Roland M. Müller, Lukas Heckendorn Urscheler Law Firm and City/Country: VISCHER Attorneys at Law, Basel and Zurich, Switzerland

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1 IBA REAL ESTATE COMMITTEE REAL ESTATE IN A NUTSHELL: SWITZERLAND OWNERSHIP/RESTRICTIONS ON OWNERSHIP BY NON-RESIDENTS Name: Roland M. Müller, Lukas Heckendorn Urscheler Law Firm and City/Country: VISCHER Attorneys at Law, Basel and Zurich, Switzerland Address: rmueller@vischer.com 1. Is local authority s permission generally mandated for non-residents to acquire real estate? If so, please outline the general requirements in order to obtain permission. In Switzerland, the acquisition of real estate by persons abroad is governed by the Federal Law of 16 December 1983 on the acquisition of real estate by persons abroad ("FL") as well as by the Ordinance of 1 October 1984 on the acquisition of real estate by persons abroad. According to the FL, requirement for permission depends on nationality as well as on residence. Generally, permission is required under three conditions: The person acquiring real estate is a person abroad within the meaning of FL; The real estate subject to the transaction is or will be used in a way requiring authorization according to FL; and The transaction amounts to an acquisition of real estate within the meaning of FL. Concerning the first condition, the following persons are persons abroad within the meaning of FL: 1) foreigners (not Swiss citizens) domiciled abroad as well as foreigners domiciled in Switzerland not holding a valid C settlement permit (or not entitled to stay in Switzerland for 5 years or more) who are not nationals of a European Community or European Free Trade Association member state; 2) legal and factual entities able to acquire property that have their registered office abroad or which are controlled by persons abroad. All other persons are free to acquire property without permission. Concerning the second condition, the requirement of permission depends on the use of the real estate. The FL establishes the conditions under which no permission is necessary. Mainly three cases are noteworthy: First and most importantly, no permission is required if the acquired real estate is used for business purposes (permanent establishments such as manufacturing premises, warehouse facilities, offices, hotels, and others, but not residential renting or leasing). It does not matter whether the purchaser himself or any other person use the real estate for business purposes. Thus, a person abroad can acquire property as capital investment as long as the person renting and occupying it uses it for business purpose and not as residence. Second, the purchaser (natural person) domiciled in Switzerland who occupies the property as main residence himself will not require permission. Finally, nationals of EC or EFTA Member States who commute in Switzerland do not require an authorization for acquiring a secondary residence in the area of their place of work. In all cases, the acquisition of undeveloped land in residential, industrial or commercial zones is not subject to authorization if work on a building for which no authorization is required will start within approximately one year. Besides some minor exceptions, permission is necessary for all other use. Concerning the third condition, FL defines very broadly the entitlements for the acquisition of which permission is required. Permission is necessary mainly for acquisition of property ("Eigentum"), leasehold ("Baurecht"), occupancy ("Wohnrecht") and usufruct rights

2 2 ("Nutzniessung"), but also for the acquisition of shares in a legal entity, the real purpose of which is the acquisition of real estate subject to permission, as well as generally for the purchase of any other right putting the buyer on the same footing as the owner of a property (e.g. financing). In addition, even the transfer of the statutory or factual domicile of a local company abroad is regarded as acquisition of property, if the company keeps its rights or interests in real estate subject to permission. Thus, generally speaking, acquisition of real estate by persons abroad requires permission unless the real estate is used as main residence or for business purposes. FL establishes several other exceptions. The most important one concerns the acquisition of property by ways of succession (legal heirs). According to FL, permission is granted under the following conditions: 1) If the real estate serves as capital investment of an insurance company admitted in Switzerland to the extent that the combined value of all real estate of the buyer does not exceed the actuarial reserves deemed necessary by the insurance regulatory authority; 2) if the real estate is either used for pension scheme operations benefiting personnel employed in Switzerland or serves exclusively charitable purposes, in case the buyer is exempted from direct federal tax; 3) if the real estate is encumbered with a real-estate mortgage in the favor of foreign banks and banks under foreign control with a permit to operate in Switzerland as well as insurance companies and the purchase is part of a foreclosure or a liquidation settlement. In addition, the federal units of Switzerland (cantons) can provide for further grounds for permission within the framework of FL. If cantonal legislation allows, a person abroad can acquire real estate 1) for the construction of subsidized (social) housing in places where housing is lacking 2) as secondary domicile for a physical person at a place, to which this person has exceptionally close ties worthy of protection, for the duration of this link, or 3) serving as holiday homes or serviced flats within the frame of the cantonal contingent. The federal government fixes the cantonal quota on an annual basis (total annual quota of 1,500 authorizations, December 1, 2007). In case the (Swiss or foreigner) seller of a secondary residence will suffer hardship because of the lack of cantonal regulations authorizing the sale, federal legislation allows for authorization on the ground of hardship. It is however necessary that the vendor is in financial difficulties and the dwelling has been offered for sale unsuccessfully at cost to persons not requiring authorization. Despite of these reasons, the cantonal authority will refuse issuing permission if 1) the real estate serves as inadmissible capital investment, or 2) its size exceeds the necessary amount for the purpose, or 3) the buyer has previously tried to circumvent the law, or 4) a close relative of the buyer already owns a holiday home in Switzerland, or 5) nationalpolitical interests speak against such a permission. In addition, cantonal legislation can restrict the acquisition of holiday homes in several other ways. Thus, to a certain extent, conditions and requirements might vary from one canton to another. 2. If the local authority s permission is mandated, please briefly outline the following: 2.1. What is the triggering event related to filing of application and what is the deadline for filing? The applicant acquiring real estate in Switzerland has to file an application the latest after concluding the contract or, in case there is no contract such as succession by nonrelatives, after acquiring the property. Contracts on the transfer of property involving persons abroad are therefore generally concluded subject to the necessary permission. No entry in the Land Registry or Commercial Registry can take place without legal authorization. As the ownership of real estate is, in most cases, legally invalid without an entry in

