Overview of the legal framework applicable to trusts in Switzerland, the regulatory requirements imposed on professional trustees, and the tax treatment of the different types of trusts, including CRS and FATCA reporting obligations.
- What is a trust ?
- The uses of a trust
- The different types of trusts
- The validity of a trust
- The recognition of trusts in Switzerland
- The Swiss regulatory framework
- Trust Taxation in Switzerland
- Trusts and Automatic Exchange of Information
- Common reporting standard (CRS)
- FATCA — Foreign Account Tax Compliance Act
What is a trust ?
A trust is a legal relationship enforceable against third parties that arises when the settlor, by executing a settlement or trust deed, transfers specific assets to a trustee, who must manage and use them for a purpose defined by the settlor for the benefit of one or more beneficiaries.
A trust involves:
the settlor: the person who, by unilateral act, creates the trust, transfers assets into it, establishes the rules governing it, and designates its beneficiaries;
the trustee: the person or entity responsible for administering and managing the assets held in trust for the benefit of the beneficiaries;
the beneficiaries: the persons for whose benefit the trust is established;
a distinct fund over which the trustee holds legal title. The trustee must administer this fund exclusively in the interest of the beneficiaries and in accordance with the trust deed. The beneficiaries of the trust hold a personal right (in personam equitable right) against the trustee to ensure compliance with the terms of the trust;
an optional protector: the person or entity responsible for overseeing the trustee or exercising certain powers over the trust. These powers may include, in particular, the power to appoint and remove the trustee, to approve the trustee’s remuneration, to add new beneficiaries, and to grant or withhold consent with respect to certain decisions of the trustee.
The settlor may retain certain prerogatives over the trust through reserved powers. These include the right to veto distributions proposed by the trustee or, conversely, the right to direct the trustee to make distributions, the power to issue investment instructions, the right to alter the classes of beneficiaries, and the right to amend or revoke the trust deed. In addition, the settlor may convey their wishes and intentions to the trustee by way of a letter of wishes.
The uses of a trust
Estate Planning
Upon the settlor’s death, the trust assets continue to be held and managed in accordance with the terms of the trust, rather than being distributed in their entirety to the heirs. The trust thereby serves as a vehicle for preserving a family estate or a business across generations. It is particularly well-suited to individuals seeking to organize the intergenerational transmission of family wealth, safeguard the interests of minor or vulnerable beneficiaries, or ensure a phased distribution of assets over time.
Asset Protection
A trust created for asset protection purposes operates on the principle that the settlor is no longer the legal owner of the assets transferred into the trust. The trust fund ceases to form part of the settlor’s personal estate and cannot, as a general rule, be seized by creditors, subject to the possibility of a clawback action.
This structure is particularly well-suited to individuals residing in politically or economically unstable jurisdictions who seek to protect their assets from arbitrary government seizure, as well as to those engaged in high-risk professions who wish to ring-fence their personal wealth from potential liability.
Furthermore, so long as no distribution has been made, the trust effectively shields beneficiaries from claims brought by their personal creditors.
Tax Efficiency
Depending on the jurisdiction of residence of the parties involved in the trust, the establishment of a trust may give rise to tax savings, particularly with respect to wealth tax and taxes on investment income, where applicable.
Confidentiality
A trust safeguards the privacy of all parties involved and ensures that sensitive information remains shielded from public disclosure. Access to information relating to the trust structure, the settlor, the trust assets, the protector, the trustees and, where applicable, the beneficiaries, is strictly restricted to those directly concerned.
The different types of trusts
There are fundamentally three main types of trust:
Revocable Trust
In a revocable trust, the settlor retains the right to revoke the trust at any time — or may grant this right to another designated person. Upon revocation, the trust is terminated and all assets are returned to the settlor. As a general rule, a revocable trust automatically becomes irrevocable upon the death of the settlor
Irrevocable Trust
In an irrevocable trust, the settlor permanently and irrevocably transfers assets to the trust. Within this category, a distinction is made between the fixed interest trust and the discretionary trust.
Irrevocable Discretionary Trust
The trust deed defines only classes of beneficiaries. The decision as to who will ultimately receive distributions from the trust is left to the trustee. The trustee therefore has full discretionary power to decide which beneficiaries will receive distributions, when and in what amount. It is common practice for the settlor to communicate his motivations and wishes regarding the administration of the trust to the trustee by means of a letter of wishes.
