The new withholding tax regime in Switzerland

The aim of the new regulations is to systematically record the Jurisprudence of the Federal Supreme Court, various cantonal courts and the European Court of Justice from the perspective of standardisation with the Agreement on the Free Movement of Persons of 21 June 1999 between Switzerland and the EU and its member states and to standardise them for all tax levels.

Furthermore, the innovations are intended to increase legal certainty for employees and debtors of the taxes, to standardize procedures and to take account of technical developments (e.g. uniform wage reporting system).

At 69 pages, circular no. 45 is extremely detailed compared to other practical instructions. First of all, it defines terms such as employee, debtor of the taxable benefit, residence and then explains which employees are actually subject to withholding tax. The circular goes on to explain which rates are to be applied in which situation and which new models are to be used to calculate withholding tax. In a further section, the rights and obligations of the person liable for withholding tax and the employee are described, concluding with explanations on the subsequent ordinary assessment.

In the following, we explain selected aspects of the FTA's new practical instructions in order to make it easier for the persons affected by them to get started with the new regulations, which will apply in Switzerland from 1.1.2021:

Terms

Employees

Employees within the meaning of Circular Letter No. 45 are persons who, irrespective of their place of residence or domicile, are in an employment relationship with an employer with a registered office in Switzerland. The decisive factor here is that the income from the underlying legal relationship qualifies as income from employment in accordance with Art. 17 para. 1 DBG.

Debtor of the taxable benefit (employer)

The debtor of the taxable benefit is the person who pays their employee a benefit that is subject to withholding tax. The employer, as debtor of the taxable benefit, must have their residence, registered office, effective administration, permanent establishment or fixed base in Switzerland (even in the case of a de facto employer).

If the debtor (employer) is domiciled abroad, the salary components which are paid by him and which are in principle taxable in Switzerland are subject to an ordinary assessment. In this case, the application of the so-called "Monteurklausel" within the meaning of Art. 15 para. 2 OECD-MA, according to which Switzerland may not tax the earned income.

From a Swiss perspective, the "Monteurklausel" presupposes that:

• The recipient (=employee) does not remain in Switzerland for more than 183 days in total during the calendar year in question, and
• the remuneration is paid by or on behalf of an employer who is not domiciled in Switzerland, and
• the remuneration is not paid by a permanent establishment or fixed base that the employer has in Switzerland.

The term "employer" for tax purposes is generally interpreted in economic terms, particularly in connection with the fitter clause. If the employee temporarily owes his work performance not to the employer with whom he has concluded the employment contract, but to another company (usually a group company) in Switzerland, this is referred to as a "de facto" employer.

According to circular no. 45, the existence of a de facto employer requires an examination of the following non-exhaustive criteria:

• Employee performance is an integral part of the Swiss company's business activities;
• The Swiss company bears the responsibility and the risk for the performance of the posted employee (or the foreign company bears a warranty obligation in connection with the result of the work);
• The Swiss company exercises the authority to issue instructions;
• The posted employee is integrated into the business organisation of the Swiss company (equipment, provision of premises and working materials, decisions on the nature and extent of the daily work of the posted worker, etc);
• The Swiss company bears the wage costs or should bear the wage costs economically.

According to Circular Letter No. 45, the essential characteristics of the concept of employer are the rights to the results of the work and the right to issue instructions.

As a rule, the existence of de facto employer status is only examined in the case of postings to Switzerland of more than three months within a twelve-month period.

Residence

Persons are deemed to be resident in Switzerland if they have unlimited tax liability in Switzerland on the basis of personal affiliation (i.e. on the basis of their domicile or permanent residence). Internationally, according to the Swiss double taxation agreements, residence is established in the country where a person is subject to unlimited tax liability under domestic law.

If a person is subject to unlimited tax liability in both countries according to the respective applicable national provisions, a cascade rule (so-called tie-breaker rule) is used to determine which state is to be considered the country of residence. The decisive factor here is the centre of the personal and economic interests of the employee.

Employees taxed at source

Employed workers are taxed at source on the salary or replacement income they receive from their employment relationship with a debtor of the taxable benefit.

The distinction between employees resident in Switzerland and employees resident abroad is of practical importance:

1) Employees residing in Switzerland

In principle, employees without a permanent residence permit (= C permit) or Swiss nationality who are resident in Switzerland are subject to the following regulations for income from their employment of the withholding tax. Married couples who live in an unseparated marriage are not subject to withholding tax if one of the two persons is a Swiss citizen or has a residence permit.

2) Employees residing abroad

An employee (cross-border commuter, weekly or short-term resident) residing abroad is subject to withholding tax for his salary and replacement income paid to him by a debtor with residence, effective administration, permanent establishment or fixed base in Switzerland, irrespective of nationality or residence permit. In other words, an employee resident abroad is liable to withholding tax even if he or she holds Swiss nationality or a permanent residence permit.

What are the principles of application of the tariff?

