The taxation of cross-border commuters is an important and complex issue in international tax law. A recent German court ruling addressed the issue in the context of the Germany-Switzerland tax treaty.
The employment income of cross-border commuters who are tax residents in Germany but employed in Switzerland is fully taxable in Germany, but Switzerland is allowed to withhold tax at the source on a maximum of 4.5% of the total gross remuneration. To avoid double taxation, Germany grants a tax credit for the tax paid in Switzerland.
The Germany-Switzerland income tax treaty defines a cross-border commuter as any person who is resident in one state, has their place of work in the other state, and regularly returns from the place of work to the place of residence.
In 2018, Germany and Switzerland entered into an agreement to better delineate the term “cross-border commuter.” Under the terms of this new consultation agreement, the employee must meet certain requirements, including a daily return to the residence state. If a daily return is reasonable (defined as involving a maximum of 100 kilometers by car each way, or a maximum of 90 minutes by public transportation), the employee must commute to the place of work and back at least one day per week or five days per month to qualify as a cross-border commuter. However, Germany’s right of taxation would lapse if a cross-border commuter exceeds the maximum threshold of 60 non-return-days. Cross-border commuters who have more than 60 non-return days per year no longer fall under the cross-border tax regime and instead are subject to ordinary Swiss source tax rates on their Swiss workdays, with an exemption of these work-days from German taxation.
Despite the administrative guideline from 2018 to address this issue, the question whether daily return home from the other country is feasible continues to raise interpretation challenges, with tax implications.
A 2024 court ruling by the Baden-Wuerttemberg Finance Court (currently on appeal before the Federal Finance Court (BFH)) addresses the interpretation of the term "impossibility of return" as defined in the 2018 agreement between the German and Swiss tax authorities. This term is crucial, because if return is deemed impossible for more than 60 days, the cross-border commuter status under Article 15a (2) of the Germany-Switzerland tax treaty may no longer apply, potentially affecting the taxing rights of the state of residence.
The court clarified that it is not the shortest route but the most convenient route and the actual travel time that determine whether daily return is possible. A daily commute of more than three hours (in total) is considered unreasonable and would result in the loss of cross-border commuter status. Choosing a longer route is not problematic, as long as it is chosen based on reasonable circumstances.
The court considered the rule in the consultation agreement as "too general" and found that an administrative guideline is not sufficient to properly assess the cross-border commuter's individual effort. Additionally, having Google Maps printouts from various days and times can be helpful, as they provide objective evidence of travel time and route. Courts often rely on such apps to verify the details of the case.
For more information on the court decision or the taxation of cross-border commuters, please consult your regular BDO contact or the author of this article.
Christiane Anger
BDO in Germany
Background
The employment income of cross-border commuters who are tax residents in Germany but employed in Switzerland is fully taxable in Germany, but Switzerland is allowed to withhold tax at the source on a maximum of 4.5% of the total gross remuneration. To avoid double taxation, Germany grants a tax credit for the tax paid in Switzerland.The Germany-Switzerland income tax treaty defines a cross-border commuter as any person who is resident in one state, has their place of work in the other state, and regularly returns from the place of work to the place of residence.
In 2018, Germany and Switzerland entered into an agreement to better delineate the term “cross-border commuter.” Under the terms of this new consultation agreement, the employee must meet certain requirements, including a daily return to the residence state. If a daily return is reasonable (defined as involving a maximum of 100 kilometers by car each way, or a maximum of 90 minutes by public transportation), the employee must commute to the place of work and back at least one day per week or five days per month to qualify as a cross-border commuter. However, Germany’s right of taxation would lapse if a cross-border commuter exceeds the maximum threshold of 60 non-return-days. Cross-border commuters who have more than 60 non-return days per year no longer fall under the cross-border tax regime and instead are subject to ordinary Swiss source tax rates on their Swiss workdays, with an exemption of these work-days from German taxation.
Court Ruling
Despite the administrative guideline from 2018 to address this issue, the question whether daily return home from the other country is feasible continues to raise interpretation challenges, with tax implications.A 2024 court ruling by the Baden-Wuerttemberg Finance Court (currently on appeal before the Federal Finance Court (BFH)) addresses the interpretation of the term "impossibility of return" as defined in the 2018 agreement between the German and Swiss tax authorities. This term is crucial, because if return is deemed impossible for more than 60 days, the cross-border commuter status under Article 15a (2) of the Germany-Switzerland tax treaty may no longer apply, potentially affecting the taxing rights of the state of residence.
The court clarified that it is not the shortest route but the most convenient route and the actual travel time that determine whether daily return is possible. A daily commute of more than three hours (in total) is considered unreasonable and would result in the loss of cross-border commuter status. Choosing a longer route is not problematic, as long as it is chosen based on reasonable circumstances.
The court considered the rule in the consultation agreement as "too general" and found that an administrative guideline is not sufficient to properly assess the cross-border commuter's individual effort. Additionally, having Google Maps printouts from various days and times can be helpful, as they provide objective evidence of travel time and route. Courts often rely on such apps to verify the details of the case.
For more information on the court decision or the taxation of cross-border commuters, please consult your regular BDO contact or the author of this article.
Christiane Anger
BDO in Germany