Taxation at sourceIV

We can see that limited liability causes accounting problems in the context of international agreements to prevent double taxation. We will return to this point in detail later.

Finally, it is worth noting that posted workers with limited liability in Switzerland (specialists and directors) can at federal level claim the additional deductions laid down in article 2 paragraph 1 of ExpatO. These cover the cost of travelling between their home abroad and Switzerland, together with reasonable accommodation costs if the expatriate maintains a permanent home for their personal use in a foreign country. There are however restrictive conditions.

TAXATION AT SOURCE

A) Taxation at source for workers resident or domiciled in

Switzerland

Taxation at source differs from ordinary taxation by the way it is collected. The tax is paid not by the person receiving the sum to be taxed (the employee) but by the person paying it (the employer).

Those taxed at source in Switzerland include foreign workers domiciled or staying in Switzerland under a permit B or L (article 83 of LIFD).

This tax collection method has two aims: firstly, it helps fight tax evasion in a situation where, for example, a short-term worker could leave Switzerland without paying their taxes, and secondly it makes life easier for new foreigners arriving in the country who have limited knowledge of Swiss laws and may not speak the national languages.

Holders of settlement permits (permit C) are however taxed under the ordinary system.

It is impossible to cover all the rules relating to taxation at source here. We will limit our comments to the salient points:

1) Taxation at source applies to all revenue from dependent gainful activity (salary, bonus, overtime, profit-sharing schemes, long-service bonuses, meal and transport allowances, etc.). The amount withheld is calculated based on the gross, not the net, salary. This is because social security contributions (first and second pillar), accident and loss of earnings due to illness scheme contributions, the cost of travel to work, allowances for children and other deductions are already integrated into the various tax schedules.

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2) 3) 4) 5)

People who are domiciled or resident in Switzerland can opt to be taxed under the ordinary scheme rather than at source. All they need to do is submit a request. They can then take advantage of all the deductions available under federal and canton laws. However, under a new law, from 2021 this option will be definitive, applying throughout the time they are

liable for taxation at source. There are different tax schedules (which are progressive according to annual salary) depending on the taxpayer’s family situation (married, single, divorced, widowed, etc.) and how many children they have. For example, schedule AO applies to single people without children. A single person will be taxed under schedule H1 if they have one child, and under schedule H2 if they have two children. For married couples with or without children, schedule B or C applies, depending on whether the spouse carries out gainful activity in Switzerland or abroad. Given the way this system works, employees need to inform their employers immediately if their family circumstances change (marriage, divorce, birth of a child, change in the type of permit, etc.). Generally, employees are required to complete a declaration about this at the beginning of each year and return it to their

employer. In certain situations, taxation at source serves only as a guarantee, and the taxpayer (the employee) is subsequently required to file an ordinary tax form. This is assessed based on the ordinary tax rules and schedules. This applies, for example, in Geneva if the employee has property, assets (capital of CHF 82,040 for a single person without a child, CHF 164,080 for a married couple without a child and CHF 164,080 plus CHF 41,020 per child for a single person or married couple with children), other sources of income (from 2021 in place of the current ordinary additional taxation) or a high salary (CHF 120,000 per person from 2021). In Geneva, the process takes the

form of a rectification request (see below). There are also situations in which the employee can file a rectification with the Geneva tax authorities. This mainly applies when the taxpayer is subject to subsequent ordinary taxation, in order for example to declare additional revenue or assets (see point 4), if they can claim certain special deductions (for example third pillar A contributions, training expenses, childcare costs, etc. - note that this system will no longer exist after 2021, and to claim these deductions the taxpayer will have to opt to be taxed under the ordinary scheme, as set out above) or to request an adjustment to schedule C. (Schedule C assumes a theoretical revenue from gainful activity of

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CHF 65,100 for the taxpayer’s spouse. However, the spouse’s actual income may be less than this, especially if they work in France where salaries are lower. This means that schedule C adjustments are particularly important for cross-border workers.) A rectification request must be filed at the latest on 31 March of the year following the tax year in question, accompanied by the required documents.

6) As a final note, we should point out that the taxation at source system is set to undergo a detailed overhaul in 2021, including Federal Contribution Administration circular 45 (AFC) dated 12 June 2019. To find out more about the changes, please read our article.

B) Taxation at source for workers who are not resident or domiciled in Switzerland (limited liability)

Under article 91 of LIFD, workers who, without living or staying in Switzerland, carry out dependent gainful activity in the country for short periods during the week are taxed at source on their income from this activity. This applies regardless of whether they hold a permit C, and even if they are Swiss nationals.

The main groups concerned are workers holding permits L or B who work for a Swiss employer in Switzerland during the week but travel back to a home outside the country at the weekend.

There is a specific tax regime for cross-border workers (permit G), which we will discuss below. Posted workers cannot be taxed at source (see below).

So, the taxpayer’s liability is limited to the income from their gainful activity. They do not have to pay tax on their other foreign income or on their capital (although foreign work income is taken into account when setting tax rates). If the taxpayer has other Swiss income, this will be taxed completely separately, and in this case the tax authorities may subsequently require the taxpayer to file a tax form under the ordinary system.

Under the principle of non-discrimination, if at least 90% of a taxpayer’s gross worldwide income during a particular tax year is taxable in Switzerland (a situation known as “quasi-residence”) and they are subject to taxation at source because they live abroad, they have the right to apply to the relevant tax authority, up until 31 March in the year following the year in question, to be taxed under the ordinary system in the future. In this case, taxation at source serves only as a guarantee, and a taxpayer living abroad is treated in the same way as someone resident and domiciled in Switzerland. They must renew their application each year.

