Trust and illegal tax avoidance
Summary of ATF 9C_715/2022, of 19 July 2023
In two recent judgments, rendered in the same case (the Arrêt du Tribunal fédéral ("ATF") under review and the ATF of 25 November 2022, 2C_700/2022), the Swiss Supreme Court (Tribunal fédéral "TF") examines whether the creation of an irrevocable foundation or trust under foreign law, through the transfer to this foundation or trust of very important corporate and industrial assets, constitutes a case illegal tax avoidance.
At the end of a tax recapturing procedure for the 2010 and 2011 tax years, a Geneva taxpayer (the "Taxpayer") had considerable amounts of direct income and wealth taxes recaptured by the Geneva cantonal tax authorities (Administration fiscale cantonale de Genève "AFC"). The amount of the tax recapturing, taking all taxes together, was approximately CHF 57,900,000, plus a fine for illegal tax avoidance of of ¾ of this amount (i.e. a further approximate amount of CHF 43,000,000; editor's note).
Originally, the Taxpayer held 100% of the capital of a holding company ("HoldCo"), which directly and indirectly held all the companies of a multinational industrial group, which had become world number 1 in its field of activity.
In 1992, the taxpayer irrevocably transferred the HoldCo shares and all the rights attached to the group to a Liechtenstein foundation (the "Foundation"). In 2009, the Foundation divested itself of the HoldCo shares in favour of a Singapore fund, which was held by a trust structure (the "Structure"). The Taxpayer is both a beneficiary of the Structure and a member of the group's management.
The AFC was made aware of the link between the Taxpayer and the group through press articles. The AFC notes, however, that the taxpayer's tax returns do not mention any of the assets linked to the group.
The TF first examined the question of possible statutes of limitations and time limits and concluded that the tax assessments had been made on time.
It then examined formal complaints concerning an alleged violation of the administration of evidence and the right to a fair trial, in relation to the refusal of the AFC to disclose the tax file of a company or to follow up on the offer of evidence to call four witnesses (c. 7 et seq. of the Judgment). The TF dismissed these complaints on the grounds that there was no link between the company's tax file and the proceedings underway and that the four witnesses, members of the Foundation or group executives, were in fact in a quasi-subordinate professional relationship with the Taxpayer, which compromised the relevance of the testimony.
The central question examined by the TF was whether or not the creation of the Foundation, the Singapore fund and the Structure constituted a case of illegal tax avoidance (paragraph 10 of the ATF). The TF recalls the three cumulative conditions for illegal tax avoidance, namely (i) the choice of an unusual, inappropriate or strange legal form, (ii) this choice is abusive in the sense that it only aims at a tax saving and (iii) if the chosen procedure is admitted by the tax authorities, it actually leads to a significant tax saving. If these three conditions are met, taxation is based not on the form chosen, but on the economically appropriate situation.
The TF proceeded to the analysis of the case in question and held, in substance, on the one hand that the Taxpayer had remained a beneficiary of the Structure, that as such he had received significant distributions (approaching one hundred million EUR), and on the other hand that his capacity as director and/or administrator had enabled him to retain economic control of the group. The TF did not accept the Taxpayer's argument according to which he was not a manager, but only one of several directors, and that as such he could not dispose of the group's assets. In the TF's view, the considerable distributions received, on the one hand, and the Taxpayer's contradictions throughout the proceedings as to his role and functions within the group, on the other hand, were indications that he indeed had kept control of the Structure.
In addition, the Taxpayer was unable to demonstrate that the Structure had been set up for purposes other than tax, such as inheritance or anti-competition purposes. The Structure thus had no other purpose than to conceal the identity of the owner of the group's assets and therefore constitutes a case of illegal tax avoidance
The appeal is rejected and the Taxpayer remains liable, by a look through approach, for an amount of tax of the order of CHF 100,000,000, including fines, linked to the assets of the Structure and the resulting income.
3. Conclusion and discussion
This judgement confirms the restrictive approach to the tax treatment of trusts, applied nationwide by most cantons, in this case Geneva.
For a trust to be recognized for tax purposes and benefit from opacity treatment, the settlor (or founder) must divest himself of the assets placed in the trust, not be (or his/her spouse) a beneficiary of the trust and not have management powers, or other position, that would enable him to retain economic or legal control over the assets. The settlor must therefore contemplate a definitive transfer of assets to the trustee for the benefit of the trust's beneficiaries. Where applicable, the settlor must be able to establish reasons, other than tax reasons, justifying the choice of the trust, e.g. for inheritance planning.
Provided these principles are respected, trusts enjoy tax opacity in Switzerland, particularly in the French-speaking cantons, and the assets and income derived from them are not subject to taxation until a distribution occurs. The beneficiaries will then be taxed on these distributions if they are resident in Switzerland for tax purposes.
However, this restrictive tax practice takes little account of the trust law, which limits the beneficiaries' access to the assets or income of an irrevocable trust, and empowers a trustee alone to take all decisions relating to distributions (discretionary trust). Beneficiaries have no right to decide what will be paid to them by the trust. Tax practice appears schematic and takes only imperfect account of the complexity of each situation. The fact, for example, that a settlor, who is not a beneficiary, retains a management position in a group of companies contributed to a trust should not, in itself, be sufficient grounds for denying the trust's existence. In our view, one cannot assume that the settlor's economic and strategic influence on the group have an automatic connection with the distributions that a trustee, endowed with discretionary powers, might make to the beneficiaries.
In any event, the tax treatment of a trust should always be subject to an advance tax ruling request with the Swiss tax authorities of the place where the settlor and the beneficiaries are residents, before the trust is set up. Only then can the tax treatment of a trust be secured.
On another note: New practice in Geneva on the taxation of employee incentive plans.