Facts
The complainant A., a former baker and confectioner, operated four branches in the Canton of Zurich until 1999. Between 1980 and 1995, he acquired several properties in the Cantons of Zurich and Lucerne, which he rented out. From the year 2000 onwards, he commissioned B. with the management, rental, collection of rents and preparation of accounts for the properties located in the Canton of Zurich. Until 2016, [A.] declared the properties as private assets. In the 2016 tax return, he stated for the first time that the properties were held as business assets. In the course of succession planning, he intended to transfer his real estate portfolio of his sole proprietorship into a joint-stock company (D. AG). On 3 July 2017, he filed an application with the tax office of the Canton of Zurich for a preliminary tax ruling to confirm that the property management constituted a business that could be transferred to a legal entity on a tax-neutral basis. The cantonal tax office approved the preliminary ruling on 10 July 2017. [A.] submitted applications for deferral of the real estate capital gains tax to all municipalities in which properties were located. The Municipality X. rejected the application on 6 September 2017, although other municipalities approved it. On xx.xx.2017, the sole proprietorship C. was entered in the commercial register. By public notarial deed dated xx.xx.2017, the sole proprietorship transferred all properties retroactively to xx.xx.2017 to the [D. AG], of which [A.] is the sole shareholder. On 12 January 2018, [A.] applied to the Tax Office X. for deferral of the real estate capital gains tax. The Municipality X. assessed real estate capital gains tax of CHF 629,219.50 on 14 March 2019, which was confirmed by the appeal decision of 20 May 2019. The legal remedies filed against this were dismissed by the Tax Appeals Court of the Canton of Zurich on 15 July 2021 and by the Administrative Court of the Canton of Zurich on 26 April 2022. With a public-law appeal dated 15 June 2022, [A.] requested the annulment of the judgment of the Administrative Court and the full deferral of the real estate capital gains tax CO the referral of the matter back to Municipality X.
Considerations
The Federal Supreme Court examined whether the transferred properties constituted a business within the meaning of Art. 8 para. 3 lit. b of the Tax Harmonisation Act (DTHA), which would allow a tax-neutral restructuring. A business requires an organisational and technical complex of assets that forms a relatively independent, organic unit capable of continuing to operate independently. The management of one’s own real estate only exceptionally meets the characteristics of a business; professional real estate management is required, which goes beyond mere asset management. This may also be the case if the management activities are outsourced to a third party, provided that the requirements of Circular No. 5 of the Swiss Federal Tax Administration (SFTA) are met.
Circular No. 5 of the SFTA specifies the requirements for a business within the meaning of restructuring law. According to this, a business exists if the following cumulative conditions are met: a) there is a market presence CO operating properties are rented to group companies; b) the company employs CO commissions at least one person for the management of the real estate; and c) the rental income amounts to at least 20 times the market-standard personnel expenses for real estate management. The Federal Supreme Court found that the Circular provides a convincing concretisation of the legal requirements and must generally be observed by the courts, unless there are compelling reasons for a deviation. Courts only deviate from administrative ordinances if they represent an interpretation of the legal provisions that does not adequately reflect the specific case.
In the present case, it is undisputed that the properties have been rented out for many years, generate high income and there is professional real estate management. The administrative expenses for the properties…