Employees residing abroad and holding an employment contract with a Swiss resident employer, but not working on Swiss territory are not subject to Swiss tax at source

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In its decision of March 25, 2011 the Swiss Federal Supreme Court decided that the practice of the tax administration of the canton of Zurich was unlawful.

The canton of Zurich had adopted the practice whereby an employment contract with a Swiss resident employer by itself was deemed sufficient to subject such salary to tax at source, even if the employee was not tax resident in Switzerland and worked exclusively on non-Swiss territory.  In the opinion of the Federal Supreme Court a physical presence in Switzerland is a requirement to levy tax at source.

The case involved a German citizen who worked in Switzerland for a Swiss resident employer. Until April 30, 2006 he was tax resident in Switzerland.  His salary was subject to tax at source.  On May 1, 2006 he relocated to Doha (Qatar), from where he continued to work for the Swiss resident employer.  The issue was whether as of May 1, 2006 the Swiss resident employer was under the obligation to withhold the tax at source on the salary of the German citizen, despite the fact that as of said date the German citizen was not a Swiss resident anymore and worked for the Swiss resident employer exclusively from Doha.

The double taxation treaty of September 24, 2009 concluded between Switzerland and Katar was not applicable in the case at hand.

The tax administration of the canton of Zurich was of the view that the salary of the German citizen paid by the Swiss resident employer continued to be subject to tax at source after April 30, 2006.  The Swiss resident employer on the other hand believed that as of May 1, 2006 it was under no obligation anymore to withhold the tax at source on the salary it paid to the German citizen.

The view of the tax administration of the canton of Zurich was based on the jurisprudence of the Federal Supreme Court developed under art. 3, para. 3, sub-para. e of the Federal Council’s resolution regarding federal direct taxation of December 9, 1940 (BdBSt).  Pursuant to this article individuals who were not tax domiciled or resident in Switzerland, but performed “a personal activity in Switzerland” were subject to tax at source.  The Federal Supreme Court had adopted a wide interpretation of the phrase “a personal activity in Switzerland” and was of the opinion that an employment contact with a Swiss resident employer by itself with no physical presence on Swiss territory was sufficient to create “a personal activity in Switzerland”.  The Federal Supreme Court considered that “a personal activity in Switzerland” was not equivalent with “a physical presence” in Switzerland.  The requirement of “a personal activity in Switzerland” was met if the employee e.g. acquired from non-Swiss territory over the phone Swiss costumers for the Swiss resident employer.  This jurisprudence of the Federal Supreme Court had been criticised by the majority of the Swiss doctrine.
On January 1, 1995 the BdBSt was replaced by the Federal Act on Direct Taxation of December 14, 1990 (FDTA).  Art. 5, para. 1, sub-para. a FDTA contains a provision with a similar wording as  art. 3, para. 3, sub-para. e BdBSt.  Pursuant to art. 5, para. 1, sub-para. a FDTA individuals who are not tax domiciled or resident in Switzerland, but perform a “gainful employment in Switzerland” are subject to tax at source.

The tax administration of the canton of Zurich requested the Federal Supreme Court to confirm that its jurisprudence developed under art. 3, para. 3, sub-para. e BdBSt also applied to art. 5, para. 1, sub-para. a FDTA.

The Federal Supreme Court has now ruled that the phrase “a gainful activity in Switzerland” set forth in art. 5, para. 1, sub-para. a FDTA shall not be interpreted in the sense it had interpreted “a personal activity in Switzerland” under art. 3, para. 3, sub-para. e BdBSt.  The Federal Supreme Court is of the opinion that the salary of an employee who is not tax domiciled or resident Switzerland, but is employed by a Swiss resident employer can only be subjected to tax at source if he is physically present in Switzerland.  If the employee works for the Swiss resident employer exclusively from non-Swiss territory, his salary cannot be subjected to tax at source.

In cases in which an employee relocates from Switzerland to a country that does not tax employment income and with which Switzerland has not concluded a double taxation treaty, the salary paid by the Swiss resident employer remains tax-free.  It is, however, important to note that the employee who moves from Switzerland abroad must be able to prove that he has established a new residency abroad.  Otherwise, the employee continues to be subject to Swiss taxation. It is not enough to simply cut the ties to a former Swiss residence.

Resources

Decision of the Swiss Federal Supreme Court of March 25, 2011 (2C_662/2010)

For further information or to discuss any of the issues raised, please contact Walter H. Boss or Stefanie Monge on + 41 44 220 12 12.