The validity of a trust
From a Swiss law perspective, the validity of a trust is governed by its applicable law. The validity of a trust is subject to compliance with the three certainties rule, as established in Knight v. Knight (Court of Chancery, 1840):
Certainty of intention
It must be clear, from the terms used to create the trust and the circumstances of the specific case, that the settlor intended to establish a trust. A simulated trust would be invalid and constitute a “sham trust.” This principle is illustrated by the case of Rahman v. Chase Bank Trust (Royal Court of Jersey, 1991), in which the settlor had reserved extensive powers over the trust, including the power to distribute all income and capital of the trust fund to any person, including himself, as well as a veto right over any proposed investment. The breadth of these reserved powers demonstrated that the settlor never intended the trust to produce any real legal effects. The trust was considered as a sham trust.
Certainty of object
The beneficiaries must be named, identified or described in the trust deed with sufficient precision to be determined with certainty. In this regard, it is permissible to designate a class of beneficiaries — for example, the descendants of the settlor.
Certainty of subject matter
The assets transferred to the trust must be clearly identified and effectively transferred to the trustee, who will hold legal title over them. It is common practice for a nominal symbolic sum to be transferred to the trust upon its creation (for example, USD 100), with further assets being transferred at a later stage. The initial transfer must be genuine and properly documented to avoid the trust being recharacterised as a sham trust. In practice, the transfer of the nominal sum is documented by a photocopy of the relevant banknote, attached as an annex to the trust deed.
The recognition of trusts in Switzerland
Trusts established under foreign law are automatically recognised in Switzerland pursuant to the Hague Convention on the Law Applicable to Trusts and on their Recognition, which entered into force in Switzerland in 2007.
A trust validly constituted under the law of an offshore jurisdiction is therefore recognised in Switzerland. Such recognition implies in particular that the assets held in the trust constitute a separate fund, distinct from the personal assets of both the trustee and the settlor.
The Swiss regulatory framework
The Federal Act on Financial Institutions (FinIA) and its implementing ordinances (the Ordinance on Financial Institutions, FinIO; the FINMA Financial Institutions Ordinance, FinIO-FINMA) require trustees established in Switzerland to obtain prior authorisation from the Swiss Financial Market Supervisory Authority (FINMA).
For the purposes of the FinIA, a trustee is defined as any person who, on a professional basis, manages or disposes of a separate fund in favour of a beneficiary or for a specified purpose, on the basis of the constitutive act of a trust within the meaning of the Hague Convention on the Law Applicable to Trusts and on their Recognition.
The authorisation from the FINMA is subject to compliance with the following requirements:
- the trustee must have an adequate organisational structure, a minimum capital and appropriate own funds;
- the management body of the trustee must comprise qualified executives with an adequate training to perform the activity of trustee and sufficient professional experience in the field of trusts;
- the persons responsible for administration and management must be of good repute and possess the professional qualifications required for their role;
- the trustee must have its effective place of management in Switzerland;
- the trustee must ensure the conduct of an irreproachable business activity;
- the trustee must have a dedicated compliance function.
Trustees are subject to the supervision of the FINMA, which is carried out in association with a supervisory organisation. Trustees must also engage an audit firm to conduct an annual audit covering, in particular, their organisational structure.
Finally, a professional trustee qualifies as a financial intermediary within the meaning of the Federal Act on Combating Money Laundering and Terrorist Financing (AMLA). As such, the trustee must affiliate with a self-regulatory organisation and comply with the obligations incumbent upon it under the AMLA and its implementing ordinances (AML Ordinance, AMLO-FINMA).
Trust Taxation in Switzerland
Swiss tax legislation contains no specific provisions governing the taxation of trusts. To ensure consistent treatment across cantons, the Swiss Tax Conference (STC) issued Circular No. 30 of 22 August 2007 on the Taxation of Trusts, which has since served as the primary reference framework in this area. In practice, cantonal tax authorities generally follow its guidance.
Since a trust has no legal personality, it is not itself a taxable entity, and no tax is levied on the trust. The taxation of the trust’s assets and income can therefore only arise at the level of the persons involved — the settlor or the beneficiaries — provided they are domiciled in Switzerland.
The trustee is responsible for administering and managing the trust’s assets exclusively in the interest of the beneficiaries. As the trustee holds only legal title over the trust property, such assets cannot be attributed to the trustee for tax purposes. Consequently, the trustee is not subject to tax on the trust’s assets and income.
Taxation may therefore only arise at the level of the settlor or the beneficiaries, depending on the qualification of the trust, and provided they are domiciled in Switzerland:
Revocable trust
A revocable trust is treated as transparent, meaning that its assets and income are attributed to the settlor for tax purposes. Although valid under civil law, the trust is disregarded for tax purposes. Accordingly, neither the establishment of the trust nor the transfer of assets to it is subject to taxation.
Any distribution made by the trust to the beneficiaries will be subject to gift tax, provided the settlor is domiciled in Switzerland. The applicable rate will depend on the settlor’s canton of residence and the degree of kinship between the settlor and the beneficiary.
Upon the settlor’s death, the trust becomes irrevocable (unless the power of revocation has been transferred to a third party). Where the settlor was domiciled in Switzerland at the time of death, the trust’s newly irrevocable character may trigger inheritance tax, the rate of which varies across cantons. In certain cantons, such as Geneva, the applicable rate is determined by the degree of relationship between the deceased settlor and the beneficiaries.
The tax treatment of the revocable trust may be summarised as follows:
| Element | Tax treatment |
| Tax status of the trust | The trust is treated as transparent for tax purposes; its assets and income are attributed to the settlor. |
| Establishment of the trust | The establishment of the trust and the transfer of assets to it do not give rise to any taxation. |
| Taxation of the trust fund | The trust’s assets and income are attributed to the settlor for tax purposes for as long as the trust remains revocable. |
| Distributions to beneficiaries | Distributions are subject to gift tax, provided the settlor is domiciled in Switzerland. The applicable rate varies depending on the settlor’s canton of residence and the degree of relationship with the beneficiary. |
| Situation of the trust upon the settlor’s death. | The trust becomes irrevocable upon the settlor’s death, unless the power of revocation has been transferred to a third party. |
| Tax consequence upon death | Where the settlor was domiciled in Switzerland at the time of death, inheritance tax may be levied, the rate of which varies by canton and degree of relationship with the beneficiaries. |
Irrevocable Fixed Interest Trust
For tax purposes trust assets are attributed to the beneficiaries, who hold a vested right to receive distributions from the trust.
Upon establishment of the trust, where the settlor is domiciled in Switzerland, the transfer of assets into the trust is treated as a gift from the settlor to the beneficiary, proportionate to each beneficiary’s respective share in the trust.
The beneficiary’s interest in the trust is subject to wealth tax, provided the beneficiary is domiciled in Switzerland. Where a beneficiary is entitled solely to periodic distributions (whether monthly or annual), the taxable wealth shall be determined by capitalisation of future distributions.
Distributions of trust capital, as well as capital gains realised by the trust, are exempt from taxation. By contrast, distributions of trust income are taxable in the hands of the beneficiaries. Capital distributions may only be made once all trust income has been fully distributed.
The tax treatment of the irrevocable fixed Interest trust may be summarised as follows:
| Element | Tax treatment |
| Tax status of the trust | The trust is recognised for tax purposes. The settlor’s divestiture of assets is recognised for tax purposes. |
| Establishment of the trust | The transfer of assets into the trust is treated as a gift from the settlor to the beneficiaries, proportionate to their respective share in the trust. |
| Taxation of the trust fund | Each beneficiary’s interest in the trust is subject to wealth tax, provided the beneficiary is domiciled in Switzerland. |
| Distributions to beneficiaries | Distributions of trust capital or capital gains are not subject to taxation. Distributions of trust income are taxable in the hands of the beneficiaries. |
| Situation of the trust upon the settlor’s death | The trust becomes irrevocable upon the settlor’s death, unless the right of revocation has been expressly transferred to a third party. |
Irrevocable Discretionnary Trust
The tax treatment differs depending on whether the trust was established when the settlor was domiciled abroad or in Switzerland.
Settlor domiciled abroad at the time of the establishment of the trust
Where the trust was established when the settlor was domiciled abroad, the trust capital is attributed for tax purposes neither to the settlor nor to the beneficiaries. Accordingly, neither the settlor nor the beneficiaries are subject to wealth tax on the trust capital. This absence of taxation stems from the fact that the beneficiaries have no vested right to receive distributions, given the discretionary nature of the trust.
Distributions from the trust capital are not taxable at le level of the beneficiaries.
Distributions from the trust’s income, including capital gains, are however taxable at the level of the beneficiaries domiciled in Switzerland.
