Specialist article
Section 32b EStG · Germany–Switzerland tax treaty · Foreign incomeThe progression proviso for Swiss income
Swiss income can be tax-exempt in Germany while still affecting your German tax. Where the progression proviso under section 32b of the German Income Tax Act (EStG) applies, the income concerned is not directly subject to German income tax. However, it increases or reduces the tax rate applied to your other income taxable in Germany. Whether this applies in a particular Swiss case depends on the category of income, the Germany–Switzerland tax treaty and, when moving between countries, the period of German tax liability.
Basic principle
Exempt Swiss income can change your German tax rate
The progression proviso does not make the Swiss income itself taxable in Germany.
Instead, certain income that is exempt or falls outside German taxation is taken into account when determining a special tax rate. That rate is then applied to the income actually taxable in Germany.
The principal legal basis is section 32b EStG. In Germany–Switzerland cases, income exempt under the treaty and foreign income received in the year of moving to or from Germany are particularly relevant.
The progression proviso is different from a foreign tax credit
Under the credit method, Germany taxes the income itself and grants a credit for eligible Swiss tax. Under the progression proviso, the income generally remains outside the German tax base and affects only the tax rate.
Two separate effects
Exemption and the tax rate effect must be considered separately
A tax treaty may require Germany to exempt certain Swiss income from taxation. This does not automatically mean that the income has no relevance to the German tax assessment.
- The income itself remains exempt from German tax
- The German tax rate is calculated taking that income into account
- The special rate applies to the remaining income taxable in Germany
- The income must be calculated under German tax rules
- Reporting is made in particular through Anlage AUS
Common situations
Two main categories are particularly important in Swiss cases
Income exempt under the treaty
Switzerland has the taxing right and Germany exempts the income. Section 32b(1), first sentence, no. 3 EStG may nevertheless bring the income within the progression proviso.
Moving to or from Germany
Where unlimited German tax liability applies for only part of the year, foreign income from the rest of the calendar year may affect the German tax rate under section 32b(1), first sentence, no. 2 EStG.
Positive and negative income
Income relevant to the progression proviso must be calculated under German rules. Losses may require additional restrictions to be considered, particularly for income from third countries.
Employment income
Swiss employment income is a common progression proviso case — but not always
If an individual resident in Germany physically works in Switzerland and the treaty’s general employment provision applies, the employment income attributable to Swiss workdays may be exempt from German tax. The exempt income may then be subject to the progression proviso.
The position may be different for a frontier worker under Article 15a of the treaty. In that case, the primary taxing right generally remains with Germany as the country of residence, while Switzerland may levy a limited withholding tax. The employment income is then generally taxed in Germany, rather than being taken into account solely through the progression proviso.
| Working arrangement | Typical German treatment | Progression proviso? |
|---|---|---|
| Frontier worker under Article 15a | Employment income generally taxable in Germany; Swiss withholding tax taken into account under the applicable rules | Generally not a case involving only the progression proviso |
| Not a frontier worker; work physically performed in Switzerland | Swiss taxing rights for the relevant workdays; assess German exemption under the treaty | Generally requires assessment where an exemption applies |
| Working from home in Germany | Germany generally has taxing rights over the income attributable to German workdays | No, for this German portion of the employment income |
| Work in several countries | First allocate employment income according to actual workdays | Only for the portion that is actually exempt |
First allocate employment income by workdays
For detailed allocation guidance, see allocating employment income by workdays between Germany and Switzerland . Frontier workers are covered separately in frontier workers in Switzerland: taxation in Germany .
Moving to or from Germany
In the year of relocation, Swiss income earned outside the period of German tax liability may also be relevant
Where unlimited German tax liability applies for only part of the year, section 32b(1), first sentence, no. 2 EStG covers foreign income that was not subject to German income tax during the rest of the calendar year.
Swiss employment income earned before moving to Germany or after moving to Switzerland may therefore affect the tax rate for the part of the year subject to German taxation.
Moving to Germany
Swiss income from the period before unlimited German tax liability begins may be relevant under the progression proviso.
Moving to Switzerland
Swiss income earned after unlimited German tax liability ends may affect the German tax rate in the year of departure.
Consider the entire calendar year
The German tax assessment must clearly distinguish the events throughout the calendar year, the periods of tax liability and the categories of income.
Separate guides cover the tax return for the year of arrival or departure
See the tax return for the year of moving from Switzerland to Germany (in German) and the tax return for the year of moving from Germany to Switzerland .
Important distinction
Not every type of Swiss income falls under the progression proviso
A common misconception is that all income taxed in Switzerland is exempt in Germany and is taken into account only under the progression proviso. This is incorrect.
