The main sources of real estate law in Switzerland are the Swiss Civil Code and the Swiss Code of Obligations.
As real estate in Switzerland is probably coming close to the end of its current cycle, the price level is still rather high, so it is primarily institutional investors with a need to invest allocated funds who are active as buyers, while foreign investors and ultra high net worth individuals are rather reluctant to invest at this stage. Moreover, some of the real estate actors are trying to increase their profit with development projects.
Due to the COVID-19 pandemic, the transaction level was lower in 2020 than in the previous year, and no particular transaction could be highlighted as the most significant deal. Due to the pandemic situation, residential real estate sites could not be visited physically for a certain period of time, which resulted in a lower velocity of transactions and fewer foreign buyers being active in the market.
The first transactions based on disruptive technologies have already been concluded in Switzerland. This trend is expected to continue, but this type of transaction is not expected to gain a significant market share in the next 12 months.
There are currently no planned reforms that might have a significant impact on real estate in Switzerland.
The categories of property rights that can be acquired are freehold, leasehold, co-ownership and storey-ownership rights.
Transfer of title is primarily regulated by the Swiss Civil Code and the Federal ordinance of land registry. The transfer of residential real estate to any foreign person is generally restricted, according to the Federal Law on the Acquisition of Real Estate by Persons Abroad (the so-called Lex Koller). Moreover, tax issues have to be considered, although these differ from canton to canton.
The transfer of real estate is registered at the competent land registry. Any buyer of real estate acting in good faith is protected by the information contained in the land registry, so no title insurance is required in Switzerland.
As registration is conclusive, legal due diligence involves analysing the land register extract and its supporting documents, which shows all relevant property information. In addition, any existing leases must be examined, since these are transferred to the buyer as the new landlord upon the purchase of the property. Another aspect of due diligence relates to environmental law.
In addition to legal due diligence, prudent buyers also perform tax, technical and financial due diligence. If a foreign person buys property that includes real estate that is not commercial property or provides for relevant land reserves, it must be verified that there is no infringement of the Lex Koller. This type of purchase can be deemed void, since the Lex Koller restricts foreign persons from buying residential and other non-commercial real estate in Switzerland. Financing transactions should be examined on a case-by-case basis.
As personal inspection of real estate was partially restricted in Switzerland, buyers had to rely more on data room information than on personal on-site visits.
The warranties typically given by a seller within a share deal include corporate warranties relating to the correct organisation and valid existence of the company, accurate correct presentation of the financial statements and title to shares. Other important warranties relate to the accuracy of rent rolls, and the due diligence information being accurate, complete and up to date. Moreover, specific tax representations are usually contained in the purchase agreement. In both asset and share deals, the seller does not usually provide any warranty as to the substance of the building. The seller's other representations are often qualified by the seller's knowledge.
In share deals, most of the seller's warranties are often capped at a certain amount – eg, 10% of the asset's price. However, such cap normally does not apply to the seller's title in the shares. In case of any misrepresentation, the seller is liable to compensate the buyer for any damage incurred. In share deals, part of the purchase price is often held in escrow for a limited period of time in order to protect the buyer.
Contract law, property law, building law, lease law and environmental law are the most important areas of law for an investor to consider when purchasing real estate.
Basically, the buyer of a real estate asset is responsible for soil pollution or environmental contamination of a property even if they did not cause the pollution or contamination, since the legal owner of the property is partly liable for contamination of the real estate, even if contamination took place pre-ownership. Moreover, a landlord can be held responsible for pollution caused by its tenant.
Based on the applicable building law, the buyer usuallyhas some certainty regarding the permitted uses of a property. In case of any uncertainty, the issue can be discussed with the competent authority, which can also impose specific rules for a property or area.
Governmental taking of land, condemnation, expropriation and compulsory purchase are possible. The proceedings vary, depending on whether the expropriation is based on federal or cantonal law. However, the landlord has constitutional rights under all relevant proceedings, and is usually fully compensated.
In most cantons, cantonal and/or municipal real estate transfer taxes apply to the transfer of real estate. Generally, the buyer pays the tax, but the seller is jointly and severally liable for payment. The rates range between 1% and 3.3%. It is not uncommon for the parties to contractually agree to share the transfer tax. In some cantons, there is no real estate transfer tax in share deals. Also, corporate restructurings (including of real estate companies) generally no longer trigger transfer taxes and similar charges. Further exceptions are regulated in Article 12(3) of the Federal Act on the Harmonisation of Direct Taxation at Cantonal and Communal Levels. Most cantons that impose real estate transfer tax can secure their corresponding tax receivables by a first-ranking legal lien on the real estate. In addition, the transfer of real estate is subject to cantonal and/or municipal land registry and notary fees.
Foreign ownership of residential real estate and to some extent land reserves is restricted by the Lex Koller. In the case of an infringement, the transaction can be deemed void, which can even lead to criminal sanctions. Transactions that have a similar effect to ownership should be examined on a case-by-case basis, as not only the mere ownership of residential real estate is governed by the Lex Koller, but also aspects such as financing, long leases, etc. Exceptions exist for holiday apartments, serviced apartments, inherited real estate, etc. In case of any doubt, rulings from the competent Lex Koller authorities are sought for confirmation and legal certainty.
While Swiss and foreign institutional investors (eg, pension funds, sovereign wealth funds and insurance companies) invest and hold significant real estate portfolios that are financed without external financing, other investors typically finance through a mix of equity and external funding sources (secured term loans, sometimes revolving loans, development financings). Traditionally, Swiss banks have held the lion's share of the domestic real estate financing market, but new refinancing methods may make it more attractive for foreign banking and non-banking lenders to re-enter the market – eg, following international investors. In particular, larger development financings and/or mezzanine type financings continue to be difficult to place in the Swiss domestic market only.
