When thinking about migrating to Switzerland, you might already have made your own initial tax research. In doing so, you inevitably come across the term “source tax” (often also referred to as “withholding tax” or “wage withholding tax”.) and often come to the conclusion that the tax liability is fully settled by the source tax, withheld by the employer on your salary income.
This, however, is only half of the truth: on the one hand, those who voluntarily file a tax return may be able to save taxes, and on the other hand, in certain cases, a tax return must be filed despite the source taxes. This article shall provide an informative overview of the correlation between source tax and ordinary taxation (= taxation on the basis of the filed tax return).
In general: Obligation to file a tax return
All persons resident in Switzerland are obliged to file a tax return annually. Employees subject to source tax are generally exempt from this obligation.
Spouses or persons living in a registered partnership generally file a joint tax return. In this tax return, the income and assets of both spouses or partners are declared. Parents of minors declare their children’s assets (e.g. bank accounts) and other income (e.g. bank interest) in their tax return, but not the minors’ earned income. The latter is subject to taxation at the level of the children themselves. Upon reaching the age of majority (18 years), the young individual becomes fully liable to pay taxes himself/herself and must file his/her own tax return.
Tax return forms are sent by the municipal tax office to persons whose tax liability is known. Those who do not receive a form are obliged to request the tax return form from the municipal tax office. The deadlines for submitting the tax return vary from canton to canton and can be found stated on the tax return forms.
Exemption: Source tax
Persons liable to source tax are usually not required to file a tax return (for exceptions, see below). All foreign employees who do not have a C permit (i.e. a residence permit) but who are resident in Switzerland (e.g. with a stay permit B) are liable to source tax.
Employees working in Switzerland who reside abroad are also subject to source tax on their income from employment. However, there are deviating rules in the double taxation agreements concluded by Switzerland.
Anyone who lives with a spouse or registered partner who has Swiss citizenship or the C permit is exempt from the source tax obligation. In this case, a joint tax return must be filed.
3. Subsequent ordinary assessment
Under certain conditions, a person liable to source tax may or must file a tax return. This is the so-called “subsequent ordinary assessment procedure ‘NOV’ (Subsequent ordinary assessment)”. In this context, the income and wealth taxes due are determined and assessed based on the information provided in the tax return filed.
Source taxes already paid are credited against the ordinary taxes without interest. Spouses and partners living in a registered partnership are assessed jointly if one person meets the requirements for a NOV.
Within the framework of the NOV, a distinction is made between the compulsory NOV, the NOV upon application and the NOV ex officio.
Compulsory NOV
Individuals subject to source tax who are resident in Switzerland are subject to a compulsory NOV if
- their gross income from employment amounts to at least CHF 120,000 in a tax year;
- they reclaim Swiss withholding tax on dividends and interest;
- the income not subject to withholding tax (e.g. income from securities or real estate) exceeds a cantonally determined amount (e.g. CHF 3,000 in the Canton of Zurich) or
- if the taxable assets (e.g. securities, Swiss real estate) exceed a cantonally determined amount (Canton of Zurich e.g. CHF 80,000 for single persons and CHF 160,000
- for married persons and persons living in a registered partnership).
- If one of the above-mentioned limits is exceeded, the person liable to source tax must request a tax return from the cantonal tax office by the end of March of the calendar year following the tax year.
- The compulsory NOV is carried out for all following years until the end of the source tax liability. This also applies if the aforementioned thresholds are temporarily or permanently undercut.
NOV upon request
Persons subject to source tax who are resident in Switzerland and who are not required to file a tax return (see above on the compulsory NOV) may request the forms and voluntarily file a tax return.
In doing so, additional deductions can be made which are not or not fully taken into account in the source tax tariff. No reason must be given when filing the request.
A tax return may be worth filing if the following expenses occurred during the tax year:
- High effective professional expenses
- Additional education and training costs
- Capital contributions into the 2nd pillar and/or into pillar 3a
- Third-party care costs for children
- Alimony payments and support payments
- Sickness and disability-related costs above the retention amount
- Debt interest that is deductible in Switzerland
- Donations
In order to file a voluntary tax return, a request must be filed no later than March 31 of the calendar year following the tax year at the latest. This deadline cannot be extended, which is why, if it is missed, the additional deductions cannot be claimed (or the tax authority does not act on the request).
In subsequent years, it is not necessary to submit a new request to file a tax return. As long as a person subject to source tax is resident in Switzerland, the tax authority will continue to make the assessment until the end of the source tax obligation.
In other words: Anyone who voluntarily applies for a NOV is obliged to file a tax return until the end of the source tax obligation, e.g. until he/she leaves Switzerland.
Individuals subject to source tax who are resident abroad can only apply for a NOV under certain conditions. These persons must re-file the request annually.
NOV ex officio
Individuals resident abroad who are subject to source tax are subject to the NOV ex officio if there are extraordinary circumstances. Such circumstances include, for example, a combination of income subject to source tax such as income from employment – and income not subject to source tax – such as income from real estate – in Switzerland.
Advantages of a NOV upon request
In practice, without a detailed calculation, it is often difficult to determine whether a voluntarily filing of a tax return is beneficial. This is due to the fact that the tax rates that are applied in the ordinary assessment are not identical to the source tax rate. The assessment basis is also different.
The source tax is levied on the gross salary while the ordinary tax is calculated on the net salary, taking into account other income as well as a number of deductions. In the case of larger deductions, such as purchases into the pension fund and payments into pillar 3a, a NOV upon request should be beneficial.
It is to be noted, however, that such a voluntary NOV also applies to subsequent years and there is no possibility to file a tax return only for years with extraordinary deductions. The NOV can therefore be particularly attractive if larger deductions can be claimed on a regular basis.
However, the tax savings should always be compared with the effort involved in completing a tax return.
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