- A new agreement between Switzerland and France addresses tax consequences of teleworking for cross-border workers.
- This Tax Alert highlights important changes made under the agreement.
- Employers and workers in the two countries should become familiar with the changes and watch for further updates.
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Executive Summary
Income tax
An agreement between Switzerland and France, signed at the end of June 2023 to supplement the bilateral double taxation agreement, contains new and permanent taxation rules for employment income from home working. The agreement includes a teleworking threshold authorized up to 40% for all cross-border workers (regardless of cross-border status). Temporary assignments carried out on behalf of the employer in the country of residence or in a third country are considered in calculating the 40% and must not exceed 10 days per year.
Social Security
Switzerland and certain European Union (EU)/European Free Trade Association (EFTA) countries have concluded a new multilateral framework agreement. This agreement allows employees to engage in cross-border telework from their country of residence, up to 49.9% (or less than 50%) of their working time, without affecting their Social Security subordination. If both the employer and the employee reside in a country that has signed the Framework Agreement, they have the option to remain subject to the Social Security scheme of the employer.
France announced its participation in this agreement on 2 July 2023, joining: Germany, Austria, Belgium, Estonia, Finland, Hungary, Ireland, Liechtenstein, Lithuania, Luxembourg, Malta, Norway, Netherlands, Czech Republic, Slovakia and Switzerland. The decision from Italy is still pending. For an updated list of signatory countries, please refer to: Cross-border telework in the EU, the EEA and Switzerland.
Background
As a reminder, taxation of daily cross-border workers depends on where they work. For employees working in a canton where there is no cross-border worker status, the tax treaty between France and Switzerland establishes the principle of taxation in the country where the employee works. If the employee works in a canton where cross-border worker status is granted (i.e., employee generally returns home every day (at least four days per working week for a 100% rate of activity — maximum 45 overnight stays per year outside of the country of residence) and has provided his tax residence certificate (form 2041-AS) to his employer, who must send it to the cantonal tax authorities), the individual will be taxed in his or her country of residence.
On that basis, two different tax regimes apply, depending on the canton in which the employer is located:
- Taxation of wages in the State of employment (no cross-border agreement) — Article 17 of the 1966 Double Taxation Agreement (DTA) between Switzerland and France — Geneva, Ticino, Zurich, Luzern, Uri, Schwyz, Obwald, Nidwald, Glarus, Zug, Fribourg, Schaffhausen, Appenzell Ausserrhoden, Appenzell Innerrhoden, St. Gallen, Graubünden, Aargau and Thurgau
- Taxation of wages in the State of residence — Agreement on the remuneration of cross-border workers of 11 April 1983 — Vaud, Bern, Basel Stadt, Basel Land, Solothurn, Valais, Neuchatel and Jura; cross-border being "any person resident in a State who pursues an activity as an employed person in another State with an employer established in that other State and who returns, as a general rule, each day to the State of which he is a resident"
The signing of this amendment is a further step toward formalizing the solution that Switzerland and France reached on 22 December 2022 regarding the taxation of teleworking for cross-border commuters. The next and final stage will be the approval of this amendment by the Swiss and French parliaments, which will then mark its entry into force. In the meantime, Switzerland and France have agreed to apply the teleworking arrangements in principle until 31 December 2024, based on the temporary agreement of 22 December 2022.
From a Swiss perspective, what are the provisions for cantons without cross-border agreement?
The agreement provides that for up to 40% of teleworking and up to 10 days of business travel outside of Switzerland, the daily cross-border workers will remain fully taxable in Switzerland. In practical terms, this solution means that employers can continue to deduct tax at source in Switzerland as if the teleworking activities carried out in France had been carried out on the employer's premises in Switzerland, thereby avoiding international tax allocation.
Should the teleworking exceed 40%, the exceptional arrangements as negotiated no longer apply; instead, the ordinary provisions of the double taxation agreement between Switzerland and France apply, which means that the portion of remuneration corresponding to teleworking is taxable in France from the first day of teleworking.
Switzerland and France communicated a joint interpretation rule to settle what happens if the 40% limit is exceeded and/or if the 10-day limit for temporary assignments is exceeded. To check whether the 40% teleworking rate is respected, the factors below should be considered:
- If the total is less than or equal to 40% and the temporary assignments do not exceed 10 days, there are no tax implications; 100% of the salary will be subject to Swiss withholding tax, deducted by the employer.
- If the 40% or 10 days of temporary assignments are exceeded, the days of teleworking (excluding temporary assignments) must first be counted as follows:
a. If the teleworking days exceed 40%, the totality of the teleworking days should be taxed in France via the French withholding tax system, by the Swiss employer. Withholding tax on behalf of a foreign state is, in principle, punishable under article 271 of the Swiss Penal Code.
b. If the number of teleworking days amount to less than 40% and the employee has had temporary assignments, the temporary assignments are deducted up to a maximum of 10 days. Employers must give priority to assignments carried out in France before those carried out abroad. Any surplus will be taxed in France under two separate systems:
i. If the surplus relates to temporary assignments in France, it should be taxed in France through French withholding tax by the Swiss employer, which is contrary to Swiss criminal law.
ii. If the surplus relates to temporary assignments in a third country, it will be taxed in France and the tax will be payable directly by the employee (provisional tax installments).
In relation to the impact of exceeding the thresholds, we have summarized below the various scenarios, impact on the tax status and withholding obligations: