Real estate swap between pension fund and investment foundation: tax deferral on real estate gains

A pension fund transfers all of its real estate to an investment foundation (active exclusively in the management of pension assets) in exchange for rights in the foundation attached to a group of properties including (but not limited to) the transferred properties. The Zurich Administrative Court, and later the Federal Court, overruled a decision of the city of Zurich, which wanted to levy real estate gains tax on the properties located in Zurich: the tax neutrality of the transfer is required by the Pension Fund Act (PFA), which provides that “profits resulting from the merger or division of pension funds are not taxable” (art. 80 para. 4 PFA). This provision must be interpreted independently of tax laws, so that the more restrictive conditions of tax neutrality set by the latter (in particular the requirement of a transfer of a business unit) do not apply. A “division” eligible for tax deferral under the PFA can be recognized regardless of the form of the restructuring: it is sufficient that the real estate remains dedicated to a pension purpose, which presupposes that it is still used for the pension of the employees affiliated to the transferring institution (a condition that would not be fulfilled in the case of a simple sale to another pension institution, for example). In the case at hand, the transfer of the pension fund’s real estate holdings to the investment foundation was in line with the investment rules applicable to pension funds, in particular the risk diversification rules (since the pension fund now had exposure to a larger real estate portfolio). It would therefore be contrary to the purpose of art. 80 para. 4 PFA to charge real estate capital gain tax on this transaction (decision 2C_380/2021 of 28.2.2022, intended for publication).