How cross-border workers are taxed: an introduction
Under double-taxation agreements (DTAs), workers are generally taxed on their salaries and similar payments at the place in which they carry out their gainful activity. Specific rules (taxation at the place of residence) apply to posted workers if: they spend fewer than 183 days per year in the state in which they are working, they are paid by an employer who is not based in that state, and the cost of their pay is not met by a permanent establishment or fixed base of their employer in that state.
The DTA of 9 March 1976 signed between Switzerland and Italy (document in French, German and Italian) makes no exception to these principles, as it specifies the same provisions (article 15). Nevertheless, when Italian residents carry out gainful activity abroad the Italian authorities actually tax them in Italy too, granting them a tax credit for the tax paid to the state in which they work. Conversely, Switzerland grants its residents a full tax exemption as regards the income on which they have paid tax in Italy. Switzerland does nevertheless take this income into account when calculating the Swiss tax rate for the taxpayer’s other income.
The OECD Model Tax Convention, which serves as a base for almost all the DTAs signed in the world, does not include any specific provisions concerning taxation for cross-border workers. As the OECD commentary (art. 15, no. 10) states, “it would be more suitable for the problems created by local conditions to be solved directly between the states concerned.” So, it is up to individual states to set the rules on how taxation for cross-border workers is shared between them at local level via DTAs or other ad hoc agreements, based on migration flows (which are often unequal) and economic circumstances.
In such a situation, there are three ways cross-border workers can potentially be taxed: 1) the worker is taxed at their place of residence, where they keep their personal ties, 2) they are taxed at their place of work, where their employer is based, or 3) the right to tax (and potentially the tax income) is shared between the two states. Each country negotiates with its neighbours to secure the arrangement that suits it best.
In addition, the notion of a “cross-border worker” is rarely defined in DTAs and other documents. However, “cross-border workers” are generally considered both in theory and in practice to be people who live near a border and who cross the border, in principle every day, but at least regularly (a minimum of once a week: “weekly cross-border workers”) to carry out gainful activity in the other state.
Switzerland has borders with five states (Germany, France, Austria, Italy and Liechtenstein). It has signed agreements with all of them. In this article, we will look specifically at Italian cross-border workers in Switzerland and in particular at the new agreement signed between the two countries on 23 December 2020. We should note at this point that around 65,000 Italian cross-border workers enter Switzerland each day to work in the cantons of Valais, Tessin and the Grisons.
How italian cross-border workers are taxed under the current arrangements
Article 15.4 of the DTA between Switzerland and Italy refers to the agreement dated 3 October 1974 relating to taxation of cross-border workers (text in French). Articles 1 to 5 of this agreement form an integral part of the DTA. It is based on the principle that the right to tax cross-border workers falls exclusively to the state in which they carry out their work.
Consequently, Italian cross-border workers covered by the 1974 agreement are taxed only at source in Switzerland on the income from their gainful activity. They are not taxed on this income in Italy.
In return, the cantons of Valais, Tessin and the Grisons pay (through the Italian government) a percentage (currently 38.8%) of the federal, cantonal and communal taxes they collect to adjoining Italian municipalities in which an appropriate number of Italian cross-border workers live to offset the cost to these municipalities of having the cross-border workers live there and to finance public infrastructure. This totals just under CHF 100m per year.
Switzerland has a special taxation at source schedule (schedule F) for cross-border workers who work in one of these cantons, live in one of the neighbouring Italian municipalities and whose spouses do not work in Switzerland. In all other cases, the standard schedules (A, B, C, D, E or H) apply as appropriate to the taxpayer’s personal situation.
This tax regime is particularly advantageous for cross-border workers in that they generally pay less when they are taxed at source in Switzerland than they would pay in Italy, especially on high incomes. In Italy, income in the top tax band (over €75,000) is taxed at 43%. Also, these workers are not required to declare their Swiss income in Italy.
However, neither the DTA nor the 1974 agreement actually gives a definition of the term “cross-border workers”. The Italian authorities (document in Italian) consider someone a cross-border worker if they live in an Italian municipality located, completely or partly, inside a line 20km from the border with one of the cantons of Tessin, Valais or the Grisons. There is however no requirement for the worker to work in the canton adjacent to the municipality in which they live. The current list of municipalities can be found here (in Italian).
