International tax |
16 December 2020
Generally speaking, year-end is that time of year when we clean up all open items in the current year and head into the new year with a fresh outlook and perspective. This also applies to tax. You cannot be blind to the overwhelming number of tax checklists published to help individuals, in particular, get their tax affairs in order before the year-end close. One of the items repeatedly on most checklists is the dreaded withholding tax. In fact, tax advisors regularly inform their individual clients to rethink and reassess their withholding status during critical life events (marriage, divorce, change of household status, kids, health, kids, etc) but what about planning ahead for new state law changes? This happens to be the case in Switzerland at the moment for 2021.
Withholding tax – major changes for personal taxation
Many private individuals working in Switzerland have their taxes levied at source by their employer and remitted to the Swiss state on their behalf every month. On 1 January 2021, the new law on withholding tax will come into force. While the change in this law could almost go unnoticed by the employer, the same cannot be said for the employee subject to withholding tax.
This reform is not lacking in novelties for those who will have to request a change in their withholding tax as of the 2021 tax period, i.e. in March 2022. It may seem a long way off, but given the changes, it is advisable to get informed now in order to make decisions potentially early 2021.
The basic principle
First of all, it can be noted that the general principles governing withholding tax have not changed. Tax is still levied at source, monthly, and by the employer. For the employee who is subject to it (the taxpayer), there is no change at this stage. Nor is it expected that the rates will change. The taxpayer’s tax burden- at- source should therefore remain stable.
The aim of the reform is to put all Swiss residents on an equal footing, whether or not they are taxed at source.
Correcting withholding tax
To a certain extent, the scale of withholding tax takes into account the personal situation of the employee (marital status, dependents, etc.) as well as a number of deductions that are already included in the scale.
Nevertheless, the taxpayer may wish to take advantage of certain additional deductions, claim changes in their personal situation, or be obliged to announce increases in their spouse’s remuneration or other income not previously submitted. There was the possibility to request a source tax adjustment until 31 March of the following year to do so.
Furthermore, in certain cases, if the taxpayer’s income (or wealth) exceeded a certain threshold (income of CHF 120,000 everywhere in Switzerland except Geneva with CHF 500,000), they had to fill out a full ordinary tax return. Below the threshold, this tax return was simply not accessible.
As part of the change in the law, the possibility of correcting withholding taxes and the obligation to file a tax return remain applicable, however it is the way these processes will apply that will change very significantly from the 2021 tax period onwards.
At this stage, a distinction should be made between two different categories of tax-at-source-payers: those who are Swiss residents and those who are not (workers resident abroad).
For Swiss residents
For the taxpayer who is a Swiss resident, the subsequent ordinary taxation will be compulsory as soon as the income exceeds CHF 120‘,000, even in Geneva (which will certainly see the number of tax returns to be processed by the Geneva tax authorities increase).
The possibility of filing a tax return on a voluntary basis is now accessible to all as of the 2021 tax period. Thus, even with an income of less than CHF 120‘,000, it will be possible to claim all the deductions available under ordinary taxation. However, this application must be submitted by 31 March of the following year at the latest (i.e. the first time by 31 March 2022).
Please note, however, that once the choice to file a tax return has been made, the Swiss resident tax-at-source-payer will remain subject to this procedure until the end of his tax liability. It is therefore not possible to make an annual choice or make retrospective changes.
In the event of an error in the scale or calculations (in particular of the salary submitted) which therefore do not require a complete tax return to be filed, a source tax corrective return can always be filed before 31 March of the following year.
For the non-resident
The taxpayer, who is not a Swiss tax resident, used to fill in their source tax corrective return by 31 March of the following year in order to claim various deductions, in particular LPP purchases and 3rd pillar contributions, childcare or training expenses, alimony, etc. The change will be most significant for them.
From the 2021 tax period, the scope of the withholding tax adjustments will be considerably reduced. In order to claim their deductions, the non-resident taxpayer will have to derive at least 90% of their income from Swiss sources and taxable in Switzerland (so-called “quasi-resident” status). This percentage is calculated by taking into account the total household income (cumulation with the spouse in particular). For those who reach this threshold, they will be able to apply to file an ordinary tax return and thus claim all the deductions that a resident could also claim. The request must be made annually and no later than March 31 (the first time, March 31, 2022).
For those who do not reach this threshold, no further deductions can be claimed!. The source tax corrective return will only be used to request a change in the scale (family status, spouse’s income), a correction of the gross taxable salary or to have days of work done abroad exempted. It will therefore be necessary to consider the deductibility, in their country of residence, of certain expenses and in particular Ppension (2nd pillar) buy-backs or third pillar contributions.
France, in particular, seems to consider that 2nd pillar buy-backs are an integral part of the social security charges chargeable to the salary. The tax credit calculated for the Swiss salary is generally reduced beforehand by the purchase – a purchase which will in fact potentially no longer be deductible in Switzerland for certain workers who do not reach the 90% threshold. There is therefore a real risk that the Swiss pension plan will lose its interest if deductibility in France were to be limited. A case to follow.
Conclusion
The reform comes into force on 1 January 2021, but will only have a truly visible effect until March 2022, when a choice will have to be made or new obligations imposed.
In the meantime, it is advisable to look at one’s own situation and to anticipate these new obligations or perhaps already to position oneself in relation to a voluntary choice to switch to ordinary taxation at a later date.
Finally, for non-residents, one should ask oneself what tax treatment the country of residence will apply to income from Swiss sources and how costs and expenses may be deducted there before proceeding with a new redemption and 3rd pillar contribution if they cannot be claimed as a deduction in Switzerland.
