Taxable personal use (imputed rental value)

The basis of the analysis is the decision of the Swiss Federal Supreme Court from 8 April 2020 (2C_500/2018). The decision is about A.A., who is subject to unlimited tax liability in the Canton of Solothurn and who, among other things, owned a property in France and a property in the Canton of Solothurn in the 2015 tax period in question.

Based on this basic constellation, the following analysis (1) deals with the extent to which the property is available for own use and (2) how the imputed rental value is determined for foreign properties. Finally, in section (3) the distinction between rental income and imputed rental value is examined.

(1) Available for personal use (cons. 2.2-2.6)

Pursuant to Art. 21 para. 1 let. b) DBG, income from immovable property is also the rental value of real estate or parts of real estate that are available to the taxpayer for his own use on the basis of ownership or a gratuitous right of use. The same applies to cantonal taxes (cf. Art. 7 para. 1 StHG). This is to be specified as follows:

Personal use relevant under tax law

Whether the right of use is actually exercised is not relevant for determining owner occupancy under tax law. The decisive point which, according to the purpose of the law, justifies the owner-occupied is that the owner of the property reserves the right to use the property at any time. In other words, all the real estate available to him is in his own use and are therefore relevant within the meaning of Art. 21 para. 1 subpara. b DBG. [1]  

No personal use relevant under tax law

On the other hand, personal use is not relevant for tax purposes if, due to objective and external circumstances, the property cannot be occupied by the owner himself.

This is the case, for example, if the property has been rented out, although it should be noted that in the case of a gratuitous transfer (see loan for use pursuant to Art. 305 et seq. of the Swiss Code of Obligations), it must still be assumed that there is "material" and therefore tax-relevant personal use. [2] Conversely, however, the rental income is then taxable.

According to case law, owner-occupation is also not relevant for tax purposes if the house cannot be occupied due to a defect, such as a lack of heating (however, it should be noted that partial owner-occupation may be assumed, e.g. during the summer months [3]). Furthermore, according to case law, there is also no tax-relevant owner-occupation if the house cannot be rented or sold despite serious efforts and the corresponding intention. [4] High standards are set and the taxation of the imputed rental value is only waived if the intention to sell has been clearly and professionally implemented and documented.

Assessment by the Federal Supreme Court

In the present case, the complainant A.A. asserted serious efforts to sell her property in France, which the lower instance, however, denied. The Federal Supreme Court did not consider the lower court's assessment of the evidence to be arbitrary. Specifically, evidence was provided by the mandated broker of only isolated viewings for the year 2017, whereas the mandate had been in place for some time prior and, in particular, no evidence of sales efforts was provided for the 2015 assessment period at issue. Further, the broker implicitly admitted, that the sales price was set too high. In particular, a property valuation was not carried out, which would have been necessary due to the (probably) neglected maintenance. Due to these circumstances, it cannot be assumed that there was a concrete intention to sell according to Federal Supreme Court.

(2) Determination of the imputed rental value for foreign properties (E. 3)

In addition, A.A. claims that the property tax value and the imputed rental value of the property in France are lower than those determined by the cantonal tax administration of Solothurn.

The imputed rental value is determined taking into account the usual local conditions and the actual use of the owner-occupied property at the place of residence (Art. 21 para. 2 DBG). This is the market value, i.e. the rent that could be obtained for comparable rental properties in a comparable location (Art. 28 para. 1 StG/SO), whereby certain deductions are possible.

In practice, the imputed rental value is determined in accordance with cantonal treasury regulations. This means that an official procedure is carried out by the cantonal authorities in which the property is located.

In contrast, there is no such official cantonal procedure for properties located abroad. Due to the geographical distances involved and the different jurisdictions, in practice generalizations are used in practice. In many cases, the starting point is the purchase price, which is easy to prove.

In the present case, the applicant A.A. claimed that, on the basis of the current realistic market value and the development of the euro exchange rate since the acquisition, the assessed value was (much) too high. However, as already stated above, a current property valuation was lacking in the present case. The Federal Supreme Court emphasises that, in the case of properties located abroad, it cannot be the task of the tax authorities to determine ex officio relevant price drops in certain regions. Furthermore, changes in the f/x rate of a purchase price paid are only one factor in determining the cadastral value. Other factors include location, fixtures and fittings and the condition of the building. In conclusion, the Federal Supreme Court stated that overall there were no indications of an obvious incorrectness and therefore confirmed the imputed rental value assessed by the lower court.

