For a long time, fiscal federalism resulted in the existence of 26 (often very) different cantonal tax laws. This situation hindered personal and economic mobility within Switzerland.**5** Taxpayers who were liable to be taxed in two or more cantons were subjected to different assessment principles and procedures in each canton: for example, in the case of a taxpayer who lived in one canton and owned real estate property in another. Furthermore, an exit tax could be imposed if an individual or a legal entity relocated from one canton to another.

In order to remove these obstacles, in a referendum of 12 June 1977, the Swiss people accepted a new federal competence allowing the federal legislator to harmonise cantonal and federal direct tax law. Subsequently, the Federal Tax Harmonisation Act entered into force on 1 January 1993, and after a transition period of 8 years has actually applied from 1 January 2001.

The Federal Tax Harmonisation Act significantly improved tax coordination in Switzerland, introducing tax harmonisation with regards to direct taxes between the Confederation and the cantons (vertical tax harmonisation) as well as between the cantons themselves (horizontal tax harmonisation). It is a legal framework that contains rules on the tax subject, the tax object, the tax base, the tax period and the tax procedure. Some of these rules go into minute detail, whilst others leave a certain scope of action and some room for interpretation to the cantons. Tax rates and tax allowances are, however, not within the scope of the federal competence. In this regard the cantons remain fully sovereign. Hence, tax competition between the cantons and between the municipalities is not hindered by the Federal Tax Harmonisation Act.**6**

4 According to Article 134 Constitution, these are the value added tax, the stamp duty, the withholding tax as well as special consumption taxes. In contrast, income taxes are levied on the federal and cantonal levels and, depending on the cantonal order, on the communal level as well.

5 See for more detail on this subsection and on the chapter as a whole: Simonek, Tax Coordination, pp. 236.

# **2. Main (Constitutional) Principles**

#### **a) Principle of Legality**

The principle of legality (Article 5 Constitution) is of fundamental importance in Swiss tax law. Article 127 I Constitution ensures its application to tax matters and states that *"the main structural features of any tax, in particular those liable to pay tax, the object of the tax and its assessment, are regulated by the law".*

Swiss courts as well as academic literature demand strict adherence to the principle of legality. It requires that tax laws be subject to an optional referendum. Furthermore, the law must be specific enough to comply with the constitutional requirement of legality.

#### **b) Principle of Universality**

The principle of universality is enshrined in Article 127 II Constitution. It demands that each member of a community contributes to the community's financial burdens and denotes that all taxpayers or groups of taxpayers should be subject to the same taxes and taxation rules. Although the principle of universality aims to prevent the application of any privileges or discrimination, Swiss tax law nevertheless contains certain privileges which are considered justified due to their fulfilment of other constitutional principles and objectives. In particular, certain tax incentives granted to foreign wealthy taxpayers, such as the lump-sum taxation,**7** are considered justified by the goal of fostering the growth of the Swiss economy.

#### **c) Principle of Uniformity and Ability-To-Pay Principle**

The principle of uniformity and the ability-to-pay principle share similar content, requiring that each taxpayer must contribute to the fiscal burden of the state according to his or her economic, financial and personal resources (Article 127 II Constitution).

The Constitution demands both horizontal and vertical equality of treatment of individuals. Horizontal equal treatment requires that taxpayers living in the same economic and personal situation and deriving the same amount of taxable income be taxed equally.**8** On the other hand, vertical equal treatment

7 See p. 214.

8 See p. 223 for a leading court decision with regard to equal horizontal taxation of married and non-married couples.

requires that taxpayers in different economic and personal situations and/or with different levels of taxable income be taxed differently. Vertical equality particularly refers to the design of the tax scale and to the question of whether progressive, proportional or degressive tax rates should be chosen.**9**

#### **d) Prohibition of Inter-Cantonal Double Taxation**

Since 1874, the Constitution has explicitly prohibited inter-cantonal double taxation. Today, the prohibition is enshrined in Article 127 III Constitution. Inter-cantonal double taxation arises if a taxpayer is simultaneously subjected to the same or similar taxes on the same tax object by two cantons: for example, if the taxpayer is considered to be a tax resident of two cantons, or if the business income of a taxpayer is taxed in two cantons. No law has been enacted to prevent inter-cantonal double taxation. Instead, the Federal Supreme Court developed a dense network of rules covering the allocation of taxing rights between the cantons. Although over time some of these rules have been incorporated into the Federal Tax Harmonisation Act, the majority of the intercantonal allocation rules are still based on case law.

The basic rules are the following: any income from real estate, permanent establishments and fixed places of businesses may only be taxed by the canton wherein the property is situated. The same rules apply to the taxation of net wealth. All other income or net wealth, including income from employment or moveable property, may only be taxed by the canton where the taxpayer has his or her main tax residence (usually the taxpayer's centre of life, in particular the place where his or her family lives and where he or she is integrated into social life).

Furthermore, the constitutional prohibition of inter-cantonal double taxation entails a non-discrimination rule: a taxpayer who is subject to taxation on only part of his income in a particular canton (limited tax liability) may not be treated less favourably than a taxpayer who is subject to taxation on all of his income (unlimited tax liability) in that particular canton.

#### **e) Principle of Good Faith**

The Constitution expressly requires that *"state institutions and private persons shall act in good faith"* (Article 5 III Constitution). Additionally, Article 9 Constitution states that *"every person has the right to be treated by state authorities in good faith and in a non-arbitrary manner".* Whereas Article 5 III Constitution demands honest and trustworthy behaviour from every person, Article 9 Constitution explicitly focuses on the relationship between the individual and the state. Every person has a legally enforceable right to be treated in accordance with the principle of good faith by legislative bodies as well as by those who apply the law.**10**

In tax law, the principle of good faith is of key relevance. In particular, it is considered to be the legal basis for the prohibition of an abuse of rights and the Swiss doctrine of preventing tax avoidance. According to consistent jurisprudence of the Federal Supreme Court, the criteria for defining tax avoidance are the following:

If the criteria for tax avoidance are met, the taxpayer's action is disregarded and instead it is fictitiously assumed that the taxpayer would have chosen a reasonable course of action, on which basis he or she is then taxed. If, for example, the taxpayer tries to convert taxable dividend income into tax-free capital gain by using a completely inappropriate transaction structure and thereby fulfils the conditions for tax avoidance, taxable income from dividend instead is assumed and taxed accordingly.

In addition, the principle of protecting a legitimate expectation is important in the context of the Swiss tax ruling practice.**11**

10 See for more detail on this subsection Madeleine Simonek, The principle of good faith in Swiss domestic and international tax law, in Cécile Brokelind (ed.), Principles of Law: Function, status and impact in EU tax law, Amsterdam 2014, pp. 319.

11 See for more details on the Swiss tax ruling practice pp. 224.

# **II. Most Important Taxes and Tax Codes**

### **1. Federal Taxes**

#### **a) Federal Direct Taxes**

#### aa) Introduction

The first federal direct tax was introduced during World War I to meet the increasing financial needs of the Confederation. The Confederation's right to levy a direct federal tax has been prolonged ever since and today the competence is enshrined in Article 128 Constitution.**12** The authorisation is still limited in time, relying on repeated extensions by popular vote (currently the Confederation has been granted the competence until 2035; Article 196 No. 13 Constitution).**13** As a consequence, the Confederation is forced to reconsider its financial regime on a regular basis, particularly since the federal direct tax makes up approximately one third of the federal revenue.

Based on Article 128 Constitution, the Confederation enacted the Federal Direct Tax Act**14** which regulates the federal individual and corporate income tax and provides for the imposition of a source tax on the income of certain individuals and legal entities.

#### bb) Federal Individual Income Tax

The federal individual income tax is levied from Swiss tax residents as well as from non-residents who have an economic attachment to Switzerland.

Tax residency is assumed if an individual either intends to live permanently in Switzerland (so-called "tax domicile"); stays in Switzerland for at least 30 days during which he is engaged in a gainful activity; or stays in Switzerland for at least 90 days without partaking in any gainful activity (so-called "tax abode"; Article 3 Federal Direct Tax Act). Swiss tax residents are subject to unlimited tax liability on their world-wide income, with exceptions for enterprises, permanent establishments and immoveable properties that are

12 See Madeleine Simonek, Kommentierung zu Artikel 128 BV, in: Bernhard Waldmann / Eva Maria Belser / Astrid Epiney (eds.), Basler Kommentar Bundesverfassung, Basel 2015, N 1 et seq., for additional information on the history of the federal income tax.

13 In a popular vote of 4 March 2018, the federation's competence was prolonged for another term of 16 years.

14 Federal Act on the Federal Direct Tax of 14 December 1990, SR 642.11.

situated abroad. Income derived from one of these sources is unilaterally exempt from taxation in Switzerland (Article 6 I Federal Direct Tax Act). Additionally, the rules set forth in double taxation treaties need to be taken into account.

Non-residents with an economic relationship with Switzerland are subject to a limited tax liability. Limited tax liability means that taxation is restricted to income that is derived from Swiss sources such as income from real estate, permanent establishments situated in Switzerland, or from gainful activity carried on in Switzerland (Article 6 II Federal Direct Tax Act).

The individual income tax is levied on the taxpayer's overall income. This includes income derived from employment and businesses as well as income from immoveable (e.g. rental income) and moveable property (e.g. interest, dividends, royalties, etc.), pension schemes and any other income that is realised on a single or regular occasion. Exempt from individual income tax are capital gains realised on privately held moveable and immoveable assets such as securities, works of art or real estate (Article 16 III Federal Direct Tax Act).**15** Consequently, losses incurred on such private assets cannot be deducted either. Capital gains realised on business assets are, in contrast, fully taxable while losses incurred on business assets are fully deductible although limited to a time period of seven years. The distinction between private assets and business assets is hence a rather weighty one, and in practice often a cause for dispute between the taxpayer and the tax authorities, particularly in cases in which an individual incidentally acts as a professional trader without having registered a business, for example in connection with securities or real estate.

Families are considered to form an economic unit for income tax purposes. The income of spouses living in an intact marriage (meaning not legally or effectively separated) and of partners living in a registered partnership are jointly assessed (Article 9 Federal Direct Tax Act).

There are various deductions which may be made from the taxable income (Articles 33, 33*a* and 35 Federal Direct Tax Act). For example, professional expenses are deductible from the gross income if they were closely enough linked to or caused by the earning of the income, e.g. expenses for (public) transportation (although this is capped at a certain amount),**16** expenses for any special clothing required for work, meals taken outside of the home, costs for professional development, etc. General deductions are also available for private debt interest, alimony or child support payments, donations to

15 On the cantonal level, capital gains on real estate are however taxed, principally, with a separate real estate capital gains tax.

16 Costs for private transportation are only deductible if no public transportation is available.

tax-exempt charities, contributions to social security institutions and pension plans, self-owned real estate maintenance costs, and medical expenses if not reimbursed. This list is non-exhaustive. Further, lump-sum allowances are granted for each dependent child, for married couples and for individuals who are providing financial support to a person in need.

The overall taxable income is taxed as a whole at the applicable tax rate. There are no baskets or schedules with different tax rates for certain kinds of income. Two different tariffs apply: one for single persons and one for married couples and/or families and single persons living together with minor children or persons requiring support (Article 36 Federal Direct Tax Act). The tax rate for the federal income tax currently starts at a taxable income of CHF 17,800 per tax year for those who are single and CHF 30,800 per tax year for married couples. Income which falls below this level is not taxed. The tax scale is progressive. For example: the tax rate for a single person with a taxable income of CHF 100,000 amounts to 2.87%, while a taxable income of CHF 200,000 is subject to a tax rate of 6.78%. A married couple with the same taxable income would pay federal income tax at a rate of 1.97% or 6.28% respectively. The maximum tax rate is 11.5%: it applies to a taxable income of over CHF 755,200 (for singles) and CHF 895,900 (for married couples).**17**

Swiss residents with foreign citizenship who are not engaged in any gainful activity in Switzerland may request that they are not taxed according to the ordinary assessment principles, but instead on a lump-sum basis (Article 14 Federal Direct Tax Act). The income tax in these circumstances is not based on the taxpayer's effective world-wide income, but—with some exceptions on the annual living costs of the taxpayer and his or her family (Article 14 III Federal Direct Tax Act). The precise justification of the very favourable lumpsum taxation is disputed, but its goal is mainly considered to be that of attracting very wealthy people to Switzerland. On the cantonal level, some cantons removed lump-sum taxation in order to better ensure equality (e.g. Zurich and Basel Stadt).

