On January 29, the Federal Supreme Court ruled that the current system of inter-cantonal income tax allocation for Swiss resident taxpayers who are subject to wage withholding taxes is in violation of the provisions of the free movement agreement with the European Union and European Free Trade Association. This decision means that all EU and EFTA national taxpayers moving between cantons in Switzerland will be treated equally.
The Swiss Federal Supreme Court ruled1 on 29 January 2014, that the current system of inter-cantonal allocation of income taxes of Swiss resident taxpayers who are subject to wage withholding taxes is in violation of the provisions of the free movement agreement with the European Union (“EU”) and European Free Trade Association (“EFTA”).
This case exposes the unequal tax treatment under Swiss law of EU and EFTA nationals who move to different Swiss cantons. Generally, in certain cases, the EU or EFTA national moving between cantons could remain subject to tax in the original canton from which he moved, which is what happened in the case before the Federal Supreme Court. Given the system of inter-cantonal allocation of income taxation, with circumstances being equal, the EU/EFTA taxpayer moving between cantons could remain subject to higher taxation in the canton from which he moved, whereas his Swiss citizen counterpart could be subject to lower taxation in the canton to which he moved.
This decision means that all EU and EFTA national taxpayers moving between cantons in Switzerland will be treated equally.
Switzerland levies income taxes based on the residency canton of the taxpayer. If a person who is not subject to wage withholding taxes on his or her employment income (e.g., Swiss citizens or non-Swiss citizens with a C permit) moves residency from canton A to canton B during the tax year, he or she is liable to the income tax rates of canton B for the entire tax year. However, Article 38 para. 4 of the Federal Law on Tax Harmonization (StHG) explicitly states that a person subject to wage withholding taxes on employment income (e.g., non-Swiss citizens with a B or L permit) who moves his or her residency from canton A to canton B during the tax year, will be subject to income tax on a pro-rata temporis basis in canton A and in canton B.
In the court case the plaintiff, a German national subject to wage withholding taxes, resided in the canton of St. Gallen (“high tax canton”) at the beginning of the tax year and moved in November to the canton of Schwyz (“low tax canton”). Based on the applicable rules set by the StHG, the canton of Schwyz assessed the plaintiff’s income and wealth on a pro rata basis, leaving most of the taxable income and wealth in the canton of St. Gallen for taxation purposes. This approach led to effectively higher taxation of the plaintiff’s income and wealth in contrast to a hypothetical Swiss national who would have moved between those cantons in the same tax year.
The Federal Supreme Court ruled that the taxation on a pro rata basis for employment income under the StHG is a direct violation of the non-discriminatory rule of the free movement of persons treaty with the EU (and EFTA). And, therefore, the taxation of employment income of EU and EFTA nationals who are subject to wage withholding taxes is unlawful in cases where the taxation on a pro-rata basis would result in higher taxation compared to the taxation of a Swiss citizen.
1 A yet unpublished decision (2C_490/2013)
For more information or assistance, please contact your usual KPMG professional or one of the professionals noted below with the KPMG International member firm in Switzerland.
Tel. +41 58 249 2977
Tel. +41 58 249 53 69
Tel. + 41 58 249 3671
The information contained in this newsletter was submitted by the KPMG International member firm in Switzerland.
© 2019 KPMG Holding AG is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity.
KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.
Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.