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Real estate capital gains tax Zurich Location class method
Initial situation
Companies often use two different corporations for the realisation of real estate projects. “Land AG” buys the property, holds it during the development and construction phase and sells it to third-party buyers. “Construction AG” develops the project until the building permit is obtained and is responsible for the construction. It concludes a contract for work and labour with the third-party buyers.
This structuring enables tax optimisation if the property is located in a canton such as Zurich, which levies real estate capital gains tax on corporate entities and not ordinary profit tax (so-called monistic cantons). The reason for the tax optimisation lies in the division of the project profit between two companies: Land AG pays real estate capital gains tax on the increase in the value of the land in the canton in which the property is located. In the case of Construction AG, the profit from the development and construction is subject to ordinary profit tax in the canton in which the company is domiciled. Due to the short holding period, the real estate capital gains tax rate – depending on the applicable cantonal law – is often a multiple of the ordinary profit tax rate. If the real estate project is realised by a single corporation, the profit from the development and construction is also subject to real estate capital gains tax in cantons with a monistic system.
It should be noted that the location class method is a practice that is applied in the canton of Zurich. In the case of property projects in other cantons or inter-cantonal situations, it remains to be seen to what extent this method can be transferred or whether other approaches need to be taken into account when allocating profits.
Mathias Häni, ADB
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