Different rates are applied when calculating withholding taxes. There are 9 tariff codes. These tariff codes depend on the personal circumstances of the person liable for withholding taxff at the time of payment, transfer, crediting or maturity of the taxable benefit. The consideration of changes that lead to a new tariff classification (e.g. marriage, divorce, separation, birth of children, taking up or giving up gainful employment, entering or leaving a regional church), takes place in the case of withholding tax from the beginning of the following month of the taxable period.

To name a few (list not exhaustive), there is, for example, the single-earner and two-earner tariff for married persons, the tariff for single parents or the tariff for the simplified settlement procedure for employees with smaller salaries.

The models of the withholding tax

According to Circular Letter No. 45, withholding taxes are calculated either according to the monthly or the annual model. While the monthly model is generally based on a monthly tax period and the monthly gross income usually corresponds to the gross wage determining the rate, the gross income paid out monthly in the annual model are taxed according to the rate corresponding to the annual income of the taxpayer (see Current information on withholding tax, Information letter from the Cantonal Tax Administration Bern)

The two calculation models are described in detail in Circular Letter No. 45 in chapters 6 and 7.

General obligations of the debtor of the taxable benefit (employer)

The withholding tax procedure imposes various obligations on the debtor. The taxable payment is independent of debt, which means that the debtor responsible for the payment of the withholding tax is fully liable for errors of the taxable person and third parties. If the debtor relies on incorrect information provided by the taxable person without verification and thus did not correctly deduct the withholding tax , he may be obliged to make a subsequent payments. If the employee has infringed their obligation to provide information, the debtor is, however, entitled to have recourse to the taxable person. The debtor of the taxable benefit must provide their taxable employee with the infromation on deducted withholding tax in each payroll and wage statement and in turn receives a commission for its cooperation. If the debtor intentionally or negligently fails to delivers the withholding tax or uses them for himself, this can lead to tax evasion or embezzlement charges.

General rights and obligations of employees subject to withholding tax

Rights of the employee subject to withholding tax

In return, the employee is entitled to have the deducted withholding tax shown in their payroll or salary statement. If they do not agree with the deduction in question or the deduction is not included in the pay slip, they may request the competent authority to issue a ruling on the liability to withholding tax. They may do so until 31 March of the year following the due tax period. An employee who is a resident or a quasi-resident in Switzerland and is not already subject to the mandatory subsequent ordinary assessment may, if they do not wish to claim any deductions for the withholding tax, apply to the competent authority for a subsequent ordinary assessment. If errors are discovered and reported in due time, a subsequent ordinary assessment may be replaced by a recalculation of the withholding tax.

Obligations of the employee subject to withholding tax

The employee is obliged to provide the debtor of the taxable performance with all information correctly and completely, so that a complete delivery of the withholding tax is possible. If they do not comply with this duty, they may be fined.

Change between withholding tax and ordinary assessment

1) Change from withholding tax to ordinary assessment

A person subject to withholding tax who is resident in Switzerland is released from withholding tax if they have a permanent residence permit (C permit) or the Swiss citizenship or marry a person who is in possession of a residence permit or a Swiss citizenship. If the spouse with Swiss citizenship or the residence permit is resident abroad (i.e. has a separate residence), then the other spouse without Swiss citizenship or residence permit in Switzerland continues to be subject to withholding tax.

Discharge from withholding tax takes place on the first day of the following month. The person concerned and their spouse are then subject to the ordinary assessment for the entire tax period. The deducted withholding tax is credited to the tax determined in the ordinary assessment without interest.

2) Change from ordinary assessment to withholding tax

If one of the aforementioned conditions ceases to apply, the person is subject to withholding tax again from the following month (e.g. in the event of divorce or a de facto or legal separation of the spouses, if one person has neither Swiss citizenship nor a permanent residence permit).

3) Subsequent ordinary assessment

Mandatory

If a person subject to withholding tax who is resident in Switzerland earns a gross income from employment of at least CHF 120,000 in a tax year before any income allocated to foreign countries for taxation is excluded, a mandatory subsequent ordinary assessment is carried out.

The gross income of spouses living in legally and factually unseparated marriage shall not be taken into account for the purpose of determining the minimum amount of the spouses' income from gainful employment.

Optional

For persons liable to withholding tax who are resident in Switzerland and whose income is less than CHF 120,000 per year, a retrospective ordinary assessment is carried out if they submit a corresponding application by 31 March of the tax year following the due date of the benefit.

A person liable to withholding tax who is resident abroad may apply to the competent tax authority for a subsequent ordinary assessment by 31 March of the year following the tax year if at least 90% of the worldwide gross income is subject to tax in Switzerland in the corresponding tax year (Quasi-residence). The application for a retrospective ordinary assessment can be submitted every year. It should be noted that the gross income of the spouse living in a legally and factually inseparable marriage is also added to the worldwide income of the person liable to withholding tax.