Moving to Switzerland? Your Tax Residency May Start Earlier Than You Think

Imagine you are a senior executive in Germany.

Your company asks you to relocate to Zurich on 1 July. You keep some ties to Germany, move into a Swiss apartment and start working from the Zurich office.

You assume the tax question is relatively simple:

“I will spend less than 183 days in Switzerland this year, so I should not become Swiss tax resident yet.”

That assumption can be expensive.

The famous 183-day rule is generally a tax treaty rule for employment income. It is not the basic test for determining whether you become resident in Switzerland for tax purposes.

Depending on how you relocate, Swiss tax residency can begin from the day you arrive.

When does Swiss tax residency begin?

Under Swiss domestic law, tax residency can arise when an individual establishes their residence in Switzerland or stays in Switzerland for a sufficiently long period.

If you are genuinely planning to relocate, you should ask yourself the following questions first:

Where do you actually live? Where does your family live? Where do you work? And where are your personal and economic ties concentrated?

A Swiss apartment, the relocation of your spouse and children, school enrolment, your place of work and your wider personal circumstances can all be relevant.

There are also statutory rules for individuals staying in Switzerland without establishing residence. A person may become subject to Swiss tax after at least:

• 30 days in Switzerland while carrying out gainful activity, or

• 90 days without gainful activity.

These rules are contained in Article 3 of the Federal Direct Federal Tax Act.

Do you see why the 183-day assumption can cause problems?

You may become Swiss tax resident under domestic Swiss law well before you have spent 183 days in the country.

What happens if you arrive halfway through the year?

Take the executive who moves from Germany to Zurich on 1 July.

Assume an annual salary of CHF 500,000.

For the period after the move, Switzerland may tax the income falling within the Swiss residency period. The tax rate, however, can be determined by reference to an annualised level of income.

So if approximately CHF 250,000 falls into the Swiss half of the year, you should not automatically expect to be taxed at the progressive rate applicable to someone earning only CHF 250,000 annually.

The income can be annualised for rate-determination purposes.

That small technical point can produce a rather different tax bill from the one the executive expected before moving.

The same relocation can also bring foreign investment income, rental income or deferred compensation into the Swiss tax analysis once Swiss residence begins.

This is why the date of the move can matter almost as much as the country you are moving to.

And what about the famous 183 days?

Suppose our executive continues travelling back to Germany after moving to Zurich.

Now we potentially have two separate questions:

1. Is the individual resident in Switzerland?

2. Which country may tax a particular part of the salary?

The applicable double taxation agreement deals with the second question.

Under the OECD Model approach used in many Swiss treaties, employment income is generally taxable where the employment is physically exercised. The familiar 183-day exception can preserve taxation in the employee’s residence state, but only if its additional conditions are also satisfied.

Typically, this means that the employee is present in the other state for no more than 183 days during the relevant period, the employer is not resident there, and the remuneration is not borne by a permanent establishment that the employer has there.

If there is one thing you should take away from this article, it is that counting days is rarely enough.

Imagine your family lives in Zurich, your main home is in Zurich and your work is principally performed in Zurich, but you still own a house abroad and travel there frequently.

A spreadsheet showing 170 Swiss days does not resolve the entire residency analysis.

Your employer may have a tax problem as well

There is another question that is easily missed.

Imagine a Swiss consulting company sends one of its employees to Germany for 60 days.

From the employee’s perspective, the 183-day rule may be relevant to whether Germany can tax the salary. But the company has a separate question to answer:

Has the employee’s activity created a German permanent establishment for the Swiss company?

If it has, Germany may obtain a right to tax part of the company’s business profits. It can also affect the employee’s 183-day analysis because one of the conditions for the exemption is that the remuneration must not be borne by a permanent establishment in the work state.

The type of work being performed becomes important here.

Take a Swiss engineering company installing machinery in Germany. Under the Switzerland–Germany double taxation agreement, a construction or assembly project generally becomes a permanent establishment if it lasts for more than twelve months. A consultant working at a client’s premises raises a different analysis. There is no universal rule saying that 183 days of consulting automatically creates a permanent establishment. You may instead have to look at issues such as a fixed place of business, the premises available to the company and the authority of employees to conclude contracts.

And the answer can change again when you change countries.

Consider Hong Kong.

The Switzerland–Hong Kong tax treaty uses a 270-day threshold for a building site, construction, assembly or installation project and related supervisory activities. It also contains a special rule for certain services connected with those projects if the relevant activities continue for more than 270 days within a twelve-month period.

There is an interesting detail here. During the treaty negotiations, Hong Kong proposed a broader service permanent establishment provision based on the UN Model. Switzerland did not accept it in full. The final treaty limits this special service rule to services connected with construction, assembly, installation or related supervisory activities. Ordinary consulting services do not simply become a service permanent establishment because the consultant crosses the 270-day threshold. The normal permanent establishment rules still need to be considered.

This is a good example of why a company sending employees abroad should not ask only:

How many days will they be there?

It should also ask:

What exactly will they be doing there?

Sixty days of consulting, fourteen months installing industrial equipment and an employee regularly negotiating contracts abroad can lead to very different tax results.

