The notion of domicile and residence under Swiss internal tax lawII

THE NOTION OF DOMICILE AND RESIDENCE UNDER SWISS INTERNAL TAX LAW

According to articles 3 and 6 of the Federal Act on Direct Federal Taxation of 14 December 1990 (LIFD; RS 642.11), individuals domiciled or resident have unlimited tax liability in Switzerland. This means that when they are considered under tax law to be domiciled or staying in Switzerland, they are taxed on their worldwide income.

For the purposes of tax law, a person has their domicile in Switzerland when they live in the country with the intention of making it their long-term home. A person is staying in Switzerland when, without any significant interruption, they live there for at least 30 days and carry out gainful activity.

The Federal Act on the Harmonization of Direct Taxation at Cantonal and Communal Levels of 14 December 1990 (LHID; RS 642.14), covering cantonal and communal taxes, contains almost identical provisions although the concepts of domicile and residence do not exactly mirror those established for direct federal taxation.

A) Tax domiciliation in Switzerland

Domiciliation in tax legislation is an autonomous civil law notion, although the definition given by tax law is very close to article 23 of the Swiss Civil Code.

Two cumulative criteria are required to establish a tax domicile. The first, living in a given place, is objective while the second, the intention to make a long-term home there, is subjective. To fulfil the first condition, an individual needs to be present in a certain place. The place in question is where the person spends their nights, and not where they work during the daytime. The law does not give any minimum duration, and it does not matter if the person only stays for a set or limited amount of time.

The second condition refers to where the centre of the individual’s personal and economic interests is located. Once again, there is no requirement for the taxpayer to intend to make this place the centre of their vital interests for an unlimited period of time or indefinitely.

Please also note that the place where a person files their paperwork or exercises their political rights (political domicile) is not decisive. It is simply a pointer towards their tax domicile. Similarly, when deciding where an individual’s personal interests are located, the authorities look at objective criteria and not solely declarations by the individual. Consequently, it is not possible to freely choose your tax domicile.

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Lastly, a principle of persistence applies to tax domiciles: for the authorities to accept that someone has a new tax domicile, it is not sufficient for them to cut ties with their former tax domicile, they need to have actually established a new domicile. Consequently, a taxpayer who leaves their home in Switzerland and moves abroad will continue to have their tax domicile in the country until they have established a new tax domicile in their new country. This would apply, for example, to a globe-trotter who officially leaves Switzerland to live on a boat and travel round the world. They still have unlimited tax liability in Switzerland until they establish a tax domicile in a new country, even if they live on their boat for several years.

So, a taxpayer holding a permit B or L who decides to move to Switzerland and work in the country (whether for a Swiss or foreign employer, and whether as a posted worker or employee), accompanied by their spouse and children, will in most cases be considered to have their tax domicile in Switzerland. The fact that the family may only intend to stay here for a few months is irrelevant.

The situation is however more complicated if the taxpayer regularly moves between different locations. For example, imagine a worker working in Switzerland and holding a permit B or L. They do not have cross-border worker status, but they do travel back to their spouse and children in another country very regularly (every weekend, for example). There is a dichotomy here between the economic interests created by carrying out gainful activity (in Switzerland) and the personal interests at the family home (in the other country). Case law on this subject is complex but can be summarised as follows (Federal Supreme Court decision 2C_580/2017 on 16 March 2018): “If a person stays in two locations alternately, which is the case in particular when their place of work is not the same as their habitual place of residence, their tax domicile is in the place with which they have the closest ties (ATF 132 I 29 with reference to 4.2 p.36; 131 I 145 with reference to 4.1 p.149 and following; 125 I 458 with reference to 2c p.467). For a taxpayer carrying out a dependent gainful activity, tax domicile is generally located either at their place of work, or at the place from which they carry out their gainful activity on a day-to-day basis, for a long or unlimited period of time, in order to support themself (see ATF 132 I 29 with reference to 4.2 p.36; 125 I 54 with reference to 2b p.56). For taxpayers carrying out a dependent gainful activity but not in a director’s role, who are married or living with a partner, the ties created by their personal and family relationships (spouse/partner and children) are considered to be stronger than the links they form at work; consequently, they are in principle considered to have their tax domicile at the family home, even if they only return there at the weekend and during their free time (see ATF 132 I 29 with reference to 4.2 p.36;

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decision 2C_163/2015 of 20 August 2015 with reference to 5.2). The situation is in principle different for company directors: the centre of their interests is presumed to be at their place of work. This presumption can be reversed by proving that the taxpayer, although a company director, has particularly strong links with the place where their family home is located (see ATF 132 I 29 with reference to 4.2 p.37 and 5.3 p.41; decision 2C_301/2017 of 13 November 2017 with reference to 4.2).

