As many Swiss banks and lawyers might look to Liechtenstein when setting up trusts for their clients, it is a good opportunity to deal again shortly with the Liechtenstein trust concept and later on with the legal provisions in Switzerland for ratifying the Hague Trust Convention which is beneficial to the trust business.
PART I: Trusts in Liechtenstein (Trust Settlement)
Liechtenstein is the only country within the civil law system of continental Europe which has introduced and hence regulated the concept of the Anglo-saxon trust and the American business trust. The introduction of the Anglo-Saxon trust concept into Liechtenstein civil law was effected as early as 1926, when the Liechtenstein Law on Persons and Companies (PGR) was enacted and the trust concept found its place into its articles 897 to 932. Two years later, in 1928, Liechtenstein passed the Law on Trust Enterprises. This supplemental application of the provisions on the trust enterprise, which is in fact a business trust, to the trust concept is only made possible since the trust enterprise as it exists under Liechtenstein law resembles a trust as far as its main characteristics are concerned. Liechtenstein trust should not however be confused, as it often is, with the concept of the trust enterprise, which in contrast to the trust, is a legal person under Liechtenstein law equipped with its own legal personality and capacity in order to be able to carry out a business activity.
In the following discussion of the Liechtenstein trust, I will shortly deal with some specific legal provisions of the so called "Private Express Trust". A trust may be revocable or irrevocable, modifiable or unalterable.
Unlike the Anglo-American model, the trust in Liechtenstein law may be set up for an indefinite period. It can be used in the same way as a foundation, but permits more flexible arrangements as its purpose is not limited in any way, as is the case under foundation law. The trust is the legal relationship created by a trust agreement between the settlor and the trustee whereby the settlor assigns fixed or movable assets or rights to the trustee. The trustee is required to manage and use the assets entrusted to him in his own name pursuant to the directives drawn by the settlor for the benefit of one or more third parties (beneficiaries).
Name and language:
The name of the trust can be freely chosen in any language, but enquiries must first be made to the Liechtenstein Land and Public Register Office to establish whether the name is still available. Names of countries, places and national or international organizations are not allowed as part of the name.
The chosen name must always be accompanied by the word "Treuhänderschaft" or "Trust" in unabbreviated form.
No minimum founding capital is prescribed. The trust may, for example, be endowed with CHF 1,000.
The participants are:
1) the settlor (founder): the terms of the contractual relationship must be set out in writing (trust deed = act of constitution)
2) the trustee or trustees (acceptance of the office in written form)
3) the beneficiary or beneficiaries
The formation of the trust is effected when the trust deed is signed by the settlor and trustee or by a letter or declaration of trust. The optional entry in the Public Register (instead of depositing) does not have any constitutive effect. Liechtenstein law embodies no provisions preventing perpetuation.
Compared to many other jurisdictions, the existence of the trust is reported to the local Public Register. This makes sure that only regulated trustees manage trusts which are supervised by the local Financial Supervisory Authority (Finanzmarktaufsicht FMA).
Where an entry in the Public Register is desired, the following information must be given: date of formation, designation of the trust, duration (limited or unlimited), name and address of the trustees. As an alternative to registration, the possibility of depositing the trust deed with the Land and Public Register Office exists. A deposited trust does not then exist in any register accessible to the public and inspection of information provided is possible only if evidence of a justified interest can be produced.
The trustee or trustees is/are the body responsible for the trust and hold and manage the assets of the trust in their own name and are personally liable to the settlor and the beneficiaries with their entire assets. The trustees may be any natural or legal person, regardless of their place of residence, registered office or nationality.
At least one trustee must be a citizen of an EEA (European Economic Area) Member State and have his permanent place of residence in an EEA Member State (A state treaty with Liechtenstein can grant other persons of the respective treaty state the same rights). This sole member must also be authorized to pursue the inland profession of trustee according to the law on trustees. The same authorization applies to citizens of an EEA Member State resident in an EEA Member State (or persons having the same rights due to a state treaty) who possess evidence of a qualification according to art. 2 of the law on trustees. They have also to be in at least one year full-time employment in Liechtenstein of a trustee or a trust company and exercise their activities in the context of that employment relationship according to the first sentence in this alinea. Nationals who are not citizens of an EEA Member State or who do not have the same rights according to a state treaty must have a Liechtenstein residence permit.
The beneficiaries may require the trust provisions to be performed and enforced by the courts if the trust deed does not leave the execution of benefits or the nature of the benefits to the discretion of the trustee. The settlor himself may be the beneficiary or even the sole beneficiary.
There are no provisions in the law, although in most trust deeds there are clauses for protectors with different rights and obligations.
The trustee is required to keep records of the assets forming the trust property and to adjust them annually. The trustee must be in a position to provide information on the financial status of the trust.
Filing of accounts:
No balance sheet has to be submitted to the Liechtenstein tax authorities.
To safeguard compliance with the provisions of the trust deed by the trustee, statutory auditors a protector or custodian may be appointed.
The appointment of a local representative is not necessary.
The trust deed must explicitly state that the Trust is subject to Liechtenstein law.
Trusts subject to foreign trust laws too, may be set up in Liechtenstein, with a global reference in the trust deed controlling the internal legal relationship between the parties involved made subject to foreign law, but still as regards external relationship subject to Liechtenstein law as against third parties.
