Tax consequences of restructuring of pension fund assets
Various federal legal laws encourage saving in the form of occupational pension plans. In this context, not only the paying-in professionals benefit from tax advantages, but also the pension funds which do not pay taxes on their profits. Until now, the tax consequences of pension fund restructurings were largely unclear. Many transactions had to be secured in advance with the tax authorities through rulings. Now, the Federal Supreme Court has provided clarity in one area.
Tax consequences of restructuring of pension fund assets
2. Real estate gains taxes in case of restructuring of pension fund assets (Judgement of the Federal Supreme Court 2C_380/2021 of February 28, 2022)
The purpose of Pension Fund A is to provide occupational pension benefits. The purpose of Zurich Investment Foundation is the collective investment and management of assets exclusively serving the purpose of providing occupational pension benefits and is exclusively open to tax-exempt occupational pension institutions domiciled in Switzerland. Both the fund and the foundation are exempt from profit tax. Pension Fund A transferred several properties to the Zurich Investment Foundation and in return received no-par and irrevocable claims to the Investment Group I (so-called "real estate asset swap"). In simple terms, Pension Fund A transferred its real estate into a vessel containing further real estate and received a certain percentage of the return on all assets from this vessel instead of the return on the previously held real estate. The transaction converted previous direct real estate holdings into indirect real estate investments. The intended economic purpose was a more efficient management of the real estate as well as securing a broader diversification of risks.
With the exception of the tax administration of the City of Zurich, all cantons involved had confirmed the tax neutrality of these transactions in rulings. The tax administration of the City of Zurich, however, assessed real estate gain taxes for the properties located in Zurich.
b. Considerations of the Federal Supreme Court
Pursuant to the Tax Harmonization Act applicable throughout Switzerland, the cantons are not allowed to tax real estate gains in the case of tax-neutral reorganizations (tax deferral). In the case of demergers, it is however always necessary that one or more operations are transferred, whereby after the demerger the existing legal entities each continue to conduct an operation. If assets are transferred without employees, this so-called "operating requirement" is regularly not met. Therefore, restructurings of real estate assets are regularly associated with difficulties from a tax point of view.
The Federal Act on Occupational Pension Plans provides that profits from the sale of a property by a pension fund may be taxed. However, in the case of mergers and splits of pension funds, no taxes on profits may be levied. In the present case, the Federal Supreme Court considered the question whether the contemplated transaction constituted a sale subject to profit tax or rather a tax-neutral restructuring. It found that the concept of restructuring under the Federal Law on Occupational Pension Plans was to be understood more broadly than under the Tax Harmonization Act. The first act, in contrast to the second mentioned act, did not presuppose an operating requirement. Therefore, pension funds would be able to spin off assets to other pension funds in a tax-neutral manner, provided that the transferred assets continued to serve the pension scheme of the employees affiliated with the institution in question at the acquiring company.
In the present case, the Federal Supreme Court found the transfer of the real estate against issuance of the entitlements to Investment Group I to constitute a tax-neutral split. The employees affiliated with Pension Fund A would no longer benefit directly from the return on the real estate in question, but do so indirectly, as they would benefit from the returns on the other investments in Investment Group I. The employees would therefore continue to benefit from the return on the real estate in question. Therefore, the pension purpose would be maintained. Thus, the Canton of Zurich should not be allowed to tax the real estate gain.
3. Real estate transfer tax in case of restructuring of pension assets
In general, most cantons levy a real estate transfer tax on the transfer of real estate. The Federal Law on Occupational Pension Plans holds that pension funds are only exempt from profit tax in the case of restructurings. There is no mention of real estate transfer tax. The Federal Supreme Court recently ruled in another judgment concerning the Canton of Fribourg, that the cantons may levy the real estate transfer tax in the case of restructurings of contractual investment funds (judgment Federal Supreme Court 2C_624/2021 of March 28, 2022). The highest court here relies on a formalistic approach, as the real estate transfer tax is triggered upon the change of the actual land register entry, and does not consider the economic circumstances. It also explicitly mentioned that the transfer tax is not a tax on profits but a tax on legal transactions.
The facts mentioned above occurred in the Canton of Zurich, which does not provide for a transfer tax. If the facts had occurred in the Canton of Fribourg, there would have been a 3% transfer tax on the value of the property. It is highly doubtful whether this taxation is actually in line with the federal legislator's intention to treat beneficially the taxation of occupational pension plans.
The aforementioned ruling on real estate gains taxes for real estate asset swaps is to be welcomed. However, not all difficulties in connection with the restructuring of pension fund assets have been eliminated. The ruling of the Federal Supreme Court regarding real estate transfer taxes demonstrates the uncertainties and points out that caution is still required with regard to real estate taxes in connection with restructurings.