Federal Supreme Court ruling on the taxation of irrevocable fixed interest trusts in Switzerland

Summary of the article

Federal Supreme Court ruling 9C_677/2024 clarifies the taxation of assets held in irrevocable fixed interest trusts in Switzerland. If the beneficiaries' share of the trust assets cannot be clearly determined, taxation should be based on the capitalized income. Only if the beneficiaries' rights are clearly defined will the trust assets be allocated according to fixed quotas. The court also confirms that the structure chosen by the settlor must be respected in principle, provided that there is no abuse of the law. The decision shows how central the specific structure of beneficiaries' rights is to the tax treatment of foreign trusts.

Introduction

With regard to the tax classification of trusts, a well-established practice has been in place in Switzerland since 2007 thanks to Circular No. 30 issued by the Swiss Tax Commission (SSK), which provides legal and planning certainty for taxpayers. A recent Federal Supreme Court ruling (ruling 9C_677/2024 of September 8, 2025) clarifies how the circular must be applied in practice with regard to so-called "irrevocable fixed interest trusts." It specifies how these trusts are to be treated for wealth tax purposes for beneficiaries who are liable for tax in Switzerland.

Background: Trusts and wealth taxes

A trust is a legal relationship originating in Anglo-Saxon law in which the settlor transfers assets to one or more persons (trustees) who manage them for the benefit of beneficiaries. Trusts are generally recognized in Switzerland, even though they are not specifically regulated in either civil or tax law.

According to Circular No. 30 issued by the Swiss Tax Authority (SSK), the trust itself is neither subject to unlimited nor limited tax liability in Switzerland. The trustee is also not liable for tax on the trust assets according to the principle of taxation based on economic capacity, as he is not entitled to the assets despite formal ownership. As a result, the assets and income of the trust are attributed either to the beneficiaries or to the settlor.

In the case of an irrevocable fixed interest trust, the settlor permanently disposes of their assets. The circle of beneficiaries and the scope and timing of the distributions are specified in the trust deed, which means that the beneficiaries have an enforceable claim to the assets. According to section 5.2.2 of KS-SSK No. 30, the beneficiaries are treated as usufructuaries for tax purposes, which is why the trust assets and their income are attributed to them and they are subject to wealth tax on their share of the trust assets. Any capital gains are tax-exempt under Art. 16 para. 3 DBG and Art. 7 para. 4 lit. b StHG, provided that the share is held in private assets. Distributed trust income is generally subject to income tax.

The key issue in the Federal Court ruling

In its ruling 9C_677/2024, the Federal Supreme Court had to assess how the assets of a US family trust with several beneficiaries, including the taxpayer and his brother and their possible descendants, should be treated for tax purposes. The classification of the trust as an "irrevocable fixed interest trust" was undisputed. The disputed issue, however, was whether the trust assets should be capitalized for the purpose of determining the wealth tax of the taxpayer resident in Switzerland or whether they should be attributed for tax purposes on a 50/50 basis to the taxpayer and his brother based on the asset/trust ratio.

The decision of the Federal Court

The Federal Supreme Court has ruled that taxation based on capitalized income (e.g., using the capitalization rate according to the FTA price list) best reflects the principle of taxation according to economic capacity, as long as the beneficiaries' share of the trust assets cannot be precisely determined.

In the present case, the Federal Supreme Court confirmed the opinion of the lower court that the taxpayer's share of the trust assets cannot be determined. In particular, since the settlor designated not only the taxpayer himself and his brother, but also their (potential) descendants as direct beneficiaries of the trust, and since the payment conditions are flexible, a 50/50 split of the total trust assets between the taxpayer and his brother is not justified. This would not correspond to the actual power of disposal, as the taxpayer, despite his role as trustee, only has limited power of disposal over part of the trust assets. According to the Federal Supreme Court, this justifies the taxation of assets based on the capitalized value in this specific case.

Effects of the Federal Supreme Court ruling on tax practice

The ruling makes it clear that capitalization of income is an appropriate means of determining the economic capacity of beneficiaries if their individual share of the trust assets cannot be determined (e.g., an open group of beneficiaries). If, on the other hand, the beneficiaries have full power of disposal (e.g., if distributions are fixed on a pro rata basis) and the individual allocation is clearly determined, the trust assets are regularly allocated in accordance with the respective asset or trust quota.

Foreign trusts are generally recognized in Switzerland, and the specific structure chosen for the trust must be accepted unless it was chosen for the purpose of tax evasion or constitutes another form of abuse. If the settlor provides for flexible beneficiary rights in the trust deed, this must be respected. In this case, a proportional distribution cannot take place, as a rigid allocation is not in line with the settlor's intention. Rather, the capitalization of income corresponds to taxation according to economic capacity. The court is open-minded with regard to the applicable capitalization rate. In practice, however, it can be assumed that the authorities will follow the capitalization rates published by the FTA.

For taxpayers, trustees, and advisors, this ruling clearly shows that, in the case of foreign trusts, the specific structure of the beneficiaries' rights is decisive for tax treatment in Switzerland. Careful examination of the trust deed and the economic circumstances is essential in order to avoid unintended tax consequences. Where the beneficiaries' share of the trust assets cannot be clearly determined, the capitalization of income will generally be used as the appropriate basis for assessment. In practice, the tax classification of trusts in Switzerland is often determined in consultation with the tax authorities (ruling).