This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our PRIVACY POLICY for more information on the cookies we use and how to delete or block them.
  • Discontinuation of tax at source rectification

    What now?

Article:

Discontinuation of tax at source rectification – what now?

03 November 2021

Sandro Di Giulio, Swiss Certified Tax Expert | Cäcilia Grüter, lic. iur., certified tax expert |

8 min

Until now, persons subject to withholding tax could easily claim tax-reducing deductions by submitting a tax at source rectification. This has ceased to be possible since the new withholding tax reform entered into force on 1 January 2021. What are the options? What should be taken into account and what deadlines must be met? We provide an overview.

 

Who is affected and what has changed?

The change affects employees subject to withholding tax on their earned income in Switzerland. These include, but are not limited to, employees who do not have a permanent residence permit (i.e. no Swiss citizenship/C-permit) or are not tax resident in Switzerland. The withholding tax is deducted directly from the salary by the employer as the debtor of the taxable payment and is essentially the final tax burden for the employee.

If employees subject to withholding tax incurred additional expenses (e.g. payment into pillar 3a, additional payment into BVG pension fund, alimony payments, double housing costs, etc.), they could previously claim the related tax deductions by submitting a rate correction by 31 March of the following year. This option is no longer available following the introduction of the new withholding tax reform as of 1 January 2021. The rate correction tool has been replaced by a system of voluntary subsequent ordinary tax assessment (in German "nachträglich ordentliche Veranlagung“, so-called "NOV"). For the sake of completeness, it should be mentioned that, depending on cantonal practice, the rate correction can still be applied under the new regime in a few cases such as tariff errors, allocation working days to abroad or wage errors (but not for tax-reducing deductions).

In future, employees subject to withholding tax will therefore have to claim their additional tax-reducing deductions through the NOV procedure and no longer via a rate correction. This will be relevant for the first time for the 2021 tax period, i.e. those wishing to apply will have to do so by 31 March 2022. Depending on whether the employees are tax resident in Switzerland or abroad, different requirements are applicable, and the consequences of the NOV procedure differ as well.

 

The NOV procedure in general

Under the new regime, applications must also be submitted by 31 March of the following year. This deadline is not set by the authorities but is a statutory deadline, which cannot be extended.

Whereas previously the rate correction process involved completing a relatively simple and straightforward application form, the new regime requires an ordinary tax return to be completed under the NOV procedure. This includes declaration of the worldwide income and worldwide assets of both spouses. The NOV procedure is more complex and time-consuming than the previous rate correction. However, withholding tax continues to be deducted from the salary by the employer (i.e. there is no release from the withholding tax obligation). In the NOV procedure, withholding tax salary deductions do not represent final settlement, rather they serve as security. The tax authority then credits the withholding tax without interest to the calculated tax liability determined based on the ordinary tax return.

Depending on the situation, however, employees may of course be transferred to the NOV procedure ex officio, without being given an option; this applies, for example, to employees resident in Switzerland with a gross annual salary of at least CHF 120,000 or if there is other income or assets that are not subject to withholding tax (e.g. income from self-employment, alimony income, etc.). Cases subject to compulsory NOV are not dealt with in this article.

For more information on the new withholding tax reform, please refer to the previous newsletters (in German)
Neuerungen Quellensteuer ab 1. Januar 2021 - Grundlagen & Neuerungen Quellensteuer ab 1. Januar 2021 - Internationales.

 

Conditions and consequences of the voluntary NOV

Swiss residency

For persons domiciled in Switzerland, the application for a voluntary NOV is not subject to any special requirements. As stated above, a written application must be submitted by 31 March of the following year, i.e. for the first time by 31 March 2022. The application must be signed by both spouses. If the application contains a formal error, a period of grace for rectification is granted in accordance with circular no. 45 of the Federal Tax Administration. Once an application has been submitted within the deadline and in the appropriate form, it can no longer be withdrawn and the employee remains bound by the NOV. A tax return for the relevant tax year will be sent.

This new instrument gives employees subject to withholding tax the option to apply the NOV procedure even if they do not earn the previously required annual gross salary of CHF 120,000. Of central importance for employees resident in Switzerland is that applying for an NOV triggers assessment in subsequent years as well – and indeed until the end of the withholding tax liability. It is therefore not possible for employees resident in Switzerland to apply for an NOV for one tax period only and then switch back to withholding tax as the final tax burden for subsequent periods. Depending on the specific situation, this can also have a negative impact, as the following examples show.

Furthermore, an application always relates to both spouses. Even in the event of subsequent separation or divorce, both spouses are subject to ordinary assessment until the end of their withholding tax liability.
 

Example 1 - one-time voluntary payment into BVG pension fund:

Background:

  • Single person
  • Resident in Kriens (LU)
  • Non-denominational, no children (tariff A0N)
  • Gross annual income CHF 114,000
  • One-off BVG payment in 2021 of CHF 20,000

 

Tax 2021:

  • Withholding tax deduction:

approx. CHF 15,300

  • Tax amount NOV:
approx. CHF 12,000
  • Tax advantage:
approx. CHF 3,300

 

The person applies for the voluntary NOV procedure for the year 2021 to benefit from the tax savings. In the following year 2022, with circumstances unchanged, the person does not make a voluntary BVG payment (no additional, extraordinary expenses/tax-reducing deductions):

 

Tax amounts 2022 and subsequent years:

  • Withholding tax deduction:             
approx. CHF 15,300
  • Tax amount NOV:
approx. CHF 17,000
  • Tax disadvantage:
approx. CHF -1,700!


