Taxation of Properties Owned Abroad
Declaration of real estate owned abroad
Taxpayers with a B and C permit must complete tax returns (see placeholder). This does not only include income and assets from/within Switzerland, but worldwide. As a result, properties abroad must also be declared. This is also applicable if the property is already taxed abroad. After all, we are only talking about the declaration obligation – not the actual taxation.
Taxation of real estate owned abroad
The obligation to declare the foreign property naturally raises the question of whether or not the value or (potential) income of this property is taxable in Switzerland or if it is taxable, despite the asset being already subject to tax abroad.
This question cannot be answered with ‘yes’ or ‘ no’. First of all, it depends on whether there is a double taxation treaty between the two concerned states. This is usually the case, which makes it impossible for Switzerland to tax the property additionally here. However, the double taxation agreements stipulate that Switzerland may use the income and tax value of the foreign property to calculate the applicable tax rate. This means that although the property does not directly increase taxable income or wealth, a higher tax rate is applied as a result. To put it simply: the property abroad is not taxed directly, but increases the tax rate, which leads to a higher tax liability.
A simplified example to illustrate this:
A family with a taxable income of CHF 200,000 and assets worth CHF 400,000 pays tax at the rate for this amount: i.e. CHF 200,000 income at the tax rate for CHF 200,000 and CHF 400,000 assets at the tax rate for CHF 400,000.
If the same family had a property abroad with rental income of CHF 50,000 and a tax value of CHF 300,000, this would only have to be taken into account for the rate determination as described above. The family would then have an unchanged taxable income of CHF 200,000, but this would then be taxed at a higher tax rate, i.e. the one applicable for an income of CHF 250,000.
The same happens at the level of assets. The taxable assets of CHF 400,000 remain unchanged. However, it is taxed at the rate applicable to CHF 700,000 worth of assets.
How much the family in our example or each taxpayer ultimately has to pay additionally in taxes in Switzerland by owning the foreign property, must be calculated in each specific case. The result varies depending on the canton and the specific circumstances (mortgage, etc.).
Potential tax risks and optimization opportunities
The process described above is called “international tax allocation” or “exemption with progression method”. The process’ purpose is to avoid double taxation and requires a precise distribution of net investment income and assets between Switzerland and abroad.
The tax authorities allocate the various costs for a property differently to the respective countries. This involves certain risks and opportunities for the taxpayer.
Any upkeep costs are divided subjectively (with the costs allotted to the property for which they were accrued). But any debts and interest resulting therefrom shall be divided proportionally according to the gross assets of the respective State. In certain situations, this arrangement may have an adverse effect. If the taxpayer has a valuable property abroad, which is not burdened with debts, debts and related interest, which are attributable to Switzerland, are allocated proportionately to the foreign country, which reduces or even eliminates their positive effect on the tax burden.
However, on the plus side, Swiss tax law allows unlimited deductibility of property upkeep costs, including for properties located abroad. As mentioned above, any deductions would reduce only the applicable tax rate, but this still enables a certain optimization of the tax liability in Switzerland. The taxpayers has the possibility to reduce their income tax rate in Switzerland dramatically (e.g. with comprehensive renovations). It is therefore highly recommendable for taxpayers to keep track of any upkeep and renovation costs for properties abroad for the tax return filing.