The risk of double taxation on Swiss second-pillar pension benefits (BVG/LPP) paid as a lump sum to individuals who are tax-resident in Italy has become a concrete concern following a recent change in practice by the Swiss authorities.
If you have received or are about to receive a lump-sum payment from your Swiss pension fund and reside in Italy, you may find yourself paying tax twice on the same amount: first in Switzerland, through withholding tax, and then in Italy, through the 5% substitute tax. This article examines the new Swiss interpretation, its impact on taxpayers and the possible options for protecting your position.
The New Swiss Practice: Why Are Refunds Being Denied?
Since 2024, the tax authorities of the Canton of Ticino, followed by authorities in other Swiss cantons, have increasingly begun to deny refunds of Swiss withholding tax deducted from lump-sum second-pillar pension payments (BVG/LPP) made to individuals residing in Italy.
Until recently, the process was relatively straightforward: Switzerland deducted withholding tax at source when the capital was paid out, usually at a rate of between 6% and 8%. After declaring and paying tax on the capital in Italy, the taxpayer could then request a full refund from the Swiss authorities under the applicable double taxation treaty.
This is no longer necessarily the case. The rationale put forward by the Swiss tax authorities focuses on Italian legislation: the 5% substitute tax applied in Italy to BVG/LPP lump-sum payments is regarded by the Swiss authorities as a special rather than an ordinary tax. Consequently, according to the cantonal authorities, the safeguards and tax relief provisions established by bilateral agreements to prevent double taxation would not apply.
The Italian Tax Framework and the Withholding Mechanism
In Italy, the tax treatment of capital paid out from the Swiss second pillar is relatively favourable, although its application is subject to specific rules.
Under Italian legislation and the Italian Revenue Agency's guidance, a BVG/LPP lump-sum payment made to an individual who is tax-resident in Italy is subject to a 5% substitute tax.
This tax may be collected directly by the Italian financial intermediary, usually the bank receiving the funds, where the taxpayer has given the appropriate mandate. Alternatively, the beneficiary must calculate and pay the tax directly and report the relevant amount in their Italian tax return.
A Practical Example of the Problem
Suppose the capital accumulated in your second-pillar pension fund amounts to €100,000.
- When the capital is paid out, the Swiss pension fund withholds tax at source at an assumed rate of 7%, amounting to €7,000.
- The remaining net amount is transferred to your Italian bank account. The financial institution applies the 5% substitute tax to the gross amount, withholding a further €5,000.
- If Switzerland refuses to refund the €7,000, you will have paid a total of €12,000 in tax on the same pension capital, resulting in double taxation.
International Mutual Agreement Procedures: What Is a MAP?
Legal mechanisms exist to resolve tax disputes between countries that adversely affect taxpayers. One of the main instruments in this area is the MAP.
A MAP (Mutual Agreement Procedure) is a mechanism provided for under international double taxation treaties. It allows the tax authorities of two countries, in this case Italy's Ministry of Economy and Finance (MEF) and Switzerland's State Secretariat for International Finance (SIF), to engage directly in discussions to resolve differences in the interpretation or application of a treaty.
Unfortunately, consultations and mutual agreement procedures initiated between Italy and Switzerland concerning the second pillar have not yet resolved the issue. The two countries' positions remain far apart, and the Swiss authorities continue to uphold their refusals to grant refunds.
At present, the issue is closely linked to appeals brought before the Ticino tax courts, with the first official rulings and final judgments expected during 2027.
What Options Are Available to Taxpayers?
While awaiting decisions from the Swiss courts, Italian taxpayers are not entirely without recourse. Two possible courses of action may be considered.
1. The Mutual Agreement Procedure (MAP)
A MAP requires the relevant authorities to engage in negotiations, but it does not guarantee that they will reach an agreement.
It may therefore be worth pursuing, but it should not be regarded as a certain solution. Unfortunately, the agreements between Italy and Switzerland do not provide for arbitration clauses in this context.
2. An Application for a Refund in Italy
One possible approach is to apply to the Italian Revenue Agency for a refund of the substitute tax paid in Italy, on the grounds that the Swiss withholding tax constitutes definitive foreign tax.
This approach would seek to apply, by analogy, the administrative practice used for refunds relating to foreign taxes on investment income.
Reference: Article 24 of the applicable double taxation treaty.
The availability and legal basis of such a refund would need to be assessed carefully in light of the individual circumstances and the applicable legislation.
Frequently Asked Questions (FAQs)
Are all Swiss cantons refusing to refund tax on BVG/LPP payments?
The practice became particularly established in the Canton of Ticino in 2024 and has progressively spread to, or been adopted by, tax authorities in other Swiss cantons.
Can I avoid the 5% Italian tax by leaving the money in a Swiss bank account?
No. Italian tax residence generally means that income is subject to Italian taxation regardless of where it is earned or held. The tax implications arise when the pension capital is paid out to an individual who is tax-resident in Italy, irrespective of the country in which the receiving bank account is located.
Plan Your Second-Pillar Pension Withdrawal with Studio Antonini
Managing cross-border taxation requires specialist expertise and continuous monitoring of tax court decisions.
If you are planning to receive a lump-sum payment from your Swiss second-pillar pension fund or have already received a refusal of your refund application from the Swiss authorities, it is important to assess your options before taking further action.
Studio Barbara Antonini has longstanding expertise in assisting cross-border workers and analysing the tax implications of both previous and current agreements between Italy and Switzerland.
We can help you assess your individual circumstances, calculate the actual impact of the taxes levied and identify the most appropriate course of action.
Contact Studio Barbara Antonini for personalised advice on international taxation.
