Tax Management International Forum (BNA, London);

I. Analysis assuming no treaties or international agreements apply

The comments in this section are based on the assumption that no treaty applies.

A. Swiss tax residence/unlimited Swiss tax liability

Under Swiss domestic tax law an individual becomes subject to taxation in Switzerland as a result of a personal affiliation if he establishes tax domicile (''steuerrechtlichen Wohnsitz'') or tax residence (''steuerrechtlichen Aufenthalt'') in Switzerland.¹ An individual establishes tax domicile in Switzerland if:

The individual has the intention of staying in Switzerland permanently; or
The federal law provides for special legal domicile for the individual.²
An individual establishes tax residence in Switzerland if the individual:
Engages in employment on Swiss territory for at least 30 days; or
Stays on Swiss territory without engaging in an employment for at least 90 days.

In neither case does a temporary absence from Switzerland prevent the establishment of tax residence in Switzerland.³

For purposes of the establishment of tax residence, an employment in Switzerland is any kind of dependent or independent activity performed on Swiss territory with the aim of gaining employment income.⁴

Where an individual has a personal affiliation with Switzerland as a result of the establishment of tax domicile or tax residence, the individual is subject to unlimited Swiss tax liability.⁵ Unlimited Swiss tax liability means that the individual's worldwide income and net wealth are subject to tax in Switzerland, with the exceptions of foreign real estate, foreign businesses and foreign permanent establishments (PEs), and the income derived therefrom.⁶ These exceptions are unilateral exceptions set forth in the domestic tax law.⁷ However, the exempt assets and the income derived therefrom are taken into consideration for purposes of calculating the applicable tax rates

(exemption with progression method).⁸ Unlimited Swiss tax liability commences on the day the individual acquires Swiss domicile or Swiss residence⁹ and ends when the individual passes away or leaves Switzerland for good.¹⁰

The cantons have the authority to levy cantonal/ communal taxes as well as the federal income tax. Hence, an individual who stays temporarily in Switzerland and engages in an employment establishes Swiss tax residence only if he stays within one canton for at least 30 days. Once the individual has exceeded the 30-days threshold within one canton, the cantonal tax administration enters the individual into the cantonal tax register.

B. Employee shareholdings of internationally mobile Employees

If employee stock is acquired in Switzerland on the basis of imported contingent rights, in principle, the entire non-cash benefit is deemed to be taxable income at the time the employee stock is acquired (imported contingent rights to the acquisition of employee stock are instruments that an employee has received in another country, has brought with him to Switzerland and then realises for tax purposes by acquiring employee stock).¹¹

Imported employee options that are taxed at grant in accordance with the applicable cantonal rules can be realised tax-free in Switzerland (imported employee options are options that a taxpayer has been awarded in another country and that are then realised for tax purposes in Switzerland). As a rule, imported employee options that are taxed at vesting or at exercise in accordance with the applicable cantonal rules are subject to tax in Switzerland.¹²

The import of phantom employee shareholdings is, by analogy, subject to the same rule as applies to employee stock acquired in Switzerland on the basis of imported contingent rights.¹³

C. Swiss social security system

As a matter of principle, an individual who performs an employment in Switzerland is subject to the Swiss mandatory social security schemes. However, a person who engages in an employment in Switzerland for a maximum period of three consecutive months per calendar year and who is remunerated by an employer abroad is not subject to the Swiss mandatory social security schemes.¹⁴

An employee posted temporarily to Switzerland by an employer in a state with which Switzerland has not concluded a social security totalisation agreement is subject to the following Swiss mandatory social security schemes:

Old age and survivors' insurance;
Disability insurance;
Loss of income fund/maternity insurance; and
Unemployment insurance.¹⁵

A posted employee whose employer has no presence in Switzerland and who is, therefore, not affiliated with a Swiss social security office is not mandatorily subject to the Swiss occupational pension fund scheme. He may, however, contribute to a Swiss occupational pension fund on a voluntary basis.¹⁶

Because the employer in the non-contracting state has no presence in Switzerland, the employer is not liable for Swiss mandatory social security contributions. Thus, only the posted employee is liable and he must himself, therefore, pay the total mandatory social security contributions directly to the competent Swiss social security office. If the employee is at the same time subject to mandatory social security coverage abroad and Swiss mandatory social security affiliation would place an unreasonable burden on the employee, the employee may file with the competent Swiss social security office a request for exemption from the mandatory Swiss social security schemes referred to above.¹⁷

