TQR March 2022

VOLUME 20 IS SUE 1 2 022

TRUST QUARTERLY REVIEW

CONTENTS

03 05 15 21

PRODUCED BY

FOREWORD THE EDITORS TRUST RETROSPECTIVE 1991–2021 TRUST LAW IN SWITZERLAND DAVID WALLACE WILSON ENEFICIAL OWNERSHIP B OF IMPLIED TRUSTS CHRIS THORPE

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ECONOMIC SUBSTANCE AND PRIVATE TRUST COMPANIES DHARSHI WIJETUNGA, ELINOR BOOTE AND CHLOE GARCIA

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BOOK REVIEW BENEFICIAL OWNERSHIP REGISTERS: THE STEP HANDBOOK FOR ADVISERS, REVIEWED BY PAUL BECKETT

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FOREWORD THE EDITORS

EDITORS’ WELCOME

W

elcome to this edition of the Trust Quarterly Review (TQR).

As part of the continuing 30th birthday celebrations of STEP, we start off this issue with our retrospective look at 30 years of developments in trust law in a range of jurisdictions: an overview of case law and statutory innovation in Gibraltar, Hong Kong, Israel, Malaysia, Switzerland and the US. Following on from the Swiss section of the retrospective, David Wallace Wilson TEP gives more detail on the history of Swiss trust law and an analysis of the upcoming substantive trust law.

This is a real innovation, albeit in a jurisdiction that is well acquainted with trusts – a new legal institution offering the same core features as an English trust, while respecting core principles of Swiss domestic law.

Chris Thorpe TEP follows with an overview of the law of implied trusts. This is a notoriously complex and controversial area. The case law that describes the circumstances in which a court might give effect to or recognise trusts where they have not expressly been created is challenging and continues to develop. The focus of the law tends to be on identifying relevant factual factors that support the recognition of constructive and resulting trusts. The actual form of the equity employed in these cases, and the taxation consequences of finding an implied trust, tend not to attract such focus. The article sets out an overview of the underlying principles and the tax consequences that can follow.

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Recent years have featured a raft of highly visible developments relating to economic substance. Dharshi Wijetunga TEP, Elinor Boote TEP and Chloe Garcia TEP discuss some of the common issues in relation to the application of economic substance rules so far as they apply to private trust companies. Given the increasingly widespread use of private trust companies, having a clear understanding of the existing rules – and their likely future evolution – is increasingly important.

Finally, Paul Beckett TEP reviews Beneficial Ownership Registers: The STEP Handbook for Advisers, edited by Paolo Panico TEP: a timely new resource against the rapidly evolving web of international regimes.

The co-publisher of the TQR is The Association of Corporate Trustees (TACT), the UK-based body with 50 or so full members, which for many years published its separate periodical before uniting this with the TQR. We therefore mark with sorrow the passing of Bill Stephenson, who succeeded Roy Payne as TACT’s Chief Executive until himself retiring in 2015, to be followed by Scott Clayton TEP, the current Chief Executive. Bill’s main career had been with Lloyds and his experience of the crossover of banking and trusteeship proved a valuable contribution to the ongoing development of professional trustee practice. We salute his memory.

THE EDITORS

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TRUST RETROSPECTIVE 1991–2021

30 YEARS OF TRUSTS Part four

A retrospective of selected developments in trust legislation, regulation and case law across the past 30 years 1997 Hess v Line Trust Corporation Ltd.1 The Court of Appeal of Gibraltar rules, inter alia, that the Fraudulent Conveyances Act 1571 only applies to dispositions of property where the property could be taken in execution in Gibraltar. The President of the Court of Appeal states in his judgment: ‘It is common ground that the only dispositions of property which can be affected by the 1571 Act (which was replaced in England by section 172 of the Law of Property Act 1925) are dispositions of property which can be reached by execution.

Execution is a local process.’ The Court upheld the decision in Perry v Zissis,2 which underlines the fact that in the absence of reciprocal provisions for the enforcement of judgments, the judgment of a court in country A cannot be enforced by execution in country B unless and until a judgment based on the earlier judgment has been obtained in country B.’ The case relates to a Gibraltar trust of which Line Trust Corporation is the trustee.

GIBRALTAR A 30‑YEAR TRUST TIMELINE 1991 Financial Services Commission Act 1989 and Financial Services (Investment and Fiduciary Services) Act 1989. The former establishes the Gibraltar Financial Services Commission (GFSC) and Gibraltar’s financial services regulatory framework. The latter brings a number of activities within the scope of this framework, including the activity of ‘holding out, or soliciting for or undertaking business, for profit or reward, in or from Gibraltar as a professional trustee’. These activities are defined as ‘controlled activities’ and are subject to a licensing regime supervised by the GFSC. Financial Services (Conduct of Business) Regulations 1991. Introduces a number of duties and standards dischargeable by licensees, based around such concepts as integrity, skill, care and diligence, best market practice, know your client (KYC), information for customers, conflicts of interest, customer assets, financial resources and internal organisation.

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2000 Registered Trust Act 1999. Establishes a voluntary registration regime for private trusts, where the trustees want the trust to appear on the public register or where the terms of the trust deed provide that the trust must be registered.

1 [1997/98] Gib LR 270 2 [1977] 1 Lloyd’s Rep 607

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(among other Acts) to impose an obligation on trustees to keep proper books of account as well as an obligation to maintain records identifying settlors, trustees and beneficiaries of trusts.

2005 Stamp Duties Act 2005. Imposes stamp duty tax on any conveyance or transfer of Gibraltar real estate or any rights relating to Gibraltar real estate.

Excludes any conveyance or transfer made for effectuating the appointment of a new trustee or the retirement of a trustee; or under which no beneficial interest passes in the property conveyed or transferred; or made to a beneficiary by a trustee or other person in a fiduciary capacity under any trust.

2014 Perpetuities and Accumulations (Amendment) Act 2014. Increases the maximum perpetuity period under Gibraltar law from 100 years to 250 years.

Trustees (Amendment) Act 2014. Introduces a new section into the Trustees Act conferring on the courts the power to relieve a trustee from personal liability in circumstances where that trustee has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which they committed such breach.

2006 Financial Services (Conduct of Fiduciary Services Business) Regulations 2006. Replaces the Financial Services (Conduct of Business) Regulations 1991.

Applies specifically to fiduciary services business, including professional trustees.

2007 Financial Services (Occupational Pensions Institutions) Act 2006. Transposes EU legislation regulating the activities and supervision of institutions for occupational retirement provision.

Although the Act allows for the establishment of pension schemes through vehicles other than trusts, almost all pension schemes are established as trusts in Gibraltar.

Insolvency Act 2011. Contains a provision that enables asset protection trusts to be established in Gibraltar. Section 419A provides that certain dispositions shall not be voidable at the instance of or upon application by any creditor of the settlor provided certain conditions are complied with.

2015 Trusts (Private International Law) Act 2015.

Ensures that where a matter relating to a Gibraltar trust comes before a Gibraltar court, the court must apply only Gibraltar law to that matter.

It specifically provides that no rule of foreign law can affect or be applied to any question before the court in relation to those matters.

Financial Services Commissioner Act 2007. Repeals and replaces the Financial Services Commissioner Act 1989. Seeks to change the structure and remit of the GFSC. 2011 Income Tax Act 2010. Constitutes a significant overhaul of Gibraltar’s income tax regime and, among other things, changes the way that trusts and trust beneficiaries are taxed under Gibraltar law. Section 13 provides that only trusts that are resident in Gibraltar are taxable in Gibraltar.

Section 12 provides that tax must be paid by any person ordinarily resident in Gibraltar on income received by them from a trust, where the ultimate source of that income is taxable in Gibraltar.

Purpose Trusts Act 2015. Permits the establishment of a trust for a purpose or purposes other than charitable purposes, subject to the provisions and limitations set out in that Act. Private Trust Companies Act 2015. Provides for the establishment and registration of private trust companies (PTCs) in Gibraltar. A PTC registered under, and operating within, the PTC registration regime is exempted from the requirement to obtain a professional trustee financial services licence from the GFSC.

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Trustee Act (Amendment) Regulations 2017. Makes it a criminal offence for a trustee to fail to comply with requests for information.

2016 Proceeds of Crime Act 2015. Imposes extensive due diligence and KYC requirements on ‘relevant financial businesses’ including professional trustees.

2019 Financial Services (Occupational Pensions Institutions) Act 2006 (Amendment) Regulations 2018. Amends the Financial Services (Occupational Pensions Institutions) Act 2006 in order to give effect in Gibraltar to Directive (EU) 2016/2341.

Introduces a requirement for institutions for occupational retirement provision with fewer than 100 members to register with the GFSC as a small scheme.

Partnership, Trustees and Tax Information (Miscellaneous Amendments) Act 2016. Amends, among other acts, the Trustees Act and makes it a criminal offence for trustees of a trust to fail to maintain proper books of accounts or records identifying settlors, trustees and beneficiaries.

2017 Financial Services (Pensions) Regulations 2017.

Creates new controlled activities of establishing, operating or winding up personal pension schemes, thereby requiring any person providing those services or undertaking those activities to apply to the GFSC for a financial services licence.

Persons with a class VII (professional trustee) licence are exempted.

2020 Financial Services Act 2019 and its accompanying regulations. Repeals the entire financial services legislative framework. The Act provides a modern legislative framework for all financial and professional services sectors in Gibraltar, including professional trustees, professional foundation councillors, professional pension scheme trustees and occupational pension schemes.

Private Foundations Act 2017. Permits the establishment of private foundations under Gibraltar law. Gibraltar foundations are subject to a registration regime overseen by the Registrar of Foundations and can be set up for the attainment of any purpose or purposes, as well as for the benefit of a class of beneficiaries.

2021 Proceeds of Crime (Miscellaneous Amendments) Act 2021. Makes a number of significant changes to the Trustees Act, including: • The due diligence and KYC information that a trustee must obtain and update in relation to the various parties regarding the trust.

• The due diligence and KYC information that a trustee must obtain from any service provider that it engages for the provision of financial services.

• An obligation to keep a record of the above information, as well as the actions the trustees took to obtain it.

• An obligation to notify counterparties who provide financial services to the trustees that they are acting in a trustee capacity and to provide them with due diligence information on the trust.

• A provision setting aside any flight clause that may operate to facilitate a criminal offence; frustrate an ongoing criminal investigation by a law enforcement authority; or avoid, defeat or frustrate any right or power of a law enforcement

Financial Services (Investment and Fiduciary Services) Act (Amendments) Regulations 2017.

As a consequence of the introduction of the Private Foundations Act 2017, the regulations are published to amend the Financial Services (Investment and Fiduciary Services) Act. Includes a new controlled activity of ‘holding out, or soliciting for or undertaking business, for profit or reward, in or from Gibraltar as a professional foundation councillor’.

