New protocol to the Dutch – Swiss tax treaty changes tax treatment of pension income
On June 12, 2019 the Netherlands and Switzerland agreed on a new protocol amending their tax treaty.
The protocol introduces a provision that denies the benefits of the tax treaty if one of the principal purposes of any arrangement or transaction was to obtain those benefits. In addition, the protocol significantly alters the taxation rights in respect of pensions, annuities and social security payments (hereafter referred to as pensions).
In this blog we focus on the amended taxation rights for pensions. We compare the taxation rights under the current tax treaty with the revised tax treaty for an individual who lives in Switzerland and receives pension income from the Netherlands (the individual hereafter referred to as the taxpayer).
Current tax treaty
Under the current tax treaty pensions are in principle only taxable in Switzerland as the resident state of the taxpayer. However, a pension that is facilitated from a tax perspective in the Netherlands (e.g. deduction of pension premiums and taxation of actual pension payments) may also be taxed in the Netherlands. One of the conditions that should further be met before the Netherlands can tax the pension, is that (i) the pension is not taxed at the generally applicable income tax rate in Switzerland or (ii) less than 90% of the gross amount of the pension is taxed in Switzerland.
If the taxpayer decides to redeem his pension that has been facilitated in the Netherlands, Switzerland taxes the lump-sum payment separately from other income at a reduced rate, on federal level being 1/5th of the tax rate applicable to the total amount. On cantonal/communal level the taxation of such redemption depends on the canton. The Dutch tax authorities take the view that in this case the lump-sum payment is taxable in the Netherlands, since in their view the pension is not taxed at the generally applicable income tax rate in Switzerland.
If the pension of the taxpayer may under the tax treaty be taxed in both Switzerland and the Netherlands, Switzerland as the resident state provides a relief (e.g. exempts such income from tax) in order to avoid double taxation.
Revised tax treaty
Under the revised tax treaty, the pension may be taxed in the Netherlands if the pension has been facilitated in the Netherlands. If the pension payments to the taxpayer are periodic in nature, this taxation right is limited to a rate of 15% on the gross amount of the payments. The limitation to 15% taxation is not applicable if the payment is a lump-sum payment. A lump-sum payment is taxed against the progressive income tax rates in the Netherlands and revisionary interest will be due.
We note that pensions are also still taxable in Switzerland as the resident state of the taxpayer. Switzerland is required to prevent double taxation and shall exempt the pension income from tax in case of a lump-sum payment. If the taxpayer receives periodic pension payments which may be taxed in the Netherlands at a rate of 15%, Switzerland allows a relief consisting of the deduction of one-third of the net amount of such pensions from the Swiss taxable base. The taxpayer must explicitly request this relief.
We illustrate this rather specific method of avoiding double taxation with an example.
The taxpayer receives pension income of 100 from the Netherlands. The pension has been facilitated in the Netherlands and has a periodic nature. The taxation will work out as follows:
- The Netherlands, as the state that facilitated the pension, may levy tax at a rate of 15%, effectively levying 15;
- Switzerland, as the resident state, allows a relief of one-third of 85, effectively 28;
- Switzerland may levy taxes for federal, cantonal and communal personal income tax on 57 (85 minus 28).
Depending on the tax rate in Switzerland, the taxpayer could under the revised tax treaty be confronted with a higher tax burden on his pension income than under the current tax treaty. This is due to the 15% taxation right for the Netherlands in combination with the Swiss method of relief to avoid double taxation. The tipping point for such higher tax burden is if the average Swiss tax rate upon the pension income is below approx. 34% considering the marginal personal income tax rates of up to 45%.
Please note that the amended taxation rights may also affect taxpayers that pay taxes under a Pauschal ruling in Switzerland, as the taxpayer has to declare the pension income in his annual control calculation if he claims for a relief under the tax treaty.
It is expected that the changes under the Dutch – Swiss tax treaty come into force per 1 January 2021 or 1 January 2022 at the latest. The changed treatment of pension income fits in the broader policy of the Dutch government to safeguard its taxation rights for pensions under tax treaties in general.
We recommend clients to analyze the impact of these changes to their pension income. Please contact your trusted advisor at Loyens & Loeff to discuss the effects of the revised tax treaty in your situation.