In practice, trusts and foundations frequently raise questions regarding their VAT treatment – especially when cross-border services are involved. A key element in this context is the reverse charge mechanism, a special VAT system that under certain conditions shifts the tax liability to the recipient of a service. Determining whether a trust or foundation is classified as domestic or foreign for tax purposes is critical to define the correct VAT treatment. In 2022, the Swiss Federal Tax Administration (FTA) clarified its position in this matter. This article provides an overview of the current legal framework and outlines key considerations for practical implementation.
Reverse Charge Mechanism – General Principles
The reverse charge mechanism ensures equal treatment of domestic and foreign service providers. When a Swiss-based recipient receives a service from a provider abroad who is not VAT-registered in Switzerland, the recipient must account for Swiss VAT instead of the foreign service provider. If the recipient of the service is VAT-registered, they may recover the input VAT to the extent of their taxable quota.
According to Article 45 of the Swiss VAT Act (MWSTG), the reverse charge applies in the following cases:
- Services subject to the place-of-recipient rule, provided by non-Swiss businesses not registered for VAT in Switzerland;
- Importation of data carriers without market value;
- Delivery of immovable goods not subject to import VAT (e.g. delivery under a contract for work without importation of materials by a foreign installer);
Supply of electricity and gas from foreign providers to Swiss-based taxable recipients.It is important to note that software development performed on the client’s site in Switzerland by a foreign provider is treated as a supply of goods, not as an electronic service. Consequently, it generally does not fall under the reverse charge, although the distinction can be subtle.
Telecomunication and electronic services supplied to non-taxable recipients are also not subject to reverse charge. In such cases, the foreign provider becomes liable for Swiss VAT instead.
For entities registered in the Swiss VAT system, all such services must be accounted for – there are no de-minimis thresholds. However, for unregistered entities, the reverse charge only applies if annual services purchased from non-registered foreign providers exceed CHF 10,000 per year.
If an entity becomes taxable solely due to the reverse charge, it is not entitled to input VAT deduction. In this case, voluntary or mandatory VAT registration should be considered. Voluntary registration is only possible retroactively to the beginning of the current tax period.
Importantly, the reverse charge is not limited to conventional businesses but also applies to foundations and trusts. These legal structures need to be examined in more detail, which is why the following outlines the current guidelines established by the Swiss Federal Tax Administration (ESTV) and the resulting options for action.
For correct application of the reverse charge, it is necessary to determine whether a foundation or trust is considered domestic or foreign. Only then can one assess whether the service is deemed to have been provided in Switzerland and thus subject to reverse charge. For the sake of clarity, Switzerland and the Principality of Liechtenstein (including customs union territories) are both regarded as domestic for VAT purposes.
💡 Note
Determining the place of supply is also relevant for Swiss based service providers to ensure correct VAT treatment of their own services.
Reverse Charge for Foundations
Services provided to a domestic foundation are subject to VAT.
A foundation located abroad, where the allocation of assets can be revoked, is considered to have services provided domestically if the founder resides domestically.
For a foundation located abroad, where the allocation of assets cannot be revoked and at least half of the beneficiaries reside domestically, services to the foundation are regarded as being provided domestically.
In cases where a foundation is located abroad, the allocation of assets cannot be revoked, and the beneficiaries are neither known nor determinable, services to the foundation are considered to be provided at the foundation’s location. The tax treatment depends on the nature of the respective service.
💡 Note
Liechtenstein and Swiss foundations must have a domestic seat at the time of establishment to be governed by local law. Consequently, services provided to such foundations are deemed domestic. As a consequence, it should be assessed earl if a voluntary or mandatory VAT registration should be made.
Special Rules for Trusts – Core Principles
A trust is created when the settlor transfers assets to one or more trustees under a trust deed, obligating them to manage the assets for the benefit of the beneficiaries. The following explanations on trusts also include fiduciary entities established under Liechtenstein law without legal personality.
In general, the following main types of trusts are recognized under Liechtenstein law:
- Revocable Trust
- Irrevocable Fixed Interest Trust
- Irrevocable Discretionary Trust
For tax qualification purposes, the actual facts and circumstances take precedence over formal designations in the trust deed.
💡 Tip
On 28 April 2022, the FTA published updated clarifications and practical guidance, which includes – to a great extent – editorial changes, but also significant practice adjustments. The updated rules will be discussed below.
