The new Federal Law on withholding tax on employment income will enter into force on January 1st, 2021 and includes a whole series of new provisions. What new challenges will Swiss taxpayers and employers have to face and how to best be prepared for it? We provide you hereafter with the key elements of the reform.
The ultimate rational behind that reform is to enable people subject to tax at source to be treated equally to taxpayers subject to ordinary taxation trough a tax return filing. The revision intends to ensure the respect of the principle of equality of treatment, provided for in the bilateral Agreement on the free movement of persons (AFMP) between Switzerland and the EU/EFTA countries. Beyond those reasons, it will harmonize the withhodling taxation on employment income across the country, setting clear rules where lot of cantonal practice used to be in place, notably for non-resident people whom are commuting.
What are the key impacts for the Swiss employers?
Harmonized approach of the concept of economic employer
In Swiss domestic law, the debtor of the taxable income, i.e. the legal entity which pays the worker an income subject to withholding tax, is ultimately liable for paying the withholding tax to the Swiss authorities. This obligation exists only if the employer has a domicile, an effective administration, a branch, or a fixed agency in Switzerland. The recent Circular No. 45 on “Withholding tax on employment incomes” clarifies this obligation by defining the concept of “economic employer” and setting clear conditions.
When an employee is posted to a Swiss company which bear its labor costs or assumes the employee economically and is responsible for the employee's risk and performance, then this employer, qualified as an “economic or de facto employer”, is considered as the debtor of the taxable income and is therefore responsible for the payment of the withholding tax.
In the case of a posting of more than three months per calendar year, in Switzerland, the qualification as an economic employer must be reviewed. Circular n°45 set the method of analysis according, applying the following criteria:
- Does the employer's service cover the entire economic activity of the Swiss company?
- Is the Swiss company responsible for the risk and the benefit of the posted worker?
- Does the Swiss company exercise effective management?
- Does the posted worker come under the Swiss company's business organization?
- Does the Swiss company cover the labor costs or does it assume them economically?
If you answer in the affirmative to one or more of these questions, then, it is necessary to consider in more detail your obligations, as a potential debtor of withholding tax to be remitted on the Swiss working days deployed by your mobile employee.
Modulation of the taxable income in Switzerland
Good news for cash flow management, the share of taxable income in Switzerland for employees subject to withholding tax and not resident in Switzerland can be adjusted going forward without prior approval of the tax authorities. In return, the employer may potentially be subject to a withholding tax obligation in the employee's country of residence.
As of 2021, employers affected by this change will be able to determine the share of taxable income in Switzerland for each of their employees and then analyze their potential tax obligations to the employee's country of residence, under the applicable double taxation treaties and the respective domestic laws. To note that in some cases, the Swiss employer may have tax requirements abroad, on the country where the employee is ultimately residing (ex. France for Geneva canton’s frontier worker).
Swiss intercantonal impacts
Tax remittance only in the canton of residence
According to the Swiss tax regulations, the tax at source due is deducted by the employer directly from the employee's salary and passed on to the canton in which it has its registered office. If the the employee is a resident in Switzerland, taxes are due in his canton of residence. At the end of the day, this can lead to potential cash flow issues for the employee since tax rates are not harmonized between the 26 Swiss cantons, and to a substantial administrative burden in terms of intercantonal retrocessions.
The territorial jurisdiction for the tax collection will change as of 2021. The employer will have to pay withholding tax to the canton of residence for foreign employees domiciled in Switzerland. For non-residents, the employer will have to pay withholding tax to the canton of residence on a weekly basis for weekly employees or to the canton in which the registered office, the effective administration, or the permanent establishment of the employer is located.
The debtor of the taxable income must register within the right canton and announce the arrival, departure, and situation of each employee. Also, in the case of a change of canton, the required modifications must be announced as early as the month following the employee's change of residence. This requires a smooth announcement procedure between the employees, their employer, and the tax authorities.
Harmonization of calculation methods
Depending on the place of residence, the method of calculating tax at source may be:
- Annual: the tax period refers to the calendar year: in Geneva, Vaud, Fribourg, Ticino and Valais. Monthly employee is taxed at the rate corresponding to the total gross annual income, amount paid to the canton annually.
- Monthly: the tax period corresponds to the month: in all other cantons. The income determining the rate is the monthly gross income.
Payroll softwares and tools adaptation
The existing withholding tax transmission channels (“Swissdec”, “e-demarches”, and paper-based solution) will continue to exist but will be adapted. To manage the substantial changes to come, it will be essential to adapt your transmission channel. The e-procedures (e-demarches) and paper-based solutions will soon be adapted by the Swiss authorities. However, you will have to make sure that your Swissdec certified software has the necessary modifications and potentially take steps to update it.
