With regard to the taxation of employment income, the starting point for any tax assessment is Art. 15 of the respective applicable DTA. Paragraph 1 establishes the so-called place of work principle, according to which the country of employment can tax income from employment if the work is actually physically performed in that country. If certain working days in cross-border employment relationships are no longer physically performed at the employer's registered office in the country of activity, but in the home office in the country of residence, this can lead to a different allocation of the right to tax salaries.
For the example of an an international weekly resident with residence and family domicile abroad and place of work in Switzerland, this means that Switzerland may tax the Swiss working days based on the place of work principle. However, each individual working day performed in the home office at the foreign place of residence is subject to tax abroad and must be exempt from tax in Switzerland accordingly. If the home office activity abroad reaches a certain level, it must be examined whether the foreign country of residence has the exclusive right to tax the employment income as a result of the application of the so-called "assembler's clause" in accordance with Art. 15 para. 2 of the respective DTA. This special provision applies if the employee spends a total of less than 183 calendar days in Switzerland (working days including weekends and holidays) and the remuneration is not paid by an employer in Switzerland or a permanent establishment of the foreign employer located there. If the conditions are met cumulatively, Switzerland loses its right of taxation as the place of work.
Another exception to taxation at the place of work can be found in the taxation of international weekly residentFor example, a new consultation agreement on the application of Art. 15 para. 4 DTA Germany was concluded with Germany on 6 April 2023. According to this agreement, the provisions of this article will also apply to "senior executives" with residence and family domicile abroad and place of work in Switzerland, this means that Switzerland may tax the Swiss working days based on the place of work principle. However, each individual working day performed in the home office at the foreign place of residence is subject to tax abroad and must be exempt from tax in Switzerland accordingly. If the home office activity abroad reaches a certain level, it must be examined whether the foreign country of residence has the exclusive right to tax the employment income as a result of the application of the so-called "assembler's clause" in accordance with Art. 15 para. 2 of the respective DTA. This special provision applies if the employee spends a total of less than 183 calendar days in Switzerland (working days including weekends and holidays) and the remuneration is not paid by an employer in Switzerland or a permanent establishment of the foreign employer located there. If the conditions are met cumulatively, Switzerland loses its right of taxation as the place of work.
Finally, there are further exceptions to the place of work principle for the taxation of of cross-border commuters. As in the area of social security, various special consultation agreements and regulations with countries bordering Switzerland had to be observed from a tax perspective due to the COVID-19 pandemic until recently. Although these have since ceased to apply, the increase in home office work as a result of the pandemic has provided an important impetus. Against this backdrop and the fact that employees increasingly want to work from their place of residence, various new regulations have recently been concluded with neighboring countries in the area of taxation of cross-border commuters.
The relevant basic provision in the respective DTA provides for a further exception to the place of work principle. According to this provision, the country of residence may generally still tax the employment income, even if the work is carried out in the country of employment. The decisive factor and therefore often the subject of mutual agreement procedures is the definition and interpretation of the concept of cross-border commuter status and, in particular, the so-called non-return days. Cross-border commuter status may not apply if there is no periodic return to the place of residence or the non-return days exceed a certain threshold.
The question of how home office days should be qualified and whether they qualify as non-return days was not always clear. Germany and Switzerland wanted to take account of the increasing prevalence of home office. In relation to Germany, a consultation agreement regarding full-time working days spent at home came into force on 26 July 2022. According to this agreement, working days on which a cross-border commuter works all day at their place of residence in the country of residence are not considered working days on which the person does not return to their place of residence after finishing work due to the nature of their work. These working days are therefore not considered non-return days within the meaning of the DTA.
In relation to France, the dispatch on the approval and implementation of a supplementary agreement to the double taxation agreement with France was adopted on 22 November 2023. This supplementary agreement allows cross-border working from home for up to 40% of working hours per year - especially for cross-border commuters. It is part of the home office solution agreed at the end of 2022. Within this limit, the supplementary agreement provides for remuneration in connection with teleworking to be taxed in the contracting state in which the employer is located. The agreement also stipulates that the employer's state will transfer to the employee's state of residence 40% of the taxes it has levied on the remuneration from teleworking in the state of residence. In order to ensure the application of the new rules, an automatic exchange of information on salary data is envisaged.
