The Regulatory Status Of PTCs Under The Swiss Law on Financial Institutions

Of course, such settlors shall put in place a specific trust deed, might want to appoint a protector and issue a legally unenforceable letter of wishes. However, given the extreme discomfort experienced by many settlors facing such a loss of control over their assets, a private trust company (PTC), which is far more effective than any letter of wishes, is a very attractive alternative. PTCs are companies created with the sole purpose of acting as a trustee of a trust or group of related trusts for the same family and offer many advantages such as high degree of control, confidentiality, efficiency, continuity, multi-generational family management of the family wealth, ownership of risky assets such as family-operated businesses, cost savings and greater investment flexibility.

Very wealthy families with complex asset structures are increasingly setting up a trust via a PTC.

As mentioned, this type of trust structure allows the client to retain extensive control over the assets and management of the trust by appointing family members and/or trusted professionals (lawyers, etc.) as board members of the PTC or by reserving the shareholding of the PTC or through a purpose trust whose sole purpose would be to hold the PTC’s shares.

The increased control of the structure by the settlor and/or his/her family might have an impact on its “solidity” i.e. from an asset protection or a tax efficiency point of view. Thus, careful consideration should be given before establishing a PTC as trustee of a family trust.

These entities can be established in several jurisdictions with the assistance of professional advisors. Switzerland is usually among the short-listed jurisdictions for several reasons, in particular:

• Swiss PTCs are deployed in cases in which clients prefer to be associated with onshore centres;
• As many clients often have assets in Switzerland, dealing with a Swiss-based trustee can simplify administration and reduce time-related costs;
• Switzerland is also a centre for financial and investment opportunities. Dealing with a Swiss company can therefore simplify due diligence processes;
• Switzerland has a strong tradition of excelling in providing a wide range of services to wealthy families from around the world.

When it comes to choosing the right jurisdiction, settlors would be well advised to consider, among other criteria, the possible licensing requirements in each considered jurisdiction.

Swiss Regulatory Requirements Related To Trustees

Trustees are subject to a licensing requirement and prudential supervision following the entry into force of the Financial Institutions Act (FinIA) on 1 January 2020. The scope of activity of specific trustees may, however, be very limited and the requirements of the FinIA may be disproportionate in light of its purpose in specific cases. The FinIA and the Financial Institutions Ordinance (FinIO) address these cases to some extent by specific exemptions.

In particular, the FinIA provides for a carve-out for persons managing assets exclusively for persons economically connected to them or with whom they have family ties. Despite the reference to "management of assets", the exemption also applies to trustees and not just to asset managers.

Family Ties

The FinIO further clarifies that this exemption also applies if the beneficiaries are not only persons with family ties but also institutions pursuing a public service or public utility purpose. The following individuals are deemed to be connected by family ties (art. 4 (1) FinIO):

i. relatives by blood or by marriage in the direct line;

ii. relatives by blood or by marriage up to the fourth degree in the collateral line;

iii. spouses and registered partners;

iv. co-heirs and legatees from succession until completion of the division of estate or allocation of the legacy;

v. remaindermen and residuary legatees in accordance with article 488 of the Civil Code (CC);

vi. Persons living in a long-term life partnership with the trustee.

Economic Ties

According to Art. 3 FinIO, companies or entities of a group of companies are deemed to have economic ties provided that they provide financial or trustee services to other companies or entities of the same group.

According to the Commentary of the Federal Department of Finance on the FinIO (the Commentary), parent companies, subsidiaries, and sister companies in particular are considered to be economically connected persons. In the sense of the Commentary, the group also includes, for example, group-related pension funds, employer pension funds, foundations, and non-profit organisations as well as their investment vehicles. The corporate treasury portfolio therefore often includes internal financial services of all kinds within the group: financial services to company-related pension funds (in particular company pension funds and company pension schemes, as well as their investment vehicles) in Switzerland and abroad; transitional financial services in the event of transactions as well as financial services to company-specific joint ventures; foundations and non-profit organisations as well as their investment vehicles in Switzerland and abroad. Trustee services may also be involved. This applies insofar as the activities (e.g. also portfolio analysis) are carried out for third parties in the circle of persons mentioned.

The Commentary confirms that Art. 4 (2) and (3) FinIO also cover PTCs and similar asset management relationships. The Commentary clarifies that a PTC is a company formed for the sole purpose of acting as trustee for a single trust or a group of trusts of the same settlor or a defined circle of beneficiaries (usually a particular family) - usually all the trusts of a settlor or several trusts with the same circle of beneficiaries.

Due to the limitation to the fourth degree in the collateral line, family offices and trust structures established for the benefit of families comprising several generations may not meet the conditions.

However, the PTC could also fall outside the scope of application of the FinIA if its activity is not considered to be carried out in a professional capacity.

According to Art. 17 para. 2 of the FinIA, a trustee is anyone who manages or disposes of separate assets in a professional capacity for the benefit of a beneficiary or for a specific purpose on the basis of a trust deed within the meaning of the Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition.

Art. 19 para. 1 FinIO specifies that trustees carry out their activity in a professional capacity and within the meaning of money laundering law if:

a) they generate gross proceeds of more than CHF 50,000 per calendar year;

b) they enter into business relationships with more than 20 contracting parties per calendar year or maintain at least 20 such relationships per calendar year; or

c) they have an indefinite power of disposal over third-party assets in excess of CHF 5 million at any given time.

The first two criteria, namely gross income of CHF 50,000 and 20 business relationships per calendar year, apply equally to portfolio managers and trustees.

However, the third criterion, i.e. unlimited power of disposal over assets in excess of CHF 5 million, does not apply to trustees in their capacity as trustees, as the assets they manage in this capacity do not belong to "third parties" but are their property as trustees (p. 90 of the Commentary).

It follows from the above that if the PTC does not earn more than CHF 50,000 p.a. gross from its activity as trustee for the trusts under consideration, it should be exempted from the FINMA authorization requirement, even if there is not the required family or economic link between the concerned persons.

Furthermore, Art. 19 Para. 2 of the FINMA Ordinance states that activities carried out on behalf of institutions or persons referred to in Art. 2 Para. 2 letters a, b, d and e of the FINMA Ordinance are not taken into account in the assessment of whether professional activity is involved. In other words, it is conceivable that the PTC could act as trustee of a certain family trust under the "family exception" and receive fees in excess of CHF 50,000 and also acts as trustee of a trust with no family or economic ties to another family, without this leading to liability under the Swiss Financial Market Supervisory Authority (FINMA), provided that the fees received for acting as trustee of that other family trust do not exceed CHF 50,000. However, such structure might be considered as abusive if the remuneration model is unbalanced. In case of doubt, we would recommend applying for a confirmation with the FINMA that the concerned PTC is not subject to a license application.