Bilateral Meeting IFA UK/ Switzerland Investment in Swiss Real Estate

1. Bilateral Meeting IFA UK/ SwitzerlandInvestment in Swiss Real Estate Reiner Denner, Tax Partner 10/11 May 2012

2. General purchase restriction LexKoller / Lex Friedrich rule to be considered. Purchase of apartment buildings and dwellings by a foreigner are subject to authorization by the appropriate cantonal authority. New: Limitation of vacation homes to 20% of all available dwellings for each community in Switzerland. No authorization requirement for purchase of business buildings. Taxation of rental income / Federal, Cantonal and Communal level With the purchase of Swiss real estate, the UK investor becomes subject to tax in Switzerland. Rental income is taxable in Switzerland based on unilateral law. Based on art. 6 DTT UK-Switzerland, Swiss sourced real estate income is taxable in Switzerland. However, UK resident and domiciled investor is subject to UK income tax with a tax credit for Swiss taxes Direct Investments in Swiss real estate UK Investor rental income taxed in CH Swiss real estate

3. Taxation of gains resulting from the sale of real estate Federal level Business assets are subject to income tax Private assets are tax free Cantonal level: two different systems Monistic System (e.g. Zurich) Private and business assets are subject to real estate capital gains tax Dualistic System (e.g. St. Gallen) Business assets are subject to ordinary profit or income tax Private assets are subject to real estate capital gains tax Direct Investments in Swiss real estate UK Investor Swiss real estate

4. Taxation of gains resulting from the sale of real estate UK tax implications UK will tax gains on sale of Swiss real estate at 28% (with tax credit for Swiss taxes) If UK individual establishes a non-UK company to acquire Swiss property, anti-avoidance provisions may apply in the UK Direct Investments in Swiss real estate UK Investor Swiss real estate

5. Real Estate capital gains taxation federal level corporate income tax corporate entities real estate capitalgainstax / corporate income tax monistic cantonal level dualistic corporate income tax

6. Dualistic system Cantonswithdualisticsystem AG, AI, AR, FR, GE, GL, GR, LU, OW, NE, SG, SH, SO, TG, VD, VS, ZG market value total income investment costs + investments increasing value Cantonal and Federal level: income tax purchase price e.g. Lausanne: 23.48% book value

7. Monistic system Cantonswithmonisticsystem BE, BL, BS, JU, NW, SZ, TI, UR, ZH market value cantonal level: Federal level: capital gain Real estate capital gains tax income investment costs income tax purchase price depreciations income tax book value * * alternative historic market values may be applicable

8. Direct Investment in Swiss real estate • Other taxestobeconsidered • While owning Swiss real estate • Minimum property tax in some Swiss cantons (e.g. 1.5‰ on tax value in the canton of Berne) • Net wealth tax on real estate value • No UK wealth tax for UK investors in Swiss real estate Sale of Swiss real estate • Real estate transfer tax in the cantons of AI, AR, BE, BL, BS, FR, GE, GR, JU, LU, NE, NW, OW, SG, SO, TG, VD, VS (note: none in Zurich). Highest rates (levied on transfer value) are as follows: • VD 2.2 – 3.3% • NE 3.3% • GE 3% • BS 3% • BL 2.5%

9. CH CH CH Indirect investment in Swiss real estate Investments through real estateholdingcompanies (different locations) A) B) C) UK Investor UK Investor UK Investor LuxCo 1 Real Estate Holding Company (CH) Real Estate Holding Company (UK) LuxCo 2 Swiss Hold Co • Taxation of rental income in CH • Tax consequences of asset deal are very similar compared to direct investment • Sale of CH Holding shares might trigger real estate capital gains tax in some cantons • Taxation of rental income in CH • Tax consequences of asset deal are very similar compared to direct investment • Sale of UK Holding shares might trigger real estate capital gains tax in some cantons • Taxation of rental income in CH • Tax consequences of asset deal are very similar compared to direct investment • Sale of LUX Holding or Swiss Hold Co shares should be tax free

10. Taxable transactions • Sale of real estate as such (Asset Deal) • Sale of a participation (mostly majority) in a real estate company (Share • Deal) • So called economic transfer of real estate • Definition of real estate company • The concept of economic transfer of real estate is basically only relevant in monistic cantons, but carefulreviewforeachcantonrecommended

11. Share DealSeller domiciled in Switzerland Holding Company (CH) Buyer sale to third party Real Estate Company ZH ZG Real Estate Company ZH ZG → Definition of a ‘real estate company’ varies from canton to canton

