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Voluntary buy-ins to the pension fund or contributions to Pillar 3a (Swiss Individual Retirement Account) are still attractive vehicles for employees seeking to lower their tax burden; however, employees domiciled outside Switzerland or employees taxed at source with a gross salary of less than CHF 120,000 p. a. should proceed carefully in light of the new withholding tax reforms which came into force on 1 January 2021.
The withholding tax reform has been on employers’ agendas since at least June 2019 when the FTA published Circular 45 in response to several decisions by the European Court of Justice (ECJ) that Swiss withholding practices were deemed inequitable.
Although the cantons have not yet agreed on a harmonized approach for implementation, changes to the tax return and withholding tax correction process are now applicable throughout Switzerland and employees must take a decision on pension buy-ins or Pillar 3a contributions before the end of the current tax year (2021) to determine whether they will receive a tax benefit with their 2021 tax filings.
Key considerations for employees are discussed below.
Changes in the application to correct the withholding tax amount (former tariff corrections)
The general principle of employer wage withholding for individuals earning less than CHF 120,000 is to simplify the administration and collection of tax. Consequently, wage withholding rates were set at an average across a canton, applied to the employees’ wages, and considered the “final” tax for employees. Unless an individual had non-wage, personal income, the filing of an annual tax return was not required.
Withholding tax tariff corrections facilitated the adjustment of withholdings, in lieu of filing a tax return, for such things as an incorrectly reported gross salary or withholding rate if, for example, workdays exempt from Swiss taxation or child deductions were not reflected in payroll. Similarly, employees were able to use the withholding tax tariff correction to reduce their taxable wage base from voluntary pension buy-ins and contributions to Pillar 3a plans without the need to file a Swiss tax return.
However, as of 1 January 2021, employees can no longer use a withholding tax tariff correction form to claim deductions from pension buy-ins and Pillar 3a contributions. Any potential tax benefit from these deductions are to be claimed solely through the filing of a Swiss tax return.
An overview of the impact of these legislative changes is provided here and discussed in greater detail in the following paragraphs:
- The filing of a Swiss tax return may result in an overall higher tax liability that partially or fully negates the expected savings from pension buy-ins and Pillar 3a contributions;
- The cantons do not have a uniform filing requirement threshold for non-wage personal income;
- The voluntary filing of a resident tax return obligates the taxpayer to file a tax return every year thereafter;
- Application of the 90% or “quasi-residency” gross income test for cross-border commuters is now mandatory.
1) The filing of a Swiss tax return may partially or fully offset the expected savings from pension buy-ins or Pillar 3a contributions
According to the provisions of the new legislation, Swiss tax residents earning less than CHF 120,000 p.a. and taxed at source may voluntarily file a tax return to claim additional deductions. However, actual tax rates applied in the Swiss tax return may be higher than the average withholding rates applied through payroll resulting, in some cases, a higher tax liability that may partially or fully offset the expected savings from pension buy-ins and Pillar 3a contributions. We therefore recommend an analysis of possible tax liability scenarios before electing to make additional buy-ins or contributions.
2) Cantons do not have a uniform filing requirement threshold for non-wage, personal income
Individuals tax resident in Switzerland who are taxed at source and do not reach the gross salary threshold of CHF 120,000 are mandatorily required to file a tax return reporting worldwide income and assets if they have other taxable personal income or assets. Consequently, this mandatory filing requirement will subject the taxpayer’s employment income to actual tax rates which could, in some instances, be higher than the average withholding rates applied via payroll.
Although the cantons have agreed on a uniform (non)filing requirement threshold for wage income below CHF 120,000, they have not adopted a similar filing requirement threshold for non-wage, personal income. Some cantonal thresholds are available to the public, some are applied strictly internally, and some cantons do not (yet) apply any thresholds effectively requiring the filing of a tax return if, for example, the taxpayer only has a bank account for receipt of salary. See the overview “Cantonal personal income/asset threshold” for the most recent set of cantonal non-wage filing requirements as of June 2021.
