SWITZERLAND Law and Practice Contributed by: Francis Nordmann, Johannes Bürgi, Christian Eichenberger, André Kuhn and Sabrina Kunz, Walder Wyss Ltd
so there should be no cash leakage due to a time- consuming payment and refund procedure. 8.3 Municipal Taxes Some cantons and/or municipalities levy special taxes on the value of the real estate located in their territory. These have to be paid by the property owner. Moreover, rental income is subject to federal, cantonal and municipal income tax in the canton/municipality where the property is located. While the federal cor - porate income tax rate is uniform in the whole country, the cantonal and municipal income tax rates may vary widely. 8.4 Income Tax Withholding for Foreign Investors Generally, rental income from investments in Swiss properties earned by corporate investors is subject to Swiss federal, cantonal and municipal corporate income tax in the canton and the municipality where the property is located. The aggregate corporate income tax rate varies depending on the location of the property. If the property held by an individual investor qualifies as a business asset (and not as a private asset), social security contributions may be triggered on top of this. The tax is assessed based on a tax return filed by the Swiss or foreign investor. No withholdings apply. Interest accrued on debt funding is deductible, which is also true with respect to shareholder or other relat - ed party advances. However, thin capitalisation rules apply and the amount of the debt funding and the interest rate applied should remain within the peri - odically published safe harbour limits. Otherwise, a constructive distribution may be assumed that would not allow for an income tax-effective deduction and trigger the (dividend) withholding tax of 35%. Build - ings may be depreciated over their useful lifetime, and the depreciation deductions may be deducted from taxable income. The straight line or the reducing bal - ance depreciation method may be chosen freely. Land cannot be depreciated, but a blended rate may be applied if land and building values are not split and do not have separate book entries. Safe harbour depreciation rates are available for the depreciation
methods and the blended rate. In the event of a sale of the property, recaptured depreciation deductions are subject to corporate income tax. Accordingly, depre - ciation deductions that do not reflect real losses of value lead to a mere income tax deferral. In general and with due regard to the current negative interest rate environment, in a share deal scenario deferred income taxes are fully deducted from the purchase price as a deferred liability. Interest paid on mortgage-secured funding advanced by a bank (or other lender) outside Switzerland to a Swiss borrower is subject to a local interest withhold - ing, with the applicable rate depending on the loca - tion of the property securing the loan. The interest withholding is not levied if the investor is a resident of a benign treaty jurisdiction where the interest clause in the treaty excludes taxation in the source country. The holding of a property in Switzerland is also subject to Swiss wealth tax (for individual investors) or capital tax (for corporate investors), the maximum rates for which vary significantly between the different cantons and municipalities. Appreciation gains realised on the disposal of proper - ties are subject to taxation. One of the following two systems applies, depending on the cantonal regime: • the monistic system, where any appreciation gain, be it on a private or a business asset, is subject to a separate cantonal and municipal real estate capi - tal gains tax – this system applies in the cantons of Zürich and Bern, amongst others; or • the dualistic system, where any appreciation gain realised on the disposal of a business asset remains subject to corporate income tax (and no real estate capital gains tax is levied) – this sys - tem applies in the cantons of St Gallen and Zug, amongst others. While corporate income tax is a flat tax that applies regardless of whether the property disposed of was held for a short or long period, progressive tax rates apply under real estate capital gains tax. If the hold - ing period was less than one year, some cantons and municipalities levy a real estate capital gains tax of 60% (on top of the federal income tax). If a long hold -
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