On 11 April 2018, the Federal Council decided to enact the Federal Law on the revision of the withholding tax on earned income and the associated amendments to the ordinances as of
1 January 2021. The long waiting period is mainly due to the fact that the cantons and concerned economic sectors should be given sufficient time to adapt to the changes.
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.
The applicable law now differentiates between individuals subject to withholding tax as residents (with do-micile/residence in Switzerland) and non-residents (with domicile/ residence abroad). Until now, residents were only subject to withholding tax if they did not have a settlement permit. The taxpayers switched to or-dinary assessment procedures under the following circumstances: The persons concerned either received a subsequent ordinary assessment (SOA) because they exceeded the threshold of CHF 120'000 gross in-come or they switched from source to ordinary assessment. According to Art. 5 of the Withholding Tax Or-dinance, this change can only take place if a settlement permit has been granted or if the taxpayer married a person with a settlement permit or Swiss citizenship. However, persons who had stayed or resided abroad and were only employed in Switzerland (so-called non-residents) were previously always taxed at source.
Only 9 % of individuals subject to withholding tax with domicile/ residence in Switzerland currently exceed the limit of CHF 120,000. If a person's gross income is below this threshold, he or she can currently only
make subsequent deductions from the tax base by means of a rate correction, provided that the deductions have not already been taken into account in the withholding tax rate. Due to the fact that withholding tax rates include lump-sum deductions (professional costs, insurance premiums, family expenses, etc.), the tax system and the recording of withholding tax is simplified, but the individual circumstances of taxpayers are neglected. The background to deductibility starting at a gross income of CHF 120'000 is the constitutional
principle of taxation according to economic capacity within the meaning of Art. 127 para. 2 BV. This principle is being less well observed in the case of high incomes due to the progression effects and lump-sum deduc-tions.
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 that landmark decision BGE 136 II 241, the Federal Supreme Court ruled on the case of a French non-resident subject to withholding tax who was employed in Geneva. The individual subject to withholding tax was treated as a quasi-resident by the Supreme Court, particularly as he earned 90 % of his earned income outside his country of residence, France. That taxation at source is permissible was in no way objected to by the Federal Supreme Court. Only the deductions of individuals subject to withholding tax in comparison to those subject to regular taxation were the subject of this verdict. The Federal Supreme Court found that there were no objectively identifiable differences between quasi-residents and residents with dependent em-ployment. This does not justify unequal treatment.
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.
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 SOA within 1 year (Attention, forfeiture period!) after the tax year. The cantonal tax authorities must be provided with the documents that are suffi-cient for assessing quasi-residence. However, a one-time application does not imply a fixed attachment to the procedure of subsequent ordinary taxation as for residents. An application for SOA 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 earn less than 90 % of their income in Switzerland, are henceforth also subject to withholding tax as well as its deductible costs. Accor-ding to the jurisprudence of the European Court of Justice, this is objectively justifiable. International tax law stipulates that the income of dependent employees must be taxed at the place of work. In this case, it is per-missible to claim those deductions which are directly related to this income. Deductions not subject to with-holding tax must be made in the country of residence. The same procedure applies to deductions that are recognised by the withholding tax but exceed the permissible lump-sum deduction.
4. Local jurisdiction regarding 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. Standardisation of procurement commissions
Procurement commissions are the costs for the administrative effort of the employer as a debtor of with-holding tax. Under current law, a commission of 1 to 3 % of the withholding tax amount is charged. Never-theless, the withholding tax procedure has been schematised and simplified for employers, so that the em-ployer hardly has to make a significant effort any more. Therefore, the procurement commission in the new legislation should lie between 1 and 2 %. Meanwhile, the cantons determine the approach and modalities of the procurement 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 relocates from one canton to another, the question arises as to which of the two cantons is entitled to levy withholding tax. This was clarified by means of this revision. The decision is based on the place of domicile of the person subject to withholding tax at the end of the tax period (31 December of the calendar year). In the case of international weekly residents, not the location of the debtor of the taxable
benefit (the employer), but the canton of the weekly resident is taken into account.
The revision of the withholding tax law, which comes into force on 1 January 2021, brings about the approxi-mation and equal treatment of ordinarily taxed persons and persons taxed at source as demanded by the European Court of Human Rights. However, these are individual necessary corrections - a fundamental re-vision is not apparent. Furthermore, there are still large gaps to be found, which in turn does not make the situation any easier for employers. For example, it is still unclear to what extent professional costs are de-ductible or not. Whether and to what extent the competent cantonal authorities regulate the provisions of the ordinance in the circulars in greater detail, remains open at present.