In relation to Italy, a declaration was signed on 10 November 2023 in which a tax regulation for the home office was agreed for a period of two years. According to the declaration, from 1 January 2024 all cross-border commuters within the meaning of the cross-border commuter agreement signed in December 2020 will be able to work up to 25% of their working hours from home. This has no impact on the state that is authorised to tax employment income and on the status of cross-border commuters. It was also decided to extend the transitional solution agreed by both countries on 20 April 2023. On 28 November 2023, the State Secretariat for International Financial Matters announced that both countries had agreed in a temporary mutual agreement that teleworking of up to 40% of working hours would be possible between 1 February 2023 and 31 December 2023, without any international allocation of tax rights or change in the status of cross-border commuters.
In the area of the coordination of national social security systems, in the case of a substantial activity in the country of residence within the EU/EFTA/CH, the insurance status can change from the employer country to the country of residence, provided that a substantial activity is carried out in the latter. This mainly occurs in cross-border constellations where, in addition to a work activity on the employer's premises, a home office activity is carried out in the country of residence.
Until the outbreak of the COVID-19 pandemic resp. the lockdown on 11 March 2020, a workload of 25% of the total activity on average was considered to be a substantial activity. Thus, up to a maximum of 24.9% of the total activity could be performed in the home office without a change of insurance status.
Due to the special situation in connection with the coronavirus, a flexible application of the subordination regulations was agreed within the EU/EFTA and in relation to Switzerland, according to which the insurance subordination should not change due to the pandemic-related restrictions. Thus, a person is considered to be employed in the country of employment (and thus subject to the social security system there) even if he or she is physically unable to perform his or her work there and must perform 100% of the working days in the country of residence in the home office. In principle, an A1 certificate was not required in such circumstances. Within the EU/EFTA/CH-States this flexible regulation was extended until 30 June 2023.
According to the old regulation before the lockdown, in the case of a 100% workload, a home office activity of 2 days (40%) would lead to a change of social security status to the country of residence and the employer would subsequently be liable for social security contributions in the employee's country of residence and for the payment of the corresponding social security contributions. An A1 certificate confirming the applicable social security legislation would also have to be applied for. Under the flexible application regime during the COVID-19 pandemic, however, there would be no change in social security status despite performing more than 25% of substantial work in the country of residence and no need to apply for an A1 form would arise.
In order to continue a facilitation of social security subordination after 30 June 2023, Switzerland and certain EU and EFTA states have signed a multilateral agreement. The agreement provides that persons working in the state in which their employer's registered office is located may perform up to 50% cross-border telework (maximum 49.9% of working time) in the state of residence without the subordination for social insurance changing from the state of the employer's registered office to the state of residence.
In order for the agreement to apply to their employees, Swiss employers must apply for an A1 certificate (maximum validity 3 years, renewable) from their OASI compensation fund via the ALPS platform (Applicable Legislation Portal Switzerland). The same applies to foreign employers whose Swiss employees wish to work from their home office. They must apply for an A1 certificate from the competent foreign authority.
This exception is only applicable to situations involving two states that have signed the agreement. In the case of home office in a state that has not signed the multilateral framework agreement, or for an employer based in a state that has not acceded to the agreement, the ordinary rules and procedures applied before the pandemic will apply again as of 1 July 2023 (materiality threshold of 25% of the activity, need to apply for an A1 certificate). The agreement is also not applicable if, in addition to teleworking in the country of residence, the employee carries out other activities there, such as visiting customers, or has an employment relationship in another EU/EFTA state.
