer into trust might be invalid for example for reasons of incapacity of the settlor, missing the formal requirements or the validity of the underlying contract.
2.3. Swiss Inheritance Law and Swiss Matrimonial Property Law (art. 15 HTC)
Swiss matrimonial property law and Swiss inheritance law (forced-heirship rules) provide for provisions, which have to be followed for a valid and incontestable disposal of assets. These provisions in the Swiss law cannot be derogated by voluntary acts (art. 15 HTC). The same is true with regard to the pro-visions in the Swiss law on the protection of creditors in matters of insolvency. Consequently, by setting up a trust the question whether heirs, husband, wife creditors, etc. can contest a contribution made to the trust needs to be consid-ered carefully as the trust is submitted to the Swiss International Private Law Act and to Swiss substance law.
2.4. Lois d'Application Immédiate and Ordre Public (art. 16 HTC and 18 HTC)
The Hague Convention does not prevent the application of those provisions of the law of the forum which must be applied, irrespective of rules of conflict of laws (lois d'application immédiate). In Switzerland, in particular, the law on the Acquisition of Real Estate by Persons Abroad (Lex Koller)3, the Cultural Proper-ty Transfer Act (CPTA)4 and the provisions in the special field of farm land law (BGBB)5 fall under these mandatory provisions and will be applied no matter which foreign trust law is applicable. The ordre public6 is also subject to reservation.
2.5. No Taxation Rules
It should be noted that the Hague Convention does not deal with taxation is-sues and that in Switzerland 26 cantons have competencies to levy taxes and to develop their own practices. In order to harmonize the practice on taxation of trusts the Swiss Tax Conference issued a Circular No. 30 in August 2007 on the taxation of trusts for cantonal/communal income tax purposes. A more de-tailed overview on the Circular No. 30 is given below in Section 5.
3. Introduction of New Provisions in the Swiss Law
3.1. Swiss Private International Law Act (SPILA)
The recognition of the Hague Convention is accompanied by amendments to Switzerland's domestic law which are meant to facilitate the interplay of the domestic law with the Hague Convention. A new Chapter has been adopted in the SPILA which is dedicated to trusts (art. 149a-e SPILA, art. 21 SPILA). These amendments lead to a full and complete recognition of foreign trusts as de-fined in the Hague Convention in Switzerland (art. 11 HTC).
3.2. Swiss Federal Debt Enforcement and Bankruptcy Act (SFDEBA)
The Swiss Federal Debt Enforcement and Bankruptcy Act (SFDEBA) has also been supplemented by a new Chapter (art. 284a-b SFDEBA). The core provision is that the trust assets constitute a separate fund independent of the Trustee's own patrimony.
3.3. Ordinance on Land Register (LRO)
With effect as of 1 January 2012 the new Land Register Ordinance (LRO)7 has come into force which also contains several provisions on trusts. For a more detailed overview see the following section.
4. Transferring Real Estate into Trust
4.1. Registration of Trustee in Land Register
Since 2007 it is possible to hold Swiss property in trust. In such a case, generally the trustee is the owner of the real property and is to be registered in the land register (art. 149d SPILA).
With effect as of January 1, 2012 the revised Land Register Ordinance (LRO), in German so-called "Grundbuchverordnung" (GBV)8, has come into force, which contains a few provisions on the treatment of immovable property that is part of the trust assets. Pursuant to art. 67 LRO any settlor who wishes to transfer an immovable into trust (inter vivos transaction), has first to sign a written agreement with the trustee in an authenticated document. The same is true for any trustee wanting to transfer the immovable. This formal requirement takes the general fundamental principle in Swiss immovable property law into account, that inter vivos transactions involving immovable require an authenticated instrument. If this formal requirement has not been met by the parties, the transfer of the real property is invalid and the transferor will not be registered in the land register. The new provisions also deal with the annotation of a trust encumbrance in the land register as provided by Art. 149d SPILA.
4.2. Lex Koller
By acquiring real property in Switzerland the so-called "Lex Koller9" has to be taken into consideration as well. While EU/EFTA nationals residing in Switzer-land can acquire real estates without prior authorization, third-country nationals are still submitted to a preliminary administrative authorization. If the trustee or the beneficiaries qualify as a person abroad, in principle the transfer is subject to authorization10. However, the question still remains whether all beneficiaries are to be taken into account or only the beneficiaries with a real interest in the real property. Unclear is also the legal situation if only some trustees or beneficiaries are "persons abroad".
Lex Koller generally excludes fiduciary acquisition of real property in Switzer-land11, in other words the acquisition must be made directly and in the acquirer's own name. This rule contradicts with the Hague Convention and art. 149d SPILA which entitles a trustee to register the trust relationship in the land register.
