Switzerland – Revising the Taxation at Source Rules for Employment Income

Switzerland – Revising the Taxation at Source Rules

This GMS Flash Alert reports on new rules in Switzerland for the taxation of employment income which aligns Switzerland’s rules more closely with EU rules.

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In December 2016, the Swiss parliament adopted new rules1 for the taxation of employment income for individuals who are:

  • nonresidents of Switzerland, or 
  • residents of Switzerland but have no Swiss citizenship, (long-term residency) C permit, or resident spouse with a Swiss citizenship or C permit. 

The changes include how refunds of Swiss social security contributions are taxed, the ability of Swiss residents subject to taxation at source to file a tax return, and how remuneration of board members who are nonresidents of Switzerland paid to the assigning company will be treated for tax purposes.

WHY THIS MATTERS

  • The new rules, once they take effect, could have implications for compensation packages for assignees, in particular, for those who serve on boards of directors.
  • More taxpayers subject to taxation at source will have the option to file a tax return, giving them more flexibility and more control over their tax affairs.
  • However, under certain circumstances, the ability of certain nonresident taxpayers to claim deductions will be significantly curtailed, which could raise their tax burdens – which may in turn make the tax-related costs of their international assignments increase. 
  • Nonresident employees will no longer be able to claim deductions from source tax, unless a tax treaty provides for specific deductions or unless they fulfill the criteria of the so-called “90% rule.”  Further exceptions may apply based on case law by the Federal Court.  As a consequence, nonresident employees who do not fulfill the criteria of the 90% rule may end up with no possibility to claim deductions – such as for professional expenses – either in Switzerland or in their home country.

Background

In recent years, the Federal Court of Switzerland found, in several cases it considered, legal provisions in Swiss tax law where the taxation at source rules were not in line with the European Union Agreement on the free movement of people (in effect since 1 June 2002).  The predominant aim of the revision to the taxation at source rules is therefore to align Swiss tax law with the EU Agreement.  

Key Aspects of the New Rules

Under the new provisions, there will be the following important changes:

  • Refunds of Swiss social security contributions (in lieu of a pension entitlement) will become subject to taxation at source;
  • Explicit provision to confirm taxation at source of Swiss board members’ remuneration paid to nonresidents of Switzerland that is not paid to the board member, but rather paid to the assigning company (inter-company payment); 
  • Both resident and nonresident employees fulfilling the criteria of the 90% rule can claim deductions, such as for professional expenses, but only if they are filing a tax return;
  • Residents of Switzerland subject to taxation at source can apply to file a tax return irrespective of their level of income – with the obligation to file a tax return in subsequent years as well (in which case source tax will be considered as an advance payment); and
  • Nonresidents of Switzerland subject to taxation at source can apply for a tax return filing in certain cases provided for in a double taxation treaty, or in situations where more than 90% of their total income –- including non-employment and spouse’s income – is subject to taxation in Switzerland (the 90% rule).

In addition, according to the new taxation at source provisions, there shall be no distinction between EU citizens and non-EU citizens, with the result that non-EU citizens can also benefit from the new provisions.

KPMG NOTE

Key Take-Aways

  • Companies assigning board members to Swiss entities may need to consider reviewing their board member compensation structures and policies in order to comply with the new provisions. 
  • Under the new rules, standard deductions continue to be taken into account in the source tax rates.  In order to claim additional deductions, a tax return has to be filed. 
  • With the option to file a tax return, there should be no more material disadvantages for resident employees subject to taxation at source.  However, there may be cases where taxation at source is more beneficial than filing a tax return.    
  • Nonresident employees subject to taxation at source who do not fulfill the criteria of the 90% rule (or equivalent, yet to be determined in an ordinance or by the Federal Court) may no longer be able to claim deductions for professional and other expenses under the new law. 
  • On the other hand, nonresident employees who are citizens of an EU country may already apply for a tax return filing if 90% of their total income is subject to taxation in Switzerland and if a tax return filing is more beneficial for them.

There are cantons (such as St. Gallen and Basel-City) that have already a 90% rule in place.

 

Next Steps 

It appears unlikely that there will be a petition for a referendum; therefore, the Federal Tax Administration will likely issue a new ordinance and a circular in summer 2017 with more detailed rules for the implementation of the new provisions and the date when they become effective (which may be 1 January 2020).

FOOTNOTE

1  See (in German) Bundesgesetz über die Revision der Quellenbesteuerung des Erwerbseinkommens(PDF 604 KB).

Also, see (in French) Loi fédérale sur la révision de l’imposition à la source du revenu de l’activité lucrative (PDF 570 KB).

And (in Italian), Legge federale sulla revisione dell’imposizione alle fonte del reddito da attività lucrativa (PDF 610 KB).

CONTACTS

For additional information or assistance, please contact your local GMS or People Services professional or one of the following professionals with the KPMG International member firm in Switzerland: 

 

Patrick Allemann

Tel. +41 58 249 36 68 

patrickallemann@kpmg.com

 

Thomas Wolf

Tel. +41 58 249 48 05 

thomaswolf@kpmg.com

The information contained in this newsletter was submitted by the KPMG International member firm in the Switzerland.

© 2017 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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