Revised rules on tax at source to enter into force on 1 January 2021

On 15 December 2016, parliament finally passed amendments to the rules on taxation at source in the form of the federal act on the revision of taxation of earned income at source. On 11 April 2018, the Swiss Federal Council passed the Federal Department of Finance’s fully amended ordinance on taxation at source. Both sets of rules enter into force on 1 January 2021.

The ordinance on taxation at source concretises the new law. It contains hardly any surprises compared against the consultation, concluded in December 2017. Anyone subject to tax at source who is resident in Switzerland must, as previously (in most cantons), file a tax return if their income exceeds the threshold of CHF 120,000 (retrospective ordinary assessment). Anyone else in Switzerland with a lower income can apply to do so voluntarily.

Application in cases of quasi-residence

People resident abroad can only apply to file a tax return if they are quasi-resident in other words if 90 per cent of their global income is taxed in Switzerland. Recent court rulings relativise this figure of 90 per cent, which also means the procedure changes for people with quasi-resident status applying to file a return. They must make the application before the prescribed deadline (31 March of the following year). However, the decision is made on the basis of the tax return submitted.

The most important changes in brief

» Tariffs

Tariff D (secondary employment) is being abolished as part of the tax at source procedure on data privacy grounds. This means that all employers of a person subject to tax at source who has more than one position as an employee have to levy tax at source at the regular tariff. The regular tariff is converted to 100 per cent of the income, or 180 hours per month.  The abolition of tariff D also entails the disappearance of tariff O for German cross-border commuters.

However, tariff D will not disappear completely, but will now be used in special cases: for the refund of AHV/AVS contributions (at least one year) if an employee emigrates permanently to a country with which Switzerland does not have a social insurance agreement. In other words this tariff (D) will no longer be used by employers; only by the social security authorities. Employers will likewise not be using the new G and Q tariffs. The persons subject to tax at source drawing replacement income from the insurer, set down in section 2 of tariff D, will now be handled under tariff G. Replacement income is benefits paid directly to the person taxable at source rather than via the employer. In the same situation Tariff Q relates to Germans who have cross-border commuter status.

» Greater onus on employees

The onus is explicitly placed on employees, who must now report new circumstances (e.g. changes in marital status, the birth of children, partner taking up/leaving employment, etc.) to their employer. This is absolutely necessary for the employer to be able to calculate and levy the correct tax at source. Nevertheless, employers will have to inform their employees of this and make them aware of this obligation.

» Further concretisation anticipated

The revised legislation also entails amendments to other ordinances, including the ordinance on expatriates (ExpaV/Oexpa), most of them editorial in nature.

The actual implementation of retrospective ordinary assessments is left very open, with the cantons given considerable room for manoeuvre when it comes to applying these rules. The anticipated circular should create clarity in this respect, as well as containing numerous concrete details of uniform calculation methods for all cantons. Only this way can the amended rules on taxation at source really simplify life for employers.

Contact Us

Brigitte Zulauf
TLS Partner
Leader Corporate Support Services Switzerland, Zurich
+41 58 792 47 50
brigitte.zulauf@ch.pwc.com

Employment relationships: a grey area

Players in the sharing economy never tire of stressing that they’re merely bringing together private individuals and thus operating purely as intermediaries or providers of technological platforms. But it’s worth examining this claim in its full context. In this article we’ll be taking a closer look at the relationship between the platform operator, the service provider and the employees − and how they’re treated. And we’ll be examining in more detail the way employment relationships are categorised, employment law, social security and tax.

All employment relationships aren’t created equal
Let’s first take a look at how employment relationships are defined in Swiss law. The provisions of the Code of Obligations (CO) governing employment contracts, Art. 319 ff., outline the typical employment relationship in terms of things like long-term, full-time employment, daily duties, working for a single employer, integration in the company’s organisation, authority of the employer to issue instructions, payment of a living wage by the employer and dependence on the employer. There are also various atypical types of employment relationships defined in terms such as the people involved, the place and time the work is performed, remuneration, and the duty to observe instructions and organisational integration of the employee. Drawing a distinction between an employment contract and other forms of gainful employment is not always easy – but it’s crucial to do so.

