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taxation of labor income
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Attractive job market, but...

Switzerland is an attractive labor market for members of many professional groups due to its high wage levels, the way employment income is taxed and its scenic beauty. As a result of the shortage of skilled workers, many Swiss companies are also looking for workers abroad. Purely objective considerations are the focus here.

However, the conclusion that Switzerland is a fundamentally cosmopolitan country is not entirely true. This is particularly true for families who move to Switzerland with underage children. It is not without reason that Switzerland ranks second to last in the global rankings when it comes to child-friendliness. In addition, Switzerland not only has high wages, but also rents and living costs are exorbitantly high.

This is one of the reasons why many families decide to combine the advantages of different countries. Living in Germany and working in Switzerland is a frequently encountered situation. This also results in tax questions regarding other servers, taxation of employment income and membership of one of the two social security systems in question.

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Freedom to settle and work in Switzerland

Switzerland has concluded a package of contracts with the EU, the so-called bilateral contracts. Section 12 of the Agreement on the Free Movement of Persons (FZA) deals with the free movement of persons. According to this, nationals of Switzerland and the member states of the European Union (EU) have the right to freely choose their place of work and residence within the national territories of the contracting parties. The free movement of people is supplemented by rules for the mutual recognition of professional diplomas, the coordination of social security systems and the acquisition of real estate. 

The agreement provides, among other things, for non-discriminatory access to the labor markets of the contracting parties for nationals of the other contracting party. However, asserting this right of freedom of movement is subject to certain conditions. If you are employed, a valid employment contract is required. Self-employed people, however, must be able to prove their independence. 

According to Article 45 of the Charter of Fundamental Rights of the EU, Union citizens have the right to move and reside freely within the territory of the Member States. Without prejudice to specific provisions of the Treaties, any discrimination on grounds of nationality is prohibited within their scope (Article 21(2)). According to Article 16 of the Charter, the freedom to conduct a business is recognized under Union law and national laws and practices.

Through these bilateral agreements, individuals and companies resident in Switzerland, but also EU foreigners in Switzerland, are entitled to the rights resulting from Union citizenship introduced in 1992. Anyone who is an EU citizen and can prove that they have an employment contract with a company based in Switzerland is allowed to settle in Switzerland without further consent. In this case, the method of taxation of labor income must be correctly regulated.

Limited and unlimited tax liability in Switzerland

Regarding the taxation of employment income: Switzerland levies a tax on the worldwide income of natural persons who have a personal or economic affiliation with Switzerland. A person acquires personal affiliation through a place of residence (regardless of whether it is their primary or second residence) or through their habitual residence in Switzerland.

A person has a tax residence in Switzerland if he or she stays in Switzerland for at least 30 days and carries out gainful employment, regardless of temporary interruptions, or stays in Switzerland for at least 90 days and does not carry out any gainful activity. In these cases, the tax right extends not only to the worldwide income of this person, but also to the worldwide income of the spouse or registered life partner. There is no right to choose separate assessments.

The Swiss tax authorities, on the other hand, often take the view that only a primary residence establishes personal affiliation and, moreover, only if this primary residence also provides tax residency in Switzerland within the meaning of the DTA (double taxation agreement). This interpretation is not justified by anything.

The unlimited tax liability based on personal affiliation does not extend to business operations, permanent establishments and real estate abroad. Such income and also that which may not be taxed in Switzerland via a DTA are only taken into account in Switzerland to determine the rate. With regard to debts and interest from foreign assets, there is still a direct influence on Swiss taxes. 

Furthermore, the tax liability based on personal affiliation does not answer the question of whether taxes are due in Switzerland on the income earned. Switzerland could be prevented from exercising its right to taxation due to a DTA. This affects the taxation of employment income. A DTA regulates the determination of residency and the provisions on the individual types of income, and thus which of the two states must forego the exercise of its rights in whole or in part.

The prerequisite for citizens and companies to be able to rely on a DTA is that they have a place of residence or place of business in one of the two contracting states. As paradoxical as it sounds, you have to have a place of residence in order not to be taxed in the country of residence with regard to certain income through a double taxation agreement. 

The authorities of the countries involved can, for example, come to completely different assessments with regard to tax residency. All that remains is a lengthy mutual agreement procedure. This takes place without the involvement of the taxpayer and also without the involvement of the responsible tax authority at the highest state level. The result is only communicated to those involved, not justified.  