 

Due to the principle of “once NOV – always NOV”, an NOV must also be carried out for the subsequent periods and the final tax liability must be determined on the basis of the ordinary assessment process. In the above example, the tax benefit from the BVG payment in 2021 will already have been used up after a good two years if the circumstances remain unchanged.

Example 2 – Moving house:

Background:

  • Single person
  • Resident in Freienbach (SZ)
  • Non-denominational, no children (tariff A0N)
  • Gross annual income CHF 114,000
  • No additional deductions

 

Tax amounts Schwyz 2021:

  • Withholding tax deduction:
approx. CHF 10,900
  • Tax amount NOV:
approx. CHF 9,000
  • Tax advantage:

approx. CHF 1,900

 

The person applies for the voluntary NOV procedure in canton of Schwyz to benefit from the tax savings. In the following year 2022, with circumstances unchanged, the person moves to Kriens (LU).

 

Lucerne tax amounts 2022 and subsequent years:

  • Withholding tax deduction:
approx. CHF 15,300
  • Tax amount NOV:
approx. CHF 17,000
  • Tax disadvantage:
approx. CHF -1,700!


 

Since the withholding tax rates are generally based on average cantonal rates, but the ordinary income tax rates in the NOV also take into account municipal tax rates, there can be significant differences in the tax burden depending on the municipality of residence.

 

Foreign residency

Determining tax residency is not entirely inconsequential – even taking into account the relevant double taxation agreements. If residence is abroad, employees can only apply for the NOV if they meet the requirements of what is known as “quasi-residency”. Quasi-residency means that at least 90 percent of the worldwide gross income of both spouses is subject to tax in Switzerland in the corresponding tax year.

For employees who are resident abroad for tax purposes, the application must also be submitted by 31 March of the following year, i.e. for the first time by 31 March 2022. However, the principle of “once NOV – always NOV” does not apply if the employee is resident abroad; instead, a new application must and can be submitted each year. The application is therefore only valid for one tax period.

Example - Quasi-residency:

Facts:

  • Residence/domicile of married couple in Germany
  • Husband gainfully employed in Switzerland
  • Wife in Germany with a small part-time job
  • Securities income, primarily from Swiss equities
  • Capital gains on securities
  • Owner-occupied home in Germany

 

Type Total in CHF Switzerland in CHF Abroad in CHF
Salary income husband, Switzerland 150'000 150'000 -
Salary income wife, abroad 10'000 - 10'000
Securities income 5'000 - 5'000
Capital gains p.m. - -
Deemed rental income, home Germany 20'000 - 20'000
Total 185'000 150'000 35'000
In % 100% 81% 19%

 

In the present case, only 81 percent of the worldwide gross income is generated in Switzerland, which means that the requirements for quasi-residency are not met. In principle, then, it is no longer possible to claim additional tax-reducing deductions via the NOV.

There does, however, remain a right to examine whether the situation is otherwise comparable with that of a person resident in Switzerland (Art. 99a para. 1 lit. b Swiss Federal Tax Act), whether an ordinary assessment procedure is necessary in order to take into account any deductions provided for in double taxation agreements (Art. 99a para. 1 lit. c Federal Tax Act) and/or whether there are disruptive circumstances (Art. 99b Federal Tax Act). The former is likely to apply in particular in cases where there is no tax liability due to low income in the country of residence (for example, if only a deemed rental income is allocated to the foreign country when calculating quasi-residence).

The example also shows that the calculation is based on tax principles from a Swiss perspective (allocation of securities income abroad, consideration of deemed rental income, tax-free private capital gains).

 

Conclusion

When it comes to claiming tax-reducing deductions, discontinuation of the rate correction under the new withholding tax regime has far-reaching consequences for employees subject to withholding tax. The assessment of whether and how these deductions can be claimed in the future must be carefully considered and well analysed. Those wishing to make a claim must do so by 31 March 2022 for the 2021 tax period. The distinction between employees subject to withholding tax who are resident in Switzerland and employees subject to withholding tax who are resident abroad is of central importance in this context, as requirements and tax consequences differ in each case.

Employees subject to withholding tax who are resident in Switzerland and do not earn the previously required annual gross salary of at least CHF 120,000, and for whom withholding tax previously represented the final tax burden, may now have their tax liability determined under the NOV procedure; this can be advantageous depending on the circumstances. However, the principle of “once NOV – always NOV” applies in such cases, which can also have a negative effect for subsequent periods, e.g. due to the elimination of deductions or a change of residence.

In the case of persons resident abroad, an NOV procedure is generally only possible if the requirements for quasi-residency are met. Quasi-residency means that at least 90 percent of the worldwide gross income of both spouses is subject to tax in Switzerland in the relevant tax year. If the requirements are not met, it is generally no longer possible to claim tax-reducing deductions. For non-residents, the application for NOV is only valid for one tax period and must be submitted anew each year.