The employer has its own payroll obligations

The permanent establishment question is only one part of the employer’s analysis.

A Swiss employer may also have immediate payroll and reporting obligations when an executive relocates to Switzerland.

Foreign employees without a C permit are generally subject to Swiss tax at source, or Quellensteuer, subject to the applicable rules and exceptions. The employer deducts the tax directly from salary and remits it to the competent cantonal authority.

The applicable tariff can depend on factors such as canton, marital status and children.

Social security also needs to be addressed. A genuine relocation into Swiss employment will commonly bring the employee into the Swiss AHV/IV system and may trigger occupational pension and accident-insurance obligations.

For temporary assignments, the outcome can look different. An A1 certificate may, depending on the facts and applicable international rules, allow an employee to remain within another country’s social-security system for a period.

Tax residency, payroll tax, permanent establishment risk and social security should therefore be considered together. They do not necessarily follow the same tests.

Deferred compensation is where things become interesting

Salary earned monthly is usually relatively easy to understand.

Stock options, restricted shares, bonuses and other deferred compensation are more difficult.

Imagine you move to Switzerland in July but receive shares the following March under an incentive plan connected to work performed over the previous three years.

Which country gets to tax them?

Possibly more than one.

The answer can depend on the vesting period, where the underlying work was performed, the relevant treaty and the specific rules governing the compensation.

For a senior executive with substantial equity awards, this can be far more important than whether the first month’s Quellensteuer tariff was calculated perfectly.

It is also one of the situations where an advance discussion with the competent tax authority may make sense.

Can an executive simply choose lump-sum taxation?

Switzerland’s lump-sum taxation regime receives plenty of international attention.

It is therefore understandable that a wealthy executive moving to Switzerland might ask whether they can simply use it.

Usually, the answer will be no if they intend to work here.

Swiss lump-sum taxation is generally available to qualifying foreign nationals who take up residence in Switzerland without exercising gainful activity in Switzerland. Cantonal differences also need to be considered, and some cantons have abolished the regime.

For an entrepreneur selling a business and retiring to Switzerland, the discussion may therefore look very different from that of a CEO moving to Zurich to run a Swiss company.

Keep evidence while it is still easy

Cross-border residency disputes tend to become surprisingly factual.

Where did you sleep?

Where did your spouse live?

Where did your children attend school?

Where was your main home?

Where did you actually work?

Trying to reconstruct those facts three years later is unpleasant.

An executive with a complicated cross-border situation should therefore retain ordinary documentation from the beginning: leases, travel records, employment documents, residence registrations, school records where relevant and evidence showing where work was physically performed.

You do not need to turn your life into a tax audit file.

But if two countries later disagree about where you lived, having contemporaneous evidence is considerably better than trying to reconstruct 200 travel days from memory.

Plan ahead

Most executive relocations to Switzerland are manageable.

The expensive cases usually arise when a decision with tax consequences has already been made before anyone looks at the tax position.

A move on 1 July rather than 1 January can affect the first Swiss tax year. A share award vesting shortly after arrival may require cross-border allocation. A spouse remaining abroad can change the treaty analysis. Sending an employee abroad may even create a tax exposure for the employer itself.

If a company is already deciding where the executive will live, how the employment contract will be structured, what the employee will do abroad and when outstanding bonuses or equity will vest, the tax analysis should happen at the same time.

The right moment to discover that Switzerland considers you resident, or that another country considers your employer to have a permanent establishment, is before the move, not when the first tax assessment arrives.

In a Nutshell

• Swiss tax residency can begin from the date of relocation. You do not necessarily have to spend 183 days in Switzerland first.

• The 183-day rule generally concerns the allocation of taxing rights over employment income under a tax treaty. It is not Switzerland’s basic domestic residency test.

• Spending fewer than 183 days in another country does not automatically prevent that country from taxing employment income. The other treaty conditions must also be satisfied.

• Cross-border employees can also create permanent establishment risk for their employer.

• There is no universal PE day-count. A construction project, consulting assignment and employee negotiating contracts can be treated differently, and the applicable tax treaty matters.

• The Switzerland–Hong Kong treaty is a useful example: its special 270-day service rule is limited to services connected with construction, assembly, installation and related activities.

• Residency, payroll, deferred compensation, permanent establishments and social security should ideally be reviewed before the relocation or assignment begins.

Sources

• • Federal Act on Direct Federal Taxation (DBG) – Fedle
  • Canton of Zurich – International changes in tax liability during the year
  • Canton of Zurich – Annualisation during part-year tax liability
  • Swiss Federal Tax Administration – Germany: Double Taxation Agreement
  • Swiss Federal Tax Administration – Hong Kong: Double Taxation Agreement
  • Federal Council Message on the Switzerland–Hong Kong DTA – Fedlex
  • OECD Model Tax Convention on Income and on Capital 2017 – OECD
  • Canton of Zurich – Tax at Source
  • Swiss Federal Social Insurance Office – Posted Workers
  • Swiss Federal Tax Administration – Circulars on Direct Federal Tax