Taxation of earned income: multiple unlimited tax liability, residency

If people also have a residence or habitual abode in another country in addition to Switzerland due to personal assignment or residence, they are liable to tax in two or more countries. To ensure that there is no multiple burden when taxing employment income, Switzerland has concluded a bilateral agreement to avoid double taxation (DTA for short) with many, but by no means all, states. Although the DBAs follow a uniform pattern, their content varies greatly from country to country. The agreement with Germany is special, as it focuses on the taxation of employees.

First of all, if there are several places of residence, the center of life interests and thus the tax residence within the meaning of the respective DTA must be determined. You primarily follow social contacts, especially where your family or life partner lives. Membership in clubs, social commitment, voluntary work, etc. can also be indicators of determining the center of one's life interests.

The location of the assets and other economic interests are further criteria for determining the center. If weighing up all the criteria does not lead to a clear result, nationality decides. But there are also people who have multiple nationalities. EU citizens, for example, always have at least two citizenships: national, for example German, and EU citizenship.

The tax residency

Nevertheless, it is almost always possible to determine tax residency. However, this often only happens retrospectively and then when the employment income is taxed with retroactive tax effect for several years.

If the German tax authorities have doubts as to whether an employee registered in Switzerland is actually resident there, for example because he has relatives in Germany and often crosses the border, he may drive a car with a German license plate, he maintains a bank account in Germany, is an electricity or gas customer who pays rent for another person; The discussions can then become very difficult and often lead to high additional payments, which can only be challenged through lengthy and expensive proceedings before the tax court.

Different taxation depending on the type of right of establishment

Switzerland has various residence permits for nationals of EU/EFTA member states

 

Only ID C entitles you to the full regular tax assessment in Switzerland when it comes to taxing your employment income. Holders of ID card B may be required to submit a tax return for regular assessment if their income exceeds CHF 120.000. People who earn at least 90% of their income in Switzerland can be assessed if they apply in a timely and formal manner. Furthermore, employees cannot, for example, make tax-deductible payments into the pension fund or claim possible purchases (retroactively for 5 years) into the Swiss social security system to deduct tax. They are also not granted any other tax advantages. The question arises as to whether this is compatible with the rights under the AFMP and with the regulations in the double taxation agreements (DTA). 

§ 2 of the FZA prohibits the Diskriminierung of EU nationals based on their nationality who are legally residing in Switzerland. However, this is the case when withholding tax is applied and also when the proper assessment is refused or even if the application is submitted late. These restrictive laws do not apply to Swiss nationals.

DBA and equal treatment

To the extent that a DTA exists, Switzerland guarantees equal treatment with nationals of the contracting state in the DTA. Article 25 of the DTA Germany-Switzerland reads, for example: 

The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is different or more burdensome than the taxation and connected requirements to which the nationals of that other State under like circumstances are or may be subjected.

Article 25 paragraph 4 contains an analogous regulation for the taxation of companies. Here too, there should be no disadvantages if a person from Germany invests in a Swiss company. 

 

DTAs are, by their nature, agreements under international law. An international law norm that Switzerland has adopted becomes part of the Swiss legal system and thus acquires domestic validity. The Federal Constitution requires the federal government and cantons to observe international law. In the hierarchy of norms, international law generally takes precedence over domestic law. The legal basis for this is Article 5 of the  federal Constitution and Article 26 of the Vienna Convention. 

The requirement of equal treatment under the DTA therefore takes precedence over conflicting regulations in the Swiss Federal Taxation Act (DBG). Such conflicting regulations can be found, for example, in the already mentioned Articles 83-85 DBG on the basic withholding taxation of foreign employees. 

This means that limiting the right to ordinary assessment only for Swiss and foreigners with a C permit is not legal. Anyone who, as a foreigner, is interested in the regular assessment when taxing their employment income because it saves them taxes should rely on their rights.

Withholding tax for foreign workers

In Article 83 DBG, the Swiss tax law distinguishes between Swiss nationals (regardless of where they are based) and persons who, as foreign employees, have a tax residence or residence in Switzerland without a settlement permit. Spouses who live in a legally and actually unseparated marriage are not subject to withholding tax as long as one of the spouses has Swiss citizenship or a permanent residence permit.

