Highlights of the intended Swiss Trust

The draft bill aims at introducing the trust as a new legal institution into Swiss law. The main features of the Swiss trust shall be the following:

• The trust will be a specific legal instrument. It will hence not be considered as a contract nor a legal entity endowed with enjoyment or exercise of civil rights.
• The maximum duration of a trust shall be 100 years. 
• The creation of charitable trusts and other purpose trusts shall be expressly excluded. According to the Federal Council the trust shall not compete with the legal form of the foundation, which enjoys a high reputation in Switzerland and seems to meet the needs of the various actors in this field.
• Otherwise, the draft bill does not provide for any limitation as to the purpose of the trust. In particular, the establishment of commercial trusts shall be allowed. Therefore, the Federal Council deems possible that the trust may become an alternative legal structure to partnerships or commercial companies (stock companies, limited liability companies and further).
• The draft bill does not provide for any modification or derogation from the rules of the Civil Code in matters of ownership rights. The trustee will hold full ownership rights to the assets of the trust. Beneficiaries will only have personal rights, reinforced by a bankruptcy privilege in the event of forced execution against the trustee and a tracing right where trust property has been disposed of in breach of the trustee's obligations.

Swiss trusts will have to meet international reporting and documentation requirements; trustees will in particular have to identify the beneficiaries for anti-money laundering and tax transparency purposes. In order to ensure the effective implementation of transparency rules, the draft bill provides for a new criminal provision which punishes the breach of identification and documentation duties by the trustee. 

Taxation of Trusts under the draft bill

So far, there have been no specific Swiss tax provisions on the taxation of (foreign) trusts. The principles governing the taxation of trusts were laid down in a non-binding Circular Letter of the Swiss Tax Conference (which was later adopted by the Swiss Federal Tax Administration). In principle, the trust itself and the trustees have not been subject to taxation in respect of the trust, but rather its beneficiaries and/or its  settlor, if resident in Switzerland. Thus, obtaining an advance tax ruling for the Swiss-resident individuals related to the trust has been and will remain a must.

The draft bill aims to introduce detailed provisions on the taxation of trusts. As already the Circular Letter did, the draft bill distinguishes between revocable and irrevocable fixed interest as well as irrevocable discretionary trusts. The taxation of the first two shall remain the same as it has been under the Circular Letter. However, the draft bill introduces the following new rules on the taxation of irrevocable discretionary trusts:

• When establishing such a trust, cantonal inheritance or donation taxes (where applicable) will be due. It is to be seen whether cantons will apply the tax rate for non-related persons which can be as high as 55%.
• Henceforth, provided that the trust has a Swiss-resident beneficiary, it shall be taxed as if it were a foundation (i.e. a legal entity). The portion of trust's assets and income attributable to its Swiss-resident beneficiary will be subject to corporate income tax at a reduced rate and the capital tax respectively. Distributions to Swiss-resident beneficiaries will be further subject to income tax. This seems to apply as well for the distribution of the trust's initial capital which under the current regulations is not subject to income taxation.
• Should it not be possible to determine the (Swiss-resident) beneficiaries, such trust will be liable to tax in Switzerland, if the settlor is a Swiss-resident at the time of settlement. If the trust is deemed to be resident abroad pursuant to a tax treaty, its assets and income shall still be taxed at the level of its Swiss-resident settlor (if any).

These rules shall apply to foreign trusts with a Swiss nexus (settlor or beneficiaries) as well as to Swiss trusts. In view of the new treatment of irrevocable discretionary trusts, the draft bill aims to create a generous transitional period regarding the application of the new rules. However, the duration of such period is not known yet. 

Next steps

The consultation process on the draft bill lasts until 30 April 2022. Depending on the outcome of the consultation, a final draft will be prepared and discussed in the Swiss Parliament. It remains to be seen whether the attempt to introduce Swiss trust law will be successful this time. In any event, the Federal Council has indicated to be open to the idea that Swiss private (family) foundations with broad purposes for flexible private wealth and succession planning could also be allowed in future.

Should the taxation of trusts remain unchanged in the final draft, trustees, their settlors and beneficiaries are well advised to carefully examine the tax implications for their trust structures. While the taxation of revocable and irrevocable fixed trusts should not be affected by the draft bill, irrevocable discretionary trusts will most likely face a higher overall tax burden as their income and assets will now be taxed twice: at the level of the trust itself and once the income is distributed, again at the level of the Swiss-resident beneficiary.

Being treated as a foundation for tax purposes, it seems that at least the irrevocable discretionary trust shall be "somehow" fitted into the Swiss civil law system after all. At current stage it is not yet clear whether the draft bill will affect the taxation of Liechtenstein foundations (which are taxed according to the guidelines of the same Circular Letter).

Wealth owners and providers in the wealth management industry should contact their advisers to follow any further developments and plan ahead the best course of action for the structuring of succession planning. So far Swiss trustees and fiduciaries have served settlors and their intended beneficiaries by using foreign trusts and foundations. Potentially in the near future Swiss trusts can also be offered in the proper circumstances, taking into account the risks of uncertainties of implementation and interpretation of the Swiss trust law if and when it is enacted in final form.