Swiss frontier workers and remote working in Germany, France and Italy: the tax implications
A lot of companies have already adopted hybrid models of work, which allow them to reduce the overall space they need and bring fewer workers into offices every day. Remote work has also reduced business travelling, as the extensive use of videoconferencing during the pandemic has enhanced the acceptance of virtual meetings everywhere.
In those situations where employees are no longer requested to work 100% on-site at their Swiss offices, tax law, labour law and social security issues arise for a great number of cross-border commuter workers who are resident in a foreign border zone and are gainfully employed withing the neighbouring border zones of Switzerland.
During the pandemic period, on 3 April 2020, the OECD Secretariat issued some guidelines on the application of international tax treaty rules in exceptional circumstances, where cross-border workers or individuals suffered from the unprecedented measures imposed by governments, including travel restrictions.
However, the actions exceptionally and provisionally taken by governments, due to the covid-19 emergency, have come to an end. The new widespread forms of remote working and the place where the employee is located might displace existing taxing rights and create new or different tax obligations over the employee's income in other jurisdictions.
In this article we will shortly examine how working from home might affect frontier workers employed in Switzerland and resident in Germany, France and Italy.
The 1971 double tax agreement between Switzerland and Germany (the "DTA CH-DE") contains a special provision which regulates the taxation of the frontier workers. It stipulates that German resident frontier workers are subject to income tax in their State of residence, i.e., in Germany. At the same time, Switzerland levies a 4.5% tax at source on their salary. The Swiss tax can then be credited against the income tax due in Germany.
The 2020 special agreement
During the COVID-19 pandemic, the lock-down obligations for German resident frontier workers resulted in a consultation agreement between Switzerland and Germany, which entered into force on March 11, 2020, and was renewed several times. According to this agreement, German resident frontier workers retained such a status, even if they had to work remotely from Germany during the pandemic. This agreement was extended until June 30, 2022. As of July 1, 2022, the regular rules for the cross-border workers according to the DTA CH-DE apply.
The DTA CH-DE contains its own definition of the frontier workers. Only employees who regularly return from their place of work to their place of residence are considered as frontier workers. According to the Ordinance on the implementation of the Consultation agreement between Switzerland and Germany, an employee is considered to regularly return home, if she/he returns at least one day per week or five days per month from her/his place of residence to her/his place of work and back. In other words, in case of full-time employment, four days of remote work per week are allowed, provided that an employee regularly returns from her/his place of work to the place of residence. However, the cross-border worker status shall cease if the employee does not return to her/his place of residence on more than 60 working days per year in the case of full-time employment.
It is important to note that according to the German case-law, the status of a frontier worker should be confirmed even in the case of the minor employment of 3 working days per month. The German Federal Finance Court (the "FFC") states that no exact minimum of border crossings per week or month is defined by the DTA CH-DE. Therefore, the Ordinance on the implementation of the Consultation Agreement providing the minimum of returns per week and month contradicts the DTA CH-DE. The DTA CH-DE only requires that a frontier worker returns to his/her place of residence regularly. The FFC specifies that only the total number of working days can be decisive for the assessment of whether an employee has regularly returned to his place of residence or not. Accordingly, a regular and not merely occasional return must only exist in relation to the days of employment and not in relation to the entire year.
In general, the German authorities have a more generous approach in connection with the granting of the frontier worker status than the Swiss tax authorities. These latter may challenge the frontier worker status if the employee works predominantly remotely. Therefore, it is recommended to clarify each personal situations with the Swiss tax authorities and not to only rely on the qualification made by the German tax authorities. Otherwise, a double taxation may arise.
The 1966 double tax agreement between Switzerland and France provides for the taxation of salary income at the place where the professional activity is carried out, which implies territorial presence. Frontier workers are taxed in Switzerland or in France, pro rata to the number of days worked in either country.
A special agreement on cross-border workers, signed in 1983 between the Government of the French Republic and the Swiss Federal Council acting on behalf of the cantons of Bern, Solothurn, Basel-City, Basel-Landschaft, Vaud, Valais, Neuchâtel and Jura (the "8 Cantons"), provides for a different tax treatment. It gives France, as State of residence, (i) the right to tax 100% of Swiss salaries, and (ii) the obligation to pay back to Switzerland 4.5% of the total compensation.