The principles above also apply to taxpayers who are single, separated or widowed, because case law treats their parents and siblings as part of their family. Here however, the criteria that lead the Federal Supreme Court to designate not the place where someone works but the place where their family lives must be applied particularly strictly, because most people’s links with their parents and siblings are less close than their links with their spouse or partner and their children (ATF 125 I 54 with reference to 2b/bb p.57). In such cases, the length of the working relationship and the taxpayer’s age are also particularly important. The Federal Supreme Court considers that a taxpayer generally has a more distant relationship with their parents when they are over thirty years old and have been living continually at the place where they work for more than five years (see ATF 125 I 54 with reference to 2b/bb p.57; decisions 2C_311/2014 of 30 April 2015 with reference to 2.2; 2C_854/2013 of 12 February 2014 with reference to 5.1 and the references quoted).

So, if the taxpayer is over thirty years old and carries out a dependent gainful activity, their main tax domicile will be assumed to be at the place where they live during the week, and from which they travel to their place of work. This presumption can be reversed if the taxpayer travels regularly (at least once a week) to the home of members of their family and can demonstrate that they have a particularly close relationship with them, and that they also have other personal and social relationships at this location (see decisions 2C_1045/2016 of 3 August 2017 with reference to 3.4 and the decisions quoted; 2C_518/2011 of 1 February 2012 with reference to 2.2).” It is important to note that this decision was handed down in a case involving intercantonal rather than international taxation. However, for the purposes of international tax law, just as for federal direct taxation, the principle of a single tax domicile should be applied in the first instance. This means that a person cannot have alternating tax domiciles or a tax domicile that changes seasonally. Also, international tax law makes no reference to a “director’s role”, so the fact that someone has a very demanding job (a position of responsibility with numerous staff reporting to them) is not automatically assumed to mean that their social and family relationships take second place. Quite the opposite in fact – in our opinion it is important to look at personal relationships before working relationships.

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From the information laid out above, we can deduce that a taxpayer holding a permit B or L, who has no links with Switzerland other than their position with a local employer and who regularly returns to their home country (for example at the weekend) to their family who still live there cannot be considered to have their tax domicile in Switzerland, regardless of whether they are a company director, because they have no intention of making Switzerland the centre of their vital interests. Of course, each case must be analysed on its own merits, based on objective criteria (for example, whether the person owns property in Switzerland, where they receive their mail and telephone calls, where they are registered for health insurance, their involvement in clubs and leisure activities, whether the family holidays in or travels to Switzerland, etc.).

B) Tax residency in Switzerland

As has been set out above, unlimited tax liability in Switzerland can be based not only on tax domicile but also on qualified residence. So, an individual who stays and works in Switzerland for thirty days without any notable interruption is considered to be a Swiss tax resident. We must begin by saying that this provision should be applied restrictively and as an additional consideration. Regular interruptions, even if they are brief, are sufficient to block unlimited tax liability. So residence cannot be established by adding together short periods of time, there needs to be a notion of continuity. Consequently, a posted worker, cross-border worker or even a worker employed by a Swiss company for short periods during the week, for example, is not considered to be tax resident in Switzerland (article 91 of LIFD).

In principle, the following workers are automatically excluded: those for whom a notification procedure is carried out in Switzerland and those who hold a 120-day or 4-month authorisation and return home at the weekend or do not stay in Switzerland for more than 30 days at a time.

Please note that if the minimum period is exceeded, unlimited tax liability in Switzerland is applied retroactively from the first day of the stay in the country. When calculating the number of days, arrival and departure days, Saturdays, Sundays, public holidays and any holiday time spent in Switzerland are taken into account.

C) Tax consequences and burden of proof

If unlimited tax liability applies, the worker will be taxed in Switzerland on their worldwide income (federal, cantonal and communal taxes) and on their worldwide assets (cantonal and communal taxes only), subject to exceptions laid down by Swiss internal law (for example, regarding income and assets relating to

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real property located abroad and permanent establishments/businesses again located outside Switzerland) and according to the rules laid down in agreements signed to prevent double taxation.

Liability starts on the day the taxpayer taxes up residence in Switzerland or begins their stay for the purposes of tax law (LIFD, article 8).

At federal level, posted workers with unlimited tax liability in Switzerland who hold directors’ roles and specialists with specific professional qualifications can claim additional deductions as set out in article 2 paragraph 2 of the FDF Ordinance on the Deduction of Special Professional Expenses by Expatriates for the purposes of Direct Federal Taxation of 1 January 2016 (ExpatO; RS 642.118.3) as well as professional expenses as laid out in the Ordinance of 10 February 1993 on professional expenses. This relates in particular to the costs of: moving house, the return journey at the beginning and end of the working relationship, accommodation in Switzerland if the expatriate maintains a permanent home for their personal use in the foreign country, and schooling in a foreign language at a private school for children under 18, if state schools do not offer teaching in their native language. There are however restrictive conditions.

Since 2016 however, specialists employed on a temporary basis in Switzerland no longer qualify for ExpatO.

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