M&A transactionsi Legal frameworks and deal structures
Real estate investments are mainly made via collective investment funds or standard special purpose vehicles (SPVs). Tax considerations usually determine the structure of foreign investment funds, depending on which double taxation treaty with Switzerland applies. Local investors usually acquire real estate directly in their own name, or in a business capacity via SPVs commonly known as real estate companies. The choice between acquiring property through a share deal or an asset deal largely depends on the type of property and the projects contemplated for the property.
The main stages of a real estate transaction are similar irrespective of whether the structure of a share deal, an asset deal or a Transfer of Assets and Liabilities pursuant to the Swiss Merger Act (see below) is chosen by the parties. Typically, a real estate transaction consists of (1) a preliminary phase (includes preparation, tender phase, due diligence, negotiation phase), (2) signing, (3) closing, and (4) an integration phase.
The preliminary phase usually starts with preparations, which include first meetings between seller and potential buyers. Sometimes, confidentiality agreements (NDAs) are signed at this stage. The result of the entering into contact will be the handing-in of non-binding indicative offers (NBOs) by the potential acquirers. Based on the NBOs, the seller will usually identify several parties, with which letters of intent may be concluded, and which will be given access to comprehensive information on the real properties (often by means of a virtual data room) to conduct a due diligence of the objects of sale. After the due diligence, the potential acquirers will hand in a binding offer. In case of a share deal, the due diligence will further cover the company, which is the object of sale and the owner of the real property to be acquired indirectly through the shares.
After due diligence and handing in of the binding offers, the seller will often select a small number of parties and enter into contractual negotiations with these. Eventually, if all stages are successful, there will be a signing of a contract, the closing and the subsequent integration of the transaction. Sometimes, depending on the volume of the transaction and its complexity, and especially if investments are made for the account of indirect investors (e.g., through collective investment funds), transactions are planned in detail and transaction manuals are established. Such manuals will also take into account regulatory requirements, which may significantly impact the timing of a transaction, such as permit requirements pursuant to Lex Koller or other restrictions.
The process deviates from the above in case of a public tender offer, i.e. if an acquirer wishes to take over a public (listed) real estate company. In such a case – provided the takeover is friendly (supported by the board of directors of the target company) – the potential acquirer and the target real estate company usually enter into a transaction agreement and subsequently a public tender offer is launched. The public tender offer must include an offer prospectus, which has to contain all information necessary for the target company's shareholder to be in a position to take an informed decision about the offer. The information in the offer prospectus has to be in line with the minimum content specified by the regulations of the Swiss Takeover Board and must include: the involved persons (particularly the offeror and persons acting in concert with the offeror), the financing of the offer, conditions to the offer and an abstract of the future business plans of the offeror with the target company. The Takeover Board as well as the Swiss Financial Market Supervisory Authority (FINMA) supervise public tender offers.ii Acquisition agreement terms
A basic legal principle of Swiss real estate law is that the creation of rights in rem requires the registration of such in the land registry. Every piece of land has its own file in the land register, which contains various information, particularly the identity of the current owner. Therefore, in asset deals, the transfer of title only occurs with the registration of the acquirer as new owner in the respective file of the land registry. Also, any rights of third parties pertaining to a plot of land must be registered in the land registry to be valid against a third party acquirer. Good faith in the information registered in the land registry is protected, which is why acquirers usually require legalised excerpts from the land registry of the plot(s) of land to be acquired dating from immediately before the acquisition to gain a full picture of the existing third-party rights or other encumbrances (such as easements, mortgages etc.). The registration of a transfer of title in the land registry requires the filing of a public deed at the land registry. Such public deed will have to be established before a notary public, who is only entitled to notarise public deeds in the canton, or depending on the cantonal law applicable, district, where he is competent to do so. Thus, an asset deal regarding several plots of land in different cantons requires the establishment of a public deed in every canton, where a plot is located.
A simplification to this exists for entities, which are registered in the commercial register. Such entities can transfer real property by way of a transfer of assets and liabilities pursuant to the Swiss Merger Act. In a Transfer of Assets and Liabilities, it is sufficient for the parties to establish only one transfer deed before a notary public at the domicile of the transferor, which will then be filed with the commercial register. Apart from bearing significant procedural simplifications, by relieving the parties to travel from canton to canton to have public deeds established and filed with the notary, a Transfer of Assets and Liabilities may also result in cost savings as notary fees can be significant in some cantons. Share deals are not subject to these form requirements.
