Trusts and Foundations in Switzerland: Quo Vadis? Civil law and tax perspectives

Case Study 1: Last Will

1. facts

C is a tax resident in Bern. In 2011, she set-up an institution under the laws of Liechtenstein and stated in her last will to the institution to be the sole beneficiary. Further, the by-laws foresee her to be the primary beneficiary of the institution during her lifetime. Following her death, the by-laws provide for a succession plan according to which, among others, B (not a family member), being tax resident in Zurich (secondary beneficiary) shall receive a distribution of CHF 1m per year to be paid out in yearly instalments during ten years. There is no real estate in the institution.

Questions

• Would C have been able to provide the same under a Swiss foundation?
• Will the institution be recognized from a Swiss civil law perspective?
• Is there a recognition procedure from a Swiss tax law perspective?
• How is the institution set-up under the laws of Liechtenstein to be qualified during the lifetime of C from a Swiss tax perspective?
• What are the tax consequences according to Swiss law?
• How is the institution set-up under the laws of Liechtenstein to be qualified following the death of C from a Swiss tax perspective?
• What are the tax consequences according to Swiss law?

Case Study 2: Family Foundation

1. facts

A is an Italian national and lives together with his wife B (also an Italian national) and their two minor children in Kilchberg, Zurich. A has built up quite some wealth, mainly acquired during the marriage. Various circumstances have led A and B to reconsider their asset and income allocation. In particular, their aim is to protect their assets and to govern the situation following the death of A in order to ensure that their children are able to dispose of a larger amount of the assets after having reached a certain age (staggered approach).

For this purpose, A sets-up a family foundation ("FF") according to the laws of Liechtenstein with its statutory seat in Liechtenstein. The FF is capitalized with an endowment capital of CHF 30'000. A as founder has the non-transferable right to revoke the FF. During A's lifetime, A is the sole beneficiary of the FF. Following A's death, the following shall apply:

• The two children of A and B become subsequent beneficiaries ("beneficiaries"), each entitled to 25% of the foundation's assets and its earnings; B is entitled to 50% of the foundation's assets and its earnings;
• The distributions are staggered over a certain period of time (between 10 and 30 years following A's death). In each pay-out, between 25% and 100% of the foundation's net assets are distributed. Following these distributions, the foundation shall have no assets and be liquidated;
• B and two persons designated by A become members of the foundation board; and
• The beneficiaries get a legal claim to the distributions by the FF. The legal relationship between the beneficiaries and the FF is similar to that of a usufruct.

The FF opts for taxation as a private asset structure (PVS) in Liechtenstein. Thus, it is exclusively subject to minimum income tax in Liechtenstein. All legal entities that exclusively manage private assets in pursuit of their purpose and do not engage in any economic activity and meet certain criteria (e.g. no listing on any stock exchange, held only by individuals, etc.) are considered to be PVS.

The FF is considered to be a vicarious agent for the execution of the founder's will. The following assumptions apply:

• A, B and their children will continue to be subject to unlimited taxation in Zurich;
• The FF will not hold any real estate located in Switzerland.

Further, the foundation deed and the letter of whishes provide for the following:

During the lifetime of the founder:

• A retains control over the main decisions of the foundation;
• A can dissolve the foundation at any time;
• A is the chairperson of the foundation board and the main representative of the beneficiaries' meeting;
• A has the casting vote in the foundation board;
• A appoints the second member of the foundation board in the by-laws. Subsequently, A can de facto determine his reelection or his successor due to the casting vote in the foundation board.

Following the founder's death:

• The control over the FF passes to the beneficiaries (to B and the two children);
• A chairperson of the foundation board is elected by the beneficiaries' meeting. The chairperson is either one of the beneficiaries themselves or a trusted person. The chairperson always has the casting vote;
• The first board member (i.e. the second member during the lifetime of the founder) is already defined by name in the by-laws. The chairperson is the second board member. Successors are proposed by the first member in the will of the founder A. The term of office of two years and the casting vote of the second board member/chairperson ensure that the family retains control over the first board member;
• A third foundation board member is elected by the foundation board. Again, the term of office of two years and the casting vote of the second board member/chairperson apply;
• The letter of wishes is drafted in such a manner that the members of the foundation board have specific instructions. These provide for a staggered transfer of assets to the beneficiaries. When the foundation has fulfilled this purpose, it is to be dissolved.

Questions

• Would A be able to provide the same as set forth with respect to the FF for a Swiss foundation instead?
• Will the FF be recognized from a Swiss civil law perspective?
• Could the same result be achieved by the proposed Swiss trust from a Swiss civil law perspective?
• Is there a recognition procedure from a Swiss tax law perspective?
• What are the tax consequences during the lifetime of the founder?
• What are the tax consequences following the death of the founder?
• What would be the tax consequences if the founder would have set-up a UK trust instead of a foundation according to the laws of Lichtenstein?
  a. According to the current tax practice under the circular letters No. 20 and 30 during the lifetime of the settlor
  b. According to the current tax practice under the circular letters No. 20 and 30 following the death of the settlor
  c. According to the pre-draft of the Federal Council during the lifetime of the settlor
  d. According to the pre-draft of the Federal Council following the death of the settlor
  e. According to circular letters No 20 and 30 during the lifetime of the settlor if the trust were to be qualified as an irrevocable discretionary trust
  f. According to circular letters No. 20 and 30 following the death of the settlor if the trust were to be qualified as an irrevocable discretionary trust
  g. According to the pre-draft of the Federal Council during the lifetime and upon death of the settlor if the trust were to be qualified as an irrevocable discretionary trust