Intercantonal and cross-border real estate transactions
Workshop by Laetitia Fracheboud and Olivier Margraf on the occasion of the ISIS) seminar of 12/13 September 2022 entitled "Intercantonal and cross-border land transactions".
Case 1: Loss offsetting intercantonal
1. facts of the case
Eat-Sperience AG, based in Basel, is 100% owned by Experience Holding AG, also based in Basel. It operates restaurants offering true gastronomic experiences in all cantons of German-speaking Switzerland. In the canton of Basel-Stadt, the restaurant is located in a property in a prime location, which is owned by Eat-Sperience AG. In the other cantons, Eat-Sperience AG has rented suitable premises.
Up to and including 2018, Eat-Sperience AG recorded attractive profits. But then it made headlines with contaminated fish in its restaurant in Basel. Since then, it has been confronted with expensive civil lawsuits and the guests are staying away. The Corona crisis brought the situation to a head. In 2019 up to and including 2021, Eat-Sperience AG therefore recorded the following losses, which are accepted for the purposes of direct federal tax and cantonal and municipal taxes:
- 2019: CHF 20 million
- 2020: CHF 15 million
- 2021: CHF 10 million
A loss is also expected for 2022. Experience Holding AG is aware that Eat-Sperience AG can probably only fully recover if it is taken over by an independent third party. However, it is too difficult to sell the restaurant business due to the high-profile property in Basel. In order to prepare the company for a possible sale, the property is therefore to be sold separately.
It is uncertain when a suitable buyer can be found for the property. Furthermore, Experience Holding AG is aware from previous M&A transactions that it is unlikely to find a buyer willing to pay for the loss carry-forwards. Therefore, Eat-Sperience AG decides to sell its property at a price of CHF 55 million to its wholly owned sister company Immo-Sperience AG. Later, the latter is to sell the property to a third party.
The following is known about the Eat-Sperience AG property:
- Market value: approx. CHF 65 million (according to an independent valuation report)
- Plant costs: CHF 20 million
- Book value / income tax value: CHF 10 million.
- Due to numerous third-party tenants, the property is sufficient to constitute a real estate business according to the practice of the Canton of Basel-Stadt.
The property is not located in Basel, but in Frauenfeld.
- What are the consequences of the sale of the property in Basel for the profit tax, the real estate gains tax and the transfer tax?
- What is the practical procedure for offsetting losses?
- Variant: What are the consequences of the sale of the property in Frauenfeld for the profit tax, the real estate gains tax and the real estate transfer tax?
Case 2: Economic change of ownership in intercantonal real estate companies I
1. facts of the case
John Holiday resides in the Canton of Valais. Among other things, he also holds a 100% stake in Mostindien Immobilien AG, based in the canton of Thurgau, which owns one property each in the canton of Thurgau and in the canton of St. Gallen. John, annoyed by what he sees as the extremely fiscal Thurgau tax authorities, decides to burn his bridges with the Canton of Thurgau altogether. He finds an investor, Greater Zurich Real Estate AG, whose real estate portfolio extends throughout Switzerland, which acquires 100% of the shares in Mostindien Immobilien AG.
The balance sheet picture in year n is as follows:
The purchase price of the shares in Mostindien Immobilien AG amounts to CHF 2.15 million.
John's long-standing legal counsel is no longer fully up to speed on tax expertise. Therefore, it is waived to obtain a ruling with regard to the sale of the block of shares. Mostindien Immobilien AG has a lot of (surplus) liquidity, which John is pricing into the proceeds of the sale. Greater Zurich Real Estate AG will distribute a substantial substance dividend (excess liquidity) of CHF 450,000 in year n+2.
- What are John's tax consequences for the stock sale?
- How are any tax consequences allocated to the participating cantons of Thurgau and St. Gallen?
- Are there any tax consequences for Mostindien Immobilien AG?
- Option 2: Does John have to fear further tax consequences?
