Intercantonal change of residence of persons subject to withholding tax, which are subsequently assessed in an orderly manner

Introduction

A foreign national moves to Switzerland, applies for and receives a B residence permit, takes up gainful employment with a Swiss employer and during the current tax year (or in a later tax year) transfers his or her place of residence to another canton where he or she will live from then on. The employee earns an income from employment with the Swiss employer, the amount of which triggers a subsequent ordinary assessment. The tax burden in the second canton (the so-called canton of immigration) is lower than in the first canton (the so-called canton of departure). The situation is simple, and so is the question: Which canton or cantons have the right to tax earned income and other income and taxable assets in the tax year in which they move to Switzerland? The answer is just as short in the final result. Those who know them are invited to turn the page and devote themselves to other challenges. Those who do not know them expect an entertaining read.

In the present topic, it is crucial to recognise (thematic) forks in the road as such and to take the right path. More on that in a moment.

In cases such as the present one, the employee's social security subordination must also be coordinated internationally. These coordination aspects are excluded here. The following lines focus on tax considerations.

Unlimited tax liability - taxation at source

taxation at source

First of all, it must be clarified whether what the employee describes as a "move to Switzerland" also constitutes a move to Switzerland from a tax law perspective. Does he transfer his domicile or habitual residence to Switzerland and thus become subject to unlimited tax liability? Or does he maintain his residence abroad, so that this takes precedence over the treaty and the internal taxation right is limited to the limited tax liability of the local earned income? The latter is often the case, particularly in cases where the family remains at the previous foreign residence or the employee will work in Switzerland "only" part-time and retain his or her other activities abroad.

In the present case, the unmarried taxpayer transfers his residence from abroad to Canton A on 4 April and from that date takes up residence for tax purposes within the meaning of Article 3(1) et seq. DBG and Art. 3 para. 1 f. StHG. The employment begins on 5 April with the employer in Canton A. His agreed gross salary from this activity amounts to around CHF 440,000 for the months of April to December (total per year around CHF 600,000). He initially lives in an apartment organised by the employer near the place of work. On August 20, he moves to Canton B, where he is duly registered and is entered in the tax register on September 1. On 31 December of the first tax year in Switzerland, the employee has his tax residence in Canton B.

Taxation of the Swiss earned income of the foreign employee who does not have a permanent residence permit is initially levied at source from the time of the move02The employee is subject to strict systematic taxation in canton A and, if he moves to canton B, in canton B. From the day he takes up residence in canton B, the employee is subject to taxation by that canton. In practice, in the case of an intercantonal change of residence, the obligated person is often entered in the tax register in the canton of residence from the beginning of the month following the month in which he/she takes up residence (here: 1 September). From now on, the employer calculates the withholding tax according to the provisions of Canton B, deducts it from the gross salary and transfers it to Canton B. Swiss earned income is subject to the following rules, as it exceeds an annual gross income of CHF 120,00003 the subsequent ordinary assessment04. So much for the basics.

Intercantonal change of residence during the tax year

Legal basis

How does intercantonal residence and change of tax liability affect cantonal taxation? The harmonization legislator generally regulates the intercantonal change of residence in Art. 4b StHG05however, reserves a special feature for taxpayers taxed at source whose income is subject to subsequent ordinary assessment (Art. 38 para. 4 StHG). According to Art. 4b StHG, if the taxpayer changes his tax liability within Switzerland due to personal affiliation, he is liable for the entire tax period in the canton in which he has his residence at the end of this tax period (canton of immigration).

For taxpayers subject to withholding tax with subsequent ordinary assessment, Art. 38 para. 4 StHG applies: "If a natural person subject to tax in accordance with Articles 32, 33 and 34 para. 2 transfers his domicile or residence within Switzerland, the respective domicile or canton of residence shall have the right of taxation in proportion to the duration of the tax liability". The reference to Articles 32 in conjunction with 33 and 34(2) StHG refers to natural persons resident or domiciled in Switzerland whose income from gainful employment is taxed at source and who are subject to subsequent ordinary taxation. Accordingly, the law gives the employee in question a pro rata temporis right of taxation for the cantons of residence for state and municipal taxes on the income from employment (Art. 4 of the StHG Regulation).