(3) Relationship between imputed rental value and rental income (E. 4)

Furthermore, A.A. claimed in connection with the property in Solothurn that the flat in question was exclusively available for use by her son B.A.. However, B.A. had not paid the agreed rent for 2015, whereby A.A. had been entitled to assume that payment would be made and no free transfer had been intended. In A.A.'s opinion, neither the imputed rental value could be taxed in the present case due to the lack of personal use, nor was the taxation of a rent as income permissible, as it had not been paid.

In general, income from immovable assets is taxable according to Art. 21 para. 1 DBG. Thus, according to Art. 21 para. 1 let. a) DBG, rental income or the like and, as already mentioned, according to Art. 21 para. 1 let. b) DBG, own use are taxable. Income from third-party rentals must be declared. At the same time, the obligation to declare the imputed rental value does not apply to these properties. In other words, the principle applies with regard to real estate that the imputed rental value is decisive for owner-occupation and the rental income is decisive for rental. [5] Among other things, the following must be taken into account:

1. In tax law, the principle of "actual taxation" applies. Therefore, the structuring of one's own financial circumstances is subject to private autonomy and is not subject to the reservation of correct business behaviour. It follows that preferential rents or rents from relatives are generally permissible, which means that there is no (possible) set-off against the tax-relevant imputed rental value pursuant to Art. 21 para. 1 let. b) DBG. This is only justified in the case of a significant differential amount. According to the Federal Supreme Court Jurisprudence , it can be assumed that such a difference exists if it amounts to less than half of the imputed rental value. In this case, the taxpayer is free to prove that, contrary to the existing presumption, there is no tax avoidance. [6]
2. When taxing a rent, it does not matter when the rent was paid. What is decisive is the acquisition of the claim. A claim is deemed to have been acquired when there is a firm legal entitlement to it, which is generally the case when it falls due. Exceptionally, this point in time is deviated from if it must be assumed that there is uncertainty regarding the fulfilment of the claim, which must be, however, asserted by the taxpayer.

Accordingly, in the present case, the rental agreement and the monthly due dates for the rent already led to a tax-relevant inflow of income. However, the lower court assumed in favour of the complainant a gratuitous rental relationship and therefore assessed the lower imputed rental value. According to case law, a (gratuitous) loan for use pursuant to Art. 305 et seq. Swiss Code of Obligations is assumed if the owner of the apartment gives the apartment to a close relative free of charge. Even if the owner no longer has the apartment at his disposal, he is still considered the "owner" of the apartment for tax purposes, which is why the corresponding imputed rental value is taxed for the owner. In the present case, the contractually agreed rent would in itself be taxable as income in the 2015 tax period. However, due to the prohibition of reformatio in peius, the decision of the lower court cannot amended to the detriment of the complainant by the Federal Supreme Court.

Further information on imputed rental value

The imputed rental value is a highly controversial political issue and has been the subject of tax policy discussions for years. At the moment, the Swiss Council of States is dealing with a parliamentary initiative "System change in the taxation of residential property"(17.400). As things stand at present, the Swiss Council of States must issue a draft bill by the 2021 autumn session. However, it cannot be ruled out that the current corona pandemic situation will lead to a (renewed) extension of that deadline. For a detailed discussion of the parliamentary initiative, see our blog post.

Endnotes

1] cf. Zwahlen/Lissi, in: Zweifel/Beusch (ed.), Komm. DBG, 3rd ed. 2017, Art. 21 N 18.

2] cf. BGE 146 II 97, E. 2.4.2, with further references.

3] cf. Zwahlen/Lissi, in: Zweifel/Beusch (ed.), Komm. DBG, 3rd ed. 2017, Art. 21 N 24.

4] Federal Supreme Court judgment 2C_500/2018 of 8 April 2020 E. 2.3; Judgement of the BGer 2C_1039/2015 of 28 April 2016 E. 3.3, each with further references.

5] cf. in this regard the Federal Supreme Court ruling 2C_475/2016 of 30 November 2016, E. 2.1.

6] cf. in this regard Federal Supreme Court ruling 2C_475/2016 of 30 November 2016, E. 2.2; in detail BGE 146 II 97; furthermore also Zwahlen/Lissi, in: Zweifel/Beusch (ed.), Komm. DBG, 3rd ed. 2017, Art. 21 N 9.