Switzerland | Employment Tax | “Executive employee” Art. 15 (4) Switzerland / Germany DTT

10 July 2023

Employment Tax

Switzerland | “Executive employee” Art. 15 (4) Switzerland / Germany DTT

Impact: medium

Summary

There has been an adjustment of Article 15(4) of the Consultation Agreement of August 11, 1971 between the Federal Republic of Germany and the Swiss Confederation for the Avoidance of Double Taxation on Income and on Capital (DTT CH-D).

The Detail

The double taxation treaty between Germany and Switzerland clarifies in Article 15 in which country an employee’s salary is to be taxable if an employee lives in one country, but works in another (e.g. lives in Germany, works in Switzerland). As a general rule, the treaty stipulates that employees are to be taxed in the country where their work is physically performed (place of activity principle).

However, there are significant exceptions to this principle, especially for so-called “cross border workers” (“Grenzgänger”) and executive employees. Within the DTT CH-D, the provisions for cross border workers take precedence over the provisions for executive employees.

Definition of an Executive employee according to Article 15(4) DTT CH-D

The DTT CH-D stipulates that the country allocation of income from executive employees from a corporation shall follow a different principle compared to normal employees. Article 15(4) of the DTT-CH-D deviates from the “place of activity” principle stating that an individual who is a resident of a contracting state but who serves as an officer, director, manager, or authorized signatory of a corporation of that other contracting state may be taxed in that other state on the income derived from such service.

This means that, for instance, the executive of a Swiss-based company would be taxable with his/her employment income derived from such a directorship only in Switzerland, regardless of the location at which he or she performs the work.

Note: if the country of employment should not tax the executive employee on his/her employment income, the country of residency of the employee may tax that income.

Applicability of Article 15(4) in the past

The specific definition of an “executive employee” had left some open questions. In a mutual agreement between Switzerland and Germany dated September 18, 2008, the competent authorities agreed to apply Article 15(4) of the DTT CH-D and therefore “executive employee status” only to the following persons:

• If the executive employee’s procuration/signatory powers were entered into the commercial register;
• the executive employees’ function (either board member, director, managing director or authorized signatory) was entered into the commercial register.

The above agreement was problematic as it added a precondition (entry into a commercial register) to the applicability of the “senior executive Article” which was only an administrative understanding and not anchored in the legally binding DTT CH-D and thus was not binding for the national courts.

This created a legally uncertain situation for affected parties:

• In particular, executive employee status for tax reasons did not seem to apply to managers who – by virtue of their position and responsibility within the company – had far-reaching decision-making powers but were not registered in the commercial registry. This caused confusion with certain executive employees and tax authorities;
• Also left open was the question on whether the Article 15(4) would be applicable for executive employees with either collective signature or individual signature with entry into the commercial registry, but without the mention of their function.

Clarification going forward on the applicability of Art. 15(4)

With the signed adjustment of the consultation agreement on April 6th, 2023, the above uncertainties have been clarified:

• Effective immediately Article 15(4) of the DTT CH-D agreement will apply to persons who are registered in the Swiss commercial register with an individual or collective signatory power without their function needing to be mentioned in the commercial register.
• In addition, it was agreed that Article 15(4) of the Agreement should also apply to persons not entered in the commercial register who, from a civil law perspective, occupy a position within a corporation which, according to the overall circumstances of the individual case, are comparable to the persons expressly referred to in Article 15(4) of the treaty. In this context, the management and representation authority of an executive employee must at least correspond to that of a procuration.

The following relevant attributes will be considered when looking at the overall circumstances of the individual case in order to determine if a person fulfils the criteria of a senior executive or not:

• consideration of the size of the company and the sector in which it operates, as well as its membership of a group of companies
• salary amount
• placement of the salary into one of the top salary grades in comparison to overall salary levels within the company
• the receipt and the amount of profit being shared with the employee/ amount of profit bonus
• the receipt of other special monetary benefits
• the amount of direct and indirect reportees reporting to this employee
• authority to independently hire and fire employees of the company
• power to promote/advance direct reports and / or change or extend their scope of activity,
• no application of legal limitations on maximum working hours

Not all circumstances need to be fulfilled to meet the requirements of Article 15(4) of the DTT CH-D.

The above-mentioned adjustments lead to a clearer notion on when article 15(4) is applicable as well as incorporating those executive employees who may have a managerial function but at the same time are not registered in the commercial registry or who may be registered but without a named function. The applicability of Art. 15(4) has therefore been widened.

Applicability

The amended consultation agreement is applicable effective immediately and applicable on all outstanding cases. The term of the consultation agreement is limited until December 31, 2025, unless the competent authorities agree on a continuation of the consultation agreement.

Recommended action

The new regulation may also trigger employer obligations regarding tax at source remittance for executive employees. We recommend that you review your executive employees who fulfil above criteria and take note of their residency country.

Example: Executive employee leads several teams of a Swiss corporation and reports directly to the CEO of said corporation. Due to his position within the company, he is not registered in the commercial registry, however he has hiring and firing powers within the company and his salary is in the top 10% of the overall salary bandwidth. So far the executive has worked 50% from his home office in Germany and 50% in the corporations’ offices in Switzerland. Since the new regulation now also applies to this executive, his employment income derived from his position in Switzerland will be 100% taxable in Switzerland, irrespective of which country he works from.

How we can help

Vialto can help analyse your executive employee population and support with the correct set up, reporting, tax filing and / or shadow payroll.

Contact us

For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:

• Natalia Graf, Director | natalia.graf@vialto.com

• Lenna Grotzky, Manager | lenna.grotzky@vialto.com

Further information on Vialto Partners can be found here: www.vialtopartners.com

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