Voluntary Disclosure Due to Property Abroad or the Automatic Exchange of Tax Information?

The exchange works in both directions and also affects persons living in Switzerland with assets abroad

It is often forgotten that Switzerland will not only provide information to foreign countries, but that from 1 January 2018 on, Switzerland will also receive information from abroad. Thus, persons living in Switzerland who have an undeclared foreign bank account are, from 1 January 2018 on, subject to the risk of disclosure. It is important to know that persons residing in Switzerland are under an obligation to disclose all of their worldwide assets and income.

Foreign real estate must be declared in Switzerland even if it has been properly taxed abroad

And yet, many taxpayers are not aware of the fact that they must also declare their foreign real estate in Switzerland. Because their real estate is already being taxed abroad, many taxpayers mistakenly assume that they have fulfilled all of their declaration obligations. However, this is not the case. Persons with their center of vital interests in Switzerland must declare their foreign real estate in their Swiss tax returns even if the real estate is already being properly taxed abroad. Although Switzerland is not permitted to tax foreign real estate directly, it is allowed to use the real estate’s value as well as its income, including its imputed rental value, to determine the applicable tax rate in Switzerland. Foreign real estate is thus used to determine the level of progressive taxation in Switzerland. For example, if an Italian citizen with her place of residence in Switzerland owns real estate in Italy, she is obliged to declare her real estate, including her income or imputed rental value, in her Swiss tax returns – even if the real estate has always been properly declared and taxed in Italy. If she fails to do so, the level of progression in Switzerland cannot be determined correctly, and the Italian citizen commits tax evasion, which is punishable by a fine.

Voluntary disclosure can avoid legal consequences relating to tax evasion

What has to be done? In Switzerland, as in our neighboring countries, taxpayers have the possibility to rectify their tax evasion through voluntary disclosure. Thus, if the Italian citizen discloses her Italian real estate to the tax authorities, and the tax authorities did not yet know about the tax evasion, she can avoid a fine and criminal liability. The tax authorities may only tax assets retroactively for a maximum of ten years. In addition, the Italian citizen will need to pay interest on the supplementary taxes, but will also be able to deduct the interest in her tax returns. Because foreign real estate is only relevant for determining the level of tax progression in Switzerland, it must further be examined whether the tax evasion is within a certain “tolerance range”, in which case the tax authorities will refrain from levying taxes on the real estate for the past ten years. Within this tolerance range, it is sufficient if the Italian citizen simply declares her Italian real estate properly in her tax return. If the evaded taxes exceed the tolerance range, however, there is no other possibility to avoid a fine than voluntary disclosure. Thus, if a taxpayer owns undeclared assets, a detailed assessment of the further course of action is highly recommended, even if foreign real estate has been properly declared and taxed abroad.