According to Art. 107 para. 1 DBG, the canton responsible for levying direct federal tax within the framework of the withholding tax procedure is the canton in which the employee has his legal tax residence when the taxable benefit is due. The subsequent ordinary assessment pursuant to Art. 107 para. 3 DBG is based on Art. 105 DBG06which in turn, however, makes a reservation regarding Art. 107 DBG. Thus also the direct federal tax for the competence of the assessment knows a pro rata temporis distribution of the taxation right07. An intercantonal change of residence during the tax period of a resident foreign employee without a permanent residence permit, whose earned income is taxed at source and which is subsequently subject to ordinary assessment, therefore has different tax consequences than a change of residence of a taxpayer who is subject to ordinary assessment from the outset08. The SSK recognized this different treatment and wrote a circular letter (No. 14) entitled "Intercantonal change of residence of persons subject to withholding tax who are subsequently assessed in an orderly manner (Art. 90 para. 2 DBG, Art. 34 para. 2 StHG)".09.

The difference in treatment may be to the benefit or detriment of the withholding taxable person, who is subsequently subject to regular taxation. If a taxpayer whose earned income is taxed at source and is subsequently assessed in an orderly manner moves to a canton with a more favourable tax rate during the course of the year, the pro rata taxation right of the canton of departure results in a higher income tax burden on the earned income initially taxed at source than for a taxpayer who is assessed in an orderly manner from the outset. In the opposite case, a lower load on the former results. For the sake of completeness, a significant "side-track" should be mentioned: this difference in treatment applies to income from employment taxed at source, but not to the taxation of other income and wealth. The remaining income and assets are subject to supplementary ordinary taxation in accordance with Art. 34 para. 1 StHG and Art. 90 para. 1 DBG. And for the supplementary ordinary assessment, the general rule from Art. 4b StHG applies10.

The difference in treatment has a particularly noticeable effect in the case of higher earned incomes, depending on the burden differential between the canton of departure and the canton of immigration.

Federal Supreme Court ruling of 29 January 201411

A German citizen who was initially resident in the canton of St.Gallen and had a residence permit transferred his residence from the canton of St.Gallen to the canton of Schwyz on 20 November 2010. Within the scope of the subsequent ordinary assessment, the tax administration divided the entire income and assets between the two cantons in proportion to the respective length of residence (and not only the income from employment taxed at source)12. The taxpayer brought an action before the Federal Supreme Court against Articles 2 and 9(2) of Annex I FMPA13 and Art. 25 DBAD14 as well as bad treatment in breach of Article 8(2) BV. A Swiss citizen in the same situation would be in a similar position under the then Article 68(1) StHG (now Article 4b StHG15) was liable to pay tax in the canton of Schwyz for the entire tax year 201016 and thus, because of the more favourable tax rate, were treated better. The Federal Supreme Court initially clarified that the right to tax other income and assets follows the general rule and is the exclusive right of the canton of immigration17.

The Federal Supreme Court then examined whether the disadvantage resulting from the pro rata taxation under Art. 34(2) StHG of the taxation of income from employment was contrary to the FMPA18. Since the court affirmed a violation of the FMPA, it was not necessary to examine a violation of the DBAD.

Article 21(3) FMPA19 stipulates the right of the Contracting States to apply national and treaty provisions designed to ensure the collection of taxes and prevent tax evasion. This includes, for example, Swiss withholding tax as a hedging instrument. Taxation is secured by levying income tax at source. The pro-rata-temporis assessment anchored by the legislator in Art. 38 para. 4 StHG does not have the character of security. It was justified from an administrative and economic point of view in the Federal Council's dispatch before it came into force20In the case of persons taxed at source, a change in civil status, for example, is taken into account immediately. This must also apply to changes of residence during the year. This would avoid the need for the canton of departure to transfer tax amounts delivered to the canton of arrival. The pro-rata-temporis assessment, together with the other proposals in the Dispatch on the coordination and simplification of direct tax assessment procedures in intercantonal relations, was considered by the Federal Council to be compatible with European law21. The Federal Supreme Court22 rightly points out, however, that even in the case of Art. 68 (1) StHG (or the current Art. 4b (1) StHG), tax instalments already paid must be transferred to the canton in which the person moves away. In addition, intercantonal elimination in the event of a change of residence during the year would be simplified by dispensing with a breakdown of the tax period, as this pro rata temporis accrual of the right of taxation, which only covers income from employment, would no longer apply. The pro rata temporis differentiation could not be justified either as a hedging instrument within the meaning of Art. 21(3) FMPA or by the withholding tax as such. "It therefore constitutes discrimination incompatible with the FMPA and is therefore not applicable in the case of a subsequent ordinary assessment of persons resident in Switzerland who are subject to the FMPA, insofar as this would result in higher taxation".23 The Federal Supreme Court thus implemented what it had decided in its ruling of 2 September 201324 in the context of his interpretation of Art. 38(4) StHG as "readily conceivable", but could (still) leave open the other legal question to be decided because of the different legal situation.

