LPP tax refund blocked for border workers (cross-border guide)

Context

In brief

• Cantons no longer refund withholding tax on LPP capital
• Issue originated in 2024 in Canton Ticino, now extended to other cantons
• OCST brought the case before the Tax Law Chamber
• Judgment expected likely during 2027

Key facts

• What: No refund of withholding tax on LPP capital
• When: Issue started in 2024
• Where: Canton Ticino and other Swiss cantons
• Who: Cross‑border workers residing in Italy
• Swiss rate: 7% (average)
• Italian rate: 5% (substitute)
• Institutions involved: OCST, Tax Law Chamber of Canton Ticino

Canton Ticino introduced in 2024 an interpretative change affecting cross‑border workers who choose to receive their second‑pillar assets, i.e., the LPP, as a lump‑sum. The novelty is that cantonal tax authorities have stopped refunding the withholding tax deducted at the time of capital redemption for residents in Italy. This decision has not remained limited to Ticino, but has spread to other cantons, making the problem potentially relevant for all cross‑border workers.

Tax authority's position

According to the Ticino tax authority's interpretation, the 5% substitute tax applied in Italy would constitute a form of preferential taxation. For this reason, Canton Ticino believes that the provisions of the Italy‑Switzerland double‑taxation convention should not apply. That treaty states that pension benefits linked to a terminated employment are, in principle, taxable only in the beneficiary's state of residence. By denying the convention's applicability, Ticino has begun refusing requests for refund of the withheld tax.

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Operational details

Current fiscal situation creates significant uncertainty for those planning the redemption of the LPP. To understand the economic impact, it is necessary to compare the previously consolidated mechanism with the new practice adopted by the Cantons. Previously, the system worked linearly: at the moment of redemption, Switzerland applied a withholding tax, on average 7%. The cross‑border worker then declared that capital in Italy, paying the substitute tax of 5%, and finally requested from Switzerland the refund of the initially withheld portion. This allowed avoiding double taxation, respecting the principle of taxation in the state of residence.

Extension of the problem to the various Cantons A fundamental technical detail concerns the origin of the levy: the withholding tax on the LPP capital is not collected by the Canton where the worker performs the professional activity, but by the one where the pension fund is based. This means that a cross‑border worker who works permanently in Ticino could be insured with a pension fund headquartered in Zurich, Bern or Basel. Initially, the block of refunds concerned only those insured with funds based in Ticino. However, the alignment of the other Cantons to this new interpretation has dramatically amplified the scope of the problem, affecting anyone with a pension fund in any Swiss Canton that has adopted the same practice.

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Key points

For cross‑border workers who are facing this issue or who expect to cash out their LPP capital soon, the current strategy is to wait for the legal proceedings to evolve. The ruling of the Tax Law Chamber of the Canton of Ticino is the key element that will determine whether the tax authority's interpretation is correct. According to forecasts, the final decision is likely to arrive during 2027. Until then, uncertainty remains high and refund requests risk being systematically denied.

Operational steps and complaint handling

Those who have already had their withholding‑tax refund denied can follow these steps based on OCST activity:

• Verify the location of your pension fund to identify which canton made the withholding.
• Consider union or professional assistance to start formal complaint procedures.
• Keep all documentation related to the capital redemption and communications with the Swiss tax administration.
• Monitor updates regarding the appeal brought before the Tax Law Chamber, as the ruling will potentially affect many similar cases.

It is important to remember that the Italian 5% tax must still be paid to be compliant with the residence tax authority, regardless of whether Switzerland refunds the 7% share. Managing cross‑border pension requires constant attention, especially concerning the second pillar. Those who wish to explore how these variables affect their retirement planning should consult the guides on pension available on the portal.

For precise budget management and to understand how taxes affect net available income, we recommend using our salary‑tax calculator: salary calculator.

Source: comozero.it