Income from foreign sources: how do you declare it in Switzerland?

Declaring income from a foreign source

Although the majority of income earned abroad by Swiss expatriates is subject to Swiss tax, a number of measures are in place to mitigate the issue of double taxation.

As all Swiss workers carrying out gainful employment abroad are initially subject to withholding tax in the host country, double taxation agreements (DTAs) are designed to protect Swiss nationals in 122 countries and territories.

In practice, these double taxation agreements may allow recipients of income from abroad a partial or full relief from double taxation, depending on the terms of the agreement.

Permanent contracts apply to a range of people, namely:

• persons who are tax residents in two countries (including Switzerland);
• people on temporary, paid assignments abroad;
• people working at a subsidiary located abroad.

Please note: These agreements may apply to both natural and legal persons.

At the start of the year, the employer of a Swiss citizen working abroad must complete the salary certificate in full compliance with the regulations; this is a key document that forms part of the tax return. Consequently, a separate salary certificate must be issued for each of the employee’s jobs.

It is important to note that some cantons require employers to submit the salary certificate directly to the relevant cantonal tax authority, meaning that the employee does not have access to it.
See also: How can individuals get the best exchange rate?

Declaring foreign-source dividends

The reporting of dividends, interest and licence fees of foreign origin is also subject to a high risk of double taxation. However, Swiss legislation allows, in certain cases, the amount taxed at source by the third country to be deducted from the local tax; this is known as a flat-rate tax credit.

In order to benefit from the numerous double taxation agreements signed by Switzerland regarding the taxation of dividends and interest, three criteria must be met, namely:

• be a natural person;
• be resident for tax purposes in Switzerland;
• be liable for tax in Switzerland.

Furthermore, the application for a flat-rate tax deduction must be submitted by the eligible person after the end of the tax year in which the foreign income was received, and within three years of that date.

Please note: Naturally, a claim for a flat-rate deduction is not permitted if it would otherwise be possible to obtain a full refund of the tax in the third country.

In practice, the portion reimbursable by the Swiss government is the amount exceeding the maximum tax threshold set out in the existing double taxation agreement.

Depending on whether the amount of non-recoverable withholding tax exceeds CHF 100, there are two distinct procedures to follow:

• if the amount exceeds CHF 100, you must submit your tax return online to claim the deduction (for paper returns, you will first need to complete form DA-1 in advance);
• If the amount is less than CHF 100, your dividends and interest must be reported as Swiss securities in your tax return, after deduction of tax withheld at source (abroad).

If you are not representing a natural person, please note that form DA-2 is intended for legal entities. Finally, form DA-3 relates to tax on licence fees.

Declaring property income from abroad

Although your property income from abroad is not subject to taxation in Switzerland, please bear in mind that it must still be declared, as it may affect your tax rate—both for wealth tax and income tax.

In fact, any property you own abroad increases the value of your assets and is therefore likely to push your income above the threshold of one million Swiss francs; a threshold above which wealth tax applies.

In practical terms, income from property that is exempt from tax at local, cantonal and federal level is calculated as follows:

Property income = (rental income + imputed rental value) – (maintenance costs + mortgage interest)

Once again, the law varies depending on the Swiss canton in which you are resident for tax purposes. Whilst some cantons may treat the maintenance costs of your property as negative income from abroad, the majority will simply apply a reduction to your tax rate.

Please note: As your total property debts are spread across all your properties, a certain percentage of your debts incurred abroad will be allocated to your property in Switzerland.

Declaring income from foreign sources

Certain more marginal sources of income, such as gambling winnings or lottery prizes, are generally excluded from most double taxation agreements.

However, please note that Swiss law deducts the tax withheld at source on your foreign earnings before applying any further taxation. This means that your earnings will only be taxed on their net amount.

Furthermore, Swiss withholding tax does not apply to this type of income, and taxpayers are entitled to a 5% flat-rate deduction calculated on the gross amount of the gain (i.e. before withholding tax is deducted in the third country) to cover the costs of earning the income.

The reporting of income from foreign sources is often subject to the application of double taxation agreements in order to ensure a fair tax burden for the taxpayer.

However, some procedures remain complex, and to help you navigate your tax return, the best approach is still to equip yourself with a foreign exchange solution tailored to your international operations, such as the b-sharpe range of bank accounts.