Bottom line

Conclusion of the Federal Court's ruling of 29 January 2014 is therefore The income of the resident foreign national from employment that is taxed retroactively and in accordance with the ordinary rules in the event of a change of residence during the year is subject to taxation only in the canton of immigration. According to the considerations of the Federal Court, this applies to persons subject to the FMPA and if the application of Art. 38(4) StHG would result in higher taxation. Two new forks emerge: How are persons not subject to the FMPA treated, i.e. persons who are not nationals of a Member State of the European Community (so-called "third country nationals")? What happens in the opposite case if an individual moves to a canton with a higher tax rate and becomes resident there at the end of the tax year?

According to a query to the cantons of Zurich and Zug, "third-country nationals" are treated in the same way as nationals of an EU member state. The case law also applies to the former.

If a person whose earned income is subsequently assessed in the ordinary course of business moves during the tax year from a canton with a lower tax rate to a canton with a higher tax rate, the taxpayer would be taxed at a higher rate if the Federal Supreme Court's case law were to be applied than if the pro-rata-temporis assessment under Art. 38 para. 4 StHG were to apply. The higher taxation would be the same as for a duly taxed compulsory person. This would therefore not result in a worse position, but also in a better position. In these cases, however, it must be taken into account that Art. 38 (4) StHG is (still) in force and applicable for pro rata temporis assessment. I understand that the cantons are aware of this situation.

The Canton of Zurich, for example, also applies federal court rulings when moving to a more tax-advantaged canton or when moving from a more tax-efficient canton. Art. 38 para. 4 StHG is only applied by the Zurich Tax Administration if the taxpayer claims this. The Zurich tax administration is thus implementing an unpublished recommendation of the Commission on Income and Wealth Taxes of the SSK of July 2014. The legality of this application of the law is open to discussion. An unrepresented foreign obligated party, who often moved in recently and is not familiar with Swiss tax law, would have to study tax law in depth in order to recognise the (still) valid legal basis for pro rata temporis accrual in good time before an assessment becomes legally binding. He also took notice of the fact that SSK still publishes its relevant circular letter No. 14 of 6 July 2001, which describes the pro-rata temporis assessment in detail, on the website of SSK25 is set up as circular writing. According to the information received, the Commission on Income and Property Taxes of SSK decided neither to repeal it nor to continue its application. The website does not provide any information on this26. It would be useful not only for the taxpayer, but also for those advising him and the employees of the tax authorities, if the recommendation of the Commission on Income and Wealth Taxes of the SSK had been officially published. The website could refer to this and the confusion which is reflected in different verbal information given by tax office employees or at the latest arises from misguided content could be avoided from the outset.

Clarity will be provided by the new federal withholding tax regulations, on which the Federal Council will issue its message on 28 November 201427 and whose discussion in Parliament has not yet begun. The message now provides for the general principle of deduction for resident taxpayers subject to subsequent ordinary assessment who are taxed at source28.

And finally, one last facet: The transfer of withholding tax from canton A to canton B sometimes takes several weeks or even months. In principle, no interest is paid on the withholding tax amount by Canton A, although the taxpayer in Canton B is charged compensatory interest as part of the subsequent ordinary assessment and the withholding tax delivery has the character of a payment on account29 has. A loss of interest, which is particularly noticeable for higher amounts and would have to be reconsidered in the context of the upcoming new withholding tax regime.