A result of the requirement of a public deed is that the contract in case of an asset deal is still highly influenced by the drafting of the notaries. In other words, the contractual standard and its clauses have not converged with international standards as opposed to share deals, where Swiss law share purchase agreements regarding the acquisition of companies owning real estate have over the years become similar to contracts of similar deals in other countries.
As regards representations and warranties, Swiss law provides by default that the seller is liable to the acquirer that the object of sale has no physical or legal defects, which eliminate or substantially reduce its value or fitness for use. However, in asset as well as in share deals relating to real property with existing buildings, the parties often exclude the liability of the seller for physical defects and the real property is usually sold 'as seen'.
An important warranty relates to the tenant list, which is usually included as a schedule to the contract (under Swiss law, the leases transfer to the acquirer and the acquirer has only limited possibilities to terminate the leases at transfer of ownership). The warranty usually relates to the accuracy of the information in the tenant list. Further warranties typically found in contracts regarding the transfer of real property relate to the absence (1) of pending or threatening litigation with tenants, neighbours or authorities, (2) of environmental issues (pollution, hazardous substances, etc.) regarding the buildings or the soil, or (3) specific tax warranties.
In case of share deals, acquirers further typically ask for a representation regarding the correct organisation and valid existence, the correct presentation of the financial statements and the title to shares of the target company holding the real property.
The purchase price in real estate transactions is usually fixed. Purchase price adjustment or earn out clauses are rare. A down payment of 10 per cent of the purchase price is common for assets deals, whereas there is typically no down payment in share deals.
Common conditions precedent to closing for real estate transactions are a Lex Koller ruling (see below) on the one hand and waivers of rights of first refusal on the other hand.iii Hostile transactions
So far no hostile transaction relating to listed real estate companies have occurred in Switzerland.iv Financing considerations
In the context of asset deals, real estate transactions are mainly secured by the assignment of mortgage certificates for security purposes and the assignment of rental income claims for security purposes. Security interests by way of transfer of ownership on mortgage certificates for security purposes are extremely frequent in practice. Fund management companies and SICAVs may also use this financing structure. However, regulatory requirements provide that the financing may not exceed on average one third of the market value of all real estate assets. Mortgage financings are further limited by the so called Lex Koller (see Section IV.vi. below) if granted by foreign investors or banks. Foreign mortgage financings are usually limited to 80 per cent of the value of the underlying residential real estate assets; however, the financing of commercial real estate assets is not limited as, since 2002, this type of real estate is no longer encompassed by the Lex Koller restrictions. Assignment of rental claims, insurance claims and bank account claims usually completes the assignment of mortgages for security purposes.
In the context of share deals, financing does not significantly differ from other business transactions. Financing thus occurs by means of equity or debt. Furthermore, the buyer sometimes aims to (partly) finance the purchase price from the target's assets.v Tax considerations
The sale of directly held real estate property located in Switzerland (asset deal) generally triggers similar Swiss income tax consequences for both real estate funds and real estate companies. Applicable tax rates may however vary depending on whether a real estate fund or a real estate company is selling the property.
It should in this respect be noted that real estate funds are treated as non-transparent for Swiss income tax purposes with respect to any profits from direct real estate investments in Switzerland (such profit for example includes rental income as well as capital gains). In respect of these profits, the real estate fund as such is subject to Swiss income taxation. At the same time, these profits are generally exempt from Swiss income taxation at the level of the fund investors. Different from that, other income of the real estate fund is generally not taxed at the level of the real estate fund but directly allocated to the investors from a Swiss income tax point of view (tax-transparency).
Real estate companies are generally treated as opaque for Swiss income tax purposes. Hence, same as for real estate funds, the real estate company is generally subject to Swiss income taxation with respect to profits arising from an asset deal. Such profits may also be subject to income taxation upon distribution at the level of the shareholders.
As mentioned, the asset deal is therefore in principle taxed at the level of the real estate fund or the real estate company for Swiss income tax purposes but typically not at the level of the fund investors/shareholders. Capital gains are insofar generally subject to corporate income tax at federal level. At cantonal level, capital gains from an asset deal are taxed differently depending on the location of the Swiss property. In dualistic cantons (e.g., Geneva), capital gains from asset deals are generally subject to corporate income taxes only. In monistic cantons (e.g., Zurich), however, the part of capital gains corresponding to recaptured depreciations is subject to corporate income tax (i.e., the difference between the investment costs and the book value), whereas the remaining part of the capital gains is subject to a special real estate capital gains tax (i.e., the difference between the sale price and the investment costs).
