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In principle, there can only be a withholding tax liability in Switzerland if there is an employer in Switzerland.
It should also be noted that the following group of persons resident in Switzerland are exempt from the withholding tax obligation:
- Swiss nationals
- Foreign nationals with a C permanent residence permit and foreign nationals without a C permanent residence permit but with a spouse who holds a C permanent residence permit or Swiss citizenship.
In Part 1, we turn to practical cases where employees are employed outside Switzerland. According to the previous section, one would therefore conclude that there would be no withholding tax liability for these persons. However, this approach would not be sufficient to make a complete assessment of the facts.
A few years ago, influenced by neighbouring countries, Switzerland implemented the concept of the "de facto employer". Based on the following practical example from the Canton of Zurich, we refer to the "Information sheet on de facto employers - practice in the Canton of Zurich" published by the Cantonal Tax Office of Zurich on 5 November 2020.
With this "de facto employer" construct, it is now possible to levy withholding tax for employees with an employment relationship outside of Switzerland. In neighbouring countries, the construct of the so-called "economic employer" is used.
The following case study illustrates this topic in detail:
Case study
Peter Meister is a German citizen and is employed by Finance Management AG in Frankfurt am Main (Germany). He also resides in Frankfurt am Main. In recent years, Finance Management AG has realised that the demand for its services in Switzerland has steadily increased to a high degree. For this reason, Finance Management Schweiz AG was founded in Zurich last year. The company is in the process of being established and still requires the support of employees in and from Germany.
Mr Meister is one of the employees who comes to Switzerland every month for around 5 to 8 days to support the Swiss office in Zurich.
For this reason, a 120-day permit was obtained for Mr Meister so that he can travel flexibly to Switzerland every month.
He will continue to receive his salary from Germany and will also remain insured under the German social security system. For the assignments in Switzerland, he is paid the costs of accommodation in a hotel, travelling expenses by plane or train, and a daily allowance of CHF 55 for meals.
His salary corresponds to the Swiss salary level so that Finance Management AG (in accordance with Swiss law) does not have to compensate for any additional salary difference.
Finance Management AG has decided not to charge the costs for 2023 and 2024, as the Swiss company is still being established. Only from 2025 onwards will the costs for such employee assignments be passed on internally to the Swiss company.
When he is in Switzerland, Mr Meister is assigned to existing projects and the Swiss project manager allocates him accordingly. He also has a fixed workstation in the office in Switzerland from which he works.
What is the tax situation in this constellation?
Finance Management AG in Frankfurt am Main deducted wage tax for Mr Meister, regardless of whether he worked in Switzerland or Germany.
The company came to this conclusion because the employee retains his place of residence in Germany and
- stays in Switzerland for less than 183 days per calendar year,
- he receives his salary from Germany from Finance Management AG and
- no costs are passed on to Finance Management Schweiz AG.
Based on the criteria fulfilled above, the company assesses that there is no tax liability in Switzerland. These are also basically the three conditions of Art. 15 para. 2 of the double taxation agreement between Switzerland and Germany, which must be fulfilled.
IMPORTANT:
However, there is the practical regulation on the de facto employer in the Canton of Zurich and additional points to consider. It should be noted that even if all three conditions of Art. 15 para. 2 of the DTA are met, a tax liability may still arise for the foreign employee if
- the work performed by the employee is an integral part of the Swiss company's business activities, or
- the Swiss company bears the responsibility and risk for the employee's performance, or
- the employee is subordinate to the Swiss company with regard to the authority to issue instructions, or
- the employee is integrated into the Swiss company or the Swiss company organisation.
- The individual case is considered in each case, which is why each individual case must be examined separately.
In our example of Mr Meister, he reports to the Swiss project manager and has a permanent job at the Swiss company in Zurich. This would lead to the conclusion that Finance Management Schweiz AG is Mr Meister's de facto employer.
As a result, Finance Management Schweiz AG would have to take Mr Meister's Swiss working days into account as part of the withholding tax procedure in Switzerland.
Accordingly, German wage tax would not have to be deducted on these days, as Switzerland would have the right of taxation on these days.
In principle, the withholding tax paid in Switzerland would also represent Mr Meister's definitive tax burden in Switzerland.
To determine the correct withholding tax rate in Switzerland, Finance Management Schweiz AG would have to use the withholding tax rate A0N of the Canton of Zurich, as Mr Meister is single, has no children, and does not belong to a church. As Mr Meister is not resident in Switzerland, the withholding tax rate of the Canton of Zurich, the canton in which Finance Management Schweiz AG is domiciled, is used.
To calculate the taxable income, the total earned income for the month in question must be used and then viewed from the Swiss tax perspective.
Among other things, the following can be stated in this regard:
In Germany, the employer pays the contributions to health insurance and long-term care insurance. In Switzerland, these employer contributions represent a non-cash benefit and must be taken into account accordingly when calculating taxable income. If there is no comparable pension fund solution in Germany for Mr Meister, a corresponding offset of the income would have to be made, as there is a deduction for pension fund contributions in the withholding tax rate.
These lists are not exhaustive, however, but are merely intended to show by way of example that every detail is important and must be examined carefully.
Conclusion
The concept of the de facto employer must be examined carefully in these individual cases. About determining the correct taxable income, the various elements of remuneration must be examined carefully, as the Swiss employer is ultimately responsible and liable for this.
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.