A typical security package would consist of a security interest in mortgage notes (Schuldbriefe), which can take the form of mortgage notes in paper form (Papierschuldbriefe) or registered mortgage notes (Registerschuldbriefe).
In addition, rent, insurance claims and other receivables are typically pledged or assigned for security purposes. Pledges over the shares of the borrower and security interest in bank accounts are customary.
There are no restrictions on granting security to foreign lenders with respect to Swiss commercial real estate financing transactions, nor are there any regulatory restrictions on cross-border lending in general. The financing of residential real estate by foreign lenders will have to be analysed carefully under the applicable Lex Koller legislation restricting the acquisition of residential real estate in Switzerland by foreigners.
However, financing structures typical in the Swiss residential mortgage market (standard security package, standard terms of the loan agreement, LTV below 80%, etc) should not usually raise concerns. If there is any uncertainty, Lex Koller ruling confirmations are available from the competent cantonal authorities for individual cases; for formal reasons, the Swiss Federal Office of Justice no longer seems to be willing to issue general letter confirmations on covered bond programmes or the like, for example, but has not changed its general view on the permissibility of such structures. It would be desirable – de lege ferenda – for the legislator to exempt such financing transactions from the applicability of the Lex Koller legislation in the first place, to further enhance legal certainty for debt capital market transactions and novel origination structures that will rather involve lenders other than Swiss banks.
Small registration fees apply to the registration of holders of a mortgage note in the creditor register (Gläubigerregister) of the competent land registry. However, such registration is not a perfection requirement for the mortgage security, but rather serves administrative purposes.
There are special withholding taxes on interest payments at both federal and cantonal levels, to the extent foreign lenders are involved. A refund of the Swiss source tax (or reduction at source) will be subject to any applicable double taxation treaty protection. General federal withholding tax on interest payments may also have to be looked at, depending on the exact funding structure (banks, non-banks, double taxation treaties, etc). Depending on the location of the property, transfer taxes might apply to the direct and indirect transfer of a Swiss property. Real estate capital gains are taxed either by a special real estate capital gain taxes (RCGT) or by ordinary income taxes (this varies from canton to canton). Ordinary notarial and land registry fees will apply. Finally, it is always recommended to keep an eye on Swiss VAT aspects as well (with respect to transfers of Swiss real estate but also with respect to deemed servicing fees, etc).
Under Swiss corporate and tax laws, financial assistance and corporate benefit rules will apply to any upstream or cross-stream security, guarantee or joint liability. The rules are rather detailed and complex but, in a nutshell, the value of any such “impaired” security will be limited to freely distributable reserves (that could be paid out as a dividend) of the Swiss company in question, subject to general Swiss federal withholding tax of 35%, if applicable.
The Swiss enforcement process is a court-guided process, the timing of which will very much depend on the behaviour of the borrower in question. However, in larger transactions, private sale mechanisms are often agreed contractually to avoid a lengthy process and a public auction with associated higher costs.
The subordination of existing debt to newly created debt is generally possible and frequently done, even though there are some residual uncertainties around the enforceability of such arrangements in the insolvency of the borrower. However, the general view of legal scholars is that Swiss insolvency administrators will be bound by such contractual arrangements as well.
Generally, lenders who merely financed a property will not become liable under environmental laws but the borrower may become liable, which may have an indirect effect on the financing and potential enforcement scenarios.
If a borrower becomes insolvent, security granted by a Swiss borrower will not become void automatically. It should be noted, however, that Swiss law knows the concept of avoidance actions, providing for hardening periods of one to five years. Upstream and cross-stream securities may also be limited in value. Enforcement actions may become the subject of official proceedings run by the court or insolvency administrator.
The Swiss National Bank (SNB), in co-operation with SIX Swiss Exchange, has developed CHF reference rates for the financial markets that are based on CHF repo interbank market data provided by SIX Repo Ltd. The CHF yield curve is to be based on the Swiss Average Rate Overnight (SARON) in future. The Swiss reference rates comprise the Swiss Average Rates (SAR) and the Swiss Current Rates (SCR), covering a term spectrum ranging from overnight (ON) to 12 months (12M). SIX Swiss Exchange is the Swiss reference rates administrator and is thus responsible for their daily calculation and publication.
In Switzerland, regulatory responsibilities are shared among various authorities at the federal, cantonal and municipal level. Pursuant to Article 75 of the Swiss Constitution, the Confederation shall lay down principles on spatial planning, which are binding on the cantons. Except for some specific regulations at federal level, zoning and building regulations are enacted by the cantons and implemented by the municipal building authorities. Accordingly, there are 26 different cantonal zoning and building regimes. Any construction project and any change to an existing building or construction is subject to a building permit from the competent (typically local) authority.
Design, appearance and construction method requirements vary by zones. Typically, specific dimension and distance regulations apply. Buildings and land under cultural heritage protection or nature conservation areas are subject to particularly strict regulations.
Building permits must usually be obtained from the municipal authority where the project is located. The local authority co-ordinates with the cantonal authorities and further bodies involved in the granting of the building permit. Buildings located in non-construction zones require a cantonal building permit.
The following legislation applies:
Various other federal and cantonal laws also apply, such as the Environmental Protection Act (Umweltschutzgesetz), the Noise Control Act (Lärmschutzverordnung), the Clean Air Act (Luftreinhalteverordnung), the Water Protection Law (Gewässerschutzgesetz), the Energy Law (Energiegesetz), etc.
The building permit application must be filed with the competent authority (typically the municipal authority), which will publish it if all formal requirements are met. The building permit must be granted if the project complies with all applicable regulations.
