Home Office Part II - Shift of income tax and social security nexus?


Background

In the course of the current corona epidemic, many employees have been instructed by their employers to work from home in their so-called home office. In a former legal update that we published on our COVID-19 website on 27 March 2020 (Home Office Part I), we have raised and analyzed the question whether home office work will create a permanent establishment of the company.

In this second series, we will now take a closer look at what other effects home office work in an international cross-border context may have.

Does working from home abroad have an effect on employees‘ personal income tax situation?

Employees qualifying as cross-border commuters or those with a weekly residence permit without having a tax residence in Switzerland are in principle subject to tax at source on their income from employment. However, according to Swiss domestic tax law, such source tax levied due to economic affiliation is only triggered if those employees carry out their work physically on Swiss territory.

During the current Corona crisis, employees have been instructed to work from their home abroad. Consequently, Switzerland´s right to levy source tax is in principle lifted. In the absence of a domestic legal basis for taxation, it is irrelevant whether an applicable double tax convention would allocate a taxing right to Switzerland, as double tax conventions have a so-called „negative effect“. This means that a tax liability for allocated income under an applicable double tax convention can only be established by domestic tax law.

Following its domestic tax rules, Switzerland could not tax the income from employment due to the lack of economic affiliation. On the other hand, the foreign jurisdiction where the employee resides and has her/his home office might now be in a position to tax a greater share of the employee´s income from employment received for her/his home office work performed within its territory.

Therefore, and due to the switch of the international tax allocation, the employee´s overall individual income tax burden might be subject to change and possibly higher depending on the applicable rules of the country of residence. We therefore recommend elaborating the overall personal income tax effect in advance to avoid any undesired surprises.

Is it possible to use a Swiss company car for private purposes in the EU without triggering customs and VAT?

The use of a Swiss declared and registered company car is possible without triggering EU customs duties if it is commercially used. The employee as a resident of the EU (e.g. Germany or Austria) may use her/his Swiss declared and registered car for private purposes only for her/his way to work. There are no exceptions possible. Otherwise, the car must be declared for EU customs and VAT purposes.

Consequently, EU resident home office workers should currently leave their company car in their garage as otherwise the private use of a Swiss company car could become very costly (i.e. at least 15% EU VAT on the car´s market value plus customs if no preferential treatment is eligible).

Does working from home abroad have an effect on social security laws applicable to cross-border commuters?

Applicable social security laws in principle

Within the EU, a specific regulation governs what social security scheme is applicable to employees living and/or working in different member states. Being a part of the free movement package between Switzerland and the EU, the regulation is directly applicable in Switzerland as well.

As a matter of principle, employees are subject to the social security laws of one member state only. Employees are normally subject to the social security laws of the state in which they are physically performing their work. There are, however, certain exceptions to this principle. For instance, a cross-border commuting employee, who works a significant part (i.e., 25% or more) in her/his country of residence, will be subject to the social security laws of the country of residence, not the country where the main place of work is located.

General (not corona virus) view on the home office situation

The rules summarized above also apply to employees working (partly) from home. If, for instance, a French resident works four days per week in Switzerland and one day per week from home, she or he will be subject to the social security laws of Switzerland only. In such case, the work performed at home should not qualify as significant (i.e., below 25%) in light of the applicable rules on the coordination of the social security systems.

In contrast, if the same employee works two days from home and three days in the Swiss office only, French social security laws will generally apply. The employer will thus need to make contributions to the French social security authorities, whereas no contributions should be due in Switzerland.

Home office in times of the corona virus

Due to the current COVID-19 epidemic, many companies have instructed their employees to stay at home and work out of their home office. This will, at least temporarily, mean that cross-border commuters will work more than 25% of their time from home. For this reason, the question arises whether such employees will be, at least temporarily, subject to the social security laws of their country of residence.

In principle, the answer is no. The relevant provisions of the applicable EU regulation require that work is carried out habitually and not just temporarily in several countries. As a rule of thumb, the situation during the next twelve months must be considered. A few one-off weeks of home office work, especially in the current exceptional economic situation, should not lead to a shift of the social security nexus for cross-border commuting employees. They remain subject to Swiss social security legislation if they were already subject to Swiss social security law prior to the coronavirus epidemic. Even a temporary fluctuation of the work performed in the country of residence because of the epidemic should not change the social security rules applicable to cross-border commuters who have previously worked in several countries.

Finally, it should be noted that it is also not necessary to systematically issue certificates (e.g., A1 forms) as is usually the case for posted employees.