The revised tax at source legislation (Impôt à la source/Quellensteuer) will enter into force on 1 January 2021. The aim of this revision is to ensure compliance with equal treatment rules stipulated in the EU/EFTA agreements on the free movement of persons by eliminating disparities in treatment between individuals subject to tax at source and those under ordinary taxation as well as harmonizing the practice and rules at Swiss level.
As an employer with employees subject to tax at source, you need to understand the new regulations and their impact in terms of payroll processes. Below, we have highlighted the most important changes as well as clarifications Swiss employers should consider in order to be ready from a payroll perspective:
1. Two calculation models of the tax at source
The revised legislation defines two unique calculation models, depending on the canton where the tax at source is calculated. Each model defines standardized rules on how to determine tax rates as well as taxable income and calculate tax at source. This removes the many existing cantonal disparities and makes things more transparent and reliable but, depending on the situation, not necessarily more straightforward.
The two models are the:
- Annual model (tax at source calculated monthly on a yearly basis): Fribourg, Geneva, Ticino, Vaud, Valais
- Monthly model (tax at source calculated monthly on a monthly basis): all other cantons
2. Declaration of the tax at source to the right canton
Employers will no longer be allowed to declare their employees’ tax at source in the canton where the company is located. Instead, the tax declaration must be filed in the employee’s canton of residence for employees residing in Switzerland or in the canton where the employer is located for non-resident employees (e.g. cross-border commuters, quasi-residents).
Employers must make sure to be registered with the tax at source authority of each canton in which their employees reside. In addition, employers must set up the ELM transmission (Swissdec) in the payroll software, if they have not already done so, in order to automate and facilitate tax declarations to each canton.
3. Specific calculation for part-time workers
Part-time workers are obliged to inform their employer(s) if they carry out more than one gainful activity (employed or self-employed), or if they receive income in the form of compensation.
In case of multiple activities, employers have to extrapolate the income in order to determine the tax rate, using the following methods:
- Extrapolate all gainful activities carried out by the worker into the employee’s current overall workload rate; or
- If the overall workload rate is not communicated by the employee, the known figure is extrapolated into full-time; or
- Extrapolate the worker’s overall income into actual total gross income if the employer knows this (e.g. worker performs several activities within a group or holds multiple employment contracts with the same party)
This principle also applies if one or more gainful activity is or will be carried out outside of Switzerland or if income acquired as compensation is or will be paid abroad. It is therefore essential for the employer to inform part-time employees of this new duty in due time as well as to adapt entry questionnaires for new hires.
A specific calculation to determine the rate should also be applied to employees subject to tax at source on an hourly or daily salary basis if these are not paid with a monthly salary (e.g. weekly salary or irregular payments).
4. Specific calculation on compensation paid before starting or after ending the employment agreement
Compensation paid by the employer to the employee, whether resident in Switzerland or not, before the start of the employment relationship (e.g. signing bonus) is taxed at source, taking into account the personal situation at the time the benefit is paid.
If the employment relationship is terminated, any compensation that becomes due at that time but is not paid to the employee until later (e.g. overtime pay, holiday pay, etc.) must be added to the gross income of the last month/last year of work (depending on the calculation model). The tax rate used is the one that was applicable to the last salary payment. Special rules apply for redundancy payments or payments in lieu of notice.
In case the compensation paid by the employer to the employee becomes due after the end of the employment relationship (e.g. bonus payments subsequently decided upon by management, severance pay or salary claims recognized at a later date), tax at source must be calculated separately using the calculation model applicable last.