A complex equation with many variables
In Switzerland, it’s the responsibility of the competent social security office or the accident insurer to decide whether an individual has employed or self-employed status under the terms of Swiss social security legislation. But as soon as aspects of tax legislation and immigration law are considered, the thresholds and criteria can differ. This doesn’t make the handling of individual cases any easier. And the situation gets even more complicated when the international factor is added to the equation. No global, standard definition of employment and self-employment exists, and a work relationship categorised as self-employed abroad might well have employee status in this country.

The table below sheds light on the differences between an employment relationship and other common forms of work from a legal perspective. The determining factor isn’t the agreement or contract between the parties involved, but how the work is performed in reality.

Differences between an employment relationship and other common forms of work from a legal perspective

The employment law perspective
An employment relationship is always bound by standardised protective structures arising from the employment contract. These include the primary duty of paying the employee’s wage and maintaining these payments in the event of incapacity, as well as various secondary obligations concerning the provision of care, for example protecting an employee’s rights of privacy, granting time off, holidays and issuing employment references. The binding provisions of employment law such as working and rest times and the payment of social security contributions must also be observed when an employment relationship comes into being.

Care required with social security
Whether someone is categorised as employed or self-employed will have considerable implications for the individual involved. If a person is self-employed it’s the employer’s responsibility to pay their social security contributions, but if they’re self-employed they’re responsible for correctly determining how much they owe themselves and actually paying the contributions. Even if a self-employed person pays all the necessary dues such as social security contributions and taxes, if an audit or other control finds fault the company runs the risk of having to pay back-taxes or contributions over several years. Things get even more difficult, for example, if the individual has an accident and the company sues for payment of treatment costs or maintenance of income because the worker wants to invoke the safeguards afforded by the employment relationship.

Occupational pensions are geared to an individual’s AHV/AVS (social security) status. Only employees have to be affiliated to a pension fund. If the competent authority deems someone previously considered to be self-employed to be a company employee, this person must be integrated retroactively into the employer’s occupational pension scheme (provided they satisfy the regular entry requirements in terms of age and income). This can prove a major burden in terms of social security costs and, in the worst case, give rise to an additional outlay no-one had reckoned with.

Income tax at source
Depending on the situation, if a worker is re-categorised as an employee the employer may be obliged to calculate the tax that has to be deducted directly from their income and issue a salary statement. It’s up to the employer to ensure that the correct amount of tax is calculated and handed over to the authorities. Under certain circumstances, this can be a considerable financial risk for the employer. And if the matter only comes to light several years after the end of the employment relationship through an audit or other check, the employer may be liable to pay tax at source in arrears. Claiming this tax back from the former employee will require a huge effort on the part of the company – if it’s possible at all.

The die is not yet cast
In spring 2016, SUVA (the Swiss accident insurance authority) notified one of Uber’s drivers that he didn’t satisfy the criteria for self-employed status. Not surprisingly, Uber sees things differently. In compliance with SUVA’s decision, the AHV social security offices asked the online transportation network company to produce a salary statement backdated to 2015 as a basis for calculating the necessary social security contributions. Thus far, Uber has failed to respond. So it looks like the Swiss courts will need to take a more detailed look at Uber’s business model. It remains to be seen how they will weight the various criteria for categorising an individual’s status as self-employed or employed.

In a nutshell
An individual’s status as employed or self-employed depends on how they perform their work in practice – not on the wording of their employment contract. In a court case, criteria such as authority to issue instructions and liability for results, economic independence and the duration and frequency of the relations − including any earlier business connections, for example an employee relationship − will be considered in the judgement. As the sharing economy expands and more and more organisations look at changing their business models from traditional ‘provider/consumer’ models to sharing platforms, it’s important to look carefully at the nature of the employment relationships that are created in the early stages of the project, to avoid incurring significant unforeseen costs in the form of unpaid taxes in the future. Companies that maintain this type of working relationship would be advised to set up an internal unit with the know-how and skills needed to assess these matters compliantly and devise appropriate solutions.

 

Contact

Brigitte Zulauf
TLS Partner
+41 58 792 47 50
brigitte.zulauf@ch.pwc.com

Dominic Müller
Senior Manager and Specialist for Payroll & Employment Solutions
Tel. +41 58 792 2002
dominic.mueller@ch.pwc.com

Revision of taxation at source passed

On 15 December 2016 Parliament accepted the revision of the rules on the taxation at source of employment income and passed the final wording of the law. From what we know at present, a realistic assumption is that the law will enter into force on 1 January 2020. The revision became necessary after a number of Federal Court decisions revealed that the existing rules had shortcomings and contradicted the freedom of movement with the EU.