Register of Ultimate Beneficial Owners Regulations 2017 (renamed the Register of Ultimate Beneficial Owners, Nominators and Appointors Regulations 2017). Transposes the EU Fourth Anti‑Money Laundering Directive (4AMLD) beneficial ownership register requirements.

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Companies (Amendment) Ordinance 2018.

Introduces new requirements on the keeping of significant controllers registers by companies.

Requires companies to establish, maintain and provide to government officials on request a register containing details of their significant controllers. Significant controllers include those holding more than 25 per cent of the shares or voting rights in a company.

authority to enforce, invoke or apply any provision of Gibraltar law, which aims to prevent or combat money laundering, terrorist financing, proliferation financing or tax evasion.

HONG KONG A 30‑YEAR TRUST TIMELINE

2019 Zhang v DBS Bank (Hong Kong) Limited.4 Finds that trustees could rely on very broad anti‑Bartlett provisions, provided they do not abrogate their irreducible core of duties.

1997 Handover of Hong Kong from the UK to China. Although not itself a trust or estate law development, from 1983 when the Sino‑British Joint Declaration was nearly finalised, it led to more people in Hong Kong considering offshore ownership of assets.

Re Estate of Chen Din Hwa.5 Finds that Hong Kong law is consistent with common practice in most common‑law jurisdictions in that the statutory power of advancement can be exercised while an estate is still in administration and not only after the residuary estate is ascertained.

2006 Abolition of estate duty on Hong Kong‑situs assets, including those owned through controlled foreign companies.

ISRAEL

2013 Trustee Ordinance. Amendments relating to limiting the use of trustees’ exemptions, increased default administration powers, and reserved‑settlor powers provisions.

A 30‑YEAR TRUST TIMELINE 1990 Attorney General v Tel Aviv University.6 The provisions of Trust Law, 5739‑1979 (the Trust Law) relating to charitable trusts are cogent and provisions in a will stating to the contrary are void.

Perpetuities and Accumulations Ordinance.

Amendments permitting perpetual trusts.

2014 Poon Lok Otto v Kan Lai Kwan Kay and HSBC International Trustee Ltd.3 The Hong Kong Court of Final Appeal finds that where one spouse has significant de facto control over a trust fund, despite not being trustee, that fund can be treated as a matrimonial asset in divorce cases.

1993 The Society of the Talmudic College Porat Yosef v Tova Gol Shaulof.7 The Trust Law does not apply to a religious trust created before the enactment of the Trust Law and its affairs are under the jurisdiction of the relevant religious court.

2018 Trust and company service provider (TCSP) licensing regime. Requires trust and corporate service providers to register with the Hong Kong Companies Registry for anti‑money laundering and countering terrorist financing purposes.

1994 Avinoam Wallas v Nechama Gat.8 The Supreme Court of Israel (the Supreme Court) recognises the 4 5 6 7 8

3 [2014] HKCFA 65

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[2019] HKCFA 45 [2019] HKCA 1317 CA 477/88 CA 5407/91 CA 3829/91

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creation of an ‘implied trust’ under an oral contract based on the behaviour of the parties.

The Israeli tax system undergoes a fundamental reform. Tax is imposed on all worldwide income of an Israeli resident (a personal approach). Until now, tax was imposed only on income produced or accrued in Israel (a territorial approach).

1996 Ayala Zaks Abramov v Land Registry Officer.9 A trust is a legal relation and not a legal entity.

Shoshanna Tzimbler v Rebecca Turgeman.13 When two parties enter a sale contract with respect to real property and the buyer paid the consideration in full yet the property is still registered in the name of the seller (or the lawful heirs), then the buyer has a semi‑possessory right in the property (an equitable right) and the seller holds the property in a capacity of a trustee for the benefit of the buyer under an ‘Israeli‑made constructive trust’.

1998 Relaxation of foreign currency controls. The requirement applicable to persons and private corporations to obtain a permit in order to hold foreign currency outside of Israel and conduct transactions in foreign currency is abolished, thereby abolishing the exchange control supervision that was in force until then.

1999 Attorney‑General v Lishitzky.10 When there is a non‑fundamental flaw in a will and the wishes of the deceased are clearly evident from the will itself, the flaw may be overcome by application of the Trust Law and the use of a trust.

2005 Public Trustee v Jacob Agmon.14 When a trustee of a charitable trust is appointed by the court, only the court is authorised to remove them from their position as such, regardless of the terms of the trust.

2006 Law for the Amendment of the Income Tax Ordinance (Amendment no. 147), 5765‑2005.

Introduces new provisions concerning the taxation of trusts.

2000 Weinstein v Fox.11 When a trustee of a testamentary private trust is appointed by the court, only the court is authorised to remove them from their position as such, regardless of whether the beneficiaries agreed otherwise.

2007 Law for the Amendment of the Income Tax Ordinance (Amendment no. 168 and temporary order), 2008. Introduces a ten‑year exemption from tax and reporting obligations for new immigrants with respect to their foreign‑sourced income. This exemption generally applies to trusts created by new immigrants.

2002 Ben‑Gurion University of the Negev v Adv. Dan Ben Basat.12 The Supreme Court holds that an undertaking to grant a gift is valid only if done in accordance with the provisions of the Gift Law, 1968 and when it can be inferred from the deed gift that the donor intended to execute it during their lifetime, even if in practice the donor had died before the gift was executed in full. This judgment is highly important in order to make a valid transfer of assets from the settlor during their lifetime to the trustee.

2008 Lnl Reg Trust v Levine.15 The Tel Aviv District Court effectively recognises a foreign trust entity from Liechtenstein as a legal entity entitled to litigate in Israel.

2003 Law for the Amendment of the Income Tax Ordinance (Amendment no. 132), 5762‑2002.

L.L. v Administrator General.16 When a trustee is appointed in a testamentary trust to hold assets for the benefit of an incapacitated person, they should

9 10 11 12

13 14 15 16

PCA 46/94 CA 4660‑94 CA 5717/95 CA 3727‑99

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CA 1559/99 PCA 9420‑04 CC (TA) 1327‑96 MCP (TA) 12695/06

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be subject to the legal and regulatory arrangement applicable to guardians. This includes limitations on the management of the assets as well as reporting obligations to the administrator general.

under the name of ‘A’ although the funds used for its purchase originated in ‘B’, then in the absence of an indication that the funds were a gift, A is considered to hold the rights in the property in trust for the benefit of B.

Trustees of the trusts of the Sephardic community in the holy cities of Tzfat and Meron by the Administrator Rabbi Shlomo Shlush v Tomer Shimon Kamus.17 The Supreme Court incidentally declares the existence of a charitable trust with respect to a real property based on the factual history of the property, despite the fact that neither of the parties had initiated proceedings under the Trust Law to declare it as such.

Doe v Doe.21 Under the Trust Law, the authority to manage the trust is vested in the trustee. The beneficiaries are not entitled to sell the trust assets or intervene in their management unless the terms of the trust state otherwise. Although the Trust Law allows a beneficiary to apply to the court with respect to the trust, such a beneficiary must first demonstrate a reasonable ground for their application and, even so, the court shall discuss the application only if it deems it appropriate.

2009 Rabbi Eliezer Cahanman v Rabbi Shmuel Markovitz.18 Although the Trust Law allows any ‘interested party’ to file a claim to the court with respect to a trust, the Supreme Court further requires that the true nature of the dispute be related to the trust and a claim deriving from and relating to an internal and unrelated dispute between the persons involved shall not be considered as a claim under the Trust Law.

2014 Law for the Amendment of the Income Tax Ordinance (Amendment no. 197), 2013. Reforms the tax regime applicable to trusts and reduces the exemptions from tax and reporting granted to foreign trusts.

2016 Legal Capacity and Guardianship Law (Amendment no. 18), 5776‑2016. Introduces an enduring power of attorney (EPA) into Israeli legislation. The EPA allows an agent to act for the benefit of an appointor in certain matters and under certain limitations, including the management of assets. The EPA serves as a complementary instrument to a trust.

2011 The Receiver v Marsha Tauber Tov.19 A trustee purchased real property in trust and filed a report accordingly to the Israel Tax Authority. Fifteen years later, the trustee was declared bankrupt and the bank initiated proceedings to liquidate the property, as no caveat note indicating the existence of the trust was registered. The Supreme Court holds that since the trust has been properly reported to the Israel Tax Authority, it is a ‘true trust’ and not a ‘sham trust’. As such, the rights of the beneficiaries prevail over those of the bank.

The trustee is not required to register a caveat note in the Land Registry indicating the existence of the trust in order for the rights of the beneficiaries to prevail.

Doe v Doe.22 A trust created by a contract that is intended to begin upon the death of the settlor is invalid under the Succession Law of 1965. The creation of such a trust validly must be done by a trust deed (Hekdesh) executed in accordance with the provisions of the Trust Law.

2013 Doe v Doe.20 The ‘presumption of trust’ provides that where the ownership of a property is registered

2020 Aliza Weizman v Parcel 51 in Block 7060 Ltd.23 One of the beneficiaries of a trust that is without a time limit may not bring about the termination of the trust with respect to them alone, unless such termination is possible under the terms of the trust.

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21 AFA 3771/13 22 AFA 7033/15 23 CA 4299/17

CA 6613/06 CA 10010/08 CA 5955/09 AFA 2101/13

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trusts, spendthrift trusts, special trusts and charitable trusts. Under this Act, settlors and beneficiaries can be foreigners, assets can be located in different countries, and the governing law of Labuan offshore trusts need not be Malaysian law. If an offshore trust is validly created, courts will not vary it, set it aside or recognise the validity of any claim against the trust property pursuant to a law or an order of a court of another jurisdiction, except for succession rights, etc.

MALAYSIA Significant updates to Malaysia’s trust landscape that happened prior to 1991 should be noted, including the most recent amendments to the Trustees Act 1949, which governs matters relating to powers of trustees, in 1974. In 1981, the most recent amendments to the Trust Companies Act 1949 provided for registration and regulation of trust companies in Malaysia. Finally, in 1990, the Labuan Business Activity Tax Act 1990 was enacted.

2005 Amendment to the Trustees (Incorporation) Act 1952. Allows that trustees can apply for a certificate of registration to become a body corporate and have perpetual succession, a common seal and the power to sue and be sued.

A 30‑YEAR TRUST TIMELINE 1994 Yeong Ah Chee v Lee Chong Hai & Anor and other appeals.24 Affirms the requirements of trust: ‘The 3 essentials of a valid trust are: (a) certainty of words; (b) certainty of subject; and (c) certainty of object.’ The trust deeds in all appeals except Appeal No.5 are invalid due to uncertainty of subject as beneficial ownership of the trust property passed to the purchasers when the sale of the lands took place before the trust deeds were executed. The Appeal No.5 trust deed is valid despite uncertainty of subject because the trustees at the time of signing the deed were the owners of the trust property in question both at law and equity.

