Tax treatment of the trust in general
The trust has no legal personality. Nor can a trust be considered a "foreign legal entity" within the meaning of Art. 49 para. 3 LIFD and Art. 20 para. 2 LAI. As a result, a trust cannot be a taxable entity under Swiss tax law. Therefore, following the prevailing doctrine, unlike what happens in other countries (e.g. Italy and Great Britain), in cases where the assets of the trust cannot be attributed either to the settlor or to a beneficiary, the trust itself will not be considered as a legal entity.
However, on 12.1.2022, the Federal Council initiated an preliminary project to discuss the likely introduction of the Trust in the Swiss Bond Code, which will expire on 30.4.2022. Therefore, the taxation of the Trust will also have a significant impact, which we will discuss in the next official introduction.
At present, the following considerations apply.
Tax treatment of the trustee and the protector
In line with the prevailing doctrine, the Circular prescribes that neither the assets assigned to the trustee nor the income derived from them are taxed. In accordance with the principle of taxation according to economic capacity, the trustee may not be charged for any assets or income to which he has no economic claim.
Tax treatment of settlor and beneficiaries
The assets and income of the trust (capital, capital gains, current income) are allocated for taxation to the settlor or beneficiaries (principle of transparency). Swiss tax law has incorporated the theory of asset enhancement. The decisive moment is that of the realization of the income, an income must therefore be considered acquired when the taxpayer has received the benefit or has obtained a certain right to receive it.
Taxation of Revocable Trust
In the case of a revocable trust, the settlor reserves the right to revoke the trust and return the remaining assets to her/his estate. Thus, no permanent removal of assets from the settlor will take place. For a tax assessment of whether the trust is a revocable or irrevocable trust, it is necessary to look at the specifics of the deed. Essentially, a case-by-case review must be performed. In the case of the formation of a revocable trust, the settlor does not permanently transfer his or her assets to the trust. The substance and income arising from the trust assets thus continue to be imposed on the settlor at his/her residence. During the existence of the revocable trust, the assets of the trust and the income it yields are imposed on the settlor with income and estate taxes. Capital gains that are earned from the substance of the trust are exempt, at least as long as the settlor does not qualify as a professional securities dealer.
Tax consequences upon liquidation of revocable trust
The trust is a durable institution. However, English trust law prohibits the existence of a trust without a time limitation. However, English trust law prohibits the existence of a trust without a time limitation. There is also the possibility of dissolution of a trust. When a revocable trust is liquidated, a difference must be made depending on whether the trust assets are devoluted to the settlor or devolved to the beneficiaries.
In the first case, where the trust funds are "devoluted" to the settlor, this has no tax consequences. If the trust is now liquidated, this causes no difference from a tax perspective.
In the second case we are in the presence of a donation from the settlor to the beneficiaries. Such action carries the same tax consequences as "distributions" during the existence of the trust.
Irrevocable Trust Taxation
In the case of an irrevocable trust, the settlor makes an irrevocable devolution of the trust assets to the trustee. In this way the transfer of assets is definitive. The settlor has no ability to cause the dissolution of the trust, to be appointed as a beneficiary, or to determine a reversion of the trust assets to himself. The beneficiary thus has a position comparable to that of the usufructuary.
Since the transfer of assets to the beneficiaries as a result of the establishment of an irrevocable fixed interest trust takes place without a counter-performance and the beneficiaries themselves obtain a legal claim which is enforceable in court, in accordance with the provisions of the trust deed, the transaction is regarded as a donation. The determination of the rate is governed by cantonal powers.
As part of the liquidation, the trust assets are transferred to the beneficiary. Since the trust assets had already been subject to gift tax at the time of its formation, these assets are not subject to further taxation.
Withholding tax refund
Since trusts are not mentioned in Art. 4, para. 2 of the LIP, their distributions to beneficiaries cannot be subject to withholding tax. In the absence of legal personality, the trust may also not file a claim for refund in its own name. In international relations, however, the regulations and references to double taxation conventions are not affected. These principles apply to all types of trusts.
NOTE: Further reading required
These considerations on the taxation of the Trust in Switzerland are of a general nature and are updated to the year 2021. A case-by-case analysis is necessary to get an accurate picture of your personal situation and the resulting tax impacts.