The Swiss government announced in April 2019 that the revised tax at source law enters into force as of 1 January 2021. Linked to this, the federal tax authorities published the Circular Letter no. 45 in June 2019 with the goal of clarifying uncertainties and to harmonize the cantonal approaches and by that eliminating current existing differences.
This article particularly focuses on the points employees in Switzerland need to be aware of due to the revision of the tax at source law. Our previous article primarily focused on the considerations from an employer perspective.
Limitations on the recalculation of the Swiss tax at source (Quellensteuer / Impôt à la source)
In the past, it was common practice for resident employees with a L or B permit and an annualized employment income of less than CHF 120’000 or for non-resident employees, often referred to as International Weekly Commuters (IWCs), to file a tax at source correction (Tarifkorrektur) to either claim certain deductions or exempt part of the employment income from taxation in Switzerland. Under the new regulation a re-calculation or correction of the tax at source can only be requested if the taxable gross employment income or the tax rate determining employment income has been taxed or calculated incorrectly or if a wrong tax code has been applied throughout the tax year.
Requirement to file an annual tax return
If a resident employee with a L or B permit and an annualized employment income of less than CHF 120’000 wants to claim specific tax deductions (i.e. pillar 3a contributions, voluntary pension fund contributions, interest etc.) or has additional income or assets that are not subject to the tax at source withholding a request to file a tax return must be submitted to the Swiss tax authorities by the end of March of the year following the tax year concerned. This request is irrevocable, meaning that in the following years the employee continues to be required filing a Swiss annual tax return even if no additional tax deductions are claimed or additional income/assets are taxed.
A non-resident employee (IWC) whose employment income is subject to Swiss tax at source, is only allowed to claim additional tax deductions (i.e. commuting expenses, double housing costs, voluntary pension fund contributions etc.) if 90% of the global total income (including spousal income, investment income etc.) is subject to tax in Switzerland. To claim these deductions, the employee also needs to submit a request to file a tax return by the end of March of the year following the tax year concerned. However, this request needs to be submitted every year again if the employee qualifies to claim additional tax deductions.
Tax relief regulations based on international tax treaties are not affected by the 90% rule, meaning that tax reliefs on employment income (e.g. for income related to non-Swiss working days) are granted regardless of how much of the global income is subject to tax in Switzerland. To request for tax reliefs the same procedures apply as for claiming additional tax deductions, i.e. by filing an annual tax return.
Obtaining a C permit during the tax year
Under the new regulation, resident employees who never had to file a tax return and are obtaining a C permit during the tax year, are now required to file a full-year tax return in the year they obtain the C permit. Any deducted tax at source during the period they were holding the B permit is reconciled with the tax liability calculated on the full-year tax return. In the past the employee was required to file a part-year tax return for the period the C permit was obtained.
Our recommendation for action
Resident employees as well as non-resident employees need to review their situation in detail in to determine whether the new tax at source regulations affect their tax filing obligation and ultimately their tax liability in Switzerland.
With the new regulation cantonal approaches are harmonized with the aim of eliminating existing differences. This creates possibilities and opportunities for potential tax savings for resident and non-resident employees. However, before any tax strategies are executed, it is important to understand what requirements need to be fulfilled and what the limitations are.
Other articles that may be of interest...
Remote working - Permanent establishment risks for employers in Switzerland
Considerations for employers when allowing their Swiss based employees to work remotely from home
Swiss taxes at a glance
A tax guide for foreigners and expats
Introduction of the Economic Employer principle in Switzerland
Together with the new source tax regulations, the Circular Letter 45 issued by the Federal Tax Administration came into force on 1 January 2021, which focuses on the harmonisation of the withholding tax collection process as well as the introduction of the economic employer principle across Switzerland.
Important court ruling of the German Federal Fiscal Court relevant for Executive Employees (leitender Angestellte), resident in Germany and working in Switzerland.
Relevant for employees who are resident in Germany and working in Switzerland for a Swiss employer, having the 'executive employee' status.
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