Third parties that are affected by the project (eg, neighbours) and organisations entitled to appeal may object.
Applicants and third parties that have objected to the building permit have the right to appeal to the superior administrative authority against the relevant authority’s decision. The decision of the superior administrative authority may be appealed to the Administrative Court.
Formal agreements with the authorities are not permitted, with the exception of certain aspects of the project (eg, infrastructural requirements). However, informal, non-binding negotiations with the authorities often take place before the building permit application is filed.
The competent authority must monitor the realisation of the project, and the completed project is subject to formal acceptance proceedings. Violations of the permit are subject to sanctions, and the removal of illegal structures may be ordered.
Depending on the corporate structure of the buyer, including the ultimate beneficial owner or sponsor, newly established Swiss or foreign special purpose vehicles (SPVs) are used by investors to hold real estate assets. Foreign SPVs are primarily domiciled in countries that have entered into double taxation treaties with Switzerland, to avoid withholding tax and ease an exit by share deals. Foreign SPVs domiciled in offshore jurisdictions are also used. Real estate investment funds also commonly invest in Swiss real estate.
A company with limited liability may be established by natural persons or legal entities. This requires a declaration in front of a public notary that the founder(s) is (are) forming such company, laying down the articles of association therein and appointing the governing bodies. The company is entered in the commercial register of the place in which it has its seat, and acquires legal personality once it has been registered in the Commercial Registry.
The most commonly used investment vehicle is the company limited by shares, which must have a minimum share capital of CHF100,000, of which at least CHF50,000 must be paid in. Its little sister, the so-called partnership limited by shares, must have a minimum share capital of CHF20,000. For investment funds vehicles, the capital requirements are generally higher.
The governance requirements differ between investment vehicles that require approval from Switzerland’s Financial Market Supervisory Authority (FINMA) and investment vehicles that do not require any public approval. For the latter, general corporate governance rules apply. Authorisation for investment vehicles requiring FINMA approval are granted if the following requirements are met, amongst others:
The annual entity maintenance and accounting compliance cost varies strongly depending on whether it is a regulated or non-regulated investment vehicle, and depending on the real estate assets and structure of the vehicle.
Basically, Swiss (private) law provides for two types of purely contractual arrangements (as opposed to rights in rem such as ownership and ground lease): the lease and the usufructuary lease. Public bodies may also grant public works constructions for certain infrastructure projects.
There are no different types of commercial leases.
Swiss tenancy law contains various mandatory provisions (typically in favour of the tenants).
Excessive rents are prohibited, and tenants have the right to challenge them in court as being abusive.
Typically, the lease term is not below five years (due to the requirement of a minimum term of five years for the rent to be subject to indexation). Frequently, the parties agree on the tenant's options to extend the lease. Lease terms may also be concluded for an indefinite period.
With the exception of minor repair works, all maintenance and repair costs must be borne by the landlord. Double-net and triple-net structures are valid, subject to certain conditions (eg, the tenant must confirm that the transfer of maintenance and repair obligations to them has been sufficiently reflected in the calculation of the rent).
Typically, rent is paid in advance, either monthly or quarterly.
The parties may agree on certain adaptations, subject to changes of the interest rate level and, alternatively for leases with a minimum term of five years, of the Swiss Consumer Price Index (so-called indexed rent).
The parties may also agree on staggered rents (although not in combination with indexed rents for the same period) and special types, such as turnover rents.
If the landlord makes value-adding investments in the leased premises, it has the right to unilaterally increase the rent, subject to certain statutory regulations.
Typically, Swiss tenancy law provides the framework for the calculation of any rent increases.
Basically, pursuant to Article 21 paragraph 2 No 21 of the Swiss VAT Law, real estate rent is not subject to VAT (with certain exceptions). However, for commercial leases, the landlord may opt for the VAT taxation of the rent.
Typically, the lease agreement includes the obligation of the tenant to provide security for the payment of the rent before the handover of the leased premises (rent deposit, bank guarantee). If the tenant carries out the fit-out, it must obviously bear such costs.
Maintenance and repair costs for a building and its surroundings (landscaping) are included in the ancillary costs to be paid by the tenant. The costs related to the common areas are allocated to each tenant separately (typically based on its share of the leased premises).
Costs and charges arising solely from the business operations of the tenant are typically borne by the tenant, even if invoiced to the landlord. The costs related to the common services and infrastructure are allocated to each tenant separately (typically based on the share of its leased premises).
The owner must insure a building and pay such costs. Insurance costs must not be included in the ancillary costs.
Basically, the parties are free to agree on limitations in relation to the use of leased premises; they can even agree on an obligation to use – eg, for tenants in shopping facilities.
In addition, a sublease by the tenant is subject to the landlord's approval, but such approval may only be withheld if the tenant refuses to disclose the terms of the sublease, if the terms of the sublease are abusive, or if the sublease has major disadvantages for the landlord.
If a tenant wants to alter or improve the rented property, the landlord’s written permission is required. The landlord’s consent may be subject to the obligation of the tenant to remove its alterations at the end of the lease and to waive any rights to be compensated for the added value of such works.
Basically, Swiss tenancy law differentiates between commercial and residential leases only. Certain mandatory provisions apply only to residential leases.
In the case of a tenant’s insolvency, all rent receivables due become assets in bankruptcy. However, the lease does not end automatically: the landlord can request security for future rents. If security is not provided within a grace period, the landlord is entitled to give extraordinary notice and immediately terminate the lease contract.
The forms of security that can be provided to a landlord to protect against a failure by the tenant to meet its obligations are rent deposits, bank guarantee/surety, and the additional liability of a third party/affiliate.
