Use the Lexology Navigator tool to compare the answers in this article with those from other jurisdictions.       

Trusts, foundations and charities


Are trusts legally recognised in your jurisdiction? If so, what types are available and most commonly used?

The concept of a trust does not exist under Swiss law. Therefore, it is impossible to settle a trust under Swiss substantive law.

However, since the ratification of the Hague Convention on the Law Applicable to Trusts and on their Recognition 2007 (known as the ‘Hague Trust Convention’), the Swiss courts have recognised trusts that are governed by the law of another jurisdiction as a sui generis foreign legal construct.

To be recognised, a foreign law trust must fall within the definition provided by Article 2 of the Hague Trust Convention.

What rules and procedures govern the establishment and maintenance of trusts?

There is no Swiss substantial law on trusts. However, since the ratification of the Hague Trust Convention, Swiss and foreign settlors can establish a trust under the foreign law of their choice. In addition, certain provisions of the convention were transposed into national law under the Federal Private International Law Act. The act gives the settlor substantial freedom to choose the law that will apply to the trust and if no such choice has been made, the law most closely connected to the trust will govern it.

According to Article 8 of the Hague Trust Convention, the law chosen by the settlor or, if no law was elected, the law most closely connected to the trust will govern the trust’s validity, construction, effects and administration.

How are trusts taxed in your jurisdiction?

The Hague Trust Convention and Swiss tax laws do not provide for the taxation of trusts. Nevertheless, the tax treatment of trusts under Swiss law is outlined in the August 2007 Taxation of Trusts Circularissued by the Conference of Cantonal Tax Directors (for an English translation, see here).

The taxation of trusts depends on the type of trust that was set up. The tax authority distinguishes between:

  • revocable trusts;
  • irrevocable discretionary trusts; and
  • irrevocable fixed interest trusts.

Therefore, depending on the circumstances, it may be advisable to set up one particular type of trust rather than another. For example, revocable trusts are treated as transparent for tax purposes regardless of the settlor, but irrevocable discretionary trusts are in principle transparent only if the settlor was a Swiss tax resident at the time of the settlement.

According to Swiss tax law, a trust is not considered to be a legal entity; therefore, it cannot be considered a taxpayer subject to direct taxation in Switzerland.

However, the settlors and beneficiaries of a foreign trust may be liable to taxation with regard to the assets and income of the trust if they are resident in Switzerland when the trust is established or when distributions are made after they move to Switzerland.

As a result, a trust’s assets and income are allotted either to the beneficiaries of the trust on the basis that any distributions from the trust represent taxable income or to the settlor according to the principle of transparency.

For income and wealth tax purposes, the circular distinguishes between irrevocable and revocable trusts.

In principle, where the settlor has retained a certain form of (direct or indirect) control over the trust’s assets (eg, the settlor is a beneficiary of the trust or has the power to designate a new trustee), the trust will be considered revocable and thus transparent for tax purposes. In such a case, the assets of the trust are treated as belonging to the settlor and all income is formally attributed to him or her. As a result, the assets and income of the trust remain taxable on the settlor at his or her place of residence.

Regarding irrevocable trusts, the circular also distinguishes between irrevocable fixed interest trusts and irrevocable discretionary trusts.

In the case of an irrevocable fixed interest trust, the beneficiaries are – from a tax perspective – treated by analogy to a usufruct, as they hold a legally enforceable claim on the trust assets. Swiss resident beneficiaries are therefore subject to wealth tax on their part of the trust assets and income tax on an ad hoc basis.

In the case of an irrevocable discretionary trust, the beneficiaries are considered to have a mere expectation on the trust’s assets because the time and amount of any potential distribution are at the discretion of the trustees. Therefore, beneficiaries are not taxable for wealth tax on any share in assets of the trust; however, they will be taxed on any distributions received.

Foundations and charities

Are foundations and charities legally recognised in your jurisdiction? If so, what forms can they take?

Charitable organisations and foundations are legally recognised in Switzerland.

Pursuant to Article 154 of the Federal Private International Law Act, charitable entities are governed by the law of the country in which they are organised. Therefore, Swiss law may apply only to charities that are set up in Switzerland.

While a wide variety of Swiss legal entities (eg, foundations, limited liability companies and associations) can serve charitable purposes, most take the form of foundations or associations.

A foundation or charity is not determined by the charitable activities that it carries out, but rather on whether it fulfils the criteria required to establish the selected legal form.

Foundations may have any kind of defined purpose. However, not all foundations are charities because this depends on whether the foundation pursues a charitable purpose. Associations, on the other hand, must perform the basic function of pursuing a non-economic purpose.

‘Family’ foundations, which are established for the upkeep of family members, are prohibited in Switzerland.

What rules and procedures govern the establishment and maintenance of foundations and charities?

The two legal forms used for charities are foundations and associations.

Swiss foundation law is primarily governed by Articles 80 to 89bis of the Swiss Civil Code, which cover the establishment, organisation and supervision of a foundation, as well as its modification and dissolution.

In short, a ‘foundation’ is a legal entity comprising a pool of assets irrevocably committed to one or more defined purposes. Once established, the foundation acquires full legal personality and therefore becomes the owner of the assets endowed for the particular purpose.

The founders – which can be a Swiss, foreign or even legal entity, and may include states or international organisations – can create a foundation by public deed or testamentary disposition.

In order to establish a foundation, the founders must contribute the assets, which must be proportionate to the foundation’s purpose. Whether enough capital has been brought to the foundation to ensure its existence and the furtherance of its purpose will be verified by the competent supervising authority upon the constitution of the foundation. According to the Federal Supervisory Board for Foundation, a minimum initial capital of Sfr50,000 must be contributed. The foundation acquires legal personality once it has been entered in the commercial register.

Once created, the foundation board is the supreme governing body and is vested with management and executive functions, including the administration and representation of the foundation. Foundations must in principle appoint an external and independent auditor in Switzerland. Further, Swiss foundations are subject to governmental supervision.

Associations in Switzerland are governed by Articles 60 to 79 of the Swiss Civil Code, which deal with their establishment, organisation and dissolution, as well as the rights and obligations of their members.

In short, a Swiss association is a non-profit legal entity with full legal personality, which need not be registered and acquires legal personality as soon as the intent to exist as a corporate body becomes apparent from the articles of association. Associations are not subject to governmental supervision and their supreme governing body is the general meeting of members, which makes all important decisions and has all powers that are not vested in other corporate bodies of the association.

How are foundations and charities taxed?

Foundations and associations are taxed on their net profit and capital. The applicable tax rate is lower than the one applicable to corporate entities (4.5% at the federal level, plus cantonal and municipal taxes).

Charitable foundations or associations pursuing a public-interest purpose can be exempt from profit and capital taxes. A specific tax exemption must be granted by the cantonal tax authority; however, such an exemption is granted only if strict conditions are met – notably:

  • The assets must be irrevocably attributed to the charitable entity and its purpose (no possible return to the founder).
  • Further, the charitable entity must not conduct any business activity and must effectively pursue its charitable purpose.

Click here to view full article.