Tax assessment is based on a personal tax return to be completed by each individual taxpayer. Switzerland's system does not provide for a general salary tax (commonly referred to as a "pay as you earn" system). However, a source tax is levied in some circumstances (see below). The due date for filing the tax return is usually 31 March of the calendar year following the tax year. The assessment procedure for assessing the federal income tax is delegated to the cantons: they assess the federal income tax together with the cantonal income and net wealth taxes (Article 2 Federal Direct Tax Act).

#### cc) Federal Corporate Income Tax

Legal entities that either have their statutory seat or their place of effective management in Switzerland are subject to the federal corporate income tax, known as net-profit tax (Article 50 Federal Direct Tax Act). A corporation is considered to have its statutory seat in Switzerland if it is registered with the Swiss Register of Commerce. For determining the effective place of management, the decisive criterion is where the activities which serve to achieve the company's business purpose take place in their entirety. Thereby, the day-today business decisions taken by the company are at the core of what constitutes the place of effective management, as opposed to merely strategic or administrative decisions.

Swiss income tax law generally follows the separation principle: legal entities and their shareholders are taxed separately. For that reason, Swiss income tax law does not provide for group taxation. However, a so-called participation exemption is available to avoid triple or multiple taxations within a group (Article 69 Federal Direct Tax Act). Partnerships are principally taxed transparently, and the net profit of the partnership is attributed to each partner according to the partnership agreement (Article 10 Federal Direct Tax Act).

Similar to the individual income tax, legal entity taxpayers with a personal attachment to Switzerland (i.e. statutory seat or effective place of management) are unlimitedly liable to pay tax on their world-wide income, except for income arising from permanent establishments, enterprises or real estate located abroad (Article 52 I Federal Direct Tax Act). Non-resident legal entities with an economic attachment to Switzerland are subject to a limited tax liability. This mainly includes income derived from permanent establishments, business enterprises or real estate located in Switzerland (Article 52 II Federal Direct Tax Act).

The federal corporate income tax is levied at a flat rate of 8.5% (Article 68 Federal Direct Tax Act). However, because paid taxes are deductible, the effective tax rate is actually lower and may range from approximately 7 to 7.8%, depending on the total amount of federal, cantonal and communal taxes. A reduced tax rate of 4.25% applies for associations, foundations and other legal entities (Article 71 Federal Direct Tax Act).

The required date for filing the tax return depends on the balance sheet and financial reporting date of the legal entity that is usually specified in the company's articles of association. The tax return generally has to be filed 6 to 8 months after the reporting date.

dd) Source Tax Levied on Income of Certain Individuals and Legal Entities

Because the ordinary tax assessment procedure is considered too complicated to comply with for taxpayers who are only living in Switzerland for a short period of time, Swiss tax residents with foreign citizenship and who do not have a Swiss residence permit are taxed at source for their employment income (Articles 83–90 Federal Direct Tax Act). The employer of such an individual is thus obliged to deduct the source tax directly from the salary and forward it to the tax administration. The source tax is principally a final tax replacing the ordinary income tax, however, a retrospective ordinary assessment follows in certain situations, for example, if a taxpayer derives a gross income from employment of more than CHF 120,000.

Source taxation also applies to certain non-residents who have an economic attachment to Switzerland and derive income from Swiss sources, such as cross-border commuters, artists and sportspersons, or board members and company directors (Articles 91–101 Federal Direct Tax Act). New rules on source taxation of non-residents came into force on 1 January 2021. Implementing a Federal Supreme Court decision of 26 January 2010,**18** the so-called *Schumacker doctrine* of the European Court of Justice was adopted in Swiss tax law: a non-resident taxpayer may request an ordinary assessment in certain situations, in particular where he or she receives 90% or more of his or her world-wide income in Switzerland (Article 99*a* Federal Direct Tax Act and Article 14 Ordinance on Source Taxation for the Federal Direct Tax).

#### **b) Withholding (Anticipatory) Tax**

The law covering the federal withholding tax is the Federal Act and Ordinance on Withholding Tax.**19** Withholding tax is levied on the revenue from certain moveable capital assets (particularly dividends and interest on bonds and bank accounts), on Swiss lottery winnings (including commercial bets)**20** and on certain insurance benefits (Article 1 Federal Withholding Tax Act). The Swiss debtor (e.g. a Swiss bank paying out interest on bank accounts or a Swiss company distributing dividends) is obliged by law to withhold the tax at source.

20 In principle, however, taxation of lottery winnings is restricted to amounts exceeding CHF 1 million.

The tax rate for the withholding tax varies depending on the category of item at hand. It amounts to 35% for moveable capital revenue and lottery winnings, 15% for life annuities and 8% for other insurance benefits.

The purpose of the withholding (anticipatory) tax is to secure correct income tax declarations and to avoid tax evasion and tax fraud. For that reason, Swiss resident beneficiaries can request a full reimbursement of the tax, provided that they fully comply with their income tax reporting obligations in due time.

In contrast, for non-resident beneficiaries the withholding tax is principally a final tax. Non-resident beneficiaries may only ask for a full or partial refund of the withholding tax if they are entitled to the benefits of the respective double taxation treaty concluded between Switzerland and their country of tax residence.

#### **c) Federal Value Added Tax**

The Federal Value Added Tax (VAT) was introduced in Switzerland on 1 January 1995. The current Value Added Tax Act entered into force on 1 January 2010.**21**

Swiss VAT is a general consumption tax aiming at the taxation of nonbusiness-related domestic consumption of goods and services. Therefore, VAT is levied on supplies of goods and services by a taxable person within Switzerland as well as on the import of goods and the acquisition of certain services from abroad. Because only consumption within Switzerland should be taxed, an exemption applies for the export of goods as well as the provision of certain services that are not considered to be consumed in Switzerland.

VAT is typically levied at all stages of the value chain. Since only final consumption should be taxed, registered businesses are allowed to deduct paid VAT as input VAT (net all-phase principle). This system avoids an accumulation of tax within the value chain. Because the tax must be shifted to the consumer, the business itself should not systematically have to bear any final tax costs. With regards to VAT, a taxable person is anyone who carries on a business activity in Switzerland. Currently, exemptions exist for businesses that generate a worldwide turnover of less than CHF 100,000 per year or CHF 150,000**22** per year in case of non-profit and charitable institutions (Article 10 Value Added Tax Act). Upon registration with the Federal Tax Administration, the taxable person must self-declare and self-assess the VAT amount due, generally on a quarterly or semi-annual basis.

21 Federal Act on Value Added Tax of 12 June 2009 (Value Added Tax Act, VAT Act), SR 641.20; see for an English version of the Value Added Tax Act www.fedlex.admin.ch (perma. cc/JWD3-TNJ5).

The VAT rates amount to 7.7% for all supplies not subject to a special VAT rate, 3.7% for accommodation services and 2.5% for certain goods and services typically used in daily life: for example, food, water, drugs and newspapers (Article 25 Value Added Tax Act). The maximum VAT rates are set out within the Constitution (Article 130 I Constitution). Any increase or decrease of the VAT rates thus requires the approval of the majority of the Swiss people and the cantons in a referendum. Past experience of referenda in this area demonstrates that the Swiss people tend to agree to a VAT increase if the additional revenue generated is used for a specific purpose, such as the development of railway infrastructure or to support the social security system through additional financial means.

#### **d) Other Taxes**

According to the Federal Act on Stamp Duties,**23** the Confederation levies three types of stamp duties: an issuance stamp duty on the issuance of shares as well as participation and dividend certificates in companies and cooperatives, a transfer stamp duty on the transfer of securities and a stamp duty on insurance premiums.

Pursuant to Article 131 Constitution, the Confederation is also permitted to levy further consumption taxes, for example: a tobacco tax, a beer and spirits tax; a mineral oil tax on crude oil, other mineral oils, natural gas, the products obtained from the processing thereof and motor fuel; a mineral oil surtax on motor fuel, and an automobile tax on the value of imported or domestically manufactured automobiles. Moreover, the Confederation levies a CO2 tax and a federal casino tax.

### **2. Cantonal and Communal Taxes**

#### **a) Taxes on Income and Net Wealth**

#### aa) Individual Income Tax

The cantons are obliged to levy an individual income tax based on the principles and framework outlined by the Federal Tax Harmonisation Act (Articles 3 et seq. Federal Tax Harmonisation Act). As already mentioned, tax allowances and tax rates are not harmonised. As such, the income tax rates vary considerably between the cantons and, additionally, between the communes of a canton. Traditionally, the municipalities with the lowest income tax rates are located in the Cantons of Schwyz and Zug. The more expensive regions are traditionally found in the French part of Switzerland. For example, a single person with a taxable income of CHF 100,000 per year pays cantonal and communal income taxes at a total rate of 7.65%**24** if he or she lives in Wollerau (Canton Schwyz) and at a total rate of 22.62%**25** if he or she lives in Les Verrières (Canton Neuchâtel). If such a person lived in the City of Zurich, the income tax burden (cantonal and communal levels) would amount to 13.8%.**26**

Up to this day, political efforts to restrict the cantons' sovereignty to autonomously determine their income tax rates have been unsuccessful. The positive effects resulting from tax competition have thus far been accorded more weight than considerations of equality, particularly since tax competition is considered to foster the spending discipline of the cantons (and communes) and to uphold their right of fiscal self-determination. Furthermore, there is a fiscal equalisation system in place on both the cantonal and the federal level that aims to somewhat balance out the different burdens, financial strengths and financial needs of the 26 cantons (and the various communes).

#### bb) Net Wealth Tax for Individuals

Based on Article 2 Federal Tax Harmonisation Act, the cantons are obliged to levy a tax on the net wealth of individuals. In general, individuals' worldwide net wealth is subject to the tax, including for example bank deposits, securities, cars and real estate, but not household goods and personal effects (Article 13 Federal Tax Harmonisation Act).

Assets are usually assessed at fair market value at the end of the tax year (Article 14 and Article 17 Federal Tax Harmonisation Act). All debts are deductible. Further, different personal deductions are available. Some cantons further provide for tax-free minimums in terms of net wealth (e.g. Canton of Obwalden CHF 25,000, Canton of Zug CHF 100,000).**27**

Most of the cantons provide for a system of progressive tax rates. The maximum cantonal and communal net wealth tax rates range from between approximately 0.1% in the Canton of Nidwalden to 1% in the Canton of Geneva.**28**

#### **b) Taxes on Net Profit and Capital of Legal Entities**

#### aa) Net-Profit Tax of Legal Entities

The cantons are also obliged to levy a tax on the net-profit of legal entities. Again, the relevant provisions with regards to the tax subject, the tax object,

28 Maximum tax rate for a single person without children for the tax year 2021.

the tax period, the tax procedure, and the tax penal law are harmonised and are very similar or even identical to the federal net-profit tax. The tax rates are, however, not harmonised.

On 1 January 2020, the Federal Act on Tax Reform and Financing of Social Insurance (TRAF) came into force and led to the abolishment of several cantonal preferential tax regimes. In their place, the TRAF introduced new instruments into the Federal Tax Harmonisation Act: in particular, a mandatory patent box regime that must be introduced by the cantons or as an optional instrument an additional deduction for qualifying research and development expenses. Further, as a consequence of the TRAF, most cantons have reduced their corporate income tax rates. At present, the ordinary tax rates for corporations range between 11.9% in the Canton of Zug to 21% in the Canton of Bern (the total of the effective federal, cantonal and communal tax rates in the canton's capital).**29** The tax rates of the low-tax cantons will be adjusted again to comply with the minimum tax rate of 15% agreed by the OECD and G20 member states for multinational companies with a turnover of more than EUR 750 million (Pillar Two). Switzerland plans to introduce the qualified domestic top-up-tax as well as the income inclusion rule and the undertaxed payments rule. It is expected that the implementation of the minimum tax will enter into force on 1 January 2024.

