Facts
The [X. AG] , a real estate company, sold seven lofts and four commercial spaces in 2001, which it had previously converted from its former factory site. It invested the sales profit of CHF 558,525.-- in the expansion of two floor units, which it retained for itself. The [X. AG] requested that the replacement reserve of CHF 558,525.-- be recognized for tax purposes and that it be taxed with a taxable net profit of CHF 0.-- and a taxable capital of CHF 812,000.--.
The Cantonal Tax Office of Zurich denied the prerequisites for a replacement reserve and added the provision of CHF 558,525.-- to the taxable net profit. The [X. AG] appealed to the Administrative Court of the Canton of Zurich, which dismissed the appeal.
The [X. AG] then appealed to the Federal Court and requested that the replacement reserve be recognized and taxed accordingly. The Federal Court dismissed the appeal, as the prerequisites for a replacement reserve were not met.
Considerations
The Federal Court examined whether the prerequisites for a replacement reserve according to Art. 24 para. 4 DTHA and § 68 para. 1 of the Zurich Tax Act were fulfilled. It found that the [X. AG] held the sold objects solely for the purpose of sale and that the converted apartments were held long-term, which constitutes a mere asset investment.
The court ruled that the replacement of assets that serve the company only as an asset investment or through their yield is excluded. It pointed out that tax-neutral replacement is limited to operationally necessary fixed assets that directly serve the operation and cannot be sold without impairing the…