Background
With advancing digitalization, and especially during the COVID-19 pandemic, working from home has become increasingly popular for employees. As a result, the place where work is performed is no longer necessarily where the employer is based. From a tax perspective, this means that the right of taxation has shifted from the state in which the employer is domiciled to the state in which the employees are resident. To mitigate the losses in tax revenue that Switzerland might incur, the Swiss Federal Council has proposed a new law, which serves as a national basis for the taxation of teleworking by cross-border commuters. The proposal is still to be approved by the Swiss Parliament. As of now, Switzerland has already concluded agreements with Italy and France.
In depth
On 27 June 2023, Switzerland and France signed a supplementary agreement to the bilateral double taxation treaty that regulates the allocation of the right to tax earned income from teleworking in the country of residence, effective from 1 January 2023. The agreement contains permanent taxation rules for the income of employees working from home, according to which up to 40% of working hours per year can be performed in the form of teleworking, without this affecting the employee's cross-border commuter status or the right of taxation of the country where the employer is a tax resident. As this works both ways, France also has the full right to tax the income if a cross-border commuter resident in Switzerland with a French employer works up to 40% of their working hours from home in Switzerland.
In addition, Switzerland has come to an agreement with Italy, according to which, starting from 1 January 2024, all cross-border commuters within the meaning of the cross-border commuter agreement signed on 23 December 2020 have the option of working up to 25% of their working hours from home in the form of teleworking, without this changing their cross-border commuter status within the meaning of the aforementioned agreement or the right of taxation of the country where the employer is tax resident. The corresponding protocol amending the cross-border commuters agreement with Italy is planned to be signed by 31 May 2024.
The primary objective of the Swiss Federal Council's newly proposed regulations is to provide a national tax basis for teleworking abroad by persons resident in neighboring countries for a Swiss employer, which permits taxation even if the activity is carried out remotely from the country of residence, provided international tax treaties allocate the right of taxation to Switzerland (article 5 paragraph 1 letter abis of the draft of the Direct Federal Tax Act, and article 4 paragraph 2 letter abis of the draft of the Federal Law on the Harmonization of Direct Taxes of the Cantons and Communes). This is mainly for fiscal reasons and to ensure that Switzerland loses as little tax revenue as possible because of teleworking.
Impact and outlook
With the new national basis for taxation of teleworking in the country of residence, it will be necessary to certify which working days were spent working from home. According to the Swiss Federal Council, this certification shall be submitted to the assessment authorities for each tax period based on the third-party reporting obligation in the Direct Federal Tax Act and the Federal Law on the Harmonization of Direct Taxes of the Cantons and Communes. In a further step, these certification obligations will have to be specified in more detail.
Apart from the aforementioned consequences in relation to Italy and France, the new national basis has no practical consequences for the other neighboring states, namely Germany, Liechtenstein, and Austria.
Overall, Switzerland will benefit from the new regulations as they will prevent a loss of tax revenue and strengthen the country's attractiveness as a business location, as companies will be able to make greater use of qualified labor from outside Switzerland's borders.