Once a lease is terminated, the tenant has no right to further occupy the leased premises. However, tenants may request the extension of the lease within 30 days of the termination by the landlord or two months before the end of the fixed lease term, where termination of the lease would cause a degree of hardship for them or their family, which cannot be justified by the interests of the landlord.
Due to a tenant’s mandatory right to claim an extension of the lease, a landlord’s rights in relation to legal measures are rather limited, unless it becomes obvious that the tenant will not leave on the agreed (and court-ordered, respectively) date. Under these circumstances, it might be possible to evict the tenant on the date of termination.
Pursuant to mandatory tenancy law, the tenant may transfer the lease or sublease all or a portion of the leased premises, subject to certain conditions. The landlord may withhold consent only for good cause (transfer of lease) in the following circumstances:
Unless otherwise agreed, the notice period with regard to indefinite business leases is six months. Tenants are entitled to submit a request for an extension of the lease term to a judge if the termination would cause undue hardship that cannot be justified by the landlord's interests. The maximum extension for commercial leases is six years.
Default in the payment of rent entitles a landlord to terminate a lease. However, the landlord must first grant a deadline of a minimum of 30 days for payment, combined with the announcement of termination in case of further default, and may then terminate the lease with a notice period of another 30 days. The landlord may also terminate the lease if the tenant becomes insolvent (see 6.15 Effect of the Tenant's Insolvency).
A tenant may terminate a lease if the landlord does not hand over the leased premises at the time agreed upon, or if, at the handover, the premises have defects that significantly impair their suitability for the intended use. During the lease, the tenant may give notice with immediate effect if the landlord is notified about such a defect and fails to remedy it within an adequate period of time.
In addition, both a landlord and a tenant may terminate a lease for valid reasons that make it impossible to continue the lease.
There are no registration requirements and/or execution formalities. However, the parties to a lease may agree to have it entered under priority notice in the land register with the effect that every future owner must allow the property to be used in accordance with the lease. Typically, the fees relating to such registration do not exceed CHF1,000.
Tenants can be forced to leave. The duration of the process to enforce this depends on court instances, but can take several months or years.
The government or other authorities may not terminate private leases.
As consideration for the services performed by the contractor, prices are usually agreed as unit prices (Einheitspreise) or lump sums (Globalpreise), or at a flat rate (Pauschalpreise). These prices are normally considered as fixed prices.
Unit prices determine the consideration for individual services that are listed as separate items in the schedule of services. They are defined for the individual units of quantity, so that the consideration owed for a service is computed after its completion. The quantities of services performed at unit prices are determined according to the terms of the contractor agreement, in accordance with their actual measure (by measurement, weighing or counting) or with their theoretical measure based on the underlying designs.
A lump sum may be agreed for individual services, for part of the project or for the whole of the project carried out by the contractor. It shall consist of a fixed amount of money. Agreements on lump sum payments should be made only on the basis of complete and clear documentation (ie, detailed project specifications, designs and the like).
Flat rate prices differ from lump sum payments solely in that they are not subject to price adjustment clauses.
General and total contractor models are often used.
In the general contractor model, the owner uses an architect and engineering team for the planning. The owner either enters into a single planning contract with a consortium of planners/designers (often in the form of a simple partnership) or concludes individual contracts with each architect or engineer involved. For the execution of the construction work, the owner enters into a contract with a contractor who, in turn, uses subcontractors.
In the total contractor model, the owner contracts with a single company that assumes full responsibility for the planning and realisation of a project.
The contractor is liable for ensuring that the project is carried out free of defects, and bears such liability irrespective of the cause of the defect (eg, negligent workmanship, use of unfit materials, unauthorised deviation from designs and instructions of the construction manager), and independently of fault.
If defects occur, the owner is entitled to defect warranty rights, such as the right of remediation, deduction and/or rescission. Unless otherwise agreed, the owner is to notify defects immediately (ie, within seven days). However, the owner and contractors often agree on an extended notification period of two years.
The owner’s defect warranty rights are subject to a limitation period of five years following acceptance of the project or a certain part of a project, respectively.
Parties are allowed to agree that an owner is entitled to monetary compensation if certain milestones and completion dates are not achieved. Moreover, the parties often agree on a penalty to ensure that milestones and completion dates are complied with.
It is common for owners to seek additional forms of security, particularly guarantees or sureties of a Swiss bank or insurance company.
Contractors that have supplied labour and/or materials are permitted to a statutory lien, while designers/planners for the intellectual work (ie, plans, designs and the like) are excluded from such lien. The lien is entered into the land register only if, inter alia, the claim has been acknowledged by the owner or confirmed in a court judgment, and may not be requested if the owner provides the contractor with adequate security.
There is an official inspection of the project by the competent authority of the local community before the project can be inhabited or used for its intended purpose.
Generally, the sale of real estate properties is exempt from VAT without credit of input VAT. However, with respect to commercial real estate properties, the landlord can opt to submit the rent to VAT and the seller can opt to submit the property sold to VAT. Accordingly, VAT applies to the sale, provided the buyer is (or will become) a taxable person and is registered for Swiss VAT purposes, and that the real estate property sold is not used exclusively for private purposes. In this case, the standard rate of 7.7% applies. Please note that all tasks relating to the construction of a new building for a landlord are subject to VAT. Accordingly, input VAT charges incurred on the construction can only be recovered if the landlord is exercising its option to submit the rent and the sale of the property to VAT.
