A question for home owners who claim a DA-1 refund

In my 3 years of filing taxes in Switzerland I have never been able to claim a refund on the 15% WHT of US domiciled ETFs’ dividends using the DA-1 form.

After discussions with the Vaud tax office I understand that I cannot claim it because I am also discounting my taxable income by the interest on my debt (student loans).


For example (rough numbers):

  • CHF 100k taxable income
  • CHF 3k interest accumulated over the year on my student loans allows me to reduce my taxable income to CHF 97k. This means approximately CHF 20k taxes due

Then with my DA-1:

  • CHF 2k dividends paid back to me (included in the CHF 97k taxable income above)
  • CHF 300 (15%) withheld and sent to the IRS in the US
  • Since CHF 300 tax has already been paid, this should reduce my tax to CHF 19.7k

However, even though each year I submit this, the tax office replies saying it is not allowed and revises my tax back up to CHF 20k.


So my question: do home owners also get refuted their DA-1 refunds as they are claiming interest deductions on the mortgage already for their taxes? The logic as I understand it being that their interest payments would be lower if they paid off some of the house instead of investing with borrowed funds.

I may swap my ETFs to non-dividend returning investments because right now I am paying 35% marginal tax rate + 15% WHT = 50% tax on any dividends. If we assume 6% nominal returns, 2% inflation, this 3% income tax drag, 0.3% wealth tax drag then I am only getting 0.7% real yields on my dividends and taking huge volatility risk. Something like BRK.B or ES minis 5x my real returns on the dividend portion under these assumptions…

Here is the basis for the calculation of Vaud (ciph. 7 a and c).

https://www.estv.admin.ch/dam/estv/fr/dokumente/verrechnungssteuer/merkblaetter/da-m.pdf.download.pdf/da-m.pdf

Unfortunately (a) they are right and (b) I am not able to explain the reasoning in simple words …

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hi @hippo, yes I’ve faced the same issue (in TI) and opened in the past a dedicated topic, see here

Basically it depends on several factors e.g. the interests amount, the amount of US securities vs total securities etc.

I’ll try again for 2020 and this time I might be lucky because my parameters changed (lower mortgage interests and higher % of US securities)

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The maximal amount you can claim back is:

(US-Dividends - (US-Assets/Total-Assets) * Debt Interest) * Marginal Tax rate

So for someone who has a home worth 1M with a 700k mortgage at 1%, 400k in US-Assets that had a Dividend of 7k and a marginal tax rate of 25%:

(7k - (400k/1400k) * 7k) * 25% = 1.25k

This is higher than the 7k *15% = 1.05k that is withheld, so the full amount is claimable.

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Thanks for the replies. I am going to have to spend some time combing through the tax notices over the weekend.

If this formula is the quantitative way the tax office computes it it raises some interesting scenarios for me.

As almost 100% of my assets are US domiciled (actually > 100% if my student loans are a debit) then

With a marginal tax rate of 35% my US-Dividends must be about 1.87x my student loan interest to allow for a full DA-1 refund. If they count my student loans as a debit then it goes to about 2.2x.

I guess while your dividends < interest you get no DA-1 refund which will have been the case for me in 2018 and 2019. In 2020 I should get a partial refund which would confirm this.

@hippo I don’t fully get it.

  1. Total assets include home value (not the commercial value but the taxable value) → if you are home owner (as the title of your thread would suggest) then the ratio US-Assets/Total-Assets should be < 1
  2. you said you have got 2k CHF dividends. If you have a mortgage (and - on top of it - passive interests on your student loan) how can your dividends be > than your passive interests ?

Or maybe I’ve just been misled by the thread title and you are not home owner → your debt is only the student loan ?

Yep sorry I am not a home owner. I just framed this as a question to home owners to understand how debt / interest accrued worked in general because I had never heard of anyone failing DA-1 refunds because of this.

The numbers I used were also just as an example.

My actual numbers for 2020 are more like:

  • 3.5k dividends
  • -2.5k interest on student loans
  • 200k in US domiciled ETFs and 10k in cash on 31.12.2020
  • -50k student loan debt on 31.12.2020

How is repaying the loan not the best risk free return you can get? (assuming you didn’t repay much during the year that’s 5% interest? or it was much higher loan before?)

Why don’t you take out a 50k margin loan on IB? Should lower your interest considerably.

I regularly file the DA-1 form and get the withholding tax back in a matter of weeks, compared to the years it takes to finalise the whole tax declaration. I live and own a house in ZH.

@nabalzbhf @xorfish

It may well be worth it but it is a UK student loan which is more complicated; not a straightforward trade off.

Summary of terms

  • Interest rate is fixed at RPI + 0-3% on a sliding scale based on income (RPI at 2.6% right now)
  • Repayments are 9% of income over a base level (base level of ~CHF50k in Switzerland)
    • This means if I lose my job or stop working I won’t have to repay
    • The loan is written off after 30 years
    • Of course, being a high earner in Switzerland I will pay it off in 5-6 years anyway if I keep working a high paying job

A few other things I consider:

Currency risk

  • Loan is in GBP so currency fluctuations can be good/bad for me vs CHF income and USD denominated investments

Political risk

  • The terms of the loan are dictated by the government and could well change if the labour party (more left leaning) come into power in the next years. They could reduce the interest to BOE+1% (same terms as student loans > 2 years before my studies :frowning: ) or even write it off. That would be annoying if I pay 50k which would have been forgiven 3 years later.

Inflation risk

  • So much money printing since COVID = big asset price inflation. Having debt is great if there is inflation (although RPI is a factor as economies re-open and we may see normal inflation).

Tax treatment

  • The Swiss government generously lets me write off this interest from my taxable income. So 5.6% UK interest becomes 3.6% (35% marginal tax rate) which is RPI+1%. 1% real return non-callable debt to invest with doesn’t sound too bad
  • Of course, it screws my DA-1 refund at the moment so the advantages are not so great unless I structure my investments to avoid dividends

Property investments

  • Unlikely I buy property in the near future but if I did then having 50k extra for the down payment may be a big help

I may well lump sum it off because I am earning and paying quite a lot now. But it’s not so clear.

Probably if GBP hadn’t found some strength recently I would lump sum it now since assets are so high. But currently I am more inclined to wait a year and re-assess.

IB loan is 1.5% and interest can also be written off + you get the full DA-1 back because of the decrease in interest.
Leverage of 1.33 is pretty save, especially if you are capable of paying it down fast.

Well the question comes down to how much you value non-callable debt. Also the other factors, in particular political party changing the terms to be more favourable.

If I wanted to mortgage my retirement or engage in lifecycle investing type behaviour with callable debt then E-mini futures would have lower implied costs than IB 1.5% loan. Also no dividend tax drag is pretty huge.

But yes all these points are valid - I have spent a lot of time debating my best approach to this debt and each year revisit my assumptions and trade-offs.

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