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The Competent Authorities of Switzerland and Germany have reached written agreement on several aspects of the Swiss-German tax treaty (Federal Ministry of Finance directive dated 7 July 1997 - RIW 1997, 1058). The agreement's three sections deal with the taxation of cross-border commuters (Grenzgaenger), the taxation of corporate senior executives, and the taxation of German residents employed by Swiss corporations other than as senior executives who derive income from work performed in third countries (or presumably also in Germany).
We limit our report to the taxation of corporate senior executives. The German tax authorities direct that the double taxation of senior executives resident in Germany is to be avoided in part by the exemption method and in part by the credit method from 1996 on.
1. Definition of senior executives
"Senior executive" (leitender Angestellte) under Article 15 (4) of the tax treaty is defined to include directors, deputy directors, vice directors, and general directors. As a rule, such persons will be entered in the Commercial Register. Persons not so entered can still come under the provision provided they have a general power of attorney (Prokura) or other extensive authority to represent the company, e.g. signature authority. Persons not entered in the Commercial Register must provide confirmation from their employers as to the scope of their authority.
2. Taxation in the employer's treaty state
Senior executives resident in one treaty state but employed by a corporation resident in the other treaty state are liable to tax by their employer's country of residence with respect to all remuneration from the employment relationship. This includes remuneration earned for services performed in third countries or in the senior executive's country of residence. Exceptions apply if the duties of the senior executive are defined to exclude work in the employer's country of residence or if the senior executive is a cross-border commuter.
Article 15 (4) places no limits on the right of the senior executive's country of residence to tax his remuneration. Such limits are thus found only in the article on avoidance of double taxation.
3. Avoidance of double taxation
Germany will avoid double taxation of the earnings of senior executives of Swiss corporations by means of the exemption method only to the extent the sums in question relate to services performed in Switzerland. Double taxation of compensation paid for services performed in Germany or in third countries will, on the other hand, be avoided by a credit for Swiss tax paid with respect thereto. The previous practice of granting an exemption for all compensation earned by senior executives of Swiss corporations will be discontinued for income earned from 1996 onwards.
Switzerland is not in agreement with the new German view and has reserved the right to raise the matter at the negotiating table when the tax treaty is next revised.
4. Management service agreements
The directive reports that discussions with the Swiss tax authorities on this topic are still pending.
Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.