D. Commercially justified expenses of a Swiss resident Corporation

The basis for the determination of the taxable income of a Swiss resident corporation is its net income reported in the individual commercial financial statements prepared in accordance with Swiss generally accepted accounting principles, i.e., the commercial financial statements are authoritative for the taxable result (the ''authoritative principle'').¹⁸ On the other hand, all commercially justified expenses, i.e., those expenses incurred in the normal course of business, are deductible for purposes of determining taxable net income. The net income set forth in the commercial financial statements may be adjusted for income tax purposes by adding back those expenses that are not commercially justified, such as excessive depreciation and provisions, hidden profit distributions, etc.¹⁹ In the case of corporate groups, expenses are commercially justified if the group corporation that actually incurred the costs or to which the costs relate ultimately bears the expenses. As a general rule, personnel expenses must be borne by the group corporation by which the employee concerned is employed in order to qualify as commercially justified expenses.

In addition to the authoritative principle and the requirement that costs deducted are commercially justified, the ''principle of periodicity'' must be met to ensure the tax deductibility of such costs. The principle of periodicity inherent in Swiss tax law requires a Swiss corporation to account for its income on an accrual basis, i.e., the corporation must avoid understating its net income by deducting expenses other than commercially justified, excessive or out-ofperiod expenses.²⁰ The principle of periodicity also requires that where a Swiss corporation pays deferred employee compensation or employee compensation via equity instruments subject to a vesting period, the Swiss corporation must make provision for the costs associated therewith on a linear basis over the deferred/vesting period in the fiscal years concerned.

E. Swiss transfer pricing rules

Switzerland has not released any specific transfer pricing regulations of its own but has instead adopted the OECD Transfer Pricing Guidelines.²¹ In a letter of March 4, 1997, regarding the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the ''OECD Guidelines''), the Federal Tax Administration provided information on the contents of the OECD Guidelines and encouraged the cantonal tax administrations to apply them when determining transfer prices for multinational companies. Because no geographical restrictions are set forth in the Federal Tax Administration's letter, the Swiss tax authorities also apply the OECD Guidelines to transactions involving non-treaty jurisdictions. Switzerland applies the methods suggested in the OECD Guidelines, i.e., the traditional transactionbased methods (comparable uncontrolled price method, resale price method and cost plus method) and the profit-based methods (profit split method, transactional net margin method and comparable profits methods).

The Federal Tax Administration has also issued administrative directives setting forth ''safe harbour rules'' that enable the Swiss tax authorities to determine transfer prices without requiring any specific documentation or justification, provided the transfer prices comply with the safe harbour rules.²² Of course, Swiss corporations are entitled to provide documentary evidence to the effect that more favorable ''third party prices'' exist.

Swiss domestic tax law does not contain a definition of the arm's-length principle. Nor does it specifically address the issue of transfer pricing between related parties. Inter-company transactions must be determined in accordance with ''third-party prices.'' The tax principle that only commercially justified expenses are tax-deductible for purpose of determining the net taxable income of a Swiss corporation is the legal basis for the adjustment of profits based on the arm's-length principle.²³ The Swiss tax authorities are authorised to adjust the net income as set forth in the commercial financial statement of a Swiss corporation for income tax purposes by adding back expenses that are not commercially justified, hidden profit distributions, etc.²⁴

Pursuant to the established jurisprudence of the Swiss Federal Supreme Court on hidden distributions, a transfer price may be adjusted by the Swiss tax authorities, provided the following (cumulative) conditions are met:

A service is performed that is not compensated by adequate remuneration, so that the service is considered to be a withdrawal of the corporation's funds, since it reduces results declared in the corporation's P&L statement;
The transaction benefits a shareholder or a related party and the granting of the benefit is not based on sound commercial reasons; and
The disparity between the service performed and the remuneration paid was noticeable to the management or the board of directors of the corporation performing the service, so that it may be assumed by the Swiss tax authorities that the preferential treatment was deliberately intended.²⁵

F. FCo currently has no presence in Switzerland

1. CE is sent to Switzerland to meet with third-party distributors that buy FCo's products

(The purpose of the trip is to increase sales of FCo's products in Switzerland. CE remains in Switzerland for five months, moving about the country from time to time and staying in hotel rooms. While working in Switzerland, CE continues to participate in FCo's retirement and stock option programmes.)

a. Swiss tax consequences for CE

The meetings of CE with third-party distributors that buy FCo's products in Switzerland for purposes of increasing sales of FCo's products in Switzerland are considered to constitute a dependent employment on Swiss territory.

If CE stays for at least 30 days within one canton, he will establish Swiss tax residence and be subjected to unlimited tax liability for the length of his stay in Switzerland with respect to cantonal/communal income tax and net wealth tax, as well as federal income tax.

