Banking secrecy and discretionary trusts

Tuesday, 01 May 2012
Switzerland remains a jurisdiction for discreet estate planning for international family clients.

Despite some concerns that the integrity of Swiss banking secrecy has been irreparably damaged by recent developments, there remain good reasons to keep faith in the discretion and security of Switzerland as a wealth-management jurisdiction, in particular where discretionary trusts are concerned.

Since the information exchange agreement relating to UBS accounts was concluded between the US and the Swiss Confederation in August 2009, the Swiss financial sector may be forgiven for feeling that it has been subject to a stream of attacks from external sources. During that period, significant media coverage has been devoted to these assaults and the extent to which Swiss banking secrecy may have suffered.

Switzerland has traditionally been perceived as a jurisdiction with a bulletproof banking secrecy regime – a secrecy that was codified in 1934 and that has subsequently been a flagship characteristic of the jurisdiction. There have always been circumstances in which banking secrecy would be lifted, such as cases of serious crime (including tax crime). However, Switzerland has more recently acceded to broader administrative exchange of information in tax matters and is presently assimilating wider initiatives, such as the EU Savings Tax Directive and the Foreign Account Tax Compliance Act.

A direct consequence is that Switzerland is no longer – if it ever was – a jurisdiction for estate plans built on secrecy rather than ordinary, tax-compliant succession planning. In an environment in which most major industrialised nations are urging full and automatic exchange of information, Switzerland continues to do its utmost to defend the legitimate rights of individuals to financial privacy. By way of example, it has included wording in its renegotiated tax treaties to prevent the use of stolen data to pursue account holders, and has ensured that the recent ‘Rubik’ agreements with Germany and the UK preserve the anonymity of account holders.

A further example came in the context of the UBS agreement, in which the Swiss Federal Administrative Court heard 380 appeals by US persons. Key to the determination of judgments was annex 10 of the UBS agreement, which set out the broad criteria for identifying persons relevant to an Internal Revenue Service information request, stating that ‘US persons (irrespective of their domicile) who beneficially owned “offshore company accounts”’ should be considered to be within scope. The annex did not contain a definition of ‘beneficially owned’ and the Swiss Courts determined that such a concept should be viewed in terms of the economic reality of each case, not necessarily by the application of statements made in the trust or banking documents.

Switzerland continues to do its utmost to defend financial privacy

The Swiss Courts decided they should look into the extent to which a US person retained power to dispose of and control the assets and income in an account; the greater the degree of power, the more likely the economic reality is that the US person is a beneficial owner. This approach was applied in those appeals subsequently heard by the Court concerning discretionary trusts. The result is that some clarity as to the position of discretionary trusts in the eyes of the Swiss Courts has been reached, confirming that the discretionary beneficiaries of a properly constituted discretionary trust should not be seen as the beneficial owners of the trust’s assets.

The Swiss Courts were mindful in particular of the established trust principles concerning the rights of beneficiaries and notions of equitable ownership, as set out in the Hague Trust Convention on the Law Applicable to Trusts and on their Recognition. They identified the following as characteristics of properly constituted discretionary trusts, the assets of which will not be viewed as ‘beneficially owned’ by the discretionary beneficiaries: where a US settlor-beneficiary is concerned, the irrevocable nature of the trust; where a trustee’s discretion is to accumulate income, rather than to distribute it between the discretionary beneficiaries; and where the beneficiary does not have signature rights or management rights over the trust account.

In addition, the Swiss Courts noted that, where a trust is stated as being revocable, US persons who are discretionary beneficiaries (other than in the case of settlor-beneficiaries) cannot be treated as having acquired beneficial rights over trust assets, as the settlor of a revocable trust has not, from a Swiss point of view, economically divested themselves of the assets while the power to revoke remains exercisable.

Consequently, the Swiss Courts have refused to permit the disclosure of information relating to discretionary beneficiaries to the IRS. This may be an important confirmation of the Swiss approach to beneficial-ownership questions about assets within the scope of the recent tax information exchange agreement with the UK. They stated that a UK resident will not be a ‘relevant person’ under the agreement if ‘it is not possible to ascertain the beneficial ownership of such assets, e.g. because of the discretionary nature of the arrangement’.

Author block
Matthew Shayle

Matthew Shayle is a Solicitor in the Private Client and Tax teams of Lenz & Staehelin, Geneva.

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