The uniform procedure for subsequent ordinary assessments foreseen in the revised law will close the gap between individuals subject to tax at source and those subject to ordinary taxation, and make them more comparable. The revision involves corrections rather than fundamental changes to taxation at source. However, it does leave gaps and a lack of clarity on certain points. Many of the provisions still have to be defined in detail by the FTA and the cantons. This shows just how complex the matter is, but at the same time creates an opportunity to govern taxation at source more precisely and clarify the situation regarding taxpayers and parties liable for remitting the tax. It will be easier to adapt the upcoming implementing ordinances and circulars to take account of the relevant social developments. It is to be hoped that the authorities responsible will also continue to use these ordinances and circulars as an opportunity to modernise taxation at source. The first drafts are likely to be available from mid- 2017.

Read more here.

Update: New confirmations required for 2016 taxation of German cross-border commuters’ pensions

Following a ruling by the German Federal Supreme Finance Court in Karlsruhe at the end of July last year, Germans who commute to Switzerland for work are about to see a change in the way their pensions are taxed. The law governing taxation of contributions and benefits from mandatory occupational benefit schemes in Switzerland (BVG, often simply referred to as pension funds) is to be amended. This will particularly affect employees with an extra-mandatory pension cover. The changes will enter into force for the 2016 fiscal year. Those affected will need a new confirmation to be able to declare their income tax correctly.

Germans commuting to work in Switzerland are basically covered by the BVG if they are subject to mandatory federal old-age and survivors’ insurance (AHV/AVS) and meet the age and pay requirements for admission to a BVG benefits scheme. So far the German tax authorities have not required any special certification or confirmation from the Swiss pension fund. It’s quite a different matter when it comes to child allowances, daily sickness benefits insurance contributions and other areas.

Read more…

New confirmation required for 2016 taxation of German cross-border commuters’ pensions

Following a ruling by the German Federal Supreme Finance Court in Karlsruhe, Germans who commute to Switzerland for work are about to see a change in the way their pensions are taxed. The law governing taxation of contributions and benefits from mandatory occupational benefit schemes in Switzerland (BVG, often simply referred to as pension funds) is to be amended. This will particularly affect employees with extra-mandatory pension cover. The changes will enter into force for the 2016 fiscal year. Those affected will need new confirmation to be able to declare their income tax correctly.

Germans commuting to work in Switzerland are basically covered by the BVG if they are subject to mandatory federal old-age and survivors’ insurance (AHV/AVS) and meet the age and pay requirements for admission to a BVG benefits scheme. Until now the German tax authorities have not required any special certification or confirmation from the Swiss pension fund. (It’s quite a different matter when it comes to child allowances, daily benefits insurance contributions and other areas.)

Read more…

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Outsourcing for SMEs: corporate support services

Small and medium-sized businesses (SMEs) have been working with accountants and fiduciaries regularly for many years. With the emergence of new business models and the trend to outsourcing administrative functions, the role of the traditional accounting firm is changing. Some have evolved to become experts in providing support services, managing and running integrated financial functions, IT systems and service processes.

Topics of this article:

  • Many aspects to consider when outsourcing
  • Complex HR processes

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Summary

The role of the traditional accountant-fiduciary is changing. While not everyone in the profession is following the trend, some larger firms in the accounting and fiduciary industry have already established themselves as providers of outsourcing services (corporate support services). They do this by enabling their clients to reduce the burden of time-consuming administrative processes and rationalise repetitive financial functions by transferring them to a shared service centre (SSC). In many cases these clients are less interested in cost savings than in profiting from targeted technical, legal and process expertise.

Reputable firms offering outsourcing services do much more than just making electronic platforms available. Besides the know-how and expertise they provide, a particular benefit is that they manage the risks entailed in outsourcing processes. Companies outsourcing processes shouldn’t make the mistake of assuming that ‘out of sight’ means ‘out of mind’. Client/provider relationships tend to function well, for example, if the client appoints a contact to take responsibility for supplying the provider with the necessary information.