We would have preferred to see a uniform threshold for personal income/assets adopted by all cantons as we do not expect the regulators envisioned every person taxed at source to also have a tax return filing requirement, effectively causing the gross salary threshold of CHF 120,000 to be redundant. Furthermore, we expect this absence of uniformity will also result in increased instances of inadvertent breaches of tax filing requirements.
3) The voluntary filing of a resident tax return to claim additional deductions is binding
It is important to note that the voluntary filing of a Swiss tax return to claim deductions cannot be revoked and creates an on-going obligation to file a tax return in future years. For this reason, it is advisable to consider whether future tax return filings would also be beneficial.
4) Impact on international weekly commuters who are tax resident outside Switzerland
Previously, international weekly commuters also had the option of filing a withholding tax correction form to claim additional deductions. Under the new directive (Article 99a (1)), international weekly commuters may only claim additional deductions such as double housing costs, pension fund buy-ins, Pillar 3a contributions, alimonies paid, etc. through the voluntary filing of a Swiss tax return. In addition, a tax return can only be filed under the provisions of this new directive if at least 90% of the taxpayer’s total gross income is subject to taxation in Switzerland (“quasi-residency” under Article 99a (1) lit. a). Total income includes spouse’s income, rental income or owner-occupied imputed rental values (so-called deemed rental income “Eigenmietwert”, including that from foreign properties), interest and dividends, and any other types of income.
Due to the continuous evolution of ECJ case law, the cantons have previously taken an inconsistent approach to the interpretation of the 90% income provision. The Swiss tax authorities have therefore attempted to comply with ECJ case law through Article 99a (1) (b) and (c) which provides for the voluntary filing of a tax return if the taxpayer’s non-Swiss tax resident situation is comparable with that of a taxpayer resident in Switzerland (lit. b) or the provisions of a double taxation treaty mandates the claiming of deductions solely through a tax return filing (lit. c). The authorities have yet to provide further specific guidance on Article 99a and it remains to be seen to what extent these options can be implemented. Otherwise, we expect that the guidance for implementation of Article 99a will fall to the tax courts.
Nevertheless, our recommended analysis holds true for international weekly commuters as discussed in 1) above.
Procedure
The deadline for submitting both mandatory and voluntary applications to file a tax return for the recalculation of withholding tax is set uniformly at 31 March of the following year. If the taxpayer intends to move abroad and cease Swiss tax residency, the application must be submitted before de-registering. The date of de-registration becomes the de facto filing deadline for the application. Accordingly, no claim can be made after this date and no previously submitted application can be revoked.
Mandatory tax filings
If the filing deadline is not adhered to despite the obligation to file a mandatory tax return, this may lead to procedural breaches. The tax authorities may continue to insist on submission of the tax return, or a tax assessment may be made by the tax officer with possible fines.
Voluntary tax filings
After the tax authority has examined the application to file a voluntary tax return and approved it, the tax return forms are sent out. They must be submitted within 30 days. The submission deadline can be extended according to the ordinary procedure. It is important to bear in mind that the requirements for quasi-residency (under the aforementioned 90% rule) for international weekly commuters are only finally validated when the tax return is assessed by the authorities, which could be as long as two or three years after the return has been submitted.
Our case studies below provide a detailed description of application of the new directive and possible solutions for mitigating unintended consequences.
Case Studies
The two case studies below help to illustrate the challenges employees may face with applying the new legislation (see also flyer).
Case Study #1: International weekly commuter, tax resident outside Switzerland
Tamara is an executive with XYZ Company. She commutes weekly to work in Switzerland from Germany where she and her husband, Chris, own their principle residence. Both Tamara and Chris are considered tax residents of Germany. Tamara’s gross taxable wages in Switzerland are CHF 130,000. Tamara is fully taxable in Switzerland due to her leadership role in XYZ. Chris is self-employed in Germany and has taxable wages equivalent to CHF 10,000. In addition to their employment income, Tamara and Chris have a small amount of investment income from their securities and savings of CHF 100 and deemed rental income on their home in Germany of CHF 6,000.