5. Taxation of Trusts
5.1. Circular No. 30 of 2007
The tax implications of trusts are not regulated by the Hague Convention. The Swiss Tax Conference therefore issued the Circular No. 30 in August 200712 with the intention to harmonize the various existing practices in the cantons. In 2008 the federal tax authorities adopted Circular No. 3013 as also being applicable to federal taxes14. The Circular No. 30 provides for guidelines addressed to the cantonal authorities and aims to avoid structures where assets are being "parked in no man's land". As a non-legislative act the Circular No. 30 does, however, not establish any rights or obligations of the taxpayer.
5.2. Taxation Principles of Circular No. 30
First of all, according to the Circular No. 30 a trust is not treated like a (foreign) law entity. The trust settlement is, therefore, generally disregarded and treated transparently for tax purposes. Consequently, the trust assets and the trust in-come will either be taxed by the settlor or the beneficiaries.
Hence, based on the Circular no. 30 a Swiss trustee is never subject to tax for the trust assets and the trust income. The trustee is regarded as the formal owner but not the beneficial owner of the trust assets.
5.3. Taxation of Settlor or Beneficiaries
The Circular No. 30 differs between revocable, irrevocable fixed-interest trusts and irrevocable discretionary trusts. Decisive for the tax authorities' qualification of a trust being revocable or irrevocable is not only its qualification in the trust deed but also the factors which show the settlor's powers with regard to the trust assets.
Based on The Circular No. 30 a Swiss resident settlor is taxable for the trust assets and trust income if he keeps certain control and has an economic benefit over the trust assets. This might in particular be the case, if the settlor (a) has the right to revoke the trust, (b) has the right to amend the trust deed, (c) has power to influence the management of the trust assets, (d) has power to appoint or remove trustees, protectors or beneficiaries, (e) is the first beneficiary during lifetime, (f) is a trustee, or (g) has power to effect distributions. In this case the trust is treated transparently for tax purposes. Basically, only if the beneficiaries have a stronger economic influence on the trust, the settlor is no longer subject to tax.
In the case where the settlor keeps certain control and has an economic benefit over the trust assets, the trust might be (for tax purposes) qualified as a revocable trust. The decision is up to the discretion of the assessing tax authorities. Hence, a harmonization with regard to the taxation of trusts in Switzerland based on the Circular No. 30 is not yet reached.
5.4. Revocable Trust
If a trust is qualified as a revocable trust, then the settling of the trust does not cause any change from a fiscal perspective. The settlor remains taxable and distributions to beneficiaries are treated as gifts from the settlor.
In the event of the settlor's demise, the trust becomes (for tax purposes) an irrevocable trust. Some tax authorities conclude that with the settlor's demise the settlor made a donation to the trust or the trustee and therefore is, there-fore, an inheritance. Due to lack of a provision in the Circular No. 30, the taxation is not clear and differs from canton to canton. Some cantons apply the highest inheritance tax rate and others take the relationship between the settlor and the beneficiaries into account and only then determine the tax rate. In most cantons the tax rate is zero if the heirs are direct descendants of the settlor. Other cantons do not follow the inheritance road but focus on whether the beneficiaries have substantial influence over the trust assets. If so, then the trust will still be treated transparently, meaning the trust assets and trust in-come will be taxed by the beneficiaries.
5.5. Irrevocable Fixed Interest Trust
Under Circular No 30 the creation of a fixed interest trust is treated as a donation from the settlor to the beneficiaries. The tax rate applicable depends on the degree of cognation. An assessment of gift tax on the entire trust funds can violate the principle of economic capacity, in particular, if the beneficiary is only entitled to a certain amount of the trust income. Therefore, the tax would have to be limited to the capitalized amount of the income (treatment of usufructuary).
In the event that the Swiss resident beneficiary has an entitlement to distributions of either capital or income he is taxed in analogy to an usufructuary. The amount of his entitlement to distribution will be capitalized and the capital value of his entitlement is subject to wealth tax. Any amount distributed to the beneficiary is subject to income tax unless made out of tax free capital gains or capital.
5.6. Irrevocable Discretionary Trust
The settlor irrevocably transferred the trust assets to the trustee and has given up any economic interest in the trust funds. The trustee cannot be taxed as he is not the beneficial owner of the trust assets.
Beneficiaries of an irrevocable discretionary trust have in general no legal entitlement to receive distributions from the trust. They have a mere expectation of benefitting from the trust. Under Swiss tax law an expectation is not taxable. However, under the Circular No. 30 a Swiss resident beneficiary of an irrevocable discretionary trust may be subject to tax if he is qualified as the beneficial owner of the trust assets.
