23 March 2018
2006 will be remembered in the UK mostly for the earthquake provoked by the Finance Act 2006. However, two other major developments have characterised the international landscape at the end of last year, notably the decision by the Swiss Parliament to ratify the Hague Trust Convention and the introduction in Italy of new tax rules affecting trusts.
Switzerland: the quiet revolution rolls on
The long awaited decision by the Swiss Parliament to ratify the Convention finally arrived on 20 December. In a nutshell, the Swiss Parliament has accepted the government’s proposals without any modifications. As a result, the new law:
(a) authorises the Swiss government to ratify the Hague Convention on the Law Applicable to Trusts and their Recognition of 1 July 1985;
(b) introduces private international law rules dealing with the jurisdiction of Swiss courts and the recognition of foreign decisions in trust related matters; and
© introduces the concept of segregation of trust assets into Switzerland’s insolvency and bankruptcy law.
Under Swiss constitutional law, 50,000 citizens or 8 cantons may launch a referendum against the new law within 100 days from its publication. However, this is unlikely to happen, as the new law is uncontroversial. Therefore, it is expected that the Hague Trust Convention will be ratified and the new law will come into force at a date chosen by the Swiss government in the first half of 2007.
An unofficial translation of the substantive provisions of the new law can be found in the Appendix to this note.
As indicated in the WithersLLP Stop Presses which have already been circulated, the Swiss tax authorities have been working on draft Tax Guidelines for trusts which provide, inter alia, that the mere presence of a trustee in Switzerland should not expose the assets and the income/capital gains of the trust to Swiss taxes. At this stage it is not known if and when the Tax Guidelines will come into effect and clients are advised to seek a ruling from the relevant authorities.
An Italian earthquake
As is well known, Italy was the first civil law country to ratify the Hague Trust Convention in 1992.
The Italian experiment has been marked by great success and it is not uncommon to find trusts which (but for the proper law) are exclusively connected with Italy – a technique known as ‘trust interni’ which has been upheld by various courts.
However, the tax treatment of trusts has always remained shrouded in mystery – that is until the recent earthquake provoked by the reintroduction of gift and succession tax and also the enactment of specific rules dealing with the tax treatment of trusts.
Gift and succession tax
As indicated in a previous Stop Press, gift and succession tax was reintroduced in Italy on 2 October 2006, on the back of an electoral promise made by Romano Prodi.
After some heated debate in the Italian Parliament, the new rules have been amended, but the overriding principle remains unaltered.
In a nutshell, the old law on gift and succession tax has been reintroduced as it stood just before its abolition in 2001, subject to some novelties.
(a) Under the new rules, transfers of property on death as well as lifetime gifts – including transfers to trusts – will be subject to tax at a rate of 4%, 6% or 8% depending on the degree of relationship existing between the deceased and the beneficiary.
(b) Transfers to spouses and ascendants/ descendants benefit from an exemption of €1m per beneficiary, whilst the exemption for siblings is limited to €100,000. There are also some exceptions for exempt gilts, transfers to recognised charities and transfers of family businesses in certain circumstances, whilst transfers of immovables are also subject to stamp duty land tax (‘imposte ipocatastali’).
The extension of gift and succession tax to trusts gives rise to some interesting interpretative issues. Whilst the tax is said to affect ‘the transfer of assets and rights on death, by way of a gift or [other] gratuitous transfer, as well as the creation of trusts’, some commentators have already suggested that the tax should only hit the distribution of assets to beneficiaries, rather then the mere creation of the trust. It remains to be seen how the law will be applied in practice but in any event the risk of entry tax may be avoided by careful drafting.
The Italian Finance Act 2007 treats trusts in a manner akin to companies. In the future, therefore, trusts that are resident in Italy or have Italian source income will be subject to Italian corporation tax.
Residence of trusts – actual and deemed
Under Italian law, companies are resident in Italy if their seat or place of administration is situated or their principal object is carried out in Italy. In the case of trusts, there is also a rebuttable presumption that the trust is resident in Italy if:
(a) at least one of the settlors and one of the beneficiaries is resident in Italy; and
(b) the trust is not established (‘istituito’) in a country which appears on the ‘white list’ of countries which exchange information with Italy. Note that whilst the UK appears on Italy’s white list, Switzerland does not.
In addition, a trust is treated as resident in Italy if, after its creation, an Italian resident adds immovable property or rights related to immovable property to a trust which is not established (‘istituito’) in a white-listed country.
At this stage it is not clear what factor determines whether a trust is established (‘istituito’) in a particular country (proper law of the trust? Place where the trust document is executed? Residence of trustees?). Also, does the first test mentioned above also apply where a settlor establishes a trust (other than a trust of land) whilst being resident abroad and subsequently moves Italy?
Attribution of trust income to beneficiaries
Finally, the Italian Finance Act 2007 provides that ‘where the beneficiaries have been particularised (‘individuati’), the income of the trust shall in any event be attributed to the beneficiaries by reference to their shares as particularised (‘individuati’’) in the trust instrument or in any subsequent document, failing which, in equal shares’.
