Digitalisation and the transformation to service-based economies allow larger parts of the workforce to perform their work from any place in the world.
For employers as well as their employees this may cause frictions with national taxation and social security systems that are best addressed in advance and carefully managed.
The following article explores what nonSwiss employers having their employees working remotely from Switzerland should consider.
1. Could an employer be deemed having its place of effective management in Switzerland because of employees working in Switzerland?
A corporation is subject to tax in Switzerland if it has either its statutory domicile or its place of effective management in Switzerland.
According to Swiss case law and administrative practice, the place of effective management of a corporation is the place where its essential corporate decisions are made and it has its center of economic existence. In other words, the place of effective management is where the majority of the day-today management of a corporation is carried out.
What is not relevant to determine a corporation’s place of effective management is therefore the place where purely administrative functions are carried out (eg clerical and accounting work). Moreover, the management and control activities of a corporation’s corporate supervisory (eg shareholders and the board of directors meetings) are also of lesser importance to determine the place of effective management.
A separate fixed place of business within Switzerland is not required, which means that the place of effective management can also be located at the domicile of a managing director.
In practice, it is relatively rare that the Swiss tax authorities argue that the place of effective management of a foreign incorporated corporation is within Switzerland. This may, in particular, become a point of concern if a corporation’s management is conducted by one individual only and such individual is a resident in Switzerland.
Nevertheless, when analysing a corporation’s home office strategy, special attention should be paid to the place of work of the top (operational) management functions, less because of the risk that the employer is considered effectively managed in Switzerland but more because of a permanent establishment risk (cf. question 2).
2. What about a permanent establishment?
A permanent establishment is defined in Swiss tax law as a fixed place of business in which the business of an enterprise is wholly or partly carried out. The definition is thus largely congruent with the permanent establishment definition of art 5 of the OECD Model Convention (OECD-MC).
A fixed place of business requires certain facilities or premises that are used in a nontemporary manner. It is however not necessary that the facilities or premises are specifically designed for a business activity; living quarters, for example, can also constitute a fixed business establishment.
Furthermore, the facilities or premises need to be at the disposal of an enterprise to constitute a permanent establishment of it. In case an employer disposed of the home office of an employee working remotely from Switzerland, such home office might constitute a permanent establishment of the employer.
No clear practice exists with regards to the question when home office is considered to be at the disposal of the employer. Important criteria in this regard are, whether:
- The employee is separately compensated for home office expenditures;
- The employee still has a workspace at the premises of the employer,
- The employer mandates a home office for the employees; and
- The employer provides infrastructure (electronics, furniture) for the home office of the employee.
Switzerland has entered into double taxation agreements with more than 100 jurisdictions. In case the employer is domiciled in a jurisdiction with which Switzerland has entered into a double taxation agreement, it should also be analysed, if the remote working employees are conducting purely auxiliary and preparatory activities, given that most Swiss double taxation agreements provide exceptions for activities that have a preparatory or auxiliary character. The risk of a home office creating a permanent establishment is thus more relevant for employees in managerial functions or outward facing business roles (eg sales).
3. When will the employees become liable for tax in Switzerland?
According to Swiss domestic tax law, an individual is taxable for employment income earned from employment activities performed in Switzerland. Switzerland unilaterally taxing all income earned for employment activities performed in Switzerland thus potentially creates tax liabilities for employees working remotely in Switzerland.
However, Switzerland has a large double taxation agreement network and the double taxation agreements typically include a clause akin to art 15(2) OECDMC. Pursuant to the so-called 183-day rule the salary of an employee remotely working from Switzerland will continue to be taxed only in his country of residence provided that:
- The employee is present in Switzerland for no more than 183 days;
- The remuneration is paid by, or on behalf of, an employer who is not a resident in Switzerland; and
- The remuneration is not borne by a permanent establishment of the employer in Switzerland.
The question of which entity is the employer of the remotely working employee may in certain situations need detailed analysis, as shown below (cf. question 4).
4. Will the income of the remote working employees be subject to a wage withholding tax in Switzerland?
Generally speaking, employment income of employees performing work in Switzerland is subject to a wage withholding tax unless such employees are Swiss citizens or have a so-called settlement permit (which is typically only granted after a stay of at least five years in Switzerland). In case the employer is not resident or does not have a permanent establishment in Switzerland, no wage withholding can apply, and the employee himself must pay the income tax on his/her salary.
Note that should an employee, working for a multinational group, be seconded to a Swiss group company (a secondee), the Swiss group company may qualify as ‘factual employer’ and thus become liable for wage withholding tax, despite the salary still being paid from the formal employer abroad. Criteria to determine whether a group company is to be considered as the ‘factual employer’ of a secondee are:
- The duration of the stay of the secondee (a stay of less than three months is usually harmless);
- The integration of the secondee into the Swiss group company;
- Whether the Swiss group company bears the risk for the performance of the secondee and may instruct the secondee;
- Whether the Swiss group company provides facilities and work material for the secondee; and
- Whether the Swiss group company bears the costs of the secondee through an intra-group recharge.
5. Are social security contributions payable on the salary of employees remotely working in Switzerland?
In principle, every person working in Switzerland is subject to social security contributions of approx 13-14% of their gross employment income. The social security contributions for employed person are for the large part borne half by the employer and half by the employee. The employee share is deducted from the employee salary’s and declared and paid together with the employer’s portion by the employer. In case a person working remotely from Switzerland does not have a Swiss (factual) employer, he must himself pay and declare the Swiss social security contributions.
Switzerland has concluded a social security agreement with the European Union and has entered into more than 40 bilateral social security agreements (including the USA, Canada, Japan, Australia and China). Such social security agreements typically provide that secondees remain subject to the social security systems of their home country for a certain period of time (typically 24 months) provided that certain requirements are met.