Ever since the Hague Convention on the Law Applicable to Trusts entered into force in Switzerland on 1 July last year, the Swiss courts and authorities have been required to recognise trusts, which have their origins in common law but are unknown to Swiss law. It is also now mandated by law that trust assets cannot be put at risk by a trustee’s bankruptcy.
The tax treatment of trusts, however, is unaffected by the Hague Convention; article 19 expressly leaves powers in fiscal matters in the hands of the individual contracting states. Existing laws must form the basis for tax issues pertaining to trusts. Consequently, the application of the Hague Convention is not directly reflected in the provisions of Swiss tax law. This raises the question of whether and how trusts (or trust assets) are to be classified as possible taxable entities, to what extent distributions from the trust assets are covered by what is known as the general income clause and are thus taxable, whether and to what extent capital gains are tax-exempt, and when and to who the respective taxes are due.
