On 24 June 2022, the EU published updated guidance to clarify prohibitions pertaining to the provision of trust services in prior EU regulations. In certain circumstances, EU-connected service providers would be required to dissolve trusts with settlors or beneficiaries connected to Russia.
Specifically, where the restructuring of a trust or a similar legal arrangement was initiated after 11 May 2022, and the EU service provider's services are necessary to the operation of the trust, such trust would need to be dissolved to comply with the regulations. A national competent authority can grant exceptions for operations strictly necessary for the termination of certain contracts until 5 September 2022.
On 5 July 2022, the Swiss State Secretariat for Economic Affairs (SECO) published similar guidance (see here) concerning the interpretation of prohibitions on trusts in Article 28d of the Ordinance on Measures in Connection with the Situation in Ukraine.
Swiss and EU-connected service providers risk sanctions infringement in relation to trusts that were previously modified to comply with the prohibitions. Such service providers should also be careful to make only the appropriate modifications to the structure of their trusts before the effective dates of the relevant legislation, such as assigning a trustee role to a trustee outside the EU/EEA/Switzerland or removing in-scope beneficiaries.
It remains unclear to what extent such service providers are required to comply with the guidance retroactively. For example, trusts that were restructured between the time of publication of the regulations and the guidance may need to be terminated, and the assets of a settlor or beneficiary of an in-scope person subject to an asset freeze under EU sanctions may need to be frozen. Consequently, Swiss and EU-connected service providers of a trustee or other fiduciary and related services should consider these developments so they know how to react.
The two jurisdictions have mostly converging interpretations of their restrictions, with a few exceptions. In the EU, for a trust with multiple beneficiaries and/or trustors (i.e., settlors) to be exempt from the prohibitions, all such beneficiaries and settlors would need to be exempt (e.g., be an EU national or have a temporary or permanent residence permit in the EU) for the arrangement to be exempt from the prohibitions.
Under Swiss law, a trust or similar legal arrangement falls within the exception if only one beneficiary holds a temporary or permanent residence permit for, or is a national of, Switzerland, the EEA or Monaco. The Swiss guidance refers expressly only to beneficiaries, and not settlors.
That said, it may be possible in either jurisdiction to obtain authorization from the relevant competent authority where assets are not accepted from or distributed to a person who falls within the scope of the prohibition.
Since 8 April 2022, the EU has published two regulations that amend Council Regulation (EU) No. 833/2014 ("Regulation"), concerning restrictive measures in view of Russia's actions destabilizing the situation in Ukraine, as already amended by other recent EU regulations on Russia-related sanctions.
On 9 April 2022, the EU adopted Council Regulation (EU) 2022/576 ("First Regulation"), which prohibits many transactions between trusts connected to Russian persons and service providers connected to the EU. See our alert here. On 3 June 2022, the EU adopted Council Regulation (EU) 2022/879 ("Second Regulation") as part of a sixth sanctions package against Russia. This regulation extended certain deadlines laid down in the First Regulation and expanded certain prohibitions pertaining to trusts connected to Russia, while also providing for additional exemptions. See our alert here.
On 24 June 2022, the EU published updated guidance pertaining to the prohibitions on transactions between trusts connected to Russian persons and service providers connected to the EU.
On 29 June 2022, the Swiss Federal Council adopted the EU's sixth sanctions package under the Second Regulation and amended the Swiss Ordinance on Measures in Connection with the Situation in Ukraine ("Ordinance"). As is typical, the Ordinance mirrors the EU restrictions, but provides different effective dates and interpretations of similar, or even identical, terms.
On 5 July 2022, the SECO published similar guidance (see here) pertaining to the prohibitions on trusts as laid out in Article 28d of the Ordinance.
For more information regarding the Swiss implementation of such measures, see our posts here and here.
EU and Swiss guidance
1. Defining "Trust or any Similar Legal Arrangement"
The EU guidance now expressly states that foundations are the civil law equivalent of a common law trust, and thus are in the scope of a "similar legal arrangement."
In contrast, the SECO has not yet clarified whether foundations and Treuhand are considered in the scope of "similar legal arrangements."
In general, the EU guidance states that there is no single definition of a trust and it is necessary to compare each arrangement's structure with that of a common law trust. The hallmarks of a common law trust include a fiduciary bond between parties and a separation or disconnection of legal and beneficial ownership of assets.
In addition, the EU guidance encourages reliance on a report from the European Commission to the EU Parliament and the EU Council assessing whether EU member states have duly identified "all trusts and similar legal arrangements" for the purposes of a separate EU regulation, concerning the use of the financial system for money laundering or terrorist financing. Foundations are treated as equivalent to a common law trust, as they are a civil law vehicle that may be used for similar purposes. This rule is supported by Directive (EU) 2015/849, which imposes on foundations the same beneficial ownership requirements as trusts and similar legal arrangements. Accordingly, persons holding equivalent positions in foundations as settlors and beneficiaries in trusts should be construed as being subject to the same restrictions under Article 5m.
The Swiss guidance on this topic is minimal. Further, Switzerland does not have its own trust laws. As such, it is currently unclear whether certain arrangements, such as foundations and Treuhand, may be understood to be sufficiently similar to a trust to fall within the scope of the Swiss prohibitions.
2. Prohibited activities and practical implementation
The guidance clarifies that no EU person should register a trust (or similar legal arrangement), even where required by national law.
The guidance contemplates the dissolution of trusts already in legal existence to the extent that prohibited services are necessary for their operation.
In this context, any assets to be returned or distributed to a settlor or beneficiary subject to an asset freeze under EU sanctions would need to be immediately frozen.
In addition, the guidance clarifies that the prohibitions on the provision of services apply to trusts that came into existence before and after the effective date of the relevant legislation.
3. Trusts that include both Russian and non-Russian nationals
The prohibition to register a new trust or provide trustee services only applies when a settlor or beneficiary falls under the definition of a Russian person (defined here). If such Russian person(s) are removed, the services may be provided.
The EU guidance states that the prohibitions would not apply if the trust has only one trustor or one beneficiary who is a national of a member state or a natural person with a temporary or permanent residence permit in a member state. This is understood to mean that the trust is only exempt from the prohibitions if all the beneficiaries and settlors of the trust are exempt from holding EU nationality or an appropriate residence permit.
In addition, the EU guidance states that, with authorization from the relevant member state, trusts may continue to operate under the condition that the trustee does not accept from or distribute assets to a trustor or beneficiary that is an in-scope Russian person.
The guidance adds that exemptions for the provisions of prohibited services to trusts should be applied for on an individual basis.
Relevant Swiss interpretation
The Swiss interpretation of their Ordinance largely parallels the EU guidance, but provides for different effective dates and a few notable differences.
For trusts that include both Russian and non-Russian nationals, the Swiss interpretation indicates that if a trust has only one Russia-connected beneficiary among five, the prohibitions would apply.
However, the prohibitions would not apply if one of the in-scope beneficiaries is a citizen or holds a permanent or temporary residence permit of an exempt state. The exemption under Swiss law is broader than under EU law in that it includes not only EU member states, but also the EEA, Switzerland and Monaco. The exception would come into play where, for example, among five beneficiaries of a trust there are four Russian nationals and one person who is a citizen of both Russia and an EEA member state.
The Swiss guidance does not specifically address whether the exemption applies in the case of a trustor who is a national or holds a permanent or temporary residence permit in Switzerland, the EEA or Monaco.
Finally, Switzerland has not yet clarified whether foundations and Treuhand are considered in the scope of "similar legal arrangements."