VAT focus: critical determinants for transaction economics
In real estate SLB transactions, VAT plays a key role in the overall economic rationale of the transaction. The tax treatment primarily depends on the existence of a repurchase right and the actual and future use of the property, which determine whether the parties may opt for taxation of the sale or lease – fully or partially – and thus influence the scope of input VAT recovery for both the seller-tenant and the buyer-lessor. This aspect must be assessed in light of the three transfer modalities provided for under the Swiss VAT Act (MWSTG): sale without option, sale with option, and transfer under the notification procedure. Each modality entails specific tax consequences for seller and landlord, whose interests may diverge, as well as distinct formal requirements. Additional elements, such as the construction and refurbishment history of the property and the quality and availability of supporting documentation, are also decisive.
VAT risks for both parties
For the seller, the main risk lies in input VAT correction: if VAT has been reclaimed in connection with works on the property, an exempt sale without option may trigger a potentially significant adjustment. For the buyer, the reverse risk applies: opting for taxation may result in non-deductible VAT, particularly where the buyer is not fully taxable or the property is used for non-creditable purposes. Further risks arise from misalignment between the sale and the lease agreement, which may complicate the recovery of input VAT on future costs. It should be noted that, according to the practice of the Swiss Federal Tax Administration (ESTV), input VAT on acquisition costs or value-enhancing investments in real estate must be adjusted in the event of a change in use, based on straight-line depreciation over a 20-year period.
In Switzerland, VAT treatment differs where the contract provides for the retransfer of ownership to the tenant at the end of the lease term (repurchase right). If the agreement explicitly includes a repurchase option with a predetermined price, the ESTV may consider the arrangement as a single transaction equivalent to an exempt financial service without the possibility to opt for taxation. While this qualification is generally neutral for the seller-tenant’s input VAT deduction, it may significantly restrict or even exclude the buyer-lessor’s right to deduct input VAT, directly impacting returns and the financial structuring of the transaction.
Early analysis is critical
A consistent VAT structure is essential: treatment of the sale, the decision to opt (or not) for taxation of lease services, and alignment of the parties’ economic interests. These aspects must be analyzed upfront as a solution suitable for one party may create economic or operational risks for the other. VAT structuring therefore has a material impact on transaction pricing and often requires prior clarification with the ESTV.
