Executive pay in Switzerland – The details matter to employers – Taxation

Switzerland is an attractive destination for skilled foreign workers. In addition to establishing a national employment relationship with a foreign employee residing in Switzerland, other forms of employment may be considered, such as cross-border missions, national employment contracts with foreign residents or the engagement of external consultants.

The Covid-19 pandemic has dramatically accelerated the already pre-existing trend towards other modern forms of employment, such as working from home in particular.

While the trend towards more flexible work configurations has many beneficial aspects, the obligations and responsibilities of employers in the areas of payroll should not be underestimated.

Tax withholding, certifications, social security contributions, retirement payments, accident coverage and related topics may, in negotiations with applicants, be a lower priority but should be addressed early in the process. . This will help to: (i) ensure a compliant organization for the company and the executive / board member; (ii) clearly define the functions and workplaces; (iii) avoid tax exposure at company level; (iv) ensure adequate coverage of the executive / board member in the event of accident, death, disability and illness; and (v) avoid exposure to the liability of the company and its corporate bodies.

Taxation of the remuneration of executives / members of the board of directors

Given its exposure to payroll withholding tax, it is crucial for a Swiss employer to clarify the residence status of an employee as part of the first payroll:

  • A person residing in Switzerland and intending to stay there permanently, or a person present in Switzerland for a largely uninterrupted stay of 30 days with a gainful activity, establishes a personal tax residence. This person is subject to unlimited tax in Switzerland and is subject to Swiss taxes on his income and assets worldwide, subject to the applicable double tax treaties. Such treaties usually attribute unlimited tax liability to the country where that person has his or her center of vital interest. International weekly commuters generally do not have their unlimited tax liability in Switzerland if they have their center of vital interest, i.e. their family, in another country. When a person is considered a Swiss tax resident, withholding tax on the allowances may be required for non-Swiss nationals, depending on their marital status and the type of permit.
  • A tax limited to Swiss-source income may, for example, arise from exercising a professional activity in Switzerland or from being a member of the board of directors of a Swiss company. Non-resident employees and directors are, by default, subject to Swiss withholding tax on salaries, i.e. the company is required to withhold tax directly on the gross amount of compensation paid. While withholding tax on boarding costs are levied at a flat rate and apply even if no physical work is performed in Switzerland, withholdings from labor remuneration will be levied at the progressive rate and will not be due only on gross remuneration relating to work physically performed in Switzerland.

In light of the above, a Swiss company needs to assess the tariff and base on a case-by-case basis in order to be able to accurately make any tax deductions on the salary. The Swiss company is responsible for the correct tax withholding and is also required to issue an annual salary certificate reflecting the gross remuneration and any deductions. Non-compliance can be penalized with a fine, and re-invoicing omitted withholding taxes to employees can be complicated or even impossible.

Individuals taxed at source may, depending on compliance with certain thresholds or trigger events, also be required to file an ordinary tax return in Switzerland. Under certain conditions, such ordinary taxation can also be requested voluntarily although the conditions for doing so have been relaxed by a reform of the withholding tax on wages recently adopted which entered into force on January 1, 2021. Following this of this reform, the system is also applied more uniformly in Switzerland. It is essential to assess whether ordinary taxation compares favorably with withholding tax.

Last but not least: The workplace of managers and board members not only has payroll and income tax ramifications, but can also affect the corporate tax sphere. If a foreign company has staff and facilities in Switzerland, it may be considered as operating a permanent establishment in Switzerland for Swiss and international tax purposes. A portion of the company’s profits can then be allocated for tax purposes to Switzerland.

Also, when it comes to employing senior management and board members in an international context, other questions need to be asked as to where the business is run effectively.

Aspects of social security and pensions

The social insurance obligation of senior employees and members of the board of directors must also be assessed on a case-by-case basis. Swiss social security contributions are usually triggered when an employee resides and / or works in Switzerland.

In order to coordinate or harmonize contribution obligations in cross-border cases, Switzerland has concluded bilateral social security regulations with several states. Regulations with and within the EU provide that social security contributions are only due in one state, which is usually the place of performance of the work, if no specific posting rule applies. When more than 25% of the working time is performed in Switzerland and / or in a Member State where an individual also resides, the individual is generally subject to the social security legislation of that State. Treaties with other countries, such as the United States, provide different mechanisms in that Social Security contributions can be triggered in both states.

In any case, the international rules for social security affiliation may have unexpected consequences for social insurance in Switzerland (or abroad). It should also be noted that, from the point of view of Swiss social security, senior employees and members of the board of directors are considered as employees. This can lead to mismatches with foreign countries where such functions can be treated as self-employment.

When the remuneration payable to senior executives and members of the board of directors is subject to Swiss social security contributions, contributions to the Swiss pension fund are usually also triggered. It is necessary to consider whether any exceptions apply, for example for part-time employment. If pension contributions do apply, the insured benefit may differ from the applicable salary for social security and tax purposes.

Failure to comply with social security and pension contributions not only leads to supplement calculations, but the re-invoicing of omitted deductions to employees can also prove to be cumbersome or even impossible, and a lack of social security or pension coverage in the cases where a benefit would become due may cause a company to expose itself to liability.

Recommendations

When a Swiss company employs executives or members of the board of directors, it is important for the company to keep (or have that person keep) reliable documents such as a full employment contract / mandate in writing. , a current calendar with the working days in Switzerland as well as an up-to-date certificate of affiliation or an A1 form for social security purposes and for the issuance of annual salary certificates.

From a tax and social perspective, further complexities can arise if net wage agreements or fringe benefits are implemented and when the benefits are paid in other jurisdictions or by other group companies in the framework of certain employee participation plans or retirement plans.

All these benefits will need to be examined from a Swiss perspective to assess their tax and social treatment, correct quantification, the potential need for supplement calculations and will need to be duly reflected in the annual salary certificates provided by the Swiss employer. . It is advisable to use an experienced local payroll provider, especially when the resources available in Switzerland are not sufficient to cover this internally.

In addition to the liability risk for the company as a whole, it is often difficult for the company to request the payment of additional amounts as withholding tax on wages or social security / pension contributions from employees who ultimately turn out to have had insufficient deductions from their wages.

In addition, other usual work-related compliance aspects should be considered and, if necessary, require timely filing, such as applications for necessary work permits.

Originally posted by IFLR Magazine, November 30, 2021

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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