This development is good news for Swiss-resident business owners, as it provides a much-needed vehicle for estate planning. Moreover, it broadens the toolbox of Swiss trustees, who will not have to rely solely on foreign law-governed trusts for the establishment of trusts out of Switzerland.
Legislative lift-off
One can think of the introduction of a Swiss trust law as a rocket, requiring a launch pad, plenty of preparation and the right atmospheric conditions. Here, the preparations involved various stages of legislative developments, with the ‘atmosphere’ of alignment of regulatory and political conditions. The window of opportunity for a successful launch is ready, but it is down to the legal and trust community to speak with one voice, and for the politicians to act.
Launch Pad
The fertile ground for trusts has been present for decades, given the exposure of the Swiss legal system, courts and financial professionals to family trusts. Trust companies form an integral part of the country’s financial ecosystem, and organisations like STEP and the Swiss Association of Trust Companies have contributed positively to the professionalisation of the sector.
Preparation
In 2007, Switzerland ratified the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition. That was followed the same year by the adoption of Circular No. 30 (the Circular) on trusts, creating a favourable tax regime for foreign trusts administered in Switzerland where settlors and beneficiaries are resident abroad. However, the Circular is less favourable as regards trusts’ establishment by Swiss residents.
The arrival of a Swiss trust might offer the possibility to examine this, without creating either a tax benefit or detriment for Swiss-resident settlors and beneficiaries.
Political conditions
Finally, the change of paradigm in Switzerland as an international finance centre, from reliance on banking secrecy to compliance with international standards, creates the conditions for a sound evaluation of the adoption of the trust into Swiss law. Shortcuts made by certain Swiss politicians mischaracterising trusts as a means to hide the identity of beneficial owners and evade tax do not stand the test of the current regulatory framework. The 2018 enactment of the Swiss Financial Institutions Act (FinIA)1 should further comfort politicians, as it obliges both Swiss and foreign trustees active in Switzerland to obtain a licence to carry out their activities.
It is essential for Switzerland’s legislators to get the legislative enactment right. The risk would be to characterise a trust as a contract or a corporation, because that would fail to recognise its unique features. Indeed, it would make it a tax subject where the principle for taxation of foreign trusts under the Circular is tax transparency.
Options
With that in mind, various options are open to the Swiss legislators. One of them is to borrow wholesale from a well-regarded foreign trust statute (e.g. Jersey or England and Wales). This would require significant legislative changes, such as the adoption of the notion of equity, an unfamiliar legal concept under Swiss law.
An alternative is to look in the direction of the Swiss foundation. However, the foundation, as an estate-planning vehicle at least, today presents serious legal restrictions and tax challenges, being a legal entity, and so would fail to broaden the type of vehicles at the disposal of Swiss trustees to structure family wealth.
A third interesting option is offered by honorary STEP member Professor Luc Thévenoz, who suggests that Switzerland’s legislators: ‘build upon and expand the existing but under-developed law of fiducie (Treuhand). …As is already the case for trust assets, fiduciary assets should be considered as a special patrimony (Sondervermögen), separate from the fiduciary’s personal assets and liabilities, and dedicated to the interests of the beneficiaries… It would be firmly rooted in the legal principles of Swiss civil law while enjoying international recognition by way of the Hague Trusts Convention.’2
The attractiveness of such an option lies in the analogy between the functionalities of a trust and the fiducie, and the reinforcement of an institution known for more than a century by Swiss courts and legislators.
Whatever the option chosen, any Swiss trusts law will have to integrate all the main functionalities of trusts, be tax neutral and provide a flexible wealth-transfer vehicle, currently missing under Swiss law for both Swiss residents and foreigners. The countdown to launch has begun.
1See p.47 – STEP Journal (Vol27 Iss5)
2Luc Thévenoz, ‘Proposition pour un trust suisse’, Revue suisse de droit des affaires et du marché financier, 920:2 (2018), pp. 99-112
STEP Journal, June 2019, June issue, (Vol27 Iss5), p.35