Withholding tax rate corrections: an important deadline for the withholding tax is approaching: 31 March 2019.
By that date, persons subject to withholding tax must have submitted their applications for re-assessment of the withholding taxes taking into account individual deductions or for subsequent ordinary assessment.
Foreign employees without residence permit (permit C) establishing their tax residence or abode in Switzerland are subject to unlimited tax liability in Switzerland. Nonetheless, they will be subjected to a tax deduction at source for their income from their gainful employment activity. The same applies to persons not having a tax residence or abode in Switzerland, such as cross-border commuters, weekly resident aliens and short-time resident aliens carrying out a gainful employment activity in Switzerland. They establish tax liability in Switzerland due to their economic affiliation. In both cases, the employers are obliged to directly deduct the taxes owed by their salaried employees from the wage. For international cross-border commuters and weekly resident aliens, the different regulations in the double tax agreements (DTAs) and in the cantonal instructions, depending on the country of residence and canton of work, must be observed. Contrary provisions of the DTAs remain reserved as well.
The withholding tax is designed progressively and is calculated based on the gross incomes. It covers all incomes from a gainful employment activity incl. secondary incomes and benefits in kind as well as the replacement incomes. The withholding tax deduction comprises the state, municipal, church and direct federal taxes. To ensure equal treatment of the different tax payers to the maximum extent possible, the withholding tax rates include certain correctives, such as the deduction of the mandatory contributions for OASI/DI/IC and for the occupational pension as well as the contributions for the UI and the NOAI up to the amounts stipulated by law. These general deductions are equivalent to those of the ordinary assessment. Added to this must be deductions for insurance premiums and work-related expenses. The tax laws also take account of the personal circumstances of the taxable person (civil status, number of children) by applying different rates. Individual deductions, such as column 3a or debt interest, however, are not taken into account in the rate calculation and are the subject of a subsequent application of the taxable person.
Digression: Premiums for Non-Occupational Accidents
By judgement no. QS.2018.7 of 28 August 2018, the Zurich Tax Recourse Court decreed that, where the employer bears the non-occupational accident insurance contributions (NOAI contributions) for the employer's employees, such contributions must be added to the gross wage in the withholding tax procedure. Such NOAI contributions have actually been included in the calculation of the withholding tax rate as deductible costs in a lump-sum form. Without appropriate set-off in the gross wage, persons subject to withholding tax would be given preferential treatment vis-à-vis the ordinarily taxable employees. They are not subject to any deduction of NOAI contributions from their wage, while the applicable withholding tax rate is nevertheless reduced by the NOAI contributions.
Withholding Tax Re-Assessment
Upon determination of the withholding tax rates, lump sums for work-related costs and insurance premiums as well as deductions for the family charges are taken into account. The Withholding Tax Ordinance (WTO) gives the tax authorities the opportunity to individually grant deductions not (sufficiently) taken into account in the rate. In practice, this has come to be termed "rate correction". In case of such a rate correction, the individual deductions are deducted from the gross salary of the person established in Switzerland and subject to withholding tax. The relevant withholding tax rate is applied to and the withholding tax already paid is credited against the assessment basis newly calculated in this manner. Any surplus is reimbursed. The following deductions can or must likewise be granted additionally: debt interest, column 3a payments-in, OP purchases for lacking contribution years, further training costs, third-party care costs, child support payments, maintenance contributions, costs in case of illness or accidents, disability-related costs, charitable benefits, donations, costs for week stays and travelling expenses.
In its judgement of 26/01/2010 (BGer 2C 319/2009 of 26/01/2010), the Federal Court adopted for the first time the case law developed by the European Court of Justice (ECJ) on the quasi-residency. Due to the lacking place of residence in Switzerland, a subsequent rate correction was refused in the relevant ruling. Thereupon, the Federal Court held that, in certain constellations, the present-day WTO violates the Agreement on the Free Movement of Persons (AFMP) in case of persons not established in Switzerland (so-called "non-residents"). Accordingly, undue discrimination exists if non-resident taxable persons are treated differently from resident taxable persons where these are in comparable situations. A comparable situation must always be assumed where non-residents generate large part of their incomes (90% or more of their worldwide income) in the country of their place of work. In this case, the incomes of spouses are added up. If this condition is met, the country of the non-resident's place of work is intended to grant the non-resident the same favourable tax treatments as the residents. In this way, the Federal Court paved the way for rate corrections for cross-border commuters or international weekly resident aliens having their place of residence abroad.
Subsequent Ordinary Assessment Procedure
If the gross income taxed at source exceeds a specific amount, a subsequent ordinary assessment (SOA) is implemented by offsetting the deducted withholding tax. The taxable person has to submit an ordinary tax return and declare his/her worldwide incomes and his/her worldwide assets. Both for the federal income tax and in almost all cantons, this income limit amounts to CHF 120,000. Nonetheless, this possibility exists only in case of foreign persons subject to withholding tax who establish their tax residence or abode in Switzerland. If the foreign employee resides abroad, a SOA is not possible, irrespective of any shortfall or exceedance of the income limit. In this case, only the withholding tax rate correction procedure described above is available, if need be.
Complementary Ordinary Assessment Procedure
If persons subject to withholding tax who have their place of residence in Switzerland even have further taxable income in addition to their earned income (e.g. from tangible or intangible assets) or have taxable assets, they must complete an ordinary tax return as well. The threshold values differ from canton to canton (approx. income of CHF 2,500 / assets of CHF 200,000). This is, however, an additional assessment. The earned income continues to be taxed at source, but is taken into account for the tax rate determination for the complementary ordinary assessment (COA). There is no set-off of the withholding tax effected by analogy with the SOA.
Procedural Questions and Deadline
Rate corrections for deductions of which no sufficient account has been taken in the rate in a lump-sum manner are possible only upon application. Persons subject to withholding tax can require an order on the existence and extent of the tax liability by 31 March of the following year. Pursuant to the case law of cantonal and federal courts, this deadline qualifies as a forfeiture period and cannot be extended. This deadline by the end of March of the following year also applies to "correction requests", i.e. applications for rate correction, subsequent ordinary assessment or other elimination of any undue discrimination supported by prima facie evidence.
The Federal Act on the Revision of the Taxation of Earned Income at Source adopted on 16 December 2016 dismantles the differences in treatment referred to above. For persons subject to withholding tax who have their place of residence in Switzerland (residents), the SOA continues to be mandatory for an annual gross income from a gainful employment activity starting at CHF 120,000. Now, resident persons subject to withholding tax with an annual gross income of less than CHF 120,000 as well as "quasi-resident" persons subject to withholding tax can apply for a SOA as well. For all non-resident persons subject to withholding tax, the withholding tax is definite. The COA procedure existing to date is likewise intended to be replaced by the SOA procedure. As a result, the procedures for resident persons subject to withholding tax will be harmonised. The rate correction practice existing to date will thus be abolished. The Federal Act on the Revision of the Taxation of Earned Income at Source will enter into force on 1 January 2021 along with several amendments to the Ordinance based on that Act. In this way, the cantons and the companies will be given sufficient time to carry out the necessary adjustments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.