Taxation of school fees - Legal question

Visas, Permits, Passports and Naturalization
1
I will try be as brief as possible:

I have been in Switzerland (Vaud) for 6 years on a local (not expat) contract. Part of my contract is that my employer pays my 3 kids school fees.

In December 2014 my employer told me (without warning) that the international school fees for my 3 children are now taxable. This is effective already for the 2014 tax year.

The company will give a contribution towards the tax impact, but not cover it completely. The school fees for 3 kids + company contribution is about as much as my salary. So my effective tax rate is now at the max level ( ie Taxable income is doubled & tax rates are progressive)

This will have about a -10%-15% impact on my Net Salary - Every year while my kids are in school . This hurts on a single income for family of 5.

Questions:

1. Is this a new tax ruling, coming at the last minute, or did my employer know this ( or should have known this ) and neglect to tell me?

A reference to tax legislation on this would help.

2. Is it legal to make a benefit taxable retro-actively, without giving the opportunity to choose against the benefit, or to plan effectively for it ?

I am thinking that my employer was negligent in informing me and I now face a loss which I could have avoided - do I have legal case against them ?

Thanks for any advice/experience.

If you are in the same boat & this sounds familiar to you - send me a private message.

2
Just guessing based on what you have written, but generally 'expat' conditions - the ability to deduct housing, school fees, pay into home country social security rather than into Swiss, take international health insurance rather than Swiss, etc - are granted for a maximum of 5 years. After which an employee reverts to 'local' status and faces the same tax scheme as everyone else.

If you have been here 6 years this is likely what you are seeing. After your 5th year elapsed, which sounds like 2014, you are no longer eligible for 'expat' tax treatment.

This special tax regime was designed to entice highly qualified temporary staff here, those that are going to come in, do a specialized job no one else can do, and then leave, having brought local staff up to speed. Note 'temporary. After five years it is assumed that you are no longer temporary, have decided to make Switzerland your home - and so there is no need to offer further concessions.

We came here on an expat package, then after 5 years transitioned to a local one. As have many, many others. The decision to stay or go depends on how hard you need to bite the bullet and whether staying in Switzerland offers other intangible benefits that make the financial cut worth it. We knew all along that expat benefits were limited to 5 years - it was clear in our negotiations, and reinforced by all the research I have done over the years into tax matters.

We do not have children, but those I know in similar situations who do all moved their children into local schools once they decided to stay - most moved their children after the second or third year, in fact.

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Do be aware that Switzerland generally functions on the 'selber schuld' mentality. That is, one ought to know X, Y, or Z - and if one failed to find that information, it's one's own fault if one is tripped up. Whether one agrees with that attitude or not one must understand that it exists before one proceeds down the road of claiming negligence.

Being realistic - suing your employer is a very quick way to find yourself unemployed, especially in Switzerland where a reason for dismissal is not needed. Do you really want to go down that road? I'd think very carefully here.

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You should sit down with a tax professional, go over your situation and make plans from there. You might find that there are other tax planning strategies that could be of benefit to you.

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Do you want to stay in Switzerland?

Can your children transition to local schools?

If your children cannot transition to local schools and you cannot afford international schools on your own, perhaps it is time to move on.

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Of course, all of the above is my assumption based on the 5 year rule. There could be something entirely different at play here and I could be wrong. So re-read your contract, speak to the cantonal Steueramt yourself for an explanation.

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Wishing you all the best...

3
What is your home country?

4

Even though you are quite understandably a bit in shock, you could - in the most friendly and calm way - simply ask your employer to send you a link to the relevant tax legistlation. Since it is they who say the situation is now different, they are basing it on something, so they would be able to tell you what that something is. Just say you're quite taken aback by this unexpected news, and would like to read the explanation, so you can better understand the system. And you could also phone up your local tax office, or make an appointment to see someone there, and ask them the same question.

I also agree totally with meloncollie's post about the general principle, in Switzerland, of "selber Schuld", and that there is nothing to be gained and much to be lost by arguing the case with (or against!) your employer. The employer is merely the channel through which some aspects of the tax are processed; the employer does the work of source tax, for example, and of providing you with your annual statement of earnings. The tax obligation, however, exists, by law, between you and the tax office and is, in effect, nothing to do with the employer.

5
Dear Meloncollie,

Thanks for the reply.

Based on your reply I conclude the answer to my questions to be:

1) No - its not a new rule. It would have been apparent & in place when I arrived in 2005.

My employer would have been aware and should I have been aware (although not sure how).

