a few days ago I’ve received a letter from the tax office (Canton TI), stating that my request for refund of the withholding tax (2018) on VTI through DA-1 had been denied on the basis of art. 11 cpv. 1 of the “Ordinance on the credit of foreign withholding taxes” (ref. 672.201, https://www.admin.ch/opc/de/classified-compilation/19670167/index.html).
N.B. the document only exist in German, French and Italian.
Art. 11 belongs to section C (whose description is something like “taking into account passive interests, other expenses and tax deductions”) and states - more or less (directly from google translate… ):
1 To calculate the maximum amount, interest income, other expenses and deductions with tax incidence are deducted from income.
2 The following distribution rules apply for the reduction:
a. interest expense is divided proportionally to the assets;
b. the other expenses connected directly to the incomes are divided between the relative incomes and the other expenses indirectly connected to the incomes proportionally to these incomes;
c. deductions with a tax impact connected directly to income are divided between the related incomes and deductions with a tax impact connected indirectly to income proportionally to these incomes.
3 Other expenses also include operating expenses, general administration expenses and income taxes deducted from net income in accordance with applicable law.
As the above explanation was - for me - not really clear ( ), especially the system they used to determine the amount (zero), I called the tax office and asked for clarification. They kindly provided a - locked - Excel sheet which they are using for the calculation.
I spent half an hour on it to understand the mechanism and tried to replicate the salient aspects in a google sheet, which you can find under this link: https://docs.google.com/spreadsheets/d/18EmDMJjPBnFy0EXmwFT8FKOi2Z6kCkMxLIVd8Jze1eM/edit?usp=sharing
The main point which was preventing me to get the refund is the deduction of interest on the house mortgage…
The main parameters used by the tax office in the calculation are (all values to be taken from your personal tax form):
- Total gross wealth (without debts)
- Total interest received from securities held
- Expenses for securities management
- Total passive interests (e.g. mortgage interests)
- Value of US securities
- Interests received from US securities
- Claimed withholding tax - L2WT (15%)
- Tax bracket
The tax office calculates:
- the ratio (%) of US securities to the total gross wealth and - on this basis - the portion of passive interest to ‘charge’ to the US securities
- the interest received from US securities as % of the total interest received from all the securities held and - on this basis - the portion of expenses for security management to ‘charge’ to the US securities
These two amounts will be deducted from the interest received from holding US Securities; if the balance is positive, the maximum refund will be calculated starting from this amount multiplied by your tax bracket (%).
Long story short: if you already deduct mortgage interests, you will be very unlikely able to get a refund…
Of course, the impact depends on the value of the different parameters. I tried to play a little bit with those, in order to evaluate the effect of the changes; as I recently refinanced my 10y mortgage with a better interest rate, in 2020 I will have less interest deduction and thus I’ll be able to get some refund (not so in 2019, unfortunately…).
All the above was new for me and I don’t know if and to which extent it applies to other cantons, but I think it was worth sharing…
Based on the above, does it still makes sense to go with the VTI/VXUS split (if one choses the split only to be able to claim back withholding tax on VTI and not to over/underweight specific markets) or would it be easier to stick to VT ?