If CE acquires employee stock on the basis of imported contingent rights while he is a Swiss tax resident, in principle the entire non-cash benefit is deemed to be taxable income at the time that he acquires the employee stock.²⁶ Imported employee options that are taxed at grant in accordance with the applicable cantonal rules can be realised tax-free in Switzerland. As a rule, imported employee options that are taxed at vesting or at exercise in accordance with the applicable cantonal rules are subject to tax in Switzerland.²⁷ The import of phantom employee shareholdings is, by analogy, subject to the same rule as applies to employee stock acquired in Switzerland on the basis of imported contingent rights.²⁸

b. Swiss tax consequences for FCo

Based on the above set of facts, FCo has no withholding obligation under Swiss tax law with respect to the remuneration paid to CE while he stays in Switzerland, because FCo has no presence in Switzerland. No other Swiss tax liabilities arise for FCo from the mere fact of sending CE for a period of five months to meet with third-party distributors that buy FCo's products in Switzerland for purposes of increasing sales of FCo's products in Switzerland.

c. Swiss social security consequences for CE

Because CE is posted to Switzerland temporarily by FCo, an employer from a non-contracting state, CE is subject to the following Swiss mandatory social security schemes for the length of his stay in Switzerland:

Old age and survivors' insurance;
Disability insurance;
Loss of income fund/maternity insurance; and
Unemployment insurance.²⁹

CE alone is liable for the mandatory social security contributions. CE must, therefore, pay the total mandatory social security contributions directly to the competent Swiss social security office. It is assumed that CE remains subject to mandatory social security coverage in FCo for the length of his stay. He may, therefore, file with the competent Swiss social security office a request for exemption from the mandatory Swiss social security schemes referred to above, based on the argument that Swiss mandatory social security affiliation would place an unreasonable burden on him.³⁰

d. Swiss social security consequences for FCo

Because FCo has no presence in Switzerland, FCo is not affiliated with a Swiss social security office and is, therefore, not liable for the Swiss mandatory social security contributions owed by CE, assuming CE does not request or is not granted an exemption from Swiss mandatory social security affiliation.

2. CE is sent to Switzerland to visit with thirdparty contract manufacturers in Switzerland

(The purpose of the trip is to find a third-party contract manufacturer that FCo could use to produce FCo's products for export from Switzerland. CE remains in Switzerland for five months, moving about the country from time to time and staying in hotel rooms. Suppose instead that FCo's products would also be produced by the third-party contract manufacturer for the Swiss market.)

a. Swiss tax consequences for CE

The visits of CE with third-party contract manufacturers in Switzerland for purposes of finding a thirdparty contract manufacturer that FCo could use to produce FCo's products for export from Switzerland are considered to constitute a dependent employment on Swiss territory. Alternatively, it is assumed that the purpose of the trip is to find a third-party contract manufacturer that FCo could use also to produce FCo's products for the Swiss market. This second scenario is also considered to be a dependent employment on Swiss territory. The following comments, therefore, apply to both scenarios.

b. Swiss tax consequences for FCo

FCo has no withholding obligation under Swiss tax law with respect to the remuneration paid to CE while he stays in Switzerland, because FCo has no presence in Switzerland. No other Swiss tax liabilities arise for FCo from the two scenarios described above.

c. Swiss social security consequences for CE

See the comments at IF1c., above. 3

d. Swiss social security consequences for FCo

See the comments at IF1d., above.

G. FCo currently has a subsidiary formed under the law of Switzerland (SwissCo) that is operating in Switzerland

1. SwissCo is a distributor in Switzerland of FCo's products and CE is sent to SwissCo to help increase sales of FCo's products in Switzerland

(CE remains in Switzerland for five months and works out of an office at SwissCo's headquarters.)

a. CE remains an employee of FCo

(i). Swiss tax consequences for CE

CE is sent by FCo to SwissCo to help increase sales of FCo's products in Switzerland, which is considered to be a dependent employment on Swiss territory. CE remains an employee of FCo. FCo continues to pay CE his salary while CE remains in Switzerland. CE's help with increasing sales of FCo's products in Switzerland for a limited period of time may be regarded as a project-related assignment. In these circumstances, SwissCo does not qualify as the factual employer of CE.

Under Swiss transfer pricing rules, SwissCo is obliged to remunerate FCo for the work performed by CE under the project-related assignment.

(ii). Swiss tax consequences for FCo

FCo has no withholding obligation under Swiss tax law with respect to the remuneration FCo pays to CE while he stays in Switzerland, because FCo has no presence in Switzerland. Its subsidiary SwissCo is regarded as a separate legal entity. No other Swiss tax liabilities arise for FCo.

