Taxation of pension benefits in international circumstances

Case 1: Combined pension benefit

1.1 Facts of the case

A., who lives in Muri near Bern, was employed by the Swiss Confederation for most of his working life. A few years before his retirement, he was looking for a new challenge and moved to PostAuto AG, a subsidiary of Swiss Post. The latter is a special public limited company wholly owned by the Confederation. A. retired on April 30, 2021. He had already left for Thailand in the second half of 2020, as he said he liked the climate there better. A. has lived in Thailand ever since. 

The Swiss Post pension fund paid him a lump-sum pension benefit of CHF 1.1 million as at 2 May 2021, from which it deducted withholding tax of around CHF 100,000. The assessment order was issued on April 13, 2022.

A. has accumulated the pension assets, which cover both the mandatory and extra-mandatory areas, over the course of his entire professional activity.

The provisions of the DBA-TH that are of interest here are as follows:

Extract from the DBA-TH:

Art. 17 Pensions

Subject to paragraph 2 of Article 18, pensions and similar remuneration paid to a resident of a Contracting State in respect of past employment shall be taxable only in that State.

Art. 18 Public service

1.a) Remuneration, other than pensions, paid by a Contracting State or one of its political subdivisions or local authorities to an individual in respect of services rendered to that State or political subdivision or local authority shall be taxable only in that State.

b) However, such remuneration may be taxed in the other Contracting State only if the services are rendered in that State and the individual is a resident of that State and

(i) is a national of that State; or

(ii) has not become resident in that State for the sole purpose of providing the services.

2(a) Pensions paid by a Contracting State or one of its political subdivisions or local authorities, or out of a special fund established by that State or political subdivision or local authority, to an individual for services rendered to that State or political subdivision or local authority shall be taxable only in that State.

b) However, such pensions may be taxed in the other Contracting State only if the individual is a resident of that State and a national of that State.

(3) Articles 14, 15 and 17 shall apply to remuneration and pensions for services rendered in connection with a commercial activity of a Contracting State or one of its political subdivisions or local authorities.

1.2 Questions

1. How is the taxation of pension benefits regulated in international relations in accordance with Art. 18 and Art. 19 OECD? What is the regulation in the DTA-TH?
2. In which country may this capital withdrawal of CHF 1.1 million be taxed? Does it matter that the capital was mainly accumulated during employment with the Confederation? 
3. With regard to taxation, does it matter that PostBus Ltd is a unit of the decentralized federal administration? Would anything change if A. had not been employed by PostBus Ltd but by Swiss Post itself?
4. Does it make a difference whether the capital withdrawn comes from the mandatory or extra-mandatory area? What would happen if A. withdrew his assets from pillar 3a?
5. If Switzerland is not allowed to retain the withholding tax paid, how is the refund made?

1.3 Option 1: Unplanned return to Switzerland

Same initial situation. However, the climate in Thailand does not suit A. as well as he thought. After almost three years in Thailand, he returns to Switzerland. He moves back into his old condominium in Muri near Bern. It had been empty during his stay in Thailand.

In the meantime, he has already had the withholding tax levied in Switzerland refunded. 

1.4 Question 

• Was the withholding tax rightly refunded and what could the tax authorities of the Canton of Berne do if they classify the refund as unlawful?

1.5 Option 2: Moving to a country with a DTA that is not OECD-MA-compliant

Same initial situation. However, A. emigrates to Australia because he wants to devote himself to photographing kangaroos after his retirement. 

Extract from the DBA-AUS:

Art. 18 Pensions

1. subject to paragraph 2 of Article 19, pensions, social security benefits and annuities paid to a resident of a Contracting State shall be taxable only in that State. However, if such income is derived in the other Contracting State and the recipient is not subject to tax in the first-mentioned State in respect of such income, the income may be taxed in the other Contracting State. 

(2) Subject to Article 19(2), lump-sum benefits originating in a Contracting State and paid to a resident of the other Contracting State from a pension fund or paid as a result of old age, disability, incapacity or death or as compensation for injuries may be taxed in the first-mentioned State. 

3. the term "pension" means a specific sum payable periodically on fixed dates for life or for a fixed or determinable period of time, which is paid out in cash or in cash equivalents, taking full and appropriate account of the contributions or the single premium.

