The double taxation agreement (DBA) between Germany and Switzerland contains a series of deviations from the OECD Model Tax Convention and hence also unpleasant surprises with regard to cross-border taxation between the two countries. One particular aspect is without doubt "overlapping" taxation, which grants Germany unilateral taxation advantages.
Generally, there are two variants of overlapping taxation. Both "fictitious residency" as well as the emigrant provision can be found in Article 4 of the double taxation agreement between Germany and Switzerland, and will be explained in greater detail in the following.
Fictitious residency
he special rules for fictitious residency in Art. 4 (3) of the double taxation agreement between Germany and Switzerland applies to persons resident in Switzerland who specify a residence in Germany that they could use regularly and/or where they have their habitual residency in Germany for a minimum of 6 months in each calendar year.
Permanent residenceThe "residence" is to be distinguished from the actual "domicile". While the domicile is defined under Swiss law as the location "where a person intends to remain indefinitely" (Art. 23 (2) (a) of the Swiss Civil Code (ZGB)) and under German law as the location which allows one to surmise that the "apartment is maintained and utilized" (Section 8 of the German Tax Code (AO)), a residence is not defined in the double taxation agreement between Germany and Based on the existing rulings of the Federal Financial Court (BFH), it can generally and systematically be said that a residence is probably Switzerland, nor under German law. not considered to exist in Germany if a person utilizes an apartment irregularly on a maximum of 73 days per year, does not perform employment activities in Germany, and does not have any other economic interests in Germany, i.e. does not have any assets or other income in Germany
However, a permanent residence is considered to exist if the apartment is used on more than 50 days per year in conjunction with occupational or economic interests, i.e. if a person pursues employment in Germany or owns large assets in Germany.
Habitual residence Pursuant to Section 9 of the German Tax Code (AO), a habitual residence exists when a person "remains at a particular location for a duration that is not merely temporary" and there exists a contiguous residence period of more than 6 months. Short-term interruptions (e.g. for trips home over the weekend or vacations) are not taken into consideration.
This means that employees who are often in Germany on business trips or who regularly perform professional activities there on a few days per week are quickly considered to have a habitual residence in Germany. The same applies when postings of 6 months are preceded by business trips to Germany or the postings are extended.
ConsequencesIf a permanent residence or a habitual residence in Germany exists, fictitious residency in Germany is assumed, which leads to "overlapping" taxation. This means that Germany is permitted to tax all income as if Germany (and not Switzerland) were the country of residence. This means that all income from capital assets and all non- Swiss working days are also to be taxed in Germany. The overlapping taxation leads to full tax obligations both in Germany and in Switzerland. Swiss taxation remains unaffected by the additional tax obligations in Germany; however, any taxes paid in Switzerland are offset from the German tax burden. Ultimately, this results in the employee having to pay taxes at the German level.
Emigrant ruleThe emigrant rule of the taxation agreement between Germany and Switzerland specifies in Art. 4 (4) that persons who relocate their domicile from Germany to Switzerland shall continue to be subject to tax obligations in Germany in the year of relocation and for the subsequent 5 years, unless they pursue genuinely dependent employment for an employer. The emigrant rule therefore primarily affects persons who are self-employed (e.g. entrepreneurs) and not employees.
The emigrant rule applies to citizens of all countries – except Swiss citizens – and overrides significant provisions of the double taxation agreement between Germany and Switzerland in order to grant Germany extensive rights of taxation. Generally, this is legitimized by arguing that the difference in taxation between Germany and Switzerland should not be exploited.
Summary
The special case of overlapping taxation in this configuration only exists in the double taxation agreement between Germany and Switzerland. Furthermore, fictitious residency is also only relevant for persons who live in Switzerland who work or have assets in Germany, but does not also apply conversely for persons with a domicile in Germany who work in Switzerland. Moreover, the emigrant rule only applies to persons who emigrate from Germany to Switzerland, and not for persons who emigrate from Switzerland to Germany.
With the unilateral special regulations for overlapping taxation, Germany has succeeded in obtaining a not insignificant advantage for the levying of income tax. Employees resident in Switzerland who repeatedly perform professional activities in Germany should therefore inform themselves in detail on the topic of overlapping taxation and not simply rely on the 183-day rule, as it is overridden by the regulations for overlapping taxation.
Originally published in The Global Mobility Journal
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.