(iii). Swiss tax consequences for SwissCo

SwissCo has no withholding obligation under Swiss tax law with respect to the remuneration SwissCo pays to CE while he stays in Switzerland, because SwissCo is not the factual employer of CE. No other Swiss tax liabilities arise for SwissCo.

(iv). Swiss social security consequences for CE

See the comments at IF1c., above.

(v). Swiss social security consequences for FCo

See the comments at IF1d., above.

(vi). Swiss social security consequences for SwissCo

Because SwissCo is not the factual employer of CE, SwissCo has no obligation to pay Swiss social security contributions on the remuneration paid by FCo to CE while CE stays in Switzerland.

b. CE becomes an employee of SwissCo

(i). Swiss tax consequences for CE

CE is sent by FCo to Switzerland to help increase sales of FCo's products in Switzerland, which is considered to be a dependent employment on Swiss territory. CE becomes an employee of SwissCo. Hence, SwissCo qualifies as the formal employer of CE.

If CE acquires employee stock on the basis of imported contingent rights while he is a Swiss tax resident, in principle the entire non-cash benefit is deemed to be taxable income at the time he acquires the employee stock.³¹ Imported employee options that are taxed at grant in accordance with the applicable cantonal rules can be realised tax-free in Switzerland. As a rule, imported employee options that are taxed at vesting or at exercise in accordance with the applicable cantonal rules are subject to tax in Switzerland. ³² The import of phantom employee shareholdings is, by analogy, subject to the same rule as applies to employee stock acquired in Switzerland on the basis of imported contingent rights.³³

(ii). Swiss tax consequences for FCo

FCo has no withholding obligation under Swiss tax law with respect to the remuneration SwissCo pays to CE, because FCo is not the employer of CE while he stays in Switzerland. No other Swiss tax liabilities arise for FCo.

(iii). Swiss tax consequences for SwissCo

SwissCo, the Swiss resident employer of CE, has an obligation to withhold tax at source on the remuneration it pays to CE as well as on taxable income derived by CE from employee shareholdings while he stays in Switzerland (see IG1b(i)., above), because SwissCo is the formal employer of CE.

(iv). Swiss social security consequences for CE

Because CE is posted temporarily by FCo, an employer from a non-contracting state, to Switzerland, CE is subject to the following Swiss mandatory social security schemes for the length of his stay in Switzerland:

Old age and survivors' insurance;
Disability insurance;
Loss of income fund/maternity insurance; and
Unemployment insurance.³⁴

CE may file with the competent Swiss social security office a request for exemption from the mandatory Swiss social security schemes referred to above, based on the argument that Swiss mandatory social security affiliation would place an unreasonable burden on him.³⁵

(v). Swiss social security consequences for FCo

Because FCo is not the employer of CE while he stays in Switzerland, FCo has no obligation to pay Swiss social security contributions.

(vi). Swiss social security consequences for SwissCo

SwissCo, the formal employer of CE, is liable for the Swiss mandatory social security contributions owed on the remuneration it pays to CE while he stays in Switzerland, as well as on taxable income derived by CE from employee shareholdings (see IF1b(i)., above). SwissCo must deduct the employee's share of the Swiss mandatory social security contributions from the remuneration it pays to CE while he stays in Switzerland and pay both the employee's and the employer's share of the Swiss social security contributions to the competent social security office.

c. CE is seconded to SwissCo

CE is seconded by FCo to SwissCo. There are three possible ''secondment'' (''Entsendung'') scenarios under the Federal Law on Secondment of October 8, 1999. Under the first scenario, the foreign employer ''sends'' an employee to Switzerland in order to perform certain services on behalf and for the account of the employer. Under the second scenario, the foreign employer ''sends'' an employee—who remains an employee of the foreign employer — temporarily to a Swiss branch of the employer or a Swiss group company for the benefit of the Swiss branch or the Swiss group company. The work performed by the employee for the benefit of the Swiss branch or the Swiss group company is not regarded as a project-related assignment. The employment directives are given to the employee by the Swiss branch or the Swiss group company (the factual employer). Under the third scenario, a foreign business engaged in personnel leasing ''sends'' an employee to work for a Swiss resident company.

The ''secondment'' of CE to SwissCo falls within the scope of the second scenario outlined above. During his stay in Switzerland, CE remains an employee of FCo and continues to receive his salary from FCo. CE is sent to SwissCo for the benefit of SwissCo. The work performed by CE for the benefit of SwissCo may not be regarded as a project-related assignment. In these circumstances, SwissCo qualifies as the factual employer of CE.

Under Swiss transfer pricing rules, SwissCo is obliged to remunerate FCo for the work performed by CE while he stays in Switzerland.