Case 3: Economic change of ownership in intercantonal real estate companies II
1. facts of the case
Immobilien Group AG, ZG is held 50% each by Mrs. Häberli and her brother Mr. Häberli, who reside in the Canton of Zurich and Basel-Landschaft, respectively. The siblings hold their shares as private assets. Immobilien Group AG in turn holds two subsidiaries, Real Estate West AG and Real Estate Nord-Ost AG, each with 100%. All companies are domiciled in the Canton of Zug. The following is also known about the subsidiaries of Immobilien Group AG:
- Real Estate West AG: holds commercial real estate in the cantons of LU, FR and VD;
- Real Estate Nord-Ost AG: holds commercial real estate in the cantons of SG, TG, AR and GR.
Now Mrs. Häberli is selling her 50% share in Immobilien Group AG to her brother.
Immobilien Group AG sells its 100% stake in Real Estate West AG at fair value to a third party investor.
Immobilien Group AG sells 51% of the shares in Real Estate West AG at fair value to a third party investor.
- What are the consequences of the sale of the 50% stake in Immobilien Group AG for income tax, real estate gains tax and real estate transfer tax?
- Option 1: What are the consequences of the sale of the 100% stake in Real Estate West AG for profit tax, real estate gains tax and real estate transfer tax?
- Variant 2: Does anything change in the tax consequences compared to Variant 1?
Case 4: Intercantonal replacements of private and business assets
1. facts: owner-occupied residential property: unit method
In 2012, the Zürcher family purchased a beautiful single-family house in the canton of Thurgau (investment costs CHF 900,000). In 2019, the Zürcher family sells this property again (sale proceeds CHF 1.3 million) and acquires a replacement property in the canton of Zurich (investment costs CHF 1.2 million). The Zürcher family does not find its way in the canton of Zurich, which is why it also sells the corresponding property again in 2023 (sale proceeds CHF 1.5 million). In the canton of Glarus, they find what they are looking for in a remote location and reinvest the proceeds from the sale of the Zurich property in an old, spacious farmhouse in the same year (investment costs CHF 1.9 million). But happiness does not last long in Glarus. The Zürcher family does not feel called to live a life of self-cultivation after all. In 2026, they also sell the old farmhouse and decide on a minimalist lifestyle with the greatest possible renunciation of property, which is why they rent a cooperative apartment (sale proceeds CHF 1.85 million).
- Which canton can tax which real estate gain and to what extent?
- How is it ensured that the profit deferred in a canton is known to the respective canton of immigration?
2. facts of the case: operating property (system change)
TG-Produktions AG, based in the canton of Thurgau, is on a strong expansion course. It has production halls in the canton of Thurgau. Property No. 41 in Kreuzlingen proves to be no longer suitable for its purposes, which is why it is sold. In the canton of Zurich, a replacement property is acquired in n and part of the production is transferred to this much more spacious property. The product manufactured there flops as a result of an economic slump, which is why production in the canton of Zurich is discontinued again. The production property is also sold for CHF 3,400,000 in year n+4.
Sold property in TG:
- Profit tax value: 1'150'000
- Plant costs: 1'300'000
- Proceeds from the sale: 1'450'000
Replacement object in ZH
- Purchase price: 3'500'000
Handwerker AG, which is headquartered in the canton of Zurich, holds two operating properties in its ownership. One site is located in the city of Zurich, the other in Winterthur. Due to a restructuring of the business processes, Handwerker AG decides to give up the location in Winterthur in favor of a location in Weinfelden in order to better serve the market segment Eastern Switzerland. The operating property in Winterthur will be sold in 2019 for CHF 7.8 million. In 2019, an operating property in Weinfelden will be acquired for CHF 8 million. In 2022, Handwerker AG will merge with a larger competitor. As a result of a structural adjustment, the property in Weinfelden will be sold again for CHF 8.2 million.
Regarding the sold property in Winterthur, the following information is known:
- Profit tax value: 5'000'000
- Plant costs: 6'500'000
- Market value 20 years ago: 7'000'000
Questions basic variant and variant 1
- Can a replacement be claimed and to what extent?