3 3 the Land Registry, an application is necessary for the acquisition of real estate ownership. In case of transfer of shares, the latest possible moment is the conclusion of the contract. As soon as non-residents are involved in a transaction on real estate, it is common to apply for a decision by the authority indicating that the transaction does not require permission even if the transfer is not subject to permission. Only in case the local authority establishes the requirement for permission, application for permission will be filed. In some cases, however, the Land Registry will accept confirmations by a notary public or an auditor By whom and to which authority/authorities the application must be made? The purchaser has to file an application with the competent cantonal authority. In each of the 26 cantons, a different authority is competent. In addition, within a Canton, the competent authority might be the authority of a district. In the canton of Zurich, for instance, the District council is competent; in Geneva, the Department of Economics and Health of the Canton of Geneva; in Basel-Town, the Economic and Social Department What documents must be attached to the application? The law does not explicitly require the submission of any specific document. The authorizing authority can require information on any relevant fact. Generally, the requirements for permission indicate the documents to be attached. Thus, the application should contain information on the relevant real estate, the purpose of the acquisition as well as, in case of legal persons, information on the purchaser (e.g. its business (bank, insurance company), identity of shareholders, financing structure, accounts, financial statements) and related decisions by Swiss authorities, if applicable (i.e. insurance regulatory authority, tax authority, banking authority). In addition, it is generally necessary to attach documentation on the ways of financing the transaction What are the deadlines for authority/authorities to resolve on the application and what is the typical timeframe for resolving the application? Depending on the complexity of the case, the authority should resolve on the application within four to six weeks. In exceptional cases, it is however possible that the proceedings take up to three months Is there a right of appeal against the authority s decision and if so, who is entitled to appeal and whether the appeal has a suspensive effect? The contractual partners as well as other persons with a valid interest in lifting or amending a ruling by a cantonal body of the first instance have the right to appeal against the ruling. On the cantonal level, there is an appeals body, against the decision of which an appeal is possible with the Swiss Federal Court. Besides the contracting parties, the Federal Office of Justice, the municipality in which the real estate is located as well as the cantonal authorizing body have a right to appeal. The appeal has to be filed within 30 days of the first decision. The appeal procedure in the first instance is governed by cantonal law What circumstances are likely to lead to negative decision of the authority in the practice? Any circumstance indicating that the conditions for obtaining permission are not given is likely to lead to a negative decision by the authority. In practice, once control or influence by a person residing abroad is established, use of real estate for other reasons than a commercial exploitation, especially for housing, is probably the most frequent case leading to a negative decision of the authority. As acquisition of housing is admissible only within a restricted framework, court practice indicates that there is generally more controversy around the issue whether a transaction is subject to permission or not than on the