12. Share DealProperty located in Zurich (monistic canton) Seller Buyer market value = new investment costs market value step up real estate capital gains tax sale of shares step up investment costs historic investment costs book value book value

13. Share DealProperty located in Zug (dualistic canton) Seller Buyer market value market value sale of shares investment costs investment costs book value book value → No tax consequences in Zug

14. Share DealSeller domiciled in Luxembourg Holding Company (Lux) Buyer sale to third party Real Estate Company ZH ZG Real Estate Company ZH ZG → Definition of a ‘real estate company’ varies from canton to canton

15. Tax Treaty Protection • Treaty with specific provision concerning real estate companies Gains derived by a resident of a Contracting state from the sale of shares in a company, the assets of which consist wholly or partially or real property situated in the other Contracting State, may be taxed in that other Contracting State • e.g.: UK, F, USA • Treaty without specific provision Gains from the sale of any property other than that referred to in paragraphs […] shall be taxable only in the Contracting State of which the seller is a resident • e.g.: LUX, D, A

16. Share Deal with Lux share holderProperty located in monistic canton Seller Buyer market value = new investment costs? market value step up ? real estate capital gains tax sale of Shares step up investment costs historic investment costs book value book value → Whether Step up is available depends on cantonal practice (ZH grants step up)

17. Indirect investment in Swiss real estate / International Structuring • Example: Multiple holdingstructure Holding AG Holding privilege 7.8% tax on earnings Subholding/-s Im Swiss Real Estate Companies regular taxation

18. Indirect investment in Swiss real estate / International Structuring • Multiple holdingstructure Equity Financingthroughthird partiesorinvestors Holding AG Privilege for Holding Companies interest income: 7.83% tax on earnings Subholding/-s Im Swiss Real Estate Companies loan interests interest expenses are tax deductible – high tax rate Financingthroughthird partiesorinvestors

19. Indirect investment in Swiss real estate / International Structuring • Intention of double ormoretierstructures • Achievementof a highleverage in thesubsidiariesbyuseof „distributionofdividends“  outstandingdividends will not bepaid out andkeptas an interest-bearingliability • The potential ofusingexternalfinancingcostscanbemultiplicatedbyusing a structurewithtwoholdingcompanies: externalfinancing will beutilised in themaximumamountwhichispermittedbylaw • Tax benefit • The interestexpensesare tax deductibleatthelevelofthe Real Estate Companies – regulartaxation (e.g. 21%) • The interestincomeistaxable on thelevelof Holding AG (7.83%); Holding AG isabletodeductinterestexpensespaidtothirdparties

20. Indirect investment in Swiss real estate / International Structuring • Limits • Holding Privilege: 2/3 test  2/3 of total assetsareparticipations (based on fair marketvalues)/ or 2/3 of theearningsisdividendincome • Thincapregulations on thelevelofthesubsidiaries • Amount of interestwhichcanbebornbythesubsidiaries

21. Indirect investment in Swiss real estate / International Structuring • Example: Investment with IPO • No tax implicationsfor Real Estate Co (CH) providedthatnoeconomicalchange of ownership - increase in capital > 50% possible • Notransferofthemajorityoftheshares – due tothe IPO sharesaretransferredto multiple shareholders (toberuledwithcantonal tax authorities) Holding AG IPO Real Estate Co (CH)

22. CH CH CH CH SICAV (also applicable for Investment trusts) UK Share holder Share holder SICAV / Investment trust Investment Investment

23. Tax benefit of the SICAV in general Privileged Taxation of the current earnings resulting from the real estate property as well as the profit on realisation (does only apply in dualistic systems) The collective investment funds with directly held real estate property is taxed as a so called „übrige juristische Person“, lower tax rates apply Issuesof a SICAV structure In general a tax-neutral contribution in kindof real estatepropertyis not possible – thecontribution in kind will beevaluatedwiththecurrentmarketprice. Alternatively, the SICAV hastoacquirethe real estateproperty. CH CH CH SICAV (also applicable for Investment trusts) • The applicableincome tax rate on incomederivedfromdirectlyheldpropertyamountsto 4.25% on the Federal tax level (insteadof 8.5% whichhastobepaidby a regularlytaxedcompany) and 50% oftheregular tax rate on thecantonalandcommunallevel (e.g. ZH 4% * tax basisof 2.2952). Combinedeffective tax rate of 11.84% Interest incomeissubjecttotaxation Wht SICAV rentissubjecttotaxation

24. Reiner Denner Partner KPMG AG, Tax Zurich Head KPMG Real Estate Tax Tel.: +41 44 249 24 40 e-mail: rdenner@kpmg.com Contact