Once more, there are interpretative issues connected with the wording of the new law: the word ‘individuato’ may be translated as identified, described or selected. Did Parliament intend to tax beneficiaries simply because they appear in the class of beneficiaries? Whilst this is possible, it is difficult to see why a discretionary beneficiary should pay income tax on income received by the trustees until and unless he has been ‘identified’ as the recipient of that income, i.e. until an appointment/distribution.
The adoption of the Hague Trust Convention by Switzerland is a welcome development. Given Switzerland’s pre-eminent position in the international trust arena, there is a certain similarity, in terms of significance, with Jersey’s decision to adopt a trust law in 1984.
However, both Jersey and Switzerland are effectively offshore jurisdictions and the Italian Finance Act 2007 represents the first attempt by a civil law country to deal with the taxation of trusts in an onshore context. Seen in this light, practitioners who advise international clients on trust structures should keep a close eye on the Italian approach, as it may offer indications as to the possible treatment of trusts by other civil law countries which are less familiar with the trust concept.
Unofficial translation of the substantive provisions of the Swiss law relating to the ratification and implementation of the Hague Trust Convention, adopted on 20 December 2006
The Federal Private International Law (‘PIL’) and the Federal Debt Collection and Bankruptcy Law (‘DCBL’) are amended as follows:
1. Definition (new Art. 149a PIL)
The term “trust” refers to trusts created voluntarily in accordance with the Hague Trust Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition, regardless as to whether they have been evidenced in writing (see Art. 3 of the Convention).
2. Jurisdiction of the Swiss courts (new art. 149b PIL)
1 A choice of jurisdiction for trust related matters which is made in accordance with the terms of the trust instrument shall be respected, provided it is either evidenced in writing or in another form which can be evidenced in writing. In the absence of a contrary disposition, that court shall have exclusive jurisdiction. Art. 5(2) PIL applies mutatis mutandis.
2 The designated court shall not reject jurisdiction if:
1. one of the parties, the trust or a trustee is domiciled or has its place of habitual abode or a branch in the canton in which the court is situated;
2. a significant proportion of the trust assets are situated in Switzerland.
3 In the absence of a valid trust jurisdiction clause or if the designated court does not have exclusive jurisdiction, a dispute can be commenced before the Swiss courts of:
(a) the place where the defendant is domiciled, failing which in the place of its habitual abode; or
(b) the seat of the trust [see below];
© for disputes concerning the activity of a branch situated in Switzerland, the place where that branch is situated.
4 Disputes concerning any liability based on the public offering of securities and bonds may also be commenced before the Swiss courts of the place where such securities and bonds have been issued. This jurisdiction cannot be excluded by way of a choice of jurisdiction.
3. Seat of a trust (amendments to Art. 21 PIL)
1 A company or a trust within the meaning of Art. 149a is domiciled in the place in which it has its seat.
3 The seat of a trust is the place specified in the trust instrument either in writing or in another form which can be evidenced in writing. In the absence of such an indication, the seat of the trust shall be the place of its effective management.
4 A company or trust has a permanent establishment in the country in which it has its seat or a branch.
4. Applicable law (new art. 149c PIL)
1 The law applicable to trusts shall be determined in accordance with the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition.
2 The proper law established in accordance with the provisions of the Convention also applies where Art. 5 of the Convention provides that such law shall not apply or where Art. 13 of the Convention does not require a recognition of the trust.
5. Publicity (new Art 149d PIL)
1 The existence of the trust relationship may be entered into the Land Register, Shipping Register or Airplanes Register.
2 The existence of a trust relationship concerning an intellectual property right registered in Switzerland may be entered into the relevant registry upon request.
3 A trust relationship whose existence is not mentioned in the relevant registry cannot be enforced against third parties who act in good faith.
6. Recognition of foreign decisions (new art. 149e PIL)
1 Foreign decisions in trust related matters shall be recognised in Switzerland if they:
(a) were rendered by a court which was validly designated under the rules of art. 149b(1);
(b) were rendered in the country in which the defendant had its domicile, place of habitual abode or its establishment;
© were rendered in the state in which the trust had its seat;
(d) were rendered in the state the law of which is the proper law of the trust; or
(e) are recognised in the state in which the trust had its seat, and the defendant was not domiciled in Switzerland.
2 Art. 165(2) applies mutatis mutandis for foreign decisions concerning claims related to the public offering of securities and bonds based on a prospectus, a circular letter or other similar communications.
7. Federal Debt Collection and Bankruptcy Law (‘DCBL’)
New art. 284(a) DCBL – Collection of debts of the trust fund
1 Debt collection proceedings in relation to liabilities of the trust patrimony shall be addressed to the trustee as representative of the trust.
2 The place for debt collection proceedings shall be the place in which the trust has its seat in accordance with Art. 21(3) PIL. If the designated place of administration of the trust is situated outside Switzerland, then proceedings can be commenced in the place in which the trust is effectively administered.
3 Any debt collection proceeding shall be allocated to the bankruptcy track. Any bankruptcy shall be limited to the value of the trust fund.
New art. 284(b) DCBL – Bankruptcy of trustees
In the event of a bankruptcy of the trustee, the net trust patrimony (after deduction of any claims of the trustee against it) shall be segregated from the trustee’s estate.
In practice, therefore, Switzerland has opted out of Art. 13 of the Convention and will allow “internal trusts”.