2) Raising a legal case is a risky affair and is not a route I want to go down - however just lying down and accpeting it when a mistake has been made - is not an attractive option either. My intent though would be trigger a discussion with my employer about what they want to do if their actions are clearly illegal (or at least unfair)

Where my case is different from yours is that I have always been here on a permanent local contract. So possibly there should not have been an expat tax holiday to start with. However, it seems my employer chose to classify me to the authorities as an expat (ie temporary contract), without my knowledge, then that is an interesting decision by them.

Had I known this was the case, and that I would have an impact now, then I would have decided differently.

Yes - We intend to stay long term in Switzerland.

No - Children can not transition into local schools at this late stage.

In response to Rob1 ,

I am not sure what you mean by "home country" - I have dual nationality but I am registered here on a UK passport (C permit),but never lived in the UK. My other passport is non-Eu.

I have no assets in any other country, and dont pay taxes anywhere else. I have been in Europe for the past 10 years and consider Switzerland home now.

(typical International family).

6
Not being an expert on this, but I assume the tax authorities consider this to be a "Geldwerter Vorteil" (assumed financial benefit??) that impacts your tax rate.

And yes, unfortunately, my experience is that sometimes mistakes happen and my company is also in contact with the tax authorities for my relocation cost in 2009. So it is not always clear at the start.

7
Based in having a similar experience my advice would be.

1. Your employer screwed up.

2. When the tax authorities are notified of the screw up, they not only will breathe down the employer's neck, they probably will audit their whole operating accounts.

3. It is not your fault.

4. If the salary plus 'fringe benefits' (eg school fee payment) tips over the 120k limit, you will revert to having to do a tax return and pay local tax rates, adjusted from whatever the Quellensteuer is. In some areas this will be higher, in others lower.

5. It may be not just 2014, but be back-dated. Depends what the tax office decides (ours was backdated three years to date of arrival when the error was discovered).

6. Our biggest success was via our own tax agent plus going in person to the tax office (steueramt) for the canton, although they could not 'save' any money, they did make sure it was all done perfectly as obviously we no longer trusted the employer.

7. The stuff up is not just tax, it also affects social payments as well as your pension contributions, and increases some of the money the employer must pay to the social authorities (hence the likelihood of being audited).

8. You can't do anything until the employer fixes all the paperwork. Then you are likely to get a tax return document once the tax office catches up with the paperwork. If this is the first time you have had to do a proper (full) tax return, the wheels may turn quite slowly (weeks or months). In the meantime, DO NOT PANIC!!!

9. When it finally (finally!) gets sorted out, the tax office will send you a big bill. The normal procedure is then to very quickly send a letter back quickly explaining that it was not your fault, the empoyer failed to declare it properly, and you need a payment plan for the back tax. We asked for the first bill to be split into 6x month payments, and they sent us pay-in slips for that.

10. When 2015 comes, and you are still trying to get 2014 sorted, ask your tax agent to put in a request to delay the submission date. Normally you can delay 6 months for 'no reason'...this will slow down the financial liability.

As a very very rough calculation, the tax liability will be 15% of the total value of the school fees paid. I suggest that you put aside 30% of the school fee amount, per month, to build a buffer, for when the bills come in.

Sorry to hear that it has happened to someone else like it did for us. We had three children on 50% tuition discounts for full-time childcare, and what got us through was that our financial position improved dramatically (i got a 70% job so we were both earning) and our kids went out of privately paid schooling into the local school system... So by the time it caught up with us, our situation had improved enough to get by... Our liability was around 15,000chf by the time it got sorted out... In current and back-taxes..... And we expect around 3000chf each year in additional taxes owing... But last year we think one of our employers stuffed it up again for the 2013 tax year, and we are just waiting to see if they stuffed it again in 2014...

8
Delaying the return is very bad advise as interest will be payable back dated, the OP should pay as much as he possibly can ASAP for both past & current year.

9
"In theory" that makes sense, however...

Firstly. If you do not have the money, you do not have it, and the interest charged on back-taxes is very low.

Secondly, if the person has never actually had to do tax return (only paid Quellensteuer) they many not 'exist' in the system. This was the case for us. Canton Zurich told us there was no tax payable until the paperwork was completed and the first bill arrived, and no mechanism to begin to pay early. The actual interest ended up being minor (less than 200chf) which was minimal compared to the overall tax bill.

In subsequent years, the tax owing dropped and to be honest I do not know if the interest still accrues if you defer the submission date. I believe the interest only accrues if the tax is 'payable' and that only happens from the date at which the tax office issues the first invoice/due date....

