EXPLAINED: What changes in Swiss tax law in 2021?

EXPLAINED: What changes in Swiss tax law in 2021?
Nee legislation will reform Switzerland's withholding tax system. Photo by AFP
Swiss revision of taxation at source, or withholding tax, took effect on January 1st, 2021. As all matters related to taxes, it is a bit complex. The Local explains the main points.

Foreigners working in Switzerland have their taxes deducted directly from their payroll each month, a system called taxation at source, or withholding tax.

Employers then forward the levied amounts to cantonal tax authorities. 

What is the objective of the new legislation?

Switzerland’s new law on taxation at source (Quellensteuer/ Impôt à la source/ Ritenuta d’acconto), is intended to ensure compliance with rules stipulated in the EU/EFTA agreement on the free movement of persons.

Most specifically, its aim is to eliminate disparities in treatment between workers subjected to withholding tax and those under the ordinary taxation regime.

Also, the cantons will be required to standardise the calculation of withholding taxes throughout Switzerland.

How does the system work currently?

Foreign nationals, including some 125,000 cross-border workers from France, Italy, and Germany who are employed in Switzerland, have income taxes automatically deducted from their salaries.

An agreement between Switzerland and the neighbouring countries, which is aimed at avoiding double taxation, authorises cantons to subtract withholding tax from cross-border workers’ wages. 

While most of this money remains in Switzerland, a portion is paid to the employees’ respective countries of residence or regional authorities there.

To determine the withholding tax rate, the total gross income from all employment, including supplementary earnings such as benefits from invalidity or accident insurance, must be calculated. 

Also, any foreign resident who is subject to withholding tax must file a tax return if their income exceeds 120,000 francs at the federal level. In Geneva, this threshold is currently set at 500,000 francs for a couple. 

On the other hand, Swiss citizens or foreigners who have a permanent residence status (Permit C) are not subject to taxation at source. 

Instead, companies give these employees a salary statement at the start of each year, listing the total gross and net income received in the previous year. Fiscal authorities send out tax return forms at the start of each year, which should be filled out and returned by the end of March.

READ MORE: How to navigate your way to a lower Swiss tax bill 

What will be different from January 1st?

Anyone who earns less than 120,000 a year will be entitled to file an ordinary tax return. 

Foreign nationals wishing to be taxed under the ordinary system must address their request to their cantonal tax authorities before March 31st of the year following the fiscal year in question. Once a person has been taxed under the ordinary regime, they remain subject to this system for the following years, in parallel with the withholding tax.

For all taxpayers who are not Swiss nationals, married to a Swiss national, or C Permit holders, tax at source will continue to be collected as a guarantee.

However, final taxation will be decided at a later date, in compliance with the ordinary rules and rates. The amount of the tax withheld will be applied without interest. 

For more details about the new tax system, see here. 

You can calculate your tax rate here.

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