Withholding tax is payable by some foreign employees working in Switzerland. Withholding tax is associated with some special features, as the withholding tax system is not the “regular” tax system in Switzerland. We explain what you need to know about “withholding tax”, who has to pay it and how the tax reform in 2021 will affect withholding tax in the future.
« Withholding tax is payable by foreign employees working in Switzerland – unless they have a permanent residence permit.»
What is the meaning of withholding tax?
Withholding tax is payable by foreign employees working in Switzerland – unless they have a permanent residence permit (C permit). The employer deducts the withholding tax directly from the salary and pays it to the tax authorities.
The withholding tax system thus differs from the regular tax system to which Swiss citizens and foreign employees with a C permit are subject: they receive their salary from their employer after deducting their share of social security contributions and pay the tax to the tax authorities on a provisional monthly or quarterly basis. For this group, it is mandatory to file a tax return at the end of the tax year, because the subsequent assessment by the tax office determines the definitive tax burden.
Who pays withholding tax in Switzerland?
Foreign employees who work in Switzerland but do not have a permanent residence permit (C permit) are liable to withholding tax.
These can be persons who are resident in Switzerland for tax purposes and have either a residence permit (B permit), or a short-term residence permit (L permit).
Withholding tax must also be paid by persons who are not resident in Switzerland for tax purposes but who work here for a limited period or permanently (e.g. cross-border commuters or international weekly residents).
From when do you no longer have to pay withholding tax?
As soon as the foreign employee receives a settlement permit (C permit) or marries a person with Swiss citizenship, no more withholding tax has to be paid from the following month. From then on, the employee then pays his taxes according to the ordinary Swiss tax system and submits a tax return at the end of the tax year.
Do withholding tax payers have to file a tax return?
Those who are subject to withholding tax are not required to file a tax return.
Exception: If the gross annual salary is above CHF 120,000, the employee must pay withholding tax and submit an ordinary tax return at the end of the tax year.
In this case, the withholding tax payments are treated as payments on account and the final tax burden is determined by the assessment of the tax authorities, as in the previously described categorization. Depending on factors such as the commune of residence or the financial circumstances (debts, assets, deductions), the final result is an open tax burden or a refund, which, depending on the canton, is paid out to the taxpayer or carried forward to the next tax year.
However, anyone earning less than CHF 120,000 can also apply for a refund of any excess withholding tax paid and claim various expenses for tax purposes retrospectively (e.g. expenses for pillar 2 and 3 occupational or private pension plans). For this purpose, an application for reassessment of the withholding tax or subsequent ordinary assessment must be submitted to the competent cantonal tax authority.
What are withholding tax rates?
Withholding tax is not uniform in Switzerland; it varies from canton to canton. There are also different rates depending on the circumstances of the employee. Just like conventional income tax, withholding tax is subject to progression. This means that as income increases, so does the tax rate.
The most common tariff bands are listed below:
- Tariff A: Single persons without children or persons in need of support in the household
- Tariff B: married couples with one income (with or without children)
- Tariff C: Married couples with two incomes (with or without children)
- Tariff D: Secondary wage earners
In addition, there is the church tax, provided that the employee belongs to the corresponding denominational group (Roman Catholic, Christian Catholic, Protestant Reformed) and has not left the church.
How are withholding taxes calculated?
The gross salary and all allowances and lump-sum expenses are used to calculate the tax rate. Taking into account the marital status and other circumstances, the taxpayer is assigned a rate band (A, B, C, etc.) and the tax rate is calculated. This varies from canton to canton, as you can see from the following examples.
Case 1 (tariff A): Single, no children, CHF 100,000 gross income
|Canton||Withholding tax payable per year (CHF)|
Case 2 (tariff B): Married (sole earner), 1 child, CHF 100,000 gross income
|Canton||Withholding tax payable per year (CHF)|
You can see from the above examples that there are not only major differences between the individual cantons as far as the amount of withholding tax is concerned, but also that marital status plays a major role.
Withholding tax reform January 2021
A new version of the Withholding Tax Ordinance came into force on January 1, 2021. It is intended to eliminate the unequal treatment of persons subject to withholding tax and persons subject to ordinary taxation. In addition, the calculation (but not the tax rates) of the withholding tax is to be standardized in the cantons. There are two models: the annual model (Ticino, Fribourg, Geneva, Vaud and Valais) and the monthly model (in all other cantons).
Implications for employers
The reform brings some changes for employers:
- If the employee changes residence, the employer must settle with the new canton of residence (previously: settlement with the employer’s canton of residence)
- New calculation method for the 13th month’s salary in the monthly model
- New uniform rate determination for irregular hourly wages
Effects for employees domiciled in Switzerland
The reform also has implications for employees:
- Application for subsequent ordinary assessment can be made (previously: only lump sums could be claimed for withholding tax)
- Contributions to pillar 2 and 3 deductible
- Submitting a withholding tax rate correction only in exceptional cases (e.g. if the rate needs to be corrected)
Effects for employees residing abroad
For persons liable to withholding tax who are resident abroad, the tax liability in Switzerland is limited only to the working days in which work was performed in Switzerland. A tax return in Switzerland therefore does not have to be submitted.
However, these persons now also have the option of applying for a subsequent ordinary assessment – and thus submitting a tax return. To do so, at least one of the following conditions must be met:
- More than 90% of worldwide income is subject to tax in Switzerland
- The situation of the taxpayer is comparable to a person residing and liable to pay tax in Switzerland (e.g. if the taxpayer does not have sufficient taxable income in the country of residence to claim tax deductions for marital status or children)
- Tax deduction of foreign pension contributions if a double taxation agreement exists with Switzerland
Do you have further questions about taxation in Switzerland? Contact us without any reservations, as it is a non-binding request. We will contact you promptly and discuss your individual situation.