Questions about Provisional taxes in Zurich canton

Hi,

this is a rather complex post with many questions about the provisional tax. will be great if I can get some answers (will likely require careful reading ).

Premise:

I recently received my c-permit in Sept, and received a provisional tax invoice in October for the period of Oct-Dec 2023. I am very confused by the overall provisional tax invoice system in general, and even more so with the middle-of-the-year switch to c permit.

Here are my main questions:

1) From what I understand, I will receive a provisional tax bill for tax every year in January.

Any amount that's paid before September 30 will give 1% interest rate (ZH rate for 2024).

However, a couple of things are not clear to me:

a) Will the interest be paid for the period from the date I paid the provisional tax to 30th Sept, or from the date I paid the provisional tax to when I receive the final invoice? b) What will be the principal for this computation: the whole provisional tax invoice amount or the difference between provisional tax invoice and the final tax invoice?

2) If I don't pay any provisional tax, I assume that the final tax bill will apply interest (1% in 2024) on the provisional tax bill. However, the following two things are not clear to me:

a) What will be the basis for the interest rate computation? The provisional tax invoice amount or the final tax liability?

b) For what period will the interest rate be computed: from 30th Sept until receiving the final tax invoice or 30th Sept until end of Dec 2024?

3) Is the compensatory interest received on early payment of provisional tax also counted as a source of income? In other words, will further tax be applied for the 1% compensation received on early payment of provisional tax, or will it be tax-free?

4) Is there any penalty for paying the provisional tax partially? How would the computation happen if I only pay part of the provisional tax?

5) [general question] What's the optimal way for managing provisional tax? Should I just pay it as early as possible in full amount, or only pay my estimate of final tax invoice?

6) My wife still has B permit and is still getting tax deduction at source. After I received c-permit, will she also move away from Tax At Source and rather pay tax at the end?

Thank you so much for answering these questions in advance!

best regards.

1) Interest will be paid for the full prepayment amount until end of September. For the period from end of September until your final tax bill you receive interest only for the difference between the final tax amount and your prepayment amount, if you overpay. If you underpay, you have to pay interest for the difference, again for the period from end of September until your final tax bill.

2)

a) The final tax liability

b) The period from end of September until your final tax bill

3) I'm not sure. I thought that the interest is taxable but at least canton AG explicitly writes that the interest for prepayments is exempt from taxes. I haven't found a definitive answer for ZH right away.

4) No, in ZH there is no penalty. The interest calculation is always based on the actually paid amount. The amount written on the provisional tax bill doesn't affect the interest calculation.

3. As far as I know, the interest is irrelevant for actual tax purposes.

4. If you want to pay the provisional tax amount in installments, you can do that using the same bank information - you don't need to pay it all at once - it's just a provisional statement so you know what your estimated tax will be when the bill finally comes later.

5. Up to you - if you have heaps of savings, you can put the taxes aside and pay them when the bill actually comes. If you struggle to save up, I suggest you pay it monthly so you don't spend it when it needs to be used for taxes. If you have a rough patch, you can let the taxes fall behind but then you risk being chronically 'behind' in paying your taxes.

If you don't have savings, and your final tax bill arrives, you can also request to pay it instalments - you just have to ask within 30 days of the bill arriving. There is no consequence for this (apart from a tiny bit of interest due) as long as you meet the agreed repayment plan.

6. You are your wife are taxed as a 'household' - she also needs to inform her employer that you now have a C. Permit so that they stop taking tax-at-source as well. Then you need to make sure you either pay or set aside enough tax money to cover her taxes as well. Well....actually, when you do the tax return, you will get one large bill for the 'household' - not separate 'his and hers' tax bills. You are jointly liable...

Any tax-at-source paid up until now is declared in the tax return for end of 2023. That will be deducted from your final invoice for taxes that will be processed after you lodge your tax returns. Private Tax returns are normally due end of March (In Zurich, not sure if it's the same in all cantons) and the processing time varies greatly depending on the canton and year. You can also delay lodgement, usually to end September if you wish, to give yourself longer to put the return in - and that then also delays when the final tax bill will come. Eg. we use a tax agent, our 2022 tax return was deferred and is now only being lodged, which means our final tax bill for 2022 won't arrive until maybe March 2024.... .but still all being handled properly as the tax office in Zurich has received a deferral request and it's all being done according to what is agreed.

3) AFAIK it is tax free. However, you cannot use it to park millions on your tax account. If you pay, w/o giving a prior explanation, considerably more than expected, they will reimburse part of it.

