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Transferring real estate into trust

  • Author : Marie-Noëlle Zen-Ruffinen
  • Date : April 2011
ABOUT THE AUTHOR: Marie-Noëlle Zen-Ruffinen TEP is Associate Professor (University of Geneva), PhD in law, Attorney-at-law (Partner, Tavernier Tschanz, Geneva), M Phil

Since the Hague Convention on the Law Applicable to Trusts and on their Recognition (1985) (‘the Hague Convention’) entered into force in Switzerland on 1 July 2007, there has been no doubt that it is possible, in principle, to transfer Swiss real estate into trust. The Hague Convention entitles a trustee who desires to register an asset ‘to request its registration in his capacity as trustee or in such other way that the existence of the trust is disclosed […]’. Swiss law gives a concrete form to this registration by specifying that a trust relationship can be registered in the land register.

However, the transfer of Swiss real estate into trust raises major difficulties. This is mainly due to the existence, in Switzerland, of a law restricting access to property by foreigners (Lex Koller). This law applies when Swiss real property is transferred into trust, whatever the law governing the trust.

The principles of the Lex Koller

The rules laid down by the Lex Koller (completed by a federal ordinance and cantonal and/or communal implementing laws) are complex. The basic principle of the Lex Koller is that a ‘person abroad’ must receive an authorisation to acquire real property in Switzerland.

It is therefore essential to determine those who are ‘persons abroad’ according to this law and who therefore must in principle seek an authorisation. These persons are, in particular, foreigners living abroad and foreigners living in Switzerland who are neither citizens of a European Commission/European Free Trade Association (EC/EFTA) member country, nor hold a Swiss permanent residence permit (permit C). Swiss nationals are not ‘persons abroad’ within the meaning of the law, even if they are living abroad.

The acquisition operations subject to the Lex Koller are very broadly construed. The economic result is decisive: the deed only needs to grant the acquirer a position that is similar to that of the owner (for instance, the acquirer is granted a right to occupy or to purchase the real property; they benefit from a long-term rental contract that allows them not only to use the real property but also to transform or extend it; they fund more than two-thirds of the acquisition or construction of the real property, with the possibility of the funding exceeding this threshold if the acquirer is a bank).

The implementing ordinance of the Lex Koller requires that the ‘person abroad’ who wishes to acquire a residential property (main residence, second residence or holiday residence) does so directly and in their own name; it thus prohibits any fiduciary acquisition for this type of asset or any acquisition through a company. Moreover, only physical ‘persons abroad’ (to the exclusion of legal entities subject to the Lex Koller) can acquire this type of asset.

The Lex Koller sets forth some exceptions to the authorisation system. In particular, acquisition is possible without authorisation and without restriction when it concerns a permanent establishment, namely real property that is only used for commercial purposes (e.g. factories, storehouses, offices, retail centres, stores, hotels, restaurants, medical practices). In this case, the transfer into trust is always possible, irrespective of whether the trustee personally carries out the economic activity or rents or leases the real property to a third person who carries out such an activity. Moreover, the acquisition of a residential property is not subject to authorisation when the acquirer is either a relative in ascending or descending line of the transferor, or the latter’s spouse, or a person who is already a co-owner or joint owner; the same applies when the acquisition is made through inheritance by a legal heir. However, in all these cases, the acquisition must be made directly and in their own name.

Specific difficulties linked to transferring real estate into trust

When reconciling the possibility of transferring Swiss real estate into trust with the Lex Koller, major difficulties can be encountered, mainly in two respects.

First, what are the criteria for determining whether the contemplated transfer into trust is subject to the Lex Koller (e.g. the nationality and/or domicile of the trustee, of the beneficiary or of the settlor)? This is a key question. If the Lex Koller does not apply because there are no ‘persons abroad’ within the meaning of the law, there should be no restrictions on transferring Swiss real estate into trust (in particular, the acquisition would not be required to be direct and in their own name). Conversely, if the Lex Koller applies, the acquisition must be made directly and in their own name.

