Continuing to work from home

Situation/problem

In the wake of the coronavirus crisis, many companies have asked or allowed their employees to work from home. Despite the fact that the Federal Council’s recommendation to work from home ceased to apply as of 22 June 2020, many employees have continued – and are continuing – to work from home.

Particularly in the case of employees of Swiss companies who live abroad – i.e. cross-border commuters and weekly residents – the decision to continue working from home may raise a number of social security, tax and legal issues, and have far-reaching consequences in practice. During the exceptional situation caused by the current crisis, non-resident employees who were prevented from physically performing their work in Switzerland were nevertheless considered to be working in Switzerland under international agreements. Therefore, there was no need for special action regarding taxes and social security contributions during this period. However, it is now known that the flexible application of the social security and tax obligations will only remain in effect for a limited period – e.g. until 31 December 2020 in relation to Switzerland and Germany, and only until 31 August 2020 in relation to France and Austria.

The practical implications of continuing to work from home for non-resident employees should therefore be considered ahead of time.

Please note: in the following, the possible consequences are presented as examples and somewhat simplified. Only an analysis of the specific, individual case will ensure correct application of the relevant rules. If you employ staff who are resident abroad and who will continue to work from home, please contact us.

Social security

Under an agreement reached between Switzerland and the Member States of the European Union, the citizens of these countries are subject to social security contributions in only one country. This is primarily their place of work (country of employment). For example, a person who lives in Germany and works in Switzerland is (only) subject to social security contributions in Switzerland. However, by working from home, this person is pursuing their gainful employment in two countries (Germany and Switzerland), one of which is their country of residence (Germany). In this case, the rules state that this employee is now liable for social security contributions in their country of residence if they carry out a substantial proportion of their gainful employment there. In this case, “substantial” means at least 25% of the person’s working time. This means that as soon as a cross-border commuter residing in Germany spends 25% or more of their working time at home, they become subject to mandatory social security contributions on their income in Germany. The employee’s previous liability for social security contributions in Switzerland will then cease to apply. As a result, the Swiss employer must register as an employer in Germany for social security purposes and henceforth account for and pay salary contributions in Germany.

In order to prevent the social security obligation from being “tilted” from Switzerland (country of employment) to their country of residence, employees who live abroad may not spend more than 25% of their working time at home. It is advisable to conclude a corresponding written agreement (e.g. as a supplement to the existing employment contract) with the respective employees.

Please note: if you employ employees who work in more than two countries or who live in countries outside the European Union or have a different nationality (than Swiss/EU), different rules will most likely apply, which must be analysed on a case-by-case basis.

Taxation of earned income (withholding tax)

As a rule, non-resident employees who work in Switzerland are taxable in Switzerland on the income earned here in accordance with the double taxation agreement concluded with the country in question. The taxes are levied in Switzerland in the form of withholding tax, which must be deducted and paid by the Swiss employer. Certain special rules apply to cross-border commuters. For example, cross-border commuters living in Germany and working in Switzerland pay tax on their income in Germany, however a withholding tax of 4.5% is withheld by their Swiss employer. Cross-border commuters from Italy and Austria pay tax on their income earned in Switzerland, whereby Switzerland transfers certain amounts to their country of residence. And cross-border commuters from France are actually subject to different rules depending on the canton in which they are employed.

If employees who are resident abroad spend more time working from home, a part of their income from employment, which was previously taxable in Switzerland, may become taxable in their country of residence (or vice versa). The employer and/or employee must therefore document exactly how many days are spent working from home.

Examples:

• A cross-border commuter resident in Austria was previously taxed on their entire earned income in Switzerland (withholding tax). Should this person now start working from home on two days per week, the Swiss employer may in principle only deduct withholding tax for the remaining three days on which the person works in Switzerland (i.e. there is only a withholding tax liability for 60% of the employee’s income). The remaining income would be taxed in Austria.
• A cross-border commuter resident in Germany was previously taxed in Germany on their entire earned income; a withholding tax of 4.5% was retained in Switzerland. If this person works now begins working from home on two days per week, their status as a cross-border commuter will no longer apply. As a result, the Swiss employer would only be obliged to deduct withholding tax for the remaining three days on which the employee works in Switzerland – at the full rate for this income level (instead of at 4.5%, as was previously the case). The remaining income would be allocated to Germany for purposes of taxation.

Please note: again, the situation must be analysed on both a country-specific and case-by-case basis. In addition, there are some exceptions to the basic rules for senior executives.

Jurisdiction / law applicable to contracts of employment

If non-resident employees work predominantly or mostly (e.g. 60%) from home, this may result in the place of jurisdiction being shifted abroad and the employment relationship becoming subject to foreign law. This, in turn, could have the following consequences:

• Lawsuits can only be filed against an employee at their foreign place of residence and within the jurisdiction of foreign (e.g. German) courts.
• Foreign employee protection regulations apply, which are significantly more “employee-friendly” in most surrounding countries than in Switzerland. For example, it can often be considerably more difficult to dismiss an employee who is resident in Germany.

It is permissible, subject to restrictions, to agree in the employment contract (or in an addendum thereto) that the place of jurisdiction is in Switzerland and that the employment relationship shall remain subject to Swiss law. This is strongly recommended for employees who regularly work from home in a foreign country.

Company profit tax (the problem of a “permanent establishment” for tax purposes)

If non-resident employees spend more time working from home, there is a risk that their activities abroad could give rise to a permanent establishment under tax law. As a result, the employer company would also become liable for taxation in the employee’s country of residence. Whether this risk exists in practice depends not only on how regularly non-resident employees work from home, but also on whether a workplace is made available to them at their registered business premises and/or in which capacity they work while abroad. Therefore, a detailed analysis of the activities of the employees concerned is necessary in order to assess the specific risks (e.g. by means of an employment contract or separate job description).

Example: X AG, based in Zurich, employs ten people, four of whom live in Germany. Most of these people are now working from home, where they carry out a significant proportion of the business activities conducted by X AG. Thus, X AG has established a taxable permanent establishment in Germany – and must henceforth pay part of its profit tax in Germany.

Data protection

EU countries in particular have much stricter data protection laws than Switzerland. For example, these laws must be observed as soon as employees are given access to their Swiss employer’s server while working from home elsewhere in the EU. However, it should be noted that Swiss companies with customers in the EU are obliged to comply with EU data protection laws in any case (regardless of whether any of their employees are resident abroad).