When moving to Switzerland, the structure of trusts applies. The authors at Charles Russell Speechlys – who have already addressed a number of elements of the Swiss financial scene – take a deep dive into the trusts sector.

This article is part of the series that began with Relocating to Switzerland: key points, followed by Swiss tax residency and another on the lump-sum tax regime.

The authors, Grégoire Uldry, partner and Alexia Egger, senior associate, Charles Russell Speechlys, are both based in the firm’s Geneva office. 

The editors are pleased to share this content and we hope it stimulates conversations. Please respond if you wish to do so. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

The aim of this article is to provide an overview of the legislation and taxation of trusts in Switzerland, the advantages of setting up Swiss private trust companies and the challenges and risks to be aware of.

General considerations
To date – despite a few attempts – there is no Swiss domestic trust law, which means that it is not possible to establish a trust governed by Swiss law, but this has not prevented the use of trusts in Switzerland for several decades. The use of trusts became more prominent with the adoption of international trust law principles and the ratification of the Hague Convention on the Law Applicable to Trusts and on their Recognition, which Switzerland ratified in 2007 ("Convention"). The latter provides a framework for recognising trusts established under foreign law, allowing them to be used effectively within Switzerland for various purposes, including estate planning and asset protection.

Taxation of trusts in Switzerland
There are no specific Swiss tax provisions on the taxation of foreign trust. As such, trusts are not taxable under Swiss law. The taxation of a trust depends on its qualification based on a circular (1) published by the Swiss tax conference constating of the heads of the cantonal tax authorities (“Circular”).

In principle, the assets vested in a trust and the income derived therefrom may not be taxed in the hands of the trustee or the protector. Only the beneficiaries and the settlor may be subject to Swiss income and wealth taxes provided they are Swiss residents. Their taxation depends on how the trust is organised. Swiss tax law distinguishes between revocable and irrevocable trusts. 

Neither the trust deed nor the letter of wishes alone are decisive for the qualification of a trust. The qualification for tax purposes is always based on the entire facts and circumstances. The key criterion is whether the settlor has irrevocably given up his/her rights over the trust assets. 

The qualification of trusts for Swiss tax purposes may not necessarily correspond with the qualification of the trust in the jurisdiction where it has been established. Therefore, it is usually advisable to discuss the tax treatment of the trust and future distributions with the tax authority and to confirm the outcome in a binding tax ruling.

Revocable trusts
A trust is disregarded for Swiss tax purposes as long as the settlor has control over the trust assets (e.g., if he/she is in a position to control the trustees or is him/herself the trustee, or if he/she can instruct and replace them; or if he/she remains a beneficiary). In such case, the trust assets as well as any income thereon are attributed and taxable to the settlor for tax purposes (in transparency).

Consequently, distributions from a revocable trust to the settlor are regarded as asset restructuring and, hence, are not taxable. Further, distributions from a revocable trust to a beneficiary are regarded as a donation from the settlor to the beneficiary and as such are subject to gift tax depending on the degree of kinship between the settlor and the beneficiary. Swiss gift tax is only levied if the donor is resident in Switzerland or if the donation relates to immovable property.

Irrevocable trusts
Swiss tax law further distinguishes between irrevocable and fully discretionary and fixed interest trusts. Distributions from an irrevocable and fully discretionary trust are generally subject to income tax at the level of the beneficiary. The beneficiaries of a fixed interest trust are taxed in proportion to their share on the trust assets and the respective income.

Swiss private trust companies
A private trust company (“PTC”) as trustee of a foreign law trust may be used for planning purposes. The advantages of Swiss PTCs include the following:

-- Swiss PTCs may be used for the purpose of being associated with onshore centres;
-- when assets are based in Switzerland, dealing with a Swiss-based trustee can simplify administration and reduce time-related costs;
-- Switzerland is a centre for financial and investment opportunities and therefore dealing with a Swiss company can simplify due diligence processes; and
-- Switzerland has a strong tradition of excelling in providing a wide range of services to wealthy families from around the world in association with a high level of confidentiality (e.g., the ownership of the PTC would not be publicly available).

There is a regulatory regime to keep in mind for trustees operating in Switzerland, obliging them to obtain an authorisation to carry out their activities. There are exemptions, such as certain PTCs.

Challenges and risks
Although, the Convention allows the recognition of foreign trusts in civil law, based on internationally recognised standards, and thereby improves legal certainty in this area, the tax treatment of trusts remains determined exclusively by Swiss tax law. Article 19 of the Convention expressly provides that the Convention does not affect the competence of states in tax matters. Consequently, Switzerland’s ratification of the Convention has no effect on the tax treatment of trusts. 

Swiss tax law does not always follow Swiss civil law interpretation, although there is often a close relationship between the two. Swiss tax law is governed by its own set of principles and regulations. Civil law principles may influence tax law interpretation, particularly in areas where tax law relies on civil law concepts. However, tax law has its own objectives and may interpret civil law concepts differently to achieve fiscal goals. For instance, tax authorities might apply economic substance over legal form to prevent tax avoidance, which could lead to a different interpretation than in civil law.

In Switzerland, the tax treatment of trusts is provided for in the above-mentioned Circular no. 30. As the trust’s terms are subject to interpretation and qualification pursuant to Swiss tax law, it is important to request a tax ruling from the tax authority, ideally before moving to Switzerland, to confirm the Swiss tax treatment of the trust, for example, to clarify the income and wealth taxes, as well as inheritance tax treatment. Bespoke drafting of the trust instrument may be required. 

Once the settlor has relocated to Switzerland, any trust set up is in principle automatically considered transparent and therefore the assets transferred to the trust and the income derived therefrom remain taxable in the hands of the settlor. There are exceptions to this principle, particularly in the case of settlement in Switzerland under the lump-sum tax regime (cf. Article 3 of this series). However, the transfer of assets is in principle subject to gift tax. These examples of specific situations demonstrate the need to request a tax ruling in advance to ascertain the tax consequences and avoid any unpleasant surprises.

One difficulty for trusts in Switzerland is the holding of real estate. It may be possible for a trust to hold Swiss real estate. From a Swiss tax perspective, the transfer may be seen as a gratuitous sale, which may be subject to transfer duty, or to a gift to a third party, i.e. taxed at the highest tax rate, depending on the circumstances. Again, a discussion with the relevant tax authority is recommended to avoid any unwelcome surprises. Additionally, specific approval from the competent land authority is in principle needed and given Switzerland’s rules on the ownership of real estate by foreign persons, the trust instrument will need to be drafted to satisfy several requirements which may include that the trustee must be Swiss resident and/or only Swiss nationals or Swiss residents can benefit from the trust etc. The rules vary depending on each canton.

Footnote
1,  Circular no. 30 of the Swiss tax conference dated 22.08.2007.