Either way, I can tell you that in our case there was minimal consequence for deferring. Ultimately, the tax office did also understand that it was not our fault, but that of the employer, so although we needed to pay them, they never treated us like 'tax avoiders' or non-payers... We just negotiated a bit on the repayment schedule...

Ps. I wonder if anyone knows the interest rate paid on unpaid taxes... And if it varies between cantons.

Remember, the amount that will be potentially used to accrue interest is not the total tax (the OP already paid Quellensteuer) it is only on the shortfall/adjustment amount....

10
Hi OP

I can be defintive here as I had the same surprise!

Bad news; it is indeed the "post 5 years" rule - once you are on a "C" you cannot get this special incoming worker benefit for free (you would find you also lost some other quasi-expat tax allowances but since you say you were not a householder in UK this may not hit you). Change is effective from the actual date of your 5 year stay, not by full tax year by the way.

Good news; it is not going to be back-dated - your first five years were part of the Cantonal exemption rules so you (and your employer) should be OK.

Hope this helps

PA

11
Worst case. 15K at 5% for 6 months ~400CHF. But as pointed out, that depends on how much tax is actually late, and in any case delaying the return isn't the specific issue, since the interest is from when the tax is due - which in BL at least, is somewhat different (later) than the due date of the return. We paid 40CHF to have our tax return extended to November one year (having been off tax at source for a few years), but we had no additional tax to pay once the final result was calculated.

12
No, if the tax return is delayed by 9 months followed by 12 months for the tax office to do the figures thats 21 months interest plus 12/24/36/48/60 months additional for back years. Always pay tax in advance.........

13
Yes, and I repeat, we did not have to pay anywhere near that interest, and there was no actual system for paying it early. The 'top up' tax was in addition to quellensteuer and only 'due' once things got sorted out... And the interest was minimal.

And is it really 5%?

14
It's not all doom and gloom. After 5 years you also no longer have any limitations on pumping money into your 2nd pillar pension for "missing years ("rachat d'années manquantes"); these payments are fully tax deductible. First 5 years in Switzerland you are limited to 20% of annual salary but after 5 years you could - if you have the funds - make big payments into your pension pot, this would offset your tax increase. There's a lot more detail about this to consider but just wanted to give you the idea.

15
It's 5% & yes you can pay on account in advance, you just need to ask

16
Once again, I have to put what actually happened against your wisdom, or we're talking about different things, or different Cantons operate differently. I have checked my tax account statements, and for the several years where the return was late, I have not been charged a rappen in interest. Now I get my returns done in time, but pay well in advance, I get interest credited, so it isn't that the statements don't contain those transactions/charges. I have always paid the bills at least on time, regardless of the progress of my return.

In my first year here - 12 years ago - I fully paid up my 2nd pillar pension for missing years. The payment was around 70% of my then annual income. I then started getting help with my health insurance premiums because my taxable income was so low.

It seems it isn't possible to make definitive statements about anything connected with tax, that will apply country wide.

17
So you had paid enough tax on account then, so had no arrears so nothing to pay interest on.

18
And for the third time. We did ask. It was not possible as we had never done a tax return before, so until the first bill was actually issued, we did not exist on the system so there was no way to pre-pay the tax. Until that point, we had never had to make a tax return, so no previous 'account' in the system. And yes, we asked, more than once...actually twice to the Cantonal Steueramt and twice to the Gemeinde, and each time they told us that we could not pay 'in advance' until the first tax return had been fully processed and the first payment slip issued.

So, in this case, sure, the OP can ask, but don't freak him out with the idea that there might be a big interest bill on top of the actual tax bill...because it may not actually be true...nor may he be allowed/needed to do anything until the documentation is all sorted out...

19
Thanks to all for the helpful responses.

As I am a tax declarer since 2009, I am familiar with filling out the return. This is how I manage to spot the impact already.

My issue at the moment is the pending tax bill, (& not so much the interest), coupled with lifestyle change needed to absorb the 20 000chf - 30 000 chf annual impact.

The most frustrating thing is that this all should have been made transparent to me years ago and I could have done some effective tax planning for 2014 (eg: pension missing years; house renovations etc....), or chosen to put kids into local schools before they started IGSCE/IB programs.

20
I can't help with the tax questions, but some local schools at least in Zürich (don't know about your end of the country) do offer joint IB/Matura programs.

There's also not the same social stigma associated with repeating a year here, should that be necessary - especially in conjunction with changing cantons or school systems.

Not particularly advocating for their transfer to local schools, just saying that the scope of options is broader than you may have thought.