Beside VAT, local transfer taxes and notary and/or land registry fees apply. Each of the 26 cantons has specific laws and rules on these transfer taxes and fees. Depending on the location of the property transferred, these additional charges may be substantial, particularly as in some cantons notary and land registry fees are calculated based on the value of the property transferred. While a few cantons (such as the cantons of Zürich and Schwyz) have abolished the real estate transfer tax, all cantons are levying land registry fees. In cantons where the real estate transfer tax is not known or has been abolished, notary and land registry fees may be substantial and can include a tax component as well, if computed based on the value of the property transferred. While a change of control in a so-called real estate property company by the sale of a majority stake in the shares triggers the transfer tax in the cantons that have a separate real estate transfer tax, notary and land registry fees are only triggered in the event of a change of title of the underlying property (and not by a sale of a majority stake in a real estate property company). With due regard to these local taxes, it may therefore be worthwhile to conduct a comparison between the tax consequences of an asset versus a share transaction. In a few instances, the overall charge of transfer taxes, notary and land registry fees may be lower in a share deal than in an asset deal.
The buyer is liable for the payment of real estate transfer tax in most of the cantons that have it. However, in a few cantons the seller is liable, or there is a 50:50 split between the seller and the buyer. In a corporate restructuring, an exemption from the transfer tax may be available and in some cantons the notary and/or land registry fees are reduced and the tax should not hinder corporate restructurings. This also applies to real estate companies or a group of real estate companies contemplating an internal group restructuring. Real estate transfer taxes and notary and land registry fees are charged without regard to whether the seller is realising a gain or a loss. In most of the cantons, payment of the tax (or even payment of notary and/or land registry fees) is secured by a first-ranking legal lien on the property sold, and often the seller and the buyer are jointly liable for payment of the tax (or even payment of notary and/or land registry fees). Therefore, well-advised parties to a property sale and banks providing mortgage-secured funding to the buyer will take care that all taxes triggered – and all notary and land registry fees incurred – are paid in advance or put in escrow by the relevant party.
The pros and cons of an asset versus a share deal for the acquisition of a property portfolio need to be considered carefully. Beside the implications on the corporate income and/or real estate capital gains tax, transfer taxes and notary and land registry fees also need to be taken into account. The outcome of such analysis may vary depending on the location of the properties sold. Furthermore, the set-off of gains and losses, the extraction of future profits, security deposits for Swiss taxes (in particular VAT) to be made by foreign companies and approval requirements for a future exit by the competent Swiss tax authorities need to be carefully considered.
In a share deal, a debt pushdown into the target is hardly possible and, as limitations on upstream securities apply, the structure chosen needs to be discussed with the bank, and savings made with respect to notary and land registry fees may be lost due to less advantageous funding conditions by the banks or the loss of tax-efficient interest deductions and/or acquisition costs. Case-by-case analysis should be performed, and the location of the underlying properties has a crucial impact on the outcome of such analysis.
While a share deal does not trigger VAT, an asset deal might. However, if a portfolio of assets is sold, in general the notification procedure should be open and therefore there should be no cash leakage due to a time-consuming payment and refund procedure.
Some cantons and/or municipalities levy special taxes on the value of the real estate located in their territory. These have to be paid by the property owner.
Moreover, rental income is subject to federal, cantonal and municipal income tax in the canton/municipality where the property is located. While the federal corporate income tax rate is uniform in the whole country, the cantonal and municipal income tax rates may vary widely.
Generally, rental income from investments in Swiss properties earned by corporate investors is subject to Swiss federal, cantonal and municipal corporate income tax in the canton and the municipality where the property is located. The aggregate corporate income tax rate varies depending on the location of the property. If the property held by an individual investor qualifies as a business asset (and not as a private asset), social security contributions may be triggered on top of this. The tax is assessed based on a tax return filed by the Swiss or foreign investor. No withholdings apply.
Interest accrued on debt funding is deductible, which is also true with respect to shareholder or other related party advances. However, thin capitalisation rules apply and the amount of the debt funding and the interest rate applied should remain within the periodically published safe harbour limits. Otherwise, a constructive distribution may be assumed that would not allow for an income tax-effective deduction and trigger the (dividend) withholding tax of 35%. Buildings may be depreciated over their useful lifetime, and the depreciation deductions may be deducted from taxable income. The straight line or the reducing balance depreciation method may be chosen freely.
Land cannot be depreciated, but a blended rate may be applied if land and building values are not split and do not have separate book entries. Safe harbour depreciation rates are available for the depreciation methods and the blended rate. In the event of a sale of the property, recaptured depreciation deductions are subject to corporate income tax. Accordingly, depreciation deductions taken that do not reflect real losses of value lead to a mere income tax deferral. In general and with due regard to the current negative interest rate environment, in a share deal scenario deferred income taxes are fully deducted from the purchase price as a deferred liability.
Interest paid on mortgage-secured funding advanced by a bank (or other lender) outside Switzerland to a Swiss borrower is subject to a local interest withholding, with the applicable rate depending on the location of the property securing the loan. The interest withholding is not levied if the investor is a resident of a benign treaty jurisdiction where the interest clause in the treaty excludes taxation in the source country.
The holding of a property in Switzerland is also subject to Swiss wealth tax (for individual investors) or capital tax (for corporate investors), the maximum tax rates for which vary significantly between the different cantons and municipalities.
Appreciation gains realised on the disposal of properties are subject to taxation. One of the following two systems applies, depending on the cantonal regime:
While corporate income tax is a flat tax that applies regardless of whether the property disposed of was held for a short or long period, progressive tax rates apply under real estate capital gains tax. If the holding period was less than one year, some cantons and municipalities levy a real estate capital gains tax of 60% (on top of the federal income tax). If a long holding period applies, the real estate capital gains tax may be 20%, or even less than that in some cantons. Accordingly, whether the gain realised by a corporate investor will be subject to corporate income tax or real estate capital gains tax may have quite some impact on the after-tax performance of an investment. Again, in the case of a corporate or group internal reorganisation, the tax may be deferred as it should not hinder such restructurings.
