The Swiss government’s bill on trusts is currently being debated in the Swiss Parliament. Released on 5 December 2005, the final version of its bill was approved by the Upper House without reservations on 23 March.
The message sent out by the chairman of the reporting commission was clear: “[Switzerland] has to ensure that it does not fall behind its competitors in the Anglo-Saxon part of the world and Singapore. What happened with investment funds should not happen again.” The Upper House agreed.
The new bill contemplates the following:
- the ratification of the Hague Convention on the Law Applicable to Trusts and their recognition of 1 July 1985;
- the introduction of private international law rules dealing with the jurisdiction of Swiss courts and the recognition of foreign decisions in trust-related matters; and
- the introduction into Switzerland’s insolvency and bankruptcy law of the concept of segregation of trust assets.
Approval by the Lower House is still outstanding. However, the legal affairs commission recommended unanimously the adoption of the bill on 10 July. Formal adoption by both Houses of Parliament is expected either in late 2006 or early 2007. The taxation of trusts is also being examined and the Swiss tax authorities are currently working on guidelines.
A private international law approach
The Hague Trust Convention has already been adopted by a number of other civil law nations. Italy, Liechtenstein, Luxembourg, the Netherlands and San Marino have all already ratified the convention. However, Switzerland’s approach is novel in that it would introduce express rules in its private international law dealing with the international jurisdiction and the recognition/enforcement of judgments in trust-related matters. The Hague Trust Convention only deals with the question of the applicable law.
This comprehensive approach indicates the maturity of the trust market in Switzerland and will be of interest to other countries. The relationship between common law and civil law has often been a tricky one, and this is an initiative to balance these two.
Under the proposed bill Switzerland will recognise that common law courts are typically best placed to resolve international trust disputes. The bill thus provides for a so-called ‘open architecture’ when it comes to choosing a forum. Under the new bill a beneficiary will be able to sue a Swiss trustee in Switzerland and, in the absence of a trust jurisdiction clause, also in the country the laws of which are the proper law of the trust. On the other hand, Swiss trustees will be able, if they wish, to apply to the courts of that country for directions.
This proposal does much to recognise the importance of trusts and the need to safeguard these structures. The bill thus seeks not to be overly protective of Swiss trustees, but rather to offer the best possible protection, whether at the trustees’ instigation or that of the beneficiaries.
Segregation of assets
Swiss bankruptcy law will also be amended if the bill is adopted. The amendment will make explicit the fact that a trust fund is segregated from the trustee’s estate. The Hague Trust Convention does state in Articles 11(a) and (b) that the recognition of the trust concept must imply in particular “that the personal creditors of the trustee shall have no recourse against the trust assets and that the trust assets shall not form part of the trustee’s estate upon his insolvency or bankruptcy”. However, an explicit amendment to Swiss law was felt necessary in order to put an end to the existing uncertainties that are partly a result of the limitation of the Swiss rules relating to fiduciary contracts.
On other fronts, the Swiss government has rejected the idea of constructive trusts as proposed under the Hague Trust Convention. Parliament has also implied that the issue of tracing is not covered by the convention. It will be interesting to see how the Swiss courts will interpret the provisions of the Hague Trust Convention in this context.
Contrary to some expectations, Switzerland has decided not to introduce a regulatory framework for trustees operating outside Switzerland. The current regime will thus continue, whereby anyone can act as a trustee and can use terms such as ‘trustee(s)’, ‘trust services’ or ‘trust company’ in a company name.
In a memorandum justifying this decision, the Swiss government suggested that the majority of trustees are likely to be regulated in some other capacity, usually as financial intermediaries, and so introducing rules specific to trustees would be needless red tape. Switzerland has thus tried to avoid regulatory overkill – a seemingly counter-cyclical measure. The decision has in all probability been taken to further Switzerland’s stated objective of competing effectively with long-established offshore jurisdictions. This is a bold move and one that is likely to ignite debate in the offshore community as to the appropriate level of regulation for trustees.
There has always been a degree of uncertainty as to whether a complex trust should be assimilated to a foundation or to a company for tax purposes. There are currently no express rules on the topic, and while some cantons (notably Geneva) rejected this approach, others argued that a Swiss-administered trust should be subject to corporation tax on its worldwide profit based on mind and management arguments.
Having reviewed an advance copy of the draft tax guidelines, it now looks likely that Switzerland will decide that trusts should not be assimilated to companies for tax purposes. The income and capital gains of trusts will therefore not be exposed to Swiss taxes merely due to the presence of a trustee in Switzerland.
However, the draft tax guidelines also provide that the assets and the income of a trust in which the settlor has maintained an interest will be attributed to the settlor. This will apply not only to revocable trusts, but also to irrevocable trusts where the settlor has reserved certain prerogatives. In practice this approach only affects settlors who are resident in Switzerland.
It is not clear from the new guidelines how foreign settlors who live in Switzerland under the so-called ‘forfait’ regime will be treated. The ‘forfait’ regime basically measures tax by reference to the level of the taxpayer’s estimated expenses rather than their income, with the level of relevant expenses being fixed by an agreement with the tax authorities. An initial interpretation of the draft guidelines suggests that any trust established prior to the settlor’s move to Switzerland would not be caught by the look-through approach described above. However, the wording used in the guidelines is not unequivocal and clarification is still expected from the Swiss tax authorities. In practice, a look-through approach in these circumstances would only affect the settlor’s succession tax position, as income taxes are covered by the ‘forfait’.
Lastly, withholding tax issues and the application of tax treaties to trusts are also expected to be dealt with by the forthcoming tax guidelines. Publication of these guidelines is expected later this year.
The trust arena is an intensely competitive one and Switzerland’s implementation of the Hague Trust Convention indicates the country’s determination to tackle its offshore competitors head-on. So far the Swiss courts have been very openminded in their approach. However, despite being a powerful marketing tool, the adoption of this convention will invariably lead to increased scrutiny of Swiss trustees. This represents an excellent opportunity for common law advisers active in the Swiss market.
Filippo Noseda is a principal at Withers