The Administrative Court of the Canton of Zurich has confirmed an important decision of the Zurich Tax Appeals Court and once again ruled the following: Switzerland may not levy real estate capital gains tax on the transfer of a majority shareholding in real estate companies with Swiss real estate unless the applicable double taxation agreement expressly provides for such taxation on the basis of a «land-rich company clause».
The case involved the sale of a majority stake in a real estate company with Swiss real property by a seller resident in Germany. The double tax treaty between Switzerland and Germany does not include a so-called «land-rich company clause», akin to Article 13, Paragraph 4 of the OECD Model Convention. According to the Zurich tax authorities, the right to levy the real estate capital gains tax lies with the state where the property is located, regardless of whether the tax treaty contains such a clause.
The court ruled otherwise and held that in the absence of a land-rich company clause, the right to tax such capital gains belongs to the seller’s country of residence – in this case, Germany.
Notes for the practice
The ruling confirms the long-standing practice of the Swiss tax authorities regarding the sale of real estate companies and is in line with prevailing legal doctrine. It also minimizes the risk of an actual double taxation for the concerned parties. The decision is important, as many international real estate structures have been set up in view of such a tax treatment, e.g. with holding companies in Germany, Luxembourg and Denmark.
The decision was appealed to the Federal Supreme Court which is desirable in terms of legal certainty.