Similar flexible bilateral tax regimes had been agreed between Switzerland on one hand and France, Germany, Italy and Liechtenstein on the other. The agreement with Liechtenstein expired on 31 March 2022. The agreements with Germany will expire on 30 June 2022. On 29 June 2022 the agreement with France was extended until 31 October 2022. A new agreement with France that shall replace the current regime is currently negotiated. The end of the agreement with Germany might have tax consequences for the employer and the employee.
Importance of cross-border commuters in Switzerland
Cross-border employees commuting to Switzerland have been of significant importance to Switzerland and cross-border cantons specifically. According to the Federal Statistical Office, in the first quarter of 2022, there have been more than 365,000 cross-border commuters, primarily from France, Italy and Germany.
Generally, commuting cross-border employees are covered by the social security system in the country in which they ordinarily work. If they work in more than one jurisdiction, they are subject to the social security system of their country of residence if they perform a substantial part of their work there. Before the pandemic, the so-called "25% rule" or "no impact rule" applied, i.e., the work was considered substantial if the time spent and remuneration received from the activity in their country of residence accounted for at least 25%. In these cases, the employees had to be insured by the social security institution at their place of residence according to applicable legislation. The employer had to report and pay the pertinent contributions. While this obligation could be delegated to the employee by agreement, the employer remained liable if the employee failed to comply with its obligations.
The general rule of international taxation is that employment income is taxable in the country of residence. However, employment income taxation may also occur in the country of work if at least one of the following qualifiers is met: (i) the cross-border employee (e.g., a French tax resident) is working in another country (e.g., Switzerland) for more than 183 days during the relevant tax period or (ii) the remuneration is paid by an employer of the country of work (e.g., a Swiss employer) or (iii) the remuneration is borne by a permanent establishment of the foreign employer in the country of work (e.g., the Swiss permanent establishment of a French company).
In such cases, cross-border employees' employment income is taxable in the country of work. In the case of working days spent in both countries, employment income will be subject to a working days pro-rata allocation based on the effective (physical) place of work. Further, cross-border employees should trigger wage withholding tax duties (i.e., withholding and reporting) for the Swiss employer, subject to specific bilateral agreements.
Due to restrictions in relation to the COVID-19 pandemic, the European social security coordination law, which also applies in Switzerland, was applied flexibly. Early on, the EU recommended that the insurance status of commuting cross-border employees (subject to the Agreement of the Free Movement of Persons (AFMP) or EFTA Convention) should not change as a result of COVID-19 restrictions simply because the cross-border employees worked from home as a consequence of the pandemic.
This flexible approach was extended several times and was supposed to expire on 30 June 2022. However, the EU Administrative Commission for the Coordination of Social Security Systems (including social security authority representatives of all EEA member states and Switzerland) decided on 14 June 2022 to extend the flexible approach regarding the coordination of social security systems until 31 December 2022.
From a tax perspective, Switzerland entered into specific agreements, notably with France, Germany, Italy and Liechtenstein, regarding the impact of Covid-19 on cross-border employees, according to which working days spent by cross-border employees in their country of residence would count as working days spent in the country of work, a legal fiction aimed at maintaining the status-quo despite the lack of physical presence of cross-border employees in the country of work. The agreement with Liechtenstein has expired on 31 March 2022. The agreement with Germany will no longer apply as of 30 June 2022. The agreement with France has just been extended until 31 October 2022, and discussions are ongoing as to whether a new agreement would enter into force thereafter. The agreement with Italy provides for a tacit renewal and there is no currently foreseen expiration.
Further, although not part of the agreements, the question of a potential permanent establishment of the employer in the country of residence of cross-border employees (e.g., a potential foreign permanent establishment of a Swiss employer due to home-office work from cross-border employees) was, to our best knowledge, treated until now with pragmatism by the competent tax authorities.
A glance into the future
As of 1 January 2023, the existing rules concerning social security coordination law will be interpreted or modified to ensure that a certain extent of remote work performed from an employee's country of residence is permitted without changing the applicable social security system. How such change will be implemented will be negotiated and prepared in the coming months at a European level and between Switzerland and its neighboring countries. The Swiss Social Security Administration announced that it would provide further information about the specific implementation in due time.
The Swiss Social Security Administration's announcement highlights the importance of flexible working and shows that remote work truly has found its place in Europe. With the extension, employers have more time to assess the social security aspects of their cross-border employment relationships. We recommend that employers use the transitional phase to timely assess post-COVID-19 social security risks associated with remote working cross-border employees.
From a tax perspective, due to the end of the specific agreement regarding cross-border employees with Germany, Swiss employers currently considering implementing or having already implemented home-office policies should not only ensure up-to-date wage withholding tax process, including effective counting of working days spent in Switzerland but also carefully review whether home-office policies may trigger foreign tax exposure and related reporting duties, due to the potential recognition of permanent foreign establishments. In the absence of clear practice regarding the potential qualification of home offices as permanent establishments, related developments should be carefully monitored. The status and validity of the agreements between Switzerland on the one hand and France and Italy on the other should equally be carefully monitored.