As soon as a PE is set up in an intercantonal or international relationship, the associated allocation of profit taxation must be addressed. If a home office constitutes a PE abroad, this also has consequences for the employee since it affects the employee’s taxation and social security status. As regards the risk of forming a home-office PE, a differentiation must be made between the intercantonal and international relationship.
Home-office PE in an intercantonal relationship
The concept of a PE is not uniformly regulated in the intercantonal relationship. Whereas the Direct Federal Taxation Act (DFTA) defines it in the context of direct federal taxation, the Tax Harmonization Act does not offer a definition of the term “PE”. The cantons are therefore free to provide a definition of their own for cantonal tax purposes that deviates from the DFTA, although most cantons have no own definition or use the DFTA definition. According to the DFTA, a PE is a “fixed place of business in which the business activities of an enterprise are wholly or partly carried on. PEs are, in particular, branch offices, manufacturing plants, workshops, sales outlets, permanent representative offices, mines and other sites for the exploitation of mineral resources, as well as construction and assembly sites of at least 12 months’ duration.”
To avoid intercantonal double taxation—and for practicality reasons and to preempt the fragmentation of tax liability—the Federal Supreme Court has expanded the DFTA definition of PE. Accordingly, a PE requires not only a business activity in a fixed business facility but also that the activity carried out there is qualitatively and quantitatively essential for the company.
On April 26, 2022, the Swiss Tax Conference (SSK) published an analysis of the effects of teleworking (home office) on the intercantonal tax allocation of companies. This states that with regard to intercantonal tax allocation, employees who are operationally assigned to the company’s main tax domicile do not in principle form a PE for this company in the home office or at their place of residence. Even in the case where a company operates according to a fully decentralized business model, where all employees are obliged to work in the home office and no own workplaces are available at the company’s site, the current tax rules determined by case law do not allow the formation of PEs at the various home-office locations.
In intercantonal tax law, employees who belong operationally to a PE are generally assigned to that PE. If they work in the home office, the question arises as to whether they must continue to be assigned to this PE or to the company’s main tax domicile. If the company still has a fixed place of business at the site of the PE, the home office does not call into question the existence of the PE or the assignment of the employees to it. Caution is required in cases where the company retains the premises of the PE but massively reduces their size and function, or if the PE is housed from the outset in very small premises. Such a situation may call into question the existence of the PE with the consequence that the employees will be assigned to the main tax domicile of the company for tax purposes, which may significantly change the profit tax burden of the company.
The SSK analysis has led to a defined administrative practice in the intercantonal relationship, and the risk of forming a PE is accordingly moderate. Nevertheless, in the case of special constellations or if legal certainty is required, discussions should be sought with the cantonal tax authorities.
Home-office PE in international relations
The provisions in international double taxation agreements, which are based on Art. 5 (1) OECD Model Tax Convention, define a PE as a fixed place of business in which the activities of the enterprise are wholly or partly carried on. The concept of a PE is therefore more open in international than in intercantonal relations. While according to the OECD a home-office PE is only to be affirmed in certain constellations, one is repeatedly confronted with foreign administrative practices that deviate from the OECD’s opinion. Given the increasing number of individuals working in a home office, these administrative practices are also regularly adjusted, which requires additional caution.
In our experience, some particularly relevant aspects need to be considered in order to minimize workplace risk. These should be reflected in employment contracts and any home office policies, as appropriate. For example:
- Employees must not be required or forced to work from home by the employer.
- Employees must be provided with a workstation on the company’s premises in Switzerland.
- The employer should not compensate the employees for the home office.
- Further, care should be taken to ensure that home-office work outside Switzerland does not exceed certain limits (e.g., 20% of total working hours or a certain number of maximum consecutive weeks).
- The private home should not be used for receiving customers.
- Work performed in the foreign home office should be limited to preparatory and support activities. In particular, employees should not be given the opportunity to negotiate contracts and should be prevented from submitting contract offers to customers or accepting orders from customers.
The tax business risk differs from country to country, and the determining elements vary. It is recommended to check the local rules in advance in each individual case, especially if employees at management level or employees with significant operational tasks regularly work in a foreign home office. For Swiss companies that allow their employees who are based abroad to work from home on a regular basis, it is highly recommended to carefully monitor the ongoing developments in teleworking-related tax rules, and to adapt their home office policy regularly.
Moreover, from a social security perspective, it should be noted that employees working for a Swiss employer are insured in their foreign country of residence if they perform a substantial part of their work there. This applies regardless of whether or not a foreign PE of the Swiss employer is formed because of home-office work. Thus, social security contributions may have to be settled with the foreign country of residence. At the European level, it has been agreed that until June 30, 2023, the social security subordination due to home-office work will not change to the employee’s country of residence. The flexible application of the subordination rules will also be extended under the Agreement on the Free Movement of Persons and the EFTA Convention, and will thus apply to Switzerland. Which rules will apply from June 30, 2023 is still open. Different rules apply for non-EU states. Here, too, it is advisable that the matter be clarified in advance in each individual case.
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