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    Acquisition of property in a real estate company

    What are the benefits and challenges you will face?

    Buying an investment property can be done in one’s own name or through a real estate company (RE). These options are not always left to the discretion of the purchaser. In fact, some properties are sold exclusively through a real estate company. Furthermore, if you have a property portfolio, it may be advisable, depending on the situation, to set up a real estate company to transfer your properties to it. What are the advantages and difficulties that you will face?

     

    The genesis of the real estate company

    A real estate company (RIC) is a structure whose primary purpose is the ownership and management of property, primarily for yield. Originally, RICs were formed to preserve the anonymity of purchasers. Tenant shareholders set up SIs. Instead of purchasing condominiums as is common today, they acquired shares entitling them to use a specified portion of the building (or lot).

     

    These shareholder-tenant companies (known as SIALs) hardly exist today, or at least are no longer being created. Indeed, they induce complications, especially at the time of resale. The only ones left are those that could not be completely liquidated. Some shareholders are not able to obtain additional credits or foreign owners cannot recover the withholding tax, in the absence of a double taxation agreement.

     

    Motion Saudan

    In the mid-1990s, Article 207 of the Federal Direct Tax Act (FDTA) came into force. The latter allowed the facilitated liquidation of real estate companies by reducing the taxes resulting from a liquidation by 75%. One of the conditions was its cancellation on 31.12.2003. The so-called “Saudan” motion (amendment of article 207 LIFD), for its part, introduced the possibility of a partial liquidation for real estate companies of tenant shareholders (SIAL).

     

    As soon as this motion came into force, many SIAL holders seized the opportunity. The temporary measure – effective from 1995 to 1999, extended until 2003 – in fact also provided for a 75% tax reduction in the context of partial liquidations of SIALs. Note that in addition to its incentive aspect, this law was not without financial interest, since it brought in the state’s considerable sums (some 384 million francs in the first five years).

    Concern for confidentiality

    The IS takes the form of a simple public limited company (PLC), subject to the same conditions as any other type of PLC. Its main asset is one or more properties. Acquisition via a real estate company has a special feature. The buyer becomes a shareholder and therefore receives an annual dividend. The advantage of this type of structure is that it preserves the anonymity of the owner, although to a lesser extent than in the past. This is because bearer shares must now be converted into registered shares (according to the Federal Act of 21 June 2019 on the Implementation of the Recommendations of the Global Forum on Transparency and Exchange of Information for Tax Purposes).

    Previously, this type of share structure has been used in the past.

     

    It may also be in an individual’s interest to consolidate his or her various assets under a single IS, which he or she will create for that purpose. In complicated estates or disagreements between heirs, it will be easier to divide shares than quotas of real estate.

     

    Taxation of the real estate company

    For an investment property held via an IS, the individual is subject to a double tax. In Switzerland, a first tax is imposed on the profit of the companies. Then, when dividends are added to the shareholders’ income, a second taxation takes place. However, this double taxation is reduced today. For the 2020 tax year, a holder of a qualified participation (holding at least 10% of the share capital) will see the taxable portion of his or her participation return rise to 70% (compared to 60% in 2019) when it concerns private wealth and 60% (compared to 50% in 2019) if it concerns commercial wealth (identical rates in the cantons of Geneva and Vaud).

    With the revision of corporate taxation (RIE III), IS holders have another advantage. The taxable income of the IS is subject to income tax at a rate of 13.99% (compared to 24.16% previously).

     

    However, there is a certain cost involved in setting up an IS to transfer a property to it. The property will be subject to real estate profits and gains tax (RGI) if the property was privately held. The owner will then benefit from the deductions linked to the years of ownership. In the case of a property held in commercial assets or sold by a professional, it will be subject to income tax. Finally, let us note that the sale of an IS to a private individual who wishes to pass it on in name poses certain problems with regard to the costs associated with the liquidation of the IS.

     

    In conclusion…

    There are several things to consider in order to compare and accurately determine the most suitable method of acquiring a property. The personal and tax situation of the owner is the central aspect.

     

     

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