#### bb) Capital Tax

The cantons are also obliged to levy a capital tax on a legal entity's equity. For corporations, the taxable equity includes the paid-in share capital, any capital contributions made by the shareholders, and taxed hidden reserves. In almost all cantons the tax rate is proportional and ranges from 0.001% in the Cantons of Uri and Obwalden to 0.5% in the Cantons of Neuchâtel and Valais.

#### **c) Further Cantonal Taxes**

#### aa) Inheritance and Gift Taxes

Inheritance and gifts are not subject to income tax on the federal or cantonal level. However, almost all cantons levy a special inheritance and/or gift tax.**30** Inheritance and gift taxes are not harmonised.

29 Tax rates for the tax year 2021. "Effective tax rate" means the applicable tax rate before deduction of the taxes.

30 The Canton of Schwyz and the Canton of Obwalden levy neither an inheritance nor a gift tax; the Canton of Luzern does not levy a gift tax.

The inheritance tax is levied on the transfer of assets to heirs and legatees (statutory and designated), and the gift tax comprises gifts inter vivos. The (surviving) spouse is exempted from inheritance and gift taxes in all cantons, and most cantons also fully exempt all children and grand-children. The tax is generally calculated on the market value of the assets at the time of the deceased's death or the gift minus any transferred debts. Other relevant factors in calculating the tax rate are the total amount of the assets transferred and the relationship between the heir and the deceased (i.e. the degree of relationship) or the donor and the donee respectively.

#### bb) Real Estate Capital Gains Tax

As outlined above, capital gains realised on moveable and immoveable private assets are tax-free on the federal level. Capital gains realised on moveable assets are also tax-free on the cantonal level.

The cantons are, however, obliged to levy a real estate capital gains tax on privately held immoveable property. This tax qualifies as a special kind of income tax. Even though the real estate capital gains tax is one of the harmonised taxes (Article 2 Federal Tax Harmonisation Act), there is much less harmonisation here as compared to harmonisation regarding individual and corporate income taxes. However, the Federal Tax Harmonisation Act demands that short-term real estate capital gains are subject to a higher tax burden in order to combat property speculation (Article 12 V Federal Tax Harmonisation Act).

#### cc) Other Property and Expenditure Taxes

Due to the fiscal sovereignty of the cantons, the cantons or their communes provide for various further taxes. Most cantons levy a real estate transfer tax on the transfer of ownership of immoveable property (house and land) including any associated rights located in Switzerland. Some cantons levy a special real estate property tax that is assessed on an annual basis and calculated on the tax value of the property at the end of the tax period.

All cantons levy a motor vehicle tax on all motor vehicles and trailers located in Switzerland. Such motor vehicles must be duly registered in the respective canton in order to receive the registration papers and a number plate.

Further cantonal or communal taxes include dog taxes, entertainment taxes levied on the ticket price of public events, lottery taxes, stamp duties and register duties as far as not covered by the federal stamp duties, city taxes or visitor's taxes for overnight stays, tourism promotion taxes, fire brigade exemption taxes, water taxes, etc.

### **3. International Tax Agreements**

#### **a) Multilateral Conventions**

One key multilateral convention recently ratified by Switzerland is the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), which aims to facilitate the implementation of the minimum standard outlined in the BEPS final report. The Convention came into force on 1 December 2019. Further, on 1 January 2017, the Convention on Mutual Administrative Assistance in Tax Matters took effect in Switzerland. Drafted by the OECD and the Council of Europe, the Convention is today's most comprehensive multilateral instrument applicable to all forms of tax co-operation which tackles tax evasion and avoidance. Subsequently, Switzerland also ratified the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information and the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports.

#### **b) Double Taxation Treaties**

Switzerland has signed a total of approximately 95 double taxation treaties covering individual and corporate income taxes as well as withholding taxes. Some of these treaties also cover net wealth and capital taxes. Swiss double taxation treaties principally follow the OECD model convention with just a few Swiss-specific deviations. Unlike the situation regarding income taxes, Switzerland has to date only concluded eight double taxation agreements covering inheritance taxes.

#### **c) Bilateral Agreements with the European Union**

Switzerland is not a member state of the European Union. Nevertheless, a close relationship exists between the two parties on a political, economic and cultural level. Over the years, countless bilateral agreements have been concluded to govern this relationship. From a tax perspective the most important agreements are the Agreement on Free Movement of Persons which prohibits—inter alia discrimination of EU nationals in Switzerland and vice versa,**31** and the Agreement on Automatic Exchange of Information in Tax Matters which replaced the former Agreement on the Taxation of Savings Income as of 1 January 2017.

31 See for a landmark case on the application of the Agreement on Free Movement of Persons pp. 225.

# **III. Landmark Cases**

### **1. Principle of Equality: Taxation of Married and Non-Married Couples**

In 1982, Mr. and Mrs. Hegetschweiler filed a complaint to the Swiss Federal Supreme Court, alleging that their canton of residence (Zurich) applied an income tax rate scheme that resulted in a non-justified higher, or at least different, tax burden for married couples as compared to unmarried taxpayers.

The Federal Supreme Court upheld the complaint, deciding that there had been an infringement of the Constitution.**32** According to the court, the principle of equality requires that a married couple must not be taxed at a higher rate than an unmarried couple living in the same circumstances and receiving the same taxable income.

As mentioned above, Swiss income tax law applies family taxation. The joint assessment in connection with the progressive income tax rates may often lead to a so-called "progression effect", meaning that the spouses pay higher taxes just because of their joint taxation.

As a consequence of the decision in the Hegetschweiler case, all the cantons had to amend their laws. The cantons introduced different measures to ensure equal treatment, such as splitting spouses' income to define the applicable tax rate, making special deductions for dual-income households, having various applicable tax rate schemes etc. Today, unequal treatment of married and unmarried couples is largely abolished on the cantonal and communal level. On the federal level, however, unequal taxation is not fully abolished. In particular, married couples with a high taxable income are still affected by the progression effect.

# **2. Ability-To-Pay Principle: Degressive Income Tax Rates**

In 2007, the Federal Supreme Court had to decide on the constitutionality of degressive income tax rates.**33**

The people of the Canton of Obwalden approved, in a popular vote, a new income tax scale that included degressive tax rates. The tax scale combined progressive tax rates applicable to a taxable income of up to CHF 299,999 with degressive tax rates starting at a taxable income of CHF 300,000. The income tax scale was hence as follows:

Figure 1: Tax Income Scale

A majority of 86% of the people of the Canton of Obwalden voted in favour of this new income tax scale, most likely being convinced by the government's argument that low-income tax rates for higher taxable income could attract very wealthy new taxpayers to the canton.

However, some taxpayers in the Canton of Obwalden argued before the Federal Supreme Court that the proposed partially degressive tax scale infringed the ability-to-pay principle as well as the principle of uniformity. The Federal Supreme Court upheld this complaint. They particularly considered that the conversion from a progressive to a degressive tax scale for taxable income over CHF 300,000 would be arbitrary and could not be reasonably justified. As a consequence, the new law did not enter into force. This judgement clarified that, in Switzerland, income tax rates must be progressive or at least proportional to income rates.

#### **3. Principle of Good Faith: Swiss Ruling Practice**

A Swiss company belonging to a Swiss group set up a permanent establishment in the Cayman Islands. The permanent establishment's purpose was carrying on financing functions for the whole group. In 1999, the cantonal tax administration approved the chosen structure in an advance tax ruling and confirmed that the income allocated to the Cayman permanent establishment would be exempted from Swiss income tax. A few years later, the Federal Tax Administration took the view that the Cayman permanent establishment did not have enough substance and that therefore the income previously attributed to the Cayman permanent establishment would be attributed to the Swiss company. The cantonal tax administration informed the Swiss company about this position in February 2005. This resulted in a dispute which was eventually brought before the Federal Supreme Court.

Advance tax rulings are of high practical importance in Swiss tax practice. Taxpayers are able to ask the competent tax authority to assess the tax implications of a proposed structure or transaction before implementing the structure or carrying on the transaction. Such assessments have a binding nature, based on Article 9 Constitution and the principles of good faith and the prohibition of the abuse of rights.

In the above-mentioned decision, the Federal Supreme Court confirmed the basic requirements for a tax ruling to have binding effect:

In the case at hand, the Federal Supreme Court established that the Swiss company's trust in the tax ruling should be protected for as long as its trust in the tax ruling was not destroyed.**34** However, from the moment the Swiss company received the letter from the cantonal authorities informing them of the opinion of the Federal Tax Administration, the Swiss company could no longer rely on the ruling and the protection of their good faith.

### **4. Principle of Non-Discrimination: Salary Withholding Tax**

X, a Swiss national living in France, commuted to Geneva every day for work. According to the double taxation treaty concluded between Switzerland and France, Switzerland was allowed to tax X's income from his employment.

Since X was a Swiss non-resident, his employment income was taxed at source. Under the Swiss source tax system, the source tax that was deducted from X's salary by his employer did not allow for the deduction of individual expenses, such as commuting costs, contributions to pension funds, and personal tax allowances. Instead, only flat-rate deductions were included in the source tax scale. X complained that such taxation infringes the principle of equality and the Agreement on the Free Movement of Persons concluded between Switzerland and the European Union.**35**

The Federal Supreme Court upheld X's complaint. The court referred to the Schumacker doctrine of the European Court of Justice (C-279/93), deciding that the principles developed by the European Court of Justice in that decision were also applicable to the Swiss source tax. In the case at hand, X earned more than 95% of his taxable income in Switzerland. According to the Schumacker doctrine, Switzerland therefore had to consider X's personal situation and was not allowed to tax him less favourably than a Swiss tax resident. Due to this decision, the law on the source taxation of employment income was amended.**36**

### **Selected Bibliography**

#### Madeleine Simonek

# **Peter Georg Picht / Goran Studen Civil Law Principles and Family Law**

# **I. Swiss Civil Code**

#### **1. History**

The first attempt to codify civil law in Switzerland was undertaken during the Helvetic Republic. However, with the Republic's decline in 1803, work on a comprehensive Private Law Code ceased.

In the 19th century, most cantons adopted civil law legislation with the aim of ending legal fragmentation and achieving legal certainty on a cantonal level. Whereas the French *Code Civil* of 1804 was used as a model for the (French and Italian speaking) cantons in western and southern Switzerland (Fribourg, Ticino, Vaud, Valais, Neuchatel, and Geneva), other cantons (amongst others, Bern, Lucerne, Solothurn, and Aargau) based their legislation on the Austrian Civil Law Code. A third group of German-speaking cantons in central and eastern Switzerland managed to remain uninfluenced by foreign legislation (for instance Zurich). Finally, a final group of central cantons (inter alia, Uri, Schwyz, Glarus, and Appenzell) completely abstained from enacting any comprehensive civil law legislation.**1**

The codification of the Canton of Zurich (1856) by Professor Johann Caspar Bluntschli was influential. It was Switzerland's first independently codified cantonal civil code. Bluntschli's work was well-recognised both nationally and internationally and it served as a model for the later codification and harmonisation of civil law on the federal level.

However, the Swiss civil law landscape was to remain heterogeneous throughout the second half of the 19th century. The 25 cantons**2** (i.e. federal states) retained their legislative independence, leading to a variety of civil codes. In the 1860s, the Swiss Lawyers' Association called for a unified civil code at the federal level. However, the first attempt to provide the federal legislator with the competence to enact such a code was rejected by both the people and the cantons in 1872. Shortly thereafter, Article 64 of the Constitution (1874) empowered the Confederation to legislate on all legal matters relating to commerce. The Code of Obligations was passed on 14 June

1 Peter Tuor / Bernhard Schnyder / Jorg Schmid / Alexandra Jungo, Das Schweizerische Zivilgesetzbuch, 14th edition, Zurich 2015, § 1 n. 2 et seqq.

2 Today, there are 26 cantons within the Swiss confederation. This has been the case since 1979 when the Canton of Jura seceded from the Canton of Bern by popular vote.

1881.**3** Finally, in 1898, the people and the cantons transferred the competence regarding civil law matters to the federal legislator.

Figure 1: Johann Caspar Bluntschli (1808–1881)4

### **2. Legislation**

To address the fragmented civil system, the Federal Council mandated Professor Eugen Huber to draw up a comparative compendium of all existing cantonal civil codes. From 1886 until 1893,**5**Huber published his comparative analysis in four separate volumes.

