Aspects of tax and social security contributions from the perspective of employers and employees Focus: pension provision

Case 1: Cash payment upon taking up self-employment

1. facts of the case

X drew a lump-sum benefit of CHF 300,000 from his vested benefits foundation on 30 June 2019. The cash payment was justified by the commencement of self-employment in the field of oenology.

The tax office taxed this lump-sum payment separately from X's other income at the privileged tax rate in application of Art. 38 DBG.

In the 2019 tax return, X declared a taxable income of CHF 100,000. No income from self-employment was declared.

With a condition, the tax office X requested, among other things:

• a substantiated factual statement on the nature and starting date of the activity,
• relevant evidence of external appearance (stationery, business cards, etc.),
• a statement of assets and liabilities, income and expenditure, private withdrawals and private contributions, including proof of the businesslike justification, and
• all salary statements for the 2019 tax period.

X then explained that the start of self-employment had been planned for the summer/autumn of 2019 and had also been pursued briefly on a part-time basis. However, due to an illness suffered in October 2019, the project could not be realised and taken up 100% as planned.

Finally, on 20 April 2021, the Zurich Cantonal Tax Office assessed X with a taxable income of CHF 400,000 for the 2019 tax period. Mr X's prepaid pension assets were offset as other income.

2. questions

1. Who decides whether the lump-sum withdrawal was made legally, the vested benefits foundation or the tax authorities?
2. Was the lump-sum benefit drawn wrongly and was the subsequent ordinary taxation of the lump-sum benefit in the 2019 assessment procedure justified accordingly?
3. Are there any requirements regarding the period within which self-employment must be taken up after the capital withdrawal in order to be able to make use of the privileged taxation pursuant to Art. 38 DBG?
4. Comment on the burden of proof in these proceedings.
5. How could a subsequent ordinary taxation of the capital withdrawal have been prevented?
6. Would it be possible for X to draw only part of the pension assets when he starts self-employment (gradual withdrawal)? And why might this make sense?

Case 2: Partial retirement with self-employment

1. facts of the case

A (born 1942) worked as a self-employed lawyer until the age of 70. In September 2006, he received various lump-sum benefits from the 3rd pillar, but at the same time joined the Pension Foundation of the Zurich Bar Association as a voluntarily insured self-employed person and purchased CHF 800,000; on 26 November 2007, he made a further purchase of CHF 1,200,000. From 2010, he made the following three lump-sum withdrawals totalling CHF 2,491,904:

08.12.2010 CHF 814'301

01.04.2011 CHF 817'329

01.01.2012 CHF 860'274

In 2012, the Zurich Cantonal Tax Office recorded all payments totalling CHF 2,491,904 separately from other income as lump-sum benefits, at a rate of 1/10 of the total benefit, based on § 37 StG ZH. Separate taxation of the three partial payments due to successive reduction of the degree of employment was not granted.

A subsequently filed an appeal. The capital withdrawals were to be taxed separately. According to the regulations, a partial payment was possible for dependent employees in the event of a reduction in the number of hours worked, which was why this also had to be granted to a self-employed person. The obligor's income had continuously decreased by more than one third from 2009 to 2012. A justified this with the reduction of his income from his work as a lawyer:

The applicable regulations of the Pension Foundation of the Zurich Bar Association provided for the possibility of a gradual retirement in a maximum of three steps with a minimum reduction in gainful employment of 30% per step.

2. questions

1. Is partial retirement provided for in the current pension law or is it recognised? Are changes to be expected in the course of the current pension reform (AHV 21)?
2. What must be taken into account from a tax perspective in the case of partial retirement of self-employed persons?
3. What must be taken into account from a tax perspective in the case of partial retirement of self-employed persons?
4. What are the possible consequences under tax law if partial retirement a) was not permitted under the regulations or b) is not accepted for tax reasons?

Case 3: Violation of the retention period pursuant to Art. 79b para. 3 BVG

1. facts of the case

A (born 1954) was employed in the 2016 tax period. On 21 October 2016, i.e. at the age of 62, he made a purchase of CHF 45,000 into his occupational benefit scheme (2nd pillar), which he later took into account in the tax return for the 2016 tax period to reduce tax. On 9 April 2019, i.e. at the age of 65, he received a lump-sum payment of CHF 20,000 from his Pillar 3a. He was forced to do this because the costs for his home, which had been under construction since autumn 2018, had turned out to be higher than offered.

