Third border pillar: deductibility and returns

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
• The €10,000 threshold in Article 4 of Italian Law No. 83/2023 applies exclusively to employment income earned continuously and exclusively by Italian residents in a foreign border area or neighbouring country, as referred to in Article 1(175) of Law No. 147/2013; it is neither a general allowance nor an exemption from Swiss withholding tax. The new Agreement regime has applied since 1 January 2024.

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.

Structure of the three Swiss pillars

The first pillar (AVS/AI/IPG) provides a minimum old-age pension. The second pillar (LPP) is the company pension fund where both the employer and the employee make mandatory contributions: the rate borne by the employee is 5.3% for AVS/AI/IPG, while for the LPP itself the withholding varies from 7% to 18% depending on the worker's age. The third pillar fills the gap between the AVS/LPP pension and the desired salary, ensuring autonomy in personal pension design.

Who can access the third pillar? Cross-border workers residing in Italy who work in Switzerland can join immediately. The only constraint is to have a declared income in Switzerland: a cross-border worker with a G permit who earns the first franc in Switzerland can subscribe to a 3a plan with any Swiss bank or insurance company. The deposit remains locked until retirement (except for exceptions such as purchasing the main residence or starting a business), thus ensuring a long-term reserve.

Immediate tax advantages

The most immediate advantage is deductibility. Every franc (CHF) paid into the third pillar reduces the Swiss taxable income by the same amount. If a cross-border worker pays CHF 5,000 into 3a in a year, their gross taxable income is reduced by CHF 5,000, resulting in less withholding tax and a lower amount declared to the Swiss tax authorities.

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: The Article 9 transitional regime applies only to workers who meet the Agreement’s definition and worked in Graubünden, Ticino or Valais between 31 December 2018 and 17 July 2023; covered employment income is taxable exclusively in Switzerland. The ordinary regime applies in other cases, with Italian taxation and credit for Swiss tax where applicable. The €10,000 in Article 4 of Law 83/2023 is only the income limit referred to in Article 1(175) of Law 147/2013, not a general allowance. FTA factsheet · Agreement, Article 9 · Normattiva, Article 4. Old cross-border workers remain taxed only in Switzerland (Art. 9 of the 2020 Agreement).

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.

Returns and Wealth Accumulation

The returns generated by the third pillar (interest, capital gains from investments, dividends from securities) are exempt from Swiss tax until the time of withdrawal. This means that the money paid into the third pillar 'works' in a favorable regime, accumulating without fiscal erosion each year. For a cross-border worker who pays regularly from the first year of work until retirement (40+ years of career), the compound effect can be significant. Switzerland does not apply any tax on the internal growth of the 3a fund; Italy, on the other hand, does not tax the internal returns as long as the 3a remains tied up.

Refunds: Recovering Past Taxes

Cross-border workers who have worked in Switzerland in the years prior to 2024 (effective date of the New Agreement) and have paid Swiss or Italian taxes on partially double-taxed income can apply for a refund with the competent Italian tax administration (Agenzia delle Entrate). The refund is a partial or total return of the taxes paid in excess. Even if the third pillar was not yet popular among cross-border workers at the time, some who had independently subscribed to it can benefit from refunds calculated retroactively based on the new legislation, provided that the request is submitted within the prescription terms established by the legislation.

Useful planning tools

To estimate your pension strategy, use the pension planner and the pillar 3 simulator.

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:

• Weekly or monthly via automatic debit from the Swiss current account
• Annual by December 31
• Occasional (provided the legal maximum limit is not exceeded)

Consult the Swiss bank at the time of opening to verify the current limit in your canton and your personal situation.

Step 4: Deduct from the Swiss tax return

Each year, the cross-border worker receives an updated statement and a deduction certificate from their 3a institution. These documents must be attached to the Swiss withholding tax return (in Ticino, to the Tax Office of the Cantonal Tax Administration). The deduction directly reduces the withholding tax. If the cross-border worker has already made excessive payments during the year, the withholding tax refund covers the reduction of the taxable income, producing a refund check.

Italian declaration and CE box

In Italy, the cross-border worker declares the gross Swiss income in the 730 model (foreign income section). The third pillar is not directly deducted from the Italian income (because it is a Swiss contribution), but its 'tax trace' appears in the calculation of the Swiss taxable base, and therefore in the Italian tax credit (CE box). Many cross-border workers entrust this part to an accountant experienced in cross-border tax law, as the interaction rules are complex.

Critical deadlines

• December 31: Last day for contributions to the 3a account/policy of the current year (for deduction in the fiscal year).
• March-April: Submission of the Swiss withholding tax return (cantonal).
• May-June: Submission of the 730 model in Italy with foreign income and calculated tax credit.
• June-July: Publication of data in Switzerland; possible withholding tax adjustments.

Useful tools

To plan contributions and calculate the net after 3a deductibility, use the tax calculator for cross-border workers. Also consult the guide on the third pillar 3a for in-depth information on types of plans and investment strategies. For questions about the Italian 730 declaration and CE box, see the guide to income tax declaration for cross-border workers.

Ready to start? Contact a Swiss bank that serves cross-border workers, gather your documents, and open a 3a account this year. Each year of difference represents lost years of returns. Your Swiss pension future starts today.