Koperasi Wanita Sarawak Bhd & Anor v Robert Sim Teck Hock.25 Reaffirms Yeong Ah Chee: a trust is only valid if the title to the property is vested in the trustee completely and if the trust has been validly declared. A mere application letter does not create any title right or interest in the land. A trust cannot be created over the mere application letter for the land.

Espl (M) Sdn Bhd v Radio & General Engineering Sdn Bhd.26 The Court of Appeal of Malaysia recognises that a trust is an exception to the privity doctrine.

2010 Labuan Offshore Trusts (Amendment) Act 2010.27 Amends the Labuan Offshore Trusts Act 1996.

Allows a Malaysian resident to set up and be the beneficiary of a Labuan trust (see s.9 of the amended act). New foundation and trust laws allow local investors to not only hold overseas properties and assets in Labuan trusts and foundations but also local properties.

1995 Public Trust Corporation Act 1995. Repeals the Public Trustee Act 1950. Establishes and governs Amanah Raya (AR). AR assumes the role of the Department of the Public Trustee and Official Administrator (the Department). All written laws affecting the Department in force immediately before the appointed date will, until amended or revoked, continue to be in force as if the Act has not been passed. The Probate and Administration Act 1959 is amended, since AR assumes the role of the Department.

Labuan Islamic Financial Services and Securities Act 2010. Section 150 allows the establishment of Labuan Islamic trusts. All provisions of the Labuan Trusts Act 1996 shall apply to Labuan

1996 Labuan Offshore Trusts Act 1996. Allows purpose

25 [2005] 4 MLJ 493, Court of Appeal 26 [2005] 2 MLJ 422, Court of Appeal 27 11 February 2010 [PU(B) 65/2010]

24 [1994] 2 MLJ 614, Supreme Court KL M A RCH 2 022

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Islamic trusts. Allows Shari’a‑compliant trusts to be created.

SWITZERLAND

Takako Sakao v Ng Pek Yuen & Anor.28 Establishes that s.433B of the National Land Code does not apply to a constructive trust.

A 30‑YEAR TRUST TIMELINE 1992 Inaugural meeting of STEP Suisse Romande on 29 September. It is the first STEP branch outside of the UK.

2014 PECD Bhd (in liquidation) v Amtrustee Bhd.29 Clarifies principles governing the Quistclose trust that have not been so clearly enunciated by other courts in other jurisdictions. The decision holds that a beneficiary of a Quistclose trust could, in law, be a person who was not a provider or payor of the trust money. The court accepts the principle set out in Barclays Bank Ltd v Quistclose Investments Ltd,30 which states that where a loan is made for the purpose of paying identified existing creditors, and where the borrower became insolvent and there was a dispute between those creditors and the lenders, the creditors should succeed if the primary purpose was still capable of being carried out.

1994 Re the WKR Trust. The Zurich District Court rules that the trust in question has the characteristics of a company under the Swiss private international law rules. Applying Guernsey law and jurisprudence, the structure was held to be a sham.

1999 Recognises 125 years since the first Swiss case law on trusts: Pugh and Weathers v Receiver of Schlesinger’s bankrupt estate.

2018 Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018.

2007 Guidelines are issued on behalf of the Swiss Land Registry dealing with the ownership of Swiss real estate by trusts.

2020 Labuan Business Activity Tax (Amendment) Act 2020.

Ratification of the Hague Convention on the Law Applicable to Trusts and on their Recognition (the Convention); the second civil‑law jurisdiction to ratify.

Chin Jhin Thien & Anor v Chin Huat Yean @ Chin Chun Yean & Anor.31 The federal court expressly recognises the doctrine of secret trusts and deems it to be applicable in Malaysia. In the lower courts, the law of trusts in Malaysia has been underdeveloped and largely follows that of English and Welsh law. Hence, the general rules that apply to trusts in English law are also applied in Malaysian law in relation to trusts and wills.

28 29 30 31

Formation of the Swiss Association of Trust Companies (SATC), where Swiss STEP members were the initial driving force. The SATC’s purpose is to engage in the furtherance and development of trustee activities in Switzerland, to ensure a high level of quality and integrity and the adherence to professional and ethical standards in the trust business in Switzerland. The SATC has since grown into an organisation of 32 member trust companies.

The Swiss Tax Conference issues Circular No 30 concerning the treatment of trusts for tax purposes in Switzerland.

[2010] 1CLJ 381 [2014] 1 MLJ 91, Federal Court [1970] AC 567 [2020] 4 MLJ 581, Federal Court

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Robert Palmer’s Estate: X et al v Y.32 The Ticino Court of Appeal decides the first trust case to be considered after the ratification of the Convention

by Switzerland. The case highlights the difference between the powers and duties of an executor/ trustee and a court‑appointed administrator of an estate in a civil‑law jurisdiction. The case is subsequently confirmed by the Federal Supreme Court of Switzerland (the Supreme Court).

2013 STEP Suisse Romande changes its name to STEP Geneva.

2015 A v Federal Tax Authority. The Federal Administrative Court of Switzerland rules on stamp duty related to a foreign grantor trust.

The decision is subsequently confirmed by the Supreme Court.

2008 The Swiss Federal Tax Administration issues Circular No 20 confirming the application of Circular No 30 to trusts in relation to federal income tax and withholding tax.

2016 Formation of the Swiss and Liechtenstein STEP Federation.

The Swiss Bankers Association issues updated guidelines (CDB 16) on the identification of discretionary beneficiaries of trusts and foundations.

The Swiss Bankers Association issues guidelines (CDB 08) concerning due‑diligence requirements for the opening of bank accounts for trusts.

2019 The Swiss National Council approves the ‘Regazzi Initiative’ promoting the introduction of a substantive domestic Swiss trust law. An expert group, including Swiss STEP members, commences work on the project and a public consultation on the draft trust law text opened in 2021.

2009 A v the Federal Prosecutors Office. The Federal Criminal Court of Switzerland rules on beneficiaries’ standing to challenge a freezing order.33 The case is subsequently confirmed by the Supreme Court.

2011 The Federal Administrative Court of Switzerland decides that the beneficiary of an irrevocable discretionary trust with an underlying company holding a bank account has only an expectation and is not the ‘beneficial owner’ of such bank account.

2020 Financial Institutions Act (FINIA) and implementing ordinance. Introduces compulsory licensing regulations for trustees in Switzerland.

Trustees now require a licence from the Swiss Financial Market Supervisory Authority (FINMA) to be able to conduct trustee services from Switzerland. The implementation transition period to 31 December 2022 begins, by which time all trustees operating in Switzerland must have applied to FINMA for a licence, and before making that licence application must be affiliated to an independent supervisory organisation (SO).

FINMA is therefore responsible for authorising registration and reviewing bodies, but not for supervising them.

2012 Rybolovlev v Rybolovleva.34 Against the background of a multi‑billion dollar divorce, the Supreme Court, while giving recognition to the trust under the Convention, decides that the husband remains the economic owner of the property transferred to the trust due, inter alia, to his position as protector and because of the clawback mechanism in Swiss matrimonial regime rules.

The SATC issues a white paper setting out proposals for the regulation of trustees in Switzerland.

A v C SA. The Supreme Court rules on the heirs’ request to obtain information from the executor on assets held in a foreign trust.

32 First Civil Chamber, Court of Appeal of Ticino, 19 December 2007 33 Federal Criminal Court BB.2009.71 (subsequently confirmed by the Supreme Court) 34 Swiss Supreme Court, 26 April 2012

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A joint STEP‑SATC delegation meets with FINMA to assist in the implementation of FINIA and the implementing ordinance in relation to trustees.

establishing a clear objective test to distinguish between what is a US taxable trust and what is a non‑taxable foreign trust.

FINMA licences the fifth SO, thus completing the establishment phase of the institutional conditions for the implementation of FINIA. FINMA notes that no further SO applications are pending.

1998 Although South Dakota (1983) and Delaware (1986) acted earlier, seven states pass legislation abolishing the common‑law rule against perpetuities. Today, a majority of states have either repealed the rule entirely for certain types of trust or have adopted very long maximum terms.

2021 A joint STEP‑SATC delegation meets FINMA virtually to assist in the implementation of FINIA and the implementing ordinance in relation to trustees.

2000 Uniform Trust Code. Promotes interstate commerce and consistency of rules governing trusts. It is currently adopted by 36 states and territories.

A public consultation on the draft substantive Swiss trust law is underway.35

2015 Uniform Trust Decanting Act. Provides a method for reforming the terms of an irrevocable trust within reasonable limits that ensure the trust will achieve the settlor’s original intent. It is currently adopted by 13 states and territories.

UNITED STATES

A 30‑YEAR TRUST TIMELINE 1994 Uniform Prudent Investor Act. Published by the Uniform Law Commission, the Act provides rules governing actions of trustees with respect to investment of trust property. It is currently adopted by 46 states and territories.

2017 Uniform Directed Trust Act. Provides clear functional rules allocating authority under a trust while preserving fiduciary safeguards for beneficiaries. Delaware originally enacted directed trust legislation in 1985. The Act is currently adopted by 17 states and territories.36

1997 Alaska and Delaware are the first states to adopt asset protection trust legislation, allowing for irrevocable, discretionary self‑settled trusts that mitigate claims from the settlor’s subsequent creditors. Today, 19 states have domestic asset protection trust legislation.

36 We would like to thank the following individuals for their contributions to this article: Peter Isola TEP, Senior Partner at Isolas (Gibraltar); Adrian Pilcher TEP, Partner at Isolas (Gibraltar); Joanna Caen TEP, Managing Director at PraxisIFM (Hong Kong); Dr Alon Kaplan TEP, Managing Partner at Alon Kaplan, Advocate and Notary (Israel); Meytal Liberman TEP, Founder of Meytal Liberman, Advocate (Israel); Farah Deba TEP, Partner at Messrs Wong Lu Peen & Tunku Alina (Malaysia); Richard Pease TEP, Solicitor and Independent Consultant (Switzerland); Andrew McCallum TEP, Senior Partner at Rawlinson and Hunter (Switzerland); David Wallace Wilson TEP, Partner at Schellenberg Wittmer (Switzerland); Joseph Kellogg TEP, Partner at WE Family Offices (US); Ellen Kratzer TEP, Managing Director at Fiduciary Trust Company International (US).

1996 Small Business Job Protection Act. Makes a major change to taxation of foreign trusts by 35 See page 15 for more on the draft substantive Swiss trust law.

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SWISS TRUST GENESIS An overview of the history of Swiss trust law and an analysis of the upcoming substantive trust law

BY DAVID WALLACE WILSON

I

n 1874, the Swiss Federal Constitution was approved by popular referendum.

