- International
Taxation of pension benefits in international circumstances
Note: This language version is an automatically generated translation. The text may therefore contain linguistic and terminological errors.
view in original language (German)Note: This language version is an automatically generated translation. The text may therefore contain linguistic and terminological errors.
view in original language (German)A., a resident of Muri near Bern, was employed by the federal government for almost his entire working life. A few years before his retirement, he sought a new challenge and moved to PostAuto AG, a subsidiary of Swiss Post. The latter is a special-purpose stock corporation wholly owned by the federal government. A. retired on April 30, 2021. As early as the second half of 2020, he had deregistered his residence in Switzerland and moved to Thailand, as he stated that he preferred the climate there. A. has been living in Thailand ever since.
On May 2, 2021, the Swiss Post Pension Fund paid him a lump-sum pension benefit of CHF 1.1 million, from which it withheld withholding taxes of approximately CHF 100,000. The tax assessment notice was issued on April 13, 2022.
A. accumulated the pension assets, which encompass both the mandatory and non-mandatory portions, over the course of his entire professional career.
The relevant provisions in the DBA-TH are as follows:
Excerpt from the DBA-TH:
Subject to Article 18, paragraph 2, pensions and similar remuneration paid to a resident of a Contracting State in respect of past employment may be taxed only in that State.
1.a) Remuneration, other than pensions, paid by a Contracting State or one of its political subdivisions or local authorities to an individual for services rendered to that State or political subdivision or local authority may be taxed only in that State.
b) However, such remuneration may be taxed in the other Contracting State only if the services are rendered in that State and the individual is a resident of that State and
(i) is a national of that State, or
(ii) has not become a resident of that State solely for the purpose of rendering the services.
2.a) Pensions paid by a Contracting State or one of its political subdivisions or local authorities, or from a special fund established by that State or political subdivision or local authority, to an individual in respect of services rendered to that State or political subdivision or local authority may be taxed only in that State.
b) However, such pensions may be taxed only in the other Contracting State if the individual is a resident of that State and a national of that State.
3. Articles 14, 15, and 17 shall apply to remuneration and pensions for services rendered in connection with a commercial activity of a Contracting State or one of its political subdivisions or local authorities.
Same initial facts. However, A. finds that the climate in Thailand isn’t as good as he had thought. After nearly three years in Thailand, he returns to Switzerland. He moves back into his old condominium in Muri near Bern. This property had been vacant during his stay in Thailand.
In the meantime, he has already had the withholding tax levied in Switzerland refunded.
Same initial facts. However, A. emigrates to Australia because he wants to devote himself to photographing kangaroos after his retirement.
Excerpt from the DTA-AUS:
1. Subject to Article 19, paragraph 2, pensions, social security benefits, and annuities paid to a person resident in a Contracting State may be taxed only in that State. However, if such income originates in the other Contracting State and the recipient is not subject to taxation in the first-mentioned State with respect to such income, the income may be taxed in the other Contracting State.
2. Subject to Article 19, paragraph 2, lump-sum payments arising in one Contracting State and paid to a resident of the other Contracting State, which are derived from a pension fund or are made on account of old age, disability, incapacity to work, or death, or as compensation for injury, may be taxed in the first-mentioned State.
3. The term “pension” means a fixed sum payable periodically at fixed intervals for life or for a specified or determinable period, which is paid in cash or in cash equivalent, taking full and appropriate account of contributions or a single lump-sum contribution.
1.a) Salaries, wages, and similar remuneration paid by a Contracting State, one of its political subdivisions, or one of its local authorities to an individual for services rendered to that State, political subdivision, or local authority may be taxed only in that State.
(…)
Which country may tax the capital withdrawal of CHF 1.1 million?
B., 60 years old, has worked his entire life in the sales department of W. AG, headquartered in eastern Switzerland. The company is engaged in the international trade of spirits (with a focus on whiskey). Thanks to his marketing talent, B. held a management position and earned a substantial salary. B.’s profession is also his passion; he regularly spent his vacations in Ireland and Scotland visiting various distilleries.
To devote more time to his passion for whiskey, B. has decided to emigrate to Ireland at the end of 2024. B. has agreed with his former employer to terminate his employment contract effective January 1, 2025. The termination agreement states that B. will receive “a one-time lump-sum severance payment of CHF 300,000 to cover the pension gap resulting from early retirement.”
Even after his emigration to Ireland at the end of 2024, B. will continue to be available to W. AG as an independent external consultant. He works an average of three days per month for his former employer.
B. has saved enough money during his working life and therefore wishes to refrain from having the lump-sum payment transferred to Ireland.
Excerpt from the DTA-IRL:
1. For the purposes of this Agreement, unless the context otherwise requires:
(…)
2. In accordance with the Agreement, income derived by a resident of one Contracting State from sources within the other Contracting State (whether conditionally or unconditionally) may be taxed only in the first-mentioned State or may be taxed in the other State only at a reduced rate; and if, under the applicable law of the first-mentioned State, such income is not taxable there in full, but only on the amount remitted to or received in that State, the tax exemption or reduction to be granted in the other State under the Agreement shall apply only to the amounts remitted to or received in the first-mentioned State.
