Maximizing Your Earnings: A Closer Look at VAT on Holiday Home Rentals in Switzerland

Many individuals and families decide to invest in a second home or holiday home in Switzerland. If this applies to you, or if it’s something you’re considering, it’s important that you understand the associated tax implications. In this article, we explore the different taxes which apply to second homes in Switzerland, including income tax, value-added tax (VAT), capital gains tax, and real estate transfer tax. We will pay special attention to the VAT liability which arises due to renting a holiday home.

Why invest in a second home?

Switzerland is a beautiful country renowned for its picturesque landscapes and interesting cultural heritage. It is a popular destination for both domestic and international tourists. The result is that it has become an increasing trend for families to own what is referred to as a “holiday home”.

A second home is a property that an individual or family owns or rents in addition to their primary place of residence. It could be a second place of residence, a detached house, or a holiday apartment. A holiday home is primarily used as a vacation or recreational property for the owners to use intermittently.

Owners of a second home may decide to keep it empty and use it only intermittently for their own purposes, or they may primarily rent it out to tenants, or both. All this has specific tax implications which are important to understand.

Can you always build a second residence in Switzerland?

In short, the answer is no. You may not always be entitled to freely build a second residence in Switzerland. The Second Homes Ordinance came into force on 1st January 2013, which partly aimed to “end the endless construction of second homes”. The ordinance limits the construction of second residences in municipalities where there is a second home share of more than 20 percent. In these locations, second residences are subject to special approval.

The Swiss Federal Law on Spatial Planning aims to control the construction of secondary residences to preserve the balance between permanent housing and vacation properties. The main purpose of these regulations is to avoid the increasing number of “cold beds” in Switzerland (houses which are only occupied for a short period each year). The Second Homes Act is explicitly directed towards residential properties. For those who want to build another home in a municipality with strict second homes regulations: One way to overcome this obstacle is to move your main residence to the jurisdiction, and therefore keep your former residence as your “second home”. This means that you will have to pay your taxes in the newly registered jurisdiction, which could be beneficial or not depending on the specific canton in question.

What taxes are due on a second home?

When you decide to invest in a second home in Switzerland, you become liable to pay the various required taxes. It is important to be clear about these obligations to ensure compliance with local tax regulations in the canton where the house is located.   

A second home and a specific so-called “holiday home” are treated identically for tax purposes, which is similar to the tax treatment of a primary residence. However, there are some particular factors to be aware of when it comes to the tax considerations of a second home.

The following are some of the key taxes associated with second homes in Switzerland:

Income tax on rent received

If you rent out your second home, the income generated from rental payments is subject to normal income tax. The rental income is added to your overall taxable income, and the applicable tax rate is determined based on the total income earned.

The income tax on the rental of your holiday home is generally paid in the canton where the property is located and not the canton where you reside. The reason is that the taxation of rental income is typically based on the source of income, which in this case is the location of the property itself.

Income tax on the imputed rental value

In Switzerland, if you use your second home for personal use rather than renting it out, the tax authorities will determine an “imputed rental value”. This is calculated according to the hypothetical rental income that you would have received by renting out the property instead of keeping it for personal use. This imputed rental value is then subject to income tax in the same way actual rental income is.

Again, the income tax on the imputed rental value is payable in the canton in which the property is located. The rate varies across cantons, but every canton is obliged to levy a minimum of 60% of the fair market rent. If you rent out your second home for part of the time, no imputed rent is levied over the corresponding period, as you will directly pay income taxes on the actual rent received.

Whether imputed rental value, or actual rent, or both is taxed; you can deduct both mortgage interest payments and maintenance costs from the taxable amount. As such, the tax system benefits those who finance their homes with a higher proportion of borrowed capital.

Value Added Tax (VAT)

VAT is another important tax aspect for holiday homes in Switzerland. Special VAT rules apply to the rental of holiday flats and houses. The letting of holiday flats and/or houses and/or parking spaces constitutes a separate business or part of a business. This is fulfilled if total annual gross rental income (incl. ancillary costs) of more than CHF 40,000 is generated from such rentals. This amount is understood to include VAT. If the turnover limit of CHF 100,000 is exceeded within one year from such holiday flats, this triggers the compulsory tax liability of the private individual or sole proprietorship.  

