Tax Treatment of Subsidy Advances and Debt Interest in the Context of HCHOA Financing

Facts

The complainants A.A. and B.A. acquired a property with rental apartments in St. Gallen in 1985 and took over rights and obligations towards the Swiss Confederation from the financing of the property with subsidy advances according to the Federal Law on Housing and Home Ownership Promotion (HCHOA). In 2009, the Federal Office for Housing (BWO) and A.A. agreed to dissolve the HCHOA contract in such a way that A.A. made a final payment of CHF 577,325 for the previously unpaid subsidy advances and accrued debt interest totaling CHF 1,685,675.45. The waived remaining debt towards the Swiss Confederation in the amount of CHF 1,108,350.45 was recorded by the tax administration of the canton of Appenzell A.Rh. as taxable income for the cantonal and direct federal tax in 2009.

The complainants lodged an unsuccessful appeal and subsequently a complaint with the High Court of the canton of Appenzell A.Rh. and then filed complaints in public law matters with the Federal Court.

Considerations

The Federal Court has established in its judgment that the subsidy advances and the accrued debt interest granted by the Swiss Confederation in the context of HCHOA financing are to be treated as taxable income if they are subsequently waived. The waiver of these advances and interest constitutes a taxable capital gain subject to direct federal tax.

The court has further established that the lower court correctly assumed that the income inflow is to be assigned to the immovable property and is thus reserved for exclusive taxation by the canton where the property is located, in this case…