Cross-border commuter regulation pursuant to Germany-Switzerland Tax Treaty applicable to persons in marginal employment

  • 01/30/2023
  • Reading time 4 Minutes

Some Tax Treaties contain exemptions for cross-border commuters serving the purpose of taxation in the country of residence. This also applies to the Germany-Switzerland Tax Treaty. However, if such cross-border commuter regulation can be avoided, lower taxes may be due in Switzerland. Two decisions by the German Federal Court of Finance (“BFH”) now provide for new requirements.

Cross-border commuters are employees generally working in one country’s border area and returning to their place of residence in the other country’s border area every day. For this group of persons, some Tax Treaties created special regulations in connection with the right of taxation in deviation from the prevailing place-of-activity principle. According to these special regulations, cross-border commuters remain subject to tax in the country of residence. This applies to: 

•    France (Art. 13 (5) – Taxation only in the country of residence),
•    Austria (Art. 15 (6) – Taxation only in the country of residence), 
•    Luxembourg (breakdown by working days, mutual agreement of May 26, 2011)
•    Switzerland (Art. 15a – limited taxation in the country where the work is performed and taxation in the country of residence with credit system)

Cross-border commuters living in Germany and working in Switzerland generally strive to avoiding the cross-border commuter regulation and being taxed exclusively in the country where the work is performed (Switzerland). This is due to the largely lower tax level in Switzerland. 

The German Federal Court of Finance (“BFH”) has published clarifying judgments on the concept of cross-border commuters in the Germany-Switzerland Tax Treaty (BFH I R 32/19 dated June 1, 2022, and I R 24/21 dated June 28, 2022). According to the decision I R 24/21, the number of border crossings per week or month into Switzerland is irrelevant for the concept’s application. It only requires for the taxpayer to regularly return to his place of residence after completing his work. 

Accordingly, the provision also applies if the taxpayers do not cross the border every day of the week. Only the days during which the cross-border commuters perform their activities are relevant. This is because the cross-border commuter regulation’s purpose is to take account of the close personal ties to the country of residence. 

Thus, the BFH exclusively bases its decision on the statutory provision pursuant to Art. 15a (2) Germany-Switzerland Tax Treaty and rejects the supplementary rules of application agreed upon between the countries. Art. 7 of the so-called consultation agreement provides for a different regulation. According to such Article, a regular return is deemed to exist if an employee, due to his employment contract, commutes between his place of residence and his place of work at least one day per week or at least five days per month. According to the BFH, this intergovernmental agreement violates the law’s prevailing character. 

Furthermore, in its decision I R 32/19, the BFH clarifies that in the special case of the Germany-Switzerland Tax Treaty, the concept of cross-border commuters was defined irrespective of local requirements or border areas. This also applies to persons living in metropolitan areas in Germany that are far from the border and commute to Switzerland for a non-self-employed activity that only lasts a few days. So-called marginally employed persons thus run the risk of being subject to income tax in Germany despite a salary earned exclusively in Switzerland.

In order to avoid the ramifications of current case law in connection with the cross-border commuter regulation in Switzerland, taxpayers would have to take particular care not to immediately return to Germany after every working day spent in Switzerland. Instead, cross-border commuters should try to include an occasional overnight stay in Switzerland in order to save taxes. 

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