Bonus payments in connection with an assignment are a complex topic that encompasses labour law, tax law, and social security aspects. Bonus payments can include various types of payments, such as performance-based bonuses, success bonuses, or special remuneration. Sign-on bonuses at the start of an assignment also fall into this category.
When an employee receives a bonus payment during an assignment, the legal assessment is complicated by the involvement of two different countries and their respective legal systems. In many countries, there are no specific tax and social security regulations for such cases. However, a thorough examination of the applicable rules in both countries involved in the assignment is always necessary.
Contractual Regulations
Bonus payments must be stipulated in the employment contract. If they are granted during an assignment, it is crucial to specify in the contract whether these payments will continue during the assignment. Furthermore, defining the period or event to which the bonus relates is essential. Additionally, it should be determined to what extent a granted tax equalisation also applies to bonus payments, particularly to deferred bonuses.
Tax Regulations In most countries, bonus payments are subject to taxation at the time of payment. For assignments, the key question is which country has the right to tax the bonus: the host country, the home country, or another state. A precise assessment of the specific circumstances is crucial. Generally, the country where the bonus was earned or to which the relevant event relates has the primary taxation right. The other involved countries then waive taxation, either by exempting the bonus from taxation or by granting a tax credit for foreign tax paid.
Social Security Regulations
Determining which country's social security system applies to the bonus is relatively straightforward for assignees who remain insured in their home country. Since their social security status remains unchanged, their social security contributions remain payable in the home country.
However, if the social security obligation changes and the employee becomes subject to the host country's social security system, the general approach is to allocate the bonus to the country where the employee is insured at the time of payment. This is mainly due to practical considerations, as calculating and paying social security contributions in another country is usually difficult or even impossible.
Example
Reto Meier (a Swiss national) has been working as a senior software developer at SwissTech AG, a company based in Zurich (Switzerland), for five years. Due to the company's expansion into the German market, SwissTech AG has selected Reto Meier for a 36-month assignment to its German subsidiary in Berlin. His assignment in Germany involves developing a new software product tailored specifically for German customers.
The assignment begins on 1 March 2025. Reto will receive, in addition to his gross salary, a sign-on bonus of CHF 20,000 on 25 February 2025 as an incentive to accept the assignment in Germany. Additionally, he will receive his annual bonus in April 2025 and April 2026, based on the previous financial year, which follows the calendar year. His salary will continue to be paid from Switzerland, and he will remain subject to the Swiss social security system. Reto Meier will deregister from Switzerland on 28 February 2025 and relocate to Germany.
What are the tax and social security implications? The sign-on bonus is paid while Reto is still working in Switzerland and still has his residence there. However, since the bonus relates to the assignment in Germany, Germany has the primary taxation right. In Switzerland, he must declare the bonus in his tax return, but it will only be considered under the so-called progression clause. Regarding social security, Swiss contributions must be deducted. The bonus payment he receives in April 2025 relates to the 2024 calendar year.
In that year, he worked exclusively for the Swiss company, meaning Switzerland has the primary taxation right. However, as he will already be a tax resident in Germany at the time of payment, he must declare the bonus there, where it will be considered under the progression clause. Swiss social security contributions must be deducted for this payment.
The bonus payment he receives in April 2026 relates to the 2025 calendar year. In that year, he worked in Switzerland for two months and in Germany for ten months. Consequently, the taxation right must be allocated proportionally between the two countries. Regarding social security, Swiss contributions remain applicable. In a second step, it must be determined how the bonus is treated in the tax equalisation process.
Conclusion
Bonus payments in the context of an assignment should be clearly regulated in employment contracts to prevent legal uncertainties. It is crucial to ensure that tax and social security regulations are clearly defined and that there is clarity regarding tax equalisation. A legally sound assessment of each individual case is essential to avoid incorrect taxation or misallocation of social security obligations.
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.
