Trusts

Preliminary Remarks

Swiss tax law does not acknowledge trusts as legal entities, and generally treats them as transparent. Accordingly, trusts do not incur either limited or unlimited tax liability. Thus, the pivotal questions in the taxation of trusts is whom (settlor, beneficiaries or trustees) assets and income are assigned to. 

Neither trustees resident in Switzerland who are legally, but not beneficially, owners of assets, nor the person acting as protector of the trust assets become liable to tax. Any fees perceived are, of course, liable to tax and to be declared by the trustees. 

Hence, for the tax status of a trust, it is important to know:
- Firstly, if settlor and/or beneficiaries are subject to unlimited tax liability in Switzerland (2.)
- Secondly, if certain events transpiring during the setting up, the payment of dividends or the winding-up are taxable events and thus lead to taxation (4.)


1. Emergence of unlimited liability to tax

1.1. Individuals
The legal basis giving rise to unlimited liability to tax of individuals is Arts. 3 et seq. FITA and Arts. 3 et seq. CCITHA, respectively. In special cases, Swiss law provides for lump sum taxation (Art. 14 FITA, Art. 6 CCITHA). 

1.2. Legal Entities
The legal basis giving rise to unlimited liability to tax of legal entities is Arts. 49 et seq. FITA and Arts. 20 et seq. CCITHA, respectively. 

2. Trusts
Swiss civil and tax law does not define what a trust is. In particular, the definition of trust contained, inter alia, in the Hague Convention on the Law Applicable to Trusts and on their Recognition, is applied. The denomination of the trust in the trust deed is not authoritative for its tax treatment. Rather, the actual business significance is decisive. In principle, the tax administration distinguishes between three different kinds of trusts.

2.1. Revocable Trust
A revocable trust is characterized by the fact that the person acting as settlor retains certain rights, in particular a right of revocation.

2.2. Irrevocable Trust
The distinguishing feature separating revocable and irrevocable trusts is whether or not the person acting as settlor has definitively relinquished his or her assets, retaining no rights pertaining to them. If this is the case, we are in presence of an irrevocable trust.

2.2.1. Irrevocable Fixed Interest Trust
Trustees of a fixed interest trust bound in the allocation of the trusts income as well as its assets; they have no discretion in this. The rights of the beneficiaries are set out in the trust deed.

2.2.2. Irrevocable Discretionary Trust
A discretionary trust merely names abstract classes of beneficiaries. The final decision is left to the trustees.

3. Tax Treatment Over Time

For the following, some suppositions are made:
- unlimited tax liability of settlor and/or beneficiary in Switzerland is assumed (cf. 2.).
- the bequests made by the trusts are not subject to withholding tax (Art. 4 Para. 1 WHTA).
- the trust cannot, itself, request the refund of withholding tax (Art. 24 Para. 2 et seq. WHTA, Art. 55 letter c WHTA ordinance). 

3.1. Setting up
  Tax Treatment
Revocable Trust                Due to the rights retained by the person acting as settlor, this person cannot yet be considered to have relinquished his or her assets. The trust assets remain taxable at his or her residence (Art. 16 et seq. FITA, Art. 7 et seq. CCITHA). 
Irrevocable Fixed Interest TrustThe transfer of assets to the trust is treated as a gift from the person acting as settlor to the beneficiaries and as such constitutes income of the beneficiaries. Cantonal law is applicable.                            
Irrevocable Discretionary TrustHere as well, we are in presence of a gift to the trust/the trustees. The gift is subject to gift or income tax payable by the beneficiaries when it accrues to them. Until such time, the trust assets continue to be subject to tax at the Swiss residence of the settlor (similar to Revocable Trust). If the settlor is residing abroad at the time of the creation of the trust, the assets of the trust are allocated neither to the settlor nor to the beneficiary.

3.2. Distribution to the Beneficiary
  Tax Treatment
Revocable TrustWe are in the presence of a gift to the beneficiary. The applicable cantonal tax laws for the basis for taxation.

The refund of withholding tax is reserved to the settlor, if he meets the criteria set out in Art. 21 et seq. WHTA.
Irrevocable Fixed Interest TrustThe trust assets and income are attributed to the beneficiary.

Distributions are subject to income tax (Art. 16 et seq. FITA, Art. 7 et seq. CCITHA), if the beneficiary cannot prove that a gift subject to gift tax is present.

The distributions are held to have accrued at such point in time as the beneficiary obtains a solid claim on the income, or acts on such claim. 

The beneficiary is subject to wealth tax on his part of the trust assets (Art. 13 et seq. CCITHA). If capital gains are distributed, a distinction must be made between private assets and business assets. While the first are tax free (Art. 16 Para 3 FITA, Art. 7 Para 4 letter b CCITHA), the latter are subject to tax (Art. 18 Para 2 FITA, Art. 8 Para 1 CCITHA). Furthermore, the distribution of paid-in trust capital is also subject to tax (Art. 24 letter a FITA, Art. 7 Para 4 letter c CCITHA).

The refund of withholding tax is reserved for the beneficiary, insofar as he meets the criteria set out in Art. 21 et seq. WHTA.
Irrevocable Discretionary TrustPending distribution, trust assets are assigned to the settlor (in case of Swiss residency) or to the trust (in case of foreign residency) and not the beneficiary. For tax purposes, the distributions are only subject to tax as income of the beneficiary when they accrue to him or her, or when he or she obtains a solid claim pertaining thereto. 

Hence, the beneficiary is not liable for wealth tax, but also cannot exempt distributions from taxation by declaring them to be private capital gains. 

Distributions are treated as income (Art. 16 Para. 1 FITA, Art. 7 Para 1 CCITHA), provided that upon accrual they are actually income in the sense of Art. 16 FITA. If this is not the case, the distributions are treated as gifts (Art. 24 letter a FITA, Art. 7 Para 4 letter c CCITHA).

As regards withholding tax, the attribution for tax purposes of the trust assets is the first prerequisite for a right to refund (Arts. 21 et seq. WHTA).

3.3. Dissolution
 Tax Treatment
Revocable TrustIn case of reflux to settlor, no additional assets or income have been constituted. The event is tax neutral. Any accrual to a beneficiary would constitute another gift.
Irrevocable Fixed Interest TrustSame tax consequences as with distribution (3.2.)
Irrevocable Discretionary TrustSame tax consequences as with distribution (3.2)


4. DTC

As a general rule, double tax conventions are reserved, in particular as concerns the refund of Swiss withholding tax and foreign source tax.

Circulars

Swiss Tax Conference, Circular N°30 of 22 August 2007 on the taxation of trusts (in German)

Case Law

- Decision of the Federal Supreme Court A-6903/2010 of 23 March 2011 regarding an irrevocable discretionary trust, E. 5: With a discretionary trust, the beneficiaries merely have a contention until the trustee exercises his or her discretion to determine the extent of the entitlement of the beneficiaries (in German)
Untergeordnete Seiten (1): BVGer A-6903/2010
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