Acquisition of real estate by foreigners

Switzerland, with its idyllic landscape and economic stability, attracts many foreign investors wishing to acquire real estate on its territory. However, this acquisition is strictly regulated by specific legislation known as the “Lex Koller”. Formally known as the Federal Act on the Acquisition of Real Estate by Persons Abroad (LFAIE), this regulation is a control mechanism designed to limit the purchase of property by non-residents. Introduced in the 1960s, the Lex Koller is a fundamental pillar of Swiss real estate law. It establishes a complex legal framework that determines who can buy what, where and under what conditions. Understanding this legal framework is essential for any foreigner contemplating a real estate investment in Switzerland, or for any professional involved in such transactions.

Historical foundations and objectives of the Lex Koller

The history of the Lex Koller dates back to the 1960s, a period marked by growing concerns about foreign influence on the Swiss real estate market. At that time, there was a significant increase in real estate acquisitions by foreigners, mainly in tourist areas. Faced with this situation, the federal authorities decided to intervene to preserve the national heritage.

The first restrictive measure was the Federal Decree of March 23, 1961, known as the “Lex von Moos”, after Federal Councillor Ludwig von Moos. This decree introduced the obligation to obtain authorization for the acquisition of real estate by persons abroad. Initially a temporary measure, it was extended several times in response to continuing concerns.

In 1983, this provisional regulation was replaced by a permanent law, the Federal Act on the Acquisition of Real Estate by Persons Abroad (LFAIE), commonly known as the “Lex Friedrich”. This law strengthened the authorization system and specified acquisition conditions. It was subsequently amended in 1997 at the instigation of Federal Councillor Arnold Koller, giving rise to the “Lex Koller” as we know it today.

Main objectives of the legislation

The Lex Koller pursues several fundamental objectives that reflect Switzerland’s social and economic concerns:

• Preventforeign encroachment on Swiss soil, considered a limited and precious resource
• Maintain a balanced real estate market by avoiding excessive price pressure from foreign demand
• Preservingaccess to housing for the local population
• Protect natural landscapes and architectural heritage from excessive urbanization
• Ensuring rational land use in accordance with the principles of spatial planning

Over the decades, the Lex Koller has undergone various adaptations in response to changing economic and political circumstances. In particular, the entry into force of bilateral agreements with the European Union led to adjustments for European nationals. Similarly, the increasing globalization and internationalization of real estate markets has necessitated regular updates to the legal framework.

Despite these developments, the underlying philosophy of the law remains constant: to strike a balance between the necessary economic openness and the protection of the national heritage. This tension between liberalization and protection is at the heart of the political debate that regularly surrounds the Lex Koller, with some business circles arguing for its relaxation, while others defend its retention or even reinforcement.

Scope and key definitions

To properly grasp the scope of the Lex Koller, it is essential to understand its precise scope and definitions. This legislation does not apply uniformly to all situations, but specifically targets certain categories of people and goods.

Persons subject to the law

The LFAIE applies to persons abroad, a concept that encompasses several distinct categories:

• Individuals who are not Swiss nationals and who do not hold a settlement permit C
• EU or EFTA nationals who do not have their legal and effective domicile in Switzerland
• Legal entities with their registered or actual office abroad
• Swiss companies considered to be foreign-controlled, i.e. where foreign persons hold a dominant position
• Persons acting as intermediaries on behalf of persons abroad

It should be noted that Swiss nationals living abroad are not considered foreign nationals within the meaning of the law, thus preserving their right to freely acquire real estate in their country of origin.

Buildings subject to authorization

The Lex Koller does not apply to all types of real estate. The following are mainly subject to authorization:

• Residential buildings (apartments, single-family homes, etc.)
• Building land for housing construction
• Undeveloped land not located in an area designated for economic activities

However, certain types of building are expressly excluded from the authorization system:

• Real estate used as a permanent establishment for the exercise of a commercial, industrial or craft activity, or the exercise of a liberal profession.
• Principal residences acquired by a foreigner holding a B residence permit who establishes his or her legal and effective domicile in the property
• Buildings used for public purposes (schools, hospitals, etc.)

Specific legal concepts

The LFAIE introduces several specific legal concepts that need to be clarified:

Foreign control is established when more than one-third of a company’s capital or more than one-third of its voting rights are held by foreign persons, or when a foreign person makes substantial loans to the company.

Theacquisition of real estate is not limited to the purchase of ownership, but includes any legal transaction that is economically equivalent to an acquisition, such as the acquisition of shares in real estate companies, the establishment of long-term rights of enjoyment, or the acquisition of emption or pre-emption rights.

The notion of legal and effective domicile is central to the application of the law. It implies not only a formal entry in the register of inhabitants, but also a real and lasting presence in Switzerland, with the intention of establishing there the center of personal and professional interests.

