Switzerland: Entry into force of the Federal Act on the Taxation of Teleworking in International Relations starting 1 January 2025
Brief overview on why the new federal law on the taxation of teleworking in international relations to be introduced on 1 January 2025
During the 1900s, work from home was often poorly paid and working days lasted up to 12 hours. It is generally treated as a rather dark chapter of industrialization in history books. The extensive digitalization of the work environment at the beginning of the 21st century brought about significant change. Work from home suddenly gained enormous importance as well as appreciation by today’s workforce. With the outbreak of the COVID-19 pandemic at the latest, modern, digitalized work from home revolutionized the work environment in an explosive manner. Alongside masks and hand sanitizers, the term “home office” was suddenly a beloved companion for many office workers. While masks and hand sanitizers almost belong to the past by now, home office has become an established part of today’s labour market. For many employees, the home office option is a decisive criterion when choosing an employer and often a tool for employers to remain competitive in the labour market, whilst saving on rental costs for office spaces too. The Federal Law on the Taxation of Telework in International Relations has intended to take account of the unstoppable digitalization and globalization of (cross-border) work and at the same time to prevent high losses specifically in the taxation of cross-border workers residing in a neighbouring country.
Since the term “home office” is strongly characterized by work with technical means, it is gradually being replaced by the term of teleworking (which, therefore, will be the term referred to in the following).
Distinction between (original) work from home and modern teleworking in Switzerland
As already mentioned, working from home as such is not a novelty to Swiss law. During the industrialization, entire families lived off the income generated by work from home. However, the defining characteristic of this (original) type of work from home was that the work to be done always entailed either manual or machine work. Despite it being quite rare, even today, there are still employment relationships that are classified as such (original) work from home employment relationships. Special provisions apply to these employment relationships, in particular the Federal Law on Work from Home (HarG). Since teleworking involves neither manual nor machine work, but instead working with technical tools such as laptops or tablets, the HarG is not applicable for teleworking.
Before diving into the international issue regarding teleworking, we would first like to address some of the difficulties connected to teleworking within the borders of Switzerland in terms of labour, tax and social security law.
Telework within Switzerland
The employer is obliged to protect the health of his employees even when they are teleworking. This means that the employee’s workspace for telework must meet the health and safety requirements of the Swiss Labour Act (ArG). Furthermore, expenses incurred during involuntary teleworking must be reimbursed by the employer to the employee in accordance with Art. 327a of the Swiss Code of Obligations (CO). Matters can become particularly tricky in terms of tax and social security law if, for example, teleworking occurs in a different Canton than the employer’s domicile. As soon as the place where telework is carried out is regarded as a place where essential activities of the operational division of the company are carried out, a “permanent establishment” might be present in the eyes of tax authorities. It is, therefore, of outmost importance to examine each specific case and to monitor legal developments. In addition, we recommend the introduction of companywide home office regulations. If you need any assistance in this matter, our experts will gladly assist you.
If the Swiss implementation of teleworking is unclear, what about when it comes to international matters?
Principle of International Taxation of Employment
According to Art. 5 para. 1 lit. a DBG and Art. 4 para. 2 lit. a StHG, natural persons without a tax domicile or residence in Switzerland are subject to Swiss withholding tax on their earned income (Art. 91 DBG, Art. 35 para. 1 lit. a StHG) on the basis of economic affiliation if they pursue an economic activity in Switzerland. For this taxation to be successfully carried out, the following three conditions must be cumulatively fulfilled, namely:
- Switzerland’s right of taxation is not restricted by international treaty.
- There is a domestic legal basis for taxation (i.e. the taxation is based on a Swiss law).
- The work is (in principle) carried out in Switzerland.
Until now, however, income of cross-border workers having an employer in Switzerland but residence in a neighbouring country could only be taxed in Switzerland if a corresponding bilateral agreement had been concluded between Switzerland and the country of residence and they did enter and leave Switzerland almost every working day (the number of grace days when a cross-border worker does not need to return to his country of residence without losing his cross-border worker status are defined by bilateral agreements) to perform their work at the Swiss location of their employer. Subject to contrary regulations during the pandemic, days on which such cross-border commuters did not physically perform their work at their place of work in Switzerland were not declared to the Swiss tax authorities by their employers, as neither a domestic legal basis for the taxation of work performed in the country of residence existed, nor did the bilateral agreements assign Switzerland the right to tax work performed in the country of residence. With the introduction of the Federal Act on the Taxation of Telework in International Relationships, this domestic legal basis has now been established.
Applicability of the Federal Act on the Taxation of Telework in International Relationships
The new Federal Law on the Taxation of Telework will only apply to Switzerland’s immediate neighbouring countries, i.e. Germany, Italy, France, The Principality of Liechtenstein and Austria. However, since the above three criteria must be cumulatively fulfilled and only Italy and France meet this requirement, the new taxation method will effectively only apply to these two countries as of 1 January 2025. This does not mean that the new law already failed before even having been launched, because it established a vital basis for the implementation of future bilateral taxation agreements. Thus, the following changes will come into force on 1 January 2025:
- France
In connection with the additional agreement to the double taxation agreement with France, Switzerland will be able to tax the income of a cross-border worker, who is a resident in France if telework performed in France for the Swiss employer does not exceed 40% of the overall working hours.
- Italy
Thanks to the amendment of the cross-border worker agreement between Italy and Switzerland, Switzerland will be able from 1 January 2025 to tax teleworking time performed by a cross-border employee for his Swiss employer at the place of residence in Italy if such teleworking time does not exceed 25% of the overall working time.
In summary, the introduction of the new Federal Law on the Taxation of Telework in International Relations means that Switzerland, France and Italy are moving closer to today’s requirements for an attractive, dynamic and digital cross-border labour market, as well as it being Switzerland’s attempt to prevent major tax losses due to the increasing number of cross-border workers performing telework for their Swiss employer from abroad. Under certain circumstances, international teleworking can also create a permanent establishment of the employer in an international context, which can have in particular tax consequences for the employer. If you have any questions regarding this topic, please feel free to contact us.