A lesser‑known fact: the first Swiss judgment dealing with trusts was rendered in the same year on 22 January.1 Since then, the Swiss legal system, Swiss courts and financial professionals have been regularly exposed to trusts. During the Cold War, the Swiss government adopted a decree authorising Swiss companies to protect their assets, in case of international conflict, by establishing trusts.2 In tax matters, investment trusts, unit trusts and pension trusts already benefit from several Swiss double taxation treaties (DTTs).3 For asset protection purposes, trusts also enjoy the benefit

ABSTRACT • Switzerland is a jurisdiction well acquainted with trusts, although there is no Swiss substantive trust law.

• Since 2018, an expert group has been working on a draft Swiss trust, a new sui generis legal institution that would offer the same features as an English and Welsh trust while respecting core principles of Swiss domestic law.

• Among its features, the Swiss trust would be limited to private express trusts and would not impinge on Swiss foundations. It could contain a binding arbitration clause in case of dispute.

1 Pugh and Weathers v Receiver of Schlesinger’s bankrupt estate, 22 January 1874, Geneva Commercial Court 2 Swiss Federal Council’s Decree on the Protection of Legal Entities, Partnerships and Sole Proprietorships by Precautionary Measures of 12 April 1957, RS 531.24, art.18 3 DTTs with Australia, Denmark, Hong Kong, Turkey, the UK and the US.

• The draft Bill was published for initial consultation.

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‘The idea of introducing the trust into the Swiss legal system is not new: it was mentioned in the 1950s and was the subject of renewed interest in the 2000s’ of several Swiss investment‑protection treaties and free‑trade agreements.4 One can even settle a real estate investment trust to invest in Swiss real estate.5 Since 2007, we further witnessed a notable acceleration of Swiss dealings with trusts, when Switzerland ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition (the Convention). Trust companies now form an integral part of the country’s financial centres (387 trustees now have registered to obtain a licence) and organisations like STEP and the Swiss Association of Trust Companies (SATC) have contributed positively to the education, regulation and professionalisation of the sector.

This has created a hospitable environment for local service providers to act as trustees in or from Switzerland.

The 2018 enactment of the Swiss Financial Institutions Act further comforted the public at large, as it compels both Swiss and foreign trustees active in or from Switzerland to obtain a licence to pursue their activities and to remain subject to continuous regulatory supervision.6 The introduction of these additional prudential requirements (encompassing the need for qualified personnel, proper internal governance, audit functions, professional indemnity insurance, business continuity planning, etc.) constitutes a key alignment with international standards.7 Thus, trusts have been a reality for quite some (Swiss) time, in private matters as well as in financial dealings.8

SWISS PARLIAMENT’S IMPETUS Yet, to date, there was still no trust or substantive trust law in Switzerland. However, the idea of introducing the trust into the Swiss legal system is not new: it was mentioned in the 1950s and was the subject of renewed interest in the 2000s.9 Thus, the introduction of a Swiss trust has been advocated for ever since the country ratified the Convention.10,11 Between 2017 and 2019, the Swiss parliament passed no fewer than three initiatives requesting that the government introduce a trust into Swiss legislation.12 Consequently, in 2018, the Swiss Federal Office of Justice established a group of experts (the Expert Group) to draw up a draft Bill.13 During the past three years, this group worked on the draft Bill as well as a substantial explanatory report that details the Swiss trust’s features, its distinctions from other Swiss tools and from other countries’; it runs to over 110 pages.14 In parallel, the government also commissioned an impact report that was published in 2019. This report confirmed that the use of foreign trusts was already a reality in Switzerland and found that 75 per cent or more of the stakeholders were in favour of introducing a Swiss trust (support for the liberalisation of Swiss foundation law was less widespread). This official report further 9 Friedrich Gubler, ‘Besteht in der Schweiz ein Bedürfnis nach Einführung des Instituts der angelsächsischen Treuhand (trust)?’, Revue de droit suisse 1954 II, Hebling (ed.), pp.215a–476a 10 David Wilson, ‘La Suisse doit préparer son propre droit des trusts’, Le Temps, hors‑série Finance (September 2010), p.16 11 David Wallace Wilson and Caroline López Nagai, ‘Heading Towards a Swiss Trust Law?’, Columbia Journal of European law, special issue ‘The Changing Role of Trusts in Europe’, 18 Columb. J. Eur. L. online 27 (2012) 12 Postulat 15.3098 : Faut‑il légiférer sur les trusts?, 11 March 2015; Initiative 16.488 : Codifier le trust dans la législation suisse, 23 December 2016; Motion 18.3383 : Introduction du trust dans l’ordre juridique suisse, 26 April 2018; Giovanni Merlini, ‘L’introduzione dell’istituto del trust in Svizzera’, Novità fiscali, 2020 (4), pp.173–178, available at Novità fiscali (supsi.ch) 13 Alongside representatives of the government (Federal Department of Justice, State Secretariat for International Financial Matters, Federal Tax Administration), the external experts are professor Florence Guillaume, professor Paul Eitel, professor Luc Thévenoz, Christian Lyk TEP and David Wallace Wilson TEP. 14 Rapport explicatif – Introduction du trust: modification du code des obligations (‘Explanatory Report’)

4 For example, investment treaties with Mexico and South Korea; free‑trade agreement with Japan and Singapore.

5 art.86 §3 Collective Investment Schemes Ordinance 6 Fabianne de Vos Burchart, ‘Peak Regulation’, STEP Journal (July 2018), p.33; Fabianne de Vos Burchart, ‘Regulating Switzerland’s Trust Industry – The way ahead’, Trusts & Trustees, 26:3 (April 2020), pp.216–221 7 Xavier Isaac, ‘Prepare for Lift‑off’, STEP Journal (June 2019), p.35 8 Guillaume Grisel, ‘Le trust en Suisse’, La pratique du droit, Schulthess Editions Romandes, Geneva/Zurich (2020)

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law is fundamentally justified and certainly not a legislative impossibility’.21

indicated that a Swiss trust would expand the range of services currently available for succession and wealth planning and concluded that introducing a Swiss trust would have a positive cost‑benefit ratio.15

ROOTED IN ROMAN LAW Accordingly, a Swiss trust firmly based on the established legal principles of Swiss civil law, which themselves stem from Roman law, would prove easier to implement into Swiss legislation.22 After all, ‘the trust was the most dynamic institution of the Roman law of succession, perhaps of Roman law as a whole’.23 To the point, trusts became so much favoured under the reign of Caesar Augustus (63BC–14AD), the first emperor of the Roman Empire, that he introduced a jurisdiction for trusts, the fideicommissari praetor.

Trust seems the ideal word in legal English to translate the Latin fideicommissum, as the two legal institutions have much in common: under a fideicommissum, an object was entrusted (commissum) to the good faith (fides) of the recipient, for the benefit of another person.24 The fideicommissum was also very similar to the fiducia: a fiducia enabled the transfer of property from one living person to another with conditions presented in a fiduciary agreement (pactum fiduciae), whereas a fideicommissum enabled the transfer of property under conditions after death.25 As Roman law developed to unrivalled heights, it is unsurprising that other Roman concepts also found their way into existing trust legislation worldwide, such as Jersey’s and Guernsey’s utmost good faith or ‘bon père de famille’.26,27 For centuries, authoritative English and Welsh jurists have acknowledged that trusts stem from civil law, such as Lord Chancellor Francis Bacon.28 In particular, in Sir William Blackstone’s own words:

TRUSTS IN CIVIL‑LAW JURISDICTIONS Before turning to the Swiss draft Bill, it is important to recall that trusts can validly exist and operate in civil‑law countries. Indeed, a legion of eminent scholars have amply demonstrated that ‘the trust presupposes neither equity, nor divided ownership’.16 As Professor Maurizio Lupoi elegantly put it, ‘[it] impinges on the generally held notion that trusts are the creatures of equity, which is plainly true, and on the equally generally held notion that trusts cannot exist without equity, which is untrue but not for the reasons that are commonly given for that’.17 Thus, trusts may well live without equity.18 In this respect, the reader is referred to Jessica Schaedler TEP’s recent Trust Quarterly Review contribution highlighting the authoritative Principles of European Trust Law, co‑authored by Dr David Hayton, and Professor Lupoi’s works, among others.19 Further to these, a trust can operate in any legal system provided it contains five invariable elements (formation; segregation; divestment; beneficiaries; and a fiduciary element).

Schaedler also aptly remarks that the trust industry has moved a long way since the traditional English and Welsh common‑law trust, based on uncodified equitable principles, to the more recent and largely codified international trust institution.

More specifically in Switzerland, eminent academics on both sides of the Röstigraben have also shown that trusts can be introduced in Swiss legislation and that this does not require a splitting of ownership:20 ‘the issue of a Swiss trust

‘Uses and trusts are in their origin of a nature very similar, or rather exactly the same:

15 Dr. Mario Morger, ‘Regulatory Impact Assessment for the Creation of a Trust Law in Switzerland – Analysis of the economic impact’, on behalf of the Federal Office of Justice, the State Secretariat for International Financial Matters and the State Secretariat for Economic Affairs, Berne: Office for Labour and Social Policy Studies BASS, available at bit.ly/3CtHYhx 16 George Gretton, ‘Trusts Without Equity’, International and Comparative Law Quarterly, 49 (2000), p.620 17 For what these reasons are, see Maurizio Lupoi, ‘Trusts and their Comparative Understanding’, Trusts & Trustees, 27:4 (May 2021), p.288 18 Paolo Panico, International Trust Law, 2nd edn. (Oxford University Press, 2017), chapter 14 19 Jessica Schaedler, ‘Mountain to Climb’, Trust Quarterly Review (issue 4 2019), pp.27–33 20 Röstigraben is a term used to refer to the cultural boundary between German‑speaking and French‑speaking parts of Switzerland.

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21 Prof. Dominique Jakob and Michelle Kalt, ‘Ein Trustrecht für die Schweiz’, Expert Focus (2019/9), pp.630–636 22 Luc Thévenoz, ‘Proposition pour un trust suisse’, Revue suisse de droit des affaires et du marché financier, 920:2 (2018), pp.99–112 23 David Johnston, The Roman Law of Trusts, (Clarendon, Oxford University Press, 1988) 24 Johnston, The Roman Law of Trusts, p.9 25 Irina Gvelesiani, ‘The Roman Origin of the Trust (Juridical–linguistic Peculiarities)’, Trusts & Trustees, 26:10 (December 2020), p.910 26 art.21(1)(b) Jersey Trust Law 1984; art.22(1) Guernsey Trust Law 2007 27 Lupoi, ‘Trusts and their Comparative Understanding’, p.292 28 ‘But that which resembles the use most is fidei commissio…’, Francis Bacon, Reading upon the Statute of Uses (1600)

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‘The proposed Swiss trust is not intended to compete with offshore jurisdictions … and should not be taking part in what some authors have dubbed the “race to the bottom”’

answering more to the fideicommissum than the usus‑fructus of the civil law […]. The fideicommissum, which usually was created by will, was the disposal of an inheritance to one, in confidence that he should convey it or dispose of the profits at the will of another. […] This notion was transplanted into England from civil law, about the close of the reign of Edward III, by means of the foreign ecclesiastics.’29,30 THE PROPOSED SWISS TRUST The Expert Group hence decided to build upon these established principles of civil and Roman law. This option proved the most attractive because it avoided the need to introduce Anglo‑American split ownership in a civil‑law jurisdiction. By contrast, Liechtenstein introduced the trust and the business trust, based on the common‑law model, into its domestic legislation in 1926 (Treuhänderschaft and Treuunternehmen). Yet, almost a century after its adoption, the legal qualification of a Liechtenstein trustee’s rights over the trust property remains controversial.31 Accordingly, the first option that consisted of incorporating a foreign trust law into Swiss law, by means of a graft or a legal transplant, was discarded.

