New cross-border commuter agreement between Switzerland and Italy
Articles
Tax
Employment / Immigration
The report on the new agreement was approved by the Federal Council on August 11, 2021.
Dr. Hagen Luckhaupt
Senior Tax Advisor
Christoph Rechsteiner
Tax Partner
On December 23, 2020, Switzerland and Italy signed a new agreement on the taxation of cross-border com-muters and an amendment protocol to the double taxation agreement (DTA) in Rome. The Federal Council has now approved the report on the agreement. The new cross-border commuter agreement defines the term "cross-border commuter" in a harmonized way, applies it reciprocally - in contrast to the agreement current-ly in force - and is intended to improve legal certainty.
According to the currently valid cross-border commuter agreement of 1974, Italian cross-border commuters are taxed exclusively in Switzerland. Each year, the cantons concerned - Graubünden, Ticino, and Valais - transfer approximately 40% of the taxes collected to the Italian municipalities of residence. The transfer of the respectvie taxes serves as financial compensation for the expenses incurred by the Italian border com-munities due to the cross-border commuters. Swiss cross-border commuters are not covered by the scope of the 1974 cross-border commuters agreement. We have summarized the most important changes to the cross-border commuter agreement below:
Reciprocity: the new cross-border commuter agreement applies to cross-border commuters resident in Switzerland and to cross-border commuters resident in Italy.
Harmonized definition of cross-border commuter: In the new agreement, cross-border commuters are de-fined as employees who live no further than 20 km from the border, work in the border area and, in principle, return home every day. Not returning home for 45 days in a calendar year for work-related reasons is harm-less for the cross-border commuter status. The definition of cross-border commuter applies uniformly to all cross-border commuters as of the entry into force of the new cross-border commuter.
Taxation of new cross-border commuters: For cross-border commuters who become cross-border commuters after the agreement comes into force (so-called "new cross-border commuters"), the state of employ-ment levies a withholding tax on the salaries, wages, and similar remunerations paid. However, the with-holding tax may not exceed 80% of the total amount of withholding tax normally levied. The state of residence has to avoid double taxation. For cross-border commuters resident in Switzerland, double taxation under the new cross-border commuter agreement is mitigated on a flat-rate basis because only 20% of the salary earned in Italy is taxed in Switzerland.
Transitional arrangement for existing (Italian) cross-border commuters: Existing cross-border commuters are persons who work or have worked in the cantons of Graubünden, Ticino or Valais on the day the new cross-border commuter agreement enters into force or between December 31, 2018 and the day the new agreement enters into force. Their wages, salaries, and similar remuneration will continue to be subject exclusively to taxation in Switzerland. The affected cantons will pay financial compensation amounting to approximately 40% of the revenue from the withholding tax to the municipalities of residence of the Italian cross-border commuters up to the end of 2033. From the 2034 tax year onwards, Switzerland will no longer make any compensation payments and will thus retain the entire tax revenue.
Abuse provision: The new agreement contains a provision to combat possible abuses in connection with the status of existing cross-border commuters. According to this provision, the cross-border commuter status can be revoked in the event of blatant and obvious abuse. On the occasion of the signing of the agreement, Switzerland and Italy executed an exchange of notes that clarifies the interpretation of some provisions of the new cross-border commuter agreement and ensures their correct application.
As a result, it is expected that new Italian cross-border commuters will have to pay more taxes as they will now have to pay tax on part of their income in Italy. As a result, working in Switzerland will become less attractive for them - from a pure tax perspective. In the future, Swiss cross-border commuters will have to pay tax in Switzerland on 20% of the remuneration they receive. The agreement and the protocol of amendment will enter into force upon the exchange of the ratification instruments.
