Switzerland is known for its beautiful landscapes, strong economy and high quality products. The prospect of higher wages and interesting career opportunities attracts highly skilled professionals from other countries, in particular the border countries. While many of them have made Switzerland their second home, they took the opportunity during the pandemic and continued working from their home country. While this sounds like an attractive flexible solution, there are certain tax pitfalls that employers and employees need to be aware of in advance. Here is what you need to know about tax pitfalls for cross-border activities and how to remain compliant.
Double taxation agreement
Non Swiss employees who are mainly based in Switzerland
Imagine the following: employees from Italy who are usually based and employed in Switzerland might decide to return to Italy for a little where they have family or friends and continue working from there. Do the Italian and Swiss Fiscal authorities recognize it as “work” if they don’t work from a registered business address, but answer emails and join online meetings while being based in a holiday or private accommodation? In other words, do they need to fear that they will be subject to taxes in Italy as well?
Ideally, there is a double taxation agreement between Switzerland and the country where the employer decides to continue working, in this case Italy. Double taxation agreement, as the term says, prevent double taxation of individuals and companies who are based in Switzerland, but also work or do business in other countries. Currently Switzerland has double-taxation agreements in place with over 100 countries.
Provided such an agreement is in place, the 183-day rule or sometimes called “assembler clause” is an effective legal means to prevent the host country from imposing tax on the employee. However, the employees must not work longer than 183 days per year in total in the host country and they continue to remain on their employer’s payroll. If those requirements are fulfilled, they will only be subject to Swiss taxes.
A year in this context refers to a 365 day period starting with the day of arrival and the 183 days refer to calendar days, no matter if the employee has worked on that day or not. For more information on the 183-day-rule, check out our blog about its common misconceptions.
Non Swiss employees who keep a place of residency in their home country
It is a bit more tricky though if the employee has only recently started his job in Switzerland and already returns to his home country while still having family or a residence there. In that case, it does not appear entirely clear where the employee`s main residence actually is and make them subject to taxes in both countries – just in case. Additionally, there is ultimately no guarantee that the host country might raise taxes after all, based on country specific tax rulings.
Same risk applies for those who don’t have a residence in Switzerland at all and work remotely on a permanent basis. In that case, they are partially subject to tax at source, meaning tax at source becomes payable for each day an employee has worked on site in Switzerland, for instance during a business trip or working face to face with his colleagues in the Swiss office
Depending on the taxation agreement, the employee’s home country either offsets the already paid tax at source to the taxes payable in the home country or exempts the income already taxed in Switzerland from its taxable basis
To that end, Switzerland holds special agreements with its border countries France, Germany, Liechtenstein and Italy regarding cross-border commuters.
Besides the two scenarios, there are also many employee who live in close proximity to the Swiss border and frequently commute to their Swiss employer. How to keep track when the employee works in Switzerland and when from home and how does it affect the tax at source? As it is the employers responsibility to make sure all taxes are deducted correctly, they need to document each work day if the employee has worked from home or Switzerland But that’s not all. Based on the documentation, for instance in France, the days worked from home in France are subject to French taxes. This means that the Swiss employer is required by French law to appoint a French payroll company and a French fiscal representative to fulfil its obligations in the same way as a French employer and deduct the taxes at source correctly for the payroll on French soil.
If the employees, especially when being executives, frequently work from home across the border in their home country, there is also a risk that the tax authorities might define the home office as a permanent establishment abroad of the Swiss employer. In that case, the Swiss company would be subject to taxes for their profits abroad.
In sum, before a Swiss company agrees to any remote or cross-border activities from their employees, several substantial questions need to be clarified, for instance:
Are employees working from their home country subject to taxes at source? Is a fiscal representative required, meaning does the Swiss employer need to register as foreign employer in the employee’s home country? Is there a risk that an employee’s home office is declared as an employer’s permanent establishment abroad? And what do I need to know regarding payroll taxes abroad?
To find out what which rules apply for which country, we recommend having a look at the double taxation agreement that applies for the employee’s home country. The Swiss Secretariat for International Finance offers reliable up to date information and a database of tax information sorted by country.
How People2.0 can help?
People2.0 (formerly TCP Solutions) is the leading provider of contingent workforce engagement solutions within the EMEA, U.S. and globally.
Should you like further information about how we could assist you and your company regarding working with temporary workers and contractors compliantly following local tax rulings, GDPR and work safety regulations, do not hesitate to contact us via firstname.lastname@example.org or send us a message via our contact page. We would be delighted to speak to you regarding the possibilities.