Switzerland-UK Social Security Agreement, China Prolongs Bonus Tax Benefits, and Federal Council Sets Individual Tax Guidelines – Market Trends

Switzerland & UK

Social Security Agreement Between Switzerland and United Kingdom Enters Into Force

On October 1, 2023, the Social Security Agreement signed between Switzerland and the United Kingdom in 2021 will become operational.

The pact is scheduled to take effect from October 1, 2023, although it has been under provisional enforcement since November 1, 2021. For details on this temporary implementation, refer to Article 73 of the agreement.

The 1968 Social Security Agreement between Switzerland and the United Kingdom will remain valid for the Isle of Man, Jersey, Guernsey, Alderney, Herm, and Jethou. Starting from October 1, 2023, the older agreement will persist for England, Scotland, Wales, and Northern Ireland in regards to:

• Benefits, pensions, or allowances granted before October 1, 2023;
• Pending applications for benefits, pensions, or allowances as of October 1, 2023; and
• New applications for benefits, pensions, or allowances filed after October 1, 2023, but only if they pertain to eligibility periods preceding that date.

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China

China Extends Preferential Tax Treatment of Bonuses to 31 December 2027

China’s Ministry of Finance and State Taxation Administration have announced an extension to the existing favorable tax regulations for one-time annual bonuses for residents until December 31, 2027 (Announcement of the Ministry of Finance and State Taxation Administration [2023] No. 30).

This specialized tax regime provides residents with an option to exclude annual one-time bonuses from their total income when calculating their individual income tax. Alternatively, these bonuses can be taxed as a separate category, using a rate that’s determined by dividing the amount of the annual bonus by 12.

To illustrate, if an individual receives an annual bonus of CNY 60,000, a 10% tax rate would apply (CNY 60,000/12 = CNY 5,000; the 10% rate corresponds to the income range of CNY 3,000 to CNY 12,000). The resulting tax owed on this bonus would be CNY 5,790 (CNY 60,000 x 10% minus a quick deduction of CNY 210).

Residents also retain the flexibility to incorporate these bonuses into their overall income for tax purposes, should they choose to do so.

This preferential tax treatment was initially set to expire on December 31, 2023, as noted in a prior announcement (China Further Extends Two Individual Income Tax Incentives to 31 December 2023 (18 January 2023)).

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Switzerland

Federal Council Establishes Guidelines for Individual Tax Policy

The Federal Council has laid down essential criteria for individual tax obligations, which encompass the following:

• Implementing individualized taxation at the federal, cantonal, and municipal tiers. Married pairs will be assessed taxes as if they were single, requiring them to submit two independent tax filings;
• Raising the child allowance from CHF 6,000 to CHF 9,000;
• Eliminating deductions for single-adult households and dual-adult households with a single income; and
• Adjusting tax rates to decrease them for lower and middle-income earners while marginally increasing them for those in higher income brackets.

Collectively, these measures are anticipated to result in a revenue shortfall of roughly CHF 1 billion annually in direct federal taxes for the tax year 2024.

Of this, the Confederation is projected to cover around CHF 800 million, and the cantons will provide approximately CHF 200 million.

As a subsequent action, the Federal Council plans to present a legislative proposal to the parliament by March 2024.

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