Taxation of Cross-Border Workers and Foreign Residents

Taxation of Cross-Border Workers and Foreign Residents in Switzerland

The Swiss tax framework is complex for cross-border workers and foreign residents, with specific rules varying by canton and international agreements. Switzerland, surrounded by five countries, receives more than 340,000 cross-border workers daily who contribute to its economy while residing in a neighbouring country. In parallel, many foreign residents establish themselves in Switzerland under different tax statuses. Both categories are subject to distinct taxation regimes, influenced by double taxation treaties, bilateral agreements and the particularities of Swiss fiscal federalism. Understanding these taxation mechanisms is a major issue both for those concerned and for Swiss employers, in a context where cross-border mobility continues to intensify.

The Tax Status of Cross-Border Workers in Switzerland

A cross-border worker is defined as a natural person who carries on an employed activity in one state (state of activity) while residing in another state (state of residence) to which they regularly return. In Switzerland, this status is governed by specific agreements with each neighbouring country.

The taxation of cross-border workers employed in Switzerland varies considerably depending on the country of residence. For French cross-border workers, the Franco-Swiss double taxation treaty provides that tax is levied in the state of residence, namely France, except for the cantons of Geneva, Vaud, Valais and Berne which apply a specific regime. Workers residing in France and employed in the canton of Geneva are subject to withholding tax at source in Switzerland, while Geneva pays financial compensation to the French departments bordering it.

For Italian cross-border workers, the agreement between Switzerland and Italy provides that taxation is carried out in the country of activity (Switzerland) with a partial retrocession to Italy. The cantons of Ticino, Graubünden and Valais levy tax at source and then return a portion (generally 38.8%) to the Italian municipalities where the cross-border workers reside.

German cross-border workers are subject to a different regime. Under the German-Swiss convention, they are taxed in their country of residence (Germany) if they return daily to their domicile. However, Swiss cantons may levy up to 4.5% of gross payroll.

For Austrian cross-border workers, taxation is mainly carried out in the country of activity (Switzerland), with certain exceptions for workers residing in defined border zones.

Regarding Liechtenstein cross-border workers, a specific agreement provides for taxation in the state of activity, with special provisions for civil servants.

These different tax regimes demonstrate the complexity of the system and require in-depth analysis for each individual situation.

Withholding Tax and Its Particularities

Withholding tax constitutes the main mechanism for taxing cross-border workers in Switzerland. This system allows the Swiss state to levy income tax on employment income directly through the employer, before the salary is even paid to the worker.

The withholding tax schedule varies according to several criteria:

• The canton and municipality of work
• The family situation of the taxpayer (single, married, with or without children)
• The rate of activity (full-time or part-time)
• The level of income
• Religious denomination (in certain cantons)

The deduction is made by the employer who withholds tax from gross salary and pays it over to the cantonal tax administration. This method guarantees the Swiss state the collection of tax, even if the worker resides abroad.

Since the reform that entered into force on 1 January 2021, several significant changes were introduced:

Correction of Withholding Tax

Persons subject to withholding tax may now request a correction of their taxation until 31 March of the following year in the event of errors or omissions in the calculation. This possibility relates in particular to deductions not taken into account in the standard schedule (repurchase of second pillar, continuing education costs, etc.).

Ordinary Subsequent Taxation (OST)

Swiss fiscal residents whose annual gross income reaches or exceeds CHF 120,000 are mandatorily subject to ordinary subsequent taxation. This procedure requires the filing of a complete tax return, similar to that of Swiss taxpayers. For non-residents, OST may be requested under certain conditions if their situation is close to that of a Swiss taxpayer (quasi-resident).

It should be noted that withholding tax schedules already incorporate certain flat-rate deductions (professional expenses, insurance premiums, social deductions). However, these flat rates may be unfavourable for certain taxpayers, hence the potential interest of an OST or a correction request.

For cross-border workers, the complexity lies in the articulation between Swiss withholding tax and tax obligations in their country of residence, with risks of double taxation or, conversely, opportunities for tax optimisation that require professional assistance.

Residence Permits and Their Tax Implications

The status of a foreign resident in Switzerland is determined by the type of residence permit, which directly influences the applicable tax regime. The main permits and their tax consequences are as follows:

Permit B (Residence Authorisation)

Holders of a permit B who carry on a gainful activity in Switzerland are considered Swiss fiscal residents and are taxed on their worldwide income. However, if they do not have the right to settle in Switzerland (permit B without gainful activity), they may be subject to withholding tax on their Swiss income.

For EU/EFTA nationals, permit B is generally valid for 5 years and renewable. For other nationalities, its duration is limited to one year, renewable. Permit B holders are subject to ordinary taxation and must file an annual tax return.

Permit C (Establishment Authorisation)

Permit C holders benefit from a status close to that of Swiss citizens on the tax front. They are taxed on their worldwide income and assets under the ordinary taxation system. This permit is generally issued after 5 or 10 years of residence in Switzerland, depending on nationality and international agreements.

