Introduction of a Swiss trust

A trust is a very flexible financial instrument typically used for wealth planning. In this case, the assets or part of the assets of a person (founder) are assigned to an administrator. The administrator has no ownership rights to these assets and is only responsible for managing and disbursing them according to the founder’s will. Only the beneficiaries and the founder of the trust have ownership claims. Beneficiaries can be, for example, the founder’s children. A trust is typically used in family relationships for estate planning. It allows assets to be passed down through several generations. In business, trusts are often used to preserve, manage, or secure assets. 

Swiss law does not have the legal institution of trusts. However, in 2007 Switzerland signed the Hague Trust Convention (HTC). Since this treaty came into force, foreign trusts have been recognised in Switzerland, enabling Swiss nationals to set up trusts abroad. As a result, this legal institution has become increasingly important in practice in this country as well. To ensure that Swiss actors no longer have to resort to foreign trusts, the Federal Council proposed the introduction of a new legal institution in the Code of Obligations – a Swiss trust – on behalf of Parliament. The corresponding consultation was opened in the session of 12 January 2022.

With the introduction of a Swiss trust, actors would no longer need to turn to foreign trusts, which would strengthen the Swiss financial sector. For such an introduction, however, the CO as well as other relevant federal laws must be amended. This includes explicit tax law guidelines to guarantee adequate taxation of trusts. Today, trusts are taxed according to the general principles of tax law and two circulars. In future, irrevocable trusts without fixed entitlements of the beneficiaries are to be taxed in the same way as foundations.

However, the draft prepared by the Federal Council also meets with criticism. The criticism mainly relates to the taxation of these trusts. The current draft leads to multiple double taxation of the trust capital. The trust capital is subject to gift/inheritance tax when it is set up and income tax when it is distributed. In addition, in the case of beneficiaries liable to tax abroad, a division of the trust is required, which is almost impossible in practice due to the special features of the trust. Furthermore, the beneficiaries and the settlor are to be jointly and severally liable for the taxes of the trust, even though the settlor has definitively divested himself of these assets. This raises some legal questions and could make the Swiss trust very unattractive under certain circumstances.

The consultation period expired on 30 April 2022. The Federal Council will now take note of the results collected by the commissioned authorities and decide accordingly. The decision of the Federal Council must therefore be awaited.