Dividends (and other distributions) paid by Swiss companies are subject to a withholding tax of 35%. The withholding has to be deducted from the dividend in advance and has to be paid by the debtor of the dividend – ie, the company paying the dividend (a reporting procedure is only available in the case of a Swiss parent company or a parent company in a benign double tax treaty state). For withholding tax purposes, it is therefore advantageous if the investor (a shareholder of the SPV) is domiciled in a country that has entered into a double taxation treaty with Switzerland. Unless this is the case, it is advantageous to use a foreign SPV to avoid withholding tax.
As shown above, a corporate investor may apply income tax-effective interest and depreciation deductions. Furthermore, the costs for maintaining the property in good shape and fit for its purpose, as well as income and capital taxes accrued and provisioned, may be deducted from the income tax base. The same is true with respect to all expenses relating to the property management and letting.
For many years, Switzerland has been known as a stable investment environment with a steady regulatory landscape. The year 2020 was an exceptional year due to the COVID-19 pandemic, which did not leave the Swiss economy – including the Swiss real estate sector – unscathed and it will likely also shape 2021.
Overview of the COVID-19 pandemic in Switzerland throughout 2020 and at the beginning of 2021
In March 2020, the Federal Council declared an "extraordinary situation" in the sense of the Federal Epidemics Act, which allowed the implementation of nationwide emergency measures. In an attempt to stop the rapid spread of the virus and the resulting collapse of the healthcare system, the Federal Council announced the first set of countrywide measures, including the shutdown of all publicly accessible facilities and businesses as of 17 March 2020. Economic activities were allowed to continue, provided the general rules on hygiene and conduct could be adhered to. As part of the rules on hygiene and conduct, employers were strongly advised to implement home office solutions. Due to the rising number of infections in late summer 2020, the cantons implemented new measures on their own, which led to a multitude of regulations. Shortly before Christmas, the Federal Council announced the implementation of a nationwide partial shutdown and strongly recommended implementing home office solutions for employees.
As of 21 January 2021, the Federal Council announced the implementation of even stricter measures, including the implementation of mandatory home office solutions. These measures were put in place until the end of February. On 17 February 2021, the Federal Council announced that the measures would be gradually relaxed from 1 March 2021 depending on the ongoing development of the situation. However, due to the current slow progress of the vaccination programme and the increase in COVID-19 cases, the Federal Council has postponed relaxations to date.
Impact of the COVID-19 pandemic on the Swiss economy and the prognosis
Like many other countries, Switzerland suffered an economic collapse in 2020 due to COVID-19. In May 2020, the KOF Economic Barometer, indicating the Swiss business cycle, reached the lowest level in its history. The Swiss economy experienced a slump in GDP of -8.6% in the first half of the year. In the third quarter, Switzerland's GDP recovered strongly (+7.2%) and made up for approximately three quarters of the slump that had occurred in the previous two quarters of the year. After this brief recovery phase over the summer months, however, the Economic Barometer fell again in October in the wake of rising infection rates and new restrictions.
Throughout 2020, the Federal Council approved several packages of measures worth approximately CHF60 billion to mitigate the economic impact of the pandemic. The measures are aimed at safeguarding jobs, guaranteeing wages and supporting the self-employed. Overall, the goal was to prevent bankruptcies and to cushion individuals, the most severely hit economic sectors and the Swiss economy as a whole from the financial consequences of the pandemic. At the end of January 2021, the amount intended for so-called "hardship assistance" was increased by another CHF5 billion.
In view of the ongoing pandemic and the uncertainty that this brings, the economic outlook for Switzerland is tempered. According to the forecast of the State Secretariat for Economic Affairs (SECO), published in December 2020, the Swiss GDP will increase by 3% in 2021.
Focus: impact of COVID-19 on tenancy law
The government-imposed measures put financial strain on many economic players. A particular cause of hardship was the economic impact of the lockdown, while rents for commercial premises remained unchanged.
The federal authorities refrained from presenting uniform solutions to this issue and the pertinent case law does not provide a clear answer. Some cantons implemented measures to relieve financial pressure on small and medium businesses. The Canton of Geneva, for instance, offered to intervene and make partial rent payments if the tenants were granted a rent waiver. The use of these measures was voluntary and presupposed the agreement of both parties. Under the doctrine of freedom of contract, Swiss law offers parties the flexibility to agree on suitable solutions on a case-by-case basis. In the current situation, the termination of a lease or even the bankruptcy of a tenant with a possible subsequent vacancy of the premises is neither in the interest of the tenant nor in the interest of the landlord. Therefore, many parties were indeed able to find amicable solutions, regardless of government measures.
By the decision of the Council of States and the National Council, a motion was approved in June 2020 instructing the Federal Council to draft a law according to which a tenant whose facilities had been compulsorily closed due to COVID-19 would be granted a mandatory rent reduction of 60%. The Federal Council has therefore drafted a corresponding bill and submitted it for consultation. It is unclear, however, when the two councils will discuss and vote on the bill.
Swiss regulatory landscape — Lex Koller
For many years, Switzerland has proved to be politically stable with respect to real estate-related laws. The current year – 2021 – brings two important developments in connection with the Federal Law on the Acquisition of Real Estate by Persons Abroad ("Lex Koller").
The Lex Koller – COVID-19
As previously outlined, in March 2020, the Federal Council declared the country to be in an "extraordinary situation" according to the Federal Epidemics Act. Since summer 2020, Switzerland has been in a state of "special circumstance" according to the same act and, given the ongoing uncertainty surrounding the COVID-19 pandemic, the country is likely to remain in this state for quite some time. At the beginning of this year, this prompted the Commission for Legal Affairs of the National Council to file a motion proposing changes to the Lex Koller, which, if passed, would significantly limit the acquisition of real estate by persons living abroad.