An asset deal is usually subject to real estate transfer taxes, notary fees and land register fees. Furthermore, an asset deal is generally considered as a VAT-exempt turnover with no right to input VAT deduction. However, under certain conditions, the seller may elect to levy VAT on the sale price or to apply a notification procedure. An election for VAT may allow the owner of the plot to recoup input VAT paid on construction costs (so-called input tax deduction).
Distributions by Swiss real estate funds to their investors are generally subject to Swiss withholding tax of 35 per cent. However, distributions of profits resulting from asset deals (i.e., resulting from direct real estate investments in Switzerland) are exempt from such Swiss withholding tax upon distribution by a Swiss real estate fund. Distributions by Swiss real estate companies are generally subject to Swiss withholding tax of 35 per cent as well whereby no exemption similar to Swiss real estate funds exists with respect to distributions of profits resulting from asset deals. Investors may (partially) reclaim Swiss withholding taxes based on Swiss tax law or applicable double tax treaties.
In case of the sale of shares of a real estate company respectively the units of a real estate fund with direct real estate property investments in Switzerland (share deal respectively fund unit deal), generally no Swiss income tax consequences arise at the level of the real estate company or the real estate fund. Generally, Swiss private investors/shareholders achieve an income tax-free capital gain in a share as well as a fund unit deal. A share deal as well as a fund unit deal generally triggers Swiss income tax consequences for Swiss corporate investors/shareholders whereby participation relief may apply allowing to (significantly) reduce the Swiss income tax burden. Foreign investors do generally not become subject to Swiss income tax solely as a result of disposing of shares or fund units in a share deal or a fund unit deal (however see below comment with respect to potential real estate capital gains tax consequences).
In certain cantons (typically in monistic cantons), a share deal may trigger the special real estate capital gains tax at the level of the shareholders as well as the real estate transfer tax usually at the level of the buyer (so-called economic transfer of property). However, typically (but not necessarily), 50 per cent or more of the shares of the real estate company need to be disposed of in order to fall into the scope of such economic transfer of property. Similar tax consequences may potentially apply at the level of fund investors in case of a fund unit deal. To the extent the special real estate capital gains tax applies, such tax would generally be secured by a legal lien on the Swiss property same as an asset deal.
With respect to foreign private and corporate investors/shareholders of real estate companies and real estate funds, the specific cantonal tax laws and particularly the applicable double taxation agreements determine whether Switzerland is indeed entitled to levy any real estate capital gains tax (or potentially income tax) in case of a share or a fund unit deal.
A share deal as well as a fund unit deal may be subject to Swiss transfer stamp taxes if a Swiss or Liechtenstein securities dealer for purposes of Swiss securities transfer stamp tax is involved as party or an intermediary to the transaction and no exemption applies.vi Cross-border complications and solutions
According to the Kex Koller, the acquisition of real property in Switzerland by a so called person abroad (inter alia EU/EFTA citizens who are not resident in Switzerland, non-EU/EFTA citizens not holding a C permit or any legal entity that is domiciled abroad or controlled by persons abroad) is restricted as a matter of principle. While commercial properties (e.g., offices, restaurants, retail, etc.) can be acquired with no (or few) restrictions, residential properties can only be acquired if an authorisation is issued. In practice, authorisations to acquire residential properties are granted on very limited grounds. Restrictions affecting real estate assets used for commercial purposes concern commercial premises that are empty, that contain residential parts or areas, or that are acquired in anticipation of a company's expansion in the short or medium term (but with no concrete plans to build at the time of the acquisition).
An acquisition within the meaning of the Lex Koller can be both an acquisition of a plot of land (asset deal) and the acquisition of an interest in a real estate company (share deal), provided that the shares in the relevant legal entity are not listed on a Swiss stock exchange. Shares in a real estate company listed on a Swiss stock exchange can thus be purchased without an authorisation. In practice, (non-listed) holding companies often face a situation in which a company owns, as part of its assets, one or two residential buildings. Some cantons allow a company whose purpose is an operational one (e.g., to run an industrial plant or a hotel) to own, among its assets, up to 30 per cent of non-commercial (residential) real estate assets. The reference value for calculating this 30 per cent threshold is the market value of the real estate asset. Applied to holding companies, the 30 per cent threshold is calculated on a consolidated basis, that is, on all real estate assets owned by the holding company's subsidiaries. Since cantons are entrusted with the responsibility and power to apply and ensure compliance with the Lex Koller, the local practice must be checked prior to every transaction.