Following the comparative analysis, Huber published the first draft of the Civil Code in 1900. From 1900 until 1904, a commission of experts deliberated on the draft. Finally, on 10 December 1907, the Code was adopted by the Federal Assembly: it came into force on 1 January 1912.

3 As a matter of substantive law, the Code of Obligations—although adopted earlier—is the fifth part of the Civil Code. However, the Code of Obligations formally and in terms of general use is considered a distinct codification with separate (rather than continued from the Civil Code) article numbering. Therefore, this chapter does not address the Code of Obligations and its underlying principles (for details on the Code of Obligations see the chapter on Contract and Tort Law, pp. 317).

4 Source: Wikipedia, with reference to: Reproduction from Zurich—Geschichte Kultur Wirtschaft. Gebrüder Fretz, Zurich 1932 (perma.cc/5KNN-XFGQ).

5 Notably, Huber's assistance was mandated several years before the 1898 referendum which granted the federal legislator the competence to codify civil law. This was also the situation with the Criminal Code: although the assistance of Carl Stooss was mandated in 1892, the legislative competence was not granted to the Confederation until 1898. The most probable explanation behind this is that the Federal Council was fairly confident that the referendum would pass and was merely a formality; thus they wanted to push on with the project immediately; see for details on the Criminal Code the chapter on Criminal Law, pp. 409.

Figure 2: Eugen Huber (1849–1923)6

### **3. Gender Equality**

Upon entering into force in 1912, the Swiss Civil Code was in many ways a very modern work of legislation, which drew the admiration of foreign legal scholars.

In some ways, the Swiss Civil Code also managed to improve the legal position of women compared to the cantonal laws of the past. This first modernisation of women's rights was mainly driven by Switzerland's women's movement, inspired and led by Emilie Kempin-Spyri, who graduated from the University of Zurich in 1887, and thereby became the first female in Europe to earn a PhD in law.

Figure 3: Emilie Kempin-Spyri (1853–1901)7

6 Source: Wikipedia (perma.cc/EQ7T-E2UV).

Having said this, in terms of gender equality, the Swiss Civil Code remained very much a child of its time and, de facto, married women remained hugely restricted in their ability to act independently. They needed their husband's consent for any significant legal transaction.

It was not until the last quarter of the 20th century that the hierarchical male-leadership model of marriage was replaced by a new, partnership-based model of marriage and family. First, in the 1970s, adoption and child law was revised, which also improved the position of mothers. In 1988, the revised Marriage and Marital Property Law came into force, based on the principle of equal rights. On 1 January 2013, the major revision of the law on marital names came into force. Since then, the bride and groom have been able to retain their family names upon marriage (Article 160 I). However, they can declare that they wish to use one of their names as their common name (Article 160 II). If the bride and groom retain their family names, they must also determine at the time of marriage which family name their joint children shall bear (Article 160 III). A new child support law has also been in force since 1 January 2017. Under this law, parents have to decide who is to provide practical care for the child and who is to contribute to the care of the child through monetary payments. Since 2007, the registered partnership between persons of the same sex has been permitted under a separate federal law (*Partnerschaftsgesetz;* Same-Sex Partnership Act).**8** Finally, after a lengthy process dating back to 2013, in September 2021 the Swiss people overwhelmingly voted in favour of legislation allowing same-sex marriages as of 1 July 2022.

Despite these improvements, a lot remains to be done. The Swiss Civil Code in its current form does not adequately take into account the many forms of family cohabitation outside of a traditional marriage. Today's demands for a modern civil law thus call for more dynamic regulations that acknowledge new norms and values. One such example where Swiss civil law remains behind the curve is the lack of provisions in the area of non-marital cohabitation. While non-marital long-term relationships are nowadays commonplace, only recently the Swiss National Council refused to introduce regulations aiming at enhancing the legal position of cohabiting couples. Furthermore, legal problems and uncertainties remain in the dissolution of non-marital partnerships, since divorce law does not apply to them.

8 Federal Act on Registered Partnership for Same-Sex Couples of 18 June 2004, SR 211.231, see for an English version www.fedlex.admin.ch (perma.cc/B65A-LPZ8).

#### **4. Content9**

The Civil Code is comprised of 977 Articles.

The introduction contains ten articles, which contain general principles of Swiss law (application of the law, good faith, relationship between federal and cantonal law, and rules of evidence).

Part 1 (Articles 11–89*c*) covers the *Law of Persons* and mainly regulates the legal personality of natural and legal persons, legal capacity as well as the protection of legal personality in case of infringements. It also addresses the issue of the registration of civil status such as an individual's place of origin and domicile. The section on legal persons contains fundamental principles (Articles 52–59) that are universally applicable to all legal persons under Swiss law (such as the separate legal personality of legal entities, their capacity to act and to acquire rights and obligations, their seat, and rules pertaining to their dissolution). Articles 60–79 specifically address associations and Articles 80–89*a* deal with foundations.**10**

Part 2 is dedicated to *Family Law* (Articles 90–456). It addresses the marital law and marital property law. The family law part also contains provisions on kinship and, inter alia, regulates the parent-child relationship. An entire section (Articles 360–456) sets out measures for the protection of adults (including measures for legally incompetent persons and deputyship) and introduces the instruments of the health care proxy and the living will into Swiss civil law.

Part 3 of the Civil Code (Articles 457–640) deals with the *Law of Succession*  and is subdivided into provisions relating to heirs, testamentary freedom and testamentary dispositions, executors, the commencement and legal effects of succession as well as the division of the estate.**11**

Part 4 (Articles 641–977) focuses on *Property Law.12*

The final titlecontains 251 commencement and implementing provisions, which, inter alia, regulate the transitional relationship between this federal Code and its cantonal predecessors.

10 See chapter on Law of Persons, pp. 253.

11 See chapter on Inheritance Law, pp. 275.

9 In the following text, where Articles are mentioned without referencing their source of law, they are located in the Swiss Civil Code of 10 December 1907, SR 210; see for an English version of the Civil Code www.fedlex.admin.ch (perma.cc/DG3C-PVHW).

12 See chapter on Property law, pp. 297.

Figure 4: Structure of the Civil Code

### **5. Marital Property Law**

Swiss family law establishes three marital property regimes to govern the ownership of property: (i) the marital property regime of participation in acquired property; (ii) the community of property; and (iii) the separation of property. Participation in acquired property constitutes the default regime. It applies if the spouses do not conclude a pre- or post-nuptial agreement.

The marital property regime of participation in acquired property (Articles 196–220) distinguishes property acquired during the marriage from the individual property belonging to each individual spouse. Consequently, two different types of property can be distinguished, namely the individual assets of the spouses and the assets they acquired during the marriage.**13** The *acquired property* under this regime comprises the assets which a spouse acquired for valuable consideration during the marital property regime, in particular (Article 197 II):

By law (Article 198), a spouse's *individual property* comprises:

The marital property regime is dissolved on the occurrence of one of the following: (i) divorce, (ii) death of a spouse, or (iii) the implementation of a different regime (e.g. conclusion of a marriage contract changing the marital property regime). In the case of dissolution of the marital property regime of participation in acquired property, each spouse (or, in case of dissolution upon death, his/her heirs) keeps his or her *individual* property, and the spouses (or the surviving spouse and the deceased spouse's heirs) settle their debts to one another. The distribution of the property which was acquired during the marriage depends on the surplus or deficit of each spouse's *acquired* property, whereby each spouse is entitled to one-half of the surplus of the other spouse.

The marital property regime of *community of property* comprises two types of property: the individual assets of each spouse and the common assets of the couple. If the community of property regime is dissolved by the death

13 By default, registered partners live under the property regime of separation of property, see Article 18 of the Same-Sex Partnership Act. However, registered partners can opt-in and declare applicable the principles of the regime of participation in acquired property, by way of a property agreement.

of a spouse or the implementation of a different marital property regime, each party is entitled to one-half of the common assets and may keep his or her own individual assets.

Finally, in the *separation of property* regime only one type of property exists, namely the individual property of each spouse. Each spouse enjoys the benefits of his or her individual property. If the regime of separation of property is dissolved, each spouse keeps his or her individual property.

#### **6. Maintenance Foundations and Fee Tails**

Article 335 I establishes that assets may be tied to a family by means of a family foundation created under the law of persons (Article 80 et seqq.) or inheritance law (see Article 493) to meet the costs of raising, endowing or supporting family members, or for other *"similar purposes".* However, the establishment of (new) fee tails is explicitly prohibited (Article 335 II, Article 488 II).**14** This prohibition of fee tails aims at preventing the preservation and accumulation of wealth in dynastic family structures.

The Federal Supreme Court follows a strict interpretation of the phrase *"similar purposes"* contained in Article 335. In a key ruling it held that the establishment of family foundations for maintenance purposes is not permissible.**15** However, considering the historic will of the legislator at the time of the Civil Code's enactment, this ruling was neither imperative nor convincing in the light of modern foundation law developments and the generally liberal approach of Swiss civil law. Perhaps indicating a shift towards a less strict approach, the Federal Supreme Court held in 2009 that Article 335 is not a so-called *Loi d'application immédiate* preventing the legal recognition of maintenance foundations established under foreign law.**16**

15 DFC 71 I 265.

14 Fee tails in civil law jurisdictions were a way of connecting assets to a certain family over generations by bequeathing them from father to, traditionally, eldest son thereby, preventing desegregation of the family assets (e.g. lands, castles, etc.). Nowadays commonlaw trusts and, in some jurisdictions, family foundations can serve similar purposes.

# **II. Principles**

### **1. Application and Interpretation of the Law**

According to Article 1, which addresses the relationship between statutory law and judicial power, the court must apply the law to all legal questions which it can provide an answer to, either by directly applying its wording or by interpreting its terms (paragraph 1). However, in the absence of an applicable provision, a court shall decide in accordance with customary law and, in the absence of customary law, in accordance with the rule that it would establish itself if it were the legislator (paragraph 2). When applying and interpreting the law, the court shall follow established doctrine and tradition (paragraph 3).

Article 1 can be regarded as the civil law's expression of the constitutionally protected and fundamental principle of the *rule of law:* firstly, it provides for the *separation of powers* by requiring a court to apply the law in cases where it is applicable. The legislator passes laws as abstract and general rules; thus, it is for the courts to concretely apply the law in each individual case. Secondly, Article 1 dictates that, when interpreting the law, the courts must follow established *methodology.* Although the reference to doctrine and tradition in Article 1 is not exhaustive, it explicitly identifies established doctrine and case law as two relevant considerations of methodological interpretation in the process of finding justice.**17** Thirdly, Article 1 contains the *prohibition of arbitrary decisions.* In cases where the legislator has not passed any legislation, the courts cannot simply decide the case as they see fit. Instead, this provision stipulates a process according to which a court must resort to customary (e.g. local or professional) laws, if available. If neither explicit nor customary laws exist, the court must put itself in the shoes of the legislator and establish a rule that could serve as a general statutory law-provision. Even in this scenario, the court is not permitted unfettered discretion. By dictating that the court must *"act as legislator",* Article 1 demands a structured approach, and thereby subtly yet effectively reminds courts of the fundamental principles of the rule of law—such as proportionality and legal equality.

17 "Tradition" within the meaning of Article 1 includes established case law as well as established administrative practice, see Tuor/Schnyder/Schmid, § 5 n. 37 et seqq.

Whilst interpreting the law, the Federal Supreme Court utilises the following *common legal interpretation methods:*

It should be noted that there is no hierarchy between these methods of interpretation; no method has greater importance or is accorded greater weight than the others. Instead, the Federal Supreme Court employs a "pragmatic" pluralism of methods. According to this approach, the law must primarily be interpreted in the round: its wording, meaning, and purpose as well as its underlying values and inherent rationale all must be part of the consideration. The interpretation must not be solely based on the wording of the provision. Instead, the relevant rule must be considered within the context of the law in a broader sense, and as something which can only be properly understood and concretised when it is confronted with the facts of an individual case. In this way, the rule ultimately comes to life through interpretation.**19**

This pragmatic approach is criticised in legal doctrine. On closer examination, it can be convincingly argued that the Federal Supreme Court simply wants to keep the door open for any future interpretation of a certain law. Whether such a blurring of boundaries between the different interpretation methods strengthens legal certainty, is, however, highly doubtful. In addition, with this approach, it becomes increasingly difficult to draw the line between admissible further development of the law through judicial decisions (e.g. to close a legal loophole) and inadmissible "judicial legislation".

