The taxation of trusts

The circular of the Swiss Tax Conference

Because the trust is unknown to Swiss private law, it is also unknown to Swiss tax law. Neither the Federal Act on Direct Federal Tax nor the Tax Harmonisation Act mentions it. The tax treatment of trusts rests entirely on administrative practice, which the Swiss Tax Conference, the association of the cantonal tax administrations, laid down in its Circular No. 30 of 22 August 2007 on the taxation of trusts. The Federal Tax Administration adopted the same principles for the direct federal tax in its Circular No. 20 of 27 March 2008, which reproduces the text of the conference circular.¹ The circular was a response to the ratification of the Hague Convention. Since 2007 it has governed the taxation of trusts in all cantons, including Zurich, and it remains in force in September 2026.

The circular starts from the principle that the trust is not a taxable person. Its assets and income are attributed either to the settlor or to the beneficiaries, depending on the type of trust. The circular distinguishes three types. In a revocable trust the settlor keeps the right to revoke the trust and to reclaim the assets, so that no definitive divestment takes place. In an irrevocable fixed interest trust the trust deed determines the beneficiaries and their entitlements, and the trustee has no discretion in the allocation of income or capital. In an irrevocable discretionary trust the deed names only classes of beneficiaries, and the trustee decides who receives what, so that the beneficiaries hold mere expectancies.² This three-fold classification is an administrative construction. English trust law knows many more variations, and Swiss advisers spend much effort determining into which category a particular deed falls.

Revocable and irrevocable trusts

For a revocable trust the consequences are simple. The assets and income continue to be attributed to the settlor, who is taxed on them as if the trust did not exist. Distributions to beneficiaries are treated as gifts from the settlor and are subject to cantonal gift tax where applicable. For an irrevocable fixed interest trust, the assets and income are attributed to the beneficiaries in proportion to their entitlements. Current distributions are taxable income of the beneficiary. The settlement itself is a gift from the settlor to the beneficiaries.³

The irrevocable discretionary trust is the most common form in practice and the most delicate for tax purposes. Its treatment depends on the residence of the settlor at the time of settlement. If the settlor was resident in Switzerland when he established the trust, the circular does not accept that he has definitively divested himself of the assets. The assets and income continue to be attributed to him, with the same consequences as for a revocable trust. The circular justifies this rule by reference to Article 335 of the Civil Code and to the principles against tax avoidance. A Swiss resident cannot achieve through a foreign trust what Swiss law forbids him to achieve through a Swiss family foundation. If the settlor was resident abroad when he settled the trust, the trust assets are attributed neither to him nor to the beneficiaries while the trust lasts. Distributions to Swiss resident beneficiaries are taxed as income when received. A beneficiary may, however, show that a distribution represents the original capital contributed by the settlor, which was treated as a gift at the time of settlement and is therefore exempt. The burden of proof lies on the taxpayer. Capital gains realised by the trust do not keep their tax-free character when they are distributed.⁴

Consequences for practice in Zurich

These rules shape the planning of every foreign family that moves to Zurich with an existing trust. If the trust was settled while the settlor lived abroad and is genuinely discretionary, it can in principle remain in place after the move. The settlor is not taxed on the trust assets, and Swiss resident beneficiaries are taxed only on distributions of income and gains. The careful separation of capital from income in the trust accounts then becomes a matter of real financial importance, because only distributions of original capital escape income tax. Trustees who administer trusts with Swiss resident beneficiaries therefore keep records that allow the capital to be traced over many years. Where the settlor retains powers that bring the trust close to a revocable trust, the analysis changes. Tax administrations look at the reality of the settlor’s control, including letters of wishes, the identity and independence of the protector and the history of distributions.

For a settlor who is already resident in Zurich, a new discretionary trust offers no tax advantage. The assets remain attributed to the settlor, and the eventual distributions may trigger gift or inheritance tax depending on the relationship between settlor and beneficiary. Zurich exempts spouses and direct descendants from inheritance and gift tax, so that for the core family the trust is fiscally neutral, although it may still serve purposes of asset protection, governance or succession.⁵ Advance tax rulings are common in this field and are regularly obtained from the Zurich cantonal tax office before a trust relationship with a Swiss connection is created or modified.

A further issue concerns withholding tax. Swiss companies deduct 35 per cent withholding tax from dividends and interest. A trust cannot reclaim this tax, because it is not a taxable person. The circular provides that, before an actual distribution, no refund of withholding tax is possible for a discretionary trust.⁶ For trusts with significant Swiss equity holdings this results in a real cost, which advisers take into account when they decide whether Swiss shares should be held by the trust directly or through an underlying company.

Notes

1. Federal Tax Administration (ESTV), Circular No. 20, “Besteuerung von Trusts”, 27 March 2008, https://www.estv.admin.ch/dam/de/sd-web/oFjV8C0p36UV/dbst-ks-2008-1-020-dv-de.pdf. ↩
2. Swiss Tax Conference (SSK), Circular No. 30, “Besteuerung von Trusts”, 22 August 2007, sections 3.7.1–3.7.3, https://www.ssk-csi.ch/fileadmin/dokumente/kreisschreiben/KS_30_d.pdf. ↩
3. SSK, Circular No. 30 (2007), sections 5.1.2 and 5.2.2, URL as above. ↩
4. ESTV, Circular No. 20 (2008), section 5.2.3, URL as above. For a settlor resident in Switzerland at the time of settlement, the assets and income “werden … weiterhin dem Settlor zugerechnet”, with “die gleichen Steuerfolgen wie bei einem Revocable Trust”. ↩
5. ESTV, “Erbschafts- und Schenkungssteuern (Stand der Gesetzgebung: 1. Januar 2025)”, table for the canton of Zurich showing the surviving spouse and children, grandchildren and great-grandchildren as exempt from inheritance and gift tax, https://www.estv2.admin.ch/stp/ds/d-erbschaft-schenkung-de.pdf. The details are discussed in chapter H.V. ↩
6. ESTV, Circular No. 20 (2008), section 7.2.3, URL as above. ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of September 2025.