The extraordinary regime agreed upon by Swiss and Italian competent authorities during the COVID-19 pandemic allowed to disregard tax effects of teleworking performed by Italian resident cross-border workers employed by Swiss resident employers.
However, the extraordinary regime is no longer in effect from 1 February 2023 and the impact of teleworking for Swiss employers of Italian-resident cross-border workers (especially in Grisons, Valais and Ticino) can be far reaching.
In particular, teleworking can lead to loss of frontier worker status, with the consequence of full Italian taxation on the income earned by Italian resident crossborder workers. At the same time, teleworking can create tax issues for the Swiss employer both in Italy (tax liability/permanent establishment) and in Switzerland (transfer pricing, salary source taxes), and the management of such risks can lead to employment law issues.
Finally, certain changes in the system of European social security coordination should be monitored, since in the (near) future teleworking could have an impact on the applicable social security legislation.
INTRODUCTION
While teleworking has existed since the 1970s, before the COVID-19 its spread has been rather limited and its impact from a tax (and social security) perspective has not been in the focus of public discussion in academia, jurisprudence and legislation.
Things have radically changed in the wake of the COVID19 pandemic, as teleworking has become more and more widespread, not only in the exceptional pandemic situation, but also as an increasingly normal part of most office-related jobs.
According to official data, approximately 90'000 Italian residents cross the border to Switzerland regularly in order to work for Swiss employees. They too, and their employers, have been affected by the COVID-19 restrictions and have, in many cases, resorted to teleworking.
As emergency measures and international agreements fade out or are renewed, it is advisable for employers to understand the future impact of teleworking on the tax and social security situation, both as relates to them and their employees. In addition, recent sudden developments in effect from 1 February 2023 make it imperative for any Swiss employer employing Italian cross-border workers to re-assess its internal situation as regards teleworking.
This briefing aims at providing the basic tools to perform an initial assessment in this respect.
GENERAL INFO ON TAX TREATMENT OF ITALIAN RESIDENTS EMPLOYED BY SWISS COMPANIES
From a Swiss domestic perspective, non-resident workers employed by a Swiss employer are taxed at source (withholding done by the employer).
Pursuant to domestic legislation, only days of physical presence are taxable in Switzerland. In practice, a reduction of the taxable basis can be obtained for working days spent outside of Switzerland.
Example:
- Mr. A lives in Como (Italy), is employed by X. SA in Lugano and in January 2023 has been travelling abroad for one week (including two weekends);
- the 5 working days spent abroad can be deducted from the tax basis of the month January 2023 (i.e. only 15/20 of the salary of January will be subject to taxation, at the rate of the full salary). Non-working days are not considered.
- As a general rule, Italy retains full taxing rights for workers with Italian tax residents that are employed by Swiss resident companies (pursuant to the Swiss-Italian double tax treaty of 1976, "CH-I DTA"). Double taxation is avoided, under the CH-I DTA, by Italy granting a tax credit to its resident cross-border workers. In other words, Italian residents that work in Switzerland may, under the CH-I DTA, credit the (source) wage taxes paid in Switzerland towards the income taxes to be paid in Italy.
- In this context, it should be noted that Italian income taxation is typically much higher than wage taxes to be paid in Switzerland. By way of example, a married person earning CHF 80'000 yearly with two children and a nonworking spouse would pay wage taxes of approximately 2% (Ticino), whereas the same person would (depending on applicable deductions) pay income taxes in excess of 30% in Italy.
THE SPECIFIC CASE OF FRONTIER WORKERS (LAVORATORI FRONTALIERI)
Current situation
As an exception to the general rule, special rules apply in the case of Italian frontier workers employed in Switzerland pursuant to the applicable Swiss-Italian agreement of 1974 ("FA 1974").
According to longstanding practice and to an unpublished agreement between the Italian and Swiss competent authorities of 1985, the definition of an (Italian) frontier worker requires the following elements:
- they are individuals and Italian residents;
- they reside within 20 Km of the border to Switzerland;
- they work in the Cantons of Grisons, Ticino or Valais;
- the work is performed as employee of a Swiss company or permanent establishment;
- the individuals in question cross the border and return home on a daily basis.
In the case of frontier workers that meet the abovementioned definitions, the FA 1974 provides for exclusive Swiss taxing rights. In other words, no concurring Italian taxation is admissible for frontier workers under the FA 1974. In exchange, the Cantons of Grisons, Ticino and Valais annually forward 38.8% of Swiss wage taxes paid by Italian frontier workers to the Italian State.
Impending changes
The FA 1974 will be replaced in the near future (most likely on 1 January 2024) by a new agreement, signed on 23 December 2020 and in course of ratification by the Italian Parliament (the "FA 2020").
As regards the definition of frontier worker, the FA 2020 confirms all elements of the previous definition. Nevertheless, according to the additional protocol to the FA 2020, the status of frontier worker is not lost if the person in question is unable, due to professional reasons, to return to their home for a maximum of 45 days p.a. No similar exception is foreseen, however, for days in which the employee does not cross the border (i.e. works from home). The FA 2020 states, in a noncommittal way, that the competent authorities shall consult each other to find solutions regarding teleworking.
Under the FA 2020, frontier workers will be subject to concurring Italian and Swiss taxation, whereas Swiss taxation will be limited to 80% of taxation under domestic legislation, with no reimbursement or forwarding of taxes from the Cantons to the Italian State.
Nevertheless, a grandfathering clause provides for the continuation of the current system (i.e. exclusive Swiss taxing rights) for all Italian residents already employed in the frontier region (i.e. Grisons, Ticino or Valais) at any moment starting from 31 December 2018.
The FA 2020 thus effectively establishes a two-track system, distinguishing between "old frontier workers" (taxed exclusively in Switzerland) and "new frontier workers" (taxed concurrently in Italy and Switzerland).
IMPACT OF TELEWORKING ON THE TAX TREATMENT OF (ITALIAN) CROSS-BORDER WORKERS AND THEIR SWISS EMPLOYERS
Pandemic period
On 18/19 June 2020, the Italian and Swiss competent authorities have entered into an agreement ("CH-I COVID-19 Agreement"), with effect from 24 February 2020. According to this agreement, taking into account the governmental emergency measures (lockdowns, etc.) issued in the COVID-19 pandemic, the competent authorities established that days spent working from home by employees that usually worked across the border would be disregarded and considered to have been performed in the country of the workplace (i.e. Italian residents employed by a Swiss company and usually working in Switzerland would be considered has having worked in Switzerland even on days spent working from home).
The period of validity of the CH-I COVID-19 Agreement has been extended, even after all the governmental measures related to the COVID-19 pandemic had been revoked. However, on 22 December 2022, the Italian and Swiss competent authorities announced that the agreement would cease its effects as of 1 February 2023.
It should be noted that, on the same day in which the termination of the CH-I COVID-19 Agreement was announced, the Swiss competent authority informed that it had reached a solution with France. According to the agreement with the French competent authority, in force from 1 January 2023, up to 40% teleworking can be disregarded.
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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.