The tax treatment of the irrevocable discretionnary trust may be summarised as follows:
| Element | Tax treatment |
| Tax status of the trust | The trust is recognised for tax purposes. The settlor’s divestiture is recognised for tax purposes. |
| Taxation of the trust fund | The trust capital is attributed for tax purposes neither to the settlor nor to the beneficiaries. Accordingly, neither is subject to wealth tax on the trust capital. |
| Distributions to beneficiaries | Distributions from the trust capital, as well as capital gains realised by the trust, are not subject to tax. By contrast, distributions of trust income are taxable at the level of the beneficiaries. |
| Situation of the trust upon the settlor’s death | No consequence |
Settlor domiciled in Switzerland at the time of the establishment of the trust
Where the trust was established at a time when the settlor was domiciled in Switzerland, the trust assets and their income remain taxable in the hands of the settlor. The applicable tax treatment is therefore identical to that of a revocable trust.
Settlor subject to lump-sum taxation at the time of the establishment of the trust
Where the trust was established at a time when the settlor was domiciled in Switzerland and taxed on an expenditure basis (lump-sum taxation), the irrevocable discretionary trust will be recognised for tax purposes with respect to foreign-source assets placed in the trust. The settlor’s divestiture of such foreign-source assets will be recognised, resulting in a tax treatment identical to that of an irrevocable discretionary trust established abroad. This follows from the fact that foreign-source assets are not taken into account in the control calculation for expenditure-based taxation. Gift tax may be levied on foreign-source assets thus transferred to the trust. By contrast, the transfer of Swiss-source assets to the trust will not be recognised for tax purposes, and their tax treatment will remain identical to that applicable to a revocable trust.
| Element | Foreign-source assets | Swiss-source assets |
| Consideration in the control calculation | Foreign assets are not taken into account in the control calculation for lump-sum taxation purposes. | Swiss assets are taken into account in the control calculation for lump-sum taxation purposes. |
| Taxation upon transfer to the trust | The transfer may trigger gift tax liability. | No taxation arises upon transfer. |
| Tax recognition of the trust | The irrevocable discretionary trust is recognised for tax purposes and the settlor’s divestiture of assets is accordingly acknowledged. | The trust is not recognised for tax purposes. Assets transferred in Switzerland remain attributed to the settlor for tax purposes. |
Trusts and Automatic Exchange of Information
Common reporting standard (CRS)
Switzerland applies the automatic exchange of information (AEOI) with States party to the Convention on Mutual Administrative Assistance in Tax Matters on the basis of the Multilateral Competent Authority Agreement (MCAA). In its relations with European Union member states, Switzerland applies the AEOI under the Agreement between Switzerland and the European Union on the Automatic Exchange of Financial Account Information. Both instruments give effect to the Common Reporting Standard (CRS). The list of jurisdictions party to these agreements is on the website of the State Secretariat for International Financial Matters (SIF). These international agreements are transposed into Swiss law by the Federal Act on the International Automatic Exchange of Information in Tax Matters (AEOIA) and its implementing ordinance (AEOIA-O). A directive issued by the Federal Tax Administration sets out the practical application of the CRS.
The CRS Framework
The automatic exchange of information under the CRS operates on the following principle: financial institutions identify accounts held by non-resident taxpayers and report the relevant information annually to their domestic tax authority, which then forwards it to the tax authority of the jurisdiction in which the account holder is tax resident.
The Trustee as a Reporting Financial Institution
A corporate trustee qualifies as a reporting financial institution (FI) when it meets the definition of an investment entity carrying out, on behalf of clients, investment, administration or management of financial assets.
The Trust as a Reporting Financial Institution
A trust may itself qualify as a reporting financial institution where its gross income is primarily derived from investment activities and it is managed by a financial institution, being either the trustee or a bank responsible for managing its assets.
In the absence of these conditions, the trust will be classified as a non-financial entity (NFE): passive where its income consists predominantly of passive capital income, or active where its income derives principally from an active business activity.
Where a trust qualifies as a reporting financial institution, the trustee may discharge the reporting obligations on its behalf. In such a case, the trust is treated as a trustee-documented trust and therefore classified as a non-reporting financial institution.
The Trustee-Documented Trust
Where a trust qualifies as a reporting financial institution, the trustee may assume the reporting obligations on its behalf. In such a case, the trust is treated as a trustee-documented trust and therefore classified as a non-reporting financial institution.
Underlying companies
Where a trust holds an underlying company, that company must be subject to a separate analysis under the CRS to determine its own classification — whether as a financial institution, an active non-financial entity (active NFE) or a passive non-financial entity (passive NFE).
