Can I Create Trusts Under Swiss Law?

Can I Create Trusts Under Swiss Law?

Switzerland does not have a law relating to trusts (yet). However, it ratified the Hague Convention regarding trusts and agreed therefore to recognize trusts that are created in accordance to the convention.

Switzerland, as a civil law country, does not have a law relating to trusts. The creation of a trust under Swiss law is, therefore, not possible. It is noteworthy, however, that in 2018 the Swiss parliament mandated the Federal Council to create the legal basis for a Swiss trust and since then an expert group has been drawing up corresponding proposals for regulations.

Nevertheless, at the time of writing it is too early to say whether Switzerland will implement a law relating to trusts in the foreseeable future and how this law might look like. Thus, in the following it is described what Swiss alternative to the trust is available to a descendent under existing law and how he or she might arrange for the establishment of a trust to be governed by the law of another jurisdiction.

The Swiss Usufruct

The so-called usufruct, a limited right in rem that can be created for a maximum term of 100 years, is the closest that Swiss law comes to the concept of dual property rights as recognised in common law jurisdictions. The beneficiary of the usufruct is entitled to possess, enjoy and use the property during his or her lifetime. The right of disposition, however, is restricted in so far as it would affect the rights of the owner of the bare property.

Recognition of Foreign Trusts

Switzerland has ratified and put into force per 1 July 2007 the Hague Convention on the Law Applicable to Trusts and on their Recognition of 1 July 1985. Even though Swiss law still does not provide for trusts to be established under Swiss law, the Hague Convention permits to create a trust choosing a law—other than Swiss law—which recognises the trust. A trust created in this way is – as consequence of the ratification of the Hague Convention – also recognised in Switzerland.

As a second consequence of the ratification of the Hague Convention and in order to codify the concept of property separation between trust and trustee property in Swiss law, Switzerland made the corresponding amendments to the Swiss Debt Collection and Bankruptcy Act. Thus, trust property will be protected from personal creditors of the trustee.

However, Swiss succession law and especially the provisions protecting the compulsory portion of statutory heirs may conflict with the settlement of assets into a trust. The heir whose rights to a compulsory portion are infringed can file an action in court for reduction.

The Foundation of a Trust in a Last Will or Contract of Succession

Even though trusts that are created in accordance with the Hague Convention are recognized in Switzerland, it is controversial whether a testator can provide for the constitution of a trust in a last will or in a contract of succession. The common advice is to establish a trust during lifetime with a nominal trust fund and to bequest additional funding by testamentary dispositions.

Switzerland recognizes Trusts

Switzerland does not have a law relating to trusts but recognizes trusts that are created in accordance to the Hague Convention on the Law Applicable to Trusts and on their Recognition. Nevertheless, due to the controversy around testators providing for the constitution of a trust in a last will or in a contract of succession and the additional possibilities the Swiss usufruct offers, it is advisable to address the subject in good time and seek the advice of a professional. https://www.paltzerprivateclientslaw.ch/en/ 

Dr. Edgar Paltzer works as an attorney-at-law in Switzerland and counts estate planning among his specialist areas of expertise.

trusts

Edgar Paltzer

Paltzer

May foreigners acquire real estate in Switzerland?

May foreigners acquire real estate in Switzerland?

May foreigners acquire real estate in Switzerland?

The “Federal Act on Acquisition of Real estate by Persons living abroad” restricts the acquisition of real estate in Switzerland by foreigners.

The acquisition of real estate by persons abroad is restricted by the Federal Act on the Acquisition of Real estate by Persons living abroad (“Bundesgesetz über den Erwerb von Grundstücken durch Personen im Ausland”, hereinafter “the Act”). This Act is commonly referred to as “Lex Koller” or previously also “Lex Friedrich”. It restricts the acquisition of real estate in Switzerland by foreigners, by foreign-based companies or by Swiss-based companies controlled by foreigners.

As a rule, these categories of persons or legal entities require an authorization from the competent cantonal authority. Neither the fact that the real estate may have already been in foreign hands nor the legal cause of the transfer (i.e. purchase, inheritance, gift, merger, etc.) have a bearing on the application of the law.

The application of the Act is based on three criteria: (i) an acquisition of real estate within the meaning of the Act (ii) by a person abroad and (iii) none of the exceptions applies.

Persons abroad within the meaning of the Act

Within the meaning of the Act (i) natural persons, i.e. individuals, domiciled abroad and (ii) natural persons domiciled in Switzerland, who are neither nationals of the European Union (EU) nor nationals of the European Free Trade Association (EFTA) Member States and who do not hold a valid residence permit in Switzerland (so-called “permit C”) are considered to be persons abroad.

