Taxation of investments in real estate in Switzerland and abroad

Case 1a: Debt interest and extraction cost surpluses from foreign properties

Facts

Mr. and Mrs. Tüchtig own a single-family house in Switzerland and a small holiday home in Alsace (F). With regard to the tax period 2017, the imputed rental value of the holiday home amounts to CHF 6,000. The mortgage interest on the holiday home, which is allocated according to the location of the assets, amounts to CHF 4,500. Finally, property maintenance costs of CHF 25,000 were paid for the holiday home in 2017.

Question

You will be asked by Tüchtigs whether the corresponding "loss" can be deducted from the Swiss tax base.

Variant

The Tüchtig couple lives in Germany. It also owns various properties located in Switzerland, some of which are privately owned (cantons of GR, SG and ZH) and some of which are held as business assets (such as a hotel property in the Upper Engadine, GR). The hotel business is operated in the legal form of a sole proprietorship. In 2017, this business activity resulted in a loss of CHF 250,000. While in the Canton of Zurich a positive net real estate income was generated after two debt interest payments, in the Canton of Graubünden there is no longer any net investment income to offset the operating loss. In Germany, the Tüchtig couple achieve very considerable returns on assets, which far exceed the loss from the canton of Graubünden. The Canton of Zurich will transfer the remaining business loss to Germany.

Question

Is the loss allocation to the German main tax domicile in view of DBG and cantonal StG right?

Case 1b: International removal of foreign real estate in accordance with DBA

Facts

Mr and Mrs Tüchtig, resident in Switzerland, keep the holiday home in Alsace (F)

1. directly owned,
2. through an SCI (société civile immobilière, partnership) controlled by them, or
3. through a French limited company (SA) controlled by them.

The property in France generates a net real estate loss.

Question

How are the above investments in real estate in France to be treated for Swiss income and wealth tax purposes or under the double taxation agreement with France?

Case 2: Underpriced contribution to the self-controlled corporation

Facts

On 23.5.2017, Alphonse Sparsam sells the property held as part of its private assets to its self-controlled Sparsam AG at a price of CHF 300,000 (corresponds to the investment costs). On the same day, Sparsam AG sells the same plot of land to the independent Betterworld GmbH at a sales price of CHF 600,000. The corresponding property is located in a canton with a dualistic system of real estate profit tax.

Questions

1. What are the tax consequences of the transactions?
2. What influence do any tax corrections have on the tax balance sheet?

Variant

The contributed property will not be resold by the AG.

Question

Does the variant lead to other tax consequences?

Case 3: Building law

Initial situation

Mrs. Eva Bauer, a pensioner living in Zurich, holds investment properties (office buildings) in Zurich as part of her private assets in addition to a property she lives in herself. She acquired these properties by inheritance. The properties are not mortgaged.

Sale under building lease to GmbH

With a view to settling her estate, Eva Bauer founded a limited liability company (GmbH) based in Zurich (Bauer GmbH) in 2011 with a share capital of CHF 20,000. 100% of the shares in the GmbH are owned by Eva Bauer.

Eva Bauer then established building rights to the investment properties in Zurich in favour of the GmbH. With the establishment of the building rights, the ownership of the corresponding buildings was transferred to the GmbH. In return for the building lease, the GmbH settled the building values in a one-off payment (and paid annual building lease interest).

The purchase price for the buildings corresponded to the acquisition costs for Mrs. Bauer or the market value at the time of acquisition of the properties by Mrs. Bauer (inheritance 2009).

The properties were valued as follows as of 2009 (acquisition of the properties as sole heir):

On the basis of these values, the acquisition value of the buildings corresponded to the percentage share of the net asset value of the buildings in the real value of the properties. This resulted in the following acquisition values for the buildings contributed to the GmbH (in CHF):

The purchase price for the buildings (CHF 17,386,817) transferred to Bauer GmbH as part of the granting of the building lease was left as a (non-interest-bearing) loan debt of the GmbH to Mrs. Bauer.

For the granting of the building rights, the GmbH paid a building lease interest of CHF 117,000 per year to Mrs. Eva Bauer.

