Overview

In a recent decision, the Federal Supreme Court of Switzerland provided important clarification on the taxation of income derived from rental properties and the classification of such properties as business or private assets. The court examined whether rental income from furnished apartments managed by the taxpayers should be taxed as income from self-employed activity or as mere asset management. This ruling sets a significant precedent for future cases involving the rental of furnished properties and their tax implications.

Case background

The taxpayers operate a Hotel and own rental apartments in Zurich. These properties include multiple furnished single-room apartments. The Cantonal Tax Office of Zurich classified the rental income from these furnished apartments as a self-employed activity, assigning the entire property to business assets based on the predominance method. The taxpayers contested this decision, arguing that the rental income should be considered as income from private asset management, thus subject to lower taxation with the purpose of reducing tax liability in the future, upon the sale of the apartments.

Legal proceedings

The case progressed through various legal stages, ultimately reaching the Federal Supreme Court. The key legal questions included whether the rental activity constituted a self-employed business and whether the properties should be classified as business or private assets under Swiss tax law.

Key legal findings

The court upheld the decision of the Cantonal Tax Office and the lower courts, determining that the rental of furnished apartments by the taxpayers constituted a self-employed business activity. The court found significant evidence supporting this classification:

1. Extent and Nature of Rental Activities: The taxpayers rented out a large number of furnished apartments, providing various services such as weekly cleaning and regular linen changes, which went beyond mere property management.
2. Short-Term Rentals and High Turnover: The majority of the apartments were rented out for short durations, with a high turnover of tenants, indicating a business-like operation similar to a hotel.
3. Provision of Additional Services: The services provided, including cleaning and offering amenities like Wi-Fi and slippers, reinforced the classification of the activity as a business.

The court noted that these activities and services were akin to those provided in the hotel industry, thereby justifying the classification as self-employed business income.

Implications of the ruling

The Federal Supreme Court’s ruling clarifies several critical points regarding the taxation of rental income from furnished properties:

1. Classification of Rental Activities: Properties rented out with significant services provided to tenants are likely to be classified as business assets, and the income derived from such activities will be considered self-employed business income.
2. Tax Treatment of Mixed-Use Properties: The ruling reminds the importance of the predominant use of the property and the services offered in determining the tax classification.

Conclusion

The ruling highlights the need for taxpayers involved in renting out furnished properties to carefully consider the nature and extent of their activities to ensure proper tax classification. To navigate these complex regulations and optimize tax outcomes, it is advisable to seek professional tax advice.

For assistance in understanding and applying these tax regulations, please contact contact@axcord.com.