Prepared by Paolo Lucarini, Ciro Eligiato and Domenico Antonacci
On December 20, 2020 it has been signed a new agreement between Italy and Switzerland related the tax treatment applicable to cross-border employee, which will have a significant impact on the employee’s taxation.
Differently from the earlier version of the agreement, it is provided a precise definition of cross-border employee, in fact according the article 2 of the new agreement is considered as cross border employee an individual:
- Who has his residency and actually lives in a municipality nearest than 20KM from the border with the other country;
- Works in the bord area of the other Country, for an employer resident in the other Country. As bord area the agreement means for Switzerland (i) Canton of the Grisons, (ii) Canton of Ticino (iii) Canton of Valais for Italy the regions of (i) Lombardy (ii) Aosta Valley (iii) Piedmont and (iv) the South Tyrol;
- Who commutes, as principle, every working days between his workplace and his home in the residency Country.
The three conditions above must be satisfied simultaneously to consider the employee as cross border employee for the purposes of the new agreement.
If also one of the above conditions is not met, the ordinary tax provision will apply for the employee.
With reference to the third condition we would like to highlight that the Authorities, with the definitions who commutes, as principle, every working days between his workplace and his home in the residency Country, decided to restrict as much as possible qualification of “cross border employee”, recognizing it only to employees who cross the bord on daily basis to work in the other country, leaving, though the term “on the principle” small margins of tolerance.
At the Article 3 the Agreement provided the rules about the taxation rights of the 2 Countries and giving the primary rights to tax the employment income to the country where the work activity is performed but differently from the earlier version it is not exclusive rights (basically it has deleted the terms “ONLY) and it is partially limited.
In order to avoid any discrimination between the cross-border employees from the employees ordinary resident in Switzerland, it has been established that the taxes due in the Working State cannot exceed the 80% of the taxes ordinary due (included local taxes).
In addition, it has been clarified that the residency State will have the right to tax the employment income produced in the other Country, but it will be requested to limit the double taxation.
If the residency Country will be Italy, the double taxation, according to the provision of the Article 24 of the Double tax treaty signed between Italy and Switzerland and according to the provision of the article 165 of the Italian Tax Code (TUIR) the employee will be able to claim a foreign tax credit related to the double taxation arose.
Comparing the new version of the agreement with the earlier one, there are 2 main differences:
- Simultaneous taxation: the absence of the adverb “only” implies that both Countries have the rights to tax the employment income; in addition, the last sentence of the article 3 paragraph clearly provides the taxation of the employment income in the Country of residency;
- Limited taxation at source: the taxation applied in the Country of source cannot exceed 80% of the taxation due applying the ordinary tax rules (including the local taxes). So, the State of the source will not have a full right of tax, but the taxation will be limited to 80% of the amount of taxes due resulting by the application of the ordinary tax rules (i.e. if the amount of taxes due in the State of the source is € 40.000 for the cross border employee the amount of taxes due will be limited to € 32.000).
Lastly, the paragraph 3 states that the taxation in the Country of the source must be done through the application of the withholding tax at the source from the employer, excluding the taxation through the self-assessment method (annual tax return).
It appears quite clear that the regime deriving from the new agreement, requires, for the employees tax resident in Italy, more tax compliance obligation for the cross border employees that will be required to declare the income produced in Switzerland (exempted in the earlier version of the agreement) in the RC section of the Italian tax return, and claim through the filing of the section CE of the tax return the relevant tax credit. The latter is not easy to be filled due to the peculiarity of the foreign tax credit calculation.
In addition to the more complex compliance obligation, the employees could suffer also to a higher taxation due to the different tax rates among the two countries involved.
The new provision will be applicable from January 1 of the year following the one in which the agreement will be in force. The agreement will be in force at the reception date of the last of the notifications through which the two countries will have formally communicated, through diplomatic channels, that the internal legal conditions necessary for entry into force of the Agreement and the Protocol amending Article 15 par. 4 of the Convention mentioned above.
Considering the above for the tax year 2021 the provision of the agreement signed in 1974 will continue to be applied. And as consequence the cross-border employees will continue to be taxed in the source Country Only.
As stated by the article 9 of the agreement, the provision of the agreement signed in 1974 will continue to be applicable to the employees that will be cross border employees at the date in which the agreement will enter in force or have been cross border employees during a period between December 31, 2018 and the date in which the agreement will enter in force.
The two countries, conscious that the new agreement will need more compliance duties probably more cost for the employees, the agreement includes a clause anti abuse “clear and evident” to regulate possible “fictional hiring” before the new agreement will enter in force.
In order to carry out the above the article 9 paragraph 8 provides that if one of the two Country recognize a hypothesis of clear and evident abuse, has to inform the other Country accordingly in order to allow the other Country to take any action required.
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