Problems of tax deferral, especially in the case of corporate restructuring and replacement of commercial property and owner-occupied private property

Case study 1 International reorganisation

Facts

1. starting position

Blue Holding Luxembourg S.A., Luxembourg (hereinafter "Blue Lux") is held 70% and 30% by two foreign investors (foreign corporations, hereinafter "Ltd. 1 and Ltd. 2", Ltd. 1 70%, Ltd. 2 30%).

Blue Lux is the parent company of the Swiss Blue real estate companies.

Today, the Swiss real estate portfolio held by the 20 Blue companies consists of 25 commercial properties with a total value of around CHF 1 billion. The Blue companies are domiciled in Zurich and directly hold one or more properties in the cantons of Vaud, Zurich and St. Gallen.

The current holding structure is as follows:

2nd transaction

The Luxembourg holding company Blue Lux is to be incorporated into a Swiss holding company. Through the subsequent liquidation of Blue Lux into the Swiss holding company, the holdings in the Blue companies are to be combined at the level of the Swiss holding company.

Step 1 - Establishment of a Swiss holding company and immigration spin-off of the Blue Lux investment: Ltd. 1 and Ltd. 2 establish a Swiss holding company (BlueHoldCo). BlueHoldCo was founded by means of a contribution in kind from the Blue Lux holdings in return for the issue of Blue HoldCo shares to Ltd. 1 and 2 (share capital CHF 300,000; market value of 100% Blue Lux CHF 300 million). Ltd. 1 and Ltd. 2 cannot continue in their books the previous book value of the Blue Lux shares for the BlueHoldCo shares; this results in a step-up in their books to the market value of the BlueHoldCo shares.

The shareholding percentages of Ltd. 1 and 2 in BlueHoldCo correspond to the previous shareholding percentages in the Luxembourg holding company Blue Lux and are as follows

• Ltd. 1: contribution 70% Blue Lux. Contribution in kind of CHF 210 million will be settled with BlueHoldCo shares with a nominal value of CHF 210,000 and a premium of CHF 209.790 million.
• Ltd. 2: contribution 30% Blue Lux. Contribution in kind of CHF 90 million will be settled with BlueHoldCo shares with a nominal value of CHF 90,000 and a premium of CHF 89.910 million.
• Total issue price of BlueHoldCo shares: CHF 300 million

In the balance sheet of BlueHoldCo, the investment Blue Lux with its market value of CHF 300 million is shown.

This transaction step can be summarized graphically as follows:

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Before:

Later:

Question:

What property tax consequences will be triggered by the spin-off of the Blue Lux holdings to the Swiss BlueHoldCo (property gains tax, property transfer tax)?

Step 2 - Liquidation of Blue Lux: In a further step, Blue-HoldCo takes over assets and liabilities of Blue Lux by liquidation at the Luxembourg statutory book values (which corresponds to the market values but not to the tax book values; a transfer at the tax book values is excluded for Luxembourg legal reasons).

This transaction step can be summarized graphically as follows:

Question:

What property tax consequences will be triggered by the liquidation of Blue Lux into the Swiss BlueHoldCo (property gains tax, property transfer tax)?

Case study 2 Merger and waiver of subscription rights, quasi-merger

Facts

1. starting position

Franz Weiss holds 100% of the shares in Zürich Immo AG (as private assets). Zürich Immo AG holds various properties in the canton of Zurich. The market value of the shares of Zürich Immo AG amounts to CHF 100 million.

Herbert Rot holds 100% of the shares in Bern Immo AG (as private assets). Bern Immo AG holds various properties in the Canton of Berne. The market value of Aktien Bern Immo AG amounts to CHF 300 million.

The Swiss Immo Lux real estate fund (Luxembourg SICAV with indirect real estate holdings) holds 100% of the shares in Swiss Immo AG. Swiss Immo AG holds various properties in different cantons. The market value of the fund amounts to CHF 900 million.

2. transactions

a.) Acquisition of Zürich Immo AG by Bern Immo AG: Zürich Immo AG is merged with Bern Immo AG.

As part of the merger, Franz Weiss will receive 25% of the shares in the merged Bern Immo AG instead of his previous 100% stake in Zürich Immo AG.

