Real estate: Franco-Swiss issues related to wealth tax and VAT risk management in Switzerland

In 2017, Swiss wealth tax generated CHF 7.3 billion or 9.5% of tax revenues for the cantons and municipalities⁽¹⁾.

When a Swiss resident taxed on the ordinary tax roll acquires a property in France (secondary residence, rental property, etc.), the tax impact of this acquisition will affect both France and Switzerland, despite the existence of a bilateral agreement to eliminate double taxation on income and wealth tax. Indeed, the real estate located abroad and the income derived from it must be mentioned in the Swiss annual tax return in order to be taken into account, not in the taxable base, but for the calculation of the tax rate.

In addition, particular attention will be paid to the financing of the acquisition of this real estate in order to anticipate the consequences in terms of real estate wealth tax ("IFI" = "Impôt sur la Fortune Immobilière") in France and taxation in Switzerland, as the taking into account of debt and interest is not carried out in the same way in both countries.  In France, the bank debt financing the acquisition will be deductible from the value of the property under the IFI with certain restrictions depending on the terms and conditions of the proposed loan⁽²⁾. In Switzerland, the debt (and interest) deduction will be allowed in proportion to the gross wealth (and income) taxable in Switzerland, regardless of the terms of the proposed credit.

Nevertheless, this exercise may prove complex in the case of acquisition of the property by a family or commercial company but also depending on the specificities of the canton in which the Swiss taxpayer resides.

(1) By way of comparison, the French property wealth tax (IFI, "Impôt sur la Fortune Immobilière") generated 1.9 billion euros in 2018, representing less than 0.52% of tax revenues.

(2) Refer to the rules on the deductibility of IFI debts in France for further explanations.