Legal Challenges When Appointing A Board Of Directors In Switzerland With Residence Abroad

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In Switzerland, there are a large number of board members who have such a function or work for a Swiss company who are not resident in Switzerland but abroad. In these constellations, there are also numerous legal challenges and aspects to consider.

A Board of Directors mandate can be structured based on different constellations. The most common form is the direct mandate. This means that a Board of Directors mandate exists between the Board of Directors and the Swiss company.

The following explanations refer to this constellation.

To make it easier to understand, here is an introductory example:

Peter Suter is a German citizen and lives in Munich (Germany). He is a member of the Board of Directors of Global Speciality Insurance AG in Zurich (Switzerland). He also works as a lawyer with his own law firm in Munich (Germany).

1. Duties of care and liability

Directors in Switzerland have a comprehensive duty of care towards the company, and this duty extends to all decisions they make. Even if the Board of Directors is domiciled abroad, it remains liable in Switzerland for these obligations, such as:

• Duty of proper management:
• A Board of Directors must manage the company's business in the best interests of the shareholders and the company.
• Liability for breach of duty:
• Breaches of legal requirements (e.g. in relation to corporate governance or insolvency law) can lead to personal liability, regardless of the place of residence of the member of the Board of Directors.

2. Legal responsibility

Directors living abroad must also ask themselves in which country they can be prosecuted in the event of legal disputes:

• Place of jurisdiction: The Board of Directors could be sued in a court abroad, even if the company is domiciled in Switzerland. The choice of jurisdiction for legal disputes should be clearly defined in the contract or in the company's articles of association.
• Legal representation: The Board of Directors may need to be represented by lawyers both in Switzerland and abroad.

3. Swiss company law versus international regulations

Directors who live and reside abroad should not only be familiar with Swiss company law, but also with the relevant international regulations.

For board members who live in an EU country or in a country with similar regulations, European or country-specific regulations (e.g. the General Data Protection Regulation - GDPR) may also be relevant.

4. Necessity of a work permit (work authorisation)

In Switzerland, the Board of Directors is generally considered a "dependent employee", and a work permit is required to carry out activities in Switzerland, such as attending Board meetings, unless the Board member is a Swiss national.

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The work permit is decisive for direct mandates from the first day.

Depending on the frequency of presence in Switzerland and the domicile and nationality of the Board of Directors, the following types of licenses are available under licensing law:

• Reporting procedure
• 120-day permit
• Cross-border commuter permit

which is generally issued for a period of 12 months, the board member may stay and work in Switzerland for 120 days. This type of permit can be obtained for all board members regardless of their nationality. The permit application must be submitted to the relevant cantonal labour market authority.

In principle, a cross-border commuter permit would also be possible for EU or EFTA citizens, provided they work in Switzerland at least one day a week. Depending on the scope of the Board of Directors mandate, this could also be a possible option.

5. Tax implications

In principle, the Board of Directors' fee is taxable in Switzerland. Due to residence abroad, the following aspects must be taken into account:

• Tax residency: Tax residency determines the country in which a person has unlimited tax liability. The determination of tax residency is also important to determine the applicable double taxation agreement. For example, if a person is resident for tax purposes in Germany, the double taxation agreement between Germany and Switzerland must be checked for a board of directors' mandate in Switzerland.
• Double taxation agreements (DTAs): Most of the DTAs concluded by Switzerland contain provisions on the taxation of directors' fees. As a rule, these are allocated to the country in which the company is domiciled. This means that Switzerland has the right of taxation for a directorship with a Swiss company.
• Taxation of the Board of Directors' fee in Switzerland: For Board members who are resident abroad, the cantonal withholding tax rate of the canton in which the Swiss company is domiciled applies. As a rule, this is a flat rate. For example, this tax rate is 25% in the canton of Zurich.
• Taxation of the director's fee in the country of residence: In the country of residence, this director's fee must also be declared in the tax return and, depending on the existing double taxation agreement, the exemption or imputation method for avoiding double taxation is applied.

6. Social security subordination

The social security assessment of directors' fees in cross-border relationships is usually the most difficult aspect of this topic.

When determining in which country a board of directors is subject to social insurance, it is not only the various bilateral and multilateral agreements that are decisive. Another important aspect is the assessment of whether the board of directors' mandate constitutes an employed or self-employed activity, as well as the assessment of the other activities of the board of directors. In practice, the board mandate is very often not the person's main activity.

• Assessment of the Board of Directors mandate: The assessment must be carried out both from a Swiss perspective and from the perspective of the country of residence. In this regard, there are always very different perspectives from the countries involved.
• Nationality and domicile: The domicile and nationality of the Board of Directors are decisive in determining which agreement applies to a particular situation. For EU nationals domiciled in an EU member state, the Agreement on the Free Movement of Persons applies; in the case of EFTA nationals domiciled in an EFTA state, the EFTA Convention applies; otherwise, it must be checked whether a bilateral agreement exists between the country of domicile and Switzerland.
• Obligation to pay social security contributions: In principle, directors' fees are subject to social security contributions in Switzerland. In cross-border situations, however, this social security obligation can "slip" into the country of residence.
• Provisions of the Agreement on the Free Movement of Persons and the EFTA Convention: In principle, the Agreement on the Free Movement of Persons stipulates that a person is only subject to social security contributions in one country for all their income. This country is determined by the country in which a person is employed and/or self-employed. In this constellation, the person would be subject to social security contributions in the country in which he/she is employed. If a person works as an employee in both countries, but in the country of residence this activity has a workload of at least 25%, then the social insurance obligation would apply in the country of residence.
• Provisions of the bilateral agreement: If the bilateral agreement applies, the social security obligation is generally divided according to the country of employment / place of employment.
• Formalities: Obtaining an A1 certificate or secondment certificate is important if the board member also works in the other country.

It is not always entirely clear in which country the social security obligation applies. In such cases, it is therefore helpful and advisable to clarify this directly with the two competent authorities in the country of residence and in Switzerland.

Solution to the example at the beginning of the article:

Global Speciality Insurance AG would have to do the following for Mr. Suter:

• Work permit: A work permit would have to be obtained for the working days in Switzerland. As meetings of the Board of Directors can generally be planned, but other possible working days in Switzerland tend to be planned flexibly, a 120-day permit is the best option.
• Taxation: A tax deduction of 25% is made from the Board of Directors' fee. This corresponds to the taxation in the canton of Zurich, based on the fact that the example company is domiciled in Zurich. Mr. Suter must declare the fee in his German tax return, but this only affects the German tax rate and is not taxed in Germany.
• Social security obligation: The activity as a member of the Board of Directors in Switzerland is a dependent activity and the activity as a lawyer is considered a self-employed activity under German law. Based on the Agreement on the Free Movement of Persons, which is applied in this example, this leads to social security subordination in the country in which Mr. Suter is employed. Accordingly, he not only has to insure his director's fee in Switzerland, but also the income from his work as a lawyer. This will certainly not please Mr. Suter, as he would not have to pay social security contributions on this income in Germany.

Conclusion

The legal challenges of a member of the Board of Directors in Switzerland who is resident abroad include, in particular, duties of care, licensing, social security and tax law issues, as well as various questions relating to legal responsibilities and the practical implementation of administrative tasks. It is important that the individual situation of the Board of Directors is regularly reviewed in order to avoid potential conflicts and to ensure that all legal requirements, both in Switzerland and in the country of residence, are complied with.

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.