These precise definitions make it possible to determine exactly which situations are subject to the Lex Koller, thus avoiding circumvention and ambiguity. They are the foundation on which the entire system of authorization and control set up by the legislation rests.

Authorization and administrative procedures

The operational heart of the Lex Koller lies in its system of prior authorization. Any acquisition of real estate by a person abroad, when subject to the law, requires authorization prior to the conclusion of the legal act. This administrative process involves a number of stages and different authorities.

Competent authorities and division of powers

Implementation of the Lex Koller is based on a division of powers between the Confederation and the cantons:

• The cantons are the main enforcement authorities. They designate an authority of first instance (generally a department of the cantonal administration) and an appeal authority.
• TheFederal Office of Justice has a supervisory and coordinating role. It can appeal against cantonal decisions and issues implementing directives.
• The Federal Supreme Court acts as the final court of appeal for disputes relating to the application of the LFAIE.

This federalist structure enables us to adapt our application to local conditions, while guaranteeing a degree of national consistency thanks to federal supervision.

Authorization procedure

The authorization procedure generally follows the following stages:

1. Submitting the application: The foreign buyer (or his representative) submits an application for authorization to the competent cantonal authority. This application must contain all the documents and information required for examination of the file: identity of the vendor and purchaser, precise description of the property, reasons for the acquisition, etc.

2. Examination of the application: The cantonal authority examines the application in the light of the legal conditions and available quotas. It may request additional information or guarantees from the applicant.

3. Consultation with municipalities: In many cantons, the municipality in which the building is located is consulted and may issue a prior notice.

4. Decision: The cantonal authority issues its decision, which must be substantiated. If authorization is granted, it may be subject to conditions.

5. Notification: The decision is notified not only to the applicant, but also to the Federal Office of Justice, which has a right of appeal.

Processing times vary from canton to canton, depending on the complexity of the case, but the authority must generally rule within a reasonable timeframe (often between 30 and 90 days).

Reasons for authorization and quotas

The LFAIE provides several grounds for obtaining authorization:

• Purchase of a second home in a tourist zone, subject to a cantonal quota system
• Acquisition for a public interest purpose, such as the promotion of social housing or the economic development of a region
• Acquisition by an heir not authorized by law to acquire real estate without authorization
• Acquisition justified by hardship, when refusal would entail excessively severe consequences for the purchaser

The quota system is a central element of the system for second homes. Each year, the Federal Council sets a maximum number of permits that can be issued for the country as a whole, and then distributes this quota among the cantons. The aim of this quantitative limit is to control the foreign presence on Swiss soil and preserve the equilibrium of the real estate market in tourist regions.

Sanctions and administrative measures

The LFAIE provides for an arsenal of sanctions to ensure compliance:

• Nullity of legal acts concluded in breach of the obligation to obtain authorization
• Criminal penalties of up to three years’ deprivation of liberty or a fine for intentional offences
• Administrative measures such as a compulsory sale order for the illegally acquired property

These dissuasive penalties testify to the importance attached by the legislator to compliance with these regulations, considered a pillar of national land policy.

Exceptions and special cases

While the Lex Koller lays down a general principle of restriction, it nevertheless provides for a number of exceptions and special cases, enabling its application to be relaxed in certain specific situations. These derogations reflect both practical considerations and economic or social policy objectives.

Acquisition of principal residences

One of the most significant exceptions concerns the acquisition of principal residences. A foreigner holding a B residence permit may acquire a home intended to serve as his or her principal residence without authorization, provided that he or she establishes a legal and effective domicile there. This exception recognizes everyone’s fundamental right to housing, and enables foreigners legally resident in Switzerland to own their own home.

However, this acquisition is subject to several strict conditions:

• The purchaser must occupy the property personally and not rent it out, even partially.
• The size of the home must be proportionate to the buyer’s personal and family needs.
• In the event of departure from Switzerland or change of principal residence, the buyer generally has two years in which to sell the property.

This exception reflects the fundamental distinction made by the law between acquisition for speculative or investment purposes, which is restricted, and acquisition for legitimate personal needs, which is facilitated.

Commercial property and permanent establishments

The Lex Koller exempts from authorization the acquisition of real estate used as apermanent establishment for the exercise of an economic activity. This major exception is designed not to hinder foreign investment in the Swiss economy, and concerns :

• Buildings used for commercial, industrial or craft purposes
• Professional premises
• Building plots intended for such constructions, provided that construction starts within a reasonable period of time.

This exemption applies even if the building has an ancillary residential component, provided that this is necessary for the operation of the establishment (staff housing, janitor’s quarters, etc.). However, if the residential component becomes predominant or independent of the business activity, the exemption no longer applies.