Art. 19 Public service

1.a) Salaries, wages and similar remuneration paid by a Contracting State, one of its political subdivisions or one of its local authorities to an individual for services rendered to that State, political subdivision or local authority shall be taxable only in that State.

(...)

1.6 Question 

Which state may tax the capital withdrawal of CHF 1.1 million?

Case 2: Severance payment with and without pension character

2.1 The facts of the case

B., 60 years old, has worked all his life in the sales department of W. AG, based in eastern Switzerland. The company operates an international trade in spirits (with a focus on whisky). Thanks to his marketing talent, B. held a management position and received a considerable salary. B.'s profession is also his passion; he regularly spent his vacations in Ireland and Scotland visiting various distilleries. 

In order to focus more on his passion for whisky, B. has decided to emigrate to Ireland at the end of 2024. B. has agreed with his former employer to terminate his employment contract with effect from January 1, 2025. The termination agreement states that B. will receive "a one-off lump-sum settlement of CHF 300,000 to cover the pension gap resulting from early retirement". 

Even after his emigration to Ireland at the end of 2024, B. continues to be available to W. AG as an independent external consultant. He works an average of three days per month for his former employer.

B. has saved enough money during his working life and would therefore prefer not to have the lump sum transferred to Ireland. 

Extract from the DBA-IRL:

Art. 3 General definitions

1. within the meaning of this Agreement, unless the context otherwise requires:

(...)

2. If, under the Convention, income derived by a resident of a Contracting State from sources within the other Contracting State (whether conditionally or unconditionally) may be taxed only in the first-mentioned State or taxed only at a reduced rate in the other State and if, under the applicable law of the first-mentioned State, such income is taxable there not at the full amount but only at the amount remitted to or received in that State, the exemption or reduced rate shall apply only to the income remitted to or received in the first-mentioned State, but only on the amount remitted to or received in that State, the tax exemption or reduced rate to be granted under the Convention in the other State shall apply only to the amounts remitted to or received in the first-mentioned State.

Art. 14 Self-employed work

(1) Subject to Articles 15, 17 and 18, salaries, wages and similar remuneration received by a resident of a Contracting State in respect of employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the work is performed there, the remuneration received for it may be taxed in the other state.

(...)

Art. 17 Pensions

Subject to the provisions of Article 18, pensions and similar remuneration paid to a resident of a Contracting State in respect of past employment shall be taxable only in that State.

2.2 Questions

1. Does the payment from the termination agreement have the character of a salary or pension or does it fall under Art. 14 or Art. 17 DBA-IRL?
2. Assuming that Art. 17 DBA-IRL is applicable. Which state has the power of taxation?
3. Can Switzerland subject the severance payment with pension character to withholding tax?

2.3 Variant

Same initial situation. B.'s emigration to Ireland was also due to the fact that W. AG wanted to rely more heavily on younger employees in sales, in particular to increase the level of awareness in social media. For his part, B. has no desire to deal with the new technical possibilities at his age. 

The termination agreement concluded between B. and his former employer states that B. will receive "a severance payment" of CHF 300,000. B. is also to receive a capital payment of CHF 50,000. However, B. must pay this back if he starts working for a competitor company within the next three years.

2.4 Question

Which state has the right to tax the severance payment and the compensation for the non-competition clause?

Case 3: Immigration from Germany - German pension fund

3.1 Facts of the case

B. began her career as a doctor in Germany and was a member of the pension fund of the German Medical Association (hereinafter "pension fund"). She only worked in Germany for 18 months and then took up her first position in Switzerland. She moved to Switzerland in 2004, where she joined a company pension scheme. Until her retirement in December 2024, B. worked as a doctor at the cantonal hospital X. and continued to be affiliated to the cantonal hospital's occupational pension scheme. Since moving to Switzerland, B. voluntarily continued her membership of the pension fund and made annual contributions of around CHF 5,000 to the pension fund.

The pension statute states that 

• a withdrawal of contributions once paid is not possible and there is a mere entitlement to benefits (in particular disability pension, retirement pension, death benefit, etc.) during the membership.
• there is an obligation to pay the regulatory contributions; the pension fund may terminate voluntary membership without notice in the event of late payment. 
• there are clear guidelines regarding the minimum and maximum amount of contributions that can be paid by those with voluntary continued insurance.