By virtue of the principle of freedom of the individual to make personal arrangements, the settlor may freely stipulate in the trust deed the reasons or conditions for termination of the trust, e.g. by designating authorized persons, on the occurrence of an event which constitutes a condition, when the entire trust assets have been used for the intended purpose and are no longer available or in the event of other performance of the material purpose of the trust or else upon expiry of a specified period.
Where this is stipulated in the trust deed, a trust may be revoked:
- with the assent of all the beneficiaries, the settlor and the trustee;
- by the settlor;
In the absence of other provisions in the trust deed, the trustee is required to manage the trust for at least one administrative year. Otherwise the trustee is authorized to terminate the trust with effect from the end of any calendar year by giving three months advance notice.
Amendment of the applicable law and transfer to another jurisdiction:
Amendment of the applicable law and transfer of the trust to another jurisdiction takes place by a decision of the trustees according to the regulations of the trust deed.
Trusts must pay a capital tax on the net trust assets. This is levied at the rate of 0.1 % on trust assets reported, subject to a minimum of CHF 1,000 and is payable annually in advance. There is no reporting enforced in practice.
Endowments to the trust (unless the settlor is domiciled in Liechtenstein) and payments to beneficiaries domiciled abroad are not liable for any tax in Liechtenstein.
PART II: The Hague Trust Convention
Liechtenstein ratified the Hague Trust Convention only on 13 December 2004 which entered into force on 1 April 2006. Switzerland adopted the ratification of the Hague Trust Convention in the end of 2006, and hopefully it should enter into force in July 2007.
For Liechtenstein, the Convention is only applicable for trusts set up by free will and in written form, whereas in Switzerland the evidence in writing is not a conclusive provision.
The Text of Switzerland's Trust Ratification sets forth (not complete):
A) The Swiss Private International Law Act of 18 Dec. 1987 (SPILA)
Art. 21 Domicile and establishment of companies and trusts
Par. 1) The domicile of a company or a trust in the sense of art. 149a shall be its seat.
Par. 3) The seat of a trust shall be deemed to be at the place of its administration as specified in writing in the trust instrument or in any other form that can be evidenced in writing. In the absence of such specification, its seat shall be where the trust is effectively managed.
Par. 4) A company or a trust is established in the country in which it has its seat or a branch.
Art. 149a Definition
Par. 1) The term "trust" refers to trusts created by legal act in the sense of the 1 July 1985 Hague Convention on the Law Applicable to Trusts and on their Recognition, whether or not the trust is proven in writing according to art. 3 on the said Convention.
Art. 149b Jurisdiction
Par. 1) The forum selection clause contained in the trust instrument shall be conclusive for all matters related to the law of trusts. The forum selection or the power to select a forum contained in the trust instrument shall only be enforced if made in writing or in another form that can be evidenced in writing. Unless otherwise provided, the forum selection shall be exclusive. Art. 5 Par. 2 shall apply be analogy.
Par. 2) The designated court shall not decline its jurisdiction:
- where one of the parties, the trust or a trustee is domiciled, has his habitual residence or establishment in the canton where that court is located; or
- where a substantial part of the trust's assets are located in Switzerland.
Par. 3) In the absence of a valid forum selection or where such selection is not exclusive, jurisdiction shall fall upon:
- the Swiss courts at the domicile or, failing which, the habitual residence of the defendant;
- the Swiss courts at the trust's seat; or
- the Swiss courts at the place of the establishment, for claims arising out its activity in Switzerland.
Par. 4) In case of a dispute over liability for a public offering of equity papers or bonds, proceedings may also be brought before the Swiss courts at the place of the public offering. Such jurisdiction may not be excluded by a forum selection clause.
Further important points
- Applicable law according to the Hague Convention;
- Trust assets are registered in the name of the trustee(s). If the trust relationship is not mentioned in a register, it will not be enforceable against bona fide parties. Therefore the mentioning is very important, especially in land registers (--> bankrupty of the trustee).
- Foreign decisions in matters related to the law of trusts shall be recognised in Switzerland. The provisions are written down in Art. 149e SPILA.
B) The Swiss Debt Enforcement and Bankruptcy Act (SDEBA)
Art. 284a Collecting debts against the trust
Par. 1) Where a trust in the sense of Chapter 9a SPILA is liable for a debt, the proceedings must be brought against the trustee as representative of the trust.
Par. 2) The forum for such proceedings shall be the trust's seat in the sense of art. 21 Par. 3 SPILA. Where the trust's designated place of administration lies outside Switzerland, the proceedings shall be brought where the trust is effectively managed.
Par. 3) The debt collection proceedings shall be continued by way of bankruptcy. The bankruptcy shall be limited to the trust assets.
Art. 284b Trustee's bankruptcy
In the event of a trustee's bankruptcy, the trust assets shall be segregated from the trustee's estate, after deduction of any claims the trustee against the trust.
Part III: Interesting Swiss jurisprudence on this subject
The trust set up in Liechtenstein is an organized entity embodying an endowment fund according to International Private Law (IPRG) Art. 150 I. The selection clause contained in the trust instrument shall be conclusive, at least for the legal relationships between the trust, the trustee and the beneficiaries. This follows the jurisprudence of the Swiss Federal Court (BGer) to the Anglo-saxon Private Express Trust (BGer 3 September 1999; 4C.255/1998), which largely corresponds with the Liechtenstein trust (BGer 14 September 2005 4C.94/2005).
The views contained in this article are representative of the author only. The author does not accept any loss, damage or injury howsoever arising that may result from this article. The reader is strongly invited to consult with a specialist on his specific situation.