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Withholding tax revision 2021

January 31, 2021

Current situation

On 15 December 2016, Parliament passed the Federal Act on the Revision of the Withholding Tax on Earned Income. The Withholding Tax Ordinance was published in April 2018. On 12 June 2019, the Federal Tax Administration FTA published circular no. 45 on the withholding taxation of earned income of employees.

The revision of withholding taxes has been in force since 1 January 2021. It entails some substantial changes.

What will change? - The most important at a glance

  • Income subject to withholding tax will be defined in a practically uniform manner
  • Unification of the tariff code application
  • Unification of the withholding tax calculation within cantons in the monthly or annual model
  • Uniform rate definition for irregular hourly wage earners
  • Abolition of the rate correction - prerequisites for a subsequent ordinary assessment have been adjusted and extended
  • Employers must now settle separately with all eligible cantons
  • Application of QST code D (sideline) no longer applies for the employer - in the case of several part-time activities (also substitute benefits), a complex income extrapolation is now applied
  • Withholding tax rate for the 13th month's wage in the monthly model must now be determined using a special calculation formula
  • Reference commission has been reduced to 1-2
  • Anchoring of the withholding tax obligation for the de facto employer and for inadmissible personnel leasing from abroad
  • Provisions for artists and sportsmen residing abroad have been clarified and adapted

Important changes in detail

Discontinuation of rate correction - retroactive ordinary assessment (NOV)

Until now, residents subject to withholding tax (domicile/residence in Switzerland) were subject to mandatory taxation in the NOV if their gross income exceeded CHF 120,000 or if they had other income/assets not subject to withholding tax. Since the rate correction has now been abolished, residents who do not meet the requirements of the compulsory NOV can still be taxed in the NOV upon application. In this case, the NOV is applied for by 31 March of the year following the tax year or the recalculation of the withholding taxes is requested. Once an application has been made in due form and time, it cannot be withdrawn and is binding. In addition, a subsequent ordinary assessment is also carried out ex officio in the following years (until the end of the withholding tax obligation). Depending on the municipality of residence, this can have a positive or negative effect.

Quasi-residents, i.e. persons who live abroad but work in Switzerland, can also request a NOV. The condition is that at least 90% of the gross income earned worldwide is earned in Switzerland. In a marriage, the gross income also includes the income of the partner. A request for NOV must be made here annually.

Settlement of withholding tax on the part of the employer.

The most important change for the employer is that in future it is mandatory to settle with the competent canton at the employee's place of residence. It is no longer permissible to settle all employees subject to withholding tax in the canton where the company is domiciled. Old-law tax rulings that do not comply with the new legal provisions will be ineffective as of the 2021 tax period.

Conclusion

Due to the legislator's mandate to the cantons to proceed uniformly with withholding tax, the circular KS 45 also became quite complex. Even though it provides useful answers in most cases, it does not clear up all ambiguities or contradictions. The complexity is due to the fact that withholding tax should be as close as possible to ordinary taxation. The impression is that those liable to withholding tax should not receive any advantage over persons subject to ordinary taxation. In many places, the FTA refers to the fact that the taxpayer can have the withholding tax reviewed until 31 March of the following year. Withholding tax is undoubtedly a highly complex issue and the legal foundations were revised within a tight corset. The first years of application will show how practical KS 45 actually is.

We will be happy to advise you on the analysis of your need for action, support you in the concrete implementation or examine further possibilities for tax optimisation.

Source: PWC, circular no. 45

Withholding tax revision 2021

January 31, 2021

Current situation

On 15 December 2016, Parliament passed the Federal Act on the Revision of the Withholding Tax on Earned Income. The Withholding Tax Ordinance was published in April 2018. On 12 June 2019, the Federal Tax Administration FTA published circular no. 45 on the withholding taxation of earned income of employees.

The revision of withholding taxes has been in force since 1 January 2021. It entails some substantial changes.

What will change? - The most important at a glance

  • Income subject to withholding tax will be defined in a practically uniform manner
  • Unification of the tariff code application
  • Unification of the withholding tax calculation within cantons in the monthly or annual model
  • Uniform rate definition for irregular hourly wage earners
  • Abolition of the rate correction - prerequisites for a subsequent ordinary assessment have been adjusted and extended
  • Employers must now settle separately with all eligible cantons
  • Application of QST code D (sideline) no longer applies for the employer - in the case of several part-time activities (also substitute benefits), a complex income extrapolation is now applied
  • Withholding tax rate for the 13th month's wage in the monthly model must now be determined using a special calculation formula
  • Reference commission has been reduced to 1-2
  • Anchoring of the withholding tax obligation for the de facto employer and for inadmissible personnel leasing from abroad
  • Provisions for artists and sportsmen residing abroad have been clarified and adapted

Important changes in detail

Discontinuation of rate correction - retroactive ordinary assessment (NOV)

Until now, residents subject to withholding tax (domicile/residence in Switzerland) were subject to mandatory taxation in the NOV if their gross income exceeded CHF 120,000 or if they had other income/assets not subject to withholding tax. Since the rate correction has now been abolished, residents who do not meet the requirements of the compulsory NOV can still be taxed in the NOV upon application. In this case, the NOV is applied for by 31 March of the year following the tax year or the recalculation of the withholding taxes is requested. Once an application has been made in due form and time, it cannot be withdrawn and is binding. In addition, a subsequent ordinary assessment is also carried out ex officio in the following years (until the end of the withholding tax obligation). Depending on the municipality of residence, this can have a positive or negative effect.

Quasi-residents, i.e. persons who live abroad but work in Switzerland, can also request a NOV. The condition is that at least 90% of the gross income earned worldwide is earned in Switzerland. In a marriage, the gross income also includes the income of the partner. A request for NOV must be made here annually.

Settlement of withholding tax on the part of the employer.

The most important change for the employer is that in future it is mandatory to settle with the competent canton at the employee's place of residence. It is no longer permissible to settle all employees subject to withholding tax in the canton where the company is domiciled. Old-law tax rulings that do not comply with the new legal provisions will be ineffective as of the 2021 tax period.

Conclusion

Due to the legislator's mandate to the cantons to proceed uniformly with withholding tax, the circular KS 45 also became quite complex. Even though it provides useful answers in most cases, it does not clear up all ambiguities or contradictions. The complexity is due to the fact that withholding tax should be as close as possible to ordinary taxation. The impression is that those liable to withholding tax should not receive any advantage over persons subject to ordinary taxation. In many places, the FTA refers to the fact that the taxpayer can have the withholding tax reviewed until 31 March of the following year. Withholding tax is undoubtedly a highly complex issue and the legal foundations were revised within a tight corset. The first years of application will show how practical KS 45 actually is.

We will be happy to advise you on the analysis of your need for action, support you in the concrete implementation or examine further possibilities for tax optimisation.

Source: PWC, circular no. 45

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