Since January 1, 2025, B. has been drawing a pension from the pension fund of approximately CHF 7,000 per year.

3.2 Note

The German compulsory insurance in a professional pension scheme is functionally most comparable to the AHV and the occupational pension scheme in Switzerland. Insurance in a German professional pension scheme is characterized by the fact that all members of the so-called liberal professions (doctors, dentists, veterinarians, pharmacists, architects, lawyers, tax consultants, civil engineers) who are professionally active in the area of responsibility of the professional insurance and are not incapacitated and entitled to practice their profession are insured by law (compulsory insurance). Self-employed persons can be exempted from the statutory insurance obligation in the German Pension Insurance (self-employed persons are not subject to compulsory insurance in the German Pension Insurance). Compulsory insurance with such a professional insurance company sometimes ends when you take up employment outside the area of responsibility of this insurance company. Moving abroad, for example to Switzerland, also counts as a reason for termination. After the end of compulsory insurance, the insurance can be continued voluntarily.

3.3 Questions

1. Which social security system has B. been subject to since she has been working in Switzerland?
2. Is the pension scheme equivalent to a Swiss pension scheme?
3. Are B's annual contributions deductible in Switzerland?
4. How are the pension assets that B. has accumulated in the pension fund to be assessed under Swiss wealth tax law?

Case 4: Relocation from the USA - 401k plan

4.1 Facts of the case

R. is an American citizen and 50 years old. He is currently working as an expatriate for his US employer (US company in the pharmaceutical industry) and lives in Switzerland. His secondment contract (5 years; cannot be extended) will expire at the end of 2025. His annual gross salary is USD 150,000.

As part of his private pension plan, R. participated in a 401k plan in the USA. Even after moving to Switzerland, he made regular annual contributions of USD 20,000 to this plan. By the end of 2025, he will have saved pension assets totaling around USD 500,000.

R. is considering moving to Switzerland permanently at the end of his secondment contract and being employed here by the US company's Swiss subsidiary. 

He considers what this means for his 401k plan. 

4.2 Note

The 401k plan is a model of private pension provision in the USA. It owes its name to its classification in Section 401k of the US Internal Revenue Code. The 401k plan allows limited contributions (currently (as of 2025) a maximum of USD 23,500 per year for employees under the age of 50). The employer's financial participation is voluntary. Employees can make contributions as a percentage of their income or in the form of fixed contributions. Under certain circumstances, the employer participates in the savings process. Self-employed persons can also join a 401k plan. Contributions made by both the employee and the employer are tax-deductible and are only taxed when they are paid out. Furthermore, contributions to the pension plan are generally tied up until the insured person reaches the age of 59½. Any previous withdrawals are penalized with a tax penalty of 10%. Withdrawal of benefits must begin from the age of 70½. The pension assets can be withdrawn in various ways: in the form of a pension, as a one-off lump-sum payment or in the form of staggered lump-sum payments of a freely selectable amount. In principle, a minimum withdrawal must be made each year. 401k plans are recognized by the USA as part of the social security system.

4.3 Questions

1. Which social security system is R. subject to during his posting in Switzerland? Which social security system will he be subject to when his secondment contract expires at the end of 2025 and he moves to Switzerland permanently?
2. Is a US 401k plan comparable to a Swiss pension plan?
3. Are R's annual contributions deductible during his secondment? He would like to continue to make similar contributions after the end of his secondment and permanent move to Switzerland. Can he also deduct these contributions? 
4. Are his pension assets subject to wealth tax in Switzerland? 
5. R. intended 
   
   1. to withdraw the entire capital this year, or
   2. to withdraw the capital on a staggered annual basis from the current year, or 
   3. to withdraw the pension assets as a pension.

How are the payments from the 401k plan taxed in Switzerland depending on the type of payment? Does it matter whether R. makes the payment during the current assignment or afterwards?

4.4 Variant

Would the answers change if R. is already 60 years old when he receives the 401k plan?

1. R. has made purchases into his Swiss pension fund in the last three years. Is the three-year vesting period under Art. 79b para. 3 BVG violated if R. now withdraws the capital from his 401k plan?
2. Can R. transfer his 401k assets to the Swiss pension fund? What are the tax implications?

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