Consequently, cross-border workers who live outside this 20km line are not covered by the 1974 agreement, but by article 15.1 of the Switzerland-Italy DTA. As we explained in the introduction, these workers are taxed on income from their work not only at source in Switzerland, but also in Italy. The Italian authorities use a tax credit equal to the value of tax paid in Switzerland to avoid double taxation. In addition, the first €7,500 of this income is tax-exempt (under articles 1.175 of the Legge n 147/13 and 1.690 of the Legge n 190/14 – links in Italian). Consequently, these workers that cross the border but do not meet the Italian definition of a cross-border worker are required to declare their Swiss income in Italy after deduction of the social and insurance contributions paid in Switzerland.
So it is clear that a cross-border worker’s place of residence is key to determining their tax regime.
The new rules
On 23 December 2020, after discussions lasting many years, representatives of Switzerland and Italy met in Rome to sign a new agreement on the taxation of cross-border workers (text in Italian) and a protocol amending the DTA (text in French). However, this agreement only covers, in Switzerland, the cantons of Tessin, Valais and the Grisons, and in Italy, the regions of Lombardy, Piedmont, the Aosta Valley and the Autonomous Province of Bolzano.
The agreement has yet to be approved by the Swiss and Italian parliaments. Currently, it is not clear when it will come into force. That said, the Swiss parliamentary procedure can be expected to take around two years, so the earliest date we could reasonably expect it to take effect would be 1 January 2023, and 2024 is more likely.
Under the new law, Switzerland will continue to tax Italian cross-border workers, but they will only pay 80% of the share of taxation at source (compared to 100% currently). The Italian tax authorities will tax revenue earned in Switzerland in full and grant the Italian cross-border worker a tax credit for the tax paid in Switzerland. In other words, Italian taxpayers will now be taxed equally regardless of whether they work in Switzerland or in Italy. So cross-border workers will pay more tax than they do at present.
We should not forget that there is a reciprocal element to this agreement. Switzerland will now be able to tax in full Swiss residents working in Italy. A tax credit will be granted to offset the tax paid in Italy (it will cover 80% of the Italian tax). The only permitted mode of taxation will be taxation at source in the state in which the person works. Article 99a of the Swiss LIFD (quasi-residence status) under which taxpayers can request ordinary ulterior taxation will not apply to cross-border workers covered by this agreement.
It is important to note that when this regime comes into force it will only apply to “new cross-border workers”. So, anyone who is already a cross-border worker on this date or has been subject to the regime between 31 December 2018 and the date the new regime comes into force will continue to be covered by the former regime (“existing cross-border workers”), so long as the system is not abused. Until the end of 2033, the Swiss cantons in question will pay 40% of the tax income from the taxation at source to Italy. Then, from 2034, they will retain the full amounts generated.
As part of this new agreement, Switzerland and Italy have now agreed a precise definition of the term “cross-border worker”. As we noted above, the term was not formally defined in the 1974 agreement and the authorities relied on established practice. The new agreement defines a “cross-border worker” as someone who lives in a municipality located either completely or partially within a 20km radius of the border and who in principle returns home to their municipality of residence every day. This definition will apply to both “new” and “existing” cross-border workers, and is in accordance with the current Italian interpretation of the term. We will have to wait until the agreement is implemented to see whether weekly cross-border workers, who go home to Italy only at the weekend, will also be covered. The two countries plan to hold consultations on this. However, under the law as it currently stands, cross-border workers will only be allowed to stay in the state in which they work for a maximum of 45 days, including public holidays, in each calendar year.
As we explained in the previous section, Italian workers who cross the border but do not fulfil the conditions laid out above (those who live in Milan, for example) will continued to be liable to be taxed at source in full in Switzerland and taxed in Italy, under article 15 of the Switzerland-Italy DTA presented above.
An annual electronic exchange of information between Switzerland and Italy will take place (article 7), to ensure that income is actually being declared in Italy.
Lastly, we note that there is a clause in the agreement providing for consultations and temporary adaptations for remote working. Given the difficulties cross-border workers have experienced during Covid, this provision is most welcome.
Our lawyers have been specialising in immigration and international taxation for more than 15 years. We will be happy to answer any question you may have. We suggest you also read our general article on how cross-border and short-term workers are taxed in Switzerland.