Daniel Gatenby [ LL.M. Tax, Attorney-at-Law in Lausanne and Geneva, PYTHON ]
Philippe Kenel [ Doctor of Law, Attorney-at-Law in Lausanne, Geneva and Brussels, PYTHON ]
The ownership and transfer of shares in real estate companies, whether onerous or gratuitous, give rise to interesting and sometimes complex issues, particularly in international contexts. We will first examine the concept of real estate company (REC) under Swiss law and then review certain Swiss taxes and the specifics of their application in certain international settings.
Concept of a real estate company
Swiss law does not recognise a particular form of REC as is the case in some countries. In principle, they are constituted in the form of an Ltd or an LLC. The concept of a real estate company is in fact a concept of tax law that was developed in the context of transfer taxes and the taxation of real estate gains. According to the Federal Supreme Court, a company is qualified as a real estate company when its purpose or actual activity consists mainly or exclusively in the acquisition, holding, management and sale of real estate. If the real estate is only the physical support of an industrial or commercial operation, it is not a real estate company but an operating company. The main criterion for qualifying a company as an REC is its statutory purpose (or the activity it actually pursues). However, our High Court specified that each case must be examined individually taking into account all the circumstances, a single criterion not being sufficient (ATF 2C_643/2017, recital 2.4). The following elements must also be taken into account:
• The market value of the buildings must in principle represent 2/3 of the market value of the company’s total assets;
• 2/3 of the profit must come from “real estate” activities (e.g. rentals).
It should be noted that these are not cumulative criteria but indicators that must be weighted (SCHWAB Anne-Christine, Notion de société immobilière, RDAF 2019 II p. 317).
Transfer tax is a tax on the transfer of real estate as such, regardless of whether or not a gain is realised. It is an indirect tax that has not been harmonised at the federal level, so that its treatment varies greatly from one canton to another. In all cantons, the transfer tax is in principle payable by the purchaser of the property. It is calculated on the basis of the purchase price and is generally levied at a rate between 1 and 3%.
The transfer of shares in a real estate company gives rise to the levying of transfer duties in some cantons, the intention being to tax the economic transfer of real estate as well.
It should be noted that such transfers can only give rise to transfer duties in a canton if the real estate is located there, regardless of where the real estate company is based.
Some cantonal legislations impose transfer taxes on all transfers of shares in an REC, even for the transfer of a minority shareholding. Other cantons limit such taxation to transfers of majority shareholdings, and some cantons do not levy any transfer tax on transfers of shares in an REC.
The Federal Court has recently had to decide an interesting case on transfer taxes concerning the canton of Valais (ATF 2C_643/2017). In this case, a Maltese company had acquired all the shares of a Swiss company holding apartments, all located in Valais. The Valais tax authority considered that the Swiss company should be qualified as an REC and, on the basis of Valais law, levied transfer tax on the transfer of the shares. The Maltese company contested this classification, arguing that, from the point of view of the Federal Law of 16 December 1983 on the acquisition of real estate by persons abroad (LFAIE), the cantonal authority confirmed that the transfer was not subject to authorisation, precisely because the activity of the Swiss company was qualified as a hotel activity (cf. art. 2 para. 2 let. a LFAIE and art. 3 OAIE). If the competent authority had come to the conclusion that it was an REC without hotel activities, the transfer would have been subject to authorisation under the LFAIE and such authorisation would probably not have been granted. In other words, the company criticised the State of Valais for qualifying the company differently depending on whether it applied the LFAIE or the tax law concerning transfer tax. The Federal Court dismissed this argument by stating that the decision regarding the LFAIE status of the company has no binding effect on the Valais tax authorities with regard to the levying of transfer tax. The two laws (tax law and LFAIE) serve different purposes: transfer duties aim to tax the transfer of real estate, whereas the LFAIE aims to limit the acquisition of real estate by persons abroad in order to prevent foreign control over Swiss soil (above-mentioned decision, recital 8.3). From the point of view of transfer tax law, the question is whether the transfer of the shares in the REC is equivalent to a transfer of the real estate itself or whether the aim is to transfer a business (a hotel). In contrast to the LFAIE, the tax law does not take into account the way in which the real estate is used, but attaches importance to the purpose of the company. In this case, the lower court found that the company’s purpose in its articles of incorporation was that of a “classic” REC, that the building was registered as “residential property”, and that the furniture and equipment were not typical of hotel facilities but rather the amenities of a luxury chalet. It also noted that more than two-thirds of the company’s assets consisted of real estate and that rental income accounted for more than two-thirds of the profit. Finally, the company’s commercial activity consisted mainly of renting out holiday homes, with hotel services as such being relegated to the background (above-mentioned decision, points 4.1-4-3). The Court therefore confirmed that the company was an REC and that the transfer tax was due.