Income tax equality for EU nationals in Switzerland

in Tax, 28.05.2014

Swiss Federal Supreme Court makes landmark decision on inter-cantonal taxation of employment income.

Do the following criteria apply to you or to a large part of your workforce?

• You reside in Switzerland and are not an “international weekly commuter”
• You are an EU / EFTA national
• You are subject to tax at source (Quellensteuer)
• You file a Swiss income tax return (i.e. you earn more than CHF 120,000)
• You relocated your household from one canton to another

Then the below may be of real interest to you.

While the recent initiative on immigration is aiming to make entry into Switzerland for EU nationals more difficult, there might be positive tax news for EU nationals too. Recently, the Swiss Federal Supreme Court ruled that the current legislation with regards to the taxation applicable to non-Swiss citizens moving from a canton with “higher” tax rates to a canton with “lower” tax rates is in direct violation of the non-discriminatory role of the free movement of persons under EU legislation.

Background to the tax change

Previously, an EU (or European Free Trade Association area – “EFTA”) national subject to Swiss source tax who moved from one canton to another would remain subject to income tax in the original canton from which they moved on a pro rata temporis basis (split year treatment). In other words, an individual would be liable to income tax partially in the canton where he/she resided on 1 January and partially in the canton where he/she resided on 31 December of the same year, on a pro rata basis.

However, Swiss citizens and C permit holders are being taxed in the new canton for the full year if they relocated their household to a different canton because taxation in the new canton is more beneficial. This effectively allows for some tax planning in terms of finding an optimal move date within Switzerland when moving away from a canton.

EU/EFTA nationals subject to Swiss tax at source may have been subject to a higher income tax liability in the year of domestic relocation than Swiss citizens (or other individuals not liable to Swiss tax at source).

Swiss Federal Supreme Court ruling

One such EU national challenged this inequality in taxation in the Swiss Federal Supreme Court. The court ruled that taxation on a pro rata basis was a direct violation of the non-discriminatory role of the free movement of persons under EU legislation.

Following the court ruling, EU/EFTA nationals subject to Swiss tax at source are to be treated equally to Swiss citizens and C permit holders i.e. being taxed pro rata temporis between cantons should not apply if this would result in a higher tax liability than would otherwise be incurred by Swiss citizens/C permit holders in the same situation. The ruling is not yet legislated for (more news with regards to potential income tax changes will appear on our blog soon) and therefore the Swiss cantonal tax authorities will need to interpret the existing law for the time being; this means that relevant assessments will be issued, still, on a pro rata allocation basis, where applicable.

If an individual moved from a canton with “lower” tax rates (e.g. Zug, Schwyz) to a canton with “higher” (e.g. Zurich) tax rates , the income tax assessment should be based on a pro rata temporis basis and there would be no need to appeal against the income tax assessment. If the move was from a canton with “higher” tax rates to a canton with “lower” tax rates then an appeal may be attractive. The court ruling therefore only (for now) has upside potential.

In light of this court case, there may be instances where EU/EFTA nationals who moved in prior years from a canton with “higher” tax rates to a canton with “lower” tax rates may wish to consider an appeal of any outstanding tax assessments previously issued (note that this is only possible for years where no final assessment has been made) or where an assessment has yet to be issued (i.e. future assessments).

It is expected that once the law is updated, the law covering taxation for individuals moving from one canton to another will not discriminate between Swiss, EU nationals and nationals of other countries. In other words, in due course, equality across the board can be expected.

Further information:


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