The Geneva Court of Appeal published a judgment concerning the Swiss Federal Taxation of Trusts Circular. It held that, despite a certain regularity of distributions, a trust could still be deemed discretionary for tax purposes.
Facts:
In 1939, Mr D settled an irrevocable US trust for the benefit of his descendants, providing that the net income (or the part determined by the trustee) should be distributed, at least twice a year, in the manner the trustee found the most appropriate.
In 1979, Mr D’s great-granddaughter, Mrs A, relocated to Switzerland. In 2011, the Geneva Tax Administration (GTA) decided that the trust was in fact a fixed interest trust, in view of the regular annual distributions A received – meaning that these distributions had to be capitalised for computing her wealth tax.
On appeal, the Geneva Administrative Court confirmed the GTA’s decision, given the regular quarterly distributions that A had received over more than 10 years. Mrs A appealed.
The Court’s holding:
The Geneva Court of Appeal ruled in favour of the beneficiary. It noted that the trust had been settled prior to Mrs A’s relocating to Switzerland, that she wasn’t named in the deed but only part of a generic class of beneficiaries, that she had no say in the trust’s management, and that the trustee enjoyed large powers as to the principle, amount and frequency of distributions. In particular, although the trustee had regularly distributed similar amounts of income for the last 10 years, Mrs A hadn’t received any distribution in 2006, thus demonstrating the trust’s discretionary nature. This conclusion was strengthened by the fact that there was absolutely no hint of any tax evasion.
Therefore, the trust had to be treated as a discretionary trust in accordance with the Swiss Federal Circular n° 20 on the Taxation of Trusts. Thus, Mrs A was only liable to pay income tax on the distributions she received, but these distributions couldn’t be capitalised for wealth tax purposes.
Comments:
A borderline case, but a beacon of light for beneficiaries. Trustees of irrevocable discretionary trusts should avoid making (too) regular distributions to Swiss-resident beneficiaries, failing which these will be requalified into fixed interest trusts.
Once again, the Swiss court perfectly considered the Hague Trust Convention, especially article 19 HTC, and the US-Swiss double taxation treaty.
The link to this judgment, ref. ATA/54/2016, of January 19th 2016 (in French) is available here.