The current tax at source calculation system has certain limitations. While simple, it is based on a scale incorporating standard deductions (average values), and therefore does not allow full consideration of the taxpayer's personal situation.
A 2010 case law highlighted the inequalities of this functioning, as well as its incompatibility with the agreement on the free movement of persons (ALCP) between Switzerland and the European Union / EFTA. It states that there is no justification for a taxable person who earns 90% or more of their income in Switzerland to be treated differently from a resident taxpayer from a tax point of view (principle of equality enshrined in the Constitution). This case law was quickly extended to persons taxed at source and had repercussions on the Geneva tax administration which allowed the filing of a declaration in order to take into account the actual costs, but it had not yet been transferred in the law.
Adopted by the Swiss parliament on December 16, 2016, a full legislative revision of tax at source applied to earned income will enter into force on January 1, 2021 with the new provisions included. The ordinance on the taxation at the source of April 11, 2018, the circular n ° 45 on the taxation at the source of the income from lucrative activity of workers (June 2019) and the law on the taxation at source for natural and legal persons (LISP) of January 16, 2020 will come into effect at the same time.
The aims of this new legislative framework are to transcribe into law the decision of the federal court, to limit inequalities of treatment while respecting Switzerland's international obligations and to harmonize the calculation of tax at source between cantons.
Most employers are affected by the changes brought about by this reform and, as businesses, are responsible for calculating tax at source. In this article, we detail the new legal bases so that you can implement them in due time.
In 2021, the same rules will be in effect for all employees, regardless of the canton. Depending on their situation, those subject to withholding tax may, or will have to, submit to subsequent ordinary taxation (TOU). Meaning they will be taxed at source on their salaries every month and will fill in a tax return the following year. For residents, this “TOU” may be mandatory or on request, while for non-residents it will be on request or automatic (see table below). Moreover, additional deductions will be eliminated but it will still be possible, under certain conditions, to request a rectification of the taxation at source.
From next year, the canton of the head quarter will no longer be the reference for the collection of tax at source, but it will be that of the domicile or residence of the employee that will prevail. The rules for taking into account the family situation will be harmonized between all the cantons. For benefits in capital, the collection commission will be capped. A new scale G will replace scale D. Deductions for expenses for artists, lecturers and athletes will also undergo some changes. The tax authorities will make available new digital tools to send data.
Please note, foreign resident taxpayers, even if they have taxable wealth or real estate in Switzerland, will henceforth be taxed at source and therefore deducted by the employer.
The subsequent ordinary taxation for non-residents is optional and can be repeated each year. It can be performed in three situations:
To be considered as a quasi-resident, this share must represent at least 90% of the total income and be calculated by applying the rules of taxation and international distribution.
For a cross-border worker with a gross annual income of 162,200 .- whose income is made up of:
- 110,000 .- salary resulting from their activity in Switzerland (taxed by the country in which the activity is carried out, here Switzerland)
- 30,000 .- property income from their house in France (taxable in the country where the property is located, here France)
- 200 .- bank interest from their accounts in Switzerland (taxed in the taxpayer's country of domicile, here France, even if the accounts are in Switzerland)
- 22,000 .- alimony paid by their Swiss ex-spouse (taxable in the country of domicile, here France)
According to international rules, only 110,000 .- of the income of this taxpayer out of a total of 162,200 .- are taxable in Switzerland. It represents 67.81% and therefore does not allow them to claim subsequent ordinary taxation.
Only in the event that a non-resident, because of their low income, is not taxable in their country of domicile. If they can prove they do not reach the tax base in their country of domicile, they can therefore claim a deduction.
As their country is unable to take into account their contributory capacity or personal context, the country of work must then take this into consideration and possibly accept deductions.
Switzerland has entered into double taxation agreements to accept the deduction of foreign social contributions. If the taxpayer remains subject to foreign social security contributions because they are on secondment in Switzerland and taxed at source, the deductions are not effective, but lump-sum. This person can therefore be transferred to subsequent ordinary taxation to allow Switzerland to meet its international commitments.
On the tax authorities’ initiative, this automatic taxation may be in favor or against the taxpayer and aims to obtain a tax declaration in some specific cases, for example in the case of mixed income such as self-employed and employee or owner and employee. Practice will show exactly when the authorities stand.
If until then it was possible to claim additional deductions on the amount subject to tax at source (pension buyback, 3rd pillar A contributions, alimony, childcare costs and training costs), this will no longer be possible in the same way as before. So that it can still be valid, the taxpayer will have to fill in a tax return for subsequent ordinary taxation (provided that the various criteria are met).
The request will always be possible if the taxpayer wishes to contest the scale or the rate, or whether they want family expenses, the spouse’s income (scale C) or income acquired in compensation to be included. In the same way as today, this rectification can be made at the request of the tax payer or the tax administration.
As for other subsequent ordinary taxations, the application must be filed before March 31, N + 1, regardless of the date of issue of the receipt certificate.
An example, for cross-border workers whose spouse works in France, is the adjustment of scale C. This is based on an arbitrary flat rate equivalent to that of the taxpayer’s spouse with a maximum of 65 100 .-. However, it is very common that the spouse does not earn such a high income in France, hence the need to adjust the scale so that it reflects the couple's real capacity for subjugation and to avoid paying too much taxes.
Today, the employer deducts tax at source and remits it in the canton in which it is headquartered, which sometimes creates complicated administration when the canton of headquarters and the canton of residence differ.
From 2021, the employer will remit the tax to the canton entitled, that is, for residents to the canton of domicile, and for non-residents to the canton of the place of work. For example, a company headquartered in Geneva with an employee domiciled in Canton of Vaud will have to deduct tax according to the procedures of the canton of Vaud.
The method of calculation is also modified if the employee changes canton of domicile or residence. In this situation, the company must submit the tax at source declaration to the tax authorities as early as the following month, taking into account the calculation model and the corresponding scale codes.
In Geneva, the regulations admit that additional deductions can be taken into account in reducing the amount subject to tax, for the costs which cannot be integrated in the scales as lump sum (3rd pillar A, pension buyback, alimony, childcare costs, training costs).
Depending on the place of residence, the method of calculation may be:
Currently, when the situation changes, such as the birth of a child or a marriage, the employer applies the scale change retroactively, each year to January 1. In 2021, the family situation and civil status of the taxpayer situation will be taken into account at the beginning of the following month. For example, for the birth of a child on March 15, this will be taken into account in the taxpayer's scale from April 1.
When the reform is in place, there will therefore be more payroll-related modifications throughout the year, but less at the end of the year.
Scale D, specific to secondary incomes, will disappear. The employer will have to extrapolate the taxpayer's income to 100% if they have another activity and know their family situation in order to tax them to ordinary scales.
On the other hand, scale G will be created. This progressive scale will apply to income acquired in compensation and paid directly by the insurer to the taxpayer.
Deductions of 20% of gross income for artists, lecturers and athletes will be increased to 50% for artists on January 1, 2021 and will remain unchanged for athletes and lecturers. However, it will no longer be possible for these 3 categories to claim higher effective cost deductions.
While for employees these modifications will certainly become more concrete from 2022, when they will be able to file a request for subsequent ordinary taxation on 2021 income (until March 31, 2022); for employers, the new scales and changes will be applicable from January 1, 2021.
The company will have to:
These changes represent a workload that should not be underestimated. The Synergix Human Resources team is already anticipating the new standards. Do not hesitate to contact us if you wish to outsource your HR administration and ensure its compliance.