If the beneficiary does not qualify as a beneficial owner, then the Swiss resident settlor remains tax liable for the trust fund and the trust income just as if he had set up a revocable trust. Therefore, the trust fund and trust income are still attributed to the settlor and distributions to beneficiaries are treated as gifts.
The Circular No. 30 provides for an exception of this principle in the event that the settlor was resident abroad when the trust was set up. In that case the Circular No. 30 accepts that neither the trust fund nor the trust income can be attributed to the currently in Switzerland residing settlor or the beneficiaries. Only distributions received by a Swiss resident beneficiary will be taxed as income. In practice, some tax authorities, however, do not grant the tax exemption if the settlor set up the trust shortly before he immigrated to Switzerland and declare such a pre-immigration structuring as a tax evasion. The resident distinction made by the Circular No. 30 is highly disputed as it violates the principle of equality. Thus, it is not clear whether a court would uphold such an unequal tax treatment.
The distribution of capital gains is not tax-free because the trust assets are not attributed to the beneficiaries for tax purposes. Distributed capital gains qualify as income.
5.7. Withholding Tax
Since the trust is not a legal entity, it cannot claim a refund of Swiss withholding tax. Swiss withholding tax paid on income arising on trust assets (mainly interest and dividends) will generally only be refundable to Swiss resident per-sons whom such assets are being attributed to (settlor or beneficiary).
5.8. Lack of Uniform Taxation of Trusts
Also after the issuance of Circular No. 30 the taxation of trusts by the cantons remains inconsistent and uncertain. The Circular No. 30 is highly disputed as Swiss legal principles are violated, some questions remain unanswered and some trust principles are not followed. It is, therefore, recommendable to re-quest an advance tax ruling from the tax authorities before implementing a trust structure in Switzerland.
6. Recent Swiss Court Cases
6.1. Acknowledgment of Split of Ownership
In A v the Federal Prosecutor Office15 the Federal Supreme Court acknowledged in a case regarding the freezing of a trust account in a criminal proceeding that the settling of a trust results in the split of ownership and therefore only the trustee can contest a freezing order and not the beneficiaries. The beneficiaries, who only have a mere economic interest over the trust assets, have no power to dispose of the trust assets and therefore no standing for challenging a freezing order.
6.2. Definition of Beneficial Ownership
In connection with international mutual assistance requests the Federal Administrative Court had the opportunity to deal with trust related matters several times in the past few years. In particular, with regard to the double tax treaty signed between the US and Switzerland on the exchange of information, sever-al court decisions were rendered.
In its decision of 18 March 201116, the Federal Administrative Court delivered a leading case on the rights of a beneficiary/object under a discretionary trust regarding assets in a bank account at UBS AG held in the name of the trustees. The court held that a beneficiary has no power of control over the trust assets and, therefore, is not a beneficial owner thereof. One of the conditions to grant administrative assistance is that a request must relate to a US person who is a beneficial owner of "offshore company accounts". Therefore, the Court refused to grant administrative assistance to the United States against the US tax payer and beneficiary, who had no power to dispose of assets deposited in the ac-count with UBS AG. This court order is completely in line with the Hague Convention stating that the trust assets constitute a separate fund and are not part of the trustee's own estate.
In its decision of 23 March 201117 the Swiss Federal Administrative Court dealt with a case of an irrevocable trust, one of whose assets was an underlying company that owned a bank account at UBS AG. Although the beneficiaries had no direct or indirect powers of administration over the trust assets, UBS AG made the mistake of having the beneficiaries to fill out a Form A, but then had it replaced by a Form T. The court concluded that the underlying company and the banking relationship with UBS AG were part of the trust assets. The court recognized that the beneficiaries of a discretionary trust have a mere expectation, i.e. sort of uncertain future interest. The court concluded that the underlying company could not be treated as transparent, thus the beneficiary was not the beneficial owner of the bank account.
In a decision of 28 June 201118 the Swiss Federal Administrative Court dealt with a case of a revocable trust and confirmed that the beneficiaries were not the beneficial owners of the assets in the bank account.
Since 2011 the Swiss Federal Administrative Court has defined the notion of beneficial owner also with regard to a settlor. In particular the court looks to see whether the settlor really has divested himself of his assets, directly or indi-rectly, in favour of the entity. If so, then such a person cannot be considered the beneficial owner of the accounts held by the trust.
