The Liechtenstein Trust from a Swiss perspective

The trust is not recognised under Swiss law. However, foreign trusts are recognised under civil law. The tax treatment of a trust is governed exclusively by Swiss tax law and is generally treated as transparent due to the lack of legal capacity and capacity to hold assets. The trust assets are always allocated to a person behind the trust, either the settlor or the beneficiary.

Expertise

• Trust forms and their tax qualification in Switzerland
• When is an FL trust used in Switzerland?
• When is a foundation used instead of a trust in Switzerland?
• When is a common law trust chosen instead of a FL trust?
• Civil law recognition of the FL trust in Switzerland
• Tax law recognition of the FL trust in Switzerland

Trust forms and their tax qualification in Switzerland

A distinction is made between revocable and irrevocable trusts on the one hand and discretionary and fixed interest trusts on the other. The decisive factor is the tax qualification and the will and motives of the settlor:

Revocable trust: A revocable trust is one in which the settlor retains economic control over the trust assets. This is the case if the settlor

• is favoured in the case of capital distributions from the trust assets
• is favoured for distributions of income from the trust assets
• has the right to remove the trustee and appoint another one
• has the right to favour new beneficiaries or have new beneficiaries favoured
• has the right to replace the protector, who in turn has powers similar to a trustee
• has the right to amend the trust deed or have it amended
• has the right to revoke or liquidate the trust
• has the right to veto trustee decisions regarding the trust assets

With a revocable structure, the trust is considered transparent in Switzerland and the assets are attributed directly to the settlor.

Irrevocable trust: An irrevocable trust is one in which the settlor irrevocably transfers the trust assets and no longer has any influence over the trust. The tax subject is therefore the beneficiaries.

Discretionary/fixed-interest trust: A discretionary trust exists if the trustee can determine the timing and amount of the payment to the beneficiary at his own discretion.

A fixed-interest trust exists if the beneficiaries and the time and amount of the contribution are precisely determined. An irrevocable fixed-interest trust is also a transparent trust where the trust assets are allocated to the beneficiaries.

The irrevocable discretionary trust: With this type of trust, the trust assets cannot be allocated to either the settlor or the beneficiaries (non-transparent).

According to Swiss law, however, this form of trust can only be non-transparent if the settlor was not resident in Switzerland at the time of establishment. Otherwise, this variant is considered transparent in Switzerland.

When is an FL trust used in Switzerland?

Reasons for using an FL-Trust:

• Under Swiss inheritance law, a testator cannot delegate his or her decisions, not even to the executor, whereas a trustee can make discretionary decisions.
• Last wills drawn up abroad are not readily recognised in Switzerland, whereas trusts are recognised without any problems.
• Trusts are easier to adapt to changes in life circumstances than testamentary dispositions (marriage, divorce, birth of children not wanted).
• Dividing an estate is complicated, expensive and time-consuming (certificate of inheritance), whereas settling an estate in a trust is simple.
• The transfer of real estate is often cumbersome and the assets are temporarily – and sometimes long-term – without fixed support, while trusts ensure continuity.

When is a foundation used instead of a trust in Switzerland?

If a structure is intended to be efficient as protection against inheritance taxes in the USA, a trust is chosen as the vehicle.

If the aim is to avoid capital gains tax in a continental European country, a foundation is chosen as the vehicle.

When is a common law trust chosen instead of an FL trust?

Differences between the common law trust and the FL trust:

• The FL trust is created by contract, whereas the common law trust is established by a simple legal transaction.
• The trustee of the common law trust acquires ownership of the trust property, whereas the FL trustee only has a right of disposal and administration in rem.
• The FL trust has no time limit, whereas the common law trust has a time limit.
• The FL trust can freely accumulate income, while the common law trust is limited in time with the accumulation of assets.

With regard to the number of jurisdictions, the decisive factor in practice is whether the country of domicile of the settlor or the beneficiaries is included in a blacklist.

The peculiarities of individual jurisdictions, such as the structure of asset protection or the lack of recognition of foreign compulsory portions, are also decisive in individual cases.

Both criteria are of particular importance for Switzerland when applying an FL trust.

Recognition of the FL Trust under civil law in Switzerland

Liechtenstein Trusts are generally recognised under civil law in Switzerland, albeit with restrictions under matrimonial and inheritance law. The provisions of the Hague Trust Convention are applicable law in Switzerland.

Tax law recognition of the FL Trust in Switzerland

Liechtenstein Trusts are not covered by circulars 20 and 30. It is therefore necessary to obtain a ruling from the tax authorities in accordance with the circulars.

According to the circulars, neither the trust nor the trustee is the taxable entity, but the settlor and the beneficiaries.

The taxation of the trust depends on its qualification as a trust:

Revocable trust: Trust income and trust assets are attributed to the settlor. The transfer of assets to the trustee is exempt from gift tax. Distributions to the settlor are tax-free. Distributions to the beneficiaries are subject to gift tax. No tax is payable on termination of the trust.

Irrevocable fixed interest trust: Trust income and trust assets are attributed to the beneficiary. Gift tax is levied on the beneficiary on a pro rata basis. Distributions to the beneficiary from trust capital and capital gains are tax-free, other distributions are subject to income tax. On termination of the trust, the same taxes apply as for distributions.

Irrevocable discretionary trust: The transfer of assets is not subject to gift tax. Income and assets are attributed to the settlor. However, if the settlor was resident abroad at the time of establishment, income and assets cannot be taxed. Distributions to beneficiaries are subject to income tax. No tax is payable on termination of the trust unless the capital is not paid out to the settlor (in which case the beneficiaries are liable to income tax).