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Acquiring swiss real estate

DIRECT PURCHASE OF REAL ESTATE

Preliminary considerations from a Swiss perspective. Due to the introduction of the Lex Koller in 1985, Swiss Federal law restricts the acquisition of residential real estate in Switzerland by foreign entities and individuals. The possibility to purchase a property under this regulation has always to be analysed beforehand. Specific local rules may apply.

This section discusses the most important tax implications of the direct purchase of real estate. First the impact for resident individuals is addressed then the situation for non-resident individuals. Thereafter the impact for resident companies and non-resident companies is addressed.

Resident Individuals

Transfer Taxes

The transfer of Swiss properties is subject to transfer taxes which are generally due by the purchaser. The tax is levied on the market value of the property. The usual tax rate varies between 1 and 3%.

Value added tax

The supply of real estate is exempt from VAT, unless the seller opts for VAT registration and submit the sale to VAT. However, the option only applies to real estates that is not meant for private use only. The applicable VAT rate is 7.7%.

Deductibility of costs

Established debts can be deducted from the gross amount of individual wealth. Moreover, social deductions might in some instances also apply on the net amount of individual wealth. Interest on the debt can be deducted towards the owner’s taxable income. Costs related to the acquisition of the property itself (agency costs, notary costs, transfer tax, etc.) are only deductible against the capital gain on resale of the property.

Non-resident individuals

Non-resident individuals are treated in the same manner as resident individuals. Moreover, being owner of a Swiss property implies a tax liability in Switzerland limited to the income and wealth attached to the property.

Resident companies

Transfer Taxes

The acquisition of Swiss real estate is subject to transfer taxes. The tax is levied based on the market value of the property. The usual tax rate varies between 1 and 3%.

Value added tax

The supply of real estate is exempt from VAT, unless the seller opts for VAT registration and submit the sale to VAT. However, the option only applies to real estates that are not meant for private use only. The applicable VAT rate is 7.7%.

Deductibility of costs

Interest expenses is a deductible expense for the company to the extent of thin capitalisation rules. Thin capitalisation aims to require a minimal amount of equity on which interest can’t be paid. If a company is largely financed by its shareholders or relatives, interest paid on the loans with related parties may not be fully deductible. Based on the same rule, if loans from third parties will be considered as debt, loans from related parties may be considered as equity assuming it exceeds a certain threshold. Costs linked to the acquisition of the property are usually activated as fixed assets attached to the property and may be depreciated over time. Some small expenses are directly deductible in the year of acquisition.

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 due to the property. Therefore, ordinary corporate income and capital taxes will be levied.

INDIRECT PURCHASE OF REAL ESTATE

Resident individuals

Transfer taxes

Usually, a share transfer is not subject to transfer taxes. However, economic change of ownership regarding immovable property might also trigger taxation depending on the local tax legislation. A change of the economic ownership happens notably when shares in a company holding properties (so-called ‘real estate companies’) are transferred. In general, only the transfer of all or the majority of shares in a real estate company will trigger the transfer tax. Some cantons do however also tax the transfer of minority holdings.

Personal income tax

There is no tax at the level of the individual if he purchases a property through a corporate entity, except the annual wealth tax on the shares value.

Non-resident individuals.

Non-resident individuals are treated in the same manner as resident individuals for the purchase of properties through a company, with the exception of wealth tax (shares not subject to Swiss taxation).

Resident companies

Transfer taxes

Usually, a share transfer is not subject to transfer taxes. However, economic change of ownership regarding immovable property might also trigger taxation depending on the local tax legislation. A change of the economic ownership happens notably when shares in a company holding properties (so-called ‘real estate companies’) are transferred. In general, only the transfer of all or the majority of shares in a real estate company will trigger the transfer tax. Some cantons do however also tax the transfer of minority holdings.

Corporate income tax

Swiss resident companies can ask for a reduction on their corporate income tax in the form of a ‘participation relief’ when they hold at least 10% of the participation of the entity distributing the dividends; or hold participations of the distributing entity which have a market value of at least CHF 1’000’000. In some instance, the tax relief might reduce the federal corporate income tax burden to nil.

Non-resident companies

Non-resident companies are treated in the same manner as resident companies, with the exception of withholding tax.

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