It should be noted that the above regulations only apply to the area of social security. The tax perspective must be examined separately and based on the respective applicable double taxation agreements, the supplementary agreements or memorandums of understanding, as well as the separate cantonal special agreements with the border states. A more in-depth discussion of the tax approach will be addressed in the next blog post. It should already be mentioned that a new mutual agreement has entered into force with France on 1 January 2023. A new cross-border commuter agreement and an amendment protocol also entered into force with Italy on 17 July 2023. In relation to Germany, the new consultation agreement of 6 April 2023 concerning "senior employees" must be taken into account.
In the wake of digitalization, more modern forms of work have found their way into our everyday working lives, enabling mobile working independent of an actual office infrastructure. The term "remote work" has become established as a generic term for work that is not performed on the employer's premises. The term "home office" is used to describe the form of work performed in the private home of the employee's main place of residence. The word combination "workation" covers work at a vacation location and "bleisure work" covers work from a leisure location. Employees who do not perform their work at a fixed location are included under the term "Digital Nomads". Co-working space" or a "shared office" is a workplace that is flexible in terms of time and location and is shared by several people.
Employers hope to gain a strategic advantage on the labor market by offering modern forms of work. In addition, they are no longer only active on the national market, but also accept orders abroad. If employees are sent to other countries to fulfill these orders, this entails in particular reporting obligations. What these constellations have in common is that the potential risks are often not sufficiently considered. In addition to the aforementioned aspects of reporting law, social security law, labor law and direct and value-added tax aspects must also be considered. Failure to comply with these regulations can result in heavy fines and sanctions. The tax and, in particular, value-added tax risks can also be considerable in certain constellations.
It may sound a bit paradoxical, but working on vacation is an absolute dream for many employees. What sounds so simple, however, hides numerous stumbling blocks.
In the case of "workation", in contrast to a classic secondment, the duration of the work is not clearly defined. It can last from a few days to several months. From the point of view of labor law, the remuneration, vacation days, working hours and rest periods, etc. must be correctly defined. It is important to create clear conditions by means of a supplementary agreement to the employment contract or a general "workation policy" in order to avoid later disputes. For example, it must be clearly defined which part of the workation is considered vacation and which part is considered working time. As soon as the activity has a connection to the Swiss market, the mandatory provisions of Swiss labor law and the applicable collective labor agreements, including minimum wage regulations, must also be observed.
Apart from that, workation within Switzerland is basically unproblematic. However, workation abroad is not quite as simple. Even within Europe, local legislation varies greatly. Depending on the duration of the activity, questions may arise regarding the employee's personal tax or social security obligations, the establishment of a permanent establishment by the employer in the vacation country, or work and residence permits. In order to avoid unexpected inconveniences such as compliance obligations in different countries, we recommend implementing a uniform workation regulation and defining exactly in which countries and over which period of time workation is approved.
In cooperation with various foreign consulting firms, the Deutsche Visa und Konsular Gesellschaft (DVKG) and the digitization company ESCRIBA, we can offer standard solutions for the majority of cases. We can assist in the development of a workation policy or conduct personalized workshops on the most important do's and don'ts. With the help of DVKG, an automated application and approval process can be set up, which enables all involved parties in a company to process the application in an uncomplicated manner.
In contrast to workation, the activity in the home office has a certain continuity and is usually not limited to a few weeks. From a labor law perspective, working outside the employer's country of domicile entails the risk that the place of work may change and that the employer may find himself before a foreign court in the event of labor law disputes and, in the worst case, foreign labor law may apply.
From the point of view of social security law, a substantial activity in the country of residence within the EU/EFTA/CH can change the insurance status. A substantial activity is considered to be a workload of 25% or more of the total activity on average, with efforts being made to increase this threshold. In the worst case, this can lead to the employer having to register with the social security authorities of a foreign country and settle the corresponding contributions. In Switzerland, this situation has long been known in the inbound relationship under the term of the so-called "genuine/non-genuine ANOBAG". However, the same problem can also arise in reverse if a Swiss employer or an EU employer becomes liable for social security contributions for its employees in another EU country. In relation to third countries, the respective bilateral social security agreements must be considered. As a rule, this results in a twofold assessment, whereby the contributions in one country can potentially be reduced.