- Who is entitled to the right of taxation upon the sale of the replacement property?
Handwerker AG relocates its registered office as of 30.6.2022 from Canton A to Canton B. The operating property in Canton A is already sold in 2020. The replacement acquisition will take place in 2023 in canton B, which is why the capital gain is booked as a replacement acquisition provision in the 2020 financial statements. Canton A has a generous practice with regard to the replacement acquisition period. Canton B, on the other hand, sets this period to 2 years.
- Can Canton B tax the replacement provision in 2022 in accordance with its practice?
- Can Handwerker AG at best invoke good faith?
Case 5: Capital gains in monistic and dualistic cantons and STAF reductions
1. facts of the case
Alternative AG, based in Rapperswil, SG, develops innovative and sustainable solutions for heat generation and regulation. It has a modern research center in the hip industrial district in Zurich, which is treated as a permanent establishment for tax purposes. In addition, for historical reasons - it was originally used as a real estate company by the father of the current sole shareholder and then converted into an industrial company by the innovative son - it has investment properties in the cantons of Zurich and Thurgau.
In 2021, Alternative AG reports a profit of CHF 5 million, which can be broken down as follows:
- Operating profit: CHF 1 million This is allocated 60% to the canton of St. Gallen and 40% to the canton of Zurich according to the quota-based indirect method based on the acquisition factors
- Net real estate income Zurich: CHF 500,000 (variant: CHF 0)
- Net real estate income Thurgau: CHF 500,000 (variant: CHF 1 million)
- Capital gain from the sale of a property in the canton of Zurich: CHF 3 million (no reinvested depreciation)(variant: property in the canton of Thurgau)
Alternative AG has R&D expenses of CHF 2 million which qualify for the additional deduction under Art. 25b StHG.
- How does intercantonal tax equalization present itself from the perspective of the Canton of Zurich?
- Variant: How does the intercantonal tax differentiation present itself from the perspective of the Canton of Thurgau?
Case 6: Loss from foreign real estate
1. facts of the case: business premises with real estate
Butterfly Management GmbH, headquartered in Kreuzlingen, has an operating facility in Constance (Germany). It also holds an operating property there. Due to sluggish business, Butterfly Management GmbH is forced to sell the German premises in 2022. The business premises will continue to be operated in rented commercial premises.
The accounting picture is as follows:
The property in Constance is an investment property without an operating facility.
- How does loss offsetting work in the international context for direct federal tax?
- As in state and local taxes?
- How should the variant be assessed?
Case 7: International real estate company
1. facts of the case
EURInvestment HoldCo is a private holding company based in London, UK. Through a real estate company based in London, UK, it holds various properties throughout Europe, including two commercial properties in Zug and Bern. EURInvestment HoldCo decides to sell the shares of its real estate company to a Luxembourg fund.
Before acquiring the shares, the Luxembourg fund would like to clarify what tax consequences it will face if it resells the shares in the real estate company.
- Does the sale of the shares in the real estate company trigger taxation in Switzerland?
- Does the situation change if the real estate company has its registered office in Luxembourg instead of London?
- What must be considered for the Luxembourg fund in the event of a resale?
Case 8: Deconstruction costs
1. facts of the case
Mr. X., resident in the canton of Thurgau, purchased an aging vacation home in the canton of Ticino in 2020 which is in need of renovation. This will be demolished and rebuilt in 2022. In the canton of Graubünden, Mr. X. also still owns a vacation home (private assets). Regarding the tax period 2022, a profit cost surplus of CHF 100,000 remains in the canton Ticino after the first debt interest transfer due to the deduction of the deconstruction costs. Both in the main tax domicile and in the canton Grisons, positive net asset income continues to be recorded after the 2nd debt interest transfer.
- How is the "deduction surplus" from the canton of Ticino to be taken into account in the intercantonal tax equalization?