Federal Council dispatch on revision of withholding tax on earned income

Bern, 28.11.2014 - In the future, anyone resident in Switzerland whose earned income is taxed at source should have the option of a subsequent ordinary tax assessment. This option should also be available to people taxed at source who are not resident in Switzerland but earn a major part of their global income in Switzerland. Differences between the tax treatment of individuals taxed at source and those subject to ordinary taxation can be eliminated in this way. Today, the Federal Council took note of the report on the results of the consultation procedure and adopted the dispatch for a corresponding legislative amendment.

There is an immediate need to amend the current withholding tax system at the legislative level because of a Federal Supreme Court ruling. On 26 January 2010, the FSC stated for the first time that, in certain cases, withholding tax contravenes the Agreement on the Free Movement of Persons concluded with the European Union. According to the FSC, people taxed at source who are not domiciled in Switzerland and who earn more than 90% of their global income in Switzerland (so-called "quasi-residents") are entitled to the same deductions as those subject to ordinary taxation in Switzerland.

Following the revision, withholding tax will continue to be levied for the groups of people currently affected. In the future, however, all residents taxed at source should have the option of a subsequent ordinary tax assessment. Above an income threshold still to be determined, they will officially be subject to a subsequent ordinary tax assessment as is the case under currently applicable law. All others can request a subsequent ordinary tax assessment. The supplementary ordinary tax assessment, which includes income and assets not subject to withholding tax, should also be replaced by the subsequent ordinary tax assessment. This will harmonise the procedure for residents subject to withholding tax.

A subsequent ordinary tax assessment is also available to non-residents, provided they earn a major part of their income in Switzerland and thus meet the quasi-residency requirements. Withholding tax is definitive for all other non-residents. It replaces the taxes to be assessed on income from employment in the ordinary procedure. Following the restructuring of the withholding tax regime, the rate-correction tool for subsequently claiming additional deductions will be superfluous.

It is not possible to estimate the financial impact due to a lack of reliable data. The elimination of differences between the tax treatment of individuals taxed at source and those subject to ordinary taxation will result in additional assessment-related work for the cantonal tax authorities.

Withholding tax and people taxed at source in Switzerland

Withholding tax is levied at source on the income of foreign employees in Switzerland who do not have a permanent residence permit (C permit). At present, there are approximately 760,000 employees without a permanent residence permit taxed at source in Switzerland. Some 490,000 of these have their tax domicile or place of residence in Switzerland and are therefore considered residents. Approximately 270,000 do not have their tax domicile or place of residence in Switzerland and are considered non-residents. Quasi-residents are employees who do not have their tax domicile or place of residence in Switzerland but generate a major part of their global income here. According to the Federal Supreme Court judgment, these people are entitled to the same deductions as those subject to ordinary taxation. In the case of withholding tax applied to earned income, the employer deducts the tax payable directly from the salary.

Address for enquiries

Lukas Schneider, Researcher, Federal Tax Administration FTA
Tel. 058 462 72 51, Lukas.Schneider@estv.admin.ch