Recent Developments: Foundation and Trust Law

The number of foundations established in Switzerland has increased in recent years, particularly in the fintech and blockchain sectors. The legal form of the foundation is advantageous for FinTech and blockchain start-ups, as the establishment of a foundation in Switzerland can be carried out quickly within the framework of the legal regulations, and this legal construct implies a certain level of trust between the parties involved.

It is important for Switzerland to be able to stand up to international comparison, thereby promoting and strengthening Switzerland as a financial and business location. This is to be achieved in particular by offering private individuals and companies a range of new options for investing and managing their assets and thus structuring them individually for the long term. In pursuit of this goal, several initiatives to revise Swiss legislation have been launched and partially implemented in recent years.

Updates in the area of foundations in Switzerland

In 2021 Parliament decided to revise the Swiss Civil Code (CC) in the area of foundation law, which has now entered into force  on 1 January 2024. Foundation  law had already been revised as part of the company law revision on 1 January 2023 in connection with the risk of insolvency and over-indebtedmess and the disclosure of remuneration. The most important changes in the Swiss law on foundations are as follows: 

1) Extension of the founder's rights by extending the reservation of amendment to organisational changes: Under the old Law on Foundations, the founder could change the purpose of the foundation only if he had made a corresponding reservation in the deed of establishment. Now, the competent supervisory authority may change the purpose or the organisation of a foundation at the request of the founder or on the basis of the founder's last will and testament. This amendment of the foundation deed is possible if a change of purpose or organisation has been reserved and at least ten years have passed since the establishment of the foundation or since the last change of purpose or organisation requested by the founder (Art. 86a ZGB).

2) Minor amendments to the foundation deed: Minor amendments to the foundation deed are now possible, provided that they appear justified for objective reasons and do not affect the rights of third parties (Art. 86b ZGB). It is no longer necessary to provide valid objective reasons.

3) Form of amendments to the deed: Amendments to the foundation deed in accordance with Art. 85-86b ZGB are issued by the competent federal or cantonal authority or by the supervisory authority. It is expressly stated that public certification of the amendments is not required (art. 86c CC).

4) Appeals against foundation supervision: Previously, the law did not explicitly regulate appeals against the supervision of foundations. The persons entitled to lodge an appeal are now clearly defined. Thus, the beneficiaries or creditors of the foundation, the founder, the contributors as well as former and current members of the foundation council, who have an interest in ensuring that the administration of the foundation complies with the law and the foundation deed, may lodge a complaint with the competent supervisory authority against acts and omissions of the foundation bodies (art. 84, clause. 3, CC).

5) Imminent insolvency and overindebtedness: In case of imminent insolvency or overindebtedness, the supreme foundation body must immediately notify the competent supervisory authority (art. 84a CC).

6) Disclosure of remuneration: The supreme body of the foundation must disclose annually to the competent supervisory authority the total amount of the remuneration paid directly or indirectly to it and to any management (art. 84b CC in the sense of art. 734a clause 2 of the Swiss Code of Obligations). 

Modernisation of the Zurich practice on tax exemption (foundations and associations) 

As a result of the revision of the Foundation Law 2023, the Tax Office of the Canton of Zurich has now adjusted its practice on tax exemption based on charitable status. In addition to the practice on tax exemption, further changes to the ordinances have been included in the Zurich Tax Register. The following three changes are of particular importance: 

1) Remuneration of members of the foundation council and of the executive bodies of associations: Adequate remuneration of the governing bodies of a non-profit legal entity domiciled in the Canton of Zurich no longer precludes tax exemption. Due to the new obligation to disclose the remuneration of the foundation board, the tax authorities of the Canton of Zurich assume that the remuneration has been reviewed by the supervisory authority and assessed as appropriate. An audit by the tax authorities of the Canton of Zurich may be carried out in justified cases. 

2) Activities abroad: Charitable activities abroad that go beyond the previously permitted international cooperation will now generally be measured by the same standard as activities in Switzerland. 

3) Entrepreneurial financing models: Entrepreneurial financing models (loans [especially Social Impact Bonds and Development Impact Bonds], equity investments, convertible loans) are now not tax-exempt. Although a return of funds (repayments and interest on loans, income from participations, profit sharing) to the charitable institution is possible. The prerequisite is that foundations are active in areas where there is not yet a market - i.e. they do not compete with non-tax-exempt investors. 

The amended practice was applied from 1 February 2024 to all applications for tax exemption still pending with the tax authorities of the Canton of Zurich. For foundations and associations already established, the following applies:

• Foundations: Tax-exempt foundations that amend their deed due to a change in practice may apply for confirmation of tax exemption. Proof must be provided that the supervisory authority agrees to the changes (remuneration, change of purpose). This is because the purpose of the foundation can generally no longer be changed by the founder after it has been established. A change in the purpose of the foundation is only possible within the framework provided by law (art. 85 et al. CC).