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As discussed above, taxation at source for these workers is limited by doubletaxation agreements.

C) Taxation at source for cross-border workers

Although the term “cross-border worker” has no set definition in law or in agreements, for the purposes of tax law we generally understand it to mean someone who lives near a neighbouring country and crosses the border, usually daily or at least very regularly, to carry out gainful activity there.

The Model Tax Convention on Income and on Capital published by the Organisation for Economic Co-operation and Development (MTC-OECD) does not set out any tax rules for cross-border workers. It leaves states to work out the rules between them, according to local conditions. It is in fact very difficult to set hard and fast rules in this area, and specific solutions have to be found for each situation.

The way cross-border workers are taxed differs depending on the state in which they live and the Swiss canton in which they work.

Switzerland has borders with five states: France, Italy, Germany, Austria and Liechtenstein. It has signed double-taxation conventions and/or specific agreements with each of them. Here, we will limit our discussion to the regimes in place with France, Italy and Germany.

France and Switzerland have signed two separate agreements regarding the tax regime for cross-border workers. In Geneva, under an agreement signed on 29 January 1973, income is taxed in the state in which the work is carried out (taxation at source). To compensate for this, each year Geneva pays the French local authorities a sum equal to 3.5% of gross payroll.

For eight other cantons (Vaud, Basel-City, Basel-Country, Valais, Solothurn, Neuchâtel, Jura and Bern), cross-border workers are taxed in their country of residence, but France pays 4.5% of gross payroll to Switzerland (under an agreement signed on 11 April 1983). Most French cross-border workers travel home each evening. It is however acceptable (according to an exchange of letters between Switzerland and France on 21 and 24 February 2005), for the worker not to go home to France on one day in the week or for a total of 45 days per year (nights spent in Switzerland or on business trips to third countries), primarily for professional reasons. If the period of employment is less than one year, the 45-day ceiling is reduced to 20% of the number of days worked. If the worker is employed part-time for the full year, the 45-day ceiling is reduced in proportion. In addition, the return journey time between the worker’s home and their place of work must not exceed three hours. Lastly, the worker must provide their employer with a

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certificate of tax residence (according to an exchange of letters between Switzerland and France on 5 and 12 July 2007). If any one of these conditions is not fulfilled, the worker is taxed at source in these cantons.

For Italy, income is in principle taxed in the country where the taxpayer works, under an agreement signed on 3 October 1974. The cantons of Valais, Tessin and Grisons do however currently pay 38.8% of the gross tax they collect on Italian cross-border workers’ income to Italy. In December 2015, Switzerland and Italy signed a new agreement on the taxation of cross-border workers. The agreement stated that 70% of income would be taxed in Switzerland and the remaining 30% in Italy, at each country’s usual rates. Switzerland would therefore no longer need to pay tax back to Italy. The agreement has yet to be put into practice, however. Lastly, as regards Germany, income is taxed in the cross-border worker’s state of residence (Double-Taxation Agreement with Germany [DTA with Germany], article 15a). However, the state in which the work is carried out can deduct at source tax of up to 4.5% of gross pay. To avoid double-taxation, in Switzerland the workers concerned are taxed on only 80% of their gross pay. Germany grants a tax credit.

Please note that under the DTA with Germany, if a cross-border worker does not regularly return home after work, they lose their cross-border status. The status is lost if, during a full calendar year of work, their role keeps them in Switzerland overnight on more than 60 days. The worker is then taxed at source in Switzerland based on the standard schedules.

So, cross-border workers are taxed at source in Switzerland as follows:

French cross-border workers except in the cantons of Vaud, Basel-City, Basel-Country, Valais, Solothurn, Neuchâtel, Jura and Bern if they meet the conditions. Weekly cross-border workers, who return to their home country only at the weekend are always taxed at source.

Italian cross-border workers,

German cross-border workers.

There are specific additional tax schedules for Italian and German cross-border workers. Beyond this, cross-border workers can also request an adjustment to schedule C and specific deductions such as third pillar A contributions or childcare costs, although the latter are to be replaced by quasi-resident status in 2021 (see above). Just like residents of Switzerland, cross-border workers will be able to opt to be taxed under the Swiss ordinary tax regime if at least 90% of their worldwide income is generated in Switzerland.

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D) Posted workers and taxation at source

In principle, posted workers (regardless of the residence permit they hold) are not taxed at source because, under the principle of tax substitution, the organisation paying the tax (the employer, in this case) would need to be taxable in Switzerland.

Under article 88 of LIFD, for tax to be withheld at source, the employer must have its domicile, headquarters, actual administration, a permanent establishment or a fixed facility in Switzerland, which is not the case when cross-border services are provided. The authorities take an economic approach in this regard which may end up to taxation at source in Switzerland even if the remuneration is not paid by the branch or the permanent establishment, but the activity can be allocated to the Swiss entity (Commentary on the FDF Ordinance on taxation at source).

In light of the above, there are of course abuses, in particular when the Swiss company receiving the services is the de facto employer of the posted worker (see our discussion of this issue later).

At this stage we will note here that we are in the presence of a de facto employer in Switzerland when the work is temporarily not provided for the company with which the employment contract was signed, but for another company of the

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