Prior to 2021, Tamara regularly filed a withholding tax correction by 31 March of the following year and claimed additional deductions such as weekly commuter costs and pension fund buy-ins. These deductions resulted in a partial refund of the withholding tax already paid. A subsequent Swiss tax return filing was not required and also not possible for employees with main residency outside of Switzerland.
A voluntary buy-in to the pension fund has been an attractive tax-planning vehicle in Switzerland; therefore, Tamara would like to continue making additional pension fund payments in the 2021 calendar year.*
But how should she proceed with the pension buy-in according to the provisions of the new withholding tax act?
Challenge
As previously mentioned, individuals who are tax resident outside of Switzerland must have at least 90% of their total income subject to Swiss taxation to be able to claim additional deductions (in this example, pension fund buy-ins and weekly commuter costs). Although Tamara pays Swiss tax on all of her taxable wages in Switzerland (CHF 130’000), the earned income from her spouse (CHF 10’000), the deemed rental income of their foreign property (CHF 6’000), and their investment income (CHF 100) are otherwise exempt from taxation in Switzerland. Therefore, the percentage of total income taxable in Switzerland represented by her taxable wages (89%) is less than 90%. Accordingly, Tamara will be unable to file a 2021 Swiss tax return to claim the benefit of the additional deductions.
Recommendation
The 90% rule (quasi-residency) pursuant to Art. 99a para. 1 lit. a must first be analyzed before making any additional buy-ins to the pension fund or contributions to Pillar 3a. If the rule for quasi-residency is not met, the taxpayer may still be eligible to claim a deduction for pension/Pillar 3a remittances pursuant to Art. 99a para. 1 (lit. b). This article provides that a pension/Pillar 3a deduction is possible if the “situation is comparable to that of a taxpayer resident in Switzerland”. Meaning, items of gross income allocated to the country of tax residence for the 90% rule are in fact either non-taxable or not leading to a taxable income due to being negligible in the country of tax residence.
In this example, the deemed rental income on Tamara and Chris’s home in Germany is a “hypothetical income” under Swiss law and does not have an equivalent taxable value in Germany, their country of tax residency. In case the self-employed income and investment income would not lead to a taxable income due to being negligible in the country of residence then the requirements of Art. 99a para. 1 (lit. b) would be fulfilled and the authorities would likely accept a tax return filing claiming the additional deductions.
In the event the provisions of neither Art. 99a para. 1 lit. a or b can be met, lit c. provides for the application of the double taxation treaty between Switzerland and the country of tax residency. Certain treaties provide tax relief for specific deductions in the country in which the work is performed.
It should be noted that the cantonal authorities will not agree to providing binding preliminary decisions before pension buy-ins or Pillar 3a contributions are made. Nevertheless, before making large voluntary contributions, it is recommended that the matter be presented to the respective cantonal authorities to have a full understanding of how Art. 99a will likely be applied in the specific canton.
Some cantons have provided a calculation table for performing an initial qualification of quasi-residency (e.g. Canton of Zug); however, the final determination is made subsequent to the tax return filing.
* Caution is generally advised when buying into the Swiss pension scheme in an international context. In particular, foreign tax implications must be taken into account at the time the contribution is made and/or the benefit is received.
Case Study #2: Non-Swiss national, tax resident in Switzerland, taxed at source
James is a UK national who has been living in the city of Zurich since 1 April 2020 and works in Zug. His employment income is CHF 110’000. Since James is neither a Swiss national nor a C-permit holder (permanent residency permit), his employer deducts withholding taxes from his salary every month. James has (to date) no personal assets or non-wage, personal income. For tax year 2020, he did not file a withholding tax tariff correction form or a tax return as he had neither a financial incentive to do so (e.g. for additional pension buy-ins or Pillar 3a contributions) nor a mandatory filing obligation, respectively.
- Scenario 1: In tax year 2021, James receives a cash gift of CHF 80’000. As a consequence of this gift, James has now reached the filing threshold for personal assets in the canton of Zurich (Overview “Cantonal personal income/asset threshold”).
