International weekly residence and tax residency in international tax law
The term "international weekly resident" is not explicitly defined as such in the double taxation agreements (DTAs) with Switzerland. In practice, an international weekly resident refers to a situation in which a taxpayer has two places of residence: one in the country of origin, where the centre of life is often located, and another in the country of employment, where the gainful employment is carried out.
The central question here is which country can claim the right of taxation as the country of residence. The decisive factor here is not only national tax law, but above all Art. 4 of the OECD Model Tax Convention, which regulates residence in an international context. While para. 1 is based on unlimited tax liability under national law, para. 2 applies if a person is deemed to be resident under the law of both contracting states. In such cases, the so-called tie-breaker rule applies, in which the following criteria are applied in a staggered order: the centre of vital interests, habitual residence, nationality or, lastly, a mutual agreement procedure between the contracting states.
The centre of vital interests is decisive and is determined on the basis of an overall view of objective, external circumstances from which the personal and economic ties of the person concerned can be derived. If a person regularly alternates between two places, typically with one residence in the country of work and another residence in the home country, the decisive factor is which place has the stronger personal and economic ties. In practice, the authorities usually prioritise the family residence if there is a spouse and/or children. It takes substantial evidence to refute this with other criteria.
Example
Markus, a German citizen, works from Monday to Friday for a company in Basel. Gross income CHF 150,000 per year. He has been doing this for 4 years now and has a few friends in Basel in the meantime. His wife and two children, aged 14 and 12, live in Munich. During the week, Markus lives in a rented flat in the centre of Basel. Every Friday he commutes home to his family in Munich by train or plane and back to Basel on Sunday evening.
Where is Markus based and who has the right of taxation?
For the purposes of the double taxation agreement between Switzerland and Germany, a person is deemed to be resident in a contracting state if they are subject to unlimited tax liability there under the applicable laws. In Switzerland, Markus is resident for tax purposes on the basis of economic affiliation.
If a natural person is resident in both Switzerland and Germany, the country in which they have a permanent place of residence is decisive. If they have such a residence in both countries, they are deemed to be resident in the country with which they have the closest personal and economic ties. In other words, where the centre of their life interests is located.
As Markus' family lives in Munich, the centre of his life interests is in Germany. Consequently, Markus is deemed to be resident in Germany. However, according to Art. 15 of the double taxation agreement between Switzerland and Germany, Switzerland, as the host country, is permitted to tax the earned income generated there.
In Switzerland, withholding tax is levied on earned income, whereby Markus' employer is responsible for settling the tax. In principle, only the days worked in Switzerland are subject to Swiss taxation. Working days in Germany or third countries may be exempt from Swiss withholding tax. The consideration and crediting of taxes paid in Switzerland vary depending on the country of origin.
Does Markus have to submit a tax return in Switzerland?
If Markus qualifies as an international weekly resident, he does not have to complete a tax return in Switzerland. This is not the case for a person with a B permit, who must submit a tax return in Switzerland if their income exceeds CHF 120,000 p.a. (mandatory retrospective ordinary assessment). With the revision of the Swiss withholding tax law, it was standardised throughout Switzerland that an application for a subsequent ordinary assessment (NOV) can only be made if at least 90 % of the family income is earned in Switzerland.
Miscommunication
It should be noted that the tax status as an international weekly resident is assessed independently of the migration law situation or residence status. Even people with a permanent residence permit C or Swiss citizens can be considered international weekly residents for tax purposes, provided they fulfil the above criteria. The correct permit in Markus' example would therefore be the G permit, despite residing and working in Switzerland.
The Migration Office has a limited dialogue with the Tax Office. A particular problem arises in constellations in which a B residence permit is wrongly issued instead of the correct cross-border commuter permit when moving to Switzerland. This permit is limited to a certain period of time. After its expiry, the competent migration authorities often automatically issue a permanent residence permit C without the need for tax residence in Switzerland. In such cases, there is a discrepancy between the residence status under immigration law and the qualification of residence under tax law. This discrepancy can lead to considerable legal and administrative uncertainties, particularly with regard to tax jurisdiction and the correct application of national and international tax law.
Weekly stay in an executive position and member of the Board of Directors
A separate tax domicile can be established, for example, if a spouse exercises a managerial function at the place of weekly residence. Such a function exists if the person concerned works in an economically significant company, assumes special responsibility and manages a large number of employees, usually around 100 people. However, the managerial position only has an effect on the establishment of tax residence if the professional demands are so intensive that family and social ties clearly take a back seat to professional obligations, even if regular return visits to the family take place. Special provisions apply to board members, which must be examined on a case-by-case basis.
Pension assets
It is not only the tax aspects that raise questions, the tied pension assets also require special attention for international weekly residents.
What happens to the second pillar savings when you leave Switzerland?
If you move from Switzerland to an EU or EFTA member state, the retirement assets from the mandatory portion of the occupational benefits insurance (BVG) generally remain in Switzerland until retirement age and are transferred to a vested benefits account/deposit until they are withdrawn. The extra-mandatory portion, on the other hand, can usually be withdrawn in cash. This is an option that many people are aware of. However, less attention is paid to the tax risk, as the extra-mandatory assets are not recognised as such in many European countries and are sometimes treated as taxable income. Early and forward-looking planning, taking into account the relevant double taxation agreement, is therefore essential.
There are often overlaps and gaps between the country of residence and the country of work, which can become expensive without careful planning. Anyone living across borders should therefore not only pack their suitcases, but also check their social security and tax situation for their individual starting position.
Moving away with consequences:
Moving away from Switzerland, whether with a B or C permit or even as a Swiss citizen, can have unexpected tax consequences with regard to capital withdrawals from pension assets. In a separate article, we explain why early planning is worthwhile and which mistakes should be avoided.