Special family situations

The law provides for specific regimes for certain family situations:

• A foreigner may acquire real estate by legal succession without authorization.
• Acquisition by testamentary succession or gift is still subject to authorization, but this is generally granted if there are close family ties.
• The spouses of Swiss citizens benefit from a favorable regime, particularly for the acquisition of co-ownership or joint ownership with their Swiss spouse.
• In the event of a change of status (loss of Swiss nationality or C permit), the person may keep the real estate legally acquired prior to this change.

The aim of these provisions is to respect family ties and avoid humanly difficult situations, while maintaining the general framework of the law.

Collective investments and listed companies

The regime applicable to real estate investments made by collective structures has a number of special features:

• Swiss real estate funds can acquire residential properties without authorization, even if they include foreign investors, provided they are open to the public and supervised by FINMA.
• Real estate companies listed on a Swiss stock exchange benefit from a similar regime, allowing foreign investors to hold stakes in them.
• Swiss pension funds and other pension schemes are free to invest in residential real estate, even if they have foreign policyholders.

These exceptions are designed to allow the normal functioning of Swiss financial markets and not to hinder institutional investment in the real estate sector, while maintaining control over direct ownership of property.

The multiplicity of these exceptions and special regimes testifies to the search for balance that characterizes the Lex Koller: between protection of national soil and economic openness, between general restrictions and consideration of specific situations. This complexity often requires the intervention of real estate law specialists to determine the precise regime applicable to each situation.

Practical implications and recent developments

Far from being set in stone, the Lex Koller continues to evolve and profoundly influence the Swiss real estate market. Its practical implications are numerous, both for foreign investors and for real estate professionals and authorities.

Impact on the Swiss real estate market

Regulation of the acquisition of real estate by foreigners has a significant impact on several market segments:

• In tourist areas, the Lex Koller has helped to maintain a certain moderation in prices, although other factors such as the Lex Weber (limiting second homes) now play a predominant role.
• For commercial properties, which are exempt from restrictions, there is a strong presence of foreign investors, particularly in major cities such as Geneva and Zurich.
• The housing market in urban areas remains predominantly domestic, which contributes to a certain stability despite high demand.

Economic studies suggest that, without the Lex Koller, real estate prices in certain desirable regions could rise significantly, making home ownership even more difficult for Swiss residents. However, the Lex Koller is only one of a number of factors influencing the real estate market, alongside monetary policy, spatial planning and taxation.

Recent case law trends

In recent years, the case law of the Swiss Federal Supreme Court has clarified several aspects of the application of the Lex Koller:

• Tighter controls on complex legal arrangements designed to circumvent the law, with an economic approach that prioritizes substance over form
• Clarification of the notion of effective domicile, requiring tangible proof of the establishment of the center of interests in Switzerland
• Strict interpretation of the conditions for acquiringpermanent establishments, with in-depth examination of the economic reality of business projects
• Clarification of mandatory resale conditions in the event of a change in the purchaser’s status

These developments in case law demonstrate the authorities’ heightened vigilance in the face of attempts to circumvent the law, but also illustrate the growing complexity of applying the law in a context of internationalization of investment structures.

Political debates and reform projects

The Lex Koller is regularly the subject of heated political debate, reflecting the tensions between different visions of the Swiss economy and society:

In 2017, the Federal Council had proposed a tightening of the law, aimed in particular at making the acquisition of commercial real estate subject to authorization and restricting certain exceptions. In the face of strong criticism from business circles, this project was abandoned in 2018.

At the same time, initiatives to relax the legislation are regularly championed by certain political parties and business associations, who see it as a brake on investment and an excessive administrative complexity.

Discussions are currently underway on adapting the Lex Koller to new forms of investment, such as real estate-based participatory finance platforms or property-backed crypto-assets.

The debate reflects a fundamental questioning of the balance to be struck between economic openness and protection of the national heritage, between liberalization and regulation of the real estate market.

Practical challenges for international transactions

For professionals involved in international real estate transactions, the Lex Koller poses several practical challenges:

• Precise legal qualification of each situation, often requiring in-depth analysis of shareholding structures or contractual arrangements
• Anticipation of delays linked to authorization procedures, which can have a significant impact on transaction timetables.
• Ensuring legal certainty for acquisitions, in particular by including appropriate conditional clauses in contracts
• Strategic advice to foreign investors on optimal investment structures in compliance with legislation

These complexities underline the importance of specialized legal support. A law firm familiar with the intricacies of the Lex Koller can provide considerable added value, both in the preliminary analysis of projects and in the structuring of transactions or representation before the relevant authorities.

The Lex Koller remains a cornerstone of the Swiss real estate legal landscape, and is a prerequisite for successful foreign investment in this sector. Its complexity and constant evolution make it an area where specialized legal expertise is a major asset in navigating the regulatory maze with confidence.