The "delayed chain"
The “chain transfer” of capital gains tax is based on the harmonized tax law of the cantons and municipalities.
The term “chain deferral” refers to the (theoretical!) possibility of indefinitely deferring capital gains tax based on various elements of the deferral linked together.
Real estate capital gains tax
In the event of the sale of real estate, capital gains are subject to real estate gains tax. This results in a gross profit to the extent that the proceeds exceed the investment costs (purchase price or equivalent value, expenses) (Art. 12 para. 1 LHID). Depending on the cantonal regulations governing real estate gains tax, certain deductions may be made from the gross profit.
The law equates several other legal acts (Art. 12 para. 2 LHID) with a true change of ownership under civil law, which constitutes the most important case of application. Examples include the sale of shares in a real estate company ("economic transfer"), the transfer of real estate from private to business assets ("change of system"), or the creation of private easements on real estate.
The determining parameters for calculating the tax on real estate gains, such as "product", "investment costs " and "replacement value", are legal concepts that are not specified by the harmonization .
However, the concept of " be prescribed by harmonization law . Overall, the Confederation therefore leaves the cantons and municipalities some leeway in defining the concept.
In the 25 years since the harmonization legislation came into force, cantons and municipalities have seen a surprising diversity of practices, particularly with regard to the deferral of taxation .
As long as a cantonal or municipal practice is not challenged before the Federal Supreme Court, it remains uncontested. Federal law does not provide for any harmonization instrument ".
This is why the tax base (gross profit) may vary from one canton to another , despite identical factual situations , and not only because of different tax scales.
For the deferral or transfer of capital gains to another canton, it is therefore crucial to know in which canton the amount of the deferred capital gain is determined. As will be seen below, the deferred profit is always determined in the canton where the property is sold. This canton applies its own law.
Deferred taxation
The deferral of taxation suspends the calculation of the increase in value made on the property, even if there has been a change of ownership or a similar event.
The deferral of taxation is therefore an exception to the general principle of realization. The legal transaction is treated, in a way, as if the gross profit had not (yet) been realized.
Tax deferral may only be granted by the cantons in the five specific cases expressly and exhaustively listed by the federal legislator in Art. 12 para. 3 let. a — e LHID. These are as follows:
- In the event of transfer of ownership by inheritance ( devolution of inheritance, division of inheritance, legacy), advancement of inheritance or donation (case of inheritance law);
- In the event of a transfer of property between spouses in connection with the matrimonial regime or in the event of compensation for extraordinary contributions by one spouse to the maintenance of the family (art. 165CC) or for claims arising from divorce law, provided that both spouses agree (family law case);
- In the event of land parcel reorganization (case of forced transfer);
- In the event of the total or partial sale of an agricultural and/or forestry property, provided that the proceeds of the sale are used, within a reasonable time, for the acquisition of a replacement property operated by the taxpayer himself or for the improvement of agricultural or forestry properties belonging to the taxpayer and operated by him. (scenario "agricultural replacement acquisition");
- In the event of the sale of a dwelling (house or apartment) which has been used permanently and exclusively by the seller, provided that the proceeds obtained are used, within a reasonable timeframe, for the acquisition or construction in Switzerland of a dwelling used for the same purpose (in the case of the acquisition of a replacement property).
These five scenarios that generate deferred taxation are systematically subdivided into clearly defined groups of cases , including:
A group of replacement acquisitions ( Figures 4 and 5), a group in which the owner does not receive consideration for the transfer of the property (inheritance law, ( figure 1 ) a) or within the family (family law, ( figure 2 )), as well as a group which includes transfers of properties based on constraint (land consolidation, ( figure 3 ).
It is possible to distinguish two types.
In the first case, the tax subject remains the same, while the building "changes" (particularly for replacement acquisitions [ figures 4 and 5 ]).
In the other case, the building is not affected and the modification takes place via the exchange of the tax subject (in particular in the case of a transfer of ownership between spouses or a transfer of a deferral of taxation is replaced by another event triggering deferral of taxation, the corresponding conditions are also exchanged.
The reason the federal legislature created the five scenarios, thereby introducing the deferral of taxation, lay in important economic, social and (privileged) policy motives.
In the event of a change of ownership, the cantons and municipalities are required to temporarily waive taxation of the gross profit. The principle is essentially: "not now, but later".
Due to the exhaustive list, cantons and municipalities are also not permitted to create other scenarios that trigger deferred taxation. For example, real estate acquired as a gift ( item 1 or 2 ). Within the framework of this systematization, it is important to bear in mind that each scenario has different conditions that must be met for deferred taxation to be granted.
