Relocating to Switzerland: trusts
This article is part of the series of articles that began with an article published in June on Relocating to Switzerland: key points, another article published in September on Swiss tax residency and another published in December on the lump-sum tax regime.
The aim of this article is to provide an overview of the legislation and taxation of trusts in Switzerland, as well as the advantages of setting-up Swiss private trust companies.
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. This Convention 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 circular1 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.
The above-mentioned key points must be considered when relocating to Switzerland, and especially if you are a settlor or beneficiary of trusts or if you are considering setting one up.
We are an international law firm with a focus on private capital, at the intersection of personal, family and business with a presence in major financial centres worldwide. Our expert Swiss lawyers specialise in advising families and entrepreneurs on wealth, estate, and tax planning issues, with a strong expertise in cross-border matters.
Please contact Mr Grégoire Uldry or Mrs Alexia Egger Castillo, lawyers specialising in private client matters, should you require assistance and/or have any query.
