Switzerland and Italy sign new agreement on the taxation of frontier workers
1. Introduction
After several years of protracted negotiations, on 23 December 2020, Switzerland and Italy signed both a new agreement on the taxation of frontier workers ("2020 Agreement") and a new protocol amending the 9 March 1976 Double Tax Treaty ("DTT"). The conclusion of the new agreement was expected by mid-2015, as provided for in the “Road map” on tax issues concluded on 23 February 2015, when Switzerland granted Italy the exchange of information in tax matters and when the two Contracting States bound themselves to agree on a new version of the agreement dated 3 October 1974, which is part of the DTT.
The 2020 Agreement required almost five years of negotiations and consultation with the three border Cantons to which the said agreement applies i.e., Ticino, Graubünden and Valais. Its entry into force requires the prior ratification by the parliaments of both countries.
The main aspects of the 2020 Agreement are outlined below.
2. Definition of frontier workers
The 2020 Agreement contains a definition of frontier worker, thus dispelling the different interpretations of the tax authorities of the two States. It refers to any individual resident in a Contracting State who works as a frontier worker in the border area of the other Contracting State.
For Switzerland, this border area includes the cantons of Graubünden, Ticino and Valais, and for Italy, the regions of Lombardy, Piedmont, Valle d'Aosta and the Autonomous Province of Bolzano.
The term "frontier worker" refers to an employee of a Contracting State who:
- is resident for tax purposes in a municipality, the territory of which lies wholly or partly within 20 km of the border with the other Contracting State,
- works as an employee in the border area of the other Contracting State for a resident employer, a permanent establishment or a fixed base of that other State, and
- returns, in principle, daily to his or her principal abode in his or her State of residence.
Compared to the previous agreement of 1974, a Swiss resident employee working in an Italian border area for an Italian employer can also benefit from the 2020 Agreement.
3. Tax regime
Wages, salaries and any other similar remuneration received by a frontier worker as defined above are taxable up to their 80% in the Contracting State where the activity is carried out (i.e., the source state).
Since the State of residence of the frontier worker may tax that income in any case under its own domestic law, pursuant to Article 15 of the DTT, it must eliminate double taxation, in accordance with Article 24 of the DTT. For Italy, the provisions on tax credit contained in Article 165 TUIR apply. For Switzerland, Art. 5 para. 2 of the 2020 Agreement provides that in determining the taxable base, the Confederation will consider the taxes levied pursuant to Art. 3 para. 1, by reducing by four fifths the gross amount of the salary, wage and other similar remuneration received by the Swiss resident frontier worker.
However, the total tax burden on the income from employment of the Italian resident frontier workers may not be lower than the tax which would be levied under the 1974 Agreement.
The taxation of frontier workers in the Contracting State in which the employment takes place shall be carried out by means of taxation at source. Any other method of taxation shall be excluded.
Considering the provisions of the 2020 Agreement and the clarifications contained in the circular letter of the Federal Tax Administration No. 45 of 12 June 2019, it is worth highlighting that the source State taxation is limited to the days during which the employment activity is carried out in its territory. If, in fact, the employee is employed by an employer in the other Contracting State but works on behalf of this latter in his or her State of residence or in a third State, the source State may not tax that portion of the salary relating to the activity performed outside its territory. The tax can instead be levied always by the State of residence and, possibly, by the third State, under the applicable double tax treaty.
4. Transitional provisions
The 2020 Agreement provides that those individuals who work or have been working in the cantons of Graubünden, Ticino or Valais in the period between 31 December 2018 and the date of entry into force of the 2020 Agreement are covered by the transitional regime applicable to current frontier workers, who remain subject to taxation at source in Switzerland only. Until the end of 2033, Switzerland will pay financial compensation to the Italian border municipalities in the amount of 40% of the withholding tax levied by Switzerland. After this date, Switzerland will keep the entire tax revenue.
5. Entry into force
The 2020 Agreement will enter into force as of the 1st of January of the calendar year following the exchange of ratifications of the 2020 Agreement and of the amending Protocol between both countries and will replace the 1974 Agreement.
6. Other provisions
The 2020 Agreement contains provisions on the mutual agreement procedure, that should be enacted in the event of disputes concerning the interpretation or application of the agreement, either by direct communication or by a joint commission composed of the parties themselves or their representatives. It lays down obligations to exchange information, in electronic form and on an annual basis, on the frontier workers and which is necessary for his or her correct taxation in his or her State of residence. Finally, it provides that the Contracting States shall review the Agreement every five years, with a view to deciding whether amendments to the Agreement are necessary.