Rather, the Expert Group proceeded by analogy, by creating a new sui generis legal institution that offered the same characteristics and produced the same effects as a foreign trust, while respecting the principles of Swiss domestic law. As a starting point for its works, the Expert Group referred to Professor Luc Thévenoz’s 2001 book, which contains the commissioned report written for the Federal Office of Justice on ratifying the Convention.32 The Expert Group also considered the English and Welsh trust as the reference model.

Furthermore, as the Swiss trust would mainly be aimed at Swiss residents and due to the

traditional Swiss consensus, the Swiss statutory provisions protecting the rights of the settlor’s creditors, spouse or registered partner and heirs would be reserved. Thus, the proposed Swiss trust is not intended to compete with offshore jurisdictions (the distinctions are detailed below) and should not be taking part in what some authors have dubbed the ‘race to the bottom’.

More specifically, the proposed trust is based on legal institutions already known in Swiss law and, to the extent possible, it refers to rules that are already laid down in Swiss law or that have been clarified by case law. This option guarantees international recognition by way of the Convention. This also explains why the proposal is limited to express trusts; it does not provide for trusts created by law or by a court order (resulting trusts, constructive trusts and statutory trusts).

Given these characteristics, the Expert Group also suggests anchoring the Swiss trust in the Code of Obligations (CO) rather than the Civil Code (the Code). Moreover, because the proposed Swiss trust is neither a contract nor a legal entity, the new provisions are to be inserted between these two chapters, for systematic coherence, under a ‘title twenty‑two’ of the CO containing art.529a and thereafter of the proposed CO (p‑CO).

According to art.529a p‑CO, the Swiss trust is defined as a lasting legal relation between a trustee and a beneficiary with respect to a separate patrimony held in the beneficiary’s interest. It could be settled during the settlor’s lifetime (inter vivos) or upon death (mortis causa).

If it were settled by will or succession pact, but

29 William Blackstone, ‘Commentaries on the Laws of England II’, Oxford (1766), pp.327–328 on the civil‑law and canon‑law origins of trust law in England 30 Maurizio Lupoi, ‘English Equity and the Civil Law – A tale of two worlds’, Trusts & Trustees, 26:2 (March 2020), pp.176–182 31 The ‘Vollrechtstheorie’ v ‘dinglichen Verwaltungsrecht’; Roman Concelli, ‘Der Common Law Trust – Grundlagen, rechtsvergleichende Entwicklung und Rezeptionsmöglichkeiten aus Sicht der Schweiz’ (2017), n° 189 32 Luc Thévenoz, Trusts en Suisse – Adhésion à la Convention de La Haye sur les trusts et codification de la fiducie, Schulthess (2001). This book contains a draft proposal to codify the fiducie‑gestion/Treuhand/fiducia cum amico, an institution born out of business practices that was established and progressively recognised by Swiss courts since 1905; Grüring‑Duloil v Kappeler, ATF 31 11 105

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and tracing.42 By contrast to some asset protection jurisdictions, Swiss trust beneficiaries would be guaranteed certain minimal rights. Most importantly, beneficiaries would be entitled to request information from the trustee on their rights or expectations under the terms of the trust.

However, the trustee would be entitled to refuse to answer on the grounds provided for in the deed or if it jeopardised the legitimate interests of other beneficiaries.43 Further, a beneficiary could apply to the court for the removal of a trustee or a protector where they are in serious breach of their obligations.44

without providing for any trustee, the court could appoint one.33 Self‑settled trusts would also be allowed.34 The trustee could not be the sole beneficiary of a Swiss trust.35 The Swiss trust would entitle a settlor to retain reserved powers, such as revoking the trust, amending its terms, consenting to certain acts of the trustee, hiring/firing the trustee, designating/ replacing a protector, holding the trustee to account or ordering an audit.36 These reserved powers would not suffer any representation, for instance, in case the settlor became incapable.

Moreover, the terms of the trust could also confer some or all of these powers to a protector, whose powers would also not be subject to any representation. However, if granted the revocation power, a protector could only revoke the trust during the settlor’s lifetime.37 In terms of duties, trustees would have to act diligently and faithfully in the exclusive interest of the beneficiaries.38 In particular, they would have to perform the duties arising from the terms of the trust and the law, with such diligence as may reasonably be expected from a person with their abilities and profession. Unless otherwise provided in the trust deed, the trustee would also have to act impartially, avoid any conflict of interest in the exercise of their function, and invest the trust assets with due care and prudence in the interests of the beneficiaries.39 By law, trustees would be entitled to an appropriate remuneration, the reimbursement of costs as well as compensation for damages suffered through no fault of their own.40 They would be liable for any damages caused to the trust fund or a beneficiary arising from their failure to discharge their duties, in accordance with art.97 (among others) of the CO. Moreover, the trust deed could never exclude liability for fraud or gross negligence of the trustee’s auxiliary.41 In line with modern trust laws, the draft Bill also contains provisions on insolvent trusts

DISTINCTIONS The draft Bill also contains certain classic limitations inspired by English and Welsh law: following the Saunders v Vautier rule, if all the beneficiaries have been identified they may terminate the Swiss trust earlier by unanimous agreement in writing.45 Also, and in any event, a Swiss trust comes to an end 100 years after its settlement at the latest.46 Finally, a Swiss trust can neither act as a purpose trust nor be used as a charitable trust.47 In comparison, several offshore trust laws authorise the settlement of perpetual trusts and non‑charitable purpose trusts.

These limitations are notably meant to create a clear distinction from Swiss foundations that, by contrast, enjoy legal personality, may be perpetual and can be settled for charitable purposes.

Moreover, the respective regulatory regimes of Swiss trusts and foundations are different, as professional Swiss trustees require a licence to operate. Further, trusts are flexible by nature, and the rigidity of some rules governing Swiss foundations limit their use to private purposes and exclude almost any use for commercial or financial purposes.48 In addition, recent attempts at liberalising the Swiss foundation have failed.

In 2020, a draft Bill aimed at implementing the Luginbühl initiative was rejected during the consultation phase, as most of its proposals

33 art.529b §2 p‑CO 34 art.529b §3 p‑CO, provided the trust deed specifies the assets settled by the settlor into the trust.

35 art.529c §2 p‑CO 36 art.529e, 529i §1 and 529t p‑CO 37 art.529f p‑CO 38 art.529h p‑CO 39 art.529h §3 p‑CO 40 art.529o p‑CO 41 art.529k p‑CO

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42 art.529r and 529q p‑CO 43 art.529i p‑CO 44 art.529s §2 p‑CO 45 art.529u §2 p‑CO. That said, the settlor’s consent to the dissolution may be reserved under the trust deed.

46 art.529u §1 p‑CO 47 art.529a §1 with 529d p‑CO 48 Explanatory Report 1.1.6.1

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were deemed highly controversial.49 In the same vein, the Federal Administrative Court recently rendered a judgment whereby a Zurich foundation was refused registration based on art.335 §2 of the Code, which prohibits family maintenance foundations.50 Although this (outdated) provision does not apply to trusts, the Expert Group decided not to repeal it so as not to mingle with a separate legal institution.51 These separate functions and clear distinctions drawn between Swiss trusts and foundations should reassure proponents of foundations.

Incidentally, history should reassure all practitioners both common law and civil law alike: ‘In the ascendant for more than five centuries, from the days of Augustus, the trust finally under Justinian became the predominant legal institution. In the course of this history, the civil law institutions did not wither and drop.

They persevered.’52 The draft Bill also contains secondary proposed amendments to Swiss legislation to properly integrate this new institution into the existing framework, especially the Code, the Private International Law Act and the Debt Collection and Bankruptcy Act.53 With respect to successions governed by Swiss law, the testator would be entitled to bequeath all or part of the disposable portion of their estate to settling a trust.54 In case of bequests to a Swiss trust, the action for abatement may be brought against each beneficiary in respect of the benefits already received, or against the trustee in respect of the trust fund.55

summary procedure.56 Therefore, Swiss courts would have jurisdiction for non‑contentious applications when there is legitimate doubt about the scope of the rights or obligations, or to have the compliance of a proposed trustee act checked (blessing).57 However, as a notable Swiss finish, a Swiss trust could alternatively contain an arbitration clause that would be binding upon the settlor, trustee, beneficiaries and protectors for any legal issues arising from the trust, including non‑contentious applications as well as applications to remove the trustee or protector in case of breach of trust.58 This rule would complement the recently enacted Swiss provisions that enable arbitration clauses in unilateral legal acts. It would allow sensitive family or succession disputes to be settled in private with the assistance of professional Swiss arbitrators.59 NEXT STEPS On 12 January 2022, the draft Bill on Swiss trusts, together with its explanatory report, was published for consultation. During the consultation phase, stakeholders, including STEP and the SATC, will be able to submit their comments. The federal government will then review all the feedback and make any necessary amendments, before sending the final Bill to the Swiss parliament for consideration within its legal commissions and ultimately vote. It is hard to predict when these subsequent steps could occur but it is safe to assume that, given usual Swiss timing on the legislative process, any entry in force would not occur before 2023.

The first Swiss judgment on trusts dates to 1874. This is also the year when the famous Swiss escalator group Schindler was founded. Therefore, we can only hope that the proposed Swiss trust steps up to the plate and continues to elevate the Helvetic financial centre.

SWISS ARBITRATION Naturally, the draft Bill provides for the possibility of requesting the Swiss court’s intervention to decide certain questions. As these interventions fall within the scope of non‑contentious jurisdiction, they would be subject to the

DAVID WALLACE WILSON TEP IS A PARTNER AT SCHELLENBERG WITTMER, SWITZERLAND

49 All but one canton rejected the draft tax proposals as contrary to fundamental principles of Swiss tax policy and tax law (Swiss Parliament, press release of 4 September 2020).

