Overview
On January 12, 2022, the Federal Council opened the consultation on the «Swiss Trust». This is the first step in the legislative process. Possible new regulations will come into force in 4-8 years at the earliest. In terms of tax law, the existing regulations will be largely retained and newly incorporated into the law. The exception is the new proposed regulations on the «irrevocable discretionary trust», which is to be treated as an independent tax object in the same way as a foundation.
by Daniel Bleuer and Rico Dufner
Development and Demand
So far, Switzerland has no trust law of its own. However, foreign trusts are widespread. Since the Hague Trust Convention came into force in 2007, they have been fully recognized in Switzerland. Since 2016, the Swiss Parliament has adopted three motions that essentially call for the introduction of a «Swiss trust». This shows, that in Switzerland, there is not only interest but also the will to establish a separate trust in Swiss law. Several other countries with a civil law tradition have already incorporated the trust or similar entities (fiducie) into their legislation over the last years. Switzerland is now following this European and international trend with the intended and envisaged integration of the trust into its own legal system. A report published in 2019 on this subject identified a regulatory failure in the unmet need for a suitable instrument for wealth planning. A separate Swiss trust could therefore close this gap.
The Swiss Trust in Civil Law
The preliminary draft proposes for the introduction of trusts as new legal institutions in the Swiss Code of Obligations. The proposed Swiss trust has the essential characteristics of a trust under Anglo-Saxon law and thus corresponds to the definition of the Hague Trust Convention. It is thus a genuine alternative for natural persons and legal entities who do not wish to or are unable to use either a foreign legal institution or an existing entity under Swiss law.
Moreover, the preliminary draft is not simply modeled on foreign law, but is as well based on other rules and principles, which are already known in Swiss law. This would guarantee a high degree of legal certainty. The proposed legal framework takes into account the restrictions under Swiss matrimonial and Swiss inheritance law, and in this respect ensures that the settlor cannot dispose of the assets at the expense of third parties. Furthermore, a trust can only be established for a certain period of time, which may not exceed one hundred years.
The Swiss Trust in Tax Law
The introduction of a Swiss trust gives new reason to explicitly regulate trust relationships in the tax laws as well. Currently, the taxation of trusts is based on general tax law principles and two circulars.
Proposed tax treatment of revocable and irrevocable fixed interest trusts
The proposed tax legislation retains the current practice of attributing trust income to the settlor in the case of revocable trusts and to the beneficiaries with legal rights in the case of irrevocable fixed interest trusts. These rules are consistent with taxation based on economic capacity, and their codification satisfies the principle of legality.
Proposed tax treatment of an irrevocable discretionary trust
In the case of an irrevocable discretionary trust, the trust income and assets are to be attributed to the trust, which is to be treated like a foundation as an independent taxable entity. A condition for this taxation is that at least one of the beneficiaries is resident in Switzerland. The tax liability also does not extend to the shares of beneficiaries resident abroad, whereby it is left to practice how these shares are determined in terms of amount.
If the trust is resident abroad under the applicable double taxation treaty, Switzerland cannot enforce taxation of the trust. In such cases, the income and assets of trusts are attributed to the founders (subsidiary rule). For the enforcement of the tax liability in Switzerland with respect to trusts administered abroad with beneficiaries in Switzerland, a joint and several liability of settlor and beneficiaries in Switzerland for the tax of the trust is also provided for (joint and several liability).
For asset dispositions already made, a transitional arrangement (grandfathering) is provided for these cases in accordance with the principle of good faith.