A wide-reaching Federal Supreme Court decision earlier this year has significantly improved the tax planning opportunities for employees taxed at source on their employment income.
The case involved a Swiss national, who moved to France in 2001 but continued to work in Geneva. By qualifying as a cross-border worker his employment income became subject to tax at source. As a result, he was no longer able to benefit from deductions available to him when he still was a Swiss resident filing an annual tax return.
In accordance with the legislation on cross-border workers, the taxpayer was not allowed to deduct from his taxable income professional expenses such as those incurred by travelling on a daily basis from his home in France to his employment in Geneva. The taxpayer lodged an appeal against the tax assessment issued by the Geneva tax authorities, claiming a violation of both the principle of non-discrimination and the principle of equality.
On January 26 2010 the Court decided in favour of the taxpayer, concluding that cross-border workers should be subject to the same rules on tax deductible expenses as Swiss tax residents who file an annual tax return.
Prior to the decision, cross-border workers, and also Swiss tax resident employees taxed at source (B-permit holders up to a gross salary income of CHF 120’000), were only entitled to limited itemised deductions.
Responding to the ruling, the cantonal tax authorities have confirmed that Swiss tax resident employees taxed at source will now be subject to the same rules on tax deductible expenses as Swiss tax residents who file an annual tax return. Available deductions include, for example, actual travel costs from home to the place of employment, and other professional expenses.
To benefit from the new rules, taxpayers must file an annual tax return and disclose both foreign source income and foreign assets. Although, as a rule, foreign source income does not constitute taxable income, it is taken into account for income tax rate purposes. The same applies to foreign real estate: it does not constitute taxable net wealth, but affects the net wealth tax rate, and so the obligation to disclose foreign source income and foreign assets may off-set any potential tax savings resulting from the additional deductions. It is therefore important to carefully examine whether the impact of foreign source income and foreign real estate outweighs the benefit of the additional deductions.
The Geneva tax authorities have additionally adjusted their rules with respect to French resident cross-border workers employed in the Geneva area. Provided they qualify as ‘virtual residents’, they may request additional deductions. To qualify as a virtual resident at least 90% of the total income must be earned in Switzerland. For the purpose of the calculation, foreign-earned income includes foreign employment income of the spouse, the (deemed) rental value of foreign real estate, and foreign investment income.
It is expected that other cantons will follow the decision of the Federal Supreme Court with respect to virtual residents.
Decision of the Federal Supreme Court 2C_319/2009 and 2C_321/2009 of January 26, 2010