The Germany–Switzerland tax treaty uses different methods to avoid double taxation depending on the category of income. Where the credit method applies, the income is generally taxed in Germany. Swiss tax is credited against German tax to the extent that it qualifies for a credit.
Swiss dividends
Swiss dividends received by investors resident in Germany are generally taxed in Germany. Swiss withholding tax raises questions about tax credits and refunds, rather than being a typical progression proviso case.
Swiss interest
Interest income is generally not exempt merely because it originates in Switzerland. The specific treaty and withholding tax treatment must be determined separately.
Swiss rental property
For a privately held Swiss rental property, the credit method generally needs to be considered from the German perspective. Rental income must therefore not automatically be treated as exempt income subject only to the progression proviso.
“Switzerland may tax” does not mean “Germany grants an exemption”
A Swiss taxing right resolves only one part of the treaty analysis. It is also necessary to determine how Germany, as the country of residence, provides relief from double taxation. Only then can it be established whether a tax credit, exemption or the progression proviso applies.
Calculation
How the progression proviso affects the German tax rate
In simplified terms, a special tax rate is first calculated by taking the relevant Swiss income into account together with the German taxable income for the purpose of determining the rate.
This higher average tax rate, or potentially lower rate where negative income is involved, is then applied to the income actually taxable in Germany.
German taxable income
Determine the income taxable in Germany.
Swiss income
Calculate the income relevant to the progression proviso under German tax law.
Special tax rate
Determine the tax rate taking the relevant exempt or foreign income into account.
Application
Apply the special tax rate to the income taxable in Germany.
Swiss tax figures do not automatically determine the income used for the German progression proviso
For section 32b EStG, income generally has to be calculated under German tax rules. An amount shown in a Swiss tax assessment or salary certificate therefore cannot be used without review as the basis for the German tax rate calculation.
Tax return
Where Swiss income subject to the progression proviso appears in the German tax return
Foreign income exempt under the treaty and subject to the progression proviso is generally reported in Anlage AUS. The underlying income category and any additional schedules must also be considered.
Employment income is additionally subject to the employee schedules and their specific rules for foreign income. Correct reporting therefore depends on why the Swiss amount is subject to the progression proviso.
Anlage AUS
Treaty-exempt income and foreign income relevant to the progression proviso are reported here where required by the tax return framework.
Employment income
Employee cases may additionally require Anlage N, N-AUS or specific frontier-worker disclosures.
Supporting documents
Keep salary certificates, Swiss tax assessments, workday calendars and other evidence of income available.
Anlage AUS is explained separately
For reporting guidance, see Anlage AUS for income from Switzerland . For the overall framework, see Swiss income in your German tax return .
Losses
Negative Swiss income may be subject to special restrictions
The progression proviso is not limited to positive income. Negative foreign income can, in principle, also affect the special tax rate. However, cross-border losses are subject to additional restrictions.
For Swiss income in particular, it is important to note that Switzerland is treated as a third country for certain German loss provisions. Before a loss is taken into account, it is therefore necessary to consider, in particular, whether section 2a EStG restricts loss relief.
Do not simply offset losses against positive income relevant to the progression proviso
The income category, country, treaty treatment and special loss relief rules must each be assessed separately.
Common mistakes
Common errors when applying the progression proviso to Swiss income
Exempting all Swiss income
Swiss taxation is incorrectly assumed to mean automatic exemption from German tax.
Treating frontier-worker income as relevant only to the tax rate
Article 15a of the treaty is overlooked, even though Germany generally taxes the employment income.
Ignoring the year of relocation
Swiss income earned before arrival or after departure is overlooked when applying section 32b(1) no. 2 EStG.
Copying Swiss figures
Income relevant to the progression proviso is not calculated under German tax law.
Confusing tax credits and tax rate effects
A credit for Swiss tax is confused with exemption under the treaty.
Failing to separate workdays at home
German and Swiss workdays are treated together as exempt Swiss income.
Recognising losses without review
Restrictions for third countries and section 2a EStG are not considered.
Omitting the income from the return
Swiss income is left out of the German tax return entirely because it is exempt.
Frequently asked questions
The progression proviso for Swiss income
What does the progression proviso mean?
Is all Swiss income subject to the progression proviso?
Is Swiss employment income subject to the progression proviso?
What applies when working from home for a Swiss employer?
Is Swiss income earned before I move to Germany taken into account?
Does this also apply after moving to Switzerland?
Are Swiss dividends subject to the progression proviso?
Is Swiss rental income automatically relevant only to the German tax rate?
Where do I report Swiss income subject to the progression proviso?
Further reading
German tax returns involving Swiss income
Germany–Switzerland tax advice
Do you have Swiss income and a German tax return to prepare?
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