The tax office then retroactively offset the purchase made in 2016 in the amount of CHF 20,000, which it justified with a violation of the three-year retention period pursuant to Art. 79b para. 3 BVG.

A appealed against this decision.

2. questions

1. Was the tax office right to offset the purchase in this case?
2. In which procedure has a set-off of the purchase to take place?
3. Are there (other) exceptions in which the three-year blocking period pursuant to Art. 79b para. 3 LOB does not apply?

Case 4: Severance pay

1. facts A

A (born 1947) was a member of the management of various companies of the C-group since 1986. Among other things, A headed the human resources department of the group for almost 30 years. As a result of internal restructuring, A was removed from his position in the management of the C-Group. In this context, at the end of February 2004, at the age of 57, A was finally transferred to another position within the group after lengthy negotiations between A and the C-group. A accepted the transfer in particular due to the payment of a compensation of CHF 240,000, referred to as "severance pay". The transfer was associated with a salary reduction of around 50% (original net salary around CHF 15,000 p.m., afterwards around CHF 7,500 p.m.). Finally, he was finally dismissed as of 30 April 2008 at the age of 61.

For the 2004 tax period, A declared, among other things, a lump-sum payment of CHF 240,000 described as a "severance payment". In a separate letter, A requested "that [this amount] be imposed specifically as a lump-sum payment by the employer analogous to a lump-sum payment from a pension institution, respectivement en tant que lump-sum payment remplaçant des prestations périodiques" (i.e. as a lump-sum payment by the employer analogous to a lump-sum payment from a pension institution within the meaning of Art. 17 para. 2 DBG or as a lump-sum payment for recurring benefits within the meaning of Art. 37 DBG).i.e. as a lump-sum payment by the employer analogous to a lump-sum payment by a pension institution within the meaning of Art. 17 para. 2 DBG or as a lump-sum payment for recurring benefits within the meaning of Art. 37 DBG).

2. questions

1. What requirements must be met for severance payments to be taxable under Art. 17 para. 2 DBG?
2. Is the present lump-sum benefit taxable under Art. 17 para. 2 DBG, as requested by A?
3. Could the severance/severance payment be taxed as a lump-sum payment for recurring benefits within the meaning of Art. 37 DBG?

3. circumstance B

A (born 1949) worked as a flight captain for Swissair until 31 May 2002. He received an annual salary of CHF 200,000. As a result of his early retirement at the age of 53 in connection with the grounding of Swissair, in addition to a partial lump-sum payment and a pension or transitional pension until he reached AHV age, he also received compensation of CHF X from the Swissair pension fund in 2003 under a social plan. In the 2003 tax return, A declared the lump-sum payment of CHF X and requested separate taxation for this amount.

4. questions

1. Can the lump-sum benefit be taxed as a lump-sum benefit from pension provision in accordance with Art. 38 DBG?
2. Assuming that A has been working as a self-employed tourist guide since 31 May 2002 (annual salary of max. CHF 40,000), does this circumstance change the assessment?

Case 5: Voluntary insurance according to Art. 47 and Art. 47a LOB

1. facts of the case

X was employed as a teacher (born 1961) at a public school. As there were increasing doubts about his pedagogical approaches, the employment relationship was terminated by mutual agreement as of 31 May 2020. X has not worked since then and does not intend to do so in the future, as he is in sufficiently good financial circumstances.

X would like to continue his pension relationship with the current pension fund until he reaches normal retirement age. Since he has a larger pension gap, a further build-up of the pension would also be an option for him. According to the regulations of his current pension scheme, early retirement is possible from the age of 58.

2. questions

1. Is it possible under pension law to continue the previous pension relationship after giving up gainful employment? If so, what are the requirements for this?
2. Is voluntary continued insurance recognised for tax purposes?
3. Let's assume that the employment relationship is not terminated until 31 October 2020. Does this change anything in X's pension situation?