Reporting
Financial institutions are required to report accounts held by passive non-financial entities (passive NFEs) where their controlling persons are reportable persons, namely individuals who are tax resident in a reportable jurisdiction. In the context of a trust, the following persons are treated as reportable persons: the settlor, the trustee, the protector, the beneficiaries and any other person exercising effective control over the trust, provided they are tax resident in a reportable jurisdiction.
Furthermore, investment entities that are professionally managed and established in non-participating jurisdictions are treated as passive non-financial entities (passive NFEs). Accordingly, their controlling persons are subject to reporting where they are tax resident in a reportable jurisdiction.
Where an active non-financial entity (active NFE) is resident in a reportable jurisdiction, the financial institution is required to report the relevant account. In such a case, only information relating to the entity itself is reported; the controlling persons are not subject to any reporting obligation
Where a trust qualifies as a financial institution (FI), the reportable information relates primarily to the identification of the reportable persons connected to the trust (settlor, trustee, beneficiaries, etc.), the aggregate value of the trust’s assets and any distributions made in favour of the beneficiaries.
Financial institutions are required to file their annual CRS report within six months of the end of the relevant calendar year, that is no later than 30 June of the following year.
FATCA — Foreign Account Tax Compliance Act
The Agreement between Switzerland and the United States of America of 14 February 2013 (IGA model 2), which entered into force on 2 June 2014, aims to ensure compliance with the Foreign Account Tax Compliance Act by Swiss financial institutions. It is given effect through the Federal Act on the Implementation of the FATCA Agreement between Switzerland and the United States.
The FATCA Framework
The FATCA (Foreign Account Tax Compliance Act) is a US law that requires foreign financial institutions to identify and report to the US tax authorities the accounts held by US Persons — namely US taxpayers, US tax residents, and entities controlled by US persons. Under the Model 2 FATCA Agreement, Swiss financial institutions report directly to the IRS (Internal Revenue Service).
US persons are identified through a W-9 form, while non-US individuals are identified through a W-8BEN form. Non-US entities are identified through a W-8BEN-E form, which serves in particular to identify any US controlling persons in the case of passive non-financial foreign entities (Passive NFFEs).
The Trustee as a Foreign Financial Institution
A corporate trustee qualifies as a foreign financial institution (FFI) where it meets the definition of an investment entity conducting investment, administration or financial asset management activities on behalf of clients (Type A investment entity).
The Trust as a Foreign Financial Institution
A trust may itself qualify as a foreign financial institution where its gross income is derived primarily from investment activities and it is managed by a foreign financial institution — whether a corporate trustee or a custodian bank — within the meaning of the “managed by test”. In such case, it is classified as a Type B investment entity.
Where the trust does not meet these conditions, it will be classified as a non-financial foreign entity (NFFE). A NFFE is passive where its gross income or assets are predominantly passive in nature (interest, dividends, capital gains, etc.); conversely, it is active where its income is predominantly derived from an operational activity.
Sponsoring and owner documented FFI
Sponsoring allows a trust to delegate its FATCA obligations to another entity known as a “sponsoring entity”, which fulfils those obligations on the trust’s behalf. It is common for the trustee itself to act as sponsoring entity, thereby ensuring the trust’s FATCA compliance.
Where the trust qualifies as an FFI, it may also obtain “owner documented FFI” status. To do so, it must hold an account with a participating financial institution — such as a bank — and provide it with the required documentation. That institution then assumes the trust’s FATCA reporting obligations, exempting the trust from registering directly with the IRS.
Reporting
FATCA requires foreign financial institutions (FFIs) located in a participating jurisdiction to register with the IRS, obtain a Global Intermediary Identification Number (GIIN), and report annually information on accounts held by US persons, as well as accounts of passive entities (passive NFFEs) where one or more controlling persons are US persons.
A US person is deemed to control a NFFE if he holds, directly or indirectly, more than 25% of the entity, or exercises effective control over it on another basis. In the case of a trust, the settlor, the trustee and the protector must be reported. The beneficiaries of a fixed-interest trust must be reported, as well as beneficiaries of a discretionary trust if they received a distribution from the trust during the relevant year.
With respect to beneficiaries of a discretionary trust, the FFI must report the amounts distributed to them during the relevant year. With respect to the settlor, the total value of the trust assets must be reported, together with any amounts distributed to him during the year in question. In the case of a fixed-interest trust, the amount to which the beneficiary holds a vested entitlement must be reported.
Where the trust qualifies as an active NFFE — that is, a non-financial entity whose income and assets are not predominantly passive in nature — no reporting obligation applies.
Reporting must be filed with the IRS by 31 May of each year.