### **2. Good Faith**

Another fundamental principle of Swiss civil law is enshrined in Article 2: every person must act in good faith when exercising his or her rights or fulfilling his or her obligations. Further, this provision clarifies that the manifest abuse of a right is not protected by law. The general *principle of good faith* is not limited to civil law; it is universally applicable and has validity in all aspects of Swiss law.**20**

This general rule of good faith *(bona fide)* can be divided into two subprinciples:

The principle of good faith requires that the parties to a legal relationship (regardless of whether the basis of the relationship is law or contract) act in an appropriate and honest manner, remaining loyal to their legal obligations. In this regard, Article 2 codifies and channels universal moral and philosophical principles of integrity into the civil law.**21**

The principle of good faith reveals an important facet of Swiss civil law. Article 2 is the gateway and focal point for the legal interpretation of, among others, contracts, actions, etc., and, where necessary, the creation of amendments or supplements to legal declarations of intention. Under this Article, declarations of intention (such as declarations aiming at the conclusion of a contract) which are unclear, vague, or ambiguous and thus open to various interpretations will be interpreted in accordance with the so-called *principle*

20 DFC 83 II 345: "Article 2 of the Civil Code contains a general rule which applies in addition to individual legal norms, and which claims validity also outside the scope of federal civil law, e.g. in cantonal procedural law [...]."; see the chapter on Administrative Law, pp. 169.

21 Hence, it is not surprising that the sub-principle of mutual respect has much in common with Immanuel Kant's categorical imperative: "Act only according to that maxim whereby you can, at the same time, will that it should become a universal law", Immanuel Kant, Groundwork of the Metaphysics of Morals, in:Immanuel Kant, Practical Philosophy, The Cambridge Edition of the Works of Immanuel Kant, translated and edited by Mary J. Gregor, Cambridge 2008, pp. 37.

*of trust.22* This principle mandates that in cases where the true intention of the declaring party cannot be unequivocally established, the declaration will be interpreted as the receiving party, in good faith, could and should have understood it.

Other facets of the principle of good faith are the rule against unusual clauses and the ambiguity rule. In particular, in the context of general terms and conditions (GTCs), where an unusual or surprising wording was implemented without this being explicitly brought to the attention of the other party, it will not be considered binding on the weaker or less experienced party. Furthermore, ambiguous wording will be interpreted by the court to the detriment of the author of such a clause.

The *prohibition of the abuse of rights* allows Swiss courts to rectify or prevent a result which, although correct from a purely formalistic legal point of view, would be ethically and morally questionable. It leaves room for the courts to correct or prevent unbearable consequences which might otherwise undermine trust in the legal system's ability to provide fair and reasonable (and morally acceptable) results.**23** According to established case law of the Federal Supreme Court, a blatant abuse of the law will not be granted legal protection (Article 2 II).**24** Whether an exercise of rights is abusive must be determined in light of all the facts and circumstances of the individual case. Case-law has established certain types of conduct which will be considered abusive such as, amongst others, the exercise of a right which is not justified by any legitimate interest, the misuse of a legal institution for inappropriate interests or the contradictory use of rights in a manner that violates valid expectations based on prior conduct. However, Article 2 II is to be applied restrictively and only where the results of strictly applying the law would be severely unjust.

For example: With the aim of reducing taxes and duties, the seller and buyer of a building plot decide to formally reduce the official purchase price in the notarised deed of sale from CHF 6 million to CHF 5 million. However,

22 This applies to declarations of intention which must be received by the other party *(empfangsbedürftige Willenserklärungen).* In case of a unilateral declaration of intention, which does not need to be received by another party to become legally binding (e.g. a testament), the Federal Supreme Court applies the so-called principle of intent *(Willenstheorie)* according to which only the true and real intention of the declaring party is relevant (and not the interpretation of a hypothetical and [quasi-]objective receiving third party)—as long as the interpretation result can be reconciled with the wording of the declaration.

23 DFC 125 III 257 c. 2 a.

24 Among others, Judgement of the Federal Supreme Court 4A\_141/2008 of 8 December 2009.

they agree that the buyer shall pay the seller the difference in cash. If the buyer, upon signing the notarised deed of sale, refuses to pay the additional CHF 1 million, the seller cannot claim invalidity of the notarised purchase agreement in order to get back ownership of the building plot in return for refund of the purchase price. Although, from a formal point of view, the notarised purchase agreement would be deemed invalid because it did not contain the correct purchase price and, therefore, does not fulfil the requirement that the *entire* agreement regarding the sale of land must be notarised, such approach could promote illicit behaviour between colluding parties and undermine the trust of the general public. Therefore, Article 2 II prohibits the seller from invoking the invalidity argument.**25**

One important group of cases revolves around the argument of *venire contra factum proprium,* whereby the contradictory conduct of one party is sanctioned if the other party, based on a previous act or omission of the former, could reasonably expect a different behaviour and has made financial arrangements (e.g. investments) as a result of his or her expectation.

For example: company X (a limited liability company) has rented business premises from company Y (a company limited by shares) for a fixed period of ten years. According to the rental agreement, the parties agreed to start negotiating the terms and conditions of a contract renewal three months prior to the end of the ten-year period. During the negotiations, the CEO of company Y repeatedly stated both verbally and in various e-mails that the lessor wanted to sign a new rental agreement (substantially in line with the previous one which allowed the tenant to modify the premises according to the tenant's needs) with company X *"because of the great personal and business relationship"* between the two parties.

Against this background and expecting to stay in the business premises for another five to ten years, company X started to make substantial renovations and modifications to the rented space. During this time, the parties negotiated the terms of a new contract. Company Y CEO has frequently visited the rented premises where he complimented Company X on the construction works.

However, on the day that the old rental agreement officially expired and with only minor issues left to negotiate, the CEO of company Y suddenly sent

25 Interestingly, in similar cases (DFC 92 II 323 and DFC 104 II 99 [see below, pp. 248]) the Federal Court declined to apply Article 2 II on the basis that the other party had wilfully colluded in such illicit conduct. Instead, the Court emphasised that the legal situation created by the parties as a result of the notarised deed of sale (i.e. the transfer of ownership and the changes registered in the land register) justified rejecting the formally correct argument of invalidity in order to uphold the public reliance on and faith in entries in the land register.

an e-mail to company X stating that *"as you are aware, the rental agreement is expiring today"* and demanded that company X *"remove any installations and to make sure to hand over the premises in the original condition by 5.00 pm today at the latest".*

Based on the CEO's behaviour here, company X could reasonably expect to sign a new rental agreement which would also allow the tenant to make renovations and modifications to the rented premises. By repeatedly signalling to company X during the negotiations that a contract renewal could be expected and then subsequently abruptly abandoning the negotiations, the CEO of company Y acted in a contradictory manner.

As a result and based on Article 2 II, company Y could neither claim that the original rental agreement expired nor demand that company X hand over the business premises in the original condition.

#### **3. Rules of Evidence**

When the Civil Code came into effect in 1912, the federal legislator lacked the competence to legislate on matters of civil procedural law.**26** However, it was deemed necessary that the Civil Code should address certain procedural issues regarding evidence, which could not be separated from the substantive civil law.

One such rule is contained in Article 8: unless the law provides otherwise, the *burden of proof* for establishing an alleged fact shall rest on the person who would derive rights from that fact. Consequently, the party asserting a claim is obligated to prove the legally relevant facts giving rise to and substantiating the claim.**27** Conversely, the party arguing that a claim is unsubstantiated or unenforceable bears the burden of proving the legally relevant facts that make the claim unenforceable (e.g. the argument that the applicable limitation period has lapsed or that the claimant had granted the defendant an extension).

Further, the legislator of the Civil Code foresaw potential evidence-related problems with regards to good faith if the party invoking or relying on *bona fide* would have to prove its very existence. Therefore, Article 3 makes it clear that where the law makes legal effect conditional on a person's good faith, there shall be a *presumption of good faith.* However, according to Article 3 II,

26 As a matter of fact, it is only since a referendum decided in 2000 that the competence for procedural law has been with the federal legislator resulting in the Swiss Code of Civil Procedure of 19 December 2008, SR 272. For details on Swiss Procedural Law, see the chapter on Civil Procedure, pp. 387; see for an English version of the Civil Procedure Code www.fedlex.admin.ch (perma.cc/DXA5-U5RV).

a person cannot invoke the presumption of good faith if he or she has failed to exercise the diligence required by the circumstances of the relevant case.

To illustrate this point: A, who is a car dealer, is offered a brand new "Race Car Deluxe Limited Edition" by B. B, who had stolen the car a couple of days earlier, is asking for a purchase price of CHF 30,000. The car in its current condition is being sold to customers at a market value of CHF 50,000, while the dealer price paid by professional car dealers is approximately CHF 40,000. In such a case, the low price on offer from B should alarm A. Given the car is being offered to him 40% below fair market value and still 25% off the regular dealer price, A could not claim he acted in good faith. Instead, a court would consider that he failed to exercise proper diligence when acquiring the car and, as a consequence, A would be treated as mala fide (bad faith) possessor.**28**

#### **4. Capacity of Judgement**

Under Swiss law, in order for one's actions to have legal effect, one must have capacity of judgement. According to Article 16, a person is capable of exercising judgement if he or she does not lack the capacity to act rationally because of his or her age, mental disability or disorder, intoxication, or due to other similar circumstances. Capacity of judgment is not determined in the abstract, but in the context of the legal transaction or event taking place. For instance, Article 94 requires prospective spouses to be at least 18 years old and to have capacity of judgement. In this case, the (only) relevant determination is whether the prospective spouses are mentally capable of both understanding the general concept of marriage and deciding to get married based on their own free will. In other words, for the question of capacity of judgement *in relation to a prospective marriage* it is irrelevant whether the prospective spouses would also be capable of concluding a complex legal contract. Further, capacity of judgement only requires the capacity to act rationally, not responsibly. Whether it is a good idea for an 18-year-old to get married is equally irrelevant.

According to the general rule of evidence (Article 8), the party invoking incapacity of judgement as an argument for or against a claim would, in principle, have to prove this assertion. However, *capacity of judgement* is presumed under Swiss civil law. Consequently, when entering into a contract, each party can assume that the other is legally capable. This presumption

28 For a similar case see DFC 107 II 41; see also DFC 113 II 397 where the court held that car dealers are subject to a higher standard of due care and diligence in the context of purchases and sales of cars compared to other persons.

cannot be rebutted easily. Even in cases involving a person who brings repeated legal suits, the presumption cannot be easily rebutted. As the Federal Supreme Court held, it would be unfair to automatically regard every person who tries to enforce his/her alleged rights in a stubborn manner through all possible means (and who occasionally even disregards norms of common decency) as a psychopathic querulant incapable of judgement.**29**

Doctrine and case law seem to be moving towards a less extreme approach to the presumption of capacity of judgement. In a case from 2004, the Federal Supreme Court was confronted with the following facts: in 1985 and at the age of 85, E, who had no close relatives at that time, had drawn up a notarised testament in favour of C and a local Swiss community (B). From 1988 onwards, E needed intensive care and nursing in her home. At the instigation of the guardianship authority, A started taking care of E in July 1988 and the two women developed a close personal relationship. In September 1988, E, accompanied by A, drew up a new notarised testament appointing A as E's sole heiress. Shortly afterwards E died. B and C brought forward an action for annulment arguing that E had not acted with capacity of judgment when drawing up the second testament. The Federal Supreme Court declared the second testament void. The Court held that the presumption of capacity of judgement cannot be invoked if the person concerned, according to his or her general constitution, must normally and in all probability be regarded as incapable of exercising judgment. Consequently, the burden of proof was shifted to the person arguing in favour of capacity of judgement (which in this case was A).**30**

However, this decision raises two questions: firstly, how can a person ever provide indisputable proof of capability of judgement, in particular in cases where the person concerned is deceased? Secondly, in an ageing society one must be careful not to jump to the conclusion that a person above a certain age or suffering from a mental disorder cannot have capacity of judgement, thereby shifting the burden of proof to the older and more vulnerable members of society. Hence, it will be interesting to see how Swiss courts will decide potentially less obvious cases than the one described above.

