The applicable tax regime under international standardsV

group based in Switzerland, which can be considered, from an economic point of view, as the real employer. If there is a de facto employer in Switzerland, the remuneration is subject to taxation at source from the first day of employment (Commentary on the FDF Ordinance on taxation at source).

This is also expressly stated in article 4 of the new FDF Ordinance on taxation at source in the context of the Direct Federal Tax (Ordinance on withholding tax, OIS) of 11 April 2018 which will come into force on January 1, 2021.

This means that posted workers are in principle taxed under the ordinary system, whether they have limited or unlimited tax liability in Switzerland. This would apply, for example, to an Italian national, employed by an Italian company, who is posted to Switzerland with their family to work on a ten-month project (permit L, posted worker). Of course, this situation raises questions regarding double taxation and we would have to look at the tax convention signed with Italy to determine whether the person’s salary would be taxable in Italy or in Switzerland.

Consequently, a posted worker is required to complete a tax declaration by a specified date and submit it with all the necessary documents, and in particular their employment certificate detailing all their income from regular or irregular work carried out worldwide during the tax year (which is the calendar year in Switzerland). They are also required to declare their other Swiss and foreign income (for a foreign worker with limited tax liability in Switzerland, foreign income is taken into account only for the purpose of setting tax rates).

THE APPLICABLE TAX REGIME UNDER INTERNATIONAL STANDARDS

As we saw in the introduction to this document, when there are international aspects to a situation, we need to start by looking at internal Swiss tax law as regards residence and domicile, and then examine any double-taxation agreement (DTA) that has been signed in order to resolve the taxation conflicts.

The DTAs signed with Switzerland, which are generally based on the Model Tax Convention on Income and on Capital published by the Organisation for Economic Co-operation and Development (MTC-OECD), begin with clauses that resolve tax residency and domiciliation conflicts.

As a starting point, in article 4 paragraph 1, MTC-OECD states that “resident of a Contracting State means any person who, under the laws of that state, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.” However, this does not include people who are subject to tax in that state only for income generated in that state or for capital in it.

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As we have seen above, the notion of residence and domicile is defined by reference to internal law – in this case Swiss law for Switzerland and foreign law for the foreign tax authorities.

So, when there are international aspects to a case, if the article quoted above is interpreted according to internal law in each country and applied, there is a risk that an individual could be considered a tax resident of two contracting states at the same time. This would result in dual residence and therefore double taxation, in Switzerland and abroad.

Article 4 paragraph 2 of MTC-OECD resolves this conflict using tie-breaker rules. So, when under the provisions of paragraph 1 an individual is deemed to be a tax resident of both the contracting states, the following rules are used to resolve the situation:

a) The person is considered to be a resident of the country in which they have a permanent home. This refers to any type of home (house, apartment, etc.) that the person owns or rents so long as it is available to them all the time, continuously, and is not just somewhere they stay occasionally (OECD

Commentary no. 13 at article 4). So, if a worker stays in various different hotels in Switzerland, we would not consider them to have a permanent home in the country.

b) If the person has a permanent home in both states, they are considered to be tax resident only in the state with which their personal and economic ties are closer (their “centre of vital interests”). This is the criterion generally used to determine a taxpayer’s tax residence or domicile when applying DTAs. c) If it is not possible to determine the contracting state in which the person has their centre of vital interests, or if they do not have a permanent home in any contracting state, they are considered to be resident in the contracting state where they usually live.

d) If they usually live in both the contracting states or in neither of them, they are considered to be a resident of the contracting state of which they are a national.

e) Lastly, if the person holds the nationalities of both the contracting states, or of neither of them, the relevant authorities in the contracting states will settle the matter by mutual agreement.

As we have already seen, the Swiss Federal Supreme Court considers that as regards international tax law, the notions of “regular return” and “director’s role” do not apply as they would do when settling inter-cantonal matters. This means that the taxpayer’s professional interests are not considered to be more important

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when assessing the case than their relationships with their family, friends and civil society or their political, cultural or leisure interests. Professional interests are only of greater importance when they predominate among the person’s interests as a whole (Federal Supreme Court decision 2C_1139/2012 of 20 July 2015). To determine the centre of a person’s vital interests, we also need to look at their family and social relationships, their hobbies, their political, cultural and other activities, their place of business and the place from which they administer their property (OECD Commentary no. 15 at article 4).

Lastly, we would like to highlight a specificity of the DTA with France which blends the notion of a person’s home with that of the centre of their vital interests to retain only the place with which the person has the strongest personal relationships. Also, the DTA with Germany, and those with the Netherlands and Sweden, grant concurrent taxation rights to the state from which the person has departed for a set waiting period (5 years for Germany). Once the taxpayer’s country of tax domicile or residence has been determined based on the DTA, the next step is to decide which state has the right to tax the income generated by the worker’s salaried employment, based on the rules in the agreement.

