Open the pdf file to the right to read the Italian version of the article.
The historical origins of the trust
The concept of Trust is based on confidence and has its origin from Anglo-Saxon Law in the 13th Century, at the time of the Crusades when, in England, feudal Lords were required to place their property in trust so as to be sure that everything would be preserved and controlled during their absence. Feudal Lords entrusted ownership to a person in who they trusted and who would remain in the country and have the task of protecting their assets for the benefit of their family, including in the event that they never returned home.
The trust mechanism today is not very different: there is still the owner of property, the constituent or settlor who decides to transfer property to a person in whom he trusts, the trustee, for the purpose that the assets be managed in the best interests of the beneficiaries of the Trust. The act which ties the settlor to the trustee and to the beneficiaries bears the name of the Trust Deed. The trust deed records the transfer of assets and shows the name of the beneficiaries (in other words the persons in whose benefit the trustee will act). The settlor (even though no longer the owner) can be part of the beneficiaries together with any other person, for example his children and/or other individuals and/or charities. The trust deed, provides that the trustee, should follow specific rules. These rules may include that the trustee is constantly under the protective care of another individual, called the protector, to guarantee that the interests of the beneficiaries are respected. In addition to the trust deed, the settlor can issue a letter wishes, which even though it is not part of the Trust Deed, it is addressed to the trustee for purposes of expressing specific guidance in relation to the management of the assets and the interpretation of the various articles set out in the trust deed.
Considering its origins in England, all aspects of a Trust are governed by Common Law countries rules such as those in Great Britain, the United States, Australia, Canada, South Africa as well as certain offshore centres such as Jersey, Guernsey, the British Virgin Isles, the Cayman Islands, the Bahamas. Certain civil law countries such as Japan, Panama, Lichtenstein, Mexico, Colombia, Israel and Argentina have even adopted specific Trust legislation.
Types of Trust
There are different types of trust such as the family interest trusts, the trusts for commercial or financial transactions and the trusts which have a charitable purpose. The best known is the family interest trust and we will deal with this type in this article.
A trust can be revocable or irrevocable. The transfer of assets into a trust is generally irrevocable, which means that the settlor gives up definitively the assets which have been transferred. However, the settlor may also reserve the right to revoke the trust and through this revocation, the assets transferred to the trustee will return to the personal ownership of the settlor, in this case the Trust is revocable Trust.
A Trust can be discretionary or non-discretionary. In a discretionary Trust, the beneficiaries belong to a category such as the members of a family, or to a list supplied by the settlor. Both the category and the list of beneficiaries can be modified by the settlor or by a person who has been granted this power (such as the protector) in accordance with what is laid down in the trust deed.
In the non-discretionary Trust or fixed Trust, the representative has already made his choice by identifying one or more specific beneficiaries who shall receive the capital distribution and/or income in accordance with what is laid down in the trust deed.
The above elements related to the types of trust are important in the analysis of the tax treatment of Trusts in Switzerland.
Ratification of the Hague Convention related to trust recognition
Switzerland has ratified the Hague Convention related tot the law applicable to trusts and their recognition which came into force on the 1st July 2007.
The consequence of the ratification of the Hague Convention has been the amendment and adjustment of Federal International Private Law (LDIP) and of the Federal Law on foreclosure and bankruptcy (LEF).
The LDIP did not contain any specific provisions related to Trusts and had been adjusted along with certain provisions related to the attributions of the Swiss jurisdiction and the recognition of overseas decisions which are more easily recognised compared to previously in Switzerland. The new provisions of the LDIP also allow for voluntary recording of the Trust relationship within public registers such as the land register, the nautical register, the aeronautical register and the intellectual property register. In this case, those Trust relationships which are not the object of this registration confers a degree of protection of bona fide third parties.
Federal law on foreclosure and bankruptcy (LEF) has also been amended in order to take into account the separation between the trust assets and the trustee's estate. The amendment of the law provides for a distinction between the Trust Estate and the assets of the Trustee's bankruptcy.
However, it is important to retain is that the Convention does not govern all aspects relating to the Trust and, for this reason, a trust with a Swiss Trustee have to be governed by legislation from another country which governs all the aspects of the Trust (usually a Common Law country). The legislation under which the Trust will be governed is usually selected by the Settlor. Where such a choice is not made, the Convention specifies that the Trust shall be governed by the legislation of the country with which it is more closely linked. To this end, aspects which will be taken into account are the place where the Trust is administered, the residence or the registered office of the Trustee, the purpose of the Trust and the places where such purpose is actually realised.