Other foreigners living in Switzerland are subject to different cantonal withholding taxes when it comes to taxing their income from employment and are only entitled to be properly assessed in exceptional cases and thus to be able to claim benefits from a pension fund for tax purposes, for example. At least that is the view of most tax authorities. However, this is not correct.

The question of whether a person has a settlement permit or not has tax implications. However, anyone who is an EU citizen meets the necessary additional requirements and can, for example, prove that they have an employment contract with a Swiss company, has the freedom of establishment in Switzerland based on higher law and does not obtain this through the approval of a Swiss authority.

Articles 83–85 DBG are therefore not applicable to EU citizens. Swiss tax law, on the other hand, even differentiates according to the type of establishment.approval“, whereby the original authorization under EU law is not dealt with at all and is ignored in taxation.

Special Withholding Tax

There is no objection to the special withholding tax of 4,5% for cross-border commuters within the meaning of Article 15a DBA Germany. This tax is regulated in the DTA and can also be offset against the local income tax in Germany if the taxpayer is taxed in Germany at all when taxing his or her employment income. The prerequisite for the deduction, which is limited to 4,5%, is a certificate of residence issued by the German tax office, which, contrary to what the name suggests, does not determine residence within the meaning of Article 4 DBA.

When the forms are processed, no check is made regarding the center of vital interests. If so, then only for the time of processing, but not for the future and therefore not for the conditions that actually apply to taxation. Although changes in the actual circumstances must be reported to the tax authorities, the assessment of residency is rarely about changes in actual, external circumstances, but rather about developments in the social and emotional area.

Implementation of withholding tax, transition to ordinary assessment

From a Swiss perspective, cross-border commuters, weekly residents and short-term residents living abroad are subject to withholding tax in accordance with Articles 83-85 for their income from employment earned in Switzerland. The term weekly resident is no more defined than that of cross-border commuter. Weekly residents refer to people who have a place of residence in Switzerland but are not resident in Switzerland within the meaning of the DBA. The term cross-border commuter is known in Switzerland as a category of residence permit (even without employment in Switzerland); In addition, “cross-border commuters” are mentioned in some DTAs as an exception to the normal taxation of employees and are defined in terms of content. 

 

When taxing employment income, withholding tax is levied on wages in Switzerland in the following cases:

  • Employees living in Switzerland but without a residence permit C 
    Tax varies from canton to canton 
  • Cross-border commuters within the meaning of the DBA Switzerland-Germany, 
    Tax 4,5% is credited in Germany
  • Board of Directors (not to be confused with managing directors)
    Tax varies from canton to canton 

 

The employer withholds the tax and pays it to the relevant tax authority. 

For the first time for the tax year 2021, according to Article 99a DBG, all persons subject to withholding tax and with a tax residence in Switzerland can submit an application for a subsequent regular assessment if. 

 

  • at least 90% of their worldwide income, including their spouse's income, is taxable in Switzerland;
  • their situation is comparable to that of a taxable person resident in Switzerland; or
  • such an assessment is necessary in order to claim deductions provided for in a double taxation agreement.

 

However, this application, which must be submitted by March 31 of the following year at the latest within a non-extendable deadline, does not always have to be to the taxpayer's advantage. Anyone who is considering the application in principle should do so before the end of the tax year in order to take tax-reducing measures in good time if necessary.

According to Article 99b DBG, the tax authority can, of its own motion, demand a subsequent regular assessment in favor or detriment of the taxpayer even in so-called adverse circumstances, in particular regarding the flat-rate deductions included in the withholding tax rate.

 

Persons who are subject to withholding tax when taxing their employment income are subsequently assessed in the ordinary procedure if:

  • their gross income reaches or exceeds CHF 120.00 in a tax year; or
  • they have income that is not subject to withholding tax.
  • Anyone living in a legally and actually unseparated marriage with a person living in Switzerland who is not subject to withholding tax is also subject to the subsequent regular assessment.

Swiss legal practice contrary to contract

However, Swiss legal practice looks different. It is required:

A foreign worker's start to work for an employer in Switzerland requires a permit. In principle, the employer must submit the application to obtain the work permit to the responsible cantonal authority in Switzerland. 