Question:

What property tax consequences does the merger trigger?

b.) Acquisition of Bern Immo AG by Zürich Immo AG: Herbert Roth contributes 100% of his shares in Bern Immo AG to Zürich Immo AG and is compensated with 75% of the shares in Zürich Immo AG as part of the capital increase through contribution in kind.

Franz Weiss waives his subscription rights in the context of the capital increase, which reduces his stake in Zürich Immo AG to 25%.

Question:

What property tax consequences does the transaction trigger?

c) Acquisition of Zürich Immo AG by the real estate fund Swiss Immo Lux: Zürich Immo AG is merged directly with Swiss Immo AG.

As part of the merger, Franz Weiss will receive 10% of the Swiss Immo Lux fund units.

Question:

What property tax consequences does the transaction trigger?

Case study 3 Splitting

Facts

1. starting position

Franz Weiss holds 100% of the shares in Zürich Immo AG. Zürich Immo AG owns a large former industrial site in the canton of Zurich, which is currently undergoing real estate development. The aim is to build a residential development with a total of 11 apartment buildings on the site. The project development has been completed and the building permit has been issued. Two apartment buildings already exist on part of the site, with annual rental income of around CHF 2 million.

Immo AG is parceling out the existing property in two lots. On plot 1 there are the pre-existing 2 apartment buildings. Five additional apartment buildings are to be built on plot 1 (construction costs CHF 80 million, expected annual rental income around CHF 5 million).

On plot 2, 4 apartment buildings are to be built (construction costs CHF 70 million, expected annual rental income around CHF 4 million).

Various investors are interested in buying the real estate project.

2nd transaction

Franz Weiss founds Zürich Immo 2 AG and spins off plot 2 with the construction project for 4 apartment buildings into Zürich Immo 2 AG (transfer at the pro rata book value of the land plus project costs).

Zürich Immo AG remains with plot 1, the existing 2 apartment buildings and the construction project for a further 5 apartment buildings.

The spin-off of Zürich Immo AG is being carried out with the aim of enabling Franz Weiss to sell the Zürich Immo and Zürich Immo 2 investments separately to investors.

Question:

What are the property control consequences of this split?

Case study 4 Replacement procurement at the real estate [management] company

Facts

1. starting position

Bernasconi Immobilien AG (hereafter BIAG), headquartered in Winterthur (= municipality W), has a total of 50 properties in its portfolio, most of which are located in the canton of Zurich. According to the extract from the Commercial Register, its purpose is to acquire, maintain, administer, manage, develop and broker real estate for itself or for third parties, to plan and execute buildings and renovations, and to offer real estate consulting services. The purpose explicitly includes the acquisition of real estate in Switzerland and abroad.

Up to now, all properties have always been shown in the balance sheet under fixed assets.

In line with the business strategy of continuous growth, properties that no longer fit into the portfolio have been sold and others purchased for years

2. sale land cat.-no. ABC1234 in Z

On 11 May 2017, BIAG will sell an apartment building in the municipality of Z for CHF 4,500,000.

The following additional information can be found in the tax return for real estate profit tax submitted to the municipal tax office:

On page 3 of the tax return form, the seller states that on 28 October 2016 it had already acquired a replacement property in the same municipality for CHF 8.0 million.

Therefore, on the basis of § 216 para. 3 lit. g StG ZH and Art. 8 para. 4 in conjunction with Article 12(4) StHG provides for a full tax deferral.

Questions:

• Calculate the property gains tax.
• Will you grant the tax deferral?

Variant

Starting position as in the basic case, but with the following modifications:

• In the excerpt from the commercial register, it can be explicitly stated under the description of purpose that BIAG also conducts "trading in real estate".
• BIAG is then not a pure real estate company, but a so-called mixed property management company, which holds investment properties as investment and commercial properties as current assets.
• BIAG has requested the municipal tax office in Z for confirmation of the status of a real estate dealer in view of the strategic sale of part of its real estate. This was subsequently granted on the basis of specific circumstances which are not of interest here.

Questions:

• Does the new starting position change anything in your assessment?
• Does it make any difference whether the property sold in the present case was in fixed or current assets?

Case study 5 Real estate exchange between church foundation and real estate agent

Facts

1. starting position

According to its deed of foundation of the Roman Catholic Church, the ecclesiastical foundation Maria Magdalena (abbreviated MM), with its headquarters in Zurich (= parish Z), aims at the practice of worship and pastoral care in a sub-area of the parish Z and the Roman Catholic inhabitants living there. In order to fulfil its ecclesiastical religious duties, it is provided, inter alia, that it may have appropriate real estate built and acquire it. According to the foundation charter of 1949, the foundation's assets can be increased by donations.

