July 14, 2023 Update on Switzerland/France cross border tax and social security agreements
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 | Federal Public Service - Social Security (belgium.be). 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:
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:
In relation to the impact of exceeding the thresholds, we have summarized below the various scenarios, impact on the tax status and withholding obligations: Notes:
From a Swiss perspective, what are the provisions for canton with a cross-border agreement? The agreement provides that up to 40% of teleworking, the daily cross-border will remain fully taxable in France (i.e., taxation in the country of residence, with the possibility of spending 45 nights a year outside of the country of residence). The agreement clarifying the definition of cross-border commuter applies from 1 January 2023 and allows cross-border workers to telework up to 40% of their time without challenging the cross-border status. It is important to point out that these 40% are distinct from the 45 nights spent in the country of habitual employment. Typically, a cross-border commuter working full-time could spend one night a week in Switzerland and at the same time telework two days a week from home. If the cross-border commuter works more than 40% of the time from home, the individual will have to pay tax in Switzerland on the days worked in Switzerland. The employer will have to make an international allocation of employment income (i.e., taxing in Switzerland the Swiss workdays only). In relation to the impact of exceeding the thresholds of 10 days of business trips, we have summarized below the various scenarios, impact on the tax status and withholding obligations: Notes:
Exchange of information
Obligation to certify teleworking days during the transitional period
Defining telework and temporary assignments Telework refers to any form of work activity in which work that could also have been carried out on the employer's premises is carried out by an employee in his or her State of residence. "State of residence" refers to the entire territory of the employee's State of residence. The definition also stipulates that teleworking must comply with the contractual provisions binding the employee and the employer, which still requires a contractual basis such as a teleworking agreement or a provision in the contract of employment. The definition is rather broad: as long as telework is provided for contractually (telework agreement or employment contract), it is conceivable that the employee could telework from a co-working place or from a secondary residence, if they are located in his or her country of residence. The agreement also specifies that 40% of telework activity includes "temporary assignments carried out by the employee on behalf of the employer in the country of residence or in a third country, provided that their cumulative duration does not exceed 10 days per year." Typically, business trips or training courses that a cross-border employee is asked to undertake in France or in another State on behalf of their employer are subject to taxation in France based on the criteria of place of activity (this applies for cantons not covered by the 1983 agreements). Consider, for example, the case of an individual living in Annecy who is asked by his Geneva employer to provide a training course in the United Kingdom (UK) to his UK colleagues of the group to which the Geneva employer belongs. Accomondation has therefore been provided for this type of case. Whereas previously, the first day on a temporary assignment required an international allocation of employment income, the employer now benefits from a tolerance of 10 days. This avoids exposing the individuals concerned to an international allocation of their remuneration, up to 10 days yearly in any case. Notes:
Exchange of information
Obligation to certify teleworking days during the transitional period
Defining telework and temporary assignments Telework refers to any form of work activity in which work that could also have been carried out on the employer's premises is carried out by an employee in his or her State of residence. "State of residence" refers to the entire territory of the employee's State of residence. The definition also stipulates that teleworking must comply with the contractual provisions binding the employee and the employer, which still requires a contractual basis such as a teleworking agreement or a provision in the contract of employment. The definition is rather broad: as long as telework is provided for contractually (telework agreement or employment contract), it is conceivable that the employee could telework from a co-working place or from a secondary residence, if they are located in his or her country of residence. The agreement also specifies that 40% of telework activity includes "temporary assignments carried out by the employee on behalf of the employer in the country of residence or in a third country, provided that their cumulative duration does not exceed 10 days per year." Typically, business trips or training courses that a cross-border employee is asked to undertake in France or in another State on behalf of their employer are subject to taxation in France based on the criteria of place of activity (this applies for cantons not covered by the 1983 agreements). Consider, for example, the case of an individual living in Annecy who is asked by his Geneva employer to provide a training course in the United Kingdom (UK) to his UK colleagues of the group to which the Geneva employer belongs. Accomondation has therefore been provided for this type of case. Whereas previously, the first day on a temporary assignment required an international allocation of employment income, the employer now benefits from a tolerance of 10 days. This avoids exposing the individuals concerned to an international allocation of their remuneration, up to 10 days yearly in any case. Effect on Social Security Since 1 July 2023, two regimes are applicable to EU/EFTA and Swiss citizens (third-country nationals not covered from a Swiss perspective): 1. New Framework Agreement extends teleworking possibilities: Teleworker Rules The new multilateral framework between Switzerland and several EU/EFTA countries, allowing employees to engage in cross-border telework from their country of residence, up to a maximum of 49.9% (below 50%) of their working time, without affecting their Social Security subordination, currently applies to: Germany, Austria, Belgium, Estonia, Finland, France, Hungary, Ireland, Liechtenstein, Lithuania, Luxembourg, Malta, Norway, Netherlands, Czech Republic, Slovakia and Switzerland. A decision from Italy remains pending. For an updated list of signatory countries, please refer to: Cross-border telework in the EU, the EEA and Switzerland | Federal Public Service - Social Security (belgium.be). Important conditions
Teleworker A1 certificate under Article 16 The Framework Agreement is optional. Those who wish to avail themselves of its benefits need to apply for an A1 certificate based on Article 16 of Regulation 883/2004. The A1 certificate serves as proof that the social security legislation of the employer state is applicable. The application for an A1 certificate must be mutually agreed upon by the employer and the employee. In the absence of an A1 certificate, the regular rules apply, including the 25% threshold. The A1 certificate under Article 16 will be issued for a maximum duration of three years at a time (country specific exceptions apply) and can be extended upon request. 2. Applying ordinary Social Security rules: Multistate Worker Rules EU/EFTA countries that have not signed the new agreement or employers and employees who decide to not make use of the new teleworking rules will revert to the ordinary Social Security rules that were applicable before the COVID-19 pandemic. In such cases, teleworking in the country of residence is possible for up to 24.9% of working time, while the employee remains subject to the Social Security system in the employer's country. If the 25% threshold is reached or exceeded, employees become subject to the Social Security of their country of residence. This can result in potential Social Security obligations for the employer in employee's residence country. Next steps In light of the above, employers should consider implementing tracking tools for the working locations of their employees so these are identified and properly handled from a payroll-tax-at-source withholding perspective. Employers should also consider establishing home-work policies or contractual agreements authorizing home-work (not to exceed the 40% threshold to minimize eventual French tax-at-source requirements for employers) and should communicate to their employees so they are aware of these rules and what do they mean for their personal tax compliance requirements in Switzerland and France. It will be important for employers to stay informed during the transition period — until the end of 2024 and beyond — regarding further changes and communications on requirements for the tax rules as well as for the A1 application format and process. ——————————————— For additional information with respect to this Alert, please contact the following: Ernst & Young Ltd, Geneva
Ernst & Young Ltd, Lausanne
Ernst & Young Ltd, Basel
Ernst & Young Ltd, Zug
Ernst & Young Ltd, Zurich
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor | ||||