SWITZERLAND Law and Practice Contributed by: Natalie Dini and Peter Vogt, Tax Partner AG
in-kind distributions are taxed as ordinary income on receipt, while a return of the original settled capital remains tax-free. In fixed-interest arrangements the Swiss beneficiary is usually taxed each year on the allocated share of income and wealth even if nothing is paid out. Swiss Resident Settlor When a Swiss person endows a foreign family founda - tion or foreign irrevocable trust, the initial transfer is treated as a gift and may trigger cantonal gift tax (pos - sibilities range from zero rate to maximum tax rates). Provided the structure is irrevocable and the founder/ settlor cannot unilaterally reclaim assets, the foun - dation’s/trust’s assets and income are thereafter excluded from the founder’s/settlor’s Swiss wealth and income tax base. 3.4 Exercising Control Over Irrevocable Planning Vehicles See comments in 3.3 Tax Considerations: Fiduciary or Beneficiary Designation . If the settlor retains (too much) control, the tax authorities will deem the struc - ture to be treated as tax transparent and will continue to tax the assets and income in the hands of the sett - lor. The most common vehicles for asset protection are still the family foundation or the foreign trust. See 3.1 Types of Trusts, Foundations or Similar Entities . Due to the fact that the Swiss family foundation is very restricted in its permitted purpose under Swiss Civil Law and there is no Swiss trust statute, families often use foreign structures. Once transferred, the assets are usually removed from the settlor’s legal ownership and placed under inde - pendent fiduciary control that shields the fund from future personal creditors, divorce claims or compul - sory Swiss heirship challenges. 4. Family Business Planning 4.1 Asset Protection
Swiss tax practice respects the structure so long as the settlor retains no dominant powers.
4.2 Succession Planning Family Holding Company
Founders commonly create a Swiss corporation that owns 100% of the operating firm(s). They keep a thin class A of voting-only shares and gift or bequeath the non-voting dividend class B shares to the next gen - eration. Because gifts to children are tax-free in most cantons and Switzerland has no federal gift tax, future growth accrues outside the parents’ taxable wealth base yet managerial power stays with the senior gen - eration until they are ready to step aside. Transfer of legal ownership, but with a usufruct or preferred dividend strip attached Founders can donate the shares today but reserve a lifelong dividend right (usufruct) or issue redeemable preference shares to themselves. The next generation acquires legal ownership immediately while parents keep the income they need. Sale to Heirs – Indirect Partial Liquidation Capital gains derived from the sale of privately held moveable assets such as shares in a corporation in principle benefit from a tax exemption. However, when an individual sells 20% or more of the shares in a com - pany to the buyer’s holding company (eg, to the acqui - sition company held by the heir), the deal can trigger the so-called indirect partial-liquidation rule leading to income tax consequences if, within the next five years, the company distributes pre-existing “excess” liquidity that helps repay the purchase price. Taking a dividend financed by surplus cash allows the company to equalise heirs without triggering the punitive indirect partial liquidation rules that can re- characterise a share sale as taxable income. Use of Inheritance Agreement Because Swiss law still gives children and spouses compulsory shares, parents who want the business to pass to one active heir ask the other heirs to sign an agreement in which they accept other assets instead of equity. Once signed, the waiver is binding and takes the sting out of the future estate settlement.
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