27 July 2021

Taxes and social security for Covid home office – an update

What currently applies to international employees

On May 31, the so-called stabilisation phase began in Switzerland. Since then, the home office obligation has been reduced to a recommendation. The Covid-19 policies of neighbouring countries are also subject to ongoing dynamics, depending on the respective epidemiological situation. Therefore, the assessment of the tax and social security situation for companies and their employees working in a home office can quickly become confusing. In order to counter these uncertainties, Switzerland already agreed on special Corona-related arrangements with neighbouring countries in 2020. Many of these agreements have since been extended. This article provides an overview and points out possible risks.

Taxes: International employees can remain in their home office for the time being

Due to the recommended health protection policies and the difficulties in international travel, many international employees, especially cross-border commuters, will continue to work in their home offices this summer. In response to the Covid-19 pandemic, Switzerland has concluded provisional agreements with neighbouring countries Germany, France, Italy and Liechtenstein on the taxation of international home office employees. These agreements have since been extended as far as contractually necessary. The special rules prevent the Covid-19 pandemic from leading to an interim shift in the taxation of international employees. Specifically, the existing tax treaties will continue to apply as before as long as the Covid-19 exemptions are in effect. This means that international workers who work from home due to the Covid-19 measures will continue to be subject to the same tax rules as if they were physically working at their previous place of work.

Where Switzerland has not concluded a special agreement with a country, Switzerland's right of taxation for home office days does not apply, as the employee is then not physically active in Switzerland. It is therefore particularly important to document where the employee carries out his or her work. For example, no special agreement has been concluded with Austria, meaning that there is a risk that Austria will insist that the place where the activity is carried out is decisive in the case of home office. As a result, the earned income of such cross-border commuters would be taxable in Austria. Switzerland would then have to exempt the corresponding days from taxation. Proof of the effective place of work by means of a calendar or other evidence is decisive for these cross-border commuters in order to avoid double taxation.

The above-mentioned regulations have different deadlines depending on the country; the specific terms for the individual country should therefore be kept in mind (see overview table below).

Social security: Extension of the flexible subordination

European coordination law, applicable to Switzerland, stipulates that only one state is responsible for social security for cross-border workers, namely the state in which the gainful employment is carried out. Employees who work in an EU member state and in Switzerland at the same time are insured in their country of residence if they carry out a substantial part of their work there, i.e. at least 25% of their total work. Cross-border commuters who carry out more than 25% of their work in the foreign home office must therefore be insured with the foreign social security institution in their country of residence, which means that the Swiss social insurances – including old-age and survivor's insurance (OASI), etc. – are no longer responsible.

In response to the Corona-related exceptional situation, the EU recommended a flexible interpretation of the regulations outlined above already in the early stages of the pandemic. Under social security law, the insurance status of persons subject to the Agreement on the Free Movement of Persons or the EFTA Convention should not change due to the Covid-19 restrictions. Accordingly, a person is considered to be gainfully employed in Switzerland even if he or she cannot physically perform his or her activity here due to Corona. In particular, cross-border commuters in home offices and their employers can benefit from this.

With regard to Germany, Italy, Austria and Liechtenstein, the agreed flexible application of the subordination rules has been extended until December 31, 2021. For France, this applies at least until September 30, 2021. With regard to the other EU / EFTA states, the flexible application applies in principle until December 31, 2021. As soon as the health situation has normalised, the usual subordination rules will apply again in full.

 

TAXES:

Provisional agreements on the taxation of cross-border commuters

SOCIAL SECURITY:

Flexible application of the subordination rules in social security law

Germany

Consultation Agreement:

Valid until September 30, 2021

Until December 31, 2021

France

Memorandum of Understanding:

Valid until September 30, 2021

Until September 30, 2021

Italy

Memorandum of Understanding:

Valid until further notice; extension by one month at a time; authorities must agree in advance on a termination date

Until December 31, 2021

Liechtenstein

Memorandum of Understanding:

Valid until further notice; extended one month at a time; can be terminated unilaterally at least one week before expiry date

Until December 31, 2021

Austria

None

Until December 31, 2021


Permanent establishment risk due to home office?

The consultation agreement of April 27, 2021 between Switzerland and Germany regarding the Covid-19 pandemic now contains a provision that excludes a permanent establishment if, due to the pandemic, home office activities are carried out in the employee's country of residence. According to the agreement, the necessary degree of permanence of the activity or the power of disposal of the company is already lacking for the assumption of a permanent establishment if the activity of the employees is carried out exclusively at the residence in the country of domicile due to the pandemic.

All other agreements mentioned do not contain any provisions that would change the rules regarding the creation of a permanent establishment of the employer in the employee's country of residence. The economic damage resulting from Corona and the newly awakened awareness of the whole home office issue could lead to tax authorities increasingly focusing their attention on such work concepts in the future. That this assumption is not entirely unjustified is also shown by the consultation agreement with Germany, which only denies the foundation of a permanent establishment if the work activity has to be carried out exclusively at the place of residence due to the pandemic.

From Switzerland's perspective, an employer can in principle create a permanent establishment at the employee's place of residence if the company's business activities are carried out continuously in whole or in part at a fixed place of business.[1] To the extent that work is done from home due to a home office obligation or a lockdown, this does not constitute a permanent establishment in Switzerland because of the temporary nature of such an arrangement, according to our and probably also the prevailing opinion. The situation is different if companies and employees intend to continue the home office concept even after the Corona pandemic. This applies all the more if the employees in question are senior executives who will no longer be provided with permanent workplaces. From a tax point of view, it is particularly risky if the home office employees are members of the executive board. In this case, there is a risk that the company will be partially taxed due to the place of actual management at the place of residence of the members of the executive board. This constellation must be considered not only in cross-border situations, but also in intercantonal situations.

In other countries, the requirements for the creation of a permanent establishment may be considerably lower than in Switzerland. An OECD analysis of current double taxation agreements (DTAs) nonetheless noted that the Covid-19 pandemic is a force majeure. It summarized that "teleworking by individuals from home (i.e., home office), as a public health measure imposed or recommended by at least one of the governments of the jurisdictions involved to prevent the spread of the Covid-19 virus, would not create a fixed place of business PE for the business/employer."[2] To reduce the risk of creating a permanent establishment, we recommend that employers with cross-border home office workers always keep this risk in mind – even more so the longer the situation lasts. From a tax perspective – i.e. with a view to avoiding a foreign permanent establishment – regular home offices should be avoided for international cross-border commuters if presence at the workplace is possible in principle. This applies in particular to the period after the Corona pandemic and especially to employees with signing powers. For the time during Corona, it is advisable to document which rules applied in the company regarding home office.


[1] See Art. 51 II DBG

[2] Updated guidance on tax treaties and the impact of the COVID-19 pandemic, OECD, January 21, 2021, para. 19.

Categories: Pension Funds, Tax

You are currently offline. Some pages or content may fail to load.