In the above case, the Federal Supreme Court prevented a legacy hunter from obtaining the deceased's inheritance and the judgment is therefore understandable and morally justified in its outcome. However, the Court's findings regarding the assessment of evidence of capacity leave a stale aftertaste. Has the Federal Supreme Court thrown the baby out with the bathwater by

29 DFC 98 Ia 324 c 3.

30 Judgment of the Federal Supreme Court 5C.33/2004 of 6 October 2004 (in particular, c. 3.1. and 3.2).

opening the door to a de facto reversal of the burden of proof in cases involving old age and mental decline? If it has, the consequences would be far-reaching and, in view of increasing life expectancy, questionable from a socio-political point of view.

#### **5. Separation Principle**

Part 1 of the Civil Code regulates the legal personality of legal persons, mainly societies or bodies, in Switzerland. In Swiss law, legal persons possess all the same rights and duties as natural persons, except for those rights which presuppose intrinsically human attributes, such as gender, age or kinship (Article 53).

The decision to grant legal persons legal capacity, and hence the ability to possess rights and be subjected to obligations, raises questions regarding (i) the internal relationship between the legal person and its owners, founders or members and (ii) the external relationship of the legal person vis-a-vis third parties. In this regard, Swiss civil law follows the so-called *separation principle.*

Under the separation principle, a legal person is separated both in legal and economic terms from its members, owners or founders. In other words, the legal person itself is not just the sum of its members, owners, or founders; instead, it carries out its own activities and participates independently in economic and legal transactions. Hence, the legal person, and not the natural persons behind it, is the sole owner of its assets and the sole debtor of its obligations. Consequently, the members, owners (i.e. shareholders) or founders are neither entitled to the legal person's assets nor liable to third parties for its debts.**31**

31 Of course, shareholders are entitled to a company's profits by way of dividends. However, shareholders cannot simply demand that a certain asset (e.g. real estate) belonging to the company be gifted to them (this would also be considered a breach of the fiduciary duties of the company's board of directors).

# **III. Landmark Cases**

The Federal Supreme Court in Lausanne is the highest court in Switzerland and also the highest instance court for civil cases. Parties may only appeal to the Federal Supreme Court if they have exhausted all other procedures before hierarchically lower courts. When considering civil law matters, the main task of the Federal Supreme Court is to secure the consistent application of Swiss civil law throughout Switzerland.

### **1. Formal Invalidity and Good Faith (Article 2)32**

On 21 September 1971, the claimant (the seller) entered into a notarised *preliminary* contract with the defendant (the buyer) for the sale of several plots of land. Until November 1972, the defendant had several new buildings erected on the purchased property. On 3 November 1972, the *final* contract was notarised and the change of ownership was registered in the land register. Subsequently, the defendant paid the claimant the amount of CHF 720,000 (as per the notarised final agreement), while refusing to pay an additional CHF 100,000 which he had verbally promised to pay to the claimant. The claimant initiated court proceedings, asking the courts to declare the two notarised contracts null and void and arguing that the ownership of the properties in question should be transferred back to him.

In its decision, the Federal Supreme Court had the chance to define the relationship between formal invalidity (as the formally agreed price between the parties differed from the one they informally had agreed) and the principle of good faith (Article 2).

The Federal Supreme Court started by explaining that the notarised contract deliberately contained a wrong (i.e. lower than the "real") purchase price, thus making the contract void due to lack of form.**33** Against this background, the Court had to decide whether the claimant could successfully argue that the final contract did not observe the formal requirements while he himself had agreed to such improper behaviour (by agreeing to the formally undeclared amount of an additional payment).

32 DFC 104 II 99.

33 Cf. DFC 98 II 316.

The Court held that the claimant was barred from claiming the remaining CHF 100,000 due to an abuse of rights on his part.

Further, the Court held that the legal situation intentionally created by the parties through the execution of the notarised (final) purchase contract must remain in place.

### **2. Uniform Calculation of Maintenance34**

With a decision of 9 February 2021, the Federal Supreme Court added to a series of rulings which have fundamentally changed Swiss maintenance law.

Wife A and husband B got married on 8 March 2002. Together they have a son, C, who was born in 2005. The spouses had been separated (and had not lived together) since December 2015. In August 2016, the husband was ordered to pay monthly alimony payments of CHF 1,800 for his son C and CHF 10,000 for his wife A. This court order was confirmed by the higher court in October 2017.

In January 2018, B applied for divorce. In the divorce proceedings, the competent court re-assessed the alimony payments from B to C and A. In 2019, the appeal court modified the alimony payments in favour of the son C, while significantly reducing the monthly alimony amounts payable to the wife from CHF 10,000 to CHF 4,400 from December 2021 onwards (this was essentially due to a drop in husband A's income). Following an appeal from A, the wife, the Federal Supreme Court had to deal with two key issues of post-marital maintenance and alimony:

*First,* the Federal Supreme Court found that the unexpected change of method applied by the appellate court when calculating the post-marital maintenance and alimony was not arbitrary. Due to the decrease in the husband's net income, the cantonal Court had switched to the two-step method of calculation with surplus distribution. Under this method, the total income of the spouses is compared to the basic needs of both parties (including the needs of the child) and any surplus is divided, allowing the child to participate in the surplus. For many years, the Federal Supreme Court had allowed the use of a plethora of different calculation methods in the area of alimony/maintenance and had only intervened to correct any inadmissible mixing of different methods. However, in its landmark decision of 11 November 2020, the Federal Supreme Court unified the maintenance methodology. As a result of this ruling, the two-step method must be applied when calculating child alimony.**35**

34 Judgment of the Federal Supreme Court 5A\_800/2019 of 9 February 2021.

35 Judgment of the Federal Supreme Court 5A\_311/2019 of 11 November 2020.

In another landmark ruling dated 2 February 2021, the court extended this methodology to the post-marital maintenance and alimony of spouses.**36** Against this, the application of the two-step method by the appellate court was therefore not arbitrary, but in the words of the Federal Supreme Court, will in fact be the relevant method applied in any future decisions.

*Second* and most notably, the Federal Supreme Court ruled that it was reasonable for the wife to take up employment in order to provide for herself. Continuing the trend started in previous rulings, the Court further strengthened the principle of prioritising spouses' self-sufficiency. The Federal Supreme Court held that after four years of separation, resumption of the joint household was not to be expected, and the wife could therefore be reasonably expected to take up employment. This was especially so considering the child's advanced age and the fact that he was in full-time school care.

### **Selected Bibliography**

# **Elisabetta Fiocchi Malaspina / Giulia Rossi Lawof Persons**

Elisabetta Fiocchi Malaspina is the author of chapter I. and II., and Giulia Rossi of chapter III. Elisabetta Fiocchi Malaspina would like to thank MLaw Antonia Hartmann for her contribution to the final stage of the chapter.

© 2022 Elisabetta Fiocchi Malaspina / Giulia Rossi, CC BY4.0, DOI: 10.38107/026-11

# **I. Legislation**

The Swiss Civil Code contains provisions relating to the law of natural persons, set out at Article 11 to 51.**1** The Swiss Civil Code also sets out the law governing juridical persons, including associations and foundations, at Article 52 to 89*c*.

### **1. Natural Persons**

The Civil Code regulates the rights of individuals: for example, the enjoyment and exercise of civil rights; the ability to act; the rules on the degree of kinship; the concept of domicile; the beginning and the end of legal personality (including the determination of the moment of birth and death); and actions that can be taken to protect one's personality. The second chapter of the first title contains provisions on civil status: registration requirements, data protection and disclosure, the obligations of registrars, the supervisory authorities, and relative disciplinary measures.

#### **a) Adults and Capacity**

The exercise of civil rights is defined as the ability to acquire rights and incur obligations by one's acts. According to Article 13, persons of age (18 years and over) and who are capable of judgment can exercise civil rights. On the other hand, persons incapable of judgment, minors and persons under general guardianship, in principle, cannot exercise civil rights unless the law provides otherwise.

A person has capacity of judgement if he/she does not lack the ability to act rationally, by virtue of being underage, having a mental disability or disorder, being intoxicated or because of some other similar circumstance. It is expressly set out that a person who is *"incapable of judgement cannot create legal effect by his or her actions"* (Article 18).

Therefore, under Article 13, a person of age and with capacity of judgement may exercise civil rights; that is, they are able to exercise self-determination in

1 In the following text, where Articles are mentioned without referencing their source of law, they are located in the Swiss Civil Code of 10 December 1907, SR 210; for an English version of the Civil Code see www.fedlex.admin.ch (perma.cc/DG3C-PVHW).

a wholly independent and autonomous way. The individual, therefore, has the possibility and the capacity to make commitments, i.e. to enter into obligations.

Article 19 et seqq. of the Civil Code contain a series of provisions that protect subjects capable of judgement but who are unable to act: the principle that is derived from these Articles is that assumption of obligations and any renunciation of rights cannot take place without the consent of their legal representative. This consent may be given expressly, tacitly or retrospectively (Article 19*a*). In cases of gratuitous benefits and minor matters of daily life (Article 19 II), the consent of the legal representative is not required. For example, a 14-year-old can receive a laptop as a gift from her grandmother, without the consent of the legal representative, but not a house as this entails obligations, not merely benefits. Furthermore, a 14-year-old can buy a pack of chewing gum without the consent of her legal representative, but not a car.

#### **b) Place of Origin and Domicile**

According to Article 22 of the Swiss Civil Code, the place of origin of a person is determined by his/her citizenship, which is governed by public law. Where a person is a citizen of more than one place, then the place *"which he or she is or was most recently resident or, in the absence of any such residence, the one in which he or she or his or her ancestors last acquired citizenship"* is considered to be his/her place of origin.

Domicile is defined by Article 23 as the place where a person both lives and intends to settle permanently. It differs from simple residence for the purpose of education, for example, and from "business domicile", defined as where the person concerned mainly carries out work activities. For example, living in a student dormitory does not constitute a new residence at the place of the university, as long as the student concerned regularly returns to the parental home.

#### **c) Beginning and End of "Personality"**

Article 31 of the Civil Code identifies the beginning and end of "personality", stating that *"personality rights begin on the birth of the living child"* and end with the subject's death. It also specifies that an unborn child can enjoy civil rights provided it survives birth.

Articles 34 to 38 of the Civil Code regulate the procedure for legally establishing the death of a person who has been missing for a lengthy period. According to Article 36, a request for a person to be officially declared "presumed dead" may be made to the court "if at least one year has passed since the life-threatening event or at least five years have passed since the last sign of life." The court must then put out a public request for any person with information to come forward within a specified time period (a minimum of one year). If no notable news of the missing person is received and the missing person does not come forward, he or she will be declared presumed dead, with all the corresponding consequences, such as the opening of the succession and the dissolution of the marriage.

A tragic example of such a declaration of presumed death is the case of Bruno Manser, a Swiss ethnologist and environmental and human rights activist who lived with the Penan tribe in Sarawak, Malaysia and organized several blockades against logging companies. Manser disappeared in May 2000 during his last trip to Sarawak and was officially declared presumed dead on 10 March 2005.

# **2. Juridical Persons**

In chapter one of its second title (Articles 52 to 59), the Civil Code deals with the concept of legal entities. Under Swiss Law, such entities are referred to as "juridical" persons, in contrast to "natural" persons whose rights and obligations are regulated in the first title.

#### **a) Associations**

One of the categories of legal entity regulated in the Civil Code is the association, which must be established for specific political, religious, scientific, artistic, charitable or recreational purposes. The purpose may not be commercial. The association must use its assets for the purpose specified. The Swiss Alpine Club, a mountaineering association founded in 1863, is an example of such an association.

Chapter two (Articles 60 to 79) of the second title regulates associations, establishing the modalities of their constitution and organisation; the exercise of the right to vote; their accounting and auditing requirements; the rights and duties of their members; rules relating to possible exclusion of members and concerning the association's assets; and the dissolution of the association.

