LPP tax refund blocked for border workers

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.

OCST has strongly contested this interpretation from the start. To protect its members, the organisation has provided assistance in claim procedures and, in June 2026, formally brought the case before the Tax Law Chamber of Canton Ticino. The legal process is currently pending and a definitive decision is awaited to clarify the legitimacy of the levy. Parallel friendly procedures at the international level between Italy and Switzerland have been attempted but ended negatively. For cross‑border workers wishing to manage their pension savings, it is useful to monitor the refunds provided by current regulations.

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.

Hypothetical scenarios and fiscal risks In a hypothetical scenario, a worker who redeems his capital today has to bear both levies: the Swiss withholding tax (average 7%) and the Italian substitute tax (5%). If in the past the Swiss tax was recovered, now that amount remains in the cantonal coffers. This results in a higher overall fiscal burden compared to the past, reducing the net amount actually received by the cross‑border worker. The complexity of the matter increases as friendly international procedures have not yielded positive results, leaving the legal case outcome as the only hope. Those who need to assess the impact of these withholdings on their assets can use a calculator to estimate the fiscal costs.

Useful tools for your case

To verify your within/over 20 km tax scenario, use the net salary calculator and the tax return guide.

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