Companies with their registered seat abroad qualify as persons abroad within the meaning of the Act, even if they are Swiss-owned. Furthermore, legal entities or companies without legal personality but capable to own property, who are controlled by persons abroad, are also considered persons abroad, even if they have a registered seat in Switzerland.

Persons, who in principle are not subject to the Act may nevertheless qualify as persons abroad in case they acquire real estate on behalf of persons abroad.

Acquisition requirements

The authorisation requirements differ by the type of use of the real estate at issue. The acquisition of dwellings (single-family dwellings, apartment houses, owner-occupied flats and raw land on which such dwellings are to be built) is in general subject to the Act. As an exception from this rule, the acquisition of main residences, secondary residences for cross-border commuters from the EU or EFTA Member States and dwellings purchased in exceptional circumstances in conjunction with commercial real estate are not subject to the authorisation requirements of the Act.

Foreigners domiciled in Switzerland may acquire a dwelling or building land (provided that construction starts within one year after the acquisition) in their actual place of residence as their main residence without authorisation. In this case, the buyer needs to occupy the dwelling himself. Only one residential unit may be acquired without authorisation.

EU or EFTA Member States citizens commuting with a cross-border work (permit G) may acquire a secondary residence in the area of their place of work without authorisation. They are obliged to occupy the residence themselves.

Real estate used for commercial purposes may be acquired without authorisation. In this case, it is immaterial whether the real estate is used for the buyer’s business or rented resp. leased by a third party in order to pursue commercial activities. As an exception, living accommodations may also be acquired without prior authorisation in case this is necessary for the business.

The acquisition of undeveloped land in residential, industrial or commercial zones is in general subject to prior authorisation.

Exceptions

The Act provides several exceptions from the authorisation requirement: Legal heirs under Swiss law, relatives in line of ascent or descent from the person disposing of the property and their spouse or registered partner, buyers who already hold an interest in the real estate in joint ownership or co-ownership, condominium owners exchanging their units in the same building, buyers acquiring small areas to complement the real estate they already own and cross-border EU and EFTA commuters regarding secondary residences at their workplace do not need any prior authorisation for the acquisition of real estate.

Reasons for authorisation

The Act provides various special reasons for the authorisation. In case of holiday homes and serviced flats, the dwelling must be situated in a place designated as a holiday resort by the cantonal authorities. There are annual quotas assigned to the cantons by the Confederation for holiday homes and serviced flats that have to be met. https://www.linkedin.com/in/walter-h-boss-b9810610/

trusts

Walter H. Boss

Walter Boss

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Do I need a Single or Multi-family Office?

Do I need a Single or Multi-family Office?

An increasing amount of high earning business owners and families who have sold their businesses are turning to family wealth management offices to support them, instead of standard wealth management services.

When families weigh up the question of whether to set up their own single-family office (SFO) or use the services of an existing multi-family office (MFO), they often overlook the matter of the jurisdiction in which that family office should be. This is actually an essential element that deserves serious thought.

There are quite a few questions that need answering before deciding on the jurisdiction for a family office:

  • In which jurisdiction does the family need support?
  • What are the family’s goals?
  • What should the legal form be?
  • Which of the family’s (corporate) entities need to be managed, and by whom?
  • Which assets need to be preserved and protected?

All these considerations apply when establishing an SFO or choosing an MFO. You also need to select a country that is politically, economically and financially stable, provides easy access to financial service providers, and offers a sound infrastructure, and where staff is highly qualified and experienced.

A common mistake families make is to choose or create a family office in the same jurisdiction as where they live. Although this can be very practical, for example from a communication point of view, this is often not the best choice when examined from a wealth-preservation perspective. Because one of the primary roles of a family office is to safeguard assets, and to be able to assist the family under all kinds of circumstances.

A family office for wealth preservation

This means that the family office needs to be able to protect the family’s assets and interests against geographical, political, religious, personal and economic risks, while remaining fully operational under any circumstances.

Therefore, it is only logical that the family office should be located in a secure jurisdiction. Because unstable and unsafe jurisdictions outnumber the stable and safe ones by far, the majority of family offices will need to be located outside the home jurisdiction of the families they serve. This does not necessarily mean that the entire staff or all services must be located in a foreign jurisdiction; roles such as local secretarial support, lifestyle management services and local real estate management can be (partially) based in the family’s original jurisdiction.

