New Tax at Source legislation - what do employers and employees have to prepare by 1 January 2021? - Tax and Legal blog

Deloitte tax blog GES

In April 2018, the Swiss government announced that the new tax at source law, which was adopted in December 2016, is to enter into force on 1 January 2021.

This has prompted the Federal Tax Administration (FTA) to publish circular letter 45. This letter explains the new tax at source law in detail and attempts to clarify certain topics with an ultimate goal of harmonising different cantonal practices.

Although the new tax at source legislation will only enter into force on 1 January 2021, the FTA has chosen to publish the new circular letter in order to allow the cantonal tax authorities, employers and employees enough time to prepare for the changes. The circular letter provides more details as to the future changes to the tax at source legislation and also addresses certain controversial or unclear topics where different cantonal practices currently exist. As the circular letter is binding for all cantonal tax authorities it should result in a harmonization of the different cantonal practices in the future. 
 
The circular letter stipulates that all tax rulings obtained prior to 1 January 2021 that do not correspond with the new legislation and also with the content of the circular letter, will become invalid as of the enactment of the new legislation.
 

Future changes in the new legislation

The most important changes of the new tax at source legislation are:
 
For employers:
  • Employers will no longer be allowed to account for tax at source for all their employees with the cantonal tax authorities of the canton where they are located. Instead, employers will need to make the tax at source declarations for their employees directly with the correct cantons as of 1 January 2021.  This will be either the canton of residence of the employees (for Swiss resident employees and non-resident weekly commuters) or the canton where the employer is located (for non-resident employees that do not qualify as weekly commuters).
  • Employers will be obliged to submit the tax at source declarations on a monthly basis irrespective of the number of employees subject to tax at source. The cantonal tax authorities can allow longer declaration cycles (e.g. quarterly or semi-annual) upon application. 
For employees:
  • Under the new legislation, no tax at source corrections can be submitted. However, it may be possible to request a recalculation of the tax at source if one of the following conditions apply:
  1. The taxable gross wage has been determined incorrectly; or
  2. The tax rate determining income has been determined incorrectly; or
  3. An incorrect tariff was applied.

If an employee wants to claim additional deductions that are not already included in the tax at source rate (e.g. contributions to 3rd pillar, additional voluntary contributions to the 2nd pillar, charitable contributions, interest charges etc.), a tax return must be filed.

The (irrevocable) application to file a tax return must be submitted to the tax authorities by the end of March of the year following the tax year. This deadline cannot be extended. 

While all individuals residing in Switzerland can make this application non-resident employees will only be granted this right if approximately 90% of their worldwide income is subject to Swiss taxation. 
 
For resident employees the application will be binding for future tax years, i.e. they will need to continue to file a tax return in subsequent years.  Non-resident employees can choose to apply for this right for each tax year independently (provided they meet the conditions in any particular year). 
 
The final tax liability of any employee who has (successfully) applied to file a tax return will be based upon the tax return. The application cannot be revoked even if the return triggers an additional tax liability compared to the tax at source already paid. 
 

Clarification of previously controversial or unclear areas

The circular letter provides some welcome specifications in areas that have so far been controversial or unclear. Examples include:
  •  The conditions (and examples) for a Swiss entity to qualify as an economic employer of an employee legally employed (and remunerated) by a foreign entity. 
  •  The correct determination of Swiss workdays for non-resident employees who are only subject to tax at source on their remuneration relating to Swiss workdays.* 
  •  The tax treatment of various income items (e.g. employee accident insurance premiums paid by the employer) and the application of child deductions. 

*The circular letter makes clear that employers have the right to account for tax at source only on the remuneration relating to Swiss workdays without the explicit approval of any cantonal tax authorities and specifies the proof that must be provided. 

Deloitte’s View

While the new circular letter provides relatively detailed explanations of the new legislation and addresses various controversial or unclear points many questions remain that will need to be defined by the future practice. 
 
Although the new legislation and the circular letter will only come into force on 1 January 2021, it is important for employers and employees to start preparing for the changes to come. A thorough review of current practices and rulings would, therefore, be highly recommended, especially since rulings will no longer be valid in the future should they not be in line with the new rules.
 
Deloitte will be happy to support and advise you in the review of existing rulings as well as in the adaptation of workflows in order that you are ready for the changes due on 1 January 2021.  
 

By Dominique Frison - Manager, Global Employer Services

 

If you would like to discuss more on this topic, please do reach out to our key contact below.

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Dirk Hangarter - Partner, Global Employer Services

Dirk leads the Private Client Services group in the tax practice of Deloitte in Zurich. He has more than 20 years of experience in domestic and international tax and social security questions. He specialises in advising high net worth individuals and senior executives. Dirk holds a Master in law from the University of Zurich, Switzerland, and is a Swiss-certified social security specialist.

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Key contacts

Dominique Frison110x110

Dominique Frison - Manager, Global Employer Services

Dominique works as a Manager in the Global Employer Services (GES) Practice for Deloitte Switzerland. He has more than 10 years of experience as an individual tax specialist and focuses on tax at source as on payroll and shadow payrolls topics. Before he joined Deloitte, he worked as a tax commissioner for the tax authorities of the canton of Zurich. Dominique is a certified fiduciary and holds an Executive MBA in international individual taxation.

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