There are over 300,000 cross-border commuters who commute to Switzerland for work. In the traditional model, their place of residence and workplace are located in different states. Now however, if the foreign employee works from home, their work is carried out entirely or partially in the country in which they reside. As well as having an impact on the taxation of the employee, this can also have undesired tax effects for the employer.
If the foreign employee’s work in their home office creates a permanent establishment for the employer in the country in which the employee resides, the employer becomes liable for tax in this country. The tax burden may then be higher and results in additional work as a result of tax declaration obligations and the requirement to ascertain the profit generated by the permanent foreign establishment.
Agreement with neighboring countries: Pandemic exemption
Employees who found themselves working from home as a result of the coronavirus pandemic were initially given the all-clear: The OECD recommended that the temporary relocation of the place of work due to the COVID-19 crisis should not result in the creation of a new permanent establishment for the employer. Switzerland complied with this recommendation and reached agreements with neighbors Germany, France, and Italy that home office working as a result of the pandemic should not result in any tax implications. The consultation agreement with Germany, which continues to apply until at least the end of September and will then extend automatically by another month in each case, unless terminated by one of the parties, explicitly makes it clear that this also applies to the formation of permanent establishments. This approach is to be welcomed. However, it also shows that the theme of home office working is of relevance from a tax perspective outside the coronavirus pandemic.
Double taxation treaty between Switzerland and Germany crucial to rules
Rules about the founding of a permanent establishment can be found in both national tax legislation and international double taxation treaties (DTTs). With respect to cross-border matters, the relevant DTT, for example the Switzerland-Germany DTT, is decisive to interpretations in the respective countries. Most double taxation treaties, including the Switzerland-Germany DTT, are based on a model convention from the OECD. This means that the concept of a permanent establishment is laid out internationally in a standardized manner.
What is considered a permanent establishment and when is particular caution required?
In essence, a permanent establishment, according to the model convention, requires a fixed place of business through which the business of an enterprise is wholly or partly carried out. Even private living spaces may be included under certain circumstances. A particular duration of work and the company’s power of disposal with respect to the place in question are required. This is where the existence of a permanent establishment regularly collapses, as far as the German fiscal authorities are concerned. For such a power of disposal to exist, they require the employer to have comprehensive access rights to the private premises of the employee that are used for business purposes. This is not the case in most cases.
The cantonal tax authorities in Switzerland interpret the concept of power of disposal somewhat more broadly and merely require that the place of business is attributed to the company. This is the case in particular if the employee has no place of work at the business itself. However, even in this case, the occasional use of a home office alongside the actual place of work in the office does not result in the creation of a permanent establishment. The Austrian fiscal authorities go one step further and assume that the employee grants the employer actual power of disposal if they carry out their work – arranged by the employer – from home to a considerable extent.
Particular caution is advised if the member of staff concludes contracts for the company from their home office that are not limited to auxiliary activities or the purchase of goods or commodities for the company. The profit generated from such contracts is taxed as profit from a so-called representative permanent establishment in the country of residence if the member of staff works in this country for the company with a degree of permanence. The existence of a fixed place of business is completely irrelevant within this.
Consequences for long-term, cross-border home office work
In assessing whether the home office of a foreign employee creates a permanent establishment for the employer, various factors play a role. At the forefront is the power of disposal criterion, which is interpreted differently by different national authorities. In the context of the COVID-19 crisis, a change in assessment under tax law is excluded with respect to the formation of a new permanent establishment due to members of staff or even the Executive Committee working from home.
owever, companies that are planning to give their foreign members of staff the opportunity to work from home to a greater extent in the long term should look into the tax aspects of home working in more detail in each case and document the relevant facts and circumstances in detail, so as to be able to react to queries in this regard from the authorities.