In addition to providing stability and security, the jurisdiction of the family office must also:

  • Be easily reachable
  • Be tax-efficient
  • Allow the office to manage the family’s entities efficiently (holding companies, trusts, foundations, etc.)

Finally, most family offices prefer to be located in a jurisdiction known for having a reputable financial centre. It considerably simplifies the activities of a family office when it is in the vicinity of stable private banks and financial specialists with solid reputations and lots of experience.

All the essential requirements highlighted above ultimately limit the number of best possible jurisdictions to only a few and that is exactly why you find so many SFOs and MFOs in Switzerland.

Switzerland, the traditional safe haven

Switzerland is politically, economically and financially stable. It has been a neutral country since 1815 and has not been involved in any war since 1848. As Switzerland’s political regime is a so-called direct democracy, it is one of the few countries in the world where the population can have direct influence on all (proposed) federal and local legislation.

Switzerland’s economy is extremely stable. Thanks to broad diversification and strong domestic demand the Swiss economy has been growing steadily and has not been particularly weighed down by the worldwide economic and financial crisis. Thanks to its constitutional debt brake, the Swiss government has been able to produce a budget surplus every single year since the start of the financial crisis in 2008 and as a result Switzerland nowadays has one of the world’s lowest government debt ratios and is one of the few countries left with a AAA rating.

Swiss financial infrastructure

As mentioned, close proximity to solid private banks is key, as one of the primary tasks of a family office is to manage your wealth.  Swiss banks have been world leaders in the wealth management industry for a very long time and some of the best-capitalised banks in the world are located in Switzerland. A Swiss private bank stands apart from local private banks thanks to its expertise and experience in investments and investment classes from around the world.

A Swiss private bank is not only knowledgeable about the securities traded on your local stock exchange, it also advises you on the securities traded on all other international stock exchanges (contrary to, for example, US-based banks).

Switzerland also has a very attractive corporate income tax system. Rates are relatively low and Switzerland has signed agreements for the avoidance of double taxation with many countries. On top of that Switzerland is also a signatory to the Hague Trusts Convention thereby recognising the existence and validity of trusts. All this is backed up by Switzerland’s reputable, trustworthy and solid legal system and its topflight specialists such as tax advisors, law firms, wealth planning specialists, notaries, audit firms, etc.

Moreover, the infrastructure in Switzerland is world-class. Geneva and Zurich have highly developed airports with flight connections worldwide, many direct, and both city centres can be reached within twenty minutes from their respective airports.

Family office staff

Last but not least, highly experienced, motivated, reliable and educated staff with financial experience can be recruited or found in Switzerland. But even more importantly, when you intend to establish a SFO, such staff currently located elsewhere in the world can also be persuaded to relocate to Switzerland as it is considered one of the best countries in the world to live in, due to its very high living standards.

One of the best locations for a family office

All these elements make Switzerland one of the best locations to use a multi-family office or to establish your own single one. Because a family office is not only there to manage your wealth, but also to safeguard and protect it when your home country turns out to be less stable than you had hoped or expected.

https://www.linkedin.com/in/jan-van-bueren-0a522111

These archived articles are written by authors no longer participating in the Family Matters On Line project. These articles may still be relevant however. If you want more information please do not hesitate to contact us and we will try to put you into contact with the original author or another expert in family matters.

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Is immigration to Switzerland still attractive to persons with no gainful activity in Switzerland?

Is immigration to Switzerland still attractive to persons with no gainful activity in Switzerland?

Is immigration to Switzerland still attractive to persons with no gainful activity in Switzerland? Switzerland is an attractive country and is granting substantial tax benefits to immigrating foreigners. The advantages of Switzerland include: (1) Residence permit granted to EU-citizens without major problems, (2) Purchase of real property possible, (3) Low tax rates in certain cantons, (4) Lump-sum taxation, (5) No inheritance tax for spouses and children in most cantons.

Is immigration to Switzerland still attractive to persons with no gainful activity there?

If a person thinks about leaving his home country permanently and taking up residence in Switzerland, he will have to think about his desires for life in the future at first and then about the legal requirements to be met and the taxation ramifications. When I am asked by potential immigrants about the best place in Switzerland to live from a tax point of view, I always recommend them to take a car and to drive through Switzerland. Then they should come back to me and tell me which place they like best. It will normally be possible to find acceptable tax solutions in most of the places in Switzerland.

In a second step, the following main issues need to be addressed:

  • Residence permit;

  • Purchase of property;

  • Taxation.

