What entrepreneurs need to know about withholding tax in Switzerland

If you run a company in Switzerland and employ foreign workers who are not tax residents of Switzerland (cross-border commuters) or who do not have a permanent residence permit (C permit), you need to understand how withholding tax works. This tax is deducted directly from income. Individuals who are living in Switzerland but do not have a permanent residence permit, as well as those who are not resident in Switzerland for tax purposes, are subject to withholding tax. Our blog post explains the finer points and details of withholding tax in Switzerland.

What does withholding tax mean in simple terms?

Withholding tax is a tax that is deducted directly from the income of foreign nationals who work in Switzerland and do not have a permanent residence permit (C permit). This includes foreign employees who live in Switzerland with a residence permit (B permit) or a short-term permit (L permit), as well as cross-border commuters and international weekly residents who work in Switzerland but live abroad.

The employer deducts withholding tax from each paycheck of those who are subject to it. The employer then forwards the tax amount directly to the Swiss tax authorities.

Collection via the employer is a secure and practical means of taxation. It ensures that foreign employees cannot simply return to their home country after their salary has been paid without first paying the taxes due in Switzerland.

Withholding tax in Switzerland is specially designed for foreign employees without permanent residence status. This simplified approach integrates the tax directly into payroll accounting, eliminating the need for separate tax declarations.

Types of income subject to withholding tax

The gross income of the employee subject to withholding tax is used to calculate the monthly withholding tax amount. Cash benefits and benefits in kind are added when calculating gross salary. These include, among other things:

• Basic salary
• Overtime, bonuses, commissions
• Benefits in kind (car, apartment, etc.)
• Tips
• Royalties

Any salary or monetary benefit arising directly or indirectly from the employment relationship is considered taxable income for withholding tax purposes.

Determination of withholding tax rates

Withholding tax is deducted from each paycheck according to a specific tax rate. The tax rate is based on each individual’s personal circumstances at the time of payment of taxable salary, bonuses or other employment income.

A change in personal circumstances may affect your tax situation.

There are different tariff codes (A-U) with different rates. Lower withholding tax rates generally apply to people with several family members. Here is a list of the most common tariff groups:

Rate A: Single people without children or dependants in the same household
Rate B: Married couples with one income earner
Rate C: Married couples with two income earners
Rate E: Assessment using the simplified procedure
Rate G: Benefits paid directly by an insurance company
Rate H: Single people with children or dependants in the same household
Rate L – Q: People who commute from Germany to work in Switzerland

It is also important to note that the specific percentage rates for withholding tax vary from canton to canton. Therefore, your Canton of residence in Switzerland also plays a role in determining your withholding tax rate.

How do you know when withholding tax no longer applies to your employee?

The withholding tax obligation ends when a foreign employee receives a permanent residence permit (C permit) or marries a Swiss citizen. The employee then switches to the normal Swiss tax system, regularly fulfills their tax obligations, and submits a tax return at the end of the tax year.

Tax declaration obligation for withholding tax: overview of exceptions

In general, persons who are subject to withholding tax are exempt from filing an ordinary tax return; however, there are exceptions:

If the gross annual salary exceeds CHF 120,000, the employee must continue to pay withholding tax and submit a subsequent ordinary tax return at the end of the tax year.

In such cases, the withholding tax payments are provisional and the final tax liability is determined by an assessment by the tax authorities according to the withholding tax rates. Depending on factors such as the municipality of residence and the individual’s financial circumstances (debts, assets, deductions), the assessment may result in either an outstanding tax liability or a refund.

What about the voluntary retrospective ordinary assessment?

Depending on the canton, the refund is either paid out to the taxpayer or carried forward to the next tax year. People who earn less than CHF 120,000 can also apply for a refund of overpaid withholding tax and claim various expenses retroactively for tax purposes. To do so, an application for a retrospective ordinary assessment must be submitted to the relevant cantonal tax authority.

Mandatory subsequent ordinary assessment without income exceeding CHF 120,000

If my gross income is less than CHF 120,000, when do I still need to apply for an ordinary assessment?

The application is required if you have income that is not subject to withholding tax above a certain threshold. This includes, among other things:

• Income from self-employment,
• Rental income from Swiss properties,
• Alimony for minor children,
• Dividends from domestic and foreign shares,
• Pensions from AHV, IV or pension fund,
• Or, if you have high global assets.

The mandatory ordinary assessment thresholds for income not subject to withholding tax and worldwide assets value vary from canton to canton. In contrast, the threshold of gross annual salary in excess of CHF 120,000 is stipulated by the Withholding Tax Ordinance and therefore applies nationwide.

What obligations does an employer have towards employees subject to withholding tax?

Employers are assigned important tasks under the withholding tax system:

• Calculate the withholding tax and deduct it monthly from the gross salaries of the employees concerned by applying the correct rate.
• Register with the relevant cantonal tax administration where your company is based or where foreign employees live.
• Transfer thewithheld amounts within the payment period of 30 days.

Checklist for employers

Nexova Treuhand AG has compiled this simple checklist for the most important requirements:

1. Determination of the employee’s withholding tax liability:

• Check whether each employee meets the criteria for the deduction of withholding tax from their salary.

2. Registration and notification:

• Register with the cantonal tax authorities as a withholding tax office.
• Register new employees within 8 days.
• Determine the correct tax rate for each employee.
• Immediately notify of status changes of employees within 8 days.

3. Monthly deduction:

• Use the tax guidelines to calculate the correct tax amount to be deducted.
• Deduct the withholding tax due directly from the employee’s taxable cash benefit upon payment/transfer or claim it from other benefits, e.g. benefits in kind.
• Report the tax withheld at source transparently, both in each payslip and in item 12 of the salary statement.

4. Withholding tax settlement and payment:

• Report the withholding tax withheld to the relevant tax authorities within 30 days of your accounting period.
• The statement can be made electronically or in writing. It is also required if the gross salary is temporarily CHF 0.
• Transfer the invoiced withholding tax within this period.

5. Record keeping and other duties:

• Correct differences immediately (refund if too much withholding tax was withheld, claim the additional amount if too little withholding tax was withheld).
• Keep relevant documents, particularly monthly payslips, for 10 years and allow the tax authorities to inspect them on request.
• Submit certificates of residence and report gross payrolls for French (MB Q10) and German (MB Q12) cross-border commuters.

Incentives to comply with the regulations

Employers receive the following commissions for their cooperation:

• 2% of the withholding tax amount for electronic settlement via the cantonal logins or the standardized salary reporting procedure (ELM withholding tax)
• 1% of the withholding tax for amounts settled on paper statements.
• 1% of the withholding tax amount for lump-sum benefits from the occupational benefit scheme, with a maximum amount of CHF 50 per lump-sum benefit.

Payroll period for employers (example based on the Canton of Berne):

The accounting period is determined by the total amount of withholding tax withheld per month:

• The withholding tax amount is regularly over CHF 3,000 → Monthly statement
• The withholding tax amount is regularly less than CHF 3,000 → Quarterly settlement
• The withholding tax amount is regularly less than CHF 50 → Annual settlement

Remember: If you pay withholding tax via ELM, it must be done monthly.