(i). Swiss tax consequences for CE

(ii). Swiss tax consequences for FCo

FCo has no withholding obligation under Swiss tax law with respect to the remuneration FCo pays to CE while he stays in Switzerland, first because FCo has no presence in Switzerland — its subsidiary SwissCo is regarded as a separate legal entity—and secondly because SwissCo is the factual employer.

(iii). Swiss tax consequences for SwissCo

SwissCo, the Swiss resident factual employer of CE, has an obligation to withhold the tax at source on the remuneration it pays to FCo for the worked performed by CE while he stays in Switzerland; at a minimum, the tax at source must be withheld by SwissCo on the remuneration FCo pays to CE while he stays in Switzerland.

(iv). Swiss social security consequences for CE

See the comments at IG1b(iv)., above.

(v). Swiss social security consequences for FCo

FCo has no obligation to pay Swiss social security contributions with respect to the remuneration FCo pays to CE while he stays in Switzerland, first because FCo has no presence in Switzerland — its subsidiary SwissCo is regarded as a separate legal entity — and secondly because SwissCo is the factual employer.

(vi). Swiss social security consequences for SwissCo

SwissCo, the factual employer of CE, is liable for the Swiss mandatory social security contributions on the remuneration it pays to FCo for the worked performed by CE while he stays in Switzerland, at a minimum on the remuneration FCo pays to CE while he stays in Switzerland.

2. SwissCo is a distributor in Switzerland of FCo's products and is undergoing a very intensive audit by the Swiss tax authorities

(The tax authorities have mentioned to SwissCo personnel the possibility of issuing to SwissCo a notice of a substantial tax deficiency. CE is sent to SwissCo to help negotiate a satisfactory settlement with the Swiss tax authorities. CE remains in Switzerland for five months and remains an employee of FCo during his entire time in Switzerland. While working in Switzerland, CE continues to participate in FCo's retirement and stock option programmes.)

a. Swiss tax consequences for CE

CE is sent by FCo to Switzerland to support SwissCo in a tax audit, which is considered to be a dependent employment on Swiss territory. CE remains an employee of FCo and continues to receive his salary from FCo while he stays in Switzerland. The support of CE in the tax audit of SwissCo for a limited period of time may be regarded as a project-related assignment. In these circumstances, SwissCo does not qualify as the factual employer of CE.

Under Swiss transfer pricing rules SwissCo is obliged to remunerate FCo for the work performed by CE under the project-related assignment.

b. Swiss tax consequences for FCo

c. Swiss tax consequences for SwissCo

SwissCo has no withholding obligation under Swiss tax law with respect to the remuneration FCo pays to CE while he stays in Switzerland, because SwissCo is not the factual employer of CE. No other Swiss tax liabilities arise for SwissCo.

d. Swiss social security consequences for CE

See the comments at IF1c., above.

e. Swiss social security consequences for FCo

See the comments at IF1d., above.

f. Swiss social security consequences for SwissCo

Because SwissCo is not the factual employer of CE, SwissCo has no obligation to pay Swiss social security contributions on the remuneration paid by FCo to CE while he stays in Switzerland.

II. Analysis assuming an income tax treaty and a totalisation agreement apply

A. Swiss limited taxation

To prevent or alleviate the effects of double taxation, Switzerland has entered into over 70 double taxation agreements, the overwhelming majority of which follow the OECD Model Tax Convention (OECD Model), whereby Switzerland uses the exemption method. Article 15 of the OECD Model governs remuneration for employment.

Under Article 15(1) of the OECD Model, salary derived by a resident of a contracting state is taxed only in that state unless the employment is exercised in the other contracting state. Under Article 15(2), salary derived by a resident of a Contracting State with respect to employment exercised in the other Contracting State is taxed only in the country of residence if the following three cumulative conditions are met:

The recipient is present in the other state for a period or periods not exceeding an aggregate of 183 days in any twelve months' period commencing or ending in the fiscal year concerned;
The remuneration is paid by, or on behalf of, an employer who is not a resident of the other state; and
The remuneration is not borne by a PE that the employer has in the other state.

