How is severance / social plan taxed?

Taxes
1

Hello,

I am affected by the layoffs in Switzerland.

I am getting both the lump sum severance and the social plan later, when negotiated. I want to leave Switzerland soon.

Questions:

  1. Are both taxed at the rate of income, or are there any exceptions? Must OASI/DI/APG be paid as well?
  2. I know that the tax brackets are pro-rated if you leave Switzerland before the end of the year. This lump sum payment would therefore be unfairly taxed, as it would be considered I normally earn this much.
  3. Would it be allowed, or advised to move to a low-tax canton before leaving for a reduced tax rate on severance? Does it work that way?
  4. How is social plan taxed if I have already left Switzerland before receiving it? Is it just taxed at 0%?

:pray:

2

There’s nothing special about this income, should be treated like any swiss income (so check the DTA if you moved abroad by the time you receive it).

Re pro rating, I think a bonus would be treated the same way, if you’re close to the max marginal tax rate it won’t matter tho.

3

If you can, wait for the social plan to be negotiated. It may allow for conversion of severance pay into extended garden leave. When you are taxed at the source, this may reduce your tax burden as you then don‘t have a massive income in one month.

4

It’s normal income, so:
(1) Yes, no exception. Yes, social security will be fully deducted.
(2) Yes, lump sum will put you into higher tax bracket.
(3) Yes, you can move to lower tax canton.
(4) Depends on your individual situation and where you leave by then. I would not expect the typical foreign taxation to be less than what you will pay in Switzerland.

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5

I see. So it is beneficial to stay in Switzerland for as long as I can to lower the average monthly income and therefore fall in the lower tax bracket despite the lump sum severance. Is that correct?

6

It depends on your housing cost in Switzerland. As long as you are employed, you must be a tax resident in Switzerland (otherwise, things become super messy). Tax resident doesn’t mean you were on vacations :). If you were taxed at the source, it may (if your housing cost was low) be cheaper to extend your garden leave instead of consuming a severance package. But this depends on whether your employer actually provides for such in the social plan. Some companies do, as it was good particularely for older employees with bleak employment prospect.

7

I don’t quite understand this.

Why is it bad to get a large sum in one month?

Isn’t that taxed exactly the same as if this large sum is paid gradually in multiple salaries on garden leave?

As long as you stay tax resident for the same duration of time in a year, of course. I mean I can choose to stay tax resident even after losing a job, right? It does not just automatically end.

8

Note @TeaGhost specified when (employment income) being taxed at source.

The tax for employment income taxed at source (newly landed foreigners or foreign residents) is computed monthly - at a progressive rate.

9

example.

so let’s say you normally earn 1k per month. then in december you get made redundant and get paid 100k. you are taxed at source and so the tax rate applied to the 100k is the rate as if you earned 1.2 million so you’d pay a lot of tax on it.

since you earn <120k, you can’t file a tax return to get a ‘refund’.

is that correct?

10

Yes, except in practice I’d think most people with those questions are likely to earn higher salaries or have more than 70k wealth. (And you can always decide to file taxes so that the tax at source is not final)

11

While I can’t speak for severance payments/plans, that’s how I was taxed on yearly bonus - though admittedly long ago.

As @nabalzbhf said, the possibility (or obligation) to file a regular tax return has been expanded.

12

Can you? I seem to remember reading of a case where the tax authorities refused to accept a tax return.

13

This cannot be how it works.

The tax office and your employer literally have your salary data for the past 11 months, so how can they make such a wrong assumption based on December income?

Sounds so broken if it is so.

14

it isn’t a wrong assumption. withholding tax is calculated on the income of that month. it doesn’t average it out.

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15

This withholding tax is terrible then.

I know I would recoup the overpayment in my tax return, but I have heard it sometimes takes years for your return to be processed. So maybe in 3 years I am going to get my money back, probably not even getting the interest rate for this time.

Terrible way Switzerland treats laid off people.

What if I give up my swiss tax residency on the last day of employment? Since the severance payment arrives after, it would not get taxed at all, or am I imagining this wrong?

At the very least, I can move to a cheaper canton before the payment, that should work.

16

Mmm, iirc there is a correction at the year’s end based on your total salary for the year (including e.g. bonuses and paid overtime - if any).

I guess it should be similar for this kind of one-off events

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17

The whole point of taxation at source is that you can’t go around it, because it is deducted before the payment hits your bank account. Your move in this game is to file the tax declaration and get a fair assessment.

This is by the way how taxation works for everyone in many countries.

Not sure if you can still file the tax declaration if you leave Switzerland before the end of the calendar year AND you might be also taxed on this income at your new domicile :stuck_out_tongue_winking_eye:.

18

If I go travel the world, staying only a week or two in each country, and paying careful attention to each country tax residency tests, there will be no new tax residency, the money would be 0% tax. There are caveats, of course. It’s complicated and not for everyone. Or move to Dubai, which is similar in effect, and simpler to pull off.

19

Since tax year 2021, anyone can request ordinary taxation. Beware of the March 31 deadline. For people that are leaving Switzerland, the deadline is the date of deregistration.

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