Changes concerning source taxes

In a recent decision dated June 26th, 2018 (ATF 2C_450/2017), the Swiss Federal Court did examine the legality of a partial aspect of the source tax scales and related instructions edited by the Vaud tax authorities concerning the salaries.  

The Federal Court had to specifically deal with the case of an individual, Swiss national, residing in neighboring France with his wife and their three children. Both perform a gainful activity, the gentleman in the Canton of Vaud for the public sector as a customs officer and in his wife in France. 

The Federal Court considered that the taxpayer working in Switzerland was entitled to claim a more favorable source taxation than the one previewed by the Vaud tax authorities, by taking into account the followings :

  • The dependent children (tax scales C1, C2, etc.). The content of the scales and instructions of the Vaud tax authorities stipulating that "only children for whom the taxpayer benefits from complete family allowances paid by Swiss entities may be taken into consideration for determining the scales C1, C2, etc." has been held to be contrary to Federal law by the Court;
  • The actual spouse’s income, relevant for the determination of the rate, lower than the income taken into account by the scales (the lump-sum was of CHF 65’100 per year). In the case at stake, the taxpayer wife's income was significantly lower than the lump-sum. 

However, the request for adjustment must be filed by the taxpayer with the Swiss tax authority before the end of March of the following year (Article 137, paragraph 1 LIFD, article 191, paragraph 1 LI VD).

As you know, and to the extent that the conditions are met, employers established in the canton of Vaud do not have to withhold a tax at source on the remuneration paid to their employees working in the Canton of Vaud but residing in the neighboring France. 

An exception exists for employees of the public sector who are subject to tax at source on their remuneration, their employers having thus to retain the source taxes on the remuneration paid to such employees.

Although the aforementioned decision concerns an employee of the Swiss public sector, we are of the opinion that its conclusions may also apply to employees of the private sector who :

  • • exercise a dependent gainful activity in the canton of Vaud,
  • • reside abroad with their spouse and dependent children without being French cross border worker, and
  • • whose wife has a gainful activity outside Switzerland.

The right or not to a partial payment of Swiss family allowances should also be considered notably with the Vaud tax authorities in view of determining the applicable scale. We recommend an analysis of the situation of your employees subject to taxation at source with the view to detect who might benefit from the application of this recent decision, i.e. a lower tax scale / a lower spouse’s income relevant for the tax rate. 

The right for these employees to benefit from the differential between the French and Swiss family allowances should also be considered, since this right may affect the applicable tax scales.

Our specialists do remain at disposal for any advice or assistance. For additional information, do not hesitate to contact us:

  • Jean-Michel Clerc - T 021 552 63 63 - email: jean-michel.clerc[at]mercuris.legal
  • Denis Chahidi - T 021 552 63 63 - email: denis.chahidi[at]mercuris.legal
  • Remi Wattez - T 021 552 63 63 - email: remi.wattez[at]mercuris.legal