In the Canton of Zurich, the "BVG- and Foundation Authority of the Canton of Zurich (BVS)" is the competent supervisory authority for foundations. The Federal Supervisory Authority for Foundations is responsible for the supervision of traditional foundations that operate throughout Switzerland and/or internationally. This does not include pension funds, church foundations and family foundations. The competent foundation supervisory authority can be found in the commercial register.

•  Associations: Tax-exempt associations that amend their articles of association to reflect changes in practice may apply for confirmation of tax exemption. To verify the appropriateness of the remuneration, a draft of the amendment to the articles of association, the remuneration regulations (actual remuneration per person according to type of activity [attendance fees, expenses]) and the annual accounts for the last three years must be submitted.

Changes in practice in the canton of Vaud regarding the remuneration of members of the boards of trustees of tax-exempt organisation 

On 29 January 2024, the tax administration of the Canton of Vaud clarified its practice on the remuneration of members of the governing bodies of tax-exempt entities based on their purely charitable purpose, i.e. members of foundation boards and association committees. Please note that this clarification only concerns the governing bodies of these entities, and not their employees or volunteers. 

Up to 60 hours per year of volunteer work by a trustee is considered voluntary, with the possibility of reimbursement of actual expenses. As an alternative to the reimbursement of actual expenses, a lump-sum payment of up to CHF 300 per meeting (equivalent to CHF 3,600 per year) is permitted, subject to prior approval by the tax authorities of the Canton of Vaud. These amounts remain tax-free and are not considered as salary. 

If a Board member devotes more than 60 hours per year to his or her duties, remuneration is generally accepted but must be specified in a regulation to be submitted to the tax authorities for approval. This document must specify in particular the duties expected of the position including the number of hours devoted to each task, the criteria for determining the allowance (with a maximum amount specified), and the terms of payment. This income is taxable, and a salary certificate must be issued. 

Family foundations

In December 2022, a motion was filed to amend the ban on family maintenance foundations..  The Federal Council proposed to reject the motion in February 2023. However, the Council of States adopted the motion in December 2023 and the National Council in January 2024. 

The Committee of the National Council voted in favour of the motion because, among other reasons, the motion on Swiss trust law was rejected, in particular because the tax aspects of the proposal were controversial, and a compromise seemed difficult to achieve. In view of the need for an instrument for estate and asset planning, the Commission supported the motion and thus the liberalisation of the Swiss family foundation as an alternative to the trust. The Commission points out that, unlike the trust, which originated in common law, the family foundation is already enshrined in Swiss law and there is a legal basis for the taxation of foundations. Lifting the ban on family foundations, as requested in the Motion, should therefore not cause the same problems as the introduction of trusts. 

The Federal Council is instructed to submit a dispatch to Parliament on the amendment of art. 335 CC, lifting the ban on family support foundations.

Trusts in Switzerland

 In the absence of a legal basis in Switzerland, the Federal Council launched a consultation on the introduction of a Swiss trust in January 2022. The introduction of a separate trust law was intended, among other things, to implement the tax treatment of trusts in federal law. At its meeting in September 2023, the Federal Council took note of the results of the consultation. At present, there is insufficient political consensus in favour of the introduction of a trust under Swiss law. In particular, the tax provisions were clearly rejected in the consultation. The Federal Council has therefore decided not to prepare a dispatch and no Swiss trust law is currently being drafted.

The trust is a flexible legal instrument often used in a family context for estate planning and the transfer of wealth across generations. Trusts are also used in business life to preserve, manage or secure assets, for example to finance investments and transactions. However, unlike foundations, Switzerland does not have specific legislation on trusts. Since the Hague Trust Convention entered into force on 1 July 2007, trusts established abroad are recognised in Switzerland. Nevertheless, foreign trusts are widespread in Switzerland and are currently taxed in accordance with the general tax principles and two circulars (KS 30 of the Swiss Tax Conference and KS 20 of the Federal Tax Administration).

How should these decisions be put into practice?

The revision of the Swiss Civil Code on Foundations not only makes it easier to amend foundation deeds, but also introduces far-reaching flexibility and selective simplifications in the structuring of assets by allowing the founder to exert influence retroactively. The published change in practice by the Canton of Zurich also strengthens Zurich as a location for foundations, in particular through the possibility of guaranteeing adequate compensation and operating abroad. It remains to be seen, however, what impact this will have on family support foundations.

Article written by André Kuhn and Dominique Roggo