Will trusts be included into Swiss domestic law?
At the end of April, the Council of States Legal Affairs Committee decided to follow its National Council counterpart and pass a committee motion requiring the government to prepare a bill to introduce trusts into internal Swiss law.
As readers will recall, a trust is a legal relationship created when a settlor uses a trust deed to transfer specific assets to one or more people (the trustees), who must manage or use them for a purpose established in advanced by the settlor, for one or more beneficiaries.
Some people are hailing this as a way of reinforcing the attractiveness of Switzerland as a financial centre. We are less convinced; read on to find out why.
Firstly, Switzerland is not, and never will be, a common law country. Although there is a fiduciary concept in Swiss law, it is absolutely not comparable to the notion of a trust, first and foremost because a trust is not a contractual relationship!
Also, our civil code makes no distinction between legal ownership and equitable ownership. So we would have to start by reforming the real rights that exist under Swiss law before we could integrate the concept of a trust. None of the civil law jurisdictions that have attempted such a reform have really managed to make this type of structure stand. The opposite is also true; the foundation, a stalwart of civil law, has never been significant in English-speaking countries.
In any case, trust companies have not waited for us to incorporate trusts into Swiss law to set up here. There are three separate reasons for the high number of trustees in Switzerland:
- At present, trusts are very lightly regulated in Switzerland compared to jurisdictions such as Singapore or the Cayman Islands, where a licence can cost up to USD 100,000 per year. In Switzerland, no authorisation or specific qualifications are needed to be a trustee, and in fact no financial guarantees are even required (insurance, capital, etc.). Trust companies are subject only to anti-money laundering and terrorist financing rules. However, this situation is set to change radically when the new Swiss laws on financial services and financial institutions (LSFin and LEFin) come into force;
- Unlike in other countries including the UK, in Switzerland trustees are not taxed on the trust’s income and assets, which makes life considerably easier;
- Switzerland is recognised across the globe as a financial centre where clients can hold and manage their trust assets with complete peace of mind (in banks, with wealth managers, etc.).
As the information above shows, it is perfectly possible for a trust to be based in Switzerland but subject to the law of a foreign country. Integrating trusts into local law is not going to attract more of them to the country.
In addition, will Swiss law be able to offer settlors the same flexibility as Bahamian, Cayman Island or Cook Island law, in particular as regards protection against creditors and inheritance planning? Although trusts were initially used for tax planning purposes, make no mistake: their primary purpose today is most definitely inheritance planning and protection against creditors when engaging in risky activities (including marriage). However, our legal system has rigid and well-established traditions relating to statutory inheritance entitlements, divorce settlements and claims for fraudulent conveyance or action to set a transaction aside in a bankruptcy. It is unlikely that the Swiss legislator will create gaping exceptions for trusts, just to make Switzerland more attractive as a financial centre. Consequently, we can legitimately wonder in what sense such legislation would be useful.
It is pointless to argue that it would offer clients a reputable jurisdiction in which to domicile their trusts, because the options already include the UK, Singapore, New Zealand and the USA.
It is also important to consider the tax angle. Although there is a Swiss Tax Conference circular regarding the tax treatment of trusts in Switzerland, it is clear that the tax authorities, be they federal or cantonal, pay very little heed to such structures. In the vast majority of cases they are treated as transparent and taxation is calculated as if the assets belonged to the settlor or the beneficiaries.
We must also add that it will take numerous years for courts to build up a reliable set of precedents in this area.
And finally, it would also be necessary to reform Swiss foundation law: currently, with the exception of foundations operating in the public interest, family foundations can serve only to meet the cost of raising, endowing and supporting family members. Incorporating only charitable trusts into internal law would not be a significant change, because the current law on charitable foundations already serves this purpose very well.
For all these reasons, we believe that unless trust law is completely overhauled, the confusion and insecurity generated by integrating such structures into our legal system would outweigh any benefits. In our opinion, recognition of foreign trusts is all that is required. Given that Switzerland ratified the Hague Convention in 2007, nothing further is needed.
