A few years ago, whether you are a resident of Switzerland or a French border resident, it was possible to subscribe to a 3rd pillar to prepare for retirement, reduce taxes, or help buy a primary residence. But things have changed, and the benefits of the 3rd pillar for cross-border workers are no longer as accessible as before. Can cross-border workers still subscribe to a 3rd pillar in Switzerland, and if so, what advantages can they still derive from it?
Yes, cross-border workers can subscribe to a 3rd pillar
Yes, cross-border workers can subscribe to a 3rd pillar in Switzerland, but to take advantage of the associated tax advantages, they must now ‍make a TOU to be entitled to 3rd pillar tax deductions.
However, it is important to note that not all cross-border workers are eligible for TOU. To benefit from it, it is necessary to have the status of virtual resident.
To better understand Subsequent Ordinary Taxation and its implications, see our article dedicated to TOU.
What is the status of virtual resident?
To benefit from the tax advantages linked to the 3rd pillar 3a and 3b in Switzerland, a cross-border worker must obtain the status of semi-resident and then request to benefit from the subsequent ordinary taxation (TOU). But what does that mean exactly and who can claim this status?
Quasi-resident status is a fiscal particularity that concerns only the cantons of Geneva and Fribourg in French-speaking Switzerland. To be eligible, cross-border workers must be attached for tax purposes to one of these two cantons. Unfortunately, this specificity also means that cross-border workers who are attached to cantons other than Geneva or Fribourg are not in a position to benefit from the tax deductions offered by the 3rd pillar, as they cannot acquire the status of virtual resident.
The only condition for accessing the status of virtual resident is that 90% or more of the worker's global income (or household, as part of a joint declaration) must be taxed in Switzerland. This includes all forms of income: salaries, rental income, financial investments, and others.
Once the conditions for the status of virtual resident are met, it is possible to request to switch to Subsequent Ordinary Taxation (TOU), which makes it possible to deduct 3rd pillar contributions. However, it is important to note that the status of virtual resident is reassessed every year. If this status is no longer applicable in the following years, the taxpayer will return to traditional taxation at source and will no longer be able to deduct contributions from his 3rd pillar.
When TOU is mandatory for a cross-border worker
In some cases, TOU becomes mandatory for cross-border workers even if they do not have the status of virtual resident, in particular:
- Real estate in Switzerland: Non-residents who own real estate in Switzerland are required to go to the TOU.
- Independent activity: Residents abroad who are self-employed in Switzerland must pass the TOU.
- Independent income: Receiving self-employed income in Switzerland makes the transition to TOU mandatory.
The TOU is not automatic every year. The file is examined again every year by the tax authorities.
What tax deductions can cross-border commuters benefit from with a 3rd pillar?
Cross-border workers who meet the necessary conditions to be considered as quasi-residents and who have applied to benefit from Subsequent Ordinary Taxation (TOU) can take advantage of 3rd pillar tax deductions, both for Pillar 3a linked Only for the free pillar 3b.
Tax deductions from the 3rd pillar 3a linked
For pillar 3a, the deductible amounts are legally defined and are adjusted approximately every two years according to the Consumer Price Index (CPI). Whether via the banks or insurance companies, these amounts are standardized across all cantons.
- If you are an employee (affiliated to the 2nd pillar), you can deduct up to CHF 7,258 per year.
- If you are self-employed (not affiliated to the 2nd pillar), you can deduct up to 36,288 CHF per year.
Tax deductions from the 3rd pillar 3b free
The 3rd pillar 3b, being more flexible, allows the cantons to define their own deduction limits. To date, only Geneva and Fribourg offer tax advantages for pillar 3b.
Tax deductions under the 3rd pillar 3b for the canton of Geneva
- Employees, widowers, divorcees or in a registered partnership can deduct up to CHF 2,232 per year. Self-employed persons are entitled to a deduction of CHF 4'464.
- Married couples can deduct CHF 3,348 per year, an amount that reaches 5,022 CHF if one spouse is independent and CHF 6,696 if both are independent.
- For each dependent child, an additional deduction of CHF 913 is applied for employees and CHF 1,826 for self-employed couples.
Tax deductions under the 3rd pillar 3b for the canton of Fribourg
- Single people can deduct up to CHF 750 per year
- Married couples can deduct up to CHF 1,500 per year.
Why open a 3rd pillar when you are a cross-border worker?
As a cross-border worker in Switzerland, you already benefit from the 1st pillar (AVS/AI) and the 2nd pillar (LPP/LAA), which are the mandatory pillars of the Swiss pension and pension system. However, just as in France, these pillars will not be enough to cover all of your financial needs in retirement. It is estimated that the 1st and 2nd pillars can cover around 50 to 60% of your last income, which is often insufficient to maintain your current standard of living after retirement.
The 3rd pillar, which thus offers several significant advantages:
Retirement supplement: By regularly contributing to a 3rd pillar, whether it is pillar 3a (linked) or pillar 3b (free), you create additional savings that will supplement your retirement income, thus making it possible to maintain your standard of living.
Tax reduction: Premiums paid into the 3rd pillar are deductible from your taxable income, allowing you to reduce the amount of your income taxes.
Savings in Swiss francs: With the 3rd pillar, you have the opportunity to save in Swiss francs, a currency perceived as a safe haven that tends to increase in value compared to other currencies, which may prove to be a wise choice in terms of diversification and financial security.
Establishment of a heritage: The money you accumulate in your 3rd pillar can be used for other projects, not just retirement. Whether it is for the acquisition of real estate, a departure abroad (including stopping working in Switzerland) or becoming self-employed, the 3rd pillar allows you to carry out all these projects.
Protection in case of a major blow: The 3rd pillar taken out in insurance offers pension options in the event of disability or death, thus providing financial security for the insured and their family. In the event of an unexpected event, the capital saved can be used to cover basic needs or maintain the family's standard of living.
Be careful, going to TOU is not always advantageous!
Before making the decision to switch to Subsequent Ordinary Taxation (TOU), it is crucial to conduct a tax simulation to assess the consequences. Indeed, there are three possible scenarios during the transition to TOU:
- Lower taxes with TOU: In the first case, simply switching to a TOU can already reduce your tax burden, even before taking into account 3rd pillar deductions. By then adding deductions for contributions to the 3rd pillar, your tax is further reduced, making this option very advantageous.
- Unchanged taxes before deduction: In the second scenario, your tax burden remains the same after switching to TOU as with withholding taxation. However, once you deduct your 3rd pillar contributions, your taxes decrease, giving you an advantage over your initial situation.
- Tax increase with TOU: The third case is the least favorable. Even after deducting 3rd pillar contributions, you may end up paying more taxes with TOU than with withholding taxation. It is this scenario that you should definitely avoid.
For these reasons, it is essential to carry out a detailed simulation of your tax situation by considering the transition to TOU and by deducting your contributions to the 3rd pillar. The safest approach is to consult a financial advisor who can perform this simulation accurately and guide you to the most advantageous 3rd pillar solutions. This professional advice will help you make the right decision, ensuring that switching to TOU is actually beneficial for your personal tax situation.
