Category: Real estate taxation

In the event of the sale of its property bearing a fixed-term mortgage debt, without the assumption of the mortgage contract under the same conditions by the buyer of the property, it is common for banks to levy compensation for early termination of the contract. Such a situation could generate different tax implications in the past depending on the canton where the property is located, in particular with regard to the deduction of the compensation.

To enable you to realize the consequences in this matter, harmonized since the end of 2019 through a decision of the Federal Court, here is our tax advice relating to the real estate transactions concerned.

1. Tax regime until 2019

Until the end of 2019, the cantons were relatively free in qualifying the “penalty” due to banks for early termination of the contract. The cantonal tax authorities could therefore (i) either consider this cost as a non-deductible expense, (ii) or consider that it was an expense, deductible for real estate capital gain tax purposes, (iii) or accept the deduction of the charge from the seller’s taxable income as a passive interest.

2. Tax regime since 2019

Since the decision of 16.12.2019 issued by the Federal Tribunal (2C_1009 / 2019), the principles in this area are now as follows:

• In the event of early termination, together with the conclusion of a new contract with the same financing institution, and without the property being sold, the penalty is deductible from taxable income as passive interest.
• Upon early termination, together with the conclusion of a new contract with another financing institution, the charge is not deductible from income, as it is qualified as a compensation. The same applies in principle to early repayment of the mortgage without assuming a new debt.
• Finally, when the termination occurs in conjunction with the sale of the property, the penalty is considered an expense, and therefore deductible for real estate capital gain tax purposes.

3. Recommendation of the tax specialist

Knowing the significant costs that indemnities for early termination of the fixed-term mortgage contract can indirectly generate, whether in the context of the sale of his property or during the conclusion of a new contract, it is strongly recommended for the seller to approach his tax specialist to seek prior tax advice relating to the real estate transactions in question.

1. Preliminaries

An examination which occurs at the time of each property acquisition project concerns the best taxation structure for the transaction. The objective of this contribution is to inform any potential investor of the main comparisons which are useful to determine, from a taxation point of view, the best option for their personal situation. To limit this brief in view, we will take as an example the situation of an individual physically resident in the Canton of Geneva, subject to ordinary taxation regime.

2. Taxation system at time of acquisition of Geneva property

In Geneva, the purchase in own name or by a real estate company gives rise to the levy of transfer tax at the rate of around 3.3%, while the acquisition through shares in a real estate company is, in principle, not subject to transfer tax.

3. Taxation system during property ownership

An owner in his own name will be subject to personal income taxes on net rental income at a maximum rate of about 45% in Geneva. Tax on net wealth at a maximum rate of about 1% is also levied. Finally, complementary property tax is due at the rate of 0.1% on the gross property value.

A Geneva real estate company is taxed on its net profit at the effective rate of about 14%. The company is also subject to capital tax on its equity at the rate of about 0.4% (minimum equity between 20% and 30%). For a real estate company, complementary property tax is levied at the rate of 0.2%. Distribution of profits achieved by the company is subject to withholding taxes at a rate of 35%. This withholding tax may however be credited against personal income tax due by the shareholder resident in Switzerland, which is levied at maximum rate of 31.5% if the shareholding amounts to at least 10%, any difference being reimbursed.

4. Taxation system linked to the sale of property

The sale of a property asset held in their own name gives rise to real estate capital gain tax on a sliding scale depending on the length of ownership of the property, being between 50% (less than 2 years) and 0% (after 25 years). At a federal level, no such tax is levied.

Sale of a property by a real estate company results in a profit tax at an effective rate of about 14%. A potential capital loss results in a tax deductible expense. Net profits distributed by the company are subject to withholding tax, recoverable as far as a Swiss resident is concerned, and resulting in personal income taxation for Geneva taxpayers of approximately 31.5%. 

The sale of shares in a real estate company by an individual is analysed transparently and therefore qualifies as a property sale in Geneva. The capital gain will therefore be taxed on a sliding scale between 50% and 0%. To avoid such transparent qualification of the property sale, it may be useful to structure the property ownership through ownership of the real estate company by another company. According to current practice applicable in the Canton of Geneva, the gain realized on the sale of shares in a real estate company by a company is qualified as a gain on a participation, and is therefore allocated for taxation purposes to the shareholder. At level of such entity, this gain benefits, if it is Swiss, from participation exemption.

5. Conclusion

On the basis of the above explanations, it results that the acquisition of Geneva property through a Swiss company, held in turn by a holding company, allows in principle a significant tax optimization, mainly as far as a potential capital gain is concerned. In addition, such structuring permits du delay the tax burden until final distribution of profits towards the shareholder. However, the sale of shares in a real estate company may appear to be more difficult in practice as the person taking over the shares potentially takes over a latent taxation cost on the unrealized gain of the property.

It is therefore advisable to carry out a detailed analysis of each individual case prior to the investment, which may result in a different structuring depending on each particular case of investor.

As a result of the amendment, effective as of the 1st of January 2020, to article 32 paragraphs 2 and 2bis of the Federal Direct Tax Law (FDTL) and to article 9 paragraphs 3 and 3bis of the Federal Act on the Harmonization of Direct Taxes of the Cantons and Municipalities (THL) and to the corresponding cantonal laws, private property owners may now deduct from their taxable income, expenses related to the demolition of a building, when the purpose of the demolition is to replace it by a new construction. In addition, these demolition costs as well as energy saving and environmental investment costs can be carried forward to the next two tax periods, if they cannot be fully taken into account for tax purposes in the year in which they were incurred.