B. Employee shareholdings of internationally mobile Employees

If employee stock is acquired in Switzerland on the basis of imported contingent rights, in principle the entire non-cash benefit is deemed to be taxable income at the time the stock is acquired. If, however, the employee can demonstrate in a tax assessment that this income was in fact taxed by another state in the same tax period, it is — subject to tax progression — exempted from taxation insofar as the other state has the right of taxation under the applicable double taxation agreement. The partial exemption is calculated as follows:³⁶

Taxable income x Number of days spent in DTA countries during the vesting period ÷ Number of days in the vesting period as a whole

As a rule, imported employee options that are taxed at grant in accordance with the applicable cantonal rules can be realised free of tax in Switzerland. Imported employee options that are taxed at vesting or at exercise in accordance with the applicable cantonal rules are subject to tax in Switzerland. If, however, the employee can demonstrate in a tax assessment that he was resident during the vesting period in a country with which Switzerland has signed a double taxation agreement, a part of the taxable income is exempted, subject to tax progression. The partial exemption is calculated as follows:³⁷

Taxable income x Number of days spent in DTA countries during the vesting period ÷ Number of days in the vesting period as a whole

C. Swiss social security

The social security agreements concluded by Switzerland are based on the principle that a person is subject to the social insurance legislation of the country where he/she performs work. All social insurance agreements envisage that an employee remains subject to the legislation of the home country when posted temporarily to the territory of another country by a company that is registered in the country of residence. The maximum duration of such a posting varies, depending on the agreement concerned, from 12 months to 60 months. For the duration of their posting, workers are exempt from the compulsory insurance obligations of the country of occupation that are covered in the agreement. Should the duration of the work abroad exceed the planned duration, the competent institutions of both countries can agree to extend the posting based on a joint request submitted by the employer and the employee. For purpose of Swiss social security law, ''posting'' means that a person temporarily performs work exclusively in the host country.³⁸

For the duration of their posting, employees are exempt from the mandatory old-age and survivors' insurance, the invalidity insurance, the income compensation allowances scheme and the unemployment insurance, as well as from the Swiss occupational benefit plan. In addition, they do not qualify for Swiss family allowances. A certificate should be obtained from the social insurance institution that is competent for the employer in the other contracting state, in which it is confirmed that, for the entire duration of 09/11 Tax Management International Forum BNA ISSN 0143-7941 6 the posting to Switzerland, the employee concerned remains subject to the legal provisions of the sending country concerning the branches of insurance covered by the agreement. The certificate should be submitted to the compensation fund of the Swiss employer.³⁹

D. FCo currently has no presence in Switzerland

1. CE is sent to Switzerland to meet with third-party distributors that buy FCo's products

CE is sent by FCo to Switzerland in order to meet third-party distributors that buy FCo's products. The purpose of the trip is to increase sales of FCo's products in Switzerland. CE remains in Switzerland for five months (i.e., less than 183 days), moving around the country from time to time and staying in hotel rooms. The meetings of CE with third-party distributors that buy FCo's products in Switzerland for purpose of increasing sales of FCo's products in Switzerland are considered to constitute a dependent employment on Swiss territory.

a. Swiss tax consequences for CE

In accordance with Article 15(2) of the OECD Model, the remuneration paid by FCo to CE with respect to his employment exercised in Switzerland may only be taxed in FC.

b. Swiss tax consequences for FCo

FCo has no withholding obligation under Swiss tax law with respect to the remuneration paid to CE with respect to his employment exercised in Switzerland, because the remuneration may only be taxed in FC. No other Swiss tax liabilities arise for FCo.

c. Swiss social security consequences for CE

During the posting period in Switzerland, CE is exempt from the mandatory old-age and survivors' insurance, the invalidity insurance, the income compensation allowances scheme and the unemployment insurance, as well as from the Swiss occupational benefit plan. It is assumed that CE is in possession of the necessary certificate issued by the competent social security office in FC.

d. Swiss social security consequences for FCo

FCo is not liable for Swiss social security contributions, first because CE remains affiliated with the FC social security system and secondly because FCo has no presence in Switzerland.

2. CE is sent to Switzerland to visit with thirdparty contract manufacturers in Switzerland

a. Swiss tax consequences for CE

See comments at IID1a., above.

b. Swiss tax consequences for FCo

See comments at IID1b., above.

c. Swiss social security consequences for CE

See comments at IID1c., above.

d. Swiss social security consequences for FCo

See comments at IID1d., above.

E. FCo currently has a subsidiary formed under the law of Switzerland (SwissCo) that is operating in Switzerland

1. SwissCo is a distributor in Switzerland of FCo's products and CE is sent to SwissCo to help increase sales of FCo's products in Switzerland

(CE Remains in Switzerland for five months and works out of an office at SwissCo's headquarters.)

a. CE remains an employee of FCo

CE is sent by FCo to SwissCo to help increase sales of FCo's products in Switzerland for five months (i.e., less than 183 days), which is considered to constitute a dependent employment on Swiss territory. CE remains an employee of FCo. FCo continues to pay to CE his salary while CE remains in Switzerland. CE's help in increasing sales of FCo's products in Switzerland for a limited period of time may be regarded as a project-related assignment. Under these circumstances, SwissCo does not qualify as the factual employer of CE.