Boundaries
Tax deferral must be distinguished from exemption ; the two legal mechanisms have significant conceptual differences: tax deferral lasts until the preferential grounds for deferral disappear. If the grounds for tax deferral disappear, or if all the conditions of a given scenario are no longer met, taxation occurs, and the capital gain on the property becomes the subject of the tax.
Taxation therefore remains possible after years of deferral.
On the other hand, in the case of tax exemption, the right to tax disappears from the moment the conditions are met and further taxation is no longer possible after several years – which can be illustrated using the formula “not now, nor later”.
It should also be clarified that the deferral does not constitute a taxable event for the tax reassessment within the meaning of Article 53 of the Federal Act on the Harmonization of Direct Taxes (LHID), since the elimination of the tax deferral does not constitute an event within the meaning of Article 53 paragraph 1 or Article 51 paragraph 1 letter a of the LHID: It is not taxed retroactively, as what should have already been taxed at the time is not the case. Rather, it is a matter of taxing when the reasons for the tax deferral cease to exist.
Requirements for replacement acquisition
The concept of "replacement property" is defined in a binding manner for the cantons and municipalities by the harmonization rule of Art. 12 para. 3 let. d and e LHID. The cantons and municipalities cannot autonomously define the legal concept governed by federal law .
This is all the more true since replacement acquisition is also permitted beyond cantonal borders.
On the other hand, it remains the responsibility of the cantons to set the scales, rates and amounts exempt from tax (“social deductions”) (cf. art. 1 para. 3 2 sentence LHID).
Both the original alienated object and the replacement object acquired must be occupied as 'a dwelling used permanently and exclusively for the alienator's own use'.
“Dwelling” means that the owners establish their civil or tax domicile at the place of the property being evicted.
The term "dwelling used for the owner's own use" therefore refers only to the principal residence, whereas a secondary tax residence cannot be taken into account for deferred taxation in the case of a holiday property.
In the case of a two-year lease by a third party, the Federal Court ruled that there was no longer any separate use of the property.
In principle, use by a third party (such as renting to third parties) therefore excludes own use.
In the event of a deferral following a replacement purchase, it is therefore recommended to allow, at most, short-term use of the property by a third party. Otherwise, the tax authority may no longer consider the condition of "permanent and exclusive use for one's own purposes" to be met and may levy a tax on capital gains from real estate.
The Federal Supreme Court explicitly leaves open the question of the timeframe within which the replacement acquisition must take place. The cantons may themselves determine the length of the "appropriate period" within which the replacement acquisition must occur.
Most cantons generally allow a period of two to five years. The Federal Supreme Court subsequently ruled that a seven-year gap between the sale and the replacement purchase was no longer appropriate in any case.
Furthermore, replacement acquisition can be carried out not only retroactively, but also in advance. In this case, it is referred to as "anticipatory replacement acquisition".
Method of transferring a gain whose taxation has been deferred
The transfer of the gain whose taxation has been deferred is based on two methods approved by the Federal Court.
Application of the "absolute method"
The "absolute method". According to this provision, deferred taxation is granted only for the portion of the profit invested in the acquisition of the replacement item after reusing the investment costs of the item sold (and any third-party services).
If the funds allocated to the replacement property do not exceed the investment costs of the property sold, the capital gain is taxed in full.
In this case, there is no deferral of taxation on capital gains from real estate. The profit is considered realized and not reinvested. Any profit not reinvested is taxed immediately. Therefore, the deferral of taxation under Art. 12 para. 3 let. e of the LHID (Land Tax Act) should only be granted if and to the extent that the proceeds reinvested in the replacement property exceed the investment costs of the initial property.
Application of the "unit method"
It becomes interesting that the deferral of taxation of real estate gains takes place beyond cantonal borders.
The question that arises is which canton is granted fiscal sovereignty over the initial real estate profit.
In inter-cantonal relations, the Federal Court has ruled in favour of applying the "unitary method" while excluding the "division method"
Thus, the deferred gross profit (and therefore the latent tax base) is allocated in its entirety to the canton of arrival in whose territory the alienation of the replacement property takes place, without any further deferral of taxation.
Gross profits form a single taxable object in the (last) canton of arrival, hence the designation of "single method".
The method of splitting , also discussed in doctrine, according to which the last gross taxable profit is distributed proportionally between the canton of departure and the canton of arrival (or cantons of arrival), has no basis in federal law.
The Federal Court thus confirms that not only are the latent reserves transferred to the other canton, but that jurisdiction and sovereignty in matters of taxation also change from one canton to another.
In other words: "not now, but later" means, from a procedural point of view, that only the taxing authority of the "last" canton should act, exclusively applying its own law.
From a material point of view, the entirety of the last gross profit goes to the "last" canton alone; the other cantons receive nothing.
Delayed due to a change in tax subject
The second type of deferral, through a modification of the tax subject, includes the assumptions of inheritance law and family law (figures 1 and 2).