The opening balance sheet of the GmbH was as follows:

The income statement of the GmbH was as follows:

Questions

1. What are the consequences of property tax when the properties under building law are transferred to the GmbH?
2. What are the income tax consequences for Mrs Bauer?

Sale of the Bleistrasse property to a third party

About eight years after the building lease was granted (in 2018), Mrs. Bauer decides to sell the Bleistrasse property to a third party.

In view of this sale, the previously established independent and permanent building right, which is encumbered on the Bleistrasse property, will be cancelled and the building will be transferred from the GmbH to the landowner (no transfer of the building right under civil law).

After the building has fallen into disrepair, Eva Bauer sells the property (land and buildings) to a third party for CHF 7,300,000.

The book value of the building Bleistrasse in Bauer GmbH as of 31 December 2017 was CHF 4,400,000.

The reversionary compensation is calculated according to the model of the partnership building lease agreement. The reversionary compensation corresponds to that part of the market value of the property which corresponds to the share of the net asset value of the building in the sum of the net asset value of the building and land value. The net asset value of the building is based on the value of the building at the time the building lease is granted, less the usual percentage for age depreciation and wear and tear and plus the value-adding expenses invested since the building lease was granted.

The land value corresponds to the market value of the undeveloped land at the time of reversion. The land value per m2 of parcel area was estimated at CHF 3,000 per m2 at the time of the reversion.

Based on this, the following values (in CHF) result on the occasion of the reversion (at a sales price of CHF 7,300,000 for the property):

Questions

1. What are the consequences of property tax in the event of reversion or sale to the third party?
2. What are the income and profit tax consequences for the GmbH and Mrs Bauer?

Case 4: Indirect partial liquidation

Facts

Fonds Immo AG (hereinafter referred to as "FIAG"), domiciled in Zurich, holds properties in various cantons with a total current value of around CHF 800 million.

FIAG is a pure real estate company which is 100% owned by Fantastic Properties Fund CH, a Swiss real estate fund with indirect real estate holdings.

With a purchase agreement dated 18 July 2018, FIAG acquired all shares of Sandmann Immobilien AG (hereinafter "Sandmann") for a price of approximately CHF 18 million from Mr Urs Sandmann, resident in the Canton of Zurich. Sandmann is a pure real estate company and holds a commercial property in Uster, Canton Zurich, as its main asset. The market value of the property is approximately CHF 19.5 million.

FIAG financed 100% of the purchase price of the shares with a loan from the Fantastic Properties Fund CH.

The structure after the sale of shares can be simplified as follows:

An audited interim balance sheet of Sandmann was prepared as at the date of sale on July 18, 2018. As of December 31, 2017, Sandmann's balance sheet showed cash and cash equivalents of approximately CHF 2 million and a loan debt of CHF 2 million to the shareholder. This loan debt was repaid in full before 18 July 2018 or in view of the sale of shares. There are no mortgages. There are hidden reserves of around CHF 12.4 million on the commercial property in Uster:

It is planned that FIAG will acquire its new subsidiary Sandmann retroactively as of the closing date of the takeover balance sheet of 18 July 2018 by means of an absorption merger at book value. The merger is to be completed before the end of the 2018 calendar year.

Question

What are the tax consequences of the merger?

Case 5: Crowdfunding in the real estate sector

Facts

On 1.6.2018, Crowdfunding Real Estate AG concludes a publicly notarised purchase agreement with owner A. for the property "Hauptstrasse 7, Musterhausen" for a purchase price of CHF 5,000,000. The purchase agreement contains a substitution clause limited until 31.12.2018. On 7.12.2018, 15 investors will be entered in the land register as new co-owners.

This legal transaction is based on the following business model:

Crowdfunding Real Estate AG "reserves" potential investment properties by concluding a publicly notarised purchase agreement with the respective owner, which contains a substitution clause. Accordingly, Crowdfunding Real Estate AG may allow "investors" who have applied to become co-owners for the period of the Crowdfunding to enter into the purchase agreement. In this respect, it is agreed that the purpose of Crowdfunding Real Estate AG's purchase agreement is "to secure the sale of the property in relation to the purchase object in the sense of a broker for the period of the crowdfunding, during which private investors apply to the acquiring party as subsequent property owners for the acquisition of part of the purchase object". The rights and obligations arising from the publicly notarised purchase agreement can only be assigned to the investors in their entirety. It is also stated that Crowdfunding Real Estate AG at no time has the objective or the economic possibility of "freely disposing of the purchase object".