Under Swiss transfer pricing rules, SwissCo is obliged to remunerate FCo for the work performed by CE under the project-related assignment.

(i). Swiss tax consequences for CE

In accordance with Article 15(2) of the OECD Model, the remuneration paid by FCo to CE with respect to his employment exercised in Switzerland may only be taxed in FC.

(ii). Swiss tax consequences for FCo

See comments at IID1b., above.

(iii). Swiss tax consequences for SwissCo

SwissCo has no withholding obligation under Swiss tax law with respect to the remuneration paid by FCo to CE with respect to his employment exercised in Switzerland, because the remuneration may only be taxed in FC. No other Swiss tax liabilities arise for SwissCo.

(iv). Swiss social security consequences for CE

See comments at IID1c., above.

(v). Swiss social security consequences for FCo

See comments at IID1d., above.

(vi). Swiss social security consequences for SwissCo

Because CE remains affiliated with the FC social security system and because SwissCo is not the factual employer of CE, SwissCo has no obligation to pay Swiss social security contributions on the remuneration paid by FCo to CE while he stays in Switzerland.

b. CE becomes an employee of SwissCo

(i). Swiss tax consequences for CE In accordance with Article 15(1) of the OECD Model, the remuneration paid by SwissCo to CE may be taxed in Switzerland. (ii). Swiss tax consequences for FCo

(iii). Swiss tax consequences for SwissCo

SwissCo, the Swiss resident employer of CE, has an obligation to withhold tax at source on the remuneration it pays to CE, as well as on that part of the taxable income derived from employee shareholdings that is not exempt under an applicable double taxation agreement (see IIB., above, for the relevant calculations), because SwissCo is the employer of CE.

(iv). Swiss social security consequences for CE

See comments at IID1c., above.

(v). Swiss social security consequences for FCo

FCo is not liable for Swiss social security contributions, first because CE remains affiliated with the FC social security system and secondly because FCo is not the employer of CE while he stays in Switzerland.

(vi). Swiss social security consequences for SwissCo

Because CE remains affiliated with the FC social security system, SwissCo has no obligation to pay Swiss social security contributions on the remuneration paid by SwissCo to CE while he stays in Switzerland.

c. CE is seconded to SwissCo

The ''secondment'' of CE to SwissCo falls within the scope of the second ''secondment'' scenario outlined in IG1c., above. During his stay in Switzerland, CE remains an employee of FCo and continues to receive his salary from FCo. CE is sent to SwissCo for the benefit of SwissCo. The work performed by CE for the benefit of SwissCo may not be regarded as a projectrelated assignment. In these circumstances, SwissCo qualifies as the factual employer of CE.

Under Swiss transfer pricing rules, SwissCo is obliged to remunerate FCo for the work performed by CE while he stays in Switzerland.

(i). Swiss tax consequences for CE

In accordance with Article 15(1) of the OECD Model, the remuneration paid by SwissCo to CE may be taxed in Switzerland.

(ii). Swiss tax consequences for FCo

(iii). Swiss tax consequences for SwissCo

SwissCo, the Swiss resident factual employer of CE, has an obligation to withhold tax at source on the remuneration it pays to FCo for the worked performed by CE while he stays in Switzerland; at a minimum the tax at source must be withheld on the remuneration FCo pays to CE while he stays in Switzerland.

(iv). Swiss social security consequences for CE

See comments at IID1c., above.

(v). Swiss social security consequences for FCo

See comments at IID1d., above.

(vi). Swiss social security consequences for SwissCo

Because CE remains affiliated with the FC social security system, SwissCo has no obligation to pay Swiss social security contributions on the remuneration paid by FCo to CE while he stays in Switzerland.

2. SwissCo is a distributor in Switzerland of FCo's products and is undergoing a very intensive audit by the Swiss tax authorities

CE is sent by FCo to SwissCo to support SwissCo in a tax audit for five months (i.e., less than 183 days), which is considered to constitute a dependent employment on Swiss territory. CE remains an employee of FCo and continues to receive his salary from FCo while he stays in Switzerland. The support of CE in the tax audit of SwissCo for a limited period of time may be regarded as a project-related assignment. In these circumstances, SwissCo does not qualify as the factual employer of CE.