The canton where the property is located cannot, despite a change of ownership under civil law, levy capital gains tax on the transferred property. According to the jurisprudence of the Federal Supreme Court, the reservation of usufruct does not lead, from an economic perspective, to a significantly different outcome than the transfer of ownership under civil law upon death.
The Federal Court thus emphasized that art. 12 para. 3 let. a LHID expressly includes inter vivos acts of succession (“advancement of inheritance”) and even donations based on the law of obligations.
Regarding the advancement of inheritance (which also applies to the donation of real estate), the Federal Supreme Court recently ruled that the deferral of taxation can also be invoked in the case of a mixed legal transaction. The "free" portion must not exceed a certain threshold.
The "chain deferral"
It is particularly interesting to know what happens to the extension of the deferral of taxation when one event triggering deferred taxation is followed by another event triggering deferred taxation, that is to say when the groups of cases are combined.
Example 3: Daughter C. receives a share of a condominium from her mother. The apartment not meeting her own needs, she sells the condominium share for 700,000 francs and acquires a replacement building for 850,000 francs.
Combination possibilities and limitations
The law on tax harmonization does not expressly provide whether a taxable event for deferred taxation can be replaced by another taxable event for deferred taxation.
As we have seen, the harmonized tax law of the cantons and municipalities only covers the five cases of events triggering deferred taxation, which are exhaustively listed.
Given the principle of horizontal and vertical harmonization and the fundamental importance of the conditions, existence, and revocation of tax deferrals, the Federal Supreme Court held that the possibility of combining these two elements is solely a matter of federal law. Consequently, the cantons cannot establish their own combination mechanisms, which is appropriate, since neither the cantons nor the municipalities can create new taxable events for deferred taxation.
As long as the uninterrupted connection of a new element to the old constituent element of a taxable event is guaranteed and the latent tax liability is fully maintained, the taxpayer may, of his or her own volition, move from one taxable event to another.
The Federal Court thus denied the establishment of a fact or a link between facts.
The change between the different events that trigger deferred taxation is thus based on federal law and the different scenarios can therefore be combined in different ways.
Informative processing of the "delayed chain"
In the case of a chain deferral that is somehow "infinite", it can be problematic that the deferred benefit can no longer be reconstituted after decades.
This becomes particularly difficult when several replacement acquisitions have already taken place beyond the cantonal borders.
In this regard, it is important that the taxpayer be required to cooperate (in particular by providing information) with all tax authorities involved in the intercantonal replacement acquisition.
Next, the canton granting the replacement acquisition ("departure canton") communicates its decision to the tax authority of the canton where the replacement property is located ("arrival canton").
These obligations to provide information and to inform are intended to guarantee information on the reference values that define the amount of the real estate gain and the amount of the reinvestment.
Only when the reference values are known can it be determined, when applying the absolute method, whether and to what extent tax deferral should be granted.
Furthermore, according to the case law of the Federal Court, there is a right to obtain a declaratory decision fixing the amount of the (deferred ) .
In the interest of legal certainty, taxpayers would be well advised to have the extent of the tax deferral determined as soon as possible after the replacement investment. To do so, the tax authority must, as previously mentioned , issue a declaratory judgment, which is subject to the ordinary legal and appeal procedures.
The end of the "chain deferral"
The tax deferral ends when:
A requirement is not met or disappears within a group of cases (e.g. the replacement property is no longer used "on a permanent and exclusive basis" or a spouse does not accept the deferral when transferring property into the matrimonial regime); or if the transition to another group of cases fails (e.g. there is no replacement investment within a "suitable timeframe"); or a final disposition takes place.
At the end of the chain, the calculation must be based on the last real estate gain made.
Profits earned previously and which are subject to tax deferral are not taken into consideration.
In particular, there is no aggregation of all gains ever realized . The calculation is "completely normal", that is to say, based on the last gross profit obtained, without any further tax deferral.
Capital gains on real estate are taxed, as we have seen, in the absence of another event triggering deferred taxation ("at the end of the chain"). The rules in force at that time (tax brackets, tax base, etc.) are decisive
Conclusion
Any event that triggers deferred taxation can be replaced by a similar or legally permissible event that also triggers deferred taxation, without immediate taxation occurring. Thus, a "weaving" exchange between different events that trigger deferred taxation is also permitted.
Challenges arise in particular when events triggering deferred taxation occur in inter-cantonal relations.
According to the "unitary method," the last canton where the property is located—that is, the one in which there is no further deferral of taxation—is authorized to tax the gross profit realized on the last transfer, applying its own tax law. Documenting these successive tax deferrals is therefore of great importance, particularly for this reason.
Source: steuerportal
13.12.2022
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