Swiss Federal Council Proposes Tightening of Lex Koller
The Swiss Federal Council presented its proposal for a revision of the Swiss Federal Law on the Acquisition of Real Estate by Foreigners (BewG, so called Lex Koller) on 10 March 2017 and thereby opened the legislative process by consultation.
Despite already having been rejected by parliament two years ago, the proposal includes the prohibition for foreigners to buy shares in listed Swiss residential real estate companies and the prohibition for foreigners to buy commercial properties, other than for own use. At least, it is good to see that the Swiss Federal Council does not actually propose to implement these two prohibitions but only puts them up for (re-)discussion. What parts of that proposal, if any, will eventually make it into the Lex Koller is completely open and remains to be seen in the approximately three years that this legislative process will take.
The Swiss Federal Council put up a proposal for discussion, which has just two years ago been rejected by parliament, namely the prohibition of foreigners to acquire Swiss commercial properties, except for self-use. Today, Swiss commercial properties are excluded from Lex Koller and therefore foreigners are free to acquire and rent-out such properties. Independent studies have already warned from the economic effect of such proposal.
Residential Real Estate Companies
Here again, the Swiss Federal Council raised the question in the consultation proposal whether the acquisition of listed shares in residential real estate companies shall be prohibited again, as it was the case before 2005. This is surprisingly, since the very same topic was already rejected by Swiss parliament in 2014. At least, this prohibition is not actually proposed by the Swiss federal Council but rather only put up for discussion.
The prohibition is proposed to be subject to international free trade agreements, which is in theory a nice concept but will not work in reality. It is the nature of any stock exchange transaction that everyone can buy shares without complicated and time consuming Lex Koller procedure in between two trades.
Change in Use
Under the proposal, a conversion of a commercially used property into residential use shall be prohibited if the owner of the property is foreign or foreign-controlled. However, such conversion would already be prohibited as misuse under the current Lex Koller rule. Compliance with the new restriction shall be checked by the authorities responsible for the issuance of building permits. This would create additional formalities and delays in the building permit process.
The Swiss Federal Council proposes to restrict the acquisition of mixed-use properties by foreigners to such properties that under local rules require a minimum residential use of up to one third of the floor space. Today, in some cantons it is possible to acquire mixed-use properties with up to 50% minimum residential use.
Majority of Executive Body to be Swiss
Under the proposal, a company shall be presumed to be foreign controlled, if the majority of members of the executive body are foreigners. So far, the composition of the executive body a company did not matter under Lex Koller. The proposal, thus, introduces additional formalities, delays and cost in an acquisition process. It is also not clear which corporate bodies are actually meant by “executive body” as management functions can be delegated and whether in such case the majority rule applies to each corporate body.
Real Estate Funds
The Federal Council wants to restrict the possibility of foreigners to acquire units in Swiss residential real estate funds, by requiring that such units be listed at a Swiss stock exchange. Currently foreigners can also acquire units in Swiss residential real estate funds if the relevant units are traded off-marked on a regular basis. Should that proposed restriction come into force, a number of Swiss residential real estate funds would have to list their units at a Swiss stock exchange.
Under current Lex Koller rule a real estate fund is deemed foreign-controlled if the fund manager as well as the asset managers are foreigner or foreign-controlled. The proposal wants to tighten that cumulative requirement. As a result, a real estate fund shall already be deemed foreign-controlled if either the fund manager or the asset manager are foreigner or foreign-controlled.
Restriction on Cross-Border Mortgage Lending
Under the current Lex Koller, banks and insurance companies with domicile abroad but authorized to do business in Switzerland are allowed to acquire residential property which they had mortgage financed in a debt enforcement process. This is an important right to ensure these lenders can protect their interests in case of a distressed auction sale where there are no sufficiently high bids to cover their claims. In such instance the lender can acquire the residential property itself and subsequently sell it in a non-distressed structured way. Under the proposal, foreign banks and insurance companies could no longer benefit from the above exception in cross-border mortgage lending but would have to do their mortgage lending through a Swiss subsidiary.
At the level of individuals the Swiss Federal Council proposes that the acquisition of residential real estate by non-EU/EFTA citizens without residency permit (C-permit) would only be allowed under the condition that the relevant property would have to be sold within two years from giving up that property as the actual and primary place of residence.
The contribution of a Swiss residential property into a trust shall only be permissible if none of the trustees and no beneficiary is a foreigner or foreign-controlled. This proposal would largely be the codification of the existing practice. It would actually be a good opportunity to clarify that a Swiss co-trustee should be allowed to hold Swiss residential property if under the relevant trust deed the foreign co-trustee does not have any controlling or financial rights with respect to that part of the trust assets.
The Swiss Federal Council further proposes several technical changes to the Lex Koller approval and enforcement processes. As the only liberalization contained in the proposal, the acquisition of units in residential cooperatives by foreigners shall be permitted.
No retroactive effect
The proposal, if accepted by parliament and not overruled by a referendum, would only have effect as from its entry into force which will likely only be in approximately three years. It would not have retroactive effect which means that ownership in residential property owned at that time would be grandfathered.