According to Article 64, the general meeting of members is *"the supreme governing body"* of the association, being responsible for decisions regarding the admission and exclusion of members and for electing the association's committee. According to Article 69, the committee has both the right and duty to safeguard the interests of the association and to represent it in accordance with the articles of association. According to Article 69*a*, the committee further has the task of maintaining the association's business ledgers. Articles 74 et seqq. set out the rules relating to members. Changes to the aims of the association cannot be imposed on members without their consent. Members also have the right to legally challenge resolutions adopted by the general meeting deemed contrary to the law or the articles of association, within one month of learning of the resolution. However, to be able to challenge the resolution, they must not have consented to it at the meeting.

Resolutions are passed by the general meeting, duly convened by the committee, where all members have equal voting rights (Article 67).

Regarding dissolution, the Civil Code provides that this should occur by law in the case of the association's insolvency or when the committee can no longer be constituted in accordance with the articles of association (Article 77). Furthermore, Article 78 states that the court may compel dissolution at the request of an interested party in circumstances where the association has an illicit or immoral purpose.

For example, an association whose purpose is to assist members in evading taxes could be dissolved by a court because of its illegal purpose.

#### **b) Foundations**

Chapter three (Articles 80 to 89*c*) of the second title covers the rules concerning foundations,**2** in particular regarding their constitution, form, rules for their accounting and auditing, and regarding the regulation of the so-called family and ecclesiastical foundations as well as employee benefit foundations. The foundation is best understood as self-owned special-purpose assets that either directly or indirectly benefit a group of persons (the beneficiaries), depending on the purpose of the foundation. As it is difficult to change the purpose of a foundation retrospectively, they are suitable as an estate planning instrument, whether to keep assets together or to protect a company from being taken over and split up by several heirs.

2 As explained in the chapter on Civil Law Principles and Family Law, pp. 229, a foundation is not a trust. While common law "trusts" and the concept of "foundations", as understood in most European civil law countries, share common features (such as the fact that their existence provides for certain beneficiaries or the general public), there are considerable differences between the two: a Swiss foundation is a legal entity with own rights and obligations, common law trusts are characterised by the separation of legal ownership and economic interest whereby a trustee (and not the trust) becomes the legal owner of the trust assets and acts as fiduciary in the economic interest if the beneficiaries.

Foundations are established when certain assets are designated *"for a particular purpose".* Article 81 provides that a foundation may be created by public deed and by the testamentary disposition of the deceased. In the latter case, it may be contested by the heirs. Foundations must also be registered in the commercial register, where the board members must be indicated (Articles 83 et seqq.).

Article 89*a* of the Civil Code also establishes a particular type of foundation called *"employee benefits schemes".* Employee benefit schemes differ from typical foundations in terms of their potential beneficiaries and purposes: only employees or their relatives can be beneficiaries under employee benefit schemes. The foundation is financed by contributions from the employee and employer.**3** The beneficiaries must be provided with complete information regarding the foundation's organisation, activity, and financial status. Beneficiaries can also legally request the distribution of the foundation's benefits.

The last two articles of the Swiss Civil Code dealing with law of persons cover publicly collected assets. In these cases, a purpose is determined and assets are then publicly collected for this purpose through donations. This differs from the foundation, where existing assets are dedicated to a particular purpose. For example, publicly collected assets could include collections after a fire to support the victims or collections to commemorate a public figure.

3 These schemes are a fundamental component of Switzerland's "three pillar" social system. For further information see, for example: Social security in Switzerland, AVS/ AI Information Centre, Federal Social Insurance Office and State Secretariat for Economic Affairs, January 2021 (perma.cc/62UQ-ZQZF) or "Brochure Switzerland's old-age insurance system: A tried-and-tested system—in simple terms" (perma.cc/5GL2-Z84A).

# **II. Principles**

Differing from other Swiss legal codes, the Swiss Civil Code does not contain a "general part" setting out basic legal concepts. However, the law of persons defines who and what can perform legally relevant acts and regulates legal entities; as such, it is of fundamental importance and has a very close connection with other areas of private law. Therefore, the proper functioning of the entire private law is primarily determined by the law of persons, as set out in the Swiss Civil Code.

#### **1. Natural Persons and Juridical Persons**

The most important principle of the law of persons is the distinction between a natural person and a legal entity. A natural person (essentially, a human being) enjoys civil rights and can acquire rights and contract obligations by their acts within the limits of the law. These limits are specified in Article 13, which states that a person of age, i.e. 18 years or over, and of sound mind can exercise civil rights.

A juridical person can be defined as a single entity consisting of several natural or legal persons or assets, which is recognised by law as having the capacity to act under certain conditions in accordance with its purpose, which must be legitimate and moral. As mentioned above, legal entities that serve the purpose of, for example, tax fraud are not recognised in law.

To understand the concept of a legal entity, it is necessary to analyse two key theories developed during the 19th century: firstly, the so-called theory of fiction, advocated by the German jurist Friedrich Karl Savigny (1779–1861), who was the founder of the German Historical School; and secondly, the socalled theory of reality, advocated by the German jurist Otto von Gierke (1841–1921).

According to the theory of fiction, moral persons are created using a "fictio iuris": the legislator pretends that entities other than man have, like man, the attributes of a person. The legislator extends, fictitiously, the category of human beings and creates a kind of artificial man. On the other hand, in the theory of reality developed by Gierke, legal persons are—like man endowed with their own will and are bearers of their own interest, distinct from that of the natural persons who make up the members.

The distinction between the theories is particularly important in assessing the legal person's capacity to commit a tort. According to the theory of fiction, responsibility is attributed to the persons behind it, while according to the theory of reality, it is per se possible to attribute responsibility to the legal person.

In principle, Switzerland followed the theory of reality, although it was further developed to a certain extent by the so-called abstraction theory. This theory sought to combine the advantages of the fiction and reality theories in the sense of a compromise. Legal persons are neither mere fictions nor pure "natural beings". Rather, according to this theory, they are abstractions of something actual and thus do not have to be fictitious because they already exist. The extent of the rights granted to a legal person in Switzerland should therefore be governed by what society wants to grant them. This led to Article 53, which states that legal persons are entitled to all rights that are not by their nature linked to being human, such as gender.

As a result, the scope of legal capacity of legal persons has expanded from the mere recognition of property rights to the granting of comprehensive personal rights. For example, legal persons can also invoke freedom of belief to a limited extent.

Legal entities are liable to fulfil any contractual obligations entered into and for the acts of their governing bodies. Outside of contractual obligations, they may also be liable, for example, as principals for the acts of employees or as owners of real property on the basis of certain attribution norms.

### **2. Legal Entities and Their Rights**

As mentioned above, the Swiss Civil Code essentially embraces the theory of reality: Article 55 I states that *"the governing bodies express the will of the legal entity"* and according to Article 55 II, *"they bind the legal entity by concluding transactions and by their other actions".*

The Civil Code establishes, from a general point of view, the principle of the enjoyment of civil rights by legal entities, who possess both rights and obligations, provided that the bodies provided for by law have been created with this explicit purpose.

There is a *numerus clausus* of legal forms possible for legal entities, with the rationale being the protection of legal transactions (see also the chapter on Company Law). Mixed forms are prohibited. The result is a limit on the possible forms of legal entity that can be parties to a legal transaction. Further, as legal entities are subject to clear legal regulations (governing e.g., their capital, representation, name, liability), legal certainty and legitimate expectations regarding these entities and their operation are established.

#### **3. Protection of Legal Personality**

Article 27 of the Civil Code prohibits an individual from renouncing his/her legal capacity. This provision also prohibits individuals from forfeiting or limiting their freedom in a manner which is incompatible with the law and morality. If the restrictions in a contract are too limiting for the individual, this is called excessive binding. Excessive binding can result, for example, from the duration of the contractual obligation or from excessively intensive non-compete clauses in professional sport.**4**

There are a series of provisions regarding infringements of personality rights (Article 28 et seqq), e.g. providing for judicial intervention to stop imminent or current infringements or to ascertain their illegality (Article 28*a*). For example, one can bring an action to defend oneself against defamatory and untrue statements in the media. Individuals who have suffered an infringement to their personal integrity can, under Article 28*b*, ask a judge to prohibit the infringer from certain actions: for example, in cases concerning stalking, approaching or accessing certain places, staying in certain areas and contacting the victim.

Regarding the use of a name, the provisions in the Civil Code establish the general principle that if a person's right to use a name is contested, he/she can request legal recognition; where a person has good cause, Article 30 provides that the canton may authorise a change of name. An example of a recognised "good cause" is the case of a child who, after the divorce of the parents, wishes to take the surname of the parent with custody over him or her (see Landmark cases: Change of Name I, case 4). Another example is a person who wishes to change their first name to reflect their perceived gender. Moreover, on the death of one of the two spouses, it is always possible to ask the registrar for "restoration" of one's surname before marriage.

4 As an example, see DFC 102 II 211, concerning the agreements between a football club and a player which, upon termination of the employment relationship, allowed the club to refuse the player a leaving certificate with the consequence that he could not transfer to another club and would therefore be excluded from the National League for a period of two years.

#### **4. Civil Status and Registration**

Articles 39 to 51 cover the registration of civil status. Civil status comprises information on a particular subject, e.g. birth, marriage, death, citizenship, and a person's personal and family status (for example, parentage).**5** This information is particularly relevant for the issuance of identity documents, the determination of heirs, the determination of citizenship (and thus also the right to vote), and, on a more impersonal level, it is also used for population statistics.

In relation to civil status documentation, Article 43*a* of the Civil Code provides that the Federal Council must protect the personality and fundamental rights of the person whose personal data are being processed. This Article further provides for the Federal Council to regulate the disclosure of personal data to private individuals with a direct interest worthy of protection and to designate the authorities (outside the register authorities) to which data necessary for the performance of their official duties can be disclosed, regularly or upon request (Article 43*a* II and III). In accordance with Art. 58 of the Civil Status Order (ZStV, SR 211.112.2) enacted by the Federal Council, the register authorities are obliged to disclose to Swiss courts and administrative authorities the civil status data that is indispensable for the performance of their statutory duties on request. This inter-institutional request of personal data should always be subsidiary, i.e., after prior efforts to obtain the required information from the data subject have been unsuccessful. Exceptions are cases in which a special legal basis grants a direct claim. Such an example can be found in Art. 32 of the Federal Social Insurance Law Act, General Part (ATSG, SR 830.1), in which it is stipulated that upon written and justified request authorities shall disclose data required for the determination of benefits, the prevention of unjustified withdrawals and in cases of recourse to liable third parties.

Paragraph 4 of Article 43*a* explicitly lists authorities that have an independent right to retrieve personal data from the register authorities automatically. This includes, for example, the federal agency responsible for investigations into missing persons.

5 Closely related to this issue is that of the protection of personal data. On 25 September 2020 the Federal Law on data protection (dating back to 1992) was totally revised to adapt this legislation to social conditions and technologies, and to bring it closer to more recent, modern regulations on data protection in force in Europe (in particular *General Data Protection Regulation,* (EU) no 2016/679. See: Mariusz Krzysztofek, GDPR: Personal Data Protection in the European Union, Alphen aan den Rijn 2021.)

# **III. Landmark Cases**

#### **1. Uwe Barschel6**

In this case, the Federal Supreme Court found that certain strictly personal rights can continue to exist even after death.

Following a political scandal in Germany in late summer 1987, Uwe Barschel, Minister-President of Schleswig-Holstein, was forced to step down from office. While on holiday in the Canary Islands, he was summoned to the parliamentary commission in charge of investigating his role in a political scandal. He was obliged to return to Germany. Knowing that Barschel would stop briefly in Geneva on his return journey, the editorial staff of a magazine sent a journalist, K, there to interview him. K tried several times to reach Barschel in his hotel room, but without success. Shortly after, K was able to enter Barschel's room as the door had been left ajar. He took some documents out of the room to photograph them. When K returned to the room later after taking photographs of the documents, he discovered Barschel's lifeless body in the bathtub full of water. He informed the hotel management, who called the police.

During his two visits to Barschel's room, K took 51 photos of the hotel room, the documents and the body of the deceased. Many of these photos were published in the press.