Consequently, under article 15 paragraph 1 of MTC-OECD, subject to certain exceptions (e.g. for entertainers and sportspeople, company directors’ fees and similar payments, and pensions and similar payments) salaries, wages and similar received by a tax resident of a contracting state in payment for salaried employment are taxed only in that state, unless the employment is carried out in the other contracting state. If the employment is carried out in the other state, income resulting from it is taxed in that other state.

As a result, income generated by carrying out dependent gainful activity generally belongs to the state in which the work is carried out.

There is however a specific rule in the DTA with Germany: under article 15 paragraph 4, an individual who is a tax resident of a contracting state but who is a board member, director, manager or authorised representative of an incorporated company based in another contracting state remains liable for taxation in their state of residence for the income that they receive from this activity, if this activity produces its effects only outside this other state.

There are however certain exceptions including (paragraph 2) the “183-day rule”: the place of work does not take precedence if the worker stays in the other state for a period or periods not exceeding a total of 183 days in any twelve-month period starting or ending in the tax year in question, and the income is paid by an employer, or on behalf of an employer, who is not based in the other state, and

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the cost of the pay is not met by a permanent establishment that the employer has in the other state.

This exception applies in particular to posted workers, as it enables a foreign employer to send teams to work on projects in other countries without the employees becoming liable for taxation in these countries. It can be found for example in the DTAs signed by Switzerland with neighbouring countries such as France, Italy and Germany.

For the purpose of calculating the 183 days, each day that the worker is physically present in the country is counted. So, it is not the length of the contract that is relevant, but rather the number of days the worker actually stays. (Any fraction of a day is counted as a full day.) The same applies to arrival and departure days, public holidays and weekends (OECD Commentary no. 5 at article 15). In its DTAs, Switzerland uses the term “during the tax year in question” rather than the formulation “during any twelve-month period starting or ending in the tax year in question”. The 183-day clause can lead to abuse related to the international hiring-out of labour (OECD Commentary no. 8.1 and following at article 15). A local employer looking to take on staff for a short period can be tempted to work with an intermediary in another country who will present their business as the worker’s employer and hire them out to the local employer, so that this local employer avoids being taxed in the country where the temporary gainful activity is carried out. So when looking at a case, we need to determine whether workers are genuinely being posted because one business has been contracted by another to provide a service, or whether it is a fictitious arrangement (a salaried position). Last but not least, difficult situations can arise when labour is leased between companies in the same group. SECO, the Swiss State Secretariat for Economic Affairs, issued a directive on this issue in 2017, in particular as regards the authorisations required (entitled “Intra-group staff leasing – Evaluation of the authorisation obligation/Directive 2017: clarification of directives and comments regarding the LSE”).

Like other countries, Switzerland has compiled a list of criteria to help detect abuses (see for example Federal Contribution Administration circular 45 (AFC) dated 12 June 2019 on taxation at source). Among these criteria, we would highlight (Commentary 8.12 and following at article 15):

The nature of the services provided by the employee and their role in the company,

Which company gives instructions as to how the work is to be carried out,

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Which business supplies the equipment and tools required to complete the work,

Which company is in charge of the place where the work is carried out, who is responsible for it and who bears the risks relating to it, How many staff are posted and what skills they have,

The financial arrangements agreed between the two companies, although this factor alone is not decisive. Based on the above, we can imagine the following scenarios:

1)

2)

3)

4)

5) A worker, tax resident in Italy, is posted to Switzerland by his Italian employer to assemble a machine. The project is to last 60 days during the 2020 tax year (=> authorisation to work via the Swiss notification procedure only). The worker will continue to be taxed on his pay in Italy, under article 15 paragraph 2 of the DTA with Italy.

A worker, tax resident in Portugal, comes to work for a Swiss employer in Zurich for a total of 5 months (permit L) during the 2020 tax year. She will be taxed on her pay in Switzerland, under article 15 paragraph 1 of the DTA with Portugal.

A multinational based in France sends one of its directors (a French tax resident) to its new subsidiary in Geneva for four months to train the managers and pass on the group culture (=> four-month authorisation outside the quota system). Article 17 paragraph 2 of the DTA with France applies and the worker will continue to be taxed on his salary in France. He will not be classed as a cross-border worker because his employer is French.

A group owns and manages hotels via subsidiaries in Switzerland, France and Spain. The Spanish subsidiary sends one of its receptionists to the Swiss subsidiary (to cover a staff shortage) for a period of five months. Article 17 paragraph 2 of the DTA with Spain should not apply, even though the Spanish subsidiary continues to pay the staff member’s salary. This is because the receptionist will work as an integral part of the Swiss subsidiary, and will take instructions from Swiss managers and operate under their supervision and responsibility. The receptionist has therefore not been posted in the strict sense of the term. In addition, the immigration authorities will most likely issue an “ordinary” permit L and not a posted worker’s permit. The worker should therefore be taxed at source.

Company X is based in Greece and specialises in leasing highly qualified staff. Company Z is an engineering firm located in Geneva and needs a

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