Third border pillar: deductibility and returns (cross-border guide)

Context

In brief

• Third pillar (3a) is a voluntary Swiss supplementary pension fund
• Tax deductibility on amounts paid, tax-free returns in Switzerland
• Cross-border workers Ticino-Italy can join as Italian residents working in Switzerland
• New Agreement 2024: €10,000 exemption for new cross-border workers

Key facts

• What: Swiss complementary pension system (third pillar 3a)
• When: Accessible to cross-border workers from the New Agreement effective January 1, 2024
• Where: Switzerland, managed by Swiss banks and insurance companies
• Who: Employees and self-employed workers, including cross-border workers residing in Italy
• Rates: LPP (second pillar) 7-18% by age group; AVS/AI/IPG 5.3% for employees

Swiss pension system is based on three pillars: the first is AVS (old-age and survivors' insurance), the second is LPP (mandatory company pension fund), the third is the voluntary 3a pillar. While the first two are mandatory for those working in Switzerland, the third pillar is optional but offers significant tax advantages, especially for cross-border workers residing in Italy.

The third pillar 3a allows the worker to allocate additional amounts to pension savings, obtaining a deduction from the Swiss taxable income in the same year of payment. For cross-border workers with a G permit working in Switzerland, the mechanism is particularly advantageous: withholding tax on the pay slip is only deducted in Switzerland (never in Italy), as well as the deductibility of the third pillar applies fully to the Swiss taxable base.

…

Operational details

Application of the New Agreement 2024: Exemption and Refunds

The New Cross-Border Agreement, signed on December 23, 2020, and effective from January 1, 2024, has introduced specific rules on the taxation of employment income for those residing in Italy and working in Switzerland. One of the novelties concerns the exemption: new cross-border workers (those who started working in Switzerland after July 17, 2023) benefit from an annual exemption of €10,000 on employment income. Cross-border workers already residing before this date, however, enjoy a transitional regime with an exemption of €7,500, valid until 2033.

How the 3a deductibility interacts with the tax credit

In Italy, cross-border workers declare their gross Swiss income in the 730 form (section 'foreign income'). Since the withholding tax is levied in Switzerland (where the cross-border worker works), the Italian tax authorities apply a tax credit (quadro CE of the declaration) to avoid double taxation. The third pillar comes into play here: the contributions paid reduce the Swiss taxable income, thus reducing the withholding tax paid in Switzerland. This lower Swiss tax is directly reflected in the calculation of the Italian tax credit, generating a double advantage.

A generic practical scenario illustrates the mechanism: a cross-border worker with a certain amount of gross Swiss income pays a portion into the third pillar. Their Swiss taxable income consequently decreases, with a lower withholding tax in Switzerland. When they declare their income in Italy (reduced by the amount paid into the 3a), the Italian tax credit is calculated on a lower net income, resulting in a lower final taxation. The effect is a 'reserve' that grows over time.

…

Key points

How to activate the third pillar: step-by-step procedure

Step 1: Choose a Swiss bank or insurance company

The third pillar does not have a 'unique' counterpart in Switzerland. Commercial banks (UBS, Credit Suisse, Raiffeisen, Postfinance) and insurance companies (Allianz Switzerland, AXA, Zurich) offer 3a accounts and policies with different features. Bank 3a accounts (called 'pension account') have lower fees but returns linked to current interest rates. 3a insurance policies include disability or death protection but with slightly higher costs. Italian cross-border workers can choose freely, although most prefer Swiss banks located near Ticino border crossings (Brogeda, Chiasso, etc.) for convenience.

Step 2: Prepare the documentation

To open a 3a account/policy, you need:

• Valid ID (Italian passport or ID card)
• Residence certificate in Italy (issued by the municipality of residence)
• Swiss work permit G or B (authenticated copy)
• Proof of Swiss income (recent pay slip, employer certificate, or withholding tax declaration)

Many Swiss banks also require a declaration of non-Swiss citizenship and a FATCA (Foreign Account Tax Compliance Act) self-certification for anti-money laundering compliance. For cross-border workers, the process is simplified: the above documents and a verifiable residence in Italy are sufficient.

Step 3: Define the contribution plan

Once the 3a account is opened, the cross-border worker chooses the annual amount to contribute. In Switzerland, the maximum 3a contribution limit is set by federal law and varies depending on the worker's situation (employee, self-employed, etc.). For a cross-border employee in Switzerland, the rule is: contribute up to the legally set limit, deduct from the taxable income, and the returns grow undisturbed.

Contributions can be:

…