New rules for withholding taxes (as of 01.01.2021)

In order for you to know what innovations the revision of the withholding tax entails, we have taken a closer look at the revision in the following article and point out the changes made to the old legislation.

Applicable law

The current law distinguishes between withholding taxpayers as residents (domiciled/residing in Switzerland) or non-residents (domiciled/residing abroad). Until now, residents were only subject to withholding tax if they did not have a permanent residence permit. The taxpayers switched to the ordinary assessment procedure under the following circumstances: Either they were subject to a subsequent ordinary assessment (NOV) because they exceeded the threshold of CHF 120,000 gross income, or they switched from withholding to ordinary assessment. According to Art. 5 of the Withholding Tax Ordinance, this change can only take place if a permanent residence permit was granted or the taxpayer married a person with a permanent residence permit or Swiss citizenship. However, persons who had their residence or domicile abroad and only carried out their dependent gainful activity in Switzerland (so-called non-residents) were always taxed at source until now.

Only 9 % of those subject to withholding tax who reside in Switzerland currently exceed the threshold of CHF 120,000. If a person's gross earned income is below this threshold, he or she can currently only claim subsequent deductions from the tax base by means of a rate adjustment, provided the deductions have not already been taken into account in the withholding tax rate. Due to the fact that the withholding tax rates contain flat rates for deductions (professional expenses, insurance premiums, family expenses, etc.), the tax system and the recording of taxpayers subject to withholding tax are simplified, but the individual circumstances of the taxpayer are neglected. The background to the deductibility of gross earned income of CHF 120,000 or more is the constitutional principle of taxation according to economic capacity within the meaning of Art. 127 Para. 2 BV. This principle is less well observed in the case of high incomes due to the effects of progression and the lump-sum deductions.

Why a revision?

For many years, the Federal Supreme Court has considered the taxation of non-residents subject to with-holding tax in comparison to ordinarily taxed residents to be objectively justifiable and compatible with the principle of equality of rights laid down in Art. 8 BV. In a principle decision of 26 January 2010 (BGE 136 II 241), the Federal Supreme Court had to examine whether the withholding tax procedure was compatible with the Agreement on the Free Movement of Persons of 21 June 1999 between Switzerland and the Euro-pean Union. In BGE 136 II 241, the Federal Supreme Court declared an undue discrimination of non-residents against residents, provided that they are in a similar situation. The European Court of Justice has upheld in established jurisprudence that the situation of residents and non-residents is comparable if non-residents earn at least 90 % of their income in a state other than the state of residence. As a result, non-residents may be treated as quasi-residents under certain circumstances.

In the landmark decision BGE 136 II 241, the Federal Supreme Court ruled on the case of a non-resident French national subject to withholding tax who was gainfully employed in Geneva. The withholding tax payer in question was treated by the supreme court as a quasi-resident, especially since he earned 90% of his income from gainful employment outside his country of residence, France. The fact that taxation at source is permissible was not objected to in any way by the Federal Supreme Court. Only the deductions of those taxed at source in comparison to those taxed in the ordinary way were the subject of this verdict. The Federal Supreme Court found that there are no objectively ascertainable differences between quasi-residents and residents with salaried employment. Thus, unequal treatment cannot be justified.

The Federal Supreme Court thus created a basis for the subsequent administrative practice and confirmed the violation of the principle of equality of rights in three further decisions of the same year. This established administrative practice is now being followed up with the revision of the withholding tax procedure at the le-vel of legislation and ordinances.

New legislation

1. Subsequent ordinary assessment (SOA) for residents

With the SOA for residents, an ex officio mandatory subsequent ordinary assessment takes place once a certain limit of gross income (CHF 120,000 gross income from salaried employment in accordance with Art. 9 Para. 1 QStV) has been reached. If the income is lower than this threshold, the taxpayer may now apply for a SOA. However, it is imperative for the obligated party to observe the forfeiture period. The application must be submitted by 31 March of the year following the tax year. However, caution is required here. There is the possibility that the tax liability may be higher in the subsequent ordinary assessment procedure than at source. Compatibility with the rules of the European Union is now based on the fact that all residents can obtain a SOA. As a result, taxpayers have the same deduction possibilities as ordinarily taxed individuals.

2. Subsequent ordinary assessment on application for quasi-residents

Quasi-residents are non-residents who earn a large part of their worldwide gross income (at least 90%) in Switzerland (Art. 14 para. 1 QStV). These persons can apply for a NOV within 1 year (attention: forfeiture period!) after the tax year. The cantonal tax authorities must be provided with the documents that are sufficient to verify quasi-residency. However, a one-time application does not mean a firm commitment to the procedure of subsequent ordinary taxation as in the case of residents. An application for NOV must be submitted annually.

3. Withholding tax with compensation effect for non-residents

Non-residents who do not meet the requirements for quasi-residency, i.e. who generate less than 90% of their income in Switzerland, will continue to be subject to withholding tax and their deductible expenses. This is factually justifiable according to Jurisprudence of the European Court of Justice. International tax law provides that, in the case of employed persons, the income is to be taxed at the place of work. In this context, it is permissible to claim those deductions that are directly related to this income. Deductions that are not subject to withholding tax must be claimed in the country of residence. In the same way, deductions that are recognized by the withholding tax but exceed the permissible amount of the lump-sum deduction must be claimed.

4. Local jurisdiction of taxation

Non-residents and residents who are not subject to the ordinary subsequent assessment or who have not applied for it are still taxed at the end of the month when the taxable benefit becomes due in the canton of domicile or residence of the person subject to withholding tax or his debtor. However, the revision introdu-ces new provisions concerning local jurisdiction in a subsequent ordinary assessment procedure: The can-ton of domicile or residence on 31 December of the tax period.

5. Standardised procurement commission

Withholding commissions are the costs for the administrative effort of the employer as debtor of the withholding tax. Under current law, a commission of 1 to 3% of the withholding tax amount is charged. Nevertheless, the withholding tax procedure has been schematised and simplified for employers, so that the employer hardly has to incur any significant expense. Therefore, under the new law, the reference commission should be between 1 and 2%. Meanwhile, the cantons determine the approach and modalities of the reference commission in accordance with Art. 6 of the Withholding Tax Ordinance.

6. Competence in the event of a relocation to another canton

If an employee moves his/her place of residence from one canton to another, the question arises as to which of the two cantons is responsible for taxation at source. This has been clarified by means of this revision. The domicile of the person subject to withholding tax at the end of the tax period (31 December of the calendar year) is taken into account. In the case of international weekly residents, the place of residence is not the place of the debtor of the taxable benefit (the employer), but the canton of the weekly resident.

Conclusion

The revision of the withholding tax law, which will come into force on 1 January 2021, will bring about the approximation and equality of those subject to ordinary taxation and those taxed at source as demanded by the European Court of Human Rights. However, it is a matter of individual necessary corrections - a fundamental revision is not evident. Furthermore, there are still large gaps, which in turn does not make the situation any easier for employers. For example, it is still unclear to what extent professional expenses are deductible or not. It remains to be seen whether and to what extent the competent cantonal authorities will regulate the provisions of the ordinance in more detail in the circulars.