In 1972 the MM Foundation received an apartment building (MFH) by means of a legacy. As she already had sufficient premises at that time to practice her pastoral care etc., the apartments were rented out to socially disadvantaged persons.

On August 9, 2016, the Foundation exchanged its property (MFH with a shop and 5 apartments) for a property more suitable for its purposes, which is also located in the municipality of Z. The exchanged property is a purely residential property.

The MM Foundation is exempt from profit tax because of the purpose it pursues (Art. 23 para. 1 lit. g. StHG, Art. 56 lit. h DBG, § 61 lit. i StG ZH). However, with regard to the real estate profit tax, Art. 23 para. 4 StHG applies (Kt. ZH: see § 218 lit. b StG).

2. further information on the exchange transaction

According to the exchange agreement, both parties assume an exchange value of CHF 2,400,000 each. Walter Müller Immobilien AG, a real estate broker with its registered office in Cham, Kt. ZG, which exchanges properties with the MM Foundation, has additionally undertaken to the MM Foundation to assume the transfer costs and real estate profit tax payable by it in connection with the exchange transaction.

The following additional information can be found in the tax return for real estate profit tax submitted to the municipal tax office:

On page 3 of the tax return form, the representative of the MM Foundation also claims a tax deferral based on § 216 (3) lit. g StG ZH.

In the assessment procedure, the condition response states that 20 % of the rental income of the property previously used by the MM Foundation comes from the rented shop and the rest from the residential rents.

Questions:

• Calculate the property gains tax.
• Will you grant the tax deferral?

Case study 6 Sale of the exclusively and permanently owner-occupied residential property with subsequent replacement purchase - problem case I.

Basic facts

The Wiederkehr family originally lived in a terraced house (REFH) in the municipality of A. In view of the imminent birth - twins announced themselves - they were forced to move to a larger apartment relatively quickly. Because of the daughter, who was already of school age, it was decided to stay in community A. Fortunately, a suitable solution emerged: There were good prospects of acquiring a house in the neighbourhood that had previously been rebuilt and could thus have been adapted to the personal needs of the enlarged family. After the project could not be realized in the course of 2012, a replacement property was acquired in late autumn. Only a few weeks later, the tenants, who in the meantime occupied the old property, were given notice of termination at the end of March 2013. At the beginning of April 2013, the original property was sold.

Additional information (data simplified):

The tax deferral claimed in the tax return due to the replacement purchase pursuant to § 216 para. 3 lit. i StG ZH (art. 12 para. 3 lit. e StHG) was not granted by the property tax authority of municipality A and the sale of the uO was taxed accordingly.

Question:

Rightly?

Variant

In summer 2011, the returners would have concluded a temporary rental contract for one year instead of the permanent one for the REFH that was released.

Question:

Did this change the legal assessment of the basic facts?

Case study 7 Sale of the exclusively and permanently owner-occupied residential property with subsequent replacement purchase - problem cases II. - IV. [Misappropriation and reinvestment sale]

Basic facts

Robert and Rita Schellenberg have been living in a beautiful detached house in the municipality of H (Kt. ZH) for eighteen years. Robert Schellenberg is sales manager at Digital Development AG (DDAG), with headquarters and office in Zurich. With a view to the next stage of their lives, the two of them decide, partly because of the large terraced plot of land and the fact that the property is not wheelchair-accessible, to give up their previous residence, sell the land and purchase a newly constructed apartment (StWE) in the municipality of Z (Kt. ZH) in its place. This is convenient for Robert Schellenberg anyway, as he works mainly at the company's headquarters. One and a half years later, DDAG is undergoing a reorientation. The Board of Directors wants to expand and, somewhat unexpectedly, appoints Robert Schellenberg as the new Managing Director of the recently established branch in Munich. After lengthy discussions with his wife, Schellenberg accepts this calling or challenge and decides to move to Munich with his wife. They will retain the property in Zurich, also in the sense of an investment. You will probably rent out the flat share.

On the basis of a routine inquiry by the Municipal Tax Office H, one learns from colleagues at Zugzugsgemeinde Z that the Schellenbergs have not been living in the replacement property for a short time and had moved to D. Based on this, the tax secretary of the municipality H opens an after-tax procedure. In the notification to the former tax representative of the Schellenbergs, the reason for the subsequent taxation is the misappropriation that took place.