There will be three main changes to the tax scales:
- Tax tariff D will no longer exist for incidental income. In the case of a second income received by the employee, this must be extrapolated and taxed at the appropriate scale and rate to the employee's situation. To do so, the employee must give to the employer his additional activity rate of employment and the various components of his salary.
- Income acquired as a compensation will be subject to the new scale G.
- The civil status and family charges of employees will be determined each month and no longer retroactively to beginning of the year. The employee must, therefore, inform the employer of any changes within one month. In case it is is missed, tax at source correction filing will still be possible for tax tariff change.
What are the main changes for Swiss employees?
End of withholding tax adjustment filing in y+1
Taxpayers subject to withholding tax and living in Switzerland will no longer be able to claim the deductions to which they were entitled until now via the tax at source correction form (2nd pillar buy-back contributions, 3rd pillar a contributions, childcare costs, etc.).
However, taxpayers will still be able to request a correction in very few cases, notably in the event of incorrect calculations of the gross salary taxed, or of the determining income for the tax rate, as well as in the event of incorrect application of the tax rate. Note that the withholding tax rectification procedure remains unchanged in 2021 for the 2020 tax period.
The deadline for submitting requests for withholding tax correction and subsequent ordinary tax assessments is standardized for all cantons (before March 31 of the following tax year).
Subsequent ordinary tax filing for Swiss tax residents
Until then, the ordinary taxation by means of a tax return filing was applicable to people taxed at source who have purchased a real estate, who have a taxable wealth or earning more than a certain amount of annual gross income. However, the criterias were not totally aligned across the country.
From now on, the reform provides for a subsequent ordinary assessment for Swiss residents who meet the following alternative conditions, applied consistently in the 26 cantons:
- Annual gross income exceeding CHF 120,000; or
- Income not subject to withholding tax; or
- Taxable wealth.
Tax at source will continue to be levied by the debtor of the taxable benefit but the taxpayers will subsequently be taxed according to the ordinary taxation system. The withholding tax collected will be deducted from the total amount of tax.
It should be noted that if the taxpayer chooses the ordinary taxation system, it will be a definitive choice for the entire period of liability to tax at source, even in the event of a significant change in the taxpayer's situation (loss of employment, divorce, etc.).
Subsequent ordinary tax filing for non-Swiss tax residents (deemed-resident filing)
Non-residents are not required to file a tax return to report their worldwide income and wealth, as their tax liability in Switzerland is limited to working days physically spent in Switzerland. The delta of working days remains liable to taxation in the state of residence.
However, taxpayers may opt for subsequent ordinary taxation, by means of a so-called “deemed-resident” tax return if they meet the following alternative conditions:
- Predominant part of worldwide income is taxable in Switzerland (more than 90% of the income of the employee and his/her spouse is from Swiss sources); or
- Situation comparable to a Swiss resident (does not have enough taxable income in his country of residence to claim the tax deductions); or
- Tax deduction of foreign pension contributions that Switzerland has to accept under a Double Taxation Treaty.
This request must be renewed annually. In the absence of a request, taxpayers subject to withholding tax will not be able to claim any subsequent deductions in addition to those already included in the withholding tax scales (2nd pillar buy-back contributions, 3rd pillar a contributions, etc.).
Finally, in the case of manifestly unfair or unreasonable consequences, the cantonal tax administration has the right to automatically impose ordinary taxation on the employee domiciled abroad.
The revision will bring significant changes for businesses and employees. To adapt to the new requirements, we advise companies to audit the situation to flag where they need fo fill the gap and to develop the action plan required to comply with the new applicable regulations.
To be operational in 2021, employers will also need to ensure that they adequately inform their employees about the upcoming changes. As the debtor of the taxable benefit, employers will have to regularly monitor the situation of their employees and refine the withholdings as per effective situation.
Also, we recommend that employees who are taxed at source only so far, but might be eligible to the deemed resident tax return filing, to anticipate the end of the tax at source correction filing and perform a tax estimate comparison to assess if it could be of benefit.
> Our Outsourcing and Tax & Legal teams are mobilized to support you in reviewing these new obligations and implementing support for this transition. RSM Switzerland will be delighted to scope out the support that will fit to your exact needs, and be of help to support you across the various steps of the tax reform implementation.
> For any questions relating to payroll matter, do not hesitate to contact our Outsourcing team:
. French-speaking CH (Geneva & Lausanne): Olivier Betrisey
. German-speaking CH (Zürich) : Thomas Laube.
> For any legal and tax support for employers or employees:
. German-speaking CH (Zürich): Pascal Sigrist
> RSM will host a series of webinars during the first half of September, to highlight the key changes of the reform and address any questions you might have. Stay tuned for the registration links that will follow shortly.