Prepare for Lift-Off
It is with enthusiasm that the Swiss trust industry is welcoming what was just a few years ago seen as politically and legally improbable: the introduction of a Swiss trust. On 13 March 2019, the Swiss National Council approved a motion meaning that the federal council will have to draw up a law on Swiss trusts.
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.
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.
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.
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.
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.
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.
1 See ꢀp.47 - STEP Journal (Vol27 Iss5)
ꢀ2 Luc 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 issue, (Vol27 Iss5), p.35, June 2019