27 March 2020 - Article
Release of new Bill and Explanatory Memorandum
On 5 December 2005, the Swiss Government published a new version of the Bill on trusts. Like the previous Bill of 20 October 2004, the new Bill contemplates:
- 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.
The adoption of the new Bill by the Swiss Parliament is expected to take place in the course of 2006.
Improvements by comparison with previous Bill
Following representations made by Withers LLP jointly with a leading Swiss law firm, the terms of the previous Bill have been greatly improved.
General reference to company law concepts abandoned
The rules relating to jurisdiction in trust related matters contained in the previous Bill referred to the company law definition of “seat”, which is defined as the “place specified in a company’s memorandum of association, failing which the company’s place of effective management”.
Following the representations made by Withers LLP, the Swiss Government now accepts that the reference to the company law definition of “seat” in the context of trusts is unsatisfactory. As a result, the new Bill contains a separate definition of the “seat” of a trust, which is now defined as the place of administration specified in accordance with the terms of the trust, failing which the place of its effective management.
Extension of rules on jurisdiction to cover construction or direction summonses
Construction summonses and applications for directions play a fundamental role in the life of trustees and effectively limit their liability towards beneficiaries.
The previous Bill referred to “disputes” and as a result failed to deal with the recognition of foreign construction or direction summonses (which are non-contentious matters). This defect has now been corrected. In turn, this will result in an improvement in the position of Swiss trustees.
Rules on the recognition of foreign judgments also improved
We are also glad to report that the new Bill provides that Switzerland will recognise judgments rendered by the courts of the country the law of which governs the trust.
This rule guarantees that there will always be a viable forum in circumstances in which proceedings are not available in Switzerland (e.g. because the trust is not administered there) or in the country in which the beneficiary is based (e.g. because he is resident in a country which does not recognise trusts).
Issue of tracing remains unresolved
In its previous Explanatory Report, the Swiss Government accepted that the Hague Trust Convention requires signatory countries to recognise the idea that assets may be recovered when the trustee alienates them in breach of trust. However, the Government’s view was that this restitutionary claim was based on the law of obligations, and rejected the idea of constructive trusts (which are based on a proprietary claim).
Notwithstanding the recommendations of Withers LLP, the Swiss Government has not changed its view. In the future, restitutionary claims against third party holders of trust assets (e.g. a Swiss bank) might have to be resolved in accordance with the general private international law rules on torts and unjust enrichment.
Taxation: new clouds on the horizon
The Swiss Tax Conference (which is comprised of the Heads of the cantonal tax authorities) is currently working on draft Tax Guidelines for trusts. Although the draft Tax Guidelines have not yet been made publicly available, Withers LLP has obtained an advance copy of the latest draft.
The draft Tax Guidelines confirm the practice applied in various cantons that trusts should not be assimilated to companies for tax purposes. Thus, the mere presence of a trustee in Switzerland should not expose the assets and the income/ capital gains of the trust to Swiss taxes.
However, the draft Tax Guidelines also provide that the assets and the income of a trust in which the settlor has maintained an interest should, in principle, be attributed to the settlor. This would apply not only to revocable trusts, but also to irrevocable trusts where the settlor has reserved certain prerogatives. In our view, this analysis (which admittedly only affects settlors resident in Switzerland) is inappropriate, as it lacks a solid legal basis. If implemented in their current form, the Guidelines could discourage foreign individuals from taking up residence in Switzerland and the effects for foreigners who already live in Switzerland would also have to be considered.