The trust in 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 (there may be certain restrictions as to the purpose trust). 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/guidance given by the settlor in the trust deed for the benefit of one or more third parties (beneficiaries). The trust may be revocable or irrevocable, discretionary or be of fixed interest. The trust deed can be set up in many different ways, and careful planning is needed in order that the expected tax results are granted by the Swiss tax authorities. Generally speaking, it is advantageous to obtain a ruling by the competent tax authorities in order to not become liable as a trustee because the tax effects are different than initially planned (or expected) either by the settlor or the beneficiaries.
The participants normally are:
- the settlor (founder): hereby the terms of the
contractual relationship must be set out in writing (trust
deed = act of constitution);
- the trustee or trustees (acceptance of the office in written form in Liechtenstein);
- the beneficiary or beneficiaries.
The formation/creation of the trust is effected when the trust deed is signed by the settlor and trustee or by a letter or declaration of trust. A declaration of trust should be avoided if the settlor and/or beneficiaries live in Switzerland.
The optional entry in the Public Register (instead of depositing) does not have any constitutive effect in Liechtenstein. Liechtenstein law embodies no provisions preventing perpetuity.
Registration/Depositing in Liechtenstein: Where an entry in the Public Register is desired, the following information must be provided: 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 is not shown in any register accessible to the public and inspection of information provided is possible only if evidence of a justified interest can be produced.
A trust may be set up "inter vivos" or through a testamentary disposition (following the death of the settlor).
As article 19 of the Hague Convention stipulates that taxes are left to the signing states, the ratification does not have any effects on the tax treatment of trusts and any country may treat settlors, beneficiaries, trustees etc. in different ways, which does not really make comfortable any tax consultant or trustee.
In Switzerland, the trust is considered to be set up by a written asset disposition signed by the settlor and the trustee. The consent of the trustee is not a compulsory element in order to validly set up the trust. Letter of wishes are considered to be a kind of communication of will and disposition, however they are not compulsory for the trustees. The letter of wishes is rather a disclosure of ideas how the settlor would like to have the trust administered. The letter of wishes has its practical importance especially for irrevocable discretionary trusts.
Switzerland, from the taxable point of view, makes the following main differences, and it must be pointed out that trusts can be somewhere in between and the tax results can vary. So the following presentation is simply valid for the typical category of trusts presented below.
If the settlor is a trustee or beneficiary of the trust, the trust is considered to be revocable from the Swiss tax point of view. The typical Liechtenstein trusts may therefore be revocable trusts from the Swiss tax perspective as it is commonplace that the settlor remains the main beneficiary or keeps a strong influence as protector on the economic benefits of the trust's assets. It does therefore not matter how the trust deed is legally drafted if the conditions mentioned beforehand are met. In general, a trust is revocable if the settlor has legal or economic access to the assets of the trust.
If the settlor endows the trust with the assets during the set up and he irrevocably loses any rights on the assets and has no more obligations regarding these assets, the Swiss tax authority considers this as irrevocable alienation of assets.
Irrevocable fixed interest trust (interpreted by the Swiss tax authority)
The beneficiaries and their rights are clearly established in the trust deed. The trustee has no discretion as to the allocation of income and/or assets of the trust. The trustee has neither an economic benefit at the trust assets nor an independent freedom to dispose of the assets. The beneficiaries have a claim on the assets and can give effect to such a claim through the court. The beneficiary can be considered to have a usufruct on the assets.
Irrevocable discretionary trust
It does not matter – again from the Swiss tax point of view – if the trust deed classifies the trust to be discretionary or not. The economic effect of the trust deed is relevant. The trust deed in such a case will normally define abstract classes of beneficiaries. The decision who will have a benefit and who will receive any distribution out of the trust is left upon the trustee. The trustee has full discretion, and a possible letter of wishes may explain the reasons why the settlor has set up a trust and how the trustee should use his competences. But the letter of wishes is not legally binding upon the trustee. The rights of the beneficiaries are therefore of revisionary character.
Examples of taxation in Switzerland
a) Revocable trust
The trust is considered to be transparent from the tax point of view. The assets and income of the trust continue being part of the assets and income of the settlor. The set up of the trust has no tax consequences and the assets and income are taxed at the settlor's domicile. Distributions to beneficiaries are considered to be gifts and taxed according to the relevant gift tax laws in the respective Swiss cantons.
b) Irrevocable fixed interest trust
The beneficiary can be considered to enjoy a usufruct. Therefore the trust assets and income are added to the beneficiary's assets and income from the tax point of view. The set up of the trust is considered to be a gift from the settlor to the beneficiaries and the respective Swiss canton can levy the gift tax.
Distributions to the beneficiary are considered to be taxable income. The income is realized at the moment when the beneficiary acquires a firm claim on the trust income or cashes in on the distribution. The beneficiary is also taxable on the quota of assets (tax on the assets).
Distributions to the beneficiary out of the trust which should be considered to come from profits generated through capital gains or from trust assets initially contributed to the trust (by the settlor) are tax free. If the beneficiary cannot prove this, the distribution to him is taxable income. There is always the assumption that trust asset can only be distributed when all trust income has been distributed, so the typical separation of a capital account and income account (for example to make sure that the remittance basis approach works for resident non-domiciled persons in UK) is of no value for Swiss domiciled beneficiaries to postpone income tax consequences.
c) Irrevocable discretionary trust
If the settlor has his taxable domicile in Switzerland when he sets up the trust, the assets and income of the trust continue being part of his taxable asset/income. The tax consequences are the same as for the revocable trust.
If the settlor has his taxable domicile outside of Switzerland when he sets up the trust, the asset of the trust is neither added to the settlor nor to the beneficiary. The transfer of assets from the settlor to the trust (to the trustees respectively) is a gift of the settlor.
Distributions to the beneficiaries are taxed at the moment of transfer or in the moment in which a claim to distribution arises. The distributions are normally income of the beneficiaries. If the beneficiaries can prove that the distribution comes from funds which are not income generated (original capital; contribution by the settlor already taxed as a gift), then there is no income tax.
It is noteworthy that the Swiss trustee cannot rely on the professional secrecy (lawyer, banker) if the settlor or beneficiary has the taxable domicile in Switzerland. He may have to disclose information to the Swiss tax authority.
This article does not deal with the Swiss withholding tax of 35 % on dividends which eventually can be claimed back by the settlor or beneficiary or if and how double tax treaties may be used by the trustee (the trust respectively). It must be pointed out, that the trust is rather a disadvantage to benefit from double tax treaties.
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.