 

This is about a permit to stay with gainful employment. In fact, EU citizens have general freedom of establishment if the relevant conditions are met:

 

existence of an employment contract

  • temporary
  • unbefristet

 

Duration of stay or employment:

  • short-term stay or employment
  • permanent residence or employment

 

It is therefore not a matter of granting a permit, but rather of checking whether the additional provisions laid down in the bilateral contracts have been met. 

 

According to the DBG, a person with Swiss citizenship is subject to the statutory assessment and not to withholding tax on their employment income. However, an EU citizen working in Switzerland under otherwise identical conditions will be treated differently with reference to the fact that they may not have a C settlement permit. This contradicts the AFMP and the principle of equal treatment in Article 25 DBA. Accordingly, the nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is different or more burdensome than the taxation or any requirement connected therewith to which the nationals of the other State are subject in the same circumstances. 

 

This means that, contrary to Swiss legal practice, Articles 83 ff. DBG are not applicable to persons who can, for example, rely on the DBA-Germany-Switzerland.

 

In light of the AFMP, the question arises as to why Switzerland believes that a work permit is also required for permanent employment contracts for EU citizens. After all, employment relationships can come into being even without the necessary authorization. If approval is not granted after the employment contract has been concluded, the employer may be liable to pay wages, even if the employee is not allowed to work. 

According to common practice, EU and EFTA nationals who have an employment contract with a Swiss company must still submit application forms in order to obtain an employment contract.permission" to obtain. The procedure is not permitted against EU citizens. Because it clearly contradicts the agreements in the bilateral treaties, which refer to Article 5 of the  federal Constitution and Article 26 of the At least for EU citizens, the Vienna Convention takes precedence over national Swiss laws. EU citizens have a legal right to access the employment market and to settle in Switzerland; they do not require approval from the Swiss authorities. This does not affect the obligation to register properly.

Most Favored Nation Law

Private international law (IPR; conflict of laws) applies to those private law situations that have an international connection. In Switzerland, the relevant rules are codified in the Federal Act on Private International Law of December 18, 1987 (IPRG; SR 291). Some areas are regulated by state treaties. Certain of these have been negotiated within the framework of various bodies, such as the Hague Conference on Private International Law, the UN Commission on International Trade Law (UNCITRAL) or UNIDROIT.

Persons who are subject to Swiss tax law when taxing their employment income can rely on the regulations in the DBG. You can also rely on the FZA and the applicable DBA at the same time. If the regulations contradict each other in terms of content, the taxpayer can rely on the law that favors him most.

Inadmissible co-obligation of the spouse living abroad

In all code civil states, especially the EU states, spouses in the statutory property regime generally have separate property relationships. In addition, in Germany, for example, they are free to agree on the pure separation of property without compensation for gains instead of the statutory property regime. Under civil law, they also have no obligation to provide information about their respective assets and income. To the extent that they carry out joint assessments voluntarily or, for example, have to do so due to Swiss tax laws, this principle is violated.

 

In the case of regular assessment, Switzerland requires the spouse living abroad to disclose their income and assets. However, the Swiss authorities have no sovereign rights to do this. This also applies to Swiss citizens who live abroad and are not subject to tax in Switzerland based on either their personal or economic affiliation.

An employee who is subject to tax in Switzerland has no legally enforceable means of obtaining the information required by Swiss tax law regarding his or her spouse's circumstances. The requirement of the Swiss tax law could therefore prevent him from taking up employment and settling there. In this respect, there is a violation of Section 2 of the AFMP, with the result that EU citizens are not obliged to submit joint assessments in Switzerland.

Conclusion for the withholding taxation of employment income when taxing employment income

Persons with residence and EU citizenship can claim equal treatment with Swiss citizens with regard to their withholding taxed employment income, but do not have to. Therefore, regardless of the deadline of March 31 of the following year, you can apply for the cessation of withholding taxes during the year and are entitled to have your application approved.

You can still apply for the regular assessment by submitting the return after the deadline of March 31st, until the deadline for filing the regular tax return has expired. There is no obligation to file joint assessments with your spouse unless they are themselves taxable in Switzerland.

Jürgen Bächle
Jurgen Bachle

has been working as an independent tax consultant and expert in international tax law since 1989 and has been a member of the board of the German Association of Tax Consultants Baden-Württemberg, DSTVBW, for over 20 years.

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