50 X und Y Familienstiftung v Bundesmat für Justiz BJ, B‑951/2020, Federal Administrative Court, 16 August 2021 51 Bank X v Foundation Y, ATF 135 III 614, SJ 2010 I 229 52 Johnston, The Roman Law of Trusts, p.287 53 The Swiss tax treatment of (internal) trusts is outside the scope of the present contribution.

54 art.493 p‑Code 55 art.528 §3 p‑Code

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56 art.250 lit. b §§10‑12 proposed Code of Civil Procedure 57 art. 529v p‑CO 58 art.529w p‑CO 59 Daniela Dardel, Trust in Arbitration: Schweizerische Schiedsgerichtsbarkeit in trustrechtlichen Angelegenheiten, Schulthess, Zürcher Studien zum Privatrecht (2019)

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IMPLICATIONS OF PRESUMPTION An overview of identifying legal and beneficial ownership of an implied trust for UK tax purposes

BY CHRIS THORPE

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hen assessing investment income for UK income tax, or the underlying asset for capital gains tax or inheritance tax, what matters is identifying who the beneficial owner is. The legal owner will be known to the world, but the beneficial owner may not be the same person. When the legal and beneficial ownership is formally split via an express trust, there are specific rules to tax the trustees. An express trust is one where the trust was deliberately established under ‘express’ terms, usually written down in a deed or will – everyone knows who they are, what they are doing and where the legal and beneficial ownership lies. These trusts are recognised

by Her Majesty’s Revenue and Customs (HMRC) and effectively recognised by common law.

A bare trust is transparent for UK tax purposes, meaning the beneficiary is treated as owning the asset, even though they only hold the beneficial ownership. Bare trusts are usually created by deed.

They are deliberate and intended, and parties know where they stand. Occasionally, however, a bare trust is not expressly and deliberately created by the parties; rather, it is imposed by the courts in the name of equitable principles. The parties’ intentions are presumed or equity demands that beneficial ownership be assigned to someone other than the legal owner to remedy an unconscionable action.

ABSTRACT • This article looks at the imposition of beneficial ownership, critical for the assessment of UK tax, and how that can be done via a type of bare trust known as an ‘implied trust’. The main types of such trust, ‘resulting’ and ‘constructive’, are different because while the latter is traditionally a corrective tool in a fiduciary relationship, the former is based upon the presumed intentions of the parties.

• A third type of trust has emerged: the ‘common‑intention constructive trust’. This new type of trust is the same corrective tool as a traditional constructive trust. However, it uses the intentions of the parties to correct wrongs committed in equity, but not necessarily in common law. The ‘broken promise’ is a common example. Proprietary estoppel is an equitable remedy concerning ownership of a property and is often delivered through the new type of constructive trust to right an equitable wrong. Beneficial ownership indicates who will ultimately pay tax on an income source or capital asset, and the owner might not be so obvious.

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This type of corrective bare trust is known as an ‘implied’ trust.

necessity. The reason for this rule is sacred; for if the Chancery do take the liberty to construe a trust by implication of law, or to presume a trust unnecessarily, a way is open to the Lord Chancellor to construe or presume any man in England out of his estate’.4

IMPLIED TRUSTS ‘If it is intended to have a resulting trust, the ordinary and familiar mode of doing that is by saying so on the face of the instrument; and I cannot get, out of the language of this instrument, a resulting trust except by putting in words which are not there’.1

RESULTING TRUSTS ‘Presumed intention’ resulting trusts are those imposed by courts, looking at the presumed intentions of the parties and aiming to bring to fruition that intention. For example, that the person who advanced the money is the true owner and as such should be the beneficiary of that property held in trust by the legal owner; or that the transfer of an asset was not meant as a permanent gift, so the beneficial ownership remains with the original owner.

Another type of resulting trust is an ‘automatic’ one, which is borne primarily upon the failure of an express trust, when the title to a property remains with the settlor of the trust who has failed to effectively dispose of his property and fulfils the equitable maxim of ‘equity abhors a vacuum’ (i.e., someone must own the property). The automatic resulting trust takes the Latin word resultare (to ‘rebound’ or ‘spring back’) more literally by placing the ownership of a failed gift back into the hands of the original donor; the beneficial ownership is retained by the settlor, i.e., it is ‘never drawn off him’.5 The classic explanation, and indeed the origin of the description ‘automatic resulting trust’ was laid down by Justice Megarry:

This quote, from Smith v Cooke, gives us a clue about the starting position of defining an implied trust.

There is no written instrument outlining where the ownership is to lie, so the courts write words into the deed that are in accordance with the parties’ intentions, the principles of fairness and equity, or in the name of restitution. They are essentially in place to right a wrong or to recognise the true beneficial ownership in equity that was not forthcoming under common law.

Cook v Fountain laid down the modern distinction between express and implied trusts in 1676:2 ‘All trusts are either, first, express trusts, which are raised and created by act of the parties, or implied trusts, which are raised or created by act or construction of law; again, express trusts are declared either by word or writing; and these declarations appear either by direct or manifest proof, or violent and necessary presumption. These are commonly called presumptive trusts; and that is, when the Court, upon consideration of all circumstances presumes there was a declaration, either by word or writing; though the plain and direct proof thereof be not extant. In the case in question there is no pretence of any proof that there was a trust declared either by word or in writing; so the trust, if there be any, must either be implied by the law, or presumed by the Court.’3

‘The transfer to B is made on trusts which leave some or all of the beneficial interest undisposed of.

Here B automatically holds on a resulting trust for A to the extent that the beneficial interest has not been carried to him or others.’6

CONSTRUCTIVE TRUSTS

Constructive trusts are traditionally those imposed by law following an act of fraud or wrongdoing by individuals. In more modern times, the constructive trust has become a tool of the equitable/restorative concept of proprietary estoppel, whereby a promise, relied upon by someone to their detriment, has been reneged upon. The promise can be enforced and the

The imposition of an implied trust was traditionally a last resort. Lord Nottingham said: ‘The law never implies and the Court never presumes a trust, but in case of absolute 1 Smith v Cooke [1891] AC 297 at 299 (Lord Halsbury LC) 2 (1676) 3 Swans 585 3 Above note 2 at 591

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4 Above note 2 at 592 5 Godbold v Freestone (1695) 3 Lev 406 6 Re. Vandervell’s Trusts (No.2) [1974] Ch 269 at 294

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‘An early example of a constructive trust can be traced back to 1579, when the concept of constructive notice was imposed on vendors of leases who knowingly bought land, the freehold to which had already been bought’

unfortunate person who relied upon that promise can be given a beneficial proprietary stake in the property in question.

The basis of the ‘traditional’ constructive (derived from the word construe) trust was summed up nicely by Donovan Waters QC: ‘There is such a wide range of conflicting judicial and academic views, both as to the nature and the importance of the constructive trust in English law, that it is difficult to find two people who are in complete agreement. All the same, there is one point upon which all would agree. It is at least accepted by Courts and theorists that this trust is imposed by law, and that the intention of the parties, whom it affects, is consequently irrelevant.’7

use of the property as it went against their clear presumption that is equitable in the circumstances.

Where the traditional constructive trust rights legal wrongs based on fiduciary relationships, irrespective of anyone’s intention, the new‑model constructive trust corrects equitable wrongs based upon presumed intentions and equitable principles of fairness and good conscience.

Lord Diplock’s statement in Gissing v Gissing laid the foundation for these ‘common intention’ constructive trusts:9

It is therefore unlike the resulting trust in that it is based upon a construal of the legislation and is arguably a remedy to any breach thereof. The traditional constructive trust also revolves around the relevant parties’ relationship being a fiduciary one.

An early example of a constructive trust can be traced back to 1579, when the concept of constructive notice was imposed on vendors of leases who knowingly bought land, the freehold to which had already been bought.8 It is the ‘knowingly’ that is relevant: someone doing something that they know they should not. For example, somebody profiting from deliberate wrongdoing will hold their ill‑gotten gain as constructive trustees for their victims; or a shareholder who receives dividends knowing that the company has insufficient reserves will likewise hold that dividend as a constructive trustee for the company. If the individual acts in good faith with no malice aforethought, then they will not have constructive trusteeship imposed upon them.

‘A resulting, implied or constructive trust – and it is unnecessary for present purposes to distinguish between these three classes of trust – is created by a transaction between the trustee and the cestui que trust in connection with the acquisition by the trustee of a legal estate in land, whenever the trustee has so conducted himself that it would be inequitable to allow him to deny to the cestui que trust a beneficial interest in the land acquired ... and he will be held to have conducted himself if by his words or conduct he has induced the cestui que trust to act to his own detriment in the reasonable belief that by so acting he was acquiring a beneficial interest in the land.’

COMMON‑INTENTION CONSTRUCTIVE TRUST The common‑intention or ‘new model’ constructive trust bases itself upon the presumed intentions and, therefore, has something in common with resulting trusts. This class of trust sets itself up as being a weapon in the hands of the equitable concept of proprietary estoppel; that the conduct of the parties meant it would be inequitable to deny the beneficiary

There is arguably some overlap between the equitable concept of proprietary estoppel and the constructive trust imposed to enforce it, per Yaxley v Gotts,10 where Lord Justice Walker stated that ‘the

7 D. W. M. Waters, The Constructive Trust: the case for a new approach in English law, (University of London, Athlone Press, 1964) p.1 8 Ireby v Gibone (1579) Cary 82‑83

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9 [1971] AC 886 10 [2000] Ch 162

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‘There is arguably some overlap between the equitable concept of proprietary estoppel and the constructive trust imposed to enforce it’ two concepts coincide’. However, Walker LJ reminded us in Stack v Dowden that the estoppel is a ‘mere equity, asserting an equitable claim against the conscience of the true owner’ whereas the constructive trust is ‘identifying the true beneficial owner or owners, and the size of their beneficial interest’.11 The cure to a proprietary estoppel claim can be anything the court sees fit to right the wrong. This can include a monetary award, as in Habberfield v Habberfield,12 where the youngest daughter was promised a stake in the farm’s dairy unit by her father; however, upon his death, he left the farm to his widow, who then closed down the dairy unit. The England and Wales Court of Appeal deemed a GBP1.17 million award by the England and Wales High Court suitable to undo her father’s going back on his promise. A constructive trust could presumably have been an option of the court, but various factors pointed

towards the compensation. The common‑intention constructive trust is merely another tool in the court’s armoury.

CONCLUSION

Beneficial ownership is the key to UK taxation. More often than not, the beneficial and legal owners will be one and the same. If the ownership is to be intentionally split, then an express trust will exist and there are specific rules. However, the nature of the parties’ relationship and/or their relationship and conduct may lead to the ownerships being split by law and equity; in which case, that split may not be obvious. Tax advisors need to know where that beneficial ownership lies to know where the tax falls.

