Stephan Pfenninger is a partner with Tax Partner AG, Zurich, Switzerland. www.taxpartner.ch
Many Swiss and foreign investors are looking to invest in Swiss real estate through collective investment vehicles. Although Switzerland does not offer the option of a REIT, the Swiss real estate investment fund may be more flexible and tax efficient for the investor, explains Stephan Pfenninger
During the last few years real estate investments have become more and more popular. The trend is to invest in collective investment vehicles such as real estate companies or real estate investment funds. In this context, the Real Estate Investment Trust (REIT) is an important topic. The REIT is a collective real estate investment vehicle. Its legal form, depending on local law, may be a corporation or a trust. Like in the US and in Asia, many European countries introduced REITs in their local laws (eg France) or currently are in the process to do so (eg Germany). There is also a law project regarding an EU-REIT in the pipeline.
As far as taxation goes, all REITs do not pay any income tax on their real estate income or real estate capital gains. Also, profit distributions made by the REIT to its investors are not subject to any withholding tax. The way the income received from the REIT is taxed depends on the law of the home country of the investor. In most countries the investor would be taxed for such income. The concept of the REIT is to avoid a double taxation of real estate income at both the REIT's and the investor's level which is often the case for other collective investments in real estate. Therefore, the REIT is an attractive solution.
The trend for real estate investments also applies to the Swiss market. Many Swiss and foreign investors are seeking investments in Swiss real estate through collective investment vehicles. Switzerland does not offer a REIT for such investments. However, the Swiss real estate investment fund, in many ways, is comparable to a REIT but often more flexible than a REIT from the investor's perspective. Contrary to the REIT concept, the Swiss real estate income is taxed at the level of the fund and tax exempt at the level of Swiss investors or certain foreign investors – which may be more tax efficient than a REIT.
If the Swiss fund invests in direct ownership only (as opposed to investing in shares in real estate companies), it will be taxed for its Swiss real estate income at a rate of, for example, 12% in Zurich. Taking into account the possibility to erode the taxable basis by depreciation and interest expense, the resulting net tax rate is substantially lower (depending on real estate location, under reservation of higher real estate capital gains taxes). This is a much more attractive tax rate than for an investment in a Swiss real estate company or direct ownership in Swiss real estate. Also, the distribution of real estate income by the investment fund to the investor is not subject to any Swiss withholding tax.
Swiss investors do not pay any income tax on the income received from the fund. This also applies to foreign investors under some Swiss double taxation treaties (eg Austria, Netherlands, Norway, Spain) which state that the home country of the investor cannot tax the income received by the investor. The Swiss income tax levied at the level of the fund (say 12%) then reflects the overall worldwide tax burden on the investment income.
Under the majority of the tax treaties between Switzerland and the home countries of foreign investors, investors will normally be taxed for the income received from the investment fund in their home country but get a tax credit for the Swiss income tax paid by the investment fund. The overall maximum tax burden on the investment income then corresponds to the home income tax rate of the investor – in a similar way to the REIT concept.
An individual investor holding a large portfolio of Swiss properties as part of his private wealth may be interested in changing this portfolio into 'liquid' assets, ie tradable securities. Also, corporate investors may seek to transform their Swiss real estate portfolio into a flexible and more tax efficient vehicle. This could be achieved by using a Swiss real estate investment fund but transformation costs and tax consequences need to be looked at carefully.
Switzerland makes great efforts to offer attractive investment opportunities for Swiss and foreign investors, particularly with regard to its tax rules for real estate investment funds, and competes favourably with other European countries.