Secondly, when the Lex Koller applies, does the rule that states that a person who desires to acquire a main residence, a second residence or holiday residence must do so directly and in their own name, disqualify any acquisition of this type of property through a trust?

Practical application by the authorities

The practical application is still in its early days. Few decisions have been issued to date in cases concerning the transfer of Swiss real estate into trust. Moreover, the decisions and positions taken by the authorities are far from uniform.

The Federal Tribunal (the supreme court in Switzerland) had the opportunity to clarify the situation in a specific case: the transfer of Swiss real estate into trust is not subject to the Lex Koller (and is therefore possible without restriction) when neither the trustees nor the beneficiaries are ‘persons abroad’. In my opinion, however, when the trust is revocable, the situation of the settlor, who is in principle in a position that is economically similar to that of an owner (since the settlor retains some control over the trust’s assets as well as the economic benefit insofar as he can freely reinstate his rights of ownership on the trust’s assets), should be analysed. This was not really an issue in the case submitted to the Federal Tribunal since the settlor (who was also a beneficiary) was a Swiss citizen.

On the other hand, the situation is less clear in practice when all or some of the trust players are ‘persons abroad’ within the meaning of the Lex Koller. The practice varies from one canton to another. Thus, the practical application is, for example, restrictive in the cantons of Vaud and Valais, while it is flexible in Gstaad (district of Saanen).

The Federal Office of Justice attempted to provide some clarification by drafting, in July 2009, a new version of the ‘instructions to the attention of the land registry offices concerning the acquisition of real property by persons abroad’ and of the Memorandum on this subject.

(i) According to the current practice, the transfer of Swiss real estate into trust is not subject to authorisation when the trustee and beneficiary are not ‘persons abroad’ and a subsequent extension to other beneficiaries is not possible under the trust deed (it should be noted that this latter clarification, indicated in the instructions, is not, however, reflected in established precedents of the Federal Tribunal).

(ii) In the Office’s opinion we can, moreover, consider that the transfer of Swiss real estate into trust is not subject to authorisation when the foreign beneficiaries are descendants in the direct line of the settlor; when the beneficiary is also the settlor; or when the beneficiaries do not acquire rights granting their holder a position similar to that of an owner. However, the Office adds that there is currently no consistent and undisputed practical application on this point and the examination of the criteria for the applicability of the Lex Koller requires, in the majority of cases, major analysis that must be carried out by the cantonal authority responsible for implementing the Lex Koller.

The instructions of the Federal Office of Justice can be interpreted as a willingness of opening. We will, however, remain prudent in the conclusions that can be drawn from this text. First, because it reserves the appreciation of the cantonal authorities responsible for implementing the Lex Koller; and, further, because the Office does not indicate how to reconcile the transfer of a residential property into trust (even if it is not subject to an authorisation) with the obligation to acquire such an asset directly and in own name. Indeed, in a case concerning a residential property in Valais, the Federal Office of Justice (consulted by a foreigner desiring to transfer his holiday residence into trust) endorsed the negative opinion of the Valais authority, concluding that the obligation to acquire a residential property directly and in own name excluded acquisition through a trust.

Conclusion

‘Persons abroad’ can transfer Swiss real property into trust when it is used solely as an economic activity. The situation is less clear when a person abroad wishes to transfer a residential property (for instance a holiday residence) into trust.

Under the current legislation, there is an incompatibility between the provisions of the Lex Koller and the possibility (undeniable since the ratification of the Hague Convention) of transferring Swiss real estate into trust.

Under the Swiss legal system, this incompatibility should, in principle, be rectified with an amendment to the law. The legislation should, in fact, have been adapted upon the ratification of the Hague Convention if the intention was to allow persons abroad to transfer freely a Swiss residential property into trust. The authorities responsible for implementing the Lex Koller cannot act as legislator and make more flexible the rule that requires a ‘person abroad’ to acquire real property directly and in their own name. However, experience shows that the practical application of the law sometimes goes further than the actual text of law, and it emerges that certain authorities responsible for implementing the law are partly innovating their role by developing rules that, today, it would be illusory to expect the federal legislator to specify.


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