6.3. Claw-Back Mechanism of Swiss Matrimonial Property Regime
In Rybolovlev v Rybolovleva19 the Federal Supreme Court handed down a judg-ment in the context of Swiss matrimonial property law. The appeal arose out of a court decision of Geneva ordering the attachment of property belonging to a Cypriot trustee and being located abroad for a claim of the wife to a balancing payment resulting from the dissolution of the matrimonial property regime, following divorce. The court held that the spouses were subject to the Swiss matrimonial regime of jointly-acquired property and, therefore, the wife had a right to half of her husband's jointly-acquired property. The court held that the husband remained the "economic owner" of the property transferred to the trusts due to his rights and powers under the trusts and due to the claw-back mechanism under the Swiss matrimonial regime.
The husband was appointed as protector with the power to hire and fire the trustees, add or exclude beneficiaries, and to nominate special companies and was the principal discretionary beneficiary with his daughters. His wife was completely excluded and the trusts were set up right after the wife's refusal to sign a post-nuptial agreement. The Federal Supreme Court, therefore, considered that the court below had not acted arbitrarily and upheld the order attaching the trustee's property. The Supreme Court noted, however, that the question of whether and how such measures could be enforced remained open.
Unfortunately, the reasoning of the involved courts contain some inherent contradictions as to the question of the ownership of the trust assets. Furthermore, some aspects of trust law were totally disregarded. Thus, the impact of this case is not fully clear and is assumingly to be read - based on the specific facts - under the Swiss doctrine of abuse of law.
7. The Swiss Association of Trust Companies (SATC)
In Switzerland no duty exists for professional trustees to register with a super-visory authority. The private industry, including many of Switzerland's largest trust companies, however founded the Swiss Association of Trust Companies (SATC), mainly to develop the activities of trustees in Switzerland and to pro-mote the adherence to certain professional and ethical standards. SATC issued minimum standards of professional credentials and a code of ethics. In 2012 SATC published a so-called "White Paper" with various proposals on the regulation of trustees in Switzerland, namely the requirement to obtain a licence to carry out trustee activities in Switzerland.
8. Federal Act on Anti-Money Laundering
Complementing the ethical standards with regard to trusteeships Switzerland has enacted comprehensive legislation for preventing unwanted proceeds de-riving from crimes. The Swiss Federal Act regarding the Fight Against Money Laundering in the Financial Sector (AMLA) is also applicable to trustees who qualify as financial intermediaries. According to the practice of the Swiss Financial Market Supervisory Authority (FINMA)20 trustees are deemed financial intermediaries as they own the trust assets separately from their personal as-sets. This means that trustees have among others the duty to verify the contracting party's identity, to establish the beneficial owner's identity, to clarify the economic background and the purpose of unusual transactions. In addition the AMLA provides for reporting duties on the trustee in case of any suspicious transactions. Whether protectors fall under the AMLA depends on their powers under the trust.
Footnotes
1 Lately in the context of Swiss bank secrecy, on several occasions it was discussed whether Switzerland should implement its own trust law.
2 Harrison v Schweizerische Kreditanstalt, Federal Supreme Court decision BGE 96 III 79.
3 SR 211.412.41.
4 SR 444.1.
5 SR 211.412.11.
6 In BGE 135 III 614 the Federal Supreme Court held in a case regarding to a Liechtenstein foundation that art. 335 CC (prohibition of pure family maintenance foundations) has no ordre public character. With respect to trusts no such decision has been taken so far.
7 SR 211.432.1.
8 SR 211.432.1. The GBV replaces the guidelines of the Federal Office for Land Register and Real Estate Law, which deals with the same topics. Unlike those guidelines, the new regulation has status of law and is binding.
9 Federal Act on Acquisition of Property by Persons Domiciles Abroad of 16 December 1981 (SR 211.412.41).
10 Federal Supreme Court decision dated 15 January 2010 (2C_409/2009). In case of a revocable trust, the settlor should be taken into consideration as well.
11 The Land Register Commission of the Canton of Vaud denied the request of an American couple to be registered as trustees in the land register because they were holding the assets "on a fiduciary basis" and not directly (8 February 2008 in re X.). Unfortunately, the American couple did not proceed with the appeal and therefore the decision has not been examined by a court. Taking the Hague Convention into account a court should have allowed the appeal.
12 See http://www.steuerkonferenz.ch/pdf/ks_30.pdf .
13 See http://www.estv.admin.ch/bundessteuer/dokumentation/0042/00380/index.html .
14 Circular no. 20 of 27 March 2008.
15 Federal Supreme Court decision of 25 March 2010 (1B_21/2010).
16 Federal Supreme Court decision of 18 March 2011 (A-7013/2010).
17 Federal Administrative Court decision of 23 March 2011 (A-6903/2010).
18 Federal Administrative Court decision of 28 June 2011 (A-535/2011, A-539/2011, A-544/2011, A-547/2011).
19 Federal Supreme Court decision of 26 April 2012 (5A_259/2010).
20 SR 955.0.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
