France and Switzerland agree to amicable tax agreements for cross-border workers

This article was first published on Tax@Hand, and is reproduced on this blog with the authorization of its authors.

The French Ministry of Economy, Finance and Industrial and Digital Sovereignty announced on 22 December 2022 that Switzerland and France are ready to promptly conclude two amicable tax agreements for cross-border workers. The purpose of these agreements is to provide sustainable taxation rules (based on the current derogation of July 2022) regarding professional salaries when an individual is working remotely from their state of tax residence.

Two unique agreements and a strong wish to establish the rules promptly

This first agreement will apply to cross-border workers within the scope of the agreement signed in April 1983 between France and Switzerland (which applies to the cantons of Bern, Solothurn, Basle-City, Basel-Country, Vaud, Valais, Neuchâtel, and Jura).

As from 1 January 2023, individuals will be allowed to perform a professional activity remotely from their state of residence for up to 40% of their total working time without impacting their status as a cross-border worker (which implies commuting daily between their domicile in one jurisdiction and their place of work in another) or the taxation of their income, i.e., they will be taxed exclusively in their state of residence.

The second agreement will apply to cross-border workers working in the other cantons, who are covered by the rules provided in the France-Switzerland tax treaty signed in 1966 (which applies notably to the cantons of Geneva, Aargau, Fribourg, and Zurich). The two countries also have agreed on new provisions for remote work.

Even if up to 40% of the work is carried out remotely in the state or residence, the tax will arise exclusively in the state where the employer is located. An adequate compensation will be provided to the state of residence of the employee. The 1966 tax treaty will be amended accordingly. In the meantime, an amicable agreement will be signed promptly so that the rules can apply as from 1 January 2023.

Social security implications for EU Regulation (EC) No 883/2004

One question remains unanswered: the implication of these amicable tax agreements for remote work and the social security rules provided in EU Regulation (EC) No 883/2004 of 29 April 2004 on the coordination of social security systems. In fact, the EU regulation provides that an employee who performs a substantial part of their professional activity in their state of residence (at least 25% of the professional activity) must be affiliated with the mandatory social security system of that state.

Agreeing that an employee that is tax resident in France is allowed to perform up to 40% of their professional activity remotely in France would make the individual affiliated with the French mandatory social security system, with all the constraints that this implies for the Swiss employer.

France and Switzerland have decided to put on hold until 30 June 2023 an agreement on the social security rules. However, this raises questions about the future discrepancy that will result from the application of the 22 December 2022 tax agreements and the EU social security rules of EU Regulation (EC) No 883/2004.

What will the EU decide at the end of the derogation period? Asymmetry or alignment of the EU social security rules with the announced tax agreements? The trend would be for the EU to align tax and social security rules, taking into account the evolution and sustainability of remote work.

In the meantime, employers of cross-border workers would be well advised to update their remote work policy to take into account these unpreceded tax agreements.

Content provided by Deloitte Société d’Avocats. A Deloitte network entity.

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