Taxation of cross-border workers in southern Switzerland uncertain during COVID-19 pandemic

By Francesca Amaddeo,  Researcher, Tax Law Competence Centre (SUPSI), Manno, Switzerland*

COVID-19 is profoundly affecting our everyday life as governments place restrictions on our freedom through quarantines and other measures.

This situation is an emergency not only from a health perspective; it has consequences for the economy and employment.

Emergency legislation often conflicts with existing law and becomes difficult to interpret.

One piece of the global puzzle is the interpretation of international tax treaties during the pandemic. The OECD has published guidelines on this topic, suggesting that countries keep rebus sic stantibus, namely, apply the rules in the same manner as before. 

The OECD addressed the cross-border workers’ situation, among other issues, including fiscal residence, permanent establishment, and so on. Indeed, a lot of tax treaties provide special measures for cross-border workers. 

Cross-border workers in southern Switzerland

Southern Switzerland and, in particular, the Canton Ticino has a large number of cross-border workers from Italy, due to its proximity to Italy and economic ties. Every day, almost 70,000 Italians cross the border to work in Switzerland.

In 1974, Italy and Switzerland signed an agreement setting out the tax regime applicable to these cross-border workers.

Within this document, though, it is not possible to find a definition of “cross-border worker.” From parliamentary reports, the concept is identified as “the worker who works in Switzerland, but which, at the end of the workday, comes back to his/her home in Italy”.

As an exception to general tax rules, the Switzerland-Italy agreement grants exclusive taxing rights on income from employment to Switzerland, as source jurisdiction. So, Swiss employers apply a withholding tax on Italian workers’ salaries.

At the end of the fiscal year, Canton Ticino (with Canton Grabünden and Canton Valais) must pay a compensation fee (38.8% of the gross amount of taxes collected) to the Italian municipalities located within 20 km of the border.

When Coronavirus emergency hit, Canton Ticino’s authorities had to face the problem that a large number of Italian workers were active in Switzerland’s health sector as doctors and nurses.

So, many businesses asked their workers to stay in Ticino until the emergency ended, providing them board and lodging.

Other workers, instead, had to choose alternative working arrangements, such as the well-known home office. 

Different scenarios: tax uncertainty 

From these new scenarios, questions arise: are Italian workers who change their habits, remaining in Switzerland or, alternatively, working at home in Italy, still considered to be cross-border workers for purposes of the Italy-Switzerland agreement?

Indeed, the agreement between Italy and Switzerland contains no force majeure provision regarding events such as the COVID-19.

Since the requirement of returning home is essential to the definition of a cross-border worker, arguably, those that must remain in either the source or residence state because of the pandemic no longer qualify as cross-border workers.

Thus, the special provisions of the Italy-Switzerland agreement addressing this issue (in this case, article 15 §4 DTC CH-I) would not be applicable. So, automatically, the general rules (art. 15 §1 DTC) would apply.

Typically, employment income is exclusively taxed by the residence State unless the activity is carried on in another State (the source State).

Thus, for Italians who remained in Switzerland to perform their employment, the source State shall claim taxing rights. Apparently, this would apply despite the COVID-19 situation.

For Italians forced work in home offices, the current rules seem to grant Italy, as residence State, exclusive taxing rights. This will present a problem both for employees, as taxpayers, and employers. What happens to the taxes withheld by Swiss employers? Are they still due or not? If Italy claims exclusive taxing rights, a mechanism would likely be provided to refund this withdrawal.

Switzerland has negotiated with other countries, such as France, specifying a threshold number of days to allow a cross-border worker to remain at his/her residence State without incurring double taxation and providing for a force majeure clause. Up today, there has not been such a dialogue between Italy and Switzerland on the topic.

In line with OECD recommendations, it could be reasonable to proceed with a competent authority agreement to clarify different the scenarios, granting taxpayers (both individuals and businesses) legal certainty.

 Maybe, it’s time to move!

* This article was adapted from an article written by Francesca Amaddeo and Prof. Marco Bernasconi, Ph.D., to be published in May in the journal Novità Fiscali.

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Francesca Amaddeo

Lecturer-researcher at Tax Law Competence Centre, Department of Business Economics, Health and Social Care, University of Applied Science and Arts of Southern Switzerland (SUPSI)

Dr. Francesca Amaddeo, PhD in European law and national legal systems, is an Italian lawyer that works as Lecturer-researcher at the Tax Law Competence Centre, Department of Business Economics, Health and Social Care, University of Applied Science and Arts of Southern Switzerland (SUPSI).

Latest posts by Francesca Amaddeo (see all)

• International taxation: two-pillar plan and the OECD mainstream - February 28, 2022
• Swiss federal act on implementation of international tax agreements: ready for January 2022 - November 23, 2021
• EU Commission seeks to ease withholding tax mechanism on cross-border investments - October 26, 2021
• CJEU to review German transfer pricing obligation: do national tax rules affect EU freedoms? - October 11, 2021
• Switzerland advances withholding tax reform - May 17, 2021

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