4 4 granting or refusing permission. Most controversial are transactions with companies owning partly commercially used real estate and partly real estate used for residential purposes. The lack of information on the finances for a transaction frequently leads to the refusal of a decision declaring that no permission is necessary What are the consequences if the filing is not made or if the filing is late? There are criminal as well as civil sanctions in case application for permission is not filed. On the civil level, a transaction requiring but lacking permission is void. In order to effectively implement the requirement of permission, the Land Registry or the Registry of Commerce will refuse registering any transaction for which the requirement of permission cannot be excluded until the purchaser obtains permission or a decision according to which he does not require permission. As ownership of real estate requires entry in the Land Registry in most cases, the transaction will be void without permission, i.e. the purchaser will not acquire any legal property right. In such a case, the seller will have to return money received in view of the sale, unless the money was paid with the intention to circumvent the restrictions on acquisition of real estate by persons abroad. In case of legal entities, failure to obtain a required permission can have even more farreaching consequences. Legal entities aiming at concealing the requirement for permission (i.e. founded in order to make it possible for persons abroad to acquire real estate without permission) have been declared void, and their assets were transferred to the community. On the criminal level, the person who performs a transaction, which is invalid due to the lack of permission, will be liable for a fine up to CHF 100'000 or imprisonment if he/she acts intentionally, or for a fine up to CHF 50'000 if he/she acts negligently. In case of violation by a professional, the punishment will be imprisonment of at least 6 months. Published cases mostly concern transfer of shares or fiduciary transactions, as the performance of most other transactions depends upon entry in the Registry. In addition, persons intentionally providing incorrect data relevant for obtaining or refusing permission to a competent authority or to the Registry will be liable for three years of imprisonment or fine. Giving wrong information negligently might still lead to a fine of up to CHF 50' The same two punishments apply for intentionally or negligently failing to comply with requirements and orders by the authorities. Finally, the person who violates a duty to provide information or to hand-in documents to competent authorities according to FL will be punished with fine up to CHF 50'000, unless in cases of legally recognized professional secrets. 3. Are there any specific restrictions or requirements imposed with respect to acquisition of real estates by a local company in which a non-resident holds an interest? Yes. As soon as legal entities with their legal and physical office in Switzerland are controlled by persons abroad, they are regarded as persons abroad in the sense of the FL and therefore require permission for the transactions mentioned under 1). According to the FL, there is a presumption of control by persons abroad when more than one third of a company's capital or voting rights are in the hands of a person abroad or when a person abroad has loaned substantial sums to the company, or if the person abroad can influence the company to a significant extent. In addition, fiduciary transactions by Swiss companies on behalf of persons abroad equally require permission. 4. Does change of control in a local company affect its ownership of real estate if the control is acquired by a non-resident? In case a local company's aim factually consists in the acquisition of real estate requiring permission, already the acquisition of shares (without actually acquiring control) is subject

5 5 to permission according to FL. Permission is not necessary if shares are listed on a stock exchange in Switzerland. In the other cases, a transaction leading to a change of control requires permission according to the general rules (see 1.). In case of non-application by the purchaser after the conclusion of the contract, the contract will be void and the parties criminally liable (see 2.7). For other local statutory or factual legal entities, change in control in a local company might affect its ownership of real estate if it amounts to a takeover of the company. For this reason, the Registry of Commerce has the same duties as the Land Registry. 5. Are there any types of real estates which solely by virtue of their quality (e.g. agricultural land) cannot be acquired by a non-resident or by a local company in which non-resident holds an interest? No. However, the acquisition of agricultural land is subject to strict conditions (generally requiring farming by the purchaser on the land) for both, residents and non-residents. National security alone is not anymore a reason to exclude the acquisition of property by residents, though it is still possible to refuse permission in case the transaction goes against national-political interests. 6. Is there any type of foreign exchange regulation that might affect a non-resident acquiring real estate? No. 7. Is there any type of regulation concerning the lending of money to finance acquisition of real estate? Are the rules different between residents and non residents? Yes. In case a person abroad acquires substantive influence on a local company due to a loan, the person abroad is deemed to have control over the local company. Thus, any acquisition by this company of habitable real estate requires permission according to FL. 8. What (if any) reporting requirements apply to the acquisition of real estate by a nonresident or by a local company in which a non-resident holds an interest? Besides the reporting to the Land Registry, which is required for the transactions to become legally valid, and the tax related filings, no specific reporting requirements apply. 9. Are there any specific taxes, stamp duties, fees or charges of any kind levied solely when (i) a non-resident acquires real estate; or (ii) a non-resident acquires an interest in a local company owning real estate; or (ii) a local company in which nonresident holds an interest acquires real estate? Yes. For permits according to the FL, the cantonal authorizing body will generally levy a fee. In Basel-Town, this fee can amount up to CHF Concerning taxes, different mechanisms aim at ensuring actual payment by nonresidents. According to the Federal Law on Direct Taxes, the tax authority can require security for the tax due by non-residents at any moment, even before the amount of tax is definitely established. In some cantons, the canton has a statutory lien on capital gains tax if the seller is not residing in Switzerland. 10. Are there any other issues of relevance that may affect acquisition of ownership by non-residents? The Swiss parliament currently discusses completely abolishing the restrictions on the acquisition of property by persons abroad. However, even if the parliament decides to abolish the current law, the process is likely to take some time. It cannot be excluded that a parliamentary decision would be submitted to popular vote. Thus, on the short and probably even mid-term, it is unlikely that the current regulations will change substantially.