New source taxation law comes into effect in 2021 - Part 2

On January 1, 2021, the new source taxation law comes into effect. In the article series concerning the revision of the source tax law, you will learn everything you need to know about the innovations. In the second part of the series, we will explain which employees are subject to withholding tax and how the amount of the withholding tax is determined.

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

Source-taxed employees

So-called source-taxed are employees earning income from an employment relationship, which is paid by the debtor of the taxable service. Simply put, the withholding tax thus applies to the income earned by a foreign employee from a Swiss employer. Practically, it does not matter whether a person liable for source tax is resident in Switzerland or abroad.

What is meant by "employee," "debtor of the taxable service," or "residency"? – Read the first part of the series.

Employees with residency in Switzerland

Employees without a settlement permit (Permit C), who are resident in Switzerland, are generally subject to withholding tax for income from employment. However, this rule does not apply to spouses living together in an undissolved marriage if one of the persons is a Swiss citizen or holds a settlement permit and is resident in Switzerland.

Example: A., residing in Zurich without a settlement permit, must pay withholding tax on his income from a Swiss employer. However, the withholding tax does not apply if A. is married to B., who is resident in Switzerland and has a settlement permit here.

Employees with residency abroad

Regardless of nationality or residence permit, an employee resident abroad is subject to withholding tax on his or her wage and replacement income from a debtor of the taxable service. This regulation mainly covers cross-border commuters, weekly residents, and short-term residents.

Example: C. lives in Konstanz and works at a Swiss company in St.Gallen. He is therefore a cross-border commuter. Regardless of whether C. has Swiss citizenship or a residence permit in Switzerland, he is subject to withholding tax in Switzerland.

Taxable services and rates

The source tax covers gross income from employment. This includes, among others, regular salary, special services (e.g., overtime compensation), salary supplements (e.g., family allowance), or bonuses. The list of services included is extensive and defined in the circular. The calculation of the source tax owed is based on so-called tariff codes, which take into account the personal circumstances of the person liable for source tax. For example, in the tariff codes, marital status (single, married, divorced), the presence of dependent children, or the country of origin (tariffs for cross-border commuters from Germany and Italy) are considered.

Source: Circular 45 ETSV

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