The Cantonal Council of Zurich has taken action against this and reduced the tax on lump-sum withdrawals. The deadline for a referendum on the amendment to the law has passed unused. It is not yet clear when the amendment will take effect. This will be determined by the Government Council of the Canton of Zurich.
Calculation method in the Canton of Zurich
In the Canton of Zurich, the capital withdrawal tax is calculated according to the pension rate system. The capital withdrawal is converted into a theoretical pension. Afterwards, it is looked what someone would pay as income tax (in percentage) for an annuity of this size. Finally, the calculated tax rate is multiplied by the total capital withdrawal. There are no social deductions.
Previously, the pension conversion rate was 10 % (1/10). This implies that a lump-sum withdrawal of one million francs resulted in a theoretical pension of CHF 100’000. Now, the conversion rate has been reduced to 5 % (1/20), which means that a lump-sum withdrawal of one million francs results in a hypothetical pension of CHF 50’000. However, the minimum simple* tax of 2 % is maintained.
*Note that the simple tax must still be multiplied by the tax rate. Currently, the tax rate in the city of Zurich is 219 % (incl. canton). In addition, there is the federal tax, because the federal government also levies a tax on the withdrawal of pension assets.
Where does the canton of Zurich rank so far and where would it stand in the future?
Some relief for medium to higher capital withdrawals
We are now interested in how the canton of Zurich will improve as a result of the revision of the law:
- As the minimum simple tax of 2% is maintained, there is no change for smaller amounts.
- Previously, the cantonal tax rate exceeded the minimum of 2 % from an amount of CHF 204’500, but now only above CHF 409’000.
- Since the progression on the cantonal tax only takes effect at a later stage, the tax is reduced from capital withdrawals of 204,500 francs.
- However, the higher the capital withdrawal, the smaller the effect of this tax reduction. The reason: for very high amounts, it is not much use dividing the capital withdrawal by 20 instead of just 10 to determine the tax rate. In both cases, the rate-determining portion is in a very high progression bracket for very high capital withdrawals.
City of Zurich incl. cantonal and federal tax:
| Amount of capital withdrawal | Zurich (previous) | Zurich (new) |
| CHF 50’000 | 4.56 % | 4.56 % |
| CHF 100’000 | 4.96 % | 4.96 % |
| CHF 250’000 | 6.90 % | 5.99 % |
| CHF 500’000 | 11.27 % | 7.42 % |
| CHF 1’000’000 | 16.09 % | 11.44 % |
| CHF 2’000’000 | 20.89 % | 16.09 % |
| CHF 5’000’000 | 26.58 % | 22.43 % |
| CHF 10’000’000 | 28.67 % | 26.58 % |
| CHF 20’000’000 | 29.72 % | 28.67 % |
Calculation basis: payment at age 65, single man, non-denominational
Position in intercantonal comparison
We can see that the canton of Zurich can only partially improve its position.
- Since the minimum simple tax is maintained at 2 %, Zurich remains in the midfield for smaller withdrawals.
- For medium-sized capital payments between CHF 250’000 and CHF 2’000’000, Zurich can improve marginally.
- For very large payments of CHF 10 million or more, Zurich remains in last place in an intercantonal comparison.
| Amount of capital withdrawal | Rank (previsous) | Rank (new) |
| CHF 50’000 | 18 | 18 |
| CHF 100’000 | 12 | 12 |
| CHF 250’000 | 14 | 8 |
| CHF 500’000 | 24 | 9 |
| CHF 1’000’000 | 26 | 22 |
| CHF 2’000’000 | 26 | 26 |
| CHF 5’000’000 | 26 | 26 |
| CHF 10’000’000 | 26 | 26 |
| CHF 20’000’000 | 26 | 26 |
Calculation basis: payout at age 65, single man, non-denominational
Conclusion
Cutting the pension conversion rate in half from 10 % to 5 % sounds like a lot. However, the effect is not as great as one might expect at first glance. Especially for very large withdrawals, Zurich is still very expensive, which is due to the generally strong progression of income tax in the canton of Zurich. For medium capital withdrawals, though, the canton of Zurich improves considerably.