Taxation of expatriates in Switzerland

Employees who are seconded to Switzerland by their foreign employer (Expatriates) usually incur second-ment-related costs. Depending on the structure of the assignment, these expenses are tax-deductible as other respectively special professional expenses. This article explains the definition of the term Expatriate as well as the requirements for the deductibility of professional expenses associated with the assignment (Expat Costs).

Legal Provisions

The legal basis for the deduction of other expenses required for the exercise of a profession is found in Art. 26 para. 1 lit. c and para. 2 of the Direct Federal Tax Law (DBG) and Art. 9 para. 1 of the Federal Tax Harmoniza-tion Law (StHG), as well as in the relevant cantonal laws. The Ordinance of the Federal Department of Fi-nance on the Deduction of Special Professional Expenses of Expatriates for Direct Federal Taxation (ExpaV) contains the key provisions regarding the deduction of expatriate costs. The cantonal information sheets gen-erally align closely with the ExpaV and often provide useful information on cantonal specifications.

Definition of Expatriate

Executives and specialists qualify as expatriates if they are temporarily (for a maximum of five years) as-signed to Switzerland by their foreign employer.

Executive Employees

Usually members of the management/executive boardor individuals holding equivalent positions qualify as executive employees.

Specialists

Specialists are employees with specific professional qualifications. What constitutes as special professional qualification is not defined in the legal provisions. According to the authors, this likely depends both on the general demand for skilled workers in the respective canton and on the specific needs of the receiving company.

Duration of Assignment

The assignment must be temporary and may not exceed five years.

Inbound / Outbound

The ExpaV generally covers individuals who are assigned from abroad to Switzerland (Inbounds). Employees whose home country is Switzerland and who are assigned to a foreign host country (Outbounds) are not covered by the ExpaV. However, in the authors’ view, it would be inappropriate not to apply the ExpaV also to individuals who are assigned abroad but maintain a tax nexus to Switzerland during their assignment.

Employment Contract Structure

For assignments within a corporate group, there are generally two options for structuring the employment contract. In the first option, the employment contract with the foreign employer remains in place but is subordinated to a separate assignment agreement for the duration of the assignment. In the second option, a local fixed-term employment contract is concluded with the Swiss employer, while a re-employment agreement exists with the foreign group company.

Special Professional Expenses (Expat Costs)

The expenses that expatriates can claim depend on the employee's tax residency during the assignment.

Tax Residency Abroad

Expatriates with tax residence abroad (typically international weekly commuters) can claim the following expenses:

Necessary travel costs between the home and host country;
Reasonable accommodation costs in Switzerland.

Tax Residency in Switzerland

If an expatriate is tax resident in Switzerland during the assignment, they may deduct the following expenses:

Necessary travel costs between the home and host country;
Reasonable accommodation costs in Switzerland;
Necessary relocation costs to Switzerland;
School fees for the education of minor children.

Expat Costs in Detail

Necessary Travel Costs Between Home and Host Country

For expatriates with tax residency abroad, the costs incurred for regular travel between their foreign place of residence and their Swiss place of work or stay are considered necessary travel expenses.

If an expatriate is tax resident in Switzerland during the assignment, they may claim the travel expenses for themselves and their family for the journey to and from Switzerland at the beginning and end of the assignment.

Reasonable Accommodation Costs in Switzerland

A deduction for housing costs (double housing costs) is only permitted if the residence abroad remains permanently available for personal use. If the property is rented out during the assignment, the deduction is not allowed.

What is considered "reasonable" varies by canton. Some cantons include tables in their tax guidelines specifying reasonable accommodation costs by salary range. In general, individuals with tax residency abroad (international weekly commuters) can claim lower accommodation costs than those who are tax resident in Switzerland. Those who live permanently in Switzerland and do not return to their home country on weekends are typically granted a higher entitlement to housing standards in Switzerland.

Relocation Costs

Relocation costs are deductible if they are directly related to the relocation to Switzerland (e.g. transportation of household goods and furniture).

