Holding Swiss Real Estate

Real Estate Management

Direct holding of real estate

Resident individuals

Personal income tax

Income derived from the real estate such as rental income is subject to individual income tax. Moreover, a fictional amount based on market value (deemed rental value) is also added to the owner’s income in case of personal use of a property. The taxation of this deemed rental value for main residences could be subject to change in the future as various legislative projects are seeking to abolish it.

Property tax

An annual special property tax is levied on an annual basis. Rates and methods vary from one location to the other. It is usually computed based on the tax value of the property. The tax value is determined by the competent authorities. Depending on the region, they apply a formula or make an on-site estimate. As a general rule, the tax value is between 70 and 90% of the net market value of the property. Capitalised rental value applies in some regions. The rate is usually in per mile (between 0.1% and 0.3% in most of the cantons). It is due depending on location either by the owner at the beginning of the year or by the owner at the end of the year.

Deductibility of costs, interest and depreciation

For individuals who own a property as a business asset, interests can be entirely deducted from the individual income tax, whereas individuals owning a property as a private asset can only offset the total amount of income from moveable and immovable assets increased by CHF 50,000. Depreciation of commercial properties can take place on an annual basis. It is generally performed on acquisition price a straight-line basis. If interest is deductible for individuals owning properties in their private wealth, mortgage amortisation is not deductible. An indirect deduction is possible using Swiss third pillar system.

Maintenance costs, which are the costs that are expensed to maintain the value of the property, such as refreshment, paintings, repairs, heating, and green energy investments are fully deductible in the year that they are engaged. Green energy investments can be carried over up to two years if the costs cannot be fully deducted within the year. On the other hand, improvement costs, which are the costs which improve the value of the property are not deductible in the year in which they are engaged but are only deductible against the capital gain realised upon the sale of the property.

The mortgage is deductible from the business assets/personal wealth.

Losses – carry back/forward

Losses that appear in the commercial books of an independent can by carried forward for seven years. Private individuals with no independent activity cannot report a loss over time.

Non-resident individuals

Non-resident individuals are treated in the same manner as resident individuals with the exception that interest and mortgage are allocated on a pro rata basis (international tax allocation) and not on an objective basis. Thus, taxes may be due in Switzerland while the individual may have realised a global loss, or the other way around.

Thus, foreign individuals have to file an annual tax return, declaring their worldwide income and wealth. Only elements attached to the property itself will be taxed in Switzerland but at the worldwide applicable income and wealth tax rate. In most of the cantons, it is possible to opt for a simplified tax return/tax assessment. However, this method of taxation is very often more expensive than the ordinary taxation/declaration process.

Resident companies

Corporate income tax

Business income such as rental income and capital gains are subject to corporate income tax.

Deductibility of costs, interest and depreciation

Companies can deduct interest costs and depreciation costs from their profit. Depreciation of business assets can take place on an annual basis. It is generally recorded from the acquisition value on a straight-line basis.

Anti-tax avoidance rules

Switzerland has very few specific anti-avoidance rules. However, the general principle of abuse of law or tax avoidance applies in most instances. While tax avoidance might not be a punishable offence under Swiss laws per se (taxpayers will merely be asked to pay taxes in accordance with the economic substance of the structure or transaction), tax evasion and tax fraud on the other hand are both criminal offences.

Losses – carry back/forward

Losses can be carried forward for up to seven years; however, there is no possibility of a carry back. Furthermore, losses of foreign permanent establishments can also be offset with Swiss income provided there are no foreign profits.

Non-resident companies

Non-resident companies are treated in the same manner as resident companies, since non-resident companies holding real estate in Switzerland are deemed resident for tax purposes through economic affiliation. Thus, they have to file an annual tax return in Switzerland. Corporate income and capital taxes are due based on international tax allocation.