4) The penalty/profit is the 1% per year, 1%/365 per day. It's like a bank account for each tax year, which starts at zero on January 1. Any tax paid is credited. The tax due will be subtracted from your account retrospectively with valuta date September 30. The suggested tax is not part of this. Once the final bill is due, you will get an account statement, where everything is listed nicely. The final bill will be for tax due +/- interest. Sometimes they will carry over a positive balance to the next year's tax account. I once to managed to pay twice for the previous year (used the wrong bill), but none for the current. Was no big issue and negative and positive interest cancelled each other out.

5) Depends. Example, you can set up a standing order using the blank invoice.

Good question! I also haven't fully learnt how to handle it efficiently yet. In canton VD they require monthly installments and justification why you believe those should be adjusted mid-year (change of job, etc), but in ZH they want to have all at the end of September. What's more confusing they sent me more bills to let me choose, either 1 big bill to be paid end of September or a smaller chunk every quarter. I suspected that in the end it only matters what amount lands on the account in September.

Now, I've already paid the provisional tax for this year but I'm considering 2nd/3rd pillar deductions. I guess I've screwed as now I'll have to wait for the final assessment to get back what I overpaid.

Can I ask for an early refund from the account explaining why I believe I've overpaid?

On the other hand, from the earlier post, it seems that in ZH I don't have to explain why I didn't pay the full amount, and yet no negative interest will be charged if the final amount paid was correct, right?

Well, making additional deductions is one way, there's also another part of the story, bonuses. When they asked about my expected annual income I provided only the base salary figure as I won't know how much bonus I'll get throughout the year until I get it. I might get zero or even twice the base salary :P

In canton ZH your communal and cantonal tax liability works like this: in a tax year Y, if you receive your final tax liability on the date F (which can be multiple years after Y) that stats that you owe X CHF in taxes:

- any day before 1st October Y will generate positive interests (annualized 0.25% today, 1% next year) on the amount of taxes you prepaid already

- any day before 1st October Y and F will generate positive or negative interest (annualized +/-0.25% today, +/-1% next year) on the amount of taxes you prepaid already minus X

- after F + 30 days, if you are still short of having paid X - you will be charged high penalty interests (4-5% or so). In other words, it's almost never worth not to pay the final tax bill within 30 days

Whether it is worth prepaying taxes before the final bill arrives really depends on your situation and how you approach your personal finance. Ultimately you need to figure out what is a better use of that money you can do and decide whether it is worth the hassle.

Reasons to prepay:

- it generates some interests (or after October is does not generate negative interest, which is the same thing w.r.t. the opportunity cost). If you are the person who would simply keep the money sitting in the checking account instead - worth prepaying

- easy finance management: you can prepay the taxes every month automatically and the total liquidity on your hands roughly matches what you have after paying the taxes, no need to worry to always keep in mind how much of your liquidity is actually tax debt (so you don't accidentally spend it, etc.)

Reasons not to prepay:

- earn more money than the tax office pays/charges. E.g. right now the tax interest rate is 0.25% but you can use the money to get 1-2% interest in other places instead. Next year tax interest rate will be increased to 1% - but the concept still stands, you normally can do better (and if not - you can always fall back to prepay when it suits you)

- more flexibility of having liquidity on hand. The tax office is basically agreeing to give you a low interest rate cash loan, if you prepay and then need the cash (some short term emergency expense) you won't find such a loan elsewhere. Also if you stop working you can avoid paying too much

This is the point I was looking to clarify.

Say on October Y I'll have 50k already prepaid, the final tax bill on date F will be also 50k, but on December Y:

- I'll received a bonus 100k so the final tax on date F will increase obviously

- I'll pay to 3rd/2nd pillar so the final tax will decrease

Another scenario, I'll have 0 chf on the account on October Y, but I'll pay that later, say A in December, B in June Y+1...

The point is that I guess the QR pay slips to prepay tax are a bit dumb, one should rather follow their individual income to know how much should be paid. Secondly I guess the interests past October Y are calculated per day or per month according to the state of the account vs the final bill, correct?

BTW, you're right about the missed opportunity, I was just asking to learn how the tax in ZH works, just for the sake of understanding it fully instead of making assumptions

You also have a blank payslip so that you can pay whatever you want. I do my own estimate and pay what I think is due plus a couple hundred; if later on I realize I underestimated my income (for example, higher dividends), I make another payment. In the end, if you fell short by 1000 CHF (which is rather gross for my taste) and pay it before March next year, 1% interest is just 5 CHF.

This is for the cantonal and communal tax only; for federal taxes you have to pay the bill as it is sent to you.

Oh, I had no idea the blank payslip is valid one, I thought it's just a print error

Basically it does not matter whether things that change your tax liability (extra income, extra deductions) happen before or after October of the tax year. Once the final tax liability is known, you were expected - in hindsight - to have prepaid exactly that amount by the October of the tax year. It's a bit silly of course since you can't know what will happen for the rest of the year, but in practice you can get quite a good approximation and if you are off by a few thousands - the interest charged will probably be small