New source taxation law comes into effect in 2021 – Part 1

On January 1, 2021, the new source taxation law will come into effect. In this series of articles on the revision of source taxation law, you will learn everything you need to know about the changes. The first part of the series explains the objectives as well as the terminology and conditions of the source tax obligation.

On January 1, 2021, the new provisions of source taxation in Switzerland will come into effect with the Federal Law on the Revision of the Source Taxation of Earned Income. The details of the new regulation are laid down in Circular No. 45 by the ESTV to the cantonal tax authorities.

Objective

The new legislation aims to harmonize the jurisdiction of the cantonal courts, the Federal Court, and the European Court of Justice in view of the Free Movement Agreement between Switzerland and the EU. Furthermore, the changes aim to strengthen legal certainty for taxpayers and to accommodate technological developments.

Terms

Initially, the circular defines the central terms of the employee, the debtor of the taxable performance, and residency.

Employee

Persons who work for an employer based in Switzerland, regardless of their residence or domicile, are considered as employees. It is crucial that the income from the underlying legal relationship is qualified as income from non-self-employed activity. Thus, a construction worker residing in Germany and working for a Swiss construction company is classified as an employee, just as the Dutch CEO of a Swiss bank is.

Debtor of the taxable performance

According to the circular, the natural or legal person who pays the employee a performance subject to source tax withholding is considered the debtor of the taxable service. Usually, the debtor of the taxable performance is the employer. However, social or private insurers or third parties liable for substitute income also fall under the definition of the debtor of the taxable performance. It is crucial that the said debtor has a residence, headquarters, actual administration, a business establishment, or a fixed establishment in Switzerland. If there is no debtor of the taxable performance in Switzerland, there is also no obligation to withhold source tax.

Residency

Persons who establish unlimited tax liability in Switzerland due to personal affiliation are regarded as residents in Switzerland. In determining whether a person is resident in Switzerland, primary consideration is given to their permanent home or the center of their life interests. Supplementary assessment criteria include habitual residence and nationality. Thus, cross-border commuters, weekly residents, and short-term visitors are not considered residents in Switzerland, which is why they are only subject to limited tax liability in Switzerland.

Source: Circular 45 ETSV

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