Business property: how should it be owned?

Holding the business property with the operating business

There are a number of advantages to holding business property together with the business:

1. Current expenses (mortgage interest and property maintenance costs) are generally lower for the company than when the real estate is leased to another company;
2. The company has full control over the property and there are no risks associated with the termination of the lease (particularly in the event of major investment by the lessor).
3. The balance sheet structure is more solid, making it easier to grant a line of credit for operating activities should this prove necessary.

... and a few disadvantages:

1. A significant amount of cash is tied up in the property (cash not available for operating activities).
2. The property is included in the bankruptcy estate if the operational business is no longer functioning.
3. This type of holding makes the structure much heavier in the event of the company being sold or transferred.

Holding the business property in a separate company

Considering the advantages and disadvantages, it is not uncommon for an entrepreneur to decide to hold the operating property in an entity that is legally separate from the one that carries out the operational activity.

Nothing could be easier if the acquisition has not yet been made. All you have to do is set up a dedicated limited company to acquire the property.

But what if the property and the business are already owned by a single company?

Generally speaking, tax laws allow restructuring to be carried out without any tax impact, provided that certain conditions are met. However, when it comes to moving property, the conditions are much more restrictive.

Company demerger

By way of example, here is an illustrative diagram of a commonly wished-for or envisaged restructuring, the demerger (separation) of a limited company:

In this configuration, tax laws require that the property transferred to the new company can be considered as a business in the tax sense of the term. In order for this to be the case, the following conditions in particular must be met by the company that will own the property after restructuring:

• Participation in the market or the property is let to group companies;
• The company employs or appoints at least one person to manage the property (one full-time job for property management work);
• Rental yields are at least 20 times higher than the cost of employing market staff to manage the building.
• In practice, this means that rental yields must be at least CHF 1 million per year to meet these conditions. It is therefore relatively rare to be able to "move" a property into a new limited company without generating tax consequences through a demerger.

Other types of restructuring
However, other types of restructuring, which are more complex to implement, could still achieve the desired end result. An example would be the transfer of assets and liabilities in a group of companies. However, this type of restructuring would require the prior interposition of a new company (holding company) between the shareholder (an individual) and the historical company:

In this configuration, the new structure could be achieved without generating any tax costs. However, this "free ride" comes at a price. Restructuring of this kind generates certain lock-up periods (of 5 years) on the shares of the companies as well as on the assets transferred. It must therefore be carefully planned. In addition, it would deprive the shareholder of the realisation of a private tax-exempt capital gain if the operating company were eventually resold. It is therefore a transaction that should not be taken lightly.

Conclusion

When buying a property, the first question to ask is WHO is going to buy it (the operating company? its shareholder? a new company to be set up?). Making the right choice at the time of acquisition often avoids the need for restructuring in the future.
If, however, the acquisition has already been made and it is now necessary for the entrepreneur to separate the property from the business, tax-neutral restructuring is always possible or conceivable. However, it is vital to anticipate such steps, particularly if they are carried out with a view to transferring or selling the operating company, so as to be able to manage any deadlines.

Anticipation and sound advice are therefore the watchwords when it comes to property, whether at the time of purchase, sale or when planning a transfer.