CHRIS THORPE TEP IS A TECHNICAL OFFICER AT THE CHARTERED INSTITUTE OF TAXATION

11 [2007] 2 AC 432 (HL) at 448 12 [2019] EWCA Civ 890

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DO ECONOMIC SUBSTANCE RULES APPLY TO PTCs? An overview of the potential application of economic substance laws to private trust company structures

BY DHARSHI WIJETUNGA, ELINOR BOOTE AND CHLOE GARCIA

HOW PTCs MAY BE RELEVANT OR LEGAL ENTITIES Economic substance laws are regulations that require ‘relevant entities’ carrying on ‘relevant activities’ to show economic substance in their jurisdiction of incorporation. A private trust company (PTC) may be structured to include a mix of both incorporated and non‑incorporated vehicles – such as companies, trusts (charitable, purpose and discretionary) and foundations – so it is quite conceivable that more than one vehicle may be conducting a relevant activity.

Jurisdictions such as Singapore, the Crown Dependencies and parts of the Caribbean allow PTCs by law. However, not all of these jurisdictions have enacted economic substance laws. A PTC set up and administered in Singapore, for example, is not currently subject to economic substance rules.

A company incorporated in any one of the jurisdictions currently enacting economic substance laws will usually meet the threshold test of being a relevant entity – called a ‘legal

ABSTRACT • Although the economic substance laws are not enacted under UK law, they are present in various jurisdictions that are highly relevant in the private wealth space, including the British Virgin Islands, the Cayman Islands and the Crown Dependencies, all of which are commonly used in private trust company (PTC) structuring.

• Many advisors are aware that the economic substance rules do not apply to trusts, but can economic substance principles apply to PTC structures? This article will discuss several scenarios where the directors of PTCs will need to be aware of the potential application of economic substance laws to the various entities administered and owned as part of a PTC, as well as some of the more common issues arising since the enactment of economic substance laws, in the context of their application to PTCs.

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‘Issues may now arise where the family and the professional board members reside in different jurisdictions and attend board meetings via teleconference’ entity’ under British Virgin Islands (BVI) economic substance law.

For example, in the case of the BVI, a PTC will be a legal entity if it is: • a company or limited partnership, where company is defined as: (a) a company within the meaning of s.3(1) of the Business Companies Act, 2004; (b) a foreign company within the meaning of s.3(2) of the Business Companies Act, 2004 that is registered under Part XI of that Act;1 and • not resident for tax purposes outside of the BVI. Note that a claim to the BVI’s International Tax Authority (ITA) with supporting evidence must be made to that effect.2 Examples of the ‘supporting evidence’ required were later clarified by Rule 3 of the BVI economic substance rules published in February 2020, which notes the following:

members reside in different jurisdictions and attend board meetings via teleconference. This may give rise to tax residence in another country and can have wide‑ranging consequences: a BVI PTC that is resident for tax purposes outside of the BVI will not meet the legal entity definition for BVI economic substance purposes.

RELEVANT ACTIVITIES OF A PTC In addition to acting as trustee, a PTC will own shares in one or more underlying companies and, in some cases, may finance group activities. The activities carried out by the PTC will therefore usually lend themselves to the relevant activity of either a ‘holding company business’ or ‘finance and leasing’. The question then is whether the PTC is doing enough to fall within the specific relevant activity.

‘Evidence which the ITA will accept to support the claim in rule 2 includes: a) a letter or certificate from, or issued by, the competent authority for the jurisdiction in question stating that the entity is considered to be resident for tax purposes in that jurisdiction, or b) an assessment to tax on the entity, a confirmation of self‑assessment to tax, a tax demand, evidence of payment of tax, or any other document, issued by the competent authority for the jurisdiction in question.’

HOLDING COMPANY For example, a BVI‑incorporated PTC will be carrying on the relevant activity of a holding company business if it is in the business of being a ‘pure equity holding entity’, where pure equity holding entity is defined as a legal entity that only holds equity participations in other entities and only earns dividends and capital gains. In comparison, although a Guernsey‑incorporated PTC will be carrying on a holding company business,3 the economic substance guidance of the Crown Dependencies implies that PTCs will not be carrying out holding company business, as the PTC is not the beneficial owner of the assets but rather functions as a trustee for one or more trusts.4 The guidance does note, however, that the company should consider whether it carries on any other relevant activities for its own account, not acting as trustee.

COVID‑19 has had an impact on how PTCs make decisions. In the past, it was common for the board to meet regularly in the jurisdiction of the PTC, but this may no longer be possible. An interesting feature of any PTC board is that most will be populated by a mix of family members, advisors and external service providers. Issues may now arise where the family and the professional board

3 As defined within the Guernsey Income Tax (Substance Requirements) (Implementation) Regulations, 2021.

4 4.1 Example 3, Guidance on aspects in relation to the economic substance requirements as issued by Guernsey, Isle of Man and Jersey (Version 2.0)

1 Economic Substance (Companies and Limited Partnerships) Act, 2018 2 Version 2 of the Rules on Economic Substance in the Virgin Islands, February 2020

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developments we have seen in many jurisdictions (such as the BVI and the Crown Dependencies’ recent amendments to include partnerships without legal personality in the scope of entities caught by economic substance rules, which were previously out of scope), intermediaries, whether advisors or trustees, need to be prepared to adapt as rules change. Over time, it is likely that the scope of the economic substance rules will continue to change or widen.

Figure 1: PTC structure Purpose trust, foundation or partnership holding the PTC shares

PTC – The Family Trust Company, BVI‑incorporated

OTHER ENTITIES IN A PTC STRUCTURE Figure 1 gives an example of a typical PTC structure and possible entities in this type of structure, several of which could be holding companies.

If the primary function of the entity is to hold equity participations, which are controlling stakes in other companies, and it has no other assets, then the entity is likely to be conducting the relevant activity of being a holding company and will be subject to the (reduced) economic substance test in its jurisdiction of incorporation. Jersey Co. 1 is the sole shareholder of Jersey Co. 2 and it has no other assets. It will therefore be a pure equity holding company under the Jersey economic substance rules.

In addition, entities within this structure may be financing and leasing businesses if they make loans to other entities within the structure and charge interest, i.e., if the lending is on commercial terms. For example, if Jersey Co. 1 provides a loan to BVI Co. 1 then it will also be carrying out the relevant activity of ‘financing and leasing’ and will be subject to the regular economic substance test.

Trustees have a fiduciary duty as regards their beneficiaries and should be monitoring trust investments and assets. If there are entities within the trust that are carrying out relevant activities, then the trustees should be aware of these activities, especially as it may be their obligation to instruct a service provider to arrange filing.

In addition, although this is less common, some structures may have their own fund or fund management entity. This business may not be widely trading if it only manages investments for the family or closed circle of beneficiaries. Fund management is a relevant activity, so this should also be on the trustees’ radar.

The Family Trust, discretionary and subject to Jersey law

Jersey Co. 1

BVI Co. 1

Jersey Co. 2

FINANCING AND LEASING In the BVI, a PTC will be carrying on the activity of financing and leasing if it is in the business of providing credit facilities of any kind for consideration,5 such as serving a treasury function or providing loans to other entities within the structure. This is similar across the relevant jurisdictions.

ACTING AS A TRUSTEE The business of acting as a trustee is not usually caught by economic substance rules. However, in light of the various economic substance law 5 s.3(1), BVI Economic Substance (Companies and Limited Partnerships) Act, 2018 (as amended)

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‘If nominee or corporate directors are used, they should be used sparingly and ideally be centralised in one location in order to ensure that the directed and managed test applicable to the entity’s relevant activity can be met’ that one of the economic substance requirements for entities (other than holding entities and those conducting intellectual property business) is that its activities be managed and directed in the jurisdiction of incorporation, issues may arise if individuals outside of the jurisdiction populate the board of the corporate director and participate in its decisions. This set‑up is seen especially in the case of larger intermediaries with a global reach, where client handlers and relationship mangers may not work in the jurisdiction of the PTC. The takeaway here is that if nominee or corporate directors are used, they should be used sparingly and ideally be centralised in one location in order to ensure that the directed and managed test applicable to the entity’s relevant activity can be met.

OUTSOURCING OF SERVICES BY PTCs Outsourcing of various corporate and administration services is very common in PTC structures. There are two aspects of outsourcing that may be relevant to economic substance laws: • The provider of the outsourced service could fall within applicable economic substance rules unknowingly if the activity/ies provided is one of the relevant activities (e.g., a headquarters business) under the laws in their particular jurisdiction.

• If the directors of the PTC outsource extensively, the PTC could be at risk of having little to no substance in the jurisdiction of incorporation and could therefore come under scrutiny for being a ‘shell’ company.6 A key consideration in any economic substance analysis taken therefore needs to be the interactions between entities within the structure and third parties, in particular regarding outsourced services.

A special note of caution should also be made regarding the use of nominee directors, given the latest published revisions to the Financial Action Task Force (FATF)’s Recommendation 24,7 noting that ‘countries should take measures to prevent and mitigate the risk of the misuse of nominee shareholding and nominee directors’. The FATF noted that said revisions were scheduled to be discussed during its February 2022 meeting.

As nominee/non‑executive directors are relatively commonplace in PTC structures, it is easy to see how PTCs could be the focus of enquiry by tax authorities in the future. The situation could be further complicated if a corporate director is used with its own board populated by individuals (usually employed by the corporate service provider) in different countries. Given

OWNERSHIP OF A PTC The shares of a PTC are commonly owned through an ‘orphan’ structure such as a purpose or charitable trust, but a PTC can also be owned by a company limited by guarantee or the PTC itself could be structured as a foundation, thereby eliminating the need for a shareholder at all. Will the economic substance laws catch a non‑traditional legal entity?

COMPANIES LIMITED BY GUARANTEE In general terms, a company limited by guarantee has members who are guarantors rather than shareholders, with the liability being limited (as per a limited liability company). The biggest difference in this type of company compared to the latter is that there can be no share capital.

Companies limited by guarantee are not exempt from reporting obligations, whether used in a PTC structure or not.

Under the Cayman Islands economic substance law, companies limited by guarantee fell under the definition of ‘domestic company’, which was

6 A shell corporation or shell company is a corporation without active business operations or significant assets.

7 FATF, Revisions to Recommendation 24 and the Interpretive Note – Public Consultation (Transparency and Beneficial Ownership of Legal Persons)

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automatically not a relevant entity. In 2020, the definition of ‘domestic company’ was amended, so that companies limited by guarantee will no longer be defined as domestic companies (and therefore not relevant entities) unless they otherwise satisfy the criteria in the definition of that term.

In the BVI, on the other hand, under the Business Companies Act, 2004, the definition of company includes BVI companies limited by guarantee,8 which means such entities are in turn caught under the definition of the BVI economic substance law definition of legal entity and are automatically in scope.

same family line is not carried on in a commercial manner or for members of the public, which would usually trigger a licensing requirement. There will usually be a host of conditions attaching to an exemption from licensing and these may include requirements such as outsourcing of designated services to licensed service providers in the jurisdiction.