During the COVID-19 pandemic, the lock-down obligations for French resident frontier workers resulted in a provisional agreement between Switzerland and France, dated May 13, 2020, which was renewed several times. According to this agreement, French resident frontier workers retained such a status, despite a 100% remote work from France. This agreement was extended until December 31, 2022.
As of January 1, 2023, a permanent agreement between Switzerland and France has come into force. It provides that, within the limit of 40% of the working time on the territory of a State, remote working does not jeopardize the status of frontier worker.
Cantons with the right to tax
Therefore, in the cantons where a tax at source is levied on the salaries of frontier workers (all Swiss cantons, except the 8 Cantons), the tax at source will be levied on 100% of the salary paid by the Swiss employer, even if the employees work remotely from France for (maximum) 40% of their working time.
If the remote work rate exceeds 40%, the taxable salary in Switzerland is limited to the time effectively worked at the place of the Swiss employer. The part of the salary related to the activity performed in France (remote working) is taxable in France. For example, for a remote working rate in France of 70% and a monthly salary of CHF 10,000, CHF 3,000 are taxed in Switzerland and CHF 7,000 in France.
Cantons without the right to tax
For the 8 Cantons, if the remote working rate is (maximum) 40%, France will tax the whole Swiss salary and pay 4.5% of the salary to Switzerland. If the remote working rate in France exceeds 40%, the frontier worker status no longer applies and Switzerland resumes its right to tax the salary of the employee, pro rata to the time spent in Switzerland. In the above example, the salary of CHF 3'000 produced in Switzerland would be subject to Swiss tax at source. In this case, France does not pay back 4.5% of the salary to Switzerland.
According to the 1976 double tax agreement between Switzerland and Italy ("DTA CH-ITA"), employment income is taxed only in the State of residence of the taxpayer, unless the employment is exercised in the other contracting State. In this case, salaries, wages and similar remuneration are taxed in both contracting States (i.e., both in the State of residence of the employee and in that where the employment is exercised).
Furthermore, the 1974 special agreement between Switzerland and Italy on frontier workers ("1974 Agreement") provides for a special tax regime for frontier workers. The employment income deriving from the employment exercised in Switzerland is taxed only in Switzerland. In order to qualify as a "frontier worker" for the purposes of the 1974 Agreement, according to the Swiss tax authorities' tax practice, the employee must reside in Italy within 20 km from the Swiss border and must "daily" cross such border to work in one the following three Swiss Cantons: Graubünden, Ticino and Valais.
The 2020 special agreement
Due to the travel restrictions in force during the COVID-19 pandemic, the Swiss and Italian authorities concluded a special agreement, dated June 18-19, 2020 ("2020 Agreement"), which regulates the tax treatment of remote working. Such 2020 Agreement, which has been renewed every month until January 2023, established a derogatory regime to the tax treatment for frontier workers as set forth by the 1974 Agreement. According to the 2020 Agreement, frontier workers resident in Italy kept their special tax treatment despite working from home, irrespectively from any thresholds.
Termination of the 2020 special agreement on remote working and the new agreement on cross-border workers
In December 2022, the competent authorities of Switzerland and Italy notified the expiration of the 2020 Agreement on January 31, 2023. Therefore, as of February 1, 2023, cross-border workers will be taxed according to the 1974 Agreement and to the DTA, which do not provide any express regulations on remote working. Therefore, the salary income deriving from employment exercised in Italy should be taxed in Italy, as per the DTA.
Due to the severe consequences arising from this unclear situation, trade unions and employers' organizations are currently urging the governments of the two States to find a solution, aimed at adopting a new special agreement in line with the provisions agreed upon by Switzerland and France.
On December 23, 2020, Switzerland and Italy concluded a new agreement on frontier workers, which provides for the taxation of employment income in both States. This new agreement will soon enter into force and will replace the tax regime under the 1974 Agreement. According to the future tax regime, salaries earned in Switzerland will be taxed up to a maximum of 80% in Switzerland (source State) and 100% in Italy (residence State), with the possibility of claiming a tax credit for taxes already paid abroad.
See the following article on this topic (https://www.altenburger.ch/blog/nuovo-accordo-sui-frontalieri-conto-alla-rovescia).
If you have questions or need assistance with tax matters, with regard to this topic, please do not hesitate to contact our specialists in Geneva, Lugano or Zurich. We will be happy to assist you.