Indirect holding of real estate

Resident individuals

Personal

Personal wealth tax is due based on the valuation of the shares (practitioners’ method). Personal income tax is due only in case of income flow from the company such as interest or dividend. Individuals who hold 10% or more of the shares in a Swiss company are deemed to have a qualified stake holding. When those shares are held in their private wealth as well as in business wealth, dividend income is subject to a maximum 50% exemption depending on location. Capital gains on the sale of shares in a company are usually tax free for Swiss residents. However, the sale of shares in a real estate company are subject to Real estate capital gain tax. Local rules may provide specific exemptions and exceptions.

Moreover, for individuals holding investments in their business assets, capital gains are taxed as income arising from their professional activity.

Dividend withholding tax

Dividends from a Swiss company are subject to a 35% dividend withholding tax in case of the distribution of dividend. The withholding tax is fully refundable for a Swiss resident assuming he declares the income received from the entity. Withholding tax also applies to deemed dividend. The withholding tax becomes final if the individuals fail to report the (deemed) income received from the company.

Deductibility of costs

Interest on debt contracted to purchase or finance the company can be deducted up to the total amount of the wealth’ income increased by CHF 50,000.

Losses

For an individual with an independent activity, losses can be carried forward for up to seven years; however, there is no possibility of a carry back. Losses from the professional activity can be used to offset income from a real estate company.

Non-resident individuals

Non-resident individuals are treated in the same manner as resident individuals, with the exception of partial taxation of dividends and wealth tax on the shares which are of the competence of the residency country only. Additionally, for non-Swiss resident beneficiaries, withholding tax is principally meant to constitute a final tax burden on income from moveable assets, unless full or partial relief (generally through refund upon request) is available pursuant to an applicable Swiss international tax treaty. Most of the double tax treaties grant the right for a partial refund of the Swiss withholding tax, leaving a final 15% tax in Switzerland, on which a foreign tax credit is usually applicable in the home country. Different rules may apply in case of sale of the real estate from one treaty to the other.

Resident companies

Corporate income tax

Income arising from dividends and capital gains may qualify for Swiss participation relief if the Swiss holding company owns at least 10% of the participation of the entity distributing the dividends; or holds participations of the distributing entity which have a fair market value of at least CHF 1’000’000. The tax rebate is calculated by reference to the ratio between the net income or gain from qualifying participations and the total taxable income earned within a tax year. For capital gains exemption, a holding period of at least a year is necessary.

Deductibility of costs, interest payments and depreciation

Normal business expenses and depreciation on both income and capital paid or accrued during the commercial year are deductible. Deductions are tax effective if they are accounted for in the company’s financial statements. Interest are generally deductible, subject to arm’s length and thin capitalisation principles. Depreciation or impairment on investments are also tax deductible. Assuming a future sale of the investment is higher than the book value, depreciations performed on the investment will be reintegrated into the taxable income and won’t benefit from capital gain’s relief.

Anti-tax avoidance directive

Switzerland has very few specific anti-avoidance rules, however, the general principle of abuse of law or tax avoidance applies in most instances. While tax avoidance might not be a punishable offence under Swiss laws per se (taxpayers will merely be asked to pay taxes in accordance with the economic substance of the structure or transaction), tax evasion and tax fraud on the other hand are both criminal offences.

Dividend withholding tax

Dividends from a Swiss company are subject to a 35% dividend withholding tax. The withholding tax is fully refundable for a Swiss resident company assuming it declares the income received from the entity. Withholding tax also applies to deemed dividend. The withholding tax becomes final if the company fails to report the (deemed) income received from the subsidiary. An exemption at source between Swiss companies is possible by filing on time appropriate forms.

Non-resident companies

Non-resident companies are treated in the same manner as resident companies, since non-resident companies holding real estate in Switzerland are deemed resident for tax purposes through economic affiliation. Additionally, for non-Swiss resident beneficiaries, withholding tax is principally meant to constitute a final tax burden on income from moveable assets, unless full or partial relief (generally through refund upon request) is available pursuant to an applicable Swiss international tax treaty. With more than 100 double tax treaties, Switzerland is quite flexible in terms of refund of withholding tax. With most of the OCDE countries, the remaining withholding tax in Switzerland is 0. An exemption at source is also possible by obtaining a pre-clearance/authorisation. Switzerland applies strict rules for treaty shopping.