Questions:

• Is the present case justifiably subject to post-tax proceedings?
• On what basis(s)?

Variant 1

The Schellenbergs are selling their property in Z.

Questions:

• Did this change the legal assessment of the basic facts?
• Who or which municipality taxes what?

variant 2

The Schellenbergs acquire the replacement property in the municipality of B., which is located in the district of SZ.

Questions:

• What is the difference to variant 1?
• Who or which municipality taxes what?

Case study 8 Sale of the exclusively and permanently owner-occupied residential property with subsequent replacement purchase - problem cases V. - IX. [Practical cases concerning replacement buildings on "own" property]

Variant 1

Maja Keller lives in an old EFH at the Seeblickstrasse 22, cat.no. 1500 (1000 m2). She's parceling out the property. Cat. no. 1800 (500 m2 with EFH) and 1801 (500 m2, undeveloped) are created. Cat.No. 1800 with the old EFH sold to Paul Schmid. On the other plot of land she is building a new EFH (Seeblickstrasse 24), which she has occupied since its construction. In the case of the sale of cat.no. 1800, it claims a tax deferral due to replacement. As reinvestment, it indicates the construction costs of the new EFH on cat.no. 1801.

Question:

Can the tax deferral be granted?

variant 2

Urs Weber lives in an old EFH at Nordstrasse 14, cat.no. 1000. He demolishes the house and builds a MFH with three apartments on the property and establishes StWE on it. Two apartments are being sold, Urs Weber himself lives in the penthouse apartment. In the case of the two sales, he claims tax deferral for replacement purchases. As reinvestment he declares the proportionate building costs of the self-occupied flat.

Question:

Can the requested tax deferral be granted?

Variant 3

Hans Honegger lives in a 3-room apartment at Trottenweg 12 (GBBl 1234). Recently the annual floor owners' meeting took place. He learns by chance about the intentions to sell of his neighbour Roger Rindlisbacher, who in turn lives in a 4 1⁄2 room shared flat (GBBl 1235) and intends to sell it. An agreement will soon be reached. Only 5 months later, the time has come and Honegger moves into his new home.

Within the framework of the real estate profit tax assessment procedure, Honegger's tax representative is claiming a tax deferral on the basis of § 216 (3) lit. i StG ZH for the replacement purchase.

Question:

Can the tax deferral be granted although Honegger still lives at the same address (= Trottenweg 12)?

Variant 4

Stefan Keller took over his parents' house at Vogelsangstrasse 39 (cat.no. 4001) 8 years ago by means of a mixed inheritance advance withdrawal. The extension is outdated. Also otherwise it does not offer its family of 4 members the required space. One decides to sell the property in the best possible way. Only a few days after the start of the advertisement Ruedi Odermatt from Odermatt Invest GmbH reaches Stefan Keller. Odermatt proposes to the Kellers to purchase the land. Instead of paying a purchase price, it is agreed that the cellars in the newly created MFH can acquire a condominium at a certain price "by way of settlement".

In the meantime the Kellers live in a 5-room apartment in the newly built MFH. In the tax return, a request for a tax deferral is made for the replacement purchase. The tax secretary responsible for the assessment initially takes the view that the property is simply being used differently than before. He argued to Kellers that the conditions for granting a tax deferral were therefore not met.

Question:

Rightly? Or is the tax deferral still to be granted?

Variant 5

Pierre and Helene Aubry sold their EFH at Waidmattweg 4, cat. no. 323, for CHF 890,000 on 4 April 2015. Since they want to take their time with the purchase of a replacement property, they first rent an apartment in the neighbouring community. After 20 months, slightly embittered, they come to the realization that none of the objects they have visited so far has really met their needs. Instead, they slowly but surely regret the sale of their old home. After the two-year replacement purchase period threatens to expire unused, they make an offer to the former buyers of their original property for a prompt repurchase. They get into it and the Aubry's can buy back their old property within the clearance period.

You apply to the competent municipal tax office in W for a revision of the real estate tax assessment from 2016 and file an application for a tax deferral according to the replacement purchase, together with a request that the real estate profit tax paid be refunded together with interest.

Question:

What are the chances of success that the audit will be approved?