Generally, the Lex Koller rule only applies to residential properties. The acquisition of business premises, hotels or manufacturing sites is exempt from the Lex Koller. In its motion filed on 14 January 2020, the Commission for Legal Affairs of the National Council proposed suspending the exemption in case of "special or extraordinary circumstances" in the sense of the Federal Epidemics Act, as well as for two years after the return to a normal state of affairs. Consequently, the restrictions of the Lex Koller would newly apply to the acquisition of business premises, hotels and manufacturing sites. Fortunately, the Swiss parliament rejected this proposal but the political pressure to apply the Lex Koller seems to remain.
Brexit: impact on the Lex Koller
The Lex Koller rule prohibits the acquisition of Swiss real estate by foreign persons unless the foreign buyer holds a residence permit. Due to the exemption of commercial real estate from the Lex Koller rule, its main application lies with Swiss residential real estate. Citizens of the European Union (EU) are exempt from the Lex Koller Rule. As the UK left the EU on 31 January 2020, the bilateral agreements between Switzerland and the EU as of 1 January 2021 no longer apply to the UK. As a result, UK citizens no longer benefit from the preferential treatment shown to EU citizens.
As of 1 January 2021, the following rules apply with respect to the acquisition of Swiss residential real estate:
Real estate investments
In previous years due to prevailing low and negative interest rates, there was a high demand for property investments. The COVID-19 pandemic and the many governmental measures that were introduced during 2020 resulted in delays in transactions and general uncertainty. As a result, 2020 showed a slight decline in the volume of real estate transactions. The federal COVID-19 measures also resulted in delays and a loss of productivity in construction. However, according to JLL Switzerland, the majority of investors held firm to their acquisition targets (JLL, Report: Büromarkt Schweiz, 2021). Compared to foreign economies and other sectors, the Swiss real estate transaction market has demonstrated that it is stable and durable in these uncertain times.
Fuelled by the COVID-19 crisis, home ownership is booming. According to a publication by PwC (PwC, Immospective Q4, 2020), the number of home purchases increased in the second and third quarters of 2020, compared to the same quarters of the previous year. This trend is likely to be ongoing in 2021.
The rental housing segment that has shown to be stable in previous years has had to contend with lower rents and higher vacancy rates in 2020. However, at the end of 2020, rents returned to roughly the same level as at the beginning of the year. According to a survey by PwC, despite this downward trend, the demand for residential investment properties remains strong among investors (PwC, Immospective Q4, 2020).
The current uncertainty prevalent in the real estate market is more evident in areas of commercial use that are dependent on economic trends. Across Europe, the year 2020 saw unprecedented office vacancy rates. The same can be said for Switzerland; however, according to JLL Switzerland, commercial space in high street locations proved more robust than outside of city centres (JLL, Report: Büromarkt Schweiz, 2021). It seems that investors are still confident about the viability of retail space in high street locations. Baker McKenzie Switzerland has had a surprising number of retail and hotel transactions in the last 12 months, including the acquisition of the Glatt shopping centre.
Space for agility: the new trend of working from home
The surprising impact of the COVID-19 pandemic at the beginning of 2020 made it necessary to adapt our old work structures. Consequently, thousands of employees switched to a home office almost overnight. Despite the extraordinary circumstances, the initial fear of a loss of productivity has not materialised. Conversely, many employees view the experience of home office work and the accompanying flexibility positively and wish to continue working from home at least partially after the COVID-19 crisis has abated. Therefore, many employers are now considering retaining the option to work from home in the future. This could lead to a reduction in the need for office space.
According to a recent decision of the Federal Supreme Court, from April 2019, employees working exclusively from home are entitled to additional compensation. In the case at hand, the employee was granted an additional compensation of CHF150 per month, ie, CHF1,800 per annum. Initial experience shows that companies are offering their employees fixed-rate compensation if part of the work is performed from home to cover costs for IT infrastructure, telephone charges and other expenses.
Apart from financial considerations, working from home has certain inherent disadvantages from a business point of view. An analysis conducted by JLL Büromarkt Schweiz of this year (JLL, Report: Büromarkt Schweiz, 2021) suggests that working from home reduces the level of solidarity and closeness between employees and, in turn, the reduced exchange can lead to a decline in innovation. In addition, the increased isolation and the distortion of the boundary between work and leisure time can be detrimental to employees' mental health.
Ultimately, when considering a longer-term transfer of employees to a home office, all circumstances will have to be taken into consideration. It is likely that in many cases a mix between working from home and office work would be suitable.
Legal Implications: Transactions
General trends and developments in transaction structures
Increasingly complex legal structures
A clear trend in larger Swiss real estate transactions is the increased legal and structural complexity. Several elements contribute to this trend.
The first is the fact that, in the current sellers' market, share deals are playing a more important role, as this transaction form is typically more tax-efficient for sellers than asset deals. Share deals require both parties to look at a transaction not just from a purely real estate perspective, but also to provide tax and accounting expertise. If structured correctly, for example, as a tax-free quasi-merger, share deals have the potential for high savings in terms of costs and taxes.
Another reason for the increased complexity is that sophisticated M&A market practice is increasingly penetrating real estate transactions, both for share deals and for regular asset deals. For example, detailed warranty limitation concepts with de minimis amounts, thresholds and liability caps are becoming more widely used. At the same time, buyers are pushing for extended warranty catalogues.
Complexity is further added when entire portfolios are being sold. When the seller is a Swiss legal entity, portfolio transactions are typically done by way of a so-called "asset transfer" under the Swiss Merger Act (Vermögensübertragung). This differs from a regular asset deal in that an asset transfer allows for the transfer of an entire real estate portfolio, even if located in different cantons, in a single public deed. The transfer of title is completed by registering the public deed in the commercial registry at the domicile of the seller. Registration in the land registry is made, subsequently, with declaratory effect only. Depending on where the properties are located and where the seller is registered, substantial cost savings can be obtained compared to a regular asset deal. The asset transfer concept also applies in group internal reorganisations.
Token-financed real estate transactions
Another upcoming trend is token-financed real estate transactions. With the technological possibilities of smart contracts in blockchain and tokenisation, a more efficient and more functional form of capital is intended to be designed for the needs of today's global investors. Tokenisation could enhance the liquidity of real estate assets by enabling fractional ownership and by simplifying, decentralising and automating real estate transactions. Real estate tokenisation is set to become a significant trend of this decade and announcements about large token-based real estate transactions will likely become commonplace.
Baker McKenzie Switzerland is at the forefront of this development, with the BrickMark transaction on Bahnhofstrasse in Zurich being the first token-based real estate transaction in Switzerland.
Data centre market in Switzerland
In a world shaped by growing digitalisation, the need for computing power is constantly increasing. Instead of running their own data centres, many companies now opt for renting "storage space" from existing data centres. A data centre is a physical facility that organisations use to house their critical applications and data. It is ultimately a network of computing and storage resources that enable the delivery of shared applications and data. This can be an attractive solution to companies because data centres usually guarantee high bandwidth connectivity and stability regarding external power supply.
According to a report by commercial real estate services company CBRE, Switzerland has the second highest density of data centres in terms of population in Europe. The Zurich region also ranks sixth among all European cities in terms of data centre capacity. The current capacity is likely to double in the coming years and provides for interesting real estate investment perspectives (CBRE, Data Center Market Switzerland – Niche real estate segment with increasing potential, Q1 2021). As investors are seeking to diversify their real estate portfolios and looking to invest in long-term trends, the niche market of data centres could potentially be very interesting. Baker McKenzie Switzerland has seen a steep increase in data centre transactions over the last 12 months.
The important topic of climate change has an impact on real estate business. The sustainability of real estate will be a key factor for the valuation of investments in the future. The demand for "green" houses will increase rapidly. At the same time, the cost of ecological technologies such as solar panels and efficient heating systems continues to fall. The market is willing to pay a premium for such ecological expansions. On the other hand, prime offices and residential buildings with a poor sustainability performance in advanced economies will suffer a so-called "brown discount". These ever-increasing sustainability requirements present opportunities and challenges. Therefore, sustainability should always be taken into account in future real estate projects.
Legal Implications: Tax
On 19 May 2019, Swiss voters approved a tax reform, the so-called Steuerreform und AHV-Finanzierung (STAF). The following measures particularly affect the real estate sector and should be taken into account by real estate investors and managers.
The tax reform abolishes the cantonal tax privilege for holding companies. This means that, from 1 January 2020, the profits of holding companies are also taxed at a cantonal and communal level. The participation exemption, which so far could only be made at the federal level, may now be applied at a cantonal and communal level. The abolition of privileges for holding companies eliminates the reduced capital tax rates.
For real estate investors and managers, the tax reform results in the following new situations. Under international accounting standards, the planned cantonal profit tax reductions may lead to extraordinary profits due to the release of deferred tax liabilities. In addition, the reductions in profit tax rates will lead to the lower taxation of profits from rental income and, in part, from the sale of real estate (if properties are sold by legal entities).
Legal Implications: Regulatory
On 1 January 2020, the new Financial Services Act (FIDLEG) and the Financial Institutions Act (FINIG) came into force. Likewise, on 1 January 2021 the new FINMA Financial Institutions Ordinance, as well as changes and adjustments to existing ordinances and circulars, came into force. The general objective of the new laws and regulations is to create uniform competitive conditions for financial intermediaries and to improve customer protection.
The new laws and regulations are applicable to financial service providers and client advisers that provide financial services. These requirements may also apply to real estate managers and brokers. Furthermore, the FIDLEG requires the real estate manager to be on the register of advisers and to register with an ombudsman's office. However, the requirements of the FIDLEG do not apply to a simple asset deal, such as the purchase or sale of real estate. Therefore, real estate managers should check their portfolios thoroughly and clarify whether they provide services that fall under the FIDLEG/FINIG and then take the necessary measures. Otherwise, sanctions may be imposed.
Despite the current uncertainty caused by the ongoing COVID-19 pandemic and the difficult economic climate on a global scale, real estate investments in Switzerland continue to be attractive. In larger transactions in particular, Swiss pension funds, life insurers and foreign institutional investors currently dominate the buyers' market. Therefore, Swiss pension funds and life insurers are forced to invest in Swiss real estate to secure stable returns to satisfy the claims of their beneficiaries. Although real estate prices in Switzerland are high and, consequently, returns are rather low for a Swiss pension fund and a life insurer, a Swiss real estate investment is still more attractive than depositing cash in the Swiss National Bank at negative interest rates. For many foreign investors, Switzerland's stable political and economic environment and the strong Swiss franc provide protection against many uncertainties in their home countries.
The increased presence of foreign investors in the Swiss real estate arena has fostered more sophisticated and more complex transaction and real estate holding structures, and, while foreign investors appreciate the stability of Switzerland, they are typically looking for higher returns than the rather conservative Swiss investors. As it is now hardly possible to buy Swiss real estate at modest prices, higher returns can primarily be achieved by a more sophisticated legal and tax structuring of transactions. As foreign investors are often used to complex transactions in their home countries, they are applying the same strategy in Switzerland as well. This helps to explain the increased complexity and sophistication of real estate transactions in Switzerland in recent years. There is little doubt that this development will continue.