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Russians place their trust in Switzerland


The combination of the economic crisis and the growing pressure being exerted by western governments to increase tax revenues has forced the wealth planning community to shift their focus east in the hope of diversifying its commercial and geographical risks. With their burgeoning private wealth market in need of professional wealth management services, Russia and CIS countries in general, offer significant wealth structuring and management opportunities for quality service providers. Whilst Russia has not been spared by the financial crisis, one positive outcome for the private wealth management community has been the growing realisation by many wealthy Russian families and their advisors of the need for quality service providers who not only can offer sophisticated asset protection and estate planning solutions, but also have the ability, through the intellectual capital of their employees and network of advisers, to adapt to clients’ changing circumstances and be pro-active in the management of their structures.

It is worth noting that tax will generally be a minor driver in the structuring of Russian family affairs. This is due mainly to the favorable Russian tax environment for resident individuals. Of course, a structure should be as tax effective as possible, however, of more importance will be solutions that promote efficient estate planning and owing to the specificities of the Russian environment, robust asset protection and confidentiality.

Among the many private wealth management tools available to Russian clients, trusts provide flexible and efficient structures within which to manage their affairs, once the issue of relinquishing control is understood and accepted.

Trust is a common law concept, underpinning which is the legal transfer of assets to a third party (trustee) on defined terms as a means of achieving a wide range of asset protection and succession benefits. Although it might first appear that the trust concept would be alien to residents of a civil law country such as Russia, trusts and trust type arrangements have been used by many a wealthy Russian family for some time now and this notwithstanding there being no concept of trust under Russian law and the fact that Russia has not ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition of 1 July 1985. In the past (and alarmingly in some present cases), very few wealthy Russians held assets in their personal name. Most favoured stand alone companies as asset-holding vehicles. While these offer a degree of confidentiality through the nominee relationship arrangement, stand alone companies are of limited use for inter-generational estate planning and asset protection. As successful Russian businesses expanded westwards, such ‘nominee shareholdings’, ‘handshake deals’ and other such agreements, which had been the norm, created difficulties for these clients when it came to effecting an IPO or other corporate restructuring where a standard prerequisite is the confirmation of legal ownership as evidenced by adequate legal documentation. The lack of such documentation often severely hampered the ability of clients to conduct business or seek funding from western financial institutions. Structuring business assets using trusts and underlying companies with clear ownership and reporting lines and adequate documentation in place can help prevent such issues.

Where assets are held personally, on the death of the relevant individual, forced heirship provisions, as they apply in Russia, will dictate the devolution of the assets. Where assets consist of shares in an underlying business this may create succession and management issues for businesses that have been built over a lifetime. A properly established trust with underlying companies may help protect the interest of the heirs and allow for the business to continue without unnecessary disruption.

There is a growing trend among Russian families to structure their wealth through discretionary family trusts or Private Trust Companies (where families may retain an element of control over the assets while achieving separation of ownership and benefitting from confidentiality) and this has resulted in a gradual shift from traditional private banking towards bespoke family office type services.

Swiss based trustees are in a favourable position to deal with Russian clientele. Switzerland is in a convenient time zone (CET = GMT+1) to do business with Russia. Furthermore, despite the recent attacks on Switzerland’s confidentiality laws, the culture of the country’s financial industry is respectful of the need for privacy and recognises its rationale. The ratification of the Hague Convention in 2007 and the promulgation of the tax circulars dealing with the tax treatment of trusts, have further added to the attraction of having a Swiss based trustee. In an environment of uncertainty and instability, Switzerland offers a secure and reliable economic and legal environment. Indeed, Swiss courts are familiar with trust concepts and are used to dealing with trust disputes as demonstrated recently by the case of A vs. the Federal Prosecutors Office [2010]. An offshore trust established and administered in Switzerland will not be taxable here, and subject to certain exceptions neither will the settlor nor the beneficiaries on the creation of the trust. Another attractive feature of Switzerland is its large number of double taxation treaty agreements.

The recent initialing of double taxation agreements reflects the increasing concern of Russian authorities to prevent tax avoidance. Similarly, the soon to be introduced laws on transfer pricing only emphasize the need to obtain legal and tax advice before any planning is implemented so as to ensure that the relevant structure is compliant in both the jurisdiction/s where family members are resident and also where the assets are located.

With a proper understanding of the goals of the family, the nature of the assets held and the jurisdictions involved, the introduction of a well-conceived trust structure can significantly meet the needs and reduce the concerns of HNW individuals from the Russian and CIS countries.