Permit L (Short-Duration Authorisation)

Permit L holders working in Switzerland for a period of less than one year are taxed at source. If their stay extends beyond one year, they may be subject to ordinary subsequent taxation.

Permit G (Cross-Border Workers)

Permit G holders are not considered Swiss fiscal residents. Their taxation depends on the tax conventions between Switzerland and their country of residence, as detailed above.

A specific case concerns expenditure-based taxation, commonly known as lump-sum taxation or flat-rate taxation. This regime allows foreign nationals establishing themselves in Switzerland for the first time, or after an absence of at least ten years, and who do not carry on any gainful activity there, to be taxed not on their worldwide income and assets, but on their expenditure. The minimum taxable amount varies by canton, with a federal floor set at CHF 400,000.

This regime presents significant advantages for wealthy individuals, but its application is strictly regulated and excludes any professional activity in Switzerland. Certain cantons, such as Zurich, Basel-Stadt, Schaffhausen, Appenzell Ausserrhoden and Basel-Landschaft, have abolished this taxation system.

Double Taxation Treaties and Their Application

Double taxation treaties (DTTs) constitute a fundamental element of international tax law. Switzerland has concluded more than 100 DTTs with different countries to prevent taxpayers from being taxed twice on the same income.

These conventions define which state has the right to tax which types of income and under what conditions. They generally provide for three mechanisms to eliminate double taxation:

• Exemption: income taxed in one state is exempt from tax in the other state
• Credit: tax paid in one state is deducted from tax due in the other state
• Rate reduction: applicable mainly to dividends, interest and royalties

For cross-border workers and foreign residents in Switzerland, DTTs determine in particular:

Tax Residence

DTTs establish tie-breaking criteria to determine in which state a person is considered a fiscal resident in the event of a conflict. These criteria generally follow a hierarchy: place of permanent habitation, centre of vital interests, habitual abode, nationality.

Taxation of Employment Income

The general principle is that income from dependent activity is taxable in the state where the activity is exercised. However, exceptions exist, in particular for short stays (the 183-day rule) or for certain categories of cross-border workers under specific agreements.

Taxation of Pensions and Annuities

Private pensions are generally taxable in the state of residence of the beneficiary, while public pensions (paid by a state or public body) are taxable in the source state. Social security benefits follow variable rules depending on the conventions.

The practical application of DTTs requires in-depth analysis of the taxpayer's personal situation and the specific provisions of the applicable convention. Specific procedures may be required to benefit from treaty advantages, such as certificates of tax residence or requests for withholding tax refunds.

For foreign residents holding assets or receiving income in their home country, the interaction between Swiss tax law and DTTs can create complex situations requiring personalised advice to optimise the tax situation while complying with legal obligations in each jurisdiction.

Current Challenges and Specialist Legal Support

The taxation of cross-border workers and foreign residents in Switzerland faces several significant developments that are changing the cross-border tax landscape.

The digitalisation of the economy and the development of telework, accelerated by the health crisis, raise unprecedented questions in terms of international taxation. The practice of teleworking for cross-border workers may modify the place of taxation if a threshold of days worked outside Switzerland is exceeded. Mutual agreement procedures were concluded temporarily with neighbouring countries during the pandemic, but the question of a permanent framework remains open.

The Automatic Exchange of Information (AEoI) and the implementation of OECD BEPS (Base Erosion and Profit Shifting) standards strengthen international tax transparency. Switzerland actively participates in these initiatives, which implies increased sharing of financial information between tax administrations and limits the possibilities of non-declaration of foreign income or assets.

The increasing international mobility of skilled workers leads to greater complexity of individual tax situations. Multinational career paths, temporary secondments and dual fiscal residences require personalised analysis.

In this context, the role of a law firm specialising in international tax law becomes determinant. Our law firm offers tailored support for:

• Analysing the specific tax situation of cross-border workers depending on their country of residence and canton of activity
• Determining the tax status of foreign residents according to their residence permit and personal situation
• Advising on legitimate tax optimisation options within the framework of double taxation conventions
• Accompanying procedures for withholding tax correction or ordinary subsequent taxation
• Representing taxpayers in their relations with Swiss and foreign tax administrations
• Anticipating the tax consequences of changes in situation (relocation, change of employment, acquisition of assets abroad)

The complexity of the Swiss tax system, characterised by its three-level federalism (federal, cantonal and municipal), combined with the specificities of international agreements, requires pointed expertise that our law firm places at the service of cross-border workers and foreign residents. In the face of constant developments in legislation and case law in tax matters, preventive legal advice allows costly tax reassessments or prejudicial double taxation situations to be avoided.

The proactive and personalised approach of our law firm aims to secure each client's tax situation while identifying legitimate optimisation opportunities in a permanently evolving international tax environment.

Taxation Regimes by Country of Residence of the Cross-Border Worker

Tax Regimes by Type of Residence Permit

Frequently Asked Questions on the Taxation of Cross-Border Workers and Foreign Residents