Operating requirement when converting a sole proprietorship (real estate portfolio) into a corporation

The transfer of taxable business assets to a legal entity is tax-neutral, provided that cumulatively (i) the tax liability in Switzerland continues to exist, (ii) the values previously relevant for income tax purposes are transferred, (iii) the transferred business assets constitute a business or part of a business and (iv) the participation or membership rights in the acquiring company are not sold during the five years following the conversion. For the qualification of real estate as business assets and the relevant indications, please refer to our article dated October 31, 2025 on "Commercial real estate trading".

A so-called real estate business exists if cumulatively (i) there is a market presence, (ii) at least one person is employed in the company to manage the real estate (i.e. one full-time position for purely administrative work) and (iii) the rental income is at least 20 times the normal market personnel expenses for real estate management.

In practice, the requirement of market presence is rarely the critical criterion. Rather, however, it is required that the person employed in the company for administrative work or for the management of the real estate (or alternatively the activity outsourced to a real estate management company) must generate personnel expenses of at least CHF 80,000 p.a. (previously: CHF 100,000 p.a.) in accordance with current/new Zurich practice. Depending on this, the annual rental income must amount to at least CHF 1.6 million (previously: CHF 2 million). However, it should be noted that this rental income may not come from a single or very few rental agreements, as otherwise the administrative expenses are not met in quantitative terms.

Particularly in connection with upcoming succession planning, it is recommended to deal with the (tax) consequences at an early stage. Advantageous structuring can lead to considerable tax savings and avoidance of social security contributions. It is strongly recommended that the existence of a real estate business (or the qualification of real estate as taxable business assets) be clarified in advance by means of a ruling with the tax authorities. In addition, a tax ruling can also be used to prove to the land registry offices that the restructuring is tax-neutral and that the lower restructuring rates are therefore applicable.

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