Residence permit in Switzerland

 As a general rule, only persons aged 55 and above who have a close association with Switzerland and are not gainfully employed in Switzerland can obtain a residence permit with non-employed status. They must have the necessary financial means at their disposal. As an exception, foreigners without a close association with Switzerland can be granted a residence permit since 2008 if they are of particular financial interest to the canton.

This means, in practice, that a minimum tax, which may range from CHF 400’000.00 to CHF 1 mio., always depending upon the canton of residence, is agreed and annually paid. According to NZZ (24 May, 2014), 389 such permits have been granted until present.

Due to the bilateral Agreement on the free movement of persons between Switzerland and the EU and a similar agreement between Switzerland and the EFTA (“the Agreement”), EU/EFTA-citizens are entitled to obtain a residence permit in Switzerland provided that:

  • they have sufficient financial resources; and
  • health and accident insurance equivalent to Swiss health and accident insurance.

It is accordingly rather easy for an EU/EFTA-citizen to be granted a residence permit in Switzerland at present.

The situation may, however, change due to an amendment of the Swiss Federal Constitution caused by a federal vote of the Swiss people on the so-called Mass Immigration Initiative. 50.3% of the votes were in favour of this initiative, which provides that Switzerland shall control the immigration of foreigners itself in the future.

The result of this vote is in contradiction to the Agreement. Under the Agreement, the EU has the right to cancel essential parts of the bilateral agreements with Switzerland, unless a mutual understanding can be found within the next three years.

For the time being, nothing has changed in practice. Immigration of EU/EFTA-citizens is still covered by the Agreement until Switzerland has released a law introducing limits to the immigration of EU/EFTA-citizens. The Swiss government hopes to be able to find a solution for continuing the bilateral agreements with the EU in the future.

Purchase of property in Switzerland

Switzerland had traditionally heavy restrictions on the acquisition of real property by foreigners. Some years ago, the restrictions in respect of the purchase of commercial property were abolished. Foreigners with no residence in Switzerland do, however, still need a permit for the purchase of private property in Switzerland. A permit will only be granted in special cases, e.g., vacation apartments in certain parts of Switzerland (maximum 200 m2).

A citizen of the EU/EFTA is entitled to acquire commercial and private real property without limits, if he is a resident of Switzerland. For other foreigners resident in Switzerland, certain restrictions apply until they have been granted a C-permit.

Taxation – Income and Net Wealth Tax – Lump-Sum Taxation

A person resident in Switzerland is subject to unlimited tax liability in Switzerland. He will have to pay income taxes at rates ranging between 20% and more than 40% as well as net wealth taxes ranging from 0.1% to 1% on his worldwide income and net wealth. Real estate and permanent establishments abroad are exempt from Swiss taxation.

The tax rate heavily depends upon the canton and commune of residence. Whilst the overall income tax rate in Wollerau, Canton of Schwyz, is at present 18.5%, cities like Zurich, Geneva and Lugano have maximum income tax rates between 40% and 46%.

A special tax system, the so-called lump sum taxation, can be elected by foreigners who, for the first time or after an absence of at least ten years, take up tax residence in Switzerland and do not engage in any gainful activity in Switzerland. Under this system, Swiss income tax is levied on the basis of the living expenses rather than on actual income. Under federal regulations, the living expenses must amount to at least five times the annual rent or rental value of the owned property at present.

Due to new legislation, this amount will be increased to seven times of the annual rent and must not be lower than CHF 400’000.00 for federal tax purposes. Whilst the new rules will come into force as of 1 January, 2016, persons who are already subject to lump sum taxation will be granted a grandfathering until 1 January, 2021.

Some cantons have, abolished the lump sum taxation for cantonal tax purposes (most importantly Zurich), whilst other cantons have introduced similar provisions as the Federation. In addition, a net wealth tax is levied by the canton, the basis of which is normally determined by a capitalisation of the taxable income at a rate of 5%.

For each year, a comparative calculation between the agreed lump sum tax and the tax on Swiss source income, foreign source income for which treaty benefits have been claimed and Swiss net wealth has to be made. The higher amount will be the basis for the annual tax.

Several double taxation treaties concluded by Switzerland (Belgium, Germany, Italy, Canada, Norway, Austria and the US) only grant treaty benefits to a person resident in Switzerland, if such person is subject to the generally imposed income taxes in Switzerland with respect to all income from the respective state. As a consequence, Switzerland introduced the so-called modified lump sum taxation.