From a tax perspective, there is a risk that a company may establish a permanent establishment in the country of residence of its employees due to their home office activity. The consequence is the allocation of a part of the company's profit. This is particularly the case if essential activities are carried out on a permanent basis or decisive business decisions are made outside the employer's place of business in a home office in a fixed business facility. According to the analysis of the Swiss Tax Conference (SSK) on the effects of teleworking on the intercantonal tax segregation of companies dated 26.04.2022, it is now at least clear that home offices in Switzerland do not generally constitute a permanent establishment. This is particularly the case because the company does not establish a sufficient right of use in the employees' premises. In the international context, it can also be assumed as a rule that, according to the current opinion of the OECD, the use of home office by cross-border commuters or the activity at Workation only constitutes a permanent establishment of the company in exceptional cases. However, the foreign tax authorities, in particular Germany and Austria, partly deviate from the OECD's view and are less reserved when it comes to the assumption of a home office permanent establishment. In this context, the possibility of a so-called representative permanent establishment must also be considered. Under certain conditions, a permanent establishment can also be established without a physical facility being available, namely if a person has a de facto power of attorney and also usually exercises this power (so-called dependent representative with power of attorney). Finally, there is a practice in certain cantons according to which managing directors who work for a foreign company from their home office in Switzerland establish a permanent establishment here. According to their opinion, the concepts of obligation or choice in the context of the organization of their work or the place from which it can or must be carried out are relative for executives who work as managing directors. As far as the activities of managing directors with signatory powers are concerned, according to this line of reasoning, these are not auxiliary activities by definition. Even if the managing directors do not make any significant decisions from Switzerland or have direct or indirect contact with clients, these cantons nevertheless assume a certain permanence and therefore the establishment of a permanent establishment purely on the basis of the function as managing director with predominant residence in Switzerland.
Cross-border provision of services
Employed persons from EU/EFTA countries can work in Switzerland without a permit for up to 90 working days per calendar year. However, their assignments must be reported online to the State Secretariat for Migration SEM. This is associated with the verification of compliance with minimum wage and working conditions. This means that in most cases, foreign employers must pay their employees a supplement to their normal salary for work assignments in Switzerland. Violation of the reporting obligations as well as non-compliance with the minimum wage regulations are strictly sanctioned by the cantons.
What many Swiss companies are not aware of is that the European Union also has reporting and registration obligations as well as minimum wage regulations (Equal Pay). The EU reporting obligations apply to posted workers, whose stay - depending on the country - must be reported to the labor authority, the social security authority or the occupational safety authority before the assignment. The EU Posted Workers Directive has been implemented in many EU/EFTA countries in such a way that the employer must report the business traveler - even if the stay lasts only one day. Failure to comply with the reporting obligation leads to considerable sanctions and far-reaching consequences such as sanction payments, legal penalties, entry bans and even exclusion from the local market. It is therefore worthwhile to check the respective reporting requirements at an early stage.
As part of our cooperation with the German Visa and Consular Society, we can provide a simple process to complete the EU declaration with just a few entries.
The aspects described above present employers with major administrative hurdles. For example, there is often a lack of appropriate internal processes that ensure compatibility with the employment, reporting, social security and tax aspects described above. In the worst case, a company is not even aware of existing risks. Through our network and with the help of our electronic applications, we can implement an automated process that reduces the administrative effort to a minimum. We can also provide with an automated alarm system that triggers an alarm in the event of special constellations, so that we or our network partners can then initiate a more in-depth investigation. In this way, possible risks can be identified at an early stage and appropriate measures can be taken.
Die zunehmende Globalisierung der Wirtschafts- und Arbeitswelt kann zu steuerlich relevanten Bezugspunkten zu mehreren Staaten und damit zu potentiellen internationalen Doppelbesteuerungskonflikten führen. Bei bestehender staatsvertraglicher Grundlage können Doppelbesteuerungskonflikte durch die Anwendung eines Doppelbesteuerungsabkommen (DBA) vermieden werden. Die DBA-Berechtigung knüpft dabei an die (steuerliche) Ansässigkeit an.