Federal Supreme Court demands correction to property gains tax

Anyone who sells their permanently owner-occupied residential property at a profit must pay a so-called property gains tax. The amount of tax depends, among other things, on how long you have owned the property. It is deferred in whole or in part if residential property is purchased again with the aim of using it permanently as a main residence.

This was also the case for a couple who sold their condominium in a Lake Zurich municipality for CHF 1.85 million and subsequently purchased a property in the canton of Graubünden for CHF 5.25 million as their new main residence. The municipality deferred the property gains tax because the Graubünden property was a so-called replacement purchase. However, the property did not remain the couple’s main residence for long. Just 22 months after moving in, he relocated to the UK for professional reasons.

Back taxes: 234,000 francs

Two years after they moved away, the Zurich municipality demanded just under 234,000 francs from the couple in a subsequent tax assessment. Justification: The law requires a “permanent” use for a tax deferral. This could not be the case with a period of residence of only 22 months. With the transfer of the main residence to the UK, the property in Switzerland mutates into a secondary residence. In other words, the replacement procurement is being misappropriated.

This was also the view of the Tax Appeal Court and the Administrative Court. However, following an appeal by the couple, the Federal Supreme Court overturned the supplementary tax ruling, as can be seen from the ruling published on Thursday. What is to be understood by the term “permanent” is regulated by federal law. The cantons would have no leeway to determine this at their own discretion. The Federal Tax Harmonization Act does not stipulate a minimum duration. Therefore, it does not matter that the couple had only lived in the new property for 22 months. The Federal Supreme Court also provided clarity in another area. In a circular dated 31. The cantonal finance directorate informed the municipalities of this in March 2014: The tax deferral originally granted would no longer apply and the deferred profit would have to be taxed subsequently if the “replacement property is definitely misappropriated within five years of the sale of the original property”.

Consequences cannot be quantified

The passage must be deleted. According to the Federal Supreme Court, there is “no room” for a cantonal regulation that deviates from federal law” – especially not in the form of a circular. It would therefore also be “inadmissible” to justify the subsequent taxation of the replacement purchase with the provisions of this circular.

Roger Keller, spokesman for the cantonal finance department, said on inquiry that the canton is not directly affected by this ruling because property gains tax is levied by the municipalities. However, the Finance Directorate will adapt the circular “in cooperation with the municipalities” in line with the Federal Supreme Court ruling. As a result of the ruling, the city of Zurich will also adapt its practices, according to Patrick Pons, spokesman for the Department of Finance. The financial impact cannot be determined exactly. However, compared to property gains taxes as a whole, they are “not serious”. Last year, the city of Zurich collected property gains tax amounting to CHF 252 million.

Judgment2C_306/2016, commented by Thomas Hasler, NZZ am Sonntag, March 2017