#33 Tax at source-exempt index funds in the 3rd Pillar

Withholding tax in Switzerland

If a company distributes dividends, the capital gains must be taxed at the personal income tax rate. To ensure that this income is properly declared, the state levies a withholding tax of 35 percent. This is withheld directly by banks and financial institutions and paid to the state. As soon as the income is declared in the tax return, the taxpayer receives the withholding tax back and the distributions are taxed together with the other income.

Tax at source on foreign investments

This works similarly for foreign investment instruments, although tax at source comes into play here. This may be partially reclaimed using form DA-1. However, the exact reclaim options depend on the respective double taxation agreement between Switzerland and the country in question. In the case of dividends from US companies, for example, the tax at source is 30 percent. The fund domicile also plays an important role. For example, if you buy an investment fund with US companies and the fund domicile is in Ireland, as a Swiss investor you only pay 15 percent tax at source.

Tax treatment of pension assets

What is the situation with regard to pension assets? In the case of Swiss investments, the withholding tax is paid directly to the federal government by the fund provider and reclaimed from the tax authorities by the pension foundation. So, the bottom line is that you as an investor do not pay any taxes. The capital withdrawal tax only becomes due when you withdraw the money before retirement.

With foreign investments, there are two possibilities: either you invest in normal funds that are accessible to everyone, in which case the tax at source is deducted as described above, or you use special fund classes that are only accessible to pension funds and pension foundations. The latter are exempt from US tax at source in the case of Switzerland. According to the double taxation agreement between Switzerland and the US, pension fund and Pillar 3a funds are exempt from tax at source on current income.

The advantage of tax at source-exempt index funds

Why is this tax exemption an advantage? Quite simply because, since no tax at source is deducted, the dividends can be reinvested directly. This boosts the compound interest effect and can increase your return in the long term. At True Wealth, we therefore place a high value on tax efficiency when selecting investment instruments. For example, we specifically use tax at source-exempt index funds in Pillar 3a to achieve the best possible result for our customers. These funds eliminate the already reduced 15 percent tax at source on dividends from US equities. And tax at source is also being further reduced on global real estate equities.

Were you aware of this issue? Did you know that there are tax at source-exempt funds for Pillar 3a? Send me a message with your feedback.