Switzerland and France on 27 June 2023 entered into an agreement that provides new and permanent taxation rules for income from home office work.
The supplementary agreement to the bilateral double taxation agreement between Switzerland and France was signed in Paris. It allows cross-border home office up to 40% of the working time per year - especially for cross-border commuters. It is part of the mutual agreement on home office concluded on 22 December 2022, which entered into force on 1 January 2023.
What is it the agreement about?
The supplementary agreement offers Swiss employers and employees the option of arranging to work from their cross-border home office for up to 40% of the annual working time. Within this limit, the supplementary agreement provides that salary payments in connection with home office will be taxed in the contracting state in which the employer is located. The supplementary agreement also introduces an innovation: an automatic exchange of information on salary data for persons who are residents of a contracting state and work for an employer in the other contracting state.
Daily cross-border commuters
Employees who fall under the special regulation for cross-border commuters (according to the special agreement of 11 April 1983 for the cantons of Berne, Solothurn, Basel-Stadt, Basel-Land, Vaud, Valais, Neuchâtel and Jura, to which reference is made in Article 17 paragraph 4 of the France-Switzerland double taxation agreement) may, without calling into question their cross-border commuter status, carry out their activity for a Swiss employer at home in France for up to 40% of the annual working time without Switzerland losing the full right of taxation of the corresponding salary.
Subject to compliance with this 40% limit, these employees remain liable to tax in their country of residence, France. The same applies in principle in the reverse case. In concrete terms, this means that France has the full right of taxation on the salary if an employee resident in Switzerland with a French employer works in a Swiss home office up to a maximum of 40%.
Other cross-border workers
For other employees who do not meet the requirements for the application of the cross-border commuter status and who fall under the regulations of the France-Switzerland double taxation agreement, the new mutual agreement basically provides for the same, namely that the salary remunerations which the French employee earns in the home office for his activity for the Swiss employer continue to be fully taxed in Switzerland, provided that they do not exceed 40% of the working time per calendar year. Again, the same applies in the reverse case.
What does this mean for Swiss employers with French employees?
For Swiss employers, this means that withholding taxes continue to be deducted as if the home office work performed in France, the employee's country of residence, had been performed on the employer's premises in Switzerland. However, if the activity in the French home office exceeds the 40% threshold, the part of the remuneration corresponding to the French home office activity is taxable in France starting from the first day of home office activity. This means that French home office activities over the 40% threshold are subject to the general provisions of the income tax treaty between Switzerland and France from the first day of teleworking.
In other words, the portion of the cross-border worker's salary that the employee performs at a place of residence in France and not at the usual place of work in Switzerland is taxable in France, not in Switzerland. Thus, for example, if an employer allows the employee to work from home three days per week (60% for a full-time equivalent), 60% of the employee’s remuneration would be taxable in France.
When does the Supplementary Agreement enter into force?
The supplementary agreement must still be approved by the parliaments of both states before it can enter into force. Since the purpose and content of the new agreement are essentially the same as those of the provisions in the already concluded mutual agreement of 22 December 2022, the signing of the supplementary agreement on 27 June 2023 has immediate effect. The Memorandum of Understanding is valid until 31 December 2024, but domestic ratification by the respective parliaments is expected by then.
Creation of domestic legal basis
Until now, Swiss tax law provided for withholding taxation on the earned income of employees' resident abroad only if the work was physically performed in Switzerland. The supplementary agreement now grants the employer’s state of residence the right of taxation, even if employees work from their home office in the state of residence for up to 40%. To create a domestic legal basis for this, the Federal Council sent an amendment to the national tax law into consultation at its meeting on 9 June 2023.
Risk of permanent establishment
If an employee works from home in France for a Swiss employer, under certain conditions, this may pose a potential risk for the Swiss employer of establishing a permanent establishment in France. An analysis of this risk is always recommended in specific cases.
Is the part of the salary related to the activity performed by the cross-border worker in France taxable in France?
As of 2023, if French home office activity exceeds the 40% threshold, the entire amount -- not just the portion in excess of 40% -- is taxable in France, starting from the first day of work in France. If the teleworking for a Swiss employer from a home office in France is below the 40% threshold, there is no allocation of the taxation right to France. In the reverse case, with a French employer and a Swiss teleworking employee, the situation would be the same.
What are the consequences if a Swiss employer employs French workers who work from home for more than 40% of their employment?
As of 2023, the Swiss employer must reduce the income subject to Swiss withholding taxes by the portion relating to the home office activity in France as part of payroll accounting. It is the employer's responsibility to keep a record of these days or to delegate this duty to the employee concerned to attest to the corresponding days of presence. It is also necessary to contact the French tax authorities to clarify the conditions for taxation of the portion of the remuneration related to French home office activity, as Swiss employers may be subject to certain payroll tax obligations in France.
Does the agreement apply to part-time employees?
Yes, a corresponding reduction is made in relation to the workload. For example, an employee with a 50% workload can perform home office activities up to one day per week (40% of the 50% workload).
Does the agreement apply if one performs home office activities from a second residence?
Yes, as long as the secondary residence is in the country of residence.
How can an employer prove that the French employee’s 40% home office activity threshold has not been exceeded?
The percentage of home office work an employee is allowed must be evidenced by the submission of a contractual document. This may include, for example, a provision of the employment contract binding the employee to his employer or a home office agreement signed between the employer and his employee.
Is there a weekly limit that cannot be exceeded for determining the 40% threshold?
There is no weekly limit. Employers and employees will retain the flexibility to organise the work week as they wish throughout the year. The 40% mark cannot be exceeded within a calendar year. Thus, depending on how work is organised, it will be possible to work more than 40% from home for one part of the year, provided the 40% threshold is not exceeded for the full year.
BDO in Switzerland