School Fees

If public schools at the place of residence in Switzerland do not offer tuition in the native language of the minor child, the costs for education at a private foreign-language school may be deducted.

A German-speaking expatriate assigned to a German-speaking canton in Switzerland cannot claim school fees for its children, as tuition is offered in the child’s native language. However, if the expatriate comes from an English- or Spanish-speaking country, for example, the school fees are be deductible.

Meal, transportation, and childcare costs before and after school do not qualify as deductible school fees.

Non-Deductible Professional Expenses

The following expenses are not considered expat costs and are therefore not deductible:

Costs for maintaining a permanent residence abroad;
Expenses for furnishing and utility costs of the accommodation in Switzerland;
Additional expenses or compensation due to the higher cost of living (Cost of Living Allowance) and/or higher tax burden (Tax Equalization);
Costs for legal and tax consulting.

Claiming Special Professional Expenses

The ability to claim expat costs depends on whether and how the costs are reimbursed by the employer, where the expatriate is tax resident during the assignment and the applicable procedure to assess the expatriate’s taxable income.

Declaration in the Swiss Salary Certificate

If the employer pays the aforementioned special professional expenses directly or reimburses the expatriate upon presentation of receipts, the paid amounts must be declared in the Swiss salary certificate under section 13.1.2 "other actual expenses."

If the employer does not reimburse the actual costs but instead pays the employee lump-sum allowances, the amounts must be reported under section 2.3 "other fringe benefits".

In practice, it is also common to see actual reimbursements included in the gross salary amount.

If an expatriate ruling exists, it should be noted under section 15. "comments".

Assessment Procedure

If the employer reimburses the costs as professional expenses, no further action is required. These costs are not included in the gross salary amount and therefore do not need to be deducted separately during the tax assessment procedure.

If the payments are included in the gross salary or if the employee has borne the costs by himself, he can deduct them as special professional expenses within the assessment procedure.

Swiss Wage Source Tax

Individuals residing in Switzerland without Swiss citizenship or a C permit as well as individuals residing abroad who have a Swiss employer, are primarily subject to Swiss wage source tax. In certain cases, they can voluntarily or must additionally submit a Swiss tax declaration. The following sections explain the circumstances under which this applies.

Subsequent Ordinary Assessment (NOV)

Individuals being tax resident in Switzerland are required to file an annual tax return, if they:

Earn a worldwide gross annual employment income of at least CHF 120’000; or
Generate income being taxable in Switzerland that is not subject to any source tax, such asreal estate income (deemed or actual rental income), income from movable assets (interest, dividends), or self-employment income, and exceed cantonal thresholds; or
Hold assets being taxable in Switzerland and exceed cantonal thresholds.

Swiss tax residents who do not meet the above criteria may voluntarily file a tax return if they wish to claim additional deductions not already included in the Swiss wage source tax rate. The same applies to individuals being tax resident abroad, provided that at least 90% of their worldwide income (including the spouse’s income) is taxable in Switzerland (Quasi-Residency).

Application for Recalculation

Individuals being tax resident in Switzerland with a worldwide gross annual income of less than CHF 120’000 as well as individuals being tax resident abroad (regardless of their annual employment income) are eligible to submit an application for recalculation of the Swiss wage source tax (formerly known as tariff correction), if they do not wish or are not eligible to file a tax return.

Submitting a recalculation application is advisable when:

The taxable and/or the tax rate-determining gross salary is incorrect (e.g. if actual expat costs were mistakenly included in the gross salary or if foreign taxable income was not excluded);
An incorrect Swiss wage source tax rate was applied and needs to be corrected.
An incorrect Swiss wage source tax rate was applied and needs to be corrected.

Conclusion

Tax questions concerning expatriates are extensive and the answers depend on numerous factors. With our support, you can meet your tax obligations efficiently while also benefiting from potential tax advantages.

We assist both employees and employers with all aspects of cross-border assignments, particularly in the following areas: