When it makes sense to establish a real estate company to save taxes

Videos, Wealth & Pension Planning

08.09.2022 da Claude Frosio Tempo di lettura: 4 minuti

Circa l’autore

Claude Frosio

Head Tax Consulting

Altri articoli

image of two pens with long shadows: how to save on both income tax and wealth tax with your property?

Do you consider the real estate you own to be an investment? If so, you may be able to save on taxes by establishing a corporation for your property. Then you are no longer holding it as a privately owned asset, but through this real estate company (an AG or GmbH). The most important criteria are which canton you live in and where the property is located.

Ideally, you’ll save on both income tax and wealth tax

The Pros

Holding real estate through a company tends to be worthwhile in the following cases:

When the property is newly acquired, i.e. it is not being transferred from existing private assets to the company. Just as in the case of a sale to a third party, if a privately held property is transferred to a corporation, real estate gains taxes and, if applicable, a real estate transfer tax would be due immediately, because the transfer always has to be made at fair market value.
When the property is rented out to a third party and is generating substantial income. In this case, since personal income taxes are highly progressive, while corporate income tax rates are often not progressive, this move does pay off because it shifts the tax burden from an individual paying higher marginal rates on this income to the company which is likely not subject to progressive tax rates.

Further points in favor of incorporating
If your property...

is located in a high-tax canton but you, as shareholder, live in a low-tax canton (see example below).

is located in a so-called “dualistic” canton and is to be sold for a large profit after a short holding period.

The majority of Switzerland’s cantons are dualistic. “Dual” in this sense means that different tax rates apply depending on whether private or business assets are being sold. These include the cantons AG, AI, AR, FR, GE, GL, GR, LU, NE, OW, SG, SH, SO, TG, VD, VS, ZG, and the federal government. Sales of private assets are always subject to real estate gains taxes, while sales of business assets are usually subject to tax on profits. If the ownership period is short, a kind of speculation surcharge is added to the real estate gains tax. In this case, it is usually advisable for tax purposes to have the gain taxed as corporate profits.

In so-called monistic cantons, the same tax applies to both cases. These include the cantons BE, BS, BL, JU, NW, SZ, TI, UR, ZH. In these cantons, real estate gains are always settled via real estate gains tax – regardless of whether the sale is made from private or business assets.

qualifies as a business asset of a real estate agent. A commercial real estate agent is subject to direct federal tax and social security contributions on all of his real estate gains. As a rule, any capital gain is charged an additional 20 percent in taxes and duties on top of the real estate gains tax.

The cons

It tends not to be worthwhile to hold real estate through a company if:

The property is owner-occupied. In this case, the company, as the owner of the property, is to be paid a rent in line with market prices. This rent cannot be deducted from the tax owed by the private tenant (as a cost of living expense) and is thus financed from after-tax savings. For the company, the amount of the rent is taxed as income, after deduction of all business-related expenses. If its retained earnings are later distributed as dividends, they are once again taxed as they become shareholder’s income. Given how it must deal with this rental income, from a tax standpoint it is generally not interesting for a company to hold the owner-occupied property. If, however, the rent that paid to the company does not conform to the usual market rates, then the tenant is deemed to be enjoying a benefit with monetary value, which must be corrected for tax purposes and offset against taxes due. In addition, in such a case mortgage creditors are likely to question the affordability of the mortgage.
The property generates low net income. If the income is too low, any tax benefits are likely to be quickly consumed by fixed costs such as additional tax declarations to be completed, accounting costs, etc.

Further points that speak against incorporation
If your property...

is located in a monistic canton and is to be resold at a profit within a short period of time (see the definition above for the distinction between dualistic and monistic).

is transferred from private assets. Caution is advised if you have held a property as a private asset for a long time and now want to transfer it to a corporation. As a rule, this would trigger real estate gains taxes and possibly also a real estate transfer tax (see above).

is located in a low-tax canton, but you as shareholder live in a high-tax canton (see example below).

Example: Mrs. Smith’s property in Geneva

Mrs. Smith lives in the canton of Schwyz and owns a property in the canton of Geneva. As a private individual she would have to pay tax on her property, including all income it generates, in Geneva, which is not considered to be particularly tax-friendly. Up to 40% income tax could be incurred on the rental income generated, and up to 1% wealth tax on the value of the property.

What happens if Mrs. Smith holds the property through a corporation?

In this case, only a corporate tax rate of around 14% would be applied to the company’s rental income – regardless of where the company is based. Additional taxes would be due as soon as Mrs. Smith receives dividends paid out by the company. The total burden on this dividend income would then be around 25%. So far, the corporation option is clearly worthwhile.
Mrs. Smith would also benefit from the point of view of her wealth tax. The shares of her real estate company being movable assets, she will pay wealth tax on these shares in the canton where she resides, in this case the tax-friendly canton of Schwyz. Here she will pay only 0.15% instead of the 1% wealth tax demanded by Geneva. Also a significant difference.

The example in figures

With an assumed property value of CHF 8 million and gross income of CHF 200,000

Property held privately

Property held through a corporation

Residence in Schwyz

Property in Geneva


Personal income tax rate		40%
Wealth tax rate		1.0%
Taxes paid:
–200,000 × 40%		80,000
–8 mn × 1.0%		80,000
= Total taxes		160,000

Corporation established in Schwyz

Property in Geneva

Tax rate on corporate profits		14%
Corporate capital tax		Not due
Taxes paid:
– 200,000 × 14%		28,000
– Dividend income on 172,000 × 12.5%		21,500
– 8 mn × 0.15%		12,000
= Total taxes		61,500

The tax calculations in this comparison show that founding a real estate company can pay off.

Summary

In essence, if you live in a low-tax canton (e.g. in Schwyz, Obwalden, or Zug) and own a property in a high-tax canton (e.g. Geneva, Vaud, Basel-Stadt, Bern, or Zurich), there is a high probability that establishing a corporation is worthwhile.

You should be aware of these points:

Tax deferral

With a real estate company, you can retain profits and write off expenses. This allows you to defer taxes, which gives you additional advantages.
Property gains and real estate transfer taxes

Attention! If you have been privately owning your property for a long time, you may have substantial real estate gains taxes and property transfer taxes to pay when you transfer ownership to a corporation.
Owner-occupied real estate

If you live in the property as your own home, in most cases it is not worth establishing a corporation.

Do you have any questions?

Whether a corporation is worthwhile in your specific case will depend on several factors. We would be happy to advise you personally and individually, and clarify which options are available in your situation.