The withholding tax simply explained

Withholding tax is a security tax imposed by the federal government on certain capital income (e.g., interest, dividends). Swiss taxpayers can reclaim the withholding tax from the Federal Tax Administration.

As the year comes to an end, many people look forward to the payment of dividends or interest income on savings capital. However, the joy of this financial boost is often dampened by the fact that 35 percent of the income is not paid out at all, but instead goes to the state in the form of the withholding tax. We will explain why this is the case and how you can still access your money in this article.

Deduction before payment of capital income

The withholding tax is one of the countless types of taxes in Switzerland. It is regulated in the Federal Act on Withholding Tax (VStG) and the associated ordinance, and it is levied by the federal government on income from movable assets. Taxable items include interest, dividends, winnings from games of chance, lotteries, promotional skill games, and certain insurance benefits. The withholding tax rate is 35 percent (15 percent on annuities and pensions, 8 percent on other insurance benefits) of the respective asset income. This amount is paid directly by the debtor of the taxable benefit (e.g., a bank paying interest or a company distributing dividends) to the Federal Tax Administration.

Example: Beat has a savings account that yields CHF 100 in taxable interest. The bank will only pay Beat CHF 65 directly.

Withholding tax serves security purposes

The reason for the deduction is simple: the withholding tax is a security tax. The purpose of the withholding tax is not to burden the recipient of capital income permanently, but rather to encourage them to declare their income in their tax return and prevent tax evasion. Those who correctly report their interest and dividends in their tax return will be refunded the withholding tax. Because the withholding tax is higher than regular taxation, it is not worthwhile to conceal a capital gain.

Example: To ensure that Beat fills out and submits his tax return, the bank is obliged to transfer the remaining CHF 35 interest income to the Federal Tax Administration.

Taxpayers can reclaim tax

Taxpayers resident in Switzerland, meaning individuals with residence and companies based in Switzerland, can reclaim the withholding tax. The recipient of the taxable benefit must submit a request for the refund of the withholding tax within three years after the end of the calendar year in which the taxable benefit has become due. The easiest way to do this is by declaring the affected asset, the interest, and the tax deduction in the tax return.

Example: To receive the withholding tax of CHF 35 back, Beat lists his savings account and the withheld withholding tax in the appropriate position on his tax return.

Tax administration checks application and reimburses withholding tax

The Federal Tax Administration checks whether all the conditions for the repayment of the withholding tax are met. For example, it is ensured that the applying person is actually resident in Switzerland. For taxpayers residing abroad, the withholding tax is usually a definitive burden unless a corresponding double taxation agreement with the taxpayer's country of residence allows for a refund. If all conditions are met, the Federal Tax Administration reimburses the withheld withholding tax.

Example: Beat has done everything right. The withheld amount of CHF 35 is transferred to him by the Federal Tax Administration to the account specified in the tax return. Now Beat has access to the full interest of CHF 100 again.

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