Under Swiss transfer pricing rules, SwissCo is obliged to remunerate FCo for the work performed by CE under the project-related assignment.

a. Swiss tax consequences for CE

In accordance with Article 15(2) of the OECD Model, the remuneration paid by FCo to CE with respect to his employment exercised in Switzerland may only be taxed in FC.

b. Swiss tax consequences for FCo

See comments at IID1b., above.

c. Swiss tax consequences for SwissCo

SwissCo has no withholding obligation under Swiss tax law with respect to the remuneration paid by FCo to CE with respect to CE's employment exercised in Switzerland, because the remuneration may only be taxed in FC. No other Swiss tax liabilities arise for SwissCo.

d. Swiss social security consequences for CE

See comments at IID1c., above.

e. Swiss social security consequences for FCo See comments at IID1d., above.

f. Swiss social security consequences for SwissCo

Footnotes

^{1 Federal Direct Tax Act of Dec. 14, 1990, as amended
(FDTA), Art. 3, para. 1; Federal Tax Harmonization Act of Dec. 14,
1990, as amended (FTHA), Art. 3, para. 1.}

^{2 FDTA, Art. 3, para. 2; FTHA, Art. 3, para. 2.}

^{3 FDTA, Art. 3, para. 3; FTHA, Art. 3, para. 1.}

^{4 Maja Bauer-Balmelli/Lucia Omlin, in: Martin Zweifel/
Peter Athanas (Hrsg.), Kommentar zum Schweizerischen Steuerrecht
I/2b, Art. 3 DBG N 8.}

^{5 FDTA, Art. 6, para. 1.}

^{6 FDTA, Art. 6, para. 1.}

^{7 Maja Bauer-Balmelli/Lucia Omlin, a.a.O., Art. 6 DBG N
5} ^{et seqq}^.

^{8 Maja Bauer-Balmelli/Lucia Omlin, a.a.O., Art. 6 DBG N
8.}

^{9 FDTA, Art. 8, para. 1.}

^{10 FDTA, Art. 8, para. 2.}

^{11 Circular of the Tax Administration of the Canton of
Zurich on the taxation of employee shareholdings for purposes of
the Zurich cantonal and communal taxes and direct federal tax of
Oct. 21, 2009, published in ZStB I No. 13/301 (''Zurich
Circular'').}

^{12 Zurich Circular.}

^{13 Zurich Circular.}

^{14 Circular of the Federal Social Insurance Office,
International Affairs, on social security for posted employees in
relation to non-contracting states of Sept., 2010
(''Circular on Posted Employees'').}

^{15 Circular on Posted Employees.}

^{16 Circular on Posted Employees.}

^{17 Circular on Posted Employees.}

^{18 FDTA, Art. 58, para. 1, sub-para. a.; FTHA, Art. 24,
para. 1.}

^{19 FDTA, Art. 58, para. 1, sub-para. b.; FTHA, Art. 24,
para. 1, sub-para. a.}

^{20 Peter Bru¨ lisauer/Flurin Poltera in: Martin
Zweifel/ Peter Athanas (Hrsg.), Kommentar zum Schweizerischen
Steuerecht I/2b, Art. 58 DBG N 58.}

^{21 E.g., Letter of the Federal Tax Administration of March
4, 1997, regarding the OECD Transfer Pricing Guidelines for
Multinational Enterprises and Tax Administrations; Circular letter
no. 4 of the Federal Tax Administration of March 19, 2004,
referring to the taxation of service companies; and Circular letter
no. 9 of the Federal Tax Administration of June 6, 2005.}

^{22 Circular of the Federal Tax Administration of Feb. 3,
2009, regarding interest payments between related group entities
(updated yearly); Circular letter no. 8 of the Federal Tax
Administration of Dec. 18, 2001, regarding the international profit
allocation of principal companies; and Circular letter no. 6 of the
Federal Tax Administration of June 6, 1997, regarding hidden
equity.}

^{23 FDTA, Art. 58, para. 1, sub-para. b; FTHA, Art. 24,
para. 1.}

^{24 FDTA, Art. 58, para. 1, sub-para. b; FTHA, Art. 24,
para. 1, sub-para. a.}

^{25 Decision of the Swiss Federal Supreme Court (BGE) 119 Ib
116 E. 2 pp. 119} ^{et seq}^.

^{26 Zurich Circular.}

^{27 Zurich Circular.}

^{28 Zurich Circular.}

^{29 Circular on Posted Employees.}

^{30 Circular on Posted Employees.}

^{31 Zurich Circular.}

^{32 Zurich Circular.}

^{33 Zurich Circular.}

^{34 Circular on Posted Employees.}

^{35 Circular on Posted Employees.}

^{36 Zurich Circular.}

^{37 Zurich Circular.}

^{38 Circular of the Federal Social Insurance Office,
International Affairs, on social security for posted employees in
relation to contracting states of July, 2009 (''Circular on
Employees Posted to Contracting States'').}

^{39 Circular on Employees Posted to Contracting
States.} ^9
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Switzerland: Tax Management International Forum (BNA, London); "Income And Employment Tax Ramifications Of Sending Corporate Personnel To Host Country"

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