- Scenario 2: James heard about the potential tax benefit of contributions to Pillar 3a and made a contribution in April 2021.
Challenge
- Scenario 1:
According to the fact pattern in Scenario 1, James now has a mandatory tax return filing requirement.
In this example, the thresholds set by the canton of Zurich were used for illustration purposes. As mentioned previously, the majority of cantons have not yet defined a threshold creating the obligation to mandatorily file a tax return due to personal income/assets. Most cantons therefore expect a tax return even where income or assets are negligible. If this (obligatory) application is not made, breaches of procedural obligations must be expected. It is hoped here that most cantons will be proactive and still define their thresholds.
Filing a tax return (here mandatory) also means that income from employment which was taxed at source must be reported on the tax return and the final tax amount is calculated based on the tax multiplier of the place of living. Due to the fact that James is living in the city of Zurich with a tax multiplier above the average, he has to expect an additional tax burden.
- Scenario 2:
To claim the potential benefit of a Pillar 3a contribution described in Scenario 2, James has the option to voluntarily file a tax return as he is no longer eligible to file a withholding tax tariff correction to claim this deduction under the new legislation.
Also in this scenario, in case James decides to voluntarily file a tax return then the income from employment which was taxed at source must now be reported on the tax return. The withholding tax was calculated by his employer on the basis of an average tax rate for all municipalities in the canton of Zurich. However, the city of Zurich tax rate, which applies for James’s tax return, is significantly above the cantonal average. Since James’s entire earned income is now taxed at a higher rate, he may experience an additional tax burden despite the additional contribution to Pillar 3a.
As noted previously, a voluntary tax filing as per Scenario 2 will also mean a binding obligation to file tax returns in future years.
Recommendation
- Scenario 1:
Employees domiciled in Switzerland who are taxed at source and whose gross income is below the Swiss-wide threshold of CHF 120’000 should obtain information on the relevant tax filing thresholds (Overview "Cantonal personal income/asset threshold") for their canton of residence. After making the determination of whether a mandatory tax filing obligation exists, a tax analysis should be conducted, mirroring the tax return procedure to determine whether the withholding tax is sufficient to cover the ordinary tax liability. If not, additional provisional payments can be made to avoid any debit interest charges.
- Scenario 2:
It is recommended to prepare a comparison calculation, in advance of a voluntary tax return filing, to estimate the expected tax costs or benefits from pension buy-ins or Pillar 3a contributions before making these investments. This is advisable not only for the current tax year, but especially for subsequent years, as the application is binding.
Other investment and tax-deferral considerations should be considered as well such as a comparison of returns on investment, tax savings through tax-free income/assets from pension savings, or the potential tax implications at date of distribution of the pension savings. Regardless of the possible increase or decrease in a current year tax liability (as a consequence of the voluntary filing of a Swiss tax return), taxation on income from qualified pension and Pillar 3a assets is always deferred and in any case taxed at distribution.
Conclusion
More than 10 months after the new law came into force, there are still many unanswered questions for employees who are taxed at source. The cantons are expected to publish further guidelines, in particular on the commuter taxation and the income/asset thresholds for the mandatory tax return filing. It is expected for deduction claims that the authorities will implement a rather restrictive practice next year in anticipation of more cases to be brought up to court for more clarification.
This makes it all the more important to start good tax planning now, especially when considering to make voluntary top-up payments into a pension or Pillar 3a plan.
Historically, the Swiss government promoted independent pension planning with attractive tax benefits, but for employees taxed at source doing so may now become unattractive from a tax perspective with the new legislation.
As described at the beginning, the main driver for the new legislation was the fact that the former Swiss withholding practices were deemed inequitable. Whether the new law will put an end to this inequitable situation or instead lead to other problematic outcomes is still debatable.
Download the Tax Reform 2021 Flyer
Practical tips and problems for international weekly commuters and persons taxed at source with a gross salary of less than CHF 120’000.
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