In various cantons, it has previously been possible to provide for substantial renovations of buildings on a lump sum basis. Such lump sum provisions were also recognised for tax purposes.
In 2020, the Federal Supreme Court ruled that provisions for substantial renovations are only tax-deductible if significant expenses are expected that cannot be capitalized, or only partially so, and which are not already covered by the regular depreciation of buildings. In an obiter dictum, the Federal Supreme Court also stated that lump sum provisions could be a reasonable approach for larger real estate companies that regularly carry out extensive renovations of their properties and allocate a substantial amount of funds for this, as part of their budgeting process. However, the fact that such lump sum provisions are recognised for tax purposes, may not result in the creation of significant untaxed reserves, which would be the case if a large long-term provision were permitted that by far exceeded the amount of substantial renovations carried out each year.
As supervisory authority for federal income tax, the Swiss Federal Tax Authority has apparently instructed the cantons to follow this Federal Supreme Court decision. Several cantons have therefore changed their practice concerning lump sum provisions for substantial renovations or announced such a change. Certain cantons only disallow the creation of new lump sum provisions, while others require the release of unused lump sum provisions over a certain time span. In cantons where only the creation of new provisions is not allowed, anymore, existing provisions must be reversed to the extent of actual expenses for substantial renovations. However, if few substantial renovations are performed over a longer period of time, the imputation of lump sum provisions by the tax authorities cannot be excluded. In cantons that require the release of the provisions for substantial renovations, the resulting taxable income has to be taken into account for the planning of the year-end closing. Particularly, for companies with large lump sum provisions for substantial renovations this can have a significant tax impact.
As an important real estate canton, Zurich has taken a relatively generous approach to lump sum provisions for substantial renovations, until today. This would make any change in practice all the more significant, which is the reason why a statement from the canton of Zurich on this matter is expected with great interest.
Affected taxpayers should address this development and its implications. Lump sum provisions are being replaced by a consistent case-by-case assessment, which requires early planning and complete documentation of future renovations. The coordination of depreciation, investments and provisions will become a central element of professional real estate and tax planning. As an immediate measure, the required provisions for substantial renovations and the tax impact due to the reversal of the excess provision should be determined.