Switzerland and Trusts

Although Switzerland is a civil law country, and the trust concept itself a creature of common law, trusts have been administered in Switzerland for years, and indeed the Swiss courts have had to adjudicate on several high profile trust cases.

However, the outcome of these cases has to a large extent been arbitrary because of the uncertain legal environment within which trusts have been administered. To address this issue of legal uncertainty, the Swiss Government ratified the Hague Convention on Trusts and their Recognition in July 2007, and in addition made necessary changes to its own laws, the objective being to enhance the attraction of Switzerland as a base from which trusts can be administered.

What does this mean in practice?

It does not mean Switzerland now has its own trust law, and thus anyone seeking to establish a trust with a Swiss connection, will still need to choose an appropriate jurisdiction for the proper law of the trust eg Jersey. The ratification of the Hague Convention and the necessary changes to Swiss substantive law (eg Bankruptcy & Insolvency Laws) do however have the following ramifications:

• There will be predictable rules governing the administration of trusts in Switzerland.
• It is possible now to have a Swiss Corporate Trustee of, for example, a Jersey proper law trust with the certainty that the assets in the trust are ring-fenced from the Trustees personal assets. This was not possible prior to July 2007.
• Any foreign judgements relating to trusts will henceforth be recognized.
• There will be explicit recognition of foreign trusts.
• Provision of rules to evidence the trust relationship vis-à-vis third parties.
• Provision of rules determining the competent court of jurisdiction.
• The Two Principal Trust Scenarios involving Switzerland
• Foreign-connected trusts

These are trusts administered in Switzerland, where the trust assets may also be based, but where the Settlor and /or the beneficiaries are not resident in Switzerland. As a general rule, this scenario has no Swiss tax ramifications for the trust/trustees, settlor, or the beneficiaries.

Swiss Resident Trusts

This scenario refers to trusts that have Swiss resident settlors and /or beneficiaries. The Swiss Tax Authorities have issued guidelines to the various Cantons regarding the taxation of Swiss resident trusts, the aim being to arrive at a more consistent treatment of trusts in terms of income and wealth taxes. The Swiss authorities treat trusts as transparent entities, and thus any income / gains arising in the trust depending on the circumstances will be attributable to the Settlor or the beneficiaries.

Notwithstanding the attempt by the Swiss authorities to achieve a more consistent treatment in terms of the taxation of trusts, each Canton / Commune still has considerable discretion in terms of how the principal beneficiaries/settlors in a trust arrangement will be taxed, and thus careful tax/legal advice should be sought with the aim of achieving a suitable Cantonal tax ruling.

How Can IFG help?

At IFG we have considerable experience in both establishing and administering trusts, and from our Geneva and Zurich offices, we can now offer clients the ability to use a Swiss corporate trustee. Furthermore we work closely with a number of legal firms and other intermediaries whom we can draw upon should clients require specific legal and / or tax advice, especially in circumstances where individuals are looking to take up residence in Switzerland and wish to establish a trust prior to settling there.

IFG does not provide taxation or legal advice. The information and expression of opinion expressed in this briefing note are not intended to be a comprehensive study or to provide taxation or legal advice. Specific advice concerning individual situations should be taken and IFG can provide introductions to advisers who specialise in this area.