Another aspect to retain is that the Convention, in accordance with its articles, does not negate the imperative rules of Swiss law, in particular the law relating to forced heirship roles. If the Swiss law on succession is applicable, legitimate heirs which have not received their share according to Swiss forced heirship roles, can instigate proceedings to recover the proportion to which they feel they are entitled from the Trust. In the same way, the settlor's creditors are protected in the event that the creation of the Trust infringes upon their rights. The convention therefore confers a degree of protection of bona fide third parties and provides a provision in favour of the public interest. A legal advice needs to be sought in these situations.
Trust and Swiss Taxation
As far as the fiscal side is concerned, despite the ratification of the Hague Convention, there is no tax legislation related to Trusts in Switzerland and the various Swiss cantons had various opinions on the subject. However, during the course of the conference on Swiss taxation (GSI) which took place on the 22nd August 2007, the Circular No 30 was adopted which seeks to be a general guide for the different cantons with regard to the tax handling of trusts in Switzerland.
A main point to be retained from the Circular is that the Trust does not have a legal personality and cannot be subject to taxation in the same way as a permanent establishment.
As far as the Swiss Trustee is concerned, an important point to retain is that the ratification of the Hague Convention affords the possibility to a Swiss resident to act as Trustee without any tax repercussions. The assets of a Trust, as well as any income generating from these assets, cannot be attributed to the Trustee or to the Protector. This means that a Swiss resident Trustee can manage assets transferred to a Trust without incurring any tax liability.
As far as the Settlor is concerned, revocable Trusts are always treated as transparent. Same applies to an irrevocable and discretionary Trust set up by a Swiss resident which will also be considered to be transparent. This means that in both cases the Swiss tax authorities will consider that the transfer has not taken place and the assets and the income generated shall be taxed as if nothing had happened in the estate of the Settlor.
However, in the event that an overseas resident sets up an irrevocable and discretionary Trust, the Swiss tax authorities shall consider that the transfer has occurred even if the Settlor subsequently becomes resident is Switzerland. The Settlor should consult with Swiss tax advisors before setting up the Trust and prior his/her moving to Switzerland.
As far as the beneficiaries are concerned, the distributions made from the an irrevocable and discretionary Trust to Swiss resident beneficiaries will usually be considered as income distributions by the tax authorities and these will be taxed as income even if the distributions represent a capital gains of the assets of the Trust. However distributions to Swiss resident beneficiaries from an irrevocable fixed interest Trust will be treated as an usufruct which means that a distinction between capital and income distributions will be made.
Considering the complexity of the points raised in the Circular and the fact that these points only represent general guidelines for the various cantons, the Settlor and the beneficiaries with connections or expected connections with Switzerland, need to consult and obtain advice from Swiss tax advisors prior the setting up of the Trust.
Trust Business in Switzerland
The consequences of the ratification of the Hague Convention on the recognition of Trusts has been to strengthen the activity in Switzerland in relation to the creation and administration of Trust structures. The fact that a Swiss company is able to act as trustee and manage assets entrusted to it without having any tax liability in Switzerland is one of the main points which occurred following the ratification of the Hague Convention.
Another Swiss advantage is that there are no regulations for a Swiss company in respect of the permission to act as Trustee provided that this is shown in the company's articles of association. This is not the position in Commonwealth countries where a company needs a government licence to act as Trustee. In order to obtain this licence in Commonwealth countries, a company must meet certain complex requirements which involve supplying to the authorities information in relation to its annual accounts, the specifics of services provided to clients, and the qualifications and professional background of its managers. Moreover, once the licence has been obtained, it should be renewed every year in accordance with complex provisions.
Considering these Swiss advantages, over recent years we have witnessed the creation in Switzerland (and particularly in the Canton of Geneva) of subsidiaries and branches of various overseas companies specialising in the creation and management of Trust structures. Overseas law Firms specialising in Trust advice have also been set up in Switzerland and particularly in the Canton of Geneva. Various offices of Swiss Law Firms have also developed internal units specialised on legal and tax trust regulations in Switzerland and overseas.
The trust industry in Switzerland has developed to such an extent that the STEP Association (Society for Trust and Estate Practitioners) - specialising in the training of fiduciary services sector - has seen the number of its members increase considerably especially in French speaking side of Switzerland. Today the association numbers some 818 members (including Lichtenstein) of which approximately 48% are part of the association in French speaking side of Switzerland. The remaining 52% are part of the German & Italian speaking side of Switzerland which also includes Liechtenstein. The STEP association which has founded in 1991 has its head office in London and has branches in 33 countries and offers a complete training program in Trust administration & management so that an individual can be considered well qualified in the complex regulations which apply to the administration of Trust structures. Bearing in mind the significant number of members of the STEP association, Switzerland can today boast of having a high level of professionals in the administration and management of Trust structures with a multijurisdictional and multilingual experience.
For more information on this subject, please contact:
Katia Venchiarutti