Corporate Taxation

Charging of management fees to a real estate company

The Swiss Federal Supreme Court, in its judgment published on April 18, 2023, had to assess whether the charging of management fees in the amount of 1% of the gross real estate assets by a foreign collective investment scheme to a real estate company is in line with third-party prices. The court rejected an appeal and confirmed the ruling of the Federal Administrative Court, which had assumed a hidden profit distribution of the real estate company that is subject to withholding tax. The Federal Supreme Court took the view that, in the given case, only a lump sum of CHF 200,000 is commercially justified, essentially based on the fact that, in market practice, property management is compensated with a maximum of 5% on the rental income.

The case concerns a real estate company (‘the GmbH’) that holds a single Swiss property where 80% of the rental income comes from a single tenant. The GmbH is indirectly held by a foreign collective investment fund. The fund is managed by a foreign investment manager (‘the Ltd.’), which also offers consulting services on real estate investments. The GmbH was charged management fees of 1% of its gross assets by the fund on the basis of a contract with the Ltd.

In its judgment, the Federal Supreme Court states that the task of the Ltd. was essentially limited to taking over partial functions of property management directly and to supervising the local property manager (third party), which received a compensation of 2%–6% of the rental income for its services. The few additional tasks performed by the Ltd. were not to be considered essential, which is why the compensation of the Ltd. could not be higher than the customary market fee of the property manager. The court found that the GmbH had not succeeded in justifying higher expenses or in showing that the Ltd. had rendered further substantial services beyond managing the property. Such substantial services could not be assumed anyway, according to the court, since about 80% of the rental income was derived from a single tenant, which would make the management tasks in connection with this property clearly less extensive than would be the case in a property with a large number of tenants. Apparently, the complainant itself had stated that the services of the Ltd. were related only to a very limited extent to asset management. However, it is unclear to what extent during the proceedings the complainant presented tasks in the area of asset management.

Since no relevant services beyond property management were proven in the present case, the Federal Supreme Court did not have to comment on the market compensation for asset management services. It can be inferred from its judgment that, beyond a fee of 2%–6% of the rental income, a fee for asset management services would only be payable if proof of the provision of such services was provided. However, providing such evidence can be difficult, especially in the case of a property with a single tenant and a long-term lease. In such a case, the tax authorities will regularly argue that asset management services are not required. However, this position fails to recognize that even a property with a long-term lease must be monitored in terms of the investment strategy, and that it poses risks such as a tenant default that must be absorbed, which means that asset management services are required on an ongoing basis here as well.

The Federal Supreme Court confirms in its judgment that for all management fees charged to a real estate company, the actual provision of corresponding services must be proven. This shows how important it is to have detailed documentation of the services provided by the management company.