If the annual rent for holiday flats and houses is below this minimum limit of CHF 40,000, they are not subject to VAT, even if the owner (as a sole proprietor) is subject to VAT on his other turnover. In the case that VAT registration is not mandatory, the owner may opt for voluntary VAT registration for the purpose of claiming input tax deductions. We will discuss VAT considerations in more detail later.

Capital gains tax

When you sell your second home in Switzerland for a profit, any capital gains you realise will be subject to capital gains tax. The tax rate depends on various factors, including the holding period and the canton in which the property is located. When calculating the capital gains realised, any value-enhancing expenses such as renovations, installation of swimming pool or sauna, etc. can be deducted for tax purposes.

Real estate transfer tax

When a property is sold, there is a “change of ownership” tax. The tax rate depends on the purchase price of the property as well as the canton where it is registered. Usually, the transfer tax rate is between 1.5 – 2%, and in some cases up to 3%.

When are you liable to pay tax on your holiday home?

If you are the registered owner of a second home, you are responsible for the associated tax payments. In general, there is no specific tax for second homes as distinct from primary homes, which means the tax calculation will be similar to your first home. This applies to both holiday homes and secondary houses for rental purposes.

The final tax liability depends on several factors. If you rent out the property, you are liable to pay income tax on the rental income received. If you use the property for personal use, you may be subject to income tax on the imputed rental value. The canton’s tax authorities may contact you once you have registered as the owner of the second home in the canton in question.

How much are the taxes on a holiday home?

The tax amount payable on a second residence or holiday home can vary significantly depending on factors such as location, property value, and the specific tax regulations of the canton in which the property is situated. In general, the taxable amount is comparable to that of your primary home; however, there may be additional considerations related to VAT charges and deductions, which we will get to in the next section.

You should always consult with a tax professional or the local authorities to obtain accurate information on the applicable tax rates and deductions specific to your situation.

More VAT considerations

Let us now explore some more aspects of VAT liability which must be considered when you own and rent a second home. As mentioned earlier, there are special VAT provisions which apply to the rental of holiday apartments, which we will now discuss in more detail.

Who must pay VAT?

In general, if the rental of second homes and holiday apartments does not exceed the minimum threshold of CHF 40,000 per calendar year, it would not be subject to VAT. In addition, according to Art. 21 of the VAT Act, the rental of real estate is exempt from VAT.

However, specific real estate dealers and companies may be subject to VAT, which is why it can apply in certain situations. Also, if the property is used commercially for a taxable cause, such as renting out venues for entertainment or catering services, there is a VAT liability.

In addition, it is possible for property owners to voluntarily register for VAT on their real estate if they deem it would be favourable for them. The condition is that the property is not used exclusively for residential purposes by the owner/taxpayer.

Charging VAT and claiming input tax deductions

If the owner decides to register for VAT on the property, they may be liable to pay VAT on the rent received and will therefore also be able to claim input VAT deductions for some of the costs and services which they incur and provide while leasing the property.

In the case of commercial leases (as well as some private leases where the owner has registered for VAT), there is often a clause which stipulates that the landlord has the right to pass on the VAT to the tenant. However, to enforce this clause, a rent increase with a form is needed, which must comply with the VAT and tenancy law regulations. Most importantly, the amount added for VAT must be explicitly shown.

There is usually also an “accommodation service” when renting out accommodation to guests/tenants. These services are subject to VAT at a special rate (currently 3.7%). The following services are considered input cost factors whereby input tax deductions can be claimed at the special VAT rate, irrespective of whether they are included in the price of the guest’s stay or billed separately:

• Room/house cleaning,
• Providing bedding and towels, toiletries, and other basic provisions,
• Use of a television, radio, and other entertainment devices,
• Internet access.

Other ancillary services such as use of parking space, gym, etc. can only be taxed at the special VAT rate if the following conditions are both met:

• The services are provided within the premises and utilised by the guests staying there.
• The services are included in the price of the guests’ stay.

It is important to consult with a tax expert to get a better understanding of the VAT liability applicable to your specific situation if you plan to rent out a holiday home or apartment in Switzerland.