The Swiss Federal Court has ruled that pension buy-backs made by a resident individual with an open-end settlement permit (C permit holder) shortly before permanently leaving Switzerland were considered a form of tax avoidance.1 As a result, the tax deduction cannot be granted. The ruling underscores the Court's stance on the boundaries of tax avoidance and deduction, emphasising that the pension buy-back did not serve the purpose of building an occupational pension plan in Switzerland, but only to reduce taxes.
WHY THIS MATTERS
The decision sheds a light on pension buy-backs and the line between tax avoidance and the normally-available tax deduction. It confirms that pension buy-backs must genuinely aim to build an occupational pension plan in Switzerland at the moment they occur, on top of meeting all other usual legal requirements.
Any pension buy-back done before leaving Switzerland permanently may be the object of an audit by the authorities. Therefore, taxpayers must be careful about their circumstances and their intentions.
Case Background and Key Points of the Decision
A French national holding a Swiss C-Permit lived and worked in Switzerland from 2008 to 2012. Then he spent two years abroad, and returned to Switzerland again for the period from 2014 to 2021, living with his partner (not married), who was also a French national with a Swiss C-Permit, and their child. In September 2021, they decided to leave Switzerland to pursue new employment opportunities abroad. Before leaving, they arranged with the Migration Services to suspend the C-Permit until 2025 to lay the groundwork for a potential smooth return to Switzerland.
Before their departure, the taxpayer and his partner made pension buy-backs totaling an amount of CHF 576,500 combined. After leaving Switzerland, all the funds of the occupational pension plan were transferred to vested benefits accounts located in cantons known for their favourable tax rates.
This arrangement would have enabled individuals to secure a substantial deduction on ordinary taxes in a high-tax canton, while also providing for any future pension pay-outs being taxed at a lower rate in a low-tax canton at the time of the potential pay-out.
Despite both taxpayers being employed at the time the buy-backs were made and the standard deductions for the deduction of pension contributions being met, the Neuchâtel Cantonal Tax Authorities rejected the tax deduction claim. The pension buy-backs would represent, in this case, an abusive use of a mechanism primarily intended for building pension rights so as to obtain solely a tax advantage.
The Swiss Federal Court ruled that the taxpayer did not demonstrate a clear plan and intention to return to Switzerland for employment and therefore to be covered again by the Swiss pension system, despite benefiting from a guarantee issued by the Migration Services to obtain his residence permit back until 2025 upon demand. The Federal Court considered that as the individuals exited the Swiss social security system after departure with no clear plan to come back to Switzerland within a reasonable timeframe, it appeared that the contribution was meaningless in terms of pension planning and coverage. At the same time, the only reason for doing the pension buy-back would have been to achieve a substantial tax saving. Consequently, tax avoidance was cited as a valid reason to deny the deduction, reinforcing the principle that pension contributions should align with legitimate economic and professional objectives, and not solely with tax reasons.
KPMG INSIGHTS
Executives of international corporations frequently move between countries throughout their careers. Some moves may be decided within a short timeframe and future moves, such as coming back to Switzerland, may be hard to foresee. Social security coverage is also a complex matter, as it largely depends on the contract set-up accepted by the employer – for instance in the form of an assignment versus a local contract in the country of destination.
This Court ruling highlights additional complexity and limitations on the deduction of pension buy-backs: while all usual conditions to obtain the deduction may be met, the pension buy-back must also reasonably aim to improve pension rights or savings at the time it is made. Should the pension buy-back appear as motivated by tax planning only, excluding any link to pension planning, then this might be seen as tax avoidance by the authorities.
KPMG encourages any individual interested in doing a pension buy-back before leaving Switzerland to carefully review the situation to assess if this could be seen by the authorities as legitimate pension planning or as tax avoidance.
FOOTNOTE:
1 Rulings 9C_349/2024 and 9C_350/2024 of the 21st of February 2025.
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The information contained in this newsletter was submitted by the KPMG International member firm in Switzerland.
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