In the Cayman Islands, although a PTC must be registered as a PTC with the Cayman Islands Monetary Authority, a PTC conducting only ‘connected trust business’ (as defined by s.2(1) of the Private Trust Companies Regulations (2020 revision)) does not require a licence to carry on such business.11 In the BVI, only unremunerated PTCs will be exempt from holding a trust licence.12 This is an example of a criterion that must be monitored to ensure that an exemption continues to apply.

Care also needs to be taken in ascertaining whether any licensing exemption is automatic.

For example, the provision of trustee services in Switzerland by a PTC to persons with whom they have economic or family ties is automatically exempt from ordinary licensing requirements under the Financial Institutions Act.13 Compare this to the Cayman Islands, where entities must register with the Cayman Islands Monetary Authority and demonstrate that they fulfil the relevant requirements in order to be exempt from any licensing requirements.

FOUNDATIONS Foundations are now legally recognised under the laws of both Guernsey and Jersey and are therefore permissible legal entities in both jurisdictions.9 However, if the PTC is set up as a foundation established under the Foundations (Guernsey) Law, 2012, it will be automatically out of scope of being a relevant entity under current Guernsey economic substance law, by virtue of a specific carve‑out within an amendment to the legislation.10 We have not yet seen the same carve‑out under either Jersey or Isle of Man economic substance law.

It is worthwhile to note that many jurisdictions have recently enacted amendments to their existing economic substance law to specifically include partnerships as legal entities for the purposes of economic substance law. Given the extension to partnerships, one can only wonder if foundations will soon be caught also.

OTHER REGIMES THAT MAY APPLY TO PTCs LICENSING OF PTC TRUSTEESHIP The provision of trust services is a regulated business in many of the commonly used trust jurisdictions, including most of the jurisdictions that have enacted economic substance laws since 2019. However, it is common to find exemptions from licensing for PTCs, usually based on the principle that the provision of trustee services to individuals who are blood relatives or within the

BENEFICIAL OWNERSHIP REGISTERS As more jurisdictions enact beneficial ownership or ultimate beneficial ownership registers, it is clear that this in an increasingly important area of law. Accordingly, PTCs are not immune to beneficial ownership considerations and are likely to be subject to some regulatory frameworks for beneficial ownership reporting. In the BVI, for example, under the Beneficial Ownership Secure Search System Act, 2017, the onus to supply documents and information on the entities for which they act as registered agent falls on the registered agent.14 The PTC must only file its

8 s.5(b)(c), BVI Business Companies Act, 2004 9 In Jersey, see the Foundations (Jersey) Law 2009 and in Guernsey, see the Foundations (Guernsey) Law, 2012 10 s.2(3)(a), Income Tax (Substance Requirements) (Implementation) (Amendment) Regulations, 2018

11 s.4(1), Private Trust Companies Regulations, 2020 12 s.5(1), Financial Services (Exemptions) Regulations, 2007 13 Note that the Financial Market Supervisory Authority, Switzerland’s financial markets regulator, has recommended that a written confirmation of the exemption be obtained.

14 s.9(1), Beneficial Ownership Secure Search System Act, 2017

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memorandum and articles of association to become incorporated as a PTC, which are then publicly available but, of course, contain little information on the structure.

It is difficult to know how this area of law will expand over time and to what extent PTCs will have to abide by new beneficial ownership registers in any, many or all of the common jurisdictions.

good governance, full compliance and sensible long‑term planning.

CONCLUSION The legislation in this space and the scope of existing rules are likely to increase as a result of the trend towards more visibility into wealthy businesses and individuals. As models such as environmental, social and governance investments become more common and the balance between privacy and transparency is consistently debated, it is very important to be making future‑proof governance choices. It is worth noting that this is an area of law that is subject to change. In the future, ‘carrying on business as a trustee’ may be a relevant activity in itself.

GLOBAL COOPERATIVE TAX REGIMES A very clear global compliance trajectory is that more efforts are being made to tackle tax avoidance, evasion and non‑compliance. The move towards transparency and combating tax avoidance is reflected in the economic substance legislation discussed in this article, but also in many other measures such as trust registers, automatic exchange of information regimes and anti‑money laundering regulations. This clearly applies to the corporate space and the private wealth space. It is vital that advisors are aware of the different measures projected to come into force and are able to help clients maintain

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DHARSHI WIJETUNGA TEP IS A PARTNER, ELINOR BOOTE IS AN ASSOCIATE AND CHLOE GARCIA TEP IS A TRUST AND ESTATE PRACTITIONER AT CHARLES RUSSELL SPEECHLYS, ZURICH AND LONDON OFFICES

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BOOK REVIEW PAUL BECKETT

Beneficial Ownership Registers: The STEP Handbook for Advisers ISBN: 9781787424142 PRICE: GBP175 PUBLISHER: Globe Law and Business EDITED BY PAOLO PANICO TEP REVIEWED BY PAUL BECKETT

B

eneficial Ownership Registers is a timely and important new resource for practitioners across a wide range of disciplines who find themselves grappling with the complexities of identifying their clients and meeting anti‑money laundering and countering the financing of terrorism (AML/CFT) compliance requirements. It is a multi‑author work and the reader can rely with complete confidence on their expertise.

It describes itself as a handbook for advisors and expounds the application in concrete legislative terms of international regulations that, by their all‑embracing nature, have a tendency towards abstraction.

The purpose of its authors is not, therefore, to give an academic critique of the beneficial ownership registration regime, but the book is not too shy to point out the limitations of that regime and the difficulties that practitioners will experience, faced with a growing global industry

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in beneficial ownership avoidance structures, as well as plain old‑fashioned skulduggery: ‘Those whose intentions are to commit crime or finance terrorism do so by concealing their identity and lying to achieve that goal. The effectiveness of central registers that record the names of registered owners may, in certain circumstances, be of limited utility in actually achieving the registers’ goals, especially if those filing the information are disposed to conceal their identity.’ — John Riches TEP and Eleanor Riches‑Lenaghan.

In particular, the awkwardness of applying the description ‘beneficial owner’ to Anglo‑Saxon trusts, and of identifying trustees, protectors and beneficiaries as coming within this category – something born of a European civil‑law mindset and wholly at odds with the equitable principles on which trusts are founded – is made apparent.

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BOOK REVIEW PAUL BECKETT

The opening chapters are by the book’s consulting editor Paolo Panico TEP, alongside John Riches TEP and Eleanor Riches‑Lenaghan.

They set EU beneficial ownership registration regulations in their historical and contemporary context (the EU’s Fourth and Fifth Anti‑Money Laundering Directives). The country chapters cover some, but not all, of the 27 EU Member States (Austria, Belgium, Cyprus, the Czech Republic, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Poland, Portugal, Slovenia and Spain). However, the materials are

not confined to the EU and include the UK, the Crown Dependencies, Liechtenstein and the US. It is to be hoped that this book will become a standard work of reference, updated to include all 27 EU Member States and reissued on a regular basis, so as to enhance in this fast‑changing field the clarity and comprehensiveness that this first edition enjoys.

PAUL BECKETT TEP IS A SENIOR COUNSEL AT MANNBENHAM ADVOCATES, ISLE OF MAN

MEMBER DISCOUNT The registration of the details of beneficial owners has become a new variable to be considered in any estate planning or asset protection exercise and more generally in any circumstance where a company or any other legal arrangement is created. The first to comprehensively approach this topic, this book, which is co-published by Globe Law and Business and STEP, provides an in-depth analysis of the beneficial ownership registers legislation in a number of EU jurisdictions as well as in the UK, which pioneered it with the creation of its own ‘PSC Register’. It also looks at similar initiatives being experienced in some leading international financial centres as well as in the US. STEP members receive a 20 per cent discount (GBP140 for members, GBP175 for non‑members).

Find out more at www.step.org/books/step-books

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T R U S T Q U A R T E R LY R E V I E W

EDITORS PHILIPPE DE SALIS, STONEHAGE FLEMING, NEUCHÂTEL, SWITZERLAND, +41 32 723 7000, PHILIPPE.DESALIS@STONEHAGEFLEMING.COM ROBIN MACKNIGHT, WILSON VUKELICH, ONTARIO, CANADA, +1 905 940 0516, RMACKNIGHT@WVLLP.CA ED POWLES, MAURICE TURNOR GARDNER, LONDON, UK, +44 (0)20 7456 8623, ED.POWLES@MTGLLP.COM CAROLYN SPARKE QC, QUEENSLAND BAR, AUSTRALIA, +61 (0)7 3012 8539, SPARKIE@VICBAR.COM.AU KEITH WALLACE, REED SMITH, LONDON, UK, +44 (0)20 3116 3624, KWALLACE@REEDSMITH.COM SHELLEY WHITE, WALKERS, CAYMAN ISLANDS, +1 345 914 4205, SHELLEY.WHITE@WALKERSGLOBAL.COM EDITOR-IN-CHIEF: LOUISE POLCARO HEAD OF EDITORIAL: BLÁTHÁIN IQBAL MANAGING EDITOR: KAITLYN GUTZKE, EDITOR@STEP.ORG ASSISTANT EDITOR: LOREN HARWAY

PUBLISHERS THINK, CAPITAL HOUSE, 25 CHAPEL STREET, LONDON NW1 5DH, TEL: +44 (0)20 3771 7200, FAX: +44 (0)20 7723 1035, WWW.THINKPUBLISHING.CO.UK MANAGING EDITOR: MIKE HINE ART DIRECTOR: GEORGE WALKER CLIENT ENGAGEMENT DIRECTOR: ANNA VASSALLO SALES DIRECTOR: TOM FOUNTAIN, TEL: +44 (0)20 3771 7250, TOM.FOUNTAIN@THINKPUBLISHING.CO.UK

READING THE TRUST QUARTERLY REVIEW COUNTS TOWARDS STEP’S CPD REQUIREMENTS: WWW.STEP.ORG/CPD

The articles published in this review are for general guidance and education only. They do not necessarily represent the views of STEP or TACT. Reliance should not be placed on these articles, nor should decisions be taken, or not be taken, on the basis of the articles, without specific advice being obtained. ISSN 1466 7932. © 2022 STEP. All rights in and relating to this publication are expressly reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without written permission from STEP. The views expressed in Trust Quarterly Review are not necessarily those of STEP and readers should seek the guidance of a suitably qualified professional before taking any action or entering into any agreement in reliance upon the information contained in this publication. While the publishers have taken every care in compiling this publication to ensure accuracy at the time of going to press, neither they nor STEP accept liability or responsibility for errors or omissions therein, however caused. STEP does not endorse or approve any advertisement and has no liability for any loss caused by any reliance on the content of any such advertisement.

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