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But before embarking on this dream step, Teresa and Michael want to clarify the following questions: Do they have to declare the Spanish property in their Swiss tax return? And if so, what impact will this have on their tax bill?
Below we set out the following key points that Michael and Teresa should bear in mind from a tax perspective when acquiring a property abroad:
Declaration obligation in Switzerland
In principle, properties are taxed in the place where they are situated. However, this does not mean that you need not declare your foreign property in your Swiss tax return. Quite the opposite: the tax value of the property and any income generated by it are used as rate-determining factors. In other words, they have an impact on the tax rate applied in Switzerland.
Specifically, this means that the imputed rental value (i.e. the notional income value, even if a property is only used by the owner) and any rental income from the Spanish property will be factored into your total (global) income. This income figure is used to determine the tax rate that will apply to your income in Switzerland. This also holds true for wealth tax: The tax value of your foreign property is taken into account for determining the tax rate applied to your assets in Switzerland.
An illustrative example for income tax
|With a foreign property||With no foreign property|
|Net income, Switzerland||CHF 100’000||CHF 100’000|
|Net income from property in Spain||CHF 10’000||CHF 0|
|Taxable income, Switzerland||CHF 100’000||CHF 100’000|
|Rate-determining income||CHF 110’000||CHF 100’000|
|Average tax rate*||5,952%||5,766%|
|Tax burden in Switzerland||CHF 5’952||CHF 5’766|
* Municipality of Zug, married, no religious affiliation
Important – debts and debit interest
As part of the international tax allocation process, debts and debit interest are divided proportionally between Switzerland and abroad, in keeping with the location of the assets in question. For example, if you have a mortgage on your home in Switzerland, a proportion of both the outstanding debt and the debit interest is assigned abroad. As a consequence, the net income and assets on which tax is payable in Switzerland will rise. The debt and debit interest relating to the property in Spain are only deductible in Switzerland when determining the tax rate.
As an example: If the taxable value of the Spanish property amounts to 5% of your total taxable assets, 5% of your debts and debt interest are allocated abroad. The taxable assets and income in Switzerland will then increase by these amounts, which have been reassigned abroad. As Canton Zug (like most cantons) applies progressive taxation, your assets and your income in Switzerland will (typically) be taxed at a higher tax rate. In other words, acquiring a foreign property may have significant repercussions for your tax bill in Switzerland.
What values should be declared?
When it comes to declaring the property abroad, the same principles that apply in Canton Zug are used here too. For income tax purposes, the imputed rental value and/or actual rental income should be declared. For wealth tax purposes, the tax value of the property is the relevant figure. This is typically the purchase price.
Deduction of maintenance costs
Just like in Switzerland, you can claim a deduction of the (actual or flat-rate) maintenance costs of your foreign property. The net income figure is what determines the income tax rate in Switzerland. If the net income from the property is negative – due to renovation work, for example – the income figure relevant for tax purposes will decline, as will the tax rate that applies to you in Switzerland.
Be aware of the repercussions before purchasing a property
The topic of foreign property ownership is complex and is given only rudimentary treatment in this article. Accordingly, the repercussions of a foreign property purchase for your Swiss tax calculation cannot be distilled into a single figure but should be clarified in the overall context of your individual situation. I recommend that you obtain detailed information about the tax repercussions prior to acquiring a holiday home abroad. That way you will avoid nasty surprises and can enjoy your foreign seaside home to the full.
NB: If you also have a bank account abroad, don’t forget that this should also be declared in your tax return.