Tax liability for foreigners with Swiss real estate

(1) Meaning and consequences of limited tax liability

Individuals who are not resident in Switzerland for tax purposes are liable to tax in Switzerland on the basis of economic affiliation if they own real estate in Switzerland.

In the case of economic affiliation, the tax liability in Switzerland is limited to those parts of the income and assets for which a tax liability exists on the basis of economic affiliation.

Switzerland's right of taxation for the Swiss property is not restricted in relation to foreign countries due to the applicable double taxation agreements (DTAs) of Switzerland.

However, since the taxpayer has points of connection in at least two different countries, a tax differentiation is required between Switzerland as the country in which the property is located and the country of residence with regard to the income and asset factors taxable in Switzerland.

The principles of this allocation are shown below:

(2) Tax elimination principles

a) Object-based transfer of income

Transfer of income by object means that the income from the Swiss property is taxable in full and only in Switzerland. This includes the rental income actually received, or otherwise, in the case of owner-occupied vacation domiciles, the imputed rental value, which is determined by the cantonal treasury offices and communicated to the taxpayers.

b) Object-based transfer of profit costs (maintenance costs)

Analogous to the income, the costs in connection with the property (e.g. maintenance costs; so-called profit costs) must also be allocated to the property. This results from the fact that these costs can usually be clearly allocated to an individual property.

c) Proportional transfer of debts (mortgage debts)

The DTAs of Switzerland do not consist of any rule concerning the transfer of debts or debt interest.

According to Swiss practice, domestic and foreign debts and debt interest are to be allocated proportionately to the tax domiciles according to the location of all (private and business) domestic and foreign assets. Consequently, debts and debt interest are allocated proportionately to the "asset locations". 

(3) Declaration | Tax return

Taxpayers domiciled abroad must always submit a fully completed and signed tax return to the canton concerned.

In this context, not only the property, related expenses and its income accruing in Switzerland have to be declared, but the entire assets and income in Switzerland and abroad (so-called world income and assets). This results from the fact that the tax for the values taxable in Switzerland is based on the tax rate corresponding to the total (world) income or assets of the taxpayer.

In most Cantons, individuals with limited tax liability who are resident abroad have the option of being taxed at the maximum rates and thus submitting a simplified tax return. In this case, the taxpayer must provide the following information:

• The tax value, income and maintenance costs of the relevant properties must be declared, and the property list of the tax return must be completed.
• Debts and debt interest on the corresponding property are regularly not taken into account in this procedure.

Example of a international debt interest transfer

The principles of international tax segregation presented are illustrated below using a simplified example:

The taxpayer X. with residence in Germany has available assets:

In the case of income and wealth tax, the property in Switzerland is decisive for taxation in Switzerland. In Switzerland, rental income or the like arising from the rental or management of the property in Switzerland must be taken into account.

In the case of wealth tax, the entire amount of the mortgage of CHF 600,000.00 cannot be taken into account due to the proportional distribution of the (mortgage) debts. The ratio between the total assets in Germany and the total assets in Switzerland is 2:1. According to this ratio of 2:1, the mortgage debts as well as the debt interest must be distributed in the income. This means for the taxpayer X. that for Germany: CHF 400'000.00 (= 2/3) and CHF 800 debt interest (2/3) and for Switzerland CHF 200'000.00 (= 1/3) are taken into account as a deduction in the assets and CHF 400 debt interest (1/3) in the income. In contrast, the maintenance costs of effectively CHF 5,000 are directly allocated to the income in Switzerland as a deduction.

In this respect, X. must pay tax in Switzerland on wealth of CHF 1,200,000 and taxable income of CHF 14,600 at the income tax rate which would result from a taxable income in Switzerland or in the Canton of Thurgau of CHF 73,800. Due to the wealth and income situation in Germany, taxation at the maximum rates by filing a simplified tax return would result in additional tax costs in this example.

Finally, it remains to be noted that, from the Swiss perspective, it is irrelevant whether - in the previous example, taxpayer X. - can take into account the value determined for Germany (CHF 400,000.00 or debt interest of CHF 800) in Germany itself. In other words, the proportional apportionment of the mortgage debt takes place irrespective of the possibility of the respective actual deductibility.