Under this system, which can be elected for each state separately, the income from sources of the respective state needs to be included in the aforementioned comparative computation with the result that such income is deemed taxed in Switzerland under the respective treaty. According to my experience, this method seems, however, not to work with the US. In case of US source income, it is, therefore, recommended to agree with the cantonal tax administration to have such income subject to ordinary Swiss taxes.

On 19 October, 2012 a federal initiative regarding the abolition of the lump sum taxation on the federal and cantonal level has been filed. It is expected that the vote on this initiative will take place in 2015.

Should the majority of the voting people and cantons accept this initiative and thereby cause an amendment of the Swiss Federal Constitution, a law concerning the abolition of the lump sum tax will have to be released within three years. The acceptance of this initiative would, therefore, mean that the lump sum tax system would be abolished in Switzerland in 2018. It is not yet known, whether there will be any grandfathering rules.

Social security contributions

Persons who are resident in Switzerland and do not exercise any gainful activity in Switzerland are subject to Swiss social security contributions until age 64 for women and age 65 for men. The annual contribution per person depends upon the living expenses and the net wealth of the individual and amounts for the time being to a maximum CHF 24’800.00.

Inheritance and gift tax

For the time being, inheritance and gift taxes are only levied by the cantons. In most of the cantons, spouses and descendants are exempt from inheritance and gift tax, whilst the tax rates can be higher than 50% for third persons.

The canton of the last residence of the testator is entitled to levy the inheritance tax from the heirs. The residence of the heirs is not relevant for Swiss inheritance tax purposes. If the testator lives, e.g., in Monaco and gives a large portfolio to his heir resident in Switzerland, Switzerland is not entitled to levy any inheritance tax. Should the testator, however, be a Swiss resident and the heir a Monaco resident, the heir in Monaco would be subject to Swiss inheritance tax.

In 2011, an initiative for an amendment of the Federal Constitution was launched according to which inheritances exceeding CHF 2 mio. and gifts exceeding CHF 20’000.00 per year and person shall be taxed on  the federal level at a rate of 20%. The competence of levying inheritance taxes would thereby be transferred from the cantons to the federation. This initiative is not family friendly at all due to the fact that descendants and third parties will pay inheritance taxes at the same rates. Only spouses shall be exempt from inheritance tax.

It is very difficult to foresee, whether this initiative will be accepted in the federal vote which will most likely only take place in 2019 due to several complex issues. https://allemann-recht.ch/

The benefits of mediation in family disputes

The benefits of mediation in family disputes

Can mediation solve family disputes? And if so what are the benefits of mediation in family disputes? Families are complex systems with several players. The way in which they function involves a combination of rational and emotional elements. It is only natural that people with their own individual talents, interests and perspectives do not always get along harmoniously. Spouses, children (clash of generations) and other members of the family system can all experience conflicts.

Can mediation solve family disputes?

Isolated and limited measures often fail to achieve any sustainable and positive effects. Legal action and other forms of enforcement of unilateral interests can certainly lead to results, but also to hurt and long-harboured resentment. The latter situation is particularly undesirable if children are involved.

Mediation is not magic but a practical craft. It is based on an acceptance that conflict exists and that it can be addressed. However, the result is not a foregone conclusion. In some cases the conflicts can be completely resolved. In other cases this is not possible, but it at least results in the consensual resolution of the consequences of a conflict. In this way the original conflict is contained and prevented from further escalating.

This in itself can be a considerable advantage if one thinks of the financial and psychological consequences of litigation that could stretch over many years. In mediation the parties have the opportunity of settling their issue by mutual agreement. The alternative to this is often a legal judgment, which can sometimes be difficult to predict in advance.

The process

The process is led by a neutral mediator (or by two co-mediators), whose core role is to help the parties work out a solution. The process can vary, but the common principle is that the participants clearly define where they are coming from and identify the interests underlying their personal perspective. What a person explicitly says and what their actual concerns are can sometimes be two quite different things. It is only once this groundwork has been carried out that fruitful and creative solutions can be found. These must be recorded in writing at the end of the process.

Sessions can be held in a choice or combination of different settings:

  • The traditional set-up consists of individual meetings over several weeks.
  • In the case of one-day sessions the participants begin in the morning and work in an open-ended fashion; and it finishes in the evening, whether or not a solution has been reached.
  • In shuttle sessions the participants are in separate rooms, at least for some of the time, and the mediator moves between them.
  • The participants can always have their lawyers or advisors with them during the sessions.
  • Hotel sessions, which are mainly one-day sessions, take place in a peaceful hotel.

Mediation is thus an option for working on family disputes in an effective and solution-oriented manner. https://allemann-recht.ch/
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