Replacement procurement for real estate companies

In June 2013, a real estate company based in Zurich (hereinafter referred to as X AG) sold a property to Z AG at a price of 32'500'000. Shortly afterwards, X AG submits an application to the Zurich tax authority for a deferral of the property gains tax due to a replacement procurement.

Contrary to this application, the property tax commission imposed a property gains tax of 3'000'000 on the X AG. X AG filed an objection against this assessment, which was rejected by the appeals commission. X AG appealed against the decision regarding its objection to the Tax Appeal Commission and later to the Administrative Court of the Canton of Zurich, which also dismissed the appeal. The decision of the Administrative Court of the Canton of Zurich was referred to the Federal Supreme Court by the taxpayers. The Federal Supreme Court dismissed the taxpayer's appeal by decision of 8 December 2016 (2C_176/2016) on the following grounds.

In a monistic property tax system, as in the Canton of Zurich, the cantons may also levy property gains tax on profits from the sale of the taxpayer's business assets, in accordance with Art. 12 para. 4 StHG. In the monistic system of property gains tax, however, the provision of the replacement procurement according to Art. 8 para. 4 StHG must always be considered, according to which hidden reserves are transferred to the newly acquired assets within a reasonable period of time for the replacement of items of the operationally necessary fixed assets, insofar as these are operationally necessary as well. To meet the replacement procurement requirements, both the departing and the reacquired property must be fixed assets that are necessary for operations.

Reacquisition of a "operationally necessary" property?

The complainant regards herself as a "genuine" operating company, i. e. the purpose of the real estate company is to manage a particular production or service operation by creating or buying real estate and making it available to the non-profit housing sector. Accordingly, the complainant argues that the real estate is to be considered an asset necessary for the operation within the meaning of Art. 8 para. 4 StHG. The Federal Supreme Court does not deny that, in a generally accepted sense, the complainant's property can be regarded as "operationally necessary" because it would not be able to fulfil its statutory purpose (provide housing) entirely without real estate. According to the Federal Supreme Court, however, this does not mean that the properties are "operationally necessary" in the sense of the tax law regarding replacement procurement. In this case, there is no obligation to reacquire property as in the case of operationally necessary properties in the fixed assets. The complainant would therefore not necessarily have to reinvest the proceeds in another property in order to fulfil its purpose, but could also make other investments or deduct the proceeds by withdrawing the capital if need be. As an additional justification, the Federal Supreme Court notes that - with view to a production and service enterprise - a property in such an enterprise can be regarded as a fixed asset in the sense of tax law if the actual work performance of the employees takes place in this property. However, the X AG did not carry out any work to fulfil its purpose on the sold property did thereby not fulfil the requirements for replacement procurement in this respect either.

In its complaint, the complainant additionally stated that it fulfils a function of public utility by supporting the construction of public utility housing and that she could claim a special status in this sense. The Federal Supreme Court did not follow the lines of this argument either. Although the complainant pursues an activity in the field of public utility housing construction, it cannot be treated in the same way as a legal entity pursuing public or non-profit purposes. This already results from the fact that the real estate company is not exempt from tax. One cannot deviate from the restrictive application of the deferment requirements simply because the real estate company's corporate purpose does not solely intend to maximise profits.

Final remark

In the monistic property gains tax system, real estate companies can only make limited use of the requirements for replacement procurement. Only the property in which the real estate company's administrative activities are carried out can be regarded as an investment property in the sense of replacement procurement. This confirms the restrictive jurisdiction with regard to replacement procurement for properties. A not purely profit-oriented corporate purpose does not change this assessment of the Federal Supreme Court in any way.