Usually, board members of companies in Switzerland have their domicile in Switzerland and their directors’ fee is subject to Swiss income tax. For board members with domicile outside of Switzerland the corresponding double tax treaty will be applicable. According to the Swiss double tax treaties, the country in which the company is domiciled is usually entitled to tax the directors’ fees of board members. In certain situations, board members risk that Swiss social security contributions are payable on all their Swiss and non-Swiss income from employment.
Double tax treaty between Switzerland and Germany
According to the double tax treaty between Switzerland and Germany, directors’ fees of Swiss companies can be fully taxed in Switzerland. The place where the work is performed does not make a difference.
The income tax on the directors’ fee of non-Swiss resident board members must be deducted by the company and be paid to the tax authorities. The employer is liable if taxes are not properly paid.
The cantons have different tax rates which are between 15% and 30%. The canton of Zug, for instance, has a tax rate of 25% (including the direct federal taxes) for directors’ fees of board members resident outside of Switzerland. In contrast to other employees, the tax rates here are fixed and not progressively increasing with the salary amount.
According to the double tax treaty between Switzerland and Germany the Swiss tax on directors’ fees can be credited against the German income tax.
Double tax treaties with other neighbouring countries
With respect to France, Italy and Liechtenstein, directors’ fees of board members of Swiss companies’ resident in the corresponding country are subject to income tax in Switzerland. According to the applicable double tax treaties between Switzerland and these countries, Swiss tax can be credited against the income tax in the country the board member has his/her domicile.
According to the double tax treaty between Switzerland and Austria the directors’ fee will not be taxed in Austria and can only be taken into account to determine the tax rate.
Distinction between directors’ fee and compensation for other activities
The above tax rules apply to compensations for a person who is resident outside of Switzerland for his/her activities as member of a board of directors, i.e. for strategic management or supervisory functions. If such person also performs operative activities for a Swiss company, other rules apply. Depending on the applicable double tax treaty it is relevant whether such person qualifies as a cross-border commuter, at which place the activities are performed and whether such person has other executive functions. Compensations for work performed in Switzerland, however, is usually subject to income tax in Switzerland.
Swiss social security contributions of board members with domicile outside of Switzerland
Switzerland entered into more than 40 social security treaties with other countries. For citizens of the European Union (EU) who are resident in the EU and who are members of the board of a Swiss company, since 1 April 2012, the EU-directives No. 883/2004 and 987/2009 are applicable, which are based on the Agreement of the Free Movement of Persons between the EU and Switzerland. According to these directives, social security contributions are payable only in one country even if a person is employed in two or more countries.
As the activities of a board member are qualified as “dependent employment” from a Swiss perspective, there are situations in which a board member resident in the EU is nonetheless subject to the Swiss social security system. This situation can even apply if the board member activities are marginal, compared to the other activities. However, according to the latest practice of the Swiss Federal Social Insurance Office, the activities must be at least partly physically performed in Switzerland to be subject to the Swiss social security system.
If the Swiss social security system is applicable, not only the directors’ fee is subject to Swiss social security contributions, but also the earned income in EU countries and even the profit from partnerships in the EU (e.g., from a GmbH & Co. KG). Therefore, before taking on the mandate as board member of a Swiss company, the corresponding consequences regarding social security contributions should be verified.
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