Taxation of trusts from a Swiss perspective – an overview

Cecilia Stenberg
Cecilia Stenberg
Olivier Weber
Olivier Weber
Taxation of trusts from a Swiss perspective – an overview

Switzerland and trusts – a topic that preoccupies high net worth individuals and professionals alike. In September 2023, the proposed legislation for the introduction of Swiss trust law was rejected mainly due to tax concerns. Consequently, the tax friendly practice continues to apply (Circular letters No. 30 of the Swiss Tax Conference and No. 20 of the Swiss Federal Tax Administration) and (foreign law) trusts are still fully recognized. 

Tradition and relevance in today’s world

Trusts have a long-standing tradition in the field of estate planning, asset management and asset protection, particularly in Anglo-Saxon law. In contrast to the constrained instruments available for inheritance planning in continental European law, trusts provide a broader array of options for cross-generational wealth and estate planning. In Switzerland, trusts enjoy great economic importance today, as wealthy families decide to structure their wealth and inheritance securely and to relocate to Switzerland, a renowned and favoured place of residence.

Making assets independent instead of passing them as inheritance

In simplified terms, a trust works as follows: The settlor of a trust transfers specified assets to a person, the trustee, who manages them for the benefit of the beneficiaries. In the event of the settlor’s death, trust assets do not automatically pass to the heirs by virtue of inheritance law. Instead, the trustee retains the ownership of the trust assets under civil law and manages these in favour of the beneficiaries. The trustee is obliged to act based on the trust deed, i.e. the settlement document signed by the settlor, and to adhere to the settlor's letter of wishes.

The taxation of trusts in Switzerland

A trust lacks its own legal personality and is not a separate tax entity. Consequently, for tax purposes, the trust assets cannot be attributed to the trustee, as the trustee is not a beneficiary of the assets.

The tax liability must therefore be attributed either to the settlor resident in Switzerland or to the beneficiaries resident in Switzerland. Trusts can be structured in a wide variety of ways to meet the needs of wealthy individuals. This post will focus on domestic trusts and pre-immigration trusts.

Transparency: look-through taxation for domestic trusts

Domestic trusts are trusts established by a settlor whilst tax resident in Switzerland. The trust is fully legally recognized under civil law, but for tax purposes it is a look-through. This is referred to as transparency.

From a tax perspective, this implies that the settlement itself has no relevance; the transfer of the assets to the trust triggers no gift tax, both the income and assets of the trust remain taxable with the settlor. Provided accurate tax filing, the Swiss withholding tax is refunded to the settlor.

Distributions to beneficiaries during the settlor’s lifetime are considered gifts from the settlor to the respective beneficiary. Depending on the settlor’s canton of residence at the time of the distribution and the degree of family relationship, such distribution may trigger gift tax.

In contrast to an inheritance contract, a domestic trust can be revoked or otherwise modified by the settlor. The significant advantage of a domestic trust is that transferring assets back to the settlor does not trigger taxes.

In the event of the settlor's death, inheritance or gift tax is determined based on the law and practice of the canton where the settlor last resided. Generally, a domestic trust is subject to inheritance tax, regardless of whether it’s legally considered as a part of the estate under civil law. Many cantons determine the tax rate applicable to the trust assets based on the degree of family relationship between the settlor and the beneficiaries of the trust. If all beneficiaries are exempt from inheritance tax, the trust assets usually remain exempt from inheritance tax. This generally prevails, if the only beneficiaries of the domestic trust are the surviving spouse and the children.  However, if the trust includes non-relatives (such as non-Swiss charity) among the beneficiaries, the trust assets may be taxed at the highest inheritance rate for persons not related to the settlor. In such scenarios, it might be beneficial for tax planning purposes, to set up several trusts to ensure that not all beneficiaries are subject to the highest tax rate but remain tax exempt to the extent possible. Attention: Certain cantons tax trust assets at the maximum rate as a matter of principle! A tax ruling with the tax authority will provide clarity.

Pre-immigration trusts: when an irrevocable discretionary trust becomes a “cloud” for tax purposes  

Pre-immigration trusts are trusts established by a settlor before moving to Switzerland. When setting up the trust, no tax issues arise as long as no Swiss real properties are concerned.

If the pre-immigration trust is irrevocable, it is considered an “independent asset”, distinct from the settlor resp. a “cloud” for tax purposes, as the settlor has permanently divested himself of his assets prior to moving to Switzerland. The income and assets from an irrevocable pre-immigration trust are exempt from taxation for the settlor provided that the settlor has fully relinquished control over the trust assets and is neither a trustee nor a beneficiary of the trust. If this condition is met, the trust is not transparent, but is considered as a “cloud” for tax purposes. Consequently, the trust is deemed independent and is no longer attributed to the settlor, neither for income/wealth tax nor for inheritance/gift tax.

Benefits accruing to the beneficiaries resident in Switzerland are subject to income tax only upon distribution. Liquidation distributions are exempt from income tax, provided that it can be proven that these distributions represent contributed capital. As long as the trust assets remain in the trust, the income generated on the assets are not taxable. On the other hand, the Swiss withholding tax cannot be refunded.

The good news: tax regulations for trusts remain stable in Switzerland

Trusts continue to serve as a useful instrument for estate planning in Switzerland, particularly for affluent families seeking to safeguard, preserve and manage their assets across generations.

For tax purposes, domestic trusts retain the benefits of transparency, facilitating easier trust reorganisation, if necessary. Irrevocable pre-immigration trusts are commonly used by wealthy individuals for wealth and tax planning prior to the relocation to Switzerland. In the case of pre-immigration trusts, it is advisable to have the tax consequences confirmed in advance by means of a tax ruling.