Tax on investment properties: Why can a corporation be worthwhile?

The Pros

Holding real estate through a company tends to be worthwhile in the following cases:

• When the property is newly acquired, i.e. it is not being transferred from existing private assets to the company. Just as in the case of a sale to a third party, if a privately held property is transferred to a corporation, real estate gains taxes and, if applicable, a real estate transfer tax would be due immediately, because the transfer always has to be made at fair market value.
• When the property is rented out to a third party and is generating substantial income. In this case, since personal income taxes are highly progressive, while corporate income tax rates are often not progressive, this move does pay off because it shifts the tax burden from an individual paying higher marginal rates on this income to the company which is likely not subject to progressive tax rates.

The cons

It tends not to be worthwhile to hold real estate through a company if:

• The property is owner-occupied. In this case, the company, as the owner of the property, is to be paid a rent in line with market prices. This rent cannot be deducted from the tax owed by the private tenant (as a cost of living expense) and is thus financed from after-tax savings. For the company, the amount of the rent is taxed as income, after deduction of all business-related expenses. If its retained earnings are later distributed as dividends, they are once again taxed as they become shareholder’s income. Given how it must deal with this rental income, from a tax standpoint it is generally not interesting for a company to hold the owner-occupied property. If, however, the rent that paid to the company does not conform to the usual market rates, then the tenant is deemed to be enjoying a benefit with monetary value, which must be corrected for tax purposes and offset against taxes due. In addition, in such a case mortgage creditors are likely to question the affordability of the mortgage.
• The property generates low net income. If the income is too low, any tax benefits are likely to be quickly consumed by fixed costs such as additional tax declarations to be completed, accounting costs, etc.

Example: Mrs. Smith’s property in Geneva

Mrs. Smith lives in the canton of Schwyz and owns a property in the canton of Geneva. As a private individual she would have to pay tax on her property, including all income it generates, in Geneva, which is not considered to be particularly tax-friendly. Up to 40% income tax could be incurred on the rental income generated, and up to 1% wealth tax on the value of the property.

What happens if Mrs. Smith holds the property through a corporation?

• In this case, only a corporate tax rate of around 14% would be applied to the company’s rental income – regardless of where the company is based. Additional taxes would be due as soon as Mrs. Smith receives dividends paid out by the company. The total burden on this dividend income would then be around 25%. So far, the corporation option is clearly worthwhile.
• Mrs. Smith would also benefit from the point of view of her wealth tax. The shares of her real estate company being movable assets, she will pay wealth tax on these shares in the canton where she resides, in this case the tax-friendly canton of Schwyz. Here she will pay only 0.15% instead of the 1% wealth tax demanded by Geneva. Also a significant difference.

The example in figures

With an assumed property value of CHF 8 million and gross income of CHF 200,000 based on the 2024 tax rates.

The tax calculations in this comparison show that founding a real estate company can pay off.

Summary

In essence, if you live in a low-tax canton (e.g. in Schwyz, Obwalden, or Zug) and own a property in a high-tax canton (e.g. Geneva, Vaud, Basel-Stadt, Bern, or Zurich), there is a high probability that establishing a corporation is worthwhile.

You should be aware of these points:

Do you have any questions?

Whether a corporation is worthwhile in your specific case will depend on several factors. We would be happy to advise you personally and individually, and clarify which options are available in your situation.