Subsequently, the relatives of the deceased filed a complaint for violation of domicile (Article 186 of the Criminal Code) and disturbance of the peace of the dead (Article 262 of the Criminal Code). These are crimes that the state only prosecutes upon complaint. In principle, according to Article 30 of the Criminal Code,**7** only the person who was harmed by the act can file a complaint for the punishment of the person responsible. In certain cases, however, the relatives may also file a criminal complaint in place of the deceased, in accordance with Article 30 IV Criminal Code.**8** In any event, in this matter the court first had to decide whether Barschel had been injured by K's acts,

6 DFC 118 IV 319.

7 Article 30 I of the Criminal Code states: *"If an act shall be liable to prosecution only if a complaint is filed, any person who suffers harm due to the act may request that the person responsible be prosecuted."*

8 Article 30 IV of the Criminal Code states: *"If the person suffering harm dies without filing the criminal complaint or without expressly waiving his right to file the criminal complaint, his next of kin are entitled to file the complaint."*

because Barschel was already deceased at the time of the act. In order for an individual to suffer an injury, it is presupposed that the individual holds strictly personal rights. Regarding this question, the Federal Supreme Court focused on the concept of personality under civil law. Therefore, the Federal Supreme Court had to decide whether the rights attributed to Barschel during his life could continue to exist after his death. As discussed above, Article 31I of the Civil Code states that personality ends with death. However, the Federal Supreme Court held that the end of the capacity to enjoy civil rights (Article 11 of the Civil Code) at death does not automatically entail the loss of all protection conveyed by personality rights. Some personality rights persist even after death, without passing to the heirs. From this, the Federal Supreme Court concluded that the deceased could still be the victim of personality-related offences and violation of domicile immediately after his death.**9**

In this case, the Federal Supreme Court recognised the lasting effect of the right of personality beyond death, as well as establishing somewhat of a protective zone ("taboo zone") in terms of criminal law around those who have recently deceased.

This is a welcome judgment of the Federal Supreme Court, especially regarding the prosecution of personality-related offences. Furthermore, the procedural basis for such cases was laid out by the legislator in Article 30 IV of the Criminal Code. Thus, the decision is not objectionable from a substantive or procedural point of view.

### **2. Challenged Autopsy**

In another ruling,**10** two mentally ill siblings committed assisted suicide by taking a lethal drug with the help of the Swiss association "Dignitas". Shortly before doing so, they each gave a general power of attorney to a lawyer allowing him to act on their behalf in dealings with *"the police, the examining magistrate, the civil registry office, the burial office of the city of Zurich, etc. in relation to my voluntary death."* After the death of the siblings, the district public prosecutor's office ordered that the autopsy be performed. The appointed lawyer filed a constitutional appeal against this order on behalf of the deceased.

The Federal Supreme Court did not examine the material question of whether an autopsy should be permitted in this case. Instead, the Federal Supreme Court rejected the constitutional appeal because it considered that the procedural requirements had not been met. The Federal Supreme Court addressed differences in legal opinion regarding the existence of independent protection of the personality *post mortem.* It ultimately denied the existence of such protection, declaring legal action in the name of a deceased person to be inadmissible. With reference to Article 31 I of the Civil Code, the Federal Supreme Court rejected the notion that deceased persons could have capacity to enjoy civil rights under Article 11 of the Civil Code, and consequently also the right to sue. Legal doctrine on Article 31 of the Civil Code also recognises that no one can bring a lawsuit as a representative of a deceased person.

The Federal Supreme Court did confirm the effects of the right of personality beyond death in some areas in its judgment on this case (for example, the information contained in a patient's medical file is protected by confidentiality even after death)**11**. However, it held that surviving relatives cannot bring legal action in the name of the deceased, only in their own name.

By granting certain rights to deceased persons even after death, but at the same time rejecting their enforcement by those acting on behalf of the deceased, the Federal Supreme Court has created unclear conditions. The fact that deceased persons should ultimately only be left with unenforceable rights is neither practical nor comprehensible. It is to be hoped that the Federal Supreme Court will provide clarity regarding this situation in future.

#### **3. Caisse de Famille12**

In 1922, a married couple (BX and CX) set up a family foundation under the name of *"Caisse de famille X"* pursuant to Article 335 I of the Civil Code. The purpose of the foundation was *"to provide for the education, maintenance and other similar expenses of family members"* (Article 2 I of the deed of foundation). In the deed of foundation, the founders limited the circle of beneficiaries to direct descendants of the founders who bore the same surname ("X"— Article 6 I of the deed of foundation). Thus, the foundation excluded women from its circle of beneficiaries if they got married and subsequently changed their names.**13**

11 Judgment of the Federal Supreme Court 2P\_339/1994 of 26 April 1995 c. 3b (published in: Pra 85/1996 No. 94 p. 289 et seqq.).

12 DFC 133 III 167 (Judgment of the Federal Supreme Court 5C\_68/2006 of 30 November 2006).

13 According to the marriage law in force prior to 31 December 1987, female descendants lost their maiden surname on marriage and therefore relevant female descendants of this particular family would have also lost their status as beneficiaries, for themselves and their descendants.

When the founders died, they left behind three children: DX, EY (maiden name X) and FX. EY's son, AY, asked the board of directors to change the foundation's purpose, extending the circle of beneficiaries to include all female descendants of the founders. In an appeal to the Federal Supreme Court, AY requested that the purpose of the foundation be amended (pursuant to Article 86 of the Civil Code) on the basis that the current purpose was illicit and immoral (pursuant to Article 88 of the Civil Code).

According to Article 86 I of the Civil Code, modification of a foundation's purpose is admissible only *"where the original objects have altered in significance or effect to such an extent that the foundation has plainly become estranged from the founder's intentions".* In the case in question, the Federal Supreme Court rejected AY's request to modify the foundation's purpose, as the necessary conditions had not been fulfilled. On the one hand, there had been no objective change to the significance or effect of the foundation's original objects. The Federal Supreme Court found that, although marriage law had changed considerably, particularly regarding maintenance and naming obligations,**14** the founding couple had voluntarily and knowingly restricted the circle of beneficiaries to prolong the existence of the foundation and to ensure that its assets would not be quickly depleted due to an excessive increase in the number of eligible family members. On the other hand, no alienation from the original intention of the founders had taken place. A change of purpose would have been justified if, in the light of the change in circumstances that had occurred, the will of the founders could no longer be carried out in the manner envisaged by the founding statutes. Regardless of the changes in marriage law, the founders' original intention for the circle of beneficiaries to be limited could still be achieved.

In addition, the Federal Supreme Court addressed the issue of unlawfulness and immorality (Article 88 I No. 2 of the Civil Code) of the purpose of the foundation and the description of its circle of beneficiaries. A provision is considered immoral if it violates prevailing morality, that is, the general sense of decency or the ethical principles and standards of value inherent in the general legal system. The Federal Supreme Court recognised that, since the foundation was established in 1922, there had been a significant change in the position of women in society and in the family. In particular, the revised Federal Constitution guarantees legal equality in Article 8, according to which

14 According to former Article 160 II of the Civil Code, a husband had to provide for the maintenance of his wife and child in an adequate manner, while according to current Article 163 of the Civil Code, spouses must *"jointly provide for the proper maintenance of the family, each according to his or her ability".*

*"Men and women have equal rights […] particularly in the family, in education, and in the workplace"* (Article 8 III of the Constitution).

However, except for the principle of equal pay (which applies to the state and private employers alike), this guarantee of fundamental rights is addressed solely to the state and does not impose obligations on private parties. Consequently, there is no general principle of equal treatment for men and women in Swiss private law. In particular, the private autonomy and freedom of founders are not limited by the principle of equality of Article 8 of the Federal Constitution and Article 335 I of the Civil Code must not be interpreted according to this principle.

In principle, therefore, the founders could treat separate beneficiaries of their family foundation differently, provided they did not violate the statutory entitlement of the survivors or other rules of protection. The restriction of the circle of beneficiaries to a certain group of family members was of a practical and traditional nature and was cognisant of the limited resources available to a family foundation. The family foundation in question fits into the tradition of many similar institutions created in the eighteenth and nineteenth centuries and which were normally reserved for male descendants only. Female descendants left the foundation of origin on marriage and became part of the corresponding foundation of their husbands. As a result, it was not the mere fact of being a female descendant that was determinative of whether or not a person was within the circle of beneficiaries; rather, it was whether that female got married and changed their surname.

Finally, the Court considered that the daughters of the beneficiary could have maintained their status as beneficiaries of the foundation by keeping their maiden name.**15**

Overall, the Federal Supreme Court did not consider that this provision was immoral, either at the time of the foundation's creation or at the time of the decision.

This decision of the Federal Supreme Court is to be supported. The limitation of the group of beneficiaries, according to which only direct descendants of the founders who bore the same surname could be beneficiaries of the foundation, was not linked to the sex of the beneficiary but to his/her name, thereby avoiding discrimination on the basis of gender. After the revision of

15 This regulation is no longer in force. Under the current marriage law, prospective spouses can decide at the time of marriage whether to keep their maiden name or to use the married name of one spouse as their surname (Article 160 I and II of the Civil Code). Furthermore, the law states: *"If the prospective spouses retain their surnames, they decide which of the surnames their children will bear"* (Article 160 III of the Civil Code).

the law in 1988, women were entitled to keep their surname after marriage. The first generation (consisting of both sons and daughters) was thus able to ensure that they would benefit from the foundation. Under the current law, descendants can also be beneficiaries of the foundation if, upon marrying, they use the X family name (under the current law, women can keep their own name upon marriage or both partners can take the woman's maiden name as the family name). Alternatively, descendants who did not retain the name X could subsequently seek a change of name to fit into the circle of beneficiaries via a request to court. In the present case, AY only applied for the purpose of the foundation to be changed: he did not request a name change. How the Federal Supreme Court would have judged the case if a change of name had been requested by AY remains open. It is likely that the Federal Supreme Court would have weighed the interests of the foundation against AY's interests in a change of name in order to decide on such a matter.

### **4. Change of Name I**

In its decision of 23 October 2014, the Federal Supreme Court established a new practice regarding the requirements for a legal change of name.**16**

BA was born on 6 June 2001 to AA (father) and CA (mother). The parents had already separated by the time of B's birth, with B consequently living alone in her mother's care. On 24 September 2001, the district court finalised AA and CA's divorce and CA, the mother, obtained exclusive parental authority. After the divorce, the mother reverted to the use of her maiden surname, "D".

On 9 February 2013, the mother, now known as CD, asked the competent authority to change her daughter's surname from "A" to "D" and approval was granted. On 23 April 2014, AA appealed this approval to the Federal Supreme Court, asking that the name change request be refused while his daughter remained under the age of majority (18 years), on the basis that until this point she would not possess the required maturity to make such a decision.

The Federal Supreme Court first stated that the right to a name or change of name is one of the strictly personal rights; a category of rights which people capable of judgment but lacking the capacity to exercise civil rights may exercise with full autonomy (Article 19c I of the Civil Code). Consequently, a request for a change of name cannot depend on the requester reaching the age of majority or possessing the ability to exercise civil rights (Article 13 of the Civil Code); only the capacity for judgment is decisive. A 12-year-old girl who acts of her own free will and without pressure from her mother can therefore validly decide to change her name.**17**

In principle, a person's civil name is immutable. In certain family law contexts,**18** however, the law grants the possibility of changing a name. The requirements for the official authorisation of a name change have undergone a significant change in recent years. As of 1 January 2013, the competent authority can authorise a change of name if there is *"good cause"19*. This, according to the Federal Supreme Court, should result in a more generous treatment in granting name changes, so that any cause which does not *"seem totally trivial"*  must be accorded respect. Even purely subjective reasons are considered good cause, provided they reach a certain level of seriousness and have an underlying rationale.

Under the previous wording of the law, only a *"serious cause"20*could warrant a name change. The Federal Supreme Court has acknowledged that the amendment to the law aimed at reducing the barriers to changing one's name. However, the amended law does not allow anyone to change their name at will. Above all, the renaming of children growing up in so-called patchwork families must be interpreted *"openly"* and only in the interest of the child. A child must have the right to share the name of the parent they are brought up by, if so requested. A concrete, serious social disadvantage is no longer a prerequisite for a change of name. For example, the evidenced need for a child's name to match their parental guardian has been considered "good cause" pursuant to Article 30 I of the Civil Code.

17 This derives from the analogy with Article 270*b* of the Civil Code regarding the consent of the child of unmarried parents to a change of name: *"If the child has attained the age of twelve, his or her surname may only be changed if he or she consents."*