The right of entry is limited in time. If there is no transfer of ownership to "one or more third parties" within this period, the contract shall lapse. In the event that the respective owner does not let the investors but an "independent" third party enter into the purchase agreement, he is obliged to pay a penalty. In addition, he must return the advance payment to Crowdfunding Real Estate AG.

Subsequently, a so-called "management agreement" is concluded with interested investors, by which the investors commission Crowdfunding Real Estate AG to "broker and handle the purchase" of the specific investment property. As soon as the purchase price is received in an escrow account, Crowdfunding Real Estate AG is obliged to let the investors enter into the purchase agreement (this is accompanied by the obligation of the investors to enter into the purchase agreement). The management contract ends if no purchase is made.

If ownership is transferred, Crowdfunding Real Estate AG is ultimately entitled to a brokerage fee of 3% of the notarised purchase agreement.

The co-owners grant Crowdfunding Real Estate AG individual power of attorney over two bank accounts, which the co-owners are obliged to set up. These accounts are used for property management.

If the co-owners decide to sell the property as a whole, Crowdfunding Real Estate AG is exclusively commissioned with the search for potential buyers. In the event of a sale, Crowdfunding Real Estate AG is entitled to a "processing commission" of 1% of the notarised purchase price (excluding VAT). Crowdfunding Real Estate AG is entitled to this claim regardless of whether it has actually brokered the buyer.

Question

What tax consequences could result from this sequence of transactions?

Case 6: Decommissioning costs

Mr. X. would like to convert a former farm building into a residential building in 2020, incurring demolition costs of CHF 200,000. Can Mr X. claim this in his tax return 2020?

How is a possible deduction carried forward for direct federal tax calculated in the following case study? The following key data are known about X. regarding the tax period 2020:

Mr. X., who lives in the Canton of Thurgau, acquired a holiday home in the Canton of Ticino as a private asset in 2018. This will be demolished and rebuilt in 2020. In the canton of Graubünden, Mr. X. also still owns a holiday home (private property). Concerning the tax period 2020, after the first debt interest relocation, the Canton of Ticino will have a surplus of profit costs of CHF 100,000 due to the deduction of demolition costs. Both in the main tax domicile and in the Canton of Grisons, positive net investment income continues to be recorded after the second debt interest relocation. How is the "deduction surplus" from the Canton of Ticino to be taken into account in intercantonal tax separation?

Mr. X., who lives in Germany, will demolish the holiday home located in the canton of Ticino in 2020 and build a new holiday home in its place. In the canton of Graubünden, Mr. X. also still owns a holiday home (private property). At his main tax domicile in Germany, Mr. X. generates investment income of the equivalent of CHF 300,000. How is a surplus of extraction costs from the Canton of Ticino (dismantling costs) to be treated in principle in international tax separation?

Case 7: Conversion of a sole proprietorship into a corporation

Facts

A. has been active in the sporting goods trade since 1985, conducting business in the legal form of a sole proprietorship. The business assets also include three condominium ownership units. Of these, two units are used as a shop, warehouse and workshop, while one unit is rented to third parties.

In 2010, A. transferred all assets and liabilities to the newly founded Sportartikel AG, with the exception of the three storey ownership units.

Even after the transfer, the sole proprietorship continues to keep accounts and carry out liquidation activities (collection of debtors, settlement of creditors, etc.)

The assessment authority of the canton of residence assumes that the three properties have been privately withdrawn and records the corresponding capital gain.

Question

Is the taxation as a result of private withdrawal justified?

Variant

A. is an independent real estate agent. Its business assets comprise three floor units. He transfers these at income tax values to a newly founded GmbH in which he holds a 100% stake. The last taxable property trade was some time ago.

Question

Can the transfer be tax neutral?