Despite Switzerland’s reputation as a tax haven, families arriving are often surprised to discover that wealth tax does exist in the country – and tax planning tools to mitigate it are scarce.
However, there are legitimate ways to reduce your Swiss wealth tax burden. Using trusts is one of them, although we’d recommend a ‘non-aggressive’ option for international families who haven’t settled, or for families expecting to receive gifts or bequests from parents or relatives living abroad.
We recommend that aggressive tax avoidance schemes are best avoided. It’s also important to remember that using trusts without expert guidance could turn into a tax disaster.
Trusts involve an owner of assets (the settlor) transferring them to a third party (the trustee), who – typically acting in a professional capacity – becomes the owner of these assets, yet has a duty to manage them in the best interest of so-called ‘beneficiaries’ (typically the settlor’s children).
A trust structure is widely regarded as facilitating a smooth, flexible transfer of family assets to a family’s next generation, while providing a range of benefits – including protection against creditors and reduction of exposure to wealth or estate tax.
It could be said that Switzerland’s relationship with trusts is a paradox.
As a world-leading wealth management center, it should be no surprise that the country boasts a flourishing trust industry. Indeed, many Swiss resident families already use trusts to hold all or part of their wealth.
Curiously though, the Swiss Civil Code does not contain a single provision on trusts.
The reason is that Switzerland isn’t a common law country. Its legal system doesn’t follow the English law tradition, but rather the Roman law tradition – in which trusts are unknown.
However, Switzerland applies the Hague Convention on the recognition of trusts and therefore recognizes trusts organized under foreign law. This allows for a satisfactory legal framework for the use of trusts in Switzerland, in terms of legal certainty and predictability. It even allows trustees to manage trusts from Switzerland.
Switzerland also has a tax system which is favorable to beneficiaries of trusts, at least in some specific contexts – which is illustrated in these two examples:
1. A foreign family (parents and children) plans to move to Switzerland.
Before moving, they transfer – let’s say – 20% of their wealth to an irrevocable trust. The Swiss tax authorities will recognize that the wealth in this trust fund no longer forms part of their taxable wealth, so will allow the family to reduce its taxable wealth by 20%.
The key condition is that this family cannot directly benefit from the trust fund. However, more remote relatives, future generations, and charities can benefit from it.
2. An elderly lady living abroad intends to bequeath her wealth to her son, who happens to live in Switzerland.
Her son will inevitably pay Swiss wealth tax on whatever he will directly inherit.
However, if she instead creates a discretionary trust for the benefit of her son, the assets could remain outside of his taxable wealth – while still benefiting him.
Any activities intended to mitigate wealth tax – including these two examples – require proper and careful structuring. Badly drafted or poorly organized trusts can lead to administrative nightmares and dramatic tax consequences – particular regarding gift and inheritance taxes.
You should always seek expert legal guidance ahead of committing to any actions intended to reduce your tax burden.
Submitted by Guillaume Grisel
Guillaume Grisel is a partner with Bonnard Lawson – International Law Firm in Geneva and Lausanne, where he advises international families in the field of cross-border tax and estate planning.
Guillaume holds a Ph.D in international law and an LL.M. from Cambridge University. He is the chairman of STEP* Lausanne and the secretary of STEP* Switzerland (* the Society of Trust and Estate Practitioners). www.ilf.ch. firstname.lastname@example.org.