1. Subject to Articles 15, 17, and 18, salaries, wages, and similar remuneration derived by a resident of a Contracting State from employment may be taxed only in that State, unless the employment is exercised in the other Contracting State. If the work is performed there, the remuneration derived therefrom may be taxed in the other State.
(…)
Subject to Article 18, pensions and similar remuneration paid to a resident of a Contracting State in respect of past employment may be taxed only in that State.
Same factual background. B.’s emigration to Ireland was also motivated by the fact that W. AG wishes to rely more heavily on younger employees in sales, particularly to increase brand awareness on social media. For his part, B. has no desire to grapple with new technological possibilities at his age.
The termination agreement concluded between B. and his former employer states that B. will receive “a severance payment” in the amount of CHF 300,000. Furthermore, B. is to receive a lump-sum payment of CHF 50,000. However, B. must repay this amount if he works for a competing company within the next three years.
Which country has the authority to tax the severance payment and the compensation for the non-compete clause?
B. began her career as a physician in Germany and was a member of the German Medical Association’s pension fund (hereinafter “pension fund”), which is recognized in Germany. She worked in Germany for only 18 months and then took up her first position in Switzerland. She moved to Switzerland in 2004. Here, she joined an occupational pension plan. Until her retirement in December 2024, B. worked as a physician at Cantonal Hospital X and remained affiliated with the hospital’s occupational pension plan. Since moving to Switzerland, B. voluntarily maintained her membership in the Pension Fund and paid annual contributions of approximately CHF 5,000 to the Pension Fund.
The pension fund’s bylaws state that
B. has been receiving an annual pension from the pension fund since January 1, 2025, amounting to approximately CHF 7,000.
German mandatory insurance in a professional pension fund is functionally most comparable to the AHV and occupational pension plans in Switzerland. Insurance in a German professional pension fund is characterized by the fact that all members of so-called chamber-eligible liberal professions (doctors, dentists, veterinarians, pharmacists, architects, lawyers, tax consultants, civil engineers) are insured by law (mandatory insurance). Employees may be exempted from the statutory insurance obligation under the German Pension Insurance (there is no insurance obligation under the German Pension Insurance for self-employed individuals). Compulsory insurance under such a professional association insurance scheme sometimes ends when the insured person takes up employment outside the scope of this insurance. Moving abroad, for example to Switzerland, is also considered a reason for termination. After the end of the compulsory insurance period, the insurance can be continued on a voluntary basis.
R. is a U.S. citizen and 50 years old. He is currently working as an expatriate for his U.S. employer (a U.S. pharmaceutical company) and resides in Switzerland. His expatriate contract (5 years; non-renewable) will expire at the end of 2025. His annual gross salary is USD 150,000.
As part of his private retirement planning, R. has participated in a 401(k) plan in the U.S. Even after moving to Switzerland, he continued to make regular annual contributions of USD 20,000 to this plan. By the end of 2025, he will have accumulated approximately USD 500,000 in retirement savings.
R. is considering moving permanently to Switzerland after his assignment contract expires and taking a position at the Swiss subsidiary of the U.S. corporation.
He is considering what this means for his 401(k) plan.
The 401k plan is a model for private retirement savings in the United States. It owes its name to its classification under Section 401k of the U.S. Internal Revenue Code. The 401k plan allows for limited contributions (currently, as of 2025, a maximum of USD 23,500 annually for employees under 50 years of age). The employer’s financial contribution is voluntary. Employees can contribute a percentage of their income or make fixed contributions. In some cases, the employer may contribute to the savings plan. Self-employed individuals may also join a 401(k) plan. Contributions made by both the employee and the employer are tax-deductible and are taxed only upon withdrawal. Furthermore, contributions generally remain locked in the retirement plan until the insured reaches the age of 59½. Any early withdrawals are subject to a 10% tax penalty. Upon reaching the age of 70½, the withdrawal of benefits must begin. The retirement savings can be withdrawn in various ways: as an annuity, as a lump-sum payment, or as a series of lump-sum payments in amounts of the insured’s choosing. In principle, a minimum withdrawal must be made each year. 401(k) plans are recognized by the U.S. as part of the social security system.
Which social security system does R. fall under during his assignment in Switzerland? Which social security system does he fall under if his assignment contract expires at the end of 2025 and he moves to Switzerland permanently?
Is a U.S. 401k plan comparable to a Swiss pension plan?
Are R.’s annual contributions during his assignment tax-deductible? He would like to continue making contributions of a similar amount even after his assignment ends and he moves to Switzerland permanently. Can he also deduct these contributions?
Is his pension balance subject to wealth tax in Switzerland?
R. intends
How are withdrawals from the 401k plan taxed in Switzerland depending on the type of payout? Does it matter whether R. makes the withdrawal during the current assignment or afterward?
Would the answers change if R. is already 60 years old when he withdraws the 401k plan?
