Switzerland and The Hague Convention
The Swiss Confederation is a civil law jurisdiction, well renowned for being the main worldwide independent financial centre and for constantly and consistently offering high quality financial, corporate and trust services.In this specific moment, where the requirements of security and public economy on the one side, and confidentiality and financial protection on the other side clash seamlessly, it is not surprising to see how this country, that has always been an example of perfect blend of both aspects, has eventually tried and succeeded in finding a tool able to combine the contrasting demands for control and confidentiality.Switzerland ratified the Hague Convention on the Law Applicable to Trusts of 1st July 1985 that came into force on 1st July 2007.This ratification is, among other things, the result of the thorough research and measured, thoughtful approach of last few years, aimed at understanding the main essence of the trust and including it in the legislation of the country in compliance with its main principles.Those operating in the business of trusts will probably agree that the best feature of this instrument is its flexibility that enables it to meet the specific needs of the settlor. It is not surprising, therefore, to see how the main worldwide Financial Authorities (although very differently from one another) are finding it difficult to define and develop a clear legal framework for the trust that complies with the fundamental legal principles and that can also be concretely implemented.The neighbouring Italy, unfortunately, stands as an example of this difficulty. Here, the Convention was ratified on 1st July 1985 (implemented through law no. 364 of 16th October 1989 and entered into force on 1st January 1992): however, today the provisions concerning trusts are still controversial, inconsistent and often even illegitimate.Switzerland, thanks to the aforementioned measured approach and to the research carried out by the most knowledgeable experts of the sector and including reacting to the experience of the neighbouring Italy, seems to have chosen a more coherent path, where a legal framework for the trust was clearly defined at the same time of law ratification.After a thorough research conducted among the main fiscal administrations and operators to investigate the current trends and the legal practices related to the trust, on 22nd August 2007 the Swiss Tax Conference (?STC?) published Circular no. 30. This was followed about seven months later, on 27th March 2008, by Circular no. 20 issued by the Swiss Tax Authorities (?STA?), which is essentially identical to Circular no. 30 and adopts its views on matter of direct federal taxation and withholding tax. Circular no. 30, also published in this Journal, has in our opinion managed to provide a coherent legal framework for trust taxation, thus allowing a certain stability and a legal certainty that is too often difficult to find.As it normally happens in these cases, though, the risk is to excessively simplify the most complex features of the trust that, among other things, make it the exceptional instrument that many professionals deal with on a daily basis.However, the Circular still remains a very good starting point because, despite such risk of simplification, it constantly refers to the main legal and fiscal principles already in force, thus representing a very good guideline for the most difficult cases that professionals working in this area constantly need to deal with.Because of the new features brought in by the ratification of the Convention, and due to the limited number of cases that prevented further studies in the past, the main references for this subject matter are the documents mentioned above, combined with some theory. As for the casework, it is still quite limited and not relevant for purposes of taxation of the trust. The taxation of the trust is almost completely administered by the federal state, except for those aspects that are not subject to tax harmonisation, like, for instance, inheritance or donation tax rates and relative definition of the degree of consanguinity.
We intentionally decided to avoid any comments or analysis with regard to the text of the Federal Decree ratifying the Convention, although it did introduce a wave of positive aspects. From now on, for clarity and consistency purposes, we will therefore solely refer to the aforementioned Circular no. 20.When analysing the Swiss context, we need to consider the federal direct taxation, the withholding taxation, the gift taxation, and, with regard to foreign residents, the international tax conventions, and namely the agreement with the EU concerning taxation on savings income.