Revocable Trust
If the settlor retains the right to revoke the trust during their lifetime, they have not definitively divested themselves of the assets. He continues to have access the assets of the trust. As a result, the trust assets and income remain attributable to the settlor. Upon the settlor’s death, the trust becomes irrevocable.
Irrevocable Fixed Interest Trust
In cases where the settlor creates an irrevocable trust, they are definitively divested of assets. In relation to the trust assets, the settlor generally no longer has any rights or obligations. If the settlor names the beneficiaries in the trust deed, the trustee no longer has discretion over which income and assets to allocate to the beneficiaries, as the scope and nature of the distributions to the beneficiaries are already determined. The beneficiaries have a legally enforceable claim against the trustee.
Irrevocable Discretionary Trust
In this type of trust, the settlor also definitively divests themselves of their assets, and thus no longer retains any rights or obligations. However, in this case, the provisions generally only outline the principles for determining the beneficiaries. The trustee has the discretion to allocate the trust’s income and/or assets to a specific group of abstract, i.e., not individually defined beneficiaries (e.g., descendants who are in need). The actual beneficiaries are not predetermined and hold a mere contingent claim. In a Letter of Wishes, the settlor can communicate their intentions to the trustee and provide specific instructions.
Determining the Tax Jurisdiction for Trusts
Trusts themselves, due to their lack of legal personality, cannot become subject to VAT in their form as private legal relationships. However, to clarify the place of the service and the potential for a tax liability, a trust must still be assigned to either the domestic or foreign jurisdiction.
If a revocable trust is in place, and the settlor or at least half of the settlors have their domicile domestically, the services provided to the trust are considered to be rendered domestically. The tax treatment depends on the nature of the respective service. Multiple settlors form a collective entity.
If an irrevocable fixed interest trust or an irrevocable discretionary trust, as per definition, is in place, and at least half of the beneficiaries or the trustees (if the beneficiaries are not known, determinable, or defined) have their domicile domestically, the services provided to the trust are considered to be rendered domestically. The tax treatment depends on the nature of the respective service
Note
In the Principality of Liechtenstein, the tax authorities sometimes require the deposit or registration with the Office of Justice for the trust relationship to be recognized. The burden of proof lies with the taxpayer.
FTA’s Updated Practice from 2023 Onward
In the publication of the changes at the end of April, the FTA also published specific changes in practice that can be applied from 2023 onwards. The FTA explicitly refers for the first time to the effect and interpretation of Trust Deeds and Letters of Wishes. It is stated that the provisions in the Trust Deed and Letter of Wishes must be examined in detail on a case-by-case basis. If the Trustee (and Protector) explicitly state in writing that they wish to apply their discretion regarding distributions and beneficiaries in accordance with the provisions in the Letter of Wishes, these provisions are decisive for determining whether a domestic or foreign trust is applicable for VAT purposes. Furthermore, the FTA clarified that fallback clauses for determining the beneficiaries are only relevant if no other provisions have been made or are applicable.
Additionally, the FTA emphasized that the T-form as per Article 41 VSB is a suitable piece of evidence for determining whether the trust is classified as domestic or foreign. The information under section 4a of the T-form is decisive, while the information under section 4b is irrelevant.
Recommendations and Conclusion
Our advisory practice repeatedly shows that the risk of reverse charge VAT is often underestimated or not clarified—especially in the case of trusts and foundations. A detailed examination of the specific circumstances is absolutely necessary, both for those advising trusts and foundations and for service providers to ensure that their services are correctly invoiced. Since the trust’s setup and qualification may change upon the death of the settlor, it is advisable to review the situation at that time.
The practice changes from the FTA offer new opportunities depending on the setup and design of the legal structures, which, after a proactive review and clarification, can reduce the reverse charge issue for trusts.
Corporations and associations should also check whether they might become subject to reverse charge VAT. Here, as with foundations, voluntary or mandatory VAT registration may make sense, as the reverse charge VAT can be claimed back as input tax in the taxable quota. A VAT registration is not possible for the trust itself, but it is possible for a foundation or association if they have a business component.
To avoid late payment interest, the reverse charge VAT risk should be regularly analyzed.
Originally published in the VAT Newsletter 08 by WEKA Business Media AG, September 2022.
