Part 3 - How can taxation be avoided?

Assembly and project assignments abroad

Author: Friederike Ruch , CONVINUS global mobility solutions

For the German version, please read here >>

The duration of most project and assembly assignments ranges from several weeks to 24 months. Only a few individual project and assembly assignments last longer.

Use from several weeks up to 183 days

For most assignments lasting up to a maximum of 6 months, taxation in the country of assignment can be avoided. Instead, taxation takes place in the employee's country of residence.

Example

An employee resident in Germany is working in Switzerland from May to October 2024 (5 months) for assembly work. In January, he already spent 2 weeks skiing in Zermatt for private reasons.

The employee is due to return to Switzerland in December 2024 for remedial work.

Salaries are paid 100% in Germany and no costs are borne by a Swiss branch or subsidiary.

This example can be used to explain the various taxation criteria if there is a double taxation agreement between the country of residence and the country of assignment. In this case, the so-called "fitter clause" applies to short-term assignments. These criteria are relatively similar in the various double taxation agreements and include the following points:

• Less than 183 days in a 12-month period, calendar year or tax year in the country of assignment and
• No payment of remuneration in the country of assignment and
• No assumption of costs for a permanent establishment or branch in the country of assignment.

It is important to note that all three points must be fulfilled in order to avoid taxation in the country of use.

In our example, the employee is in Switzerland for a total of five and a half months (assembly work plus private skiing holidays). This means that his stay in Switzerland in 2024 was less than 183 days, at the same time no salary is paid in Switzerland and no costs are incurred in Switzerland. As a result, the employee can be exempt from Swiss taxation and must continue to pay tax on income in Germany. In order for this final result to remain, care must be taken to ensure that he does not exceed 183 days even with the supplementary work in December.

In the case of short-term residence permits for a period longer than 4 months, this requires the employee to register and take up residence in Switzerland. In the case of assignments where employees may not always have to be on site, but only for a few days / weeks depending on the project or assembly status, this is associated with high costs. When taking up residence, the employee must also rent a flat in Switzerland and make it available to him.

In Switzerland, there is now a fourth aspect, the de facto employer status, which often plays no role in project and assembly assignments. The reason why this tends to play a subordinate role in project and assembly assignments is that the assignments often take place with a customer or client. However, if the assignment takes place in an affiliated company, then this aspect must also be examined.

Excursus: If the employee resides in Angola and is deployed from there for an assembly assignment in Switzerland for 5 months, the employee would be liable for tax from the first day. The reason for this is that there is no double taxation agreement in force between Switzerland and Angola.

If we were to assume that the assembly assignment would take place at a customer's premises, then the employee would have to pay their taxes in Switzerland as part of the tax declaration procedure.

Another aspect that needs to be examined is the establishment of an intentional or unintentional permanent establishment through the assembly or project assignment of an employee. This would also have tax consequences at company level.

Deployment of more than 183 days

If the project or assembly assignment lasts longer than 183 days in the country of assignment, this generally leads to taxation in the country of assignment. It should be noted that the way in which the 183-day limit is counted varies depending on the double taxation agreement.

In our example, in which the double taxation agreement between Switzerland and Germany applies, the 183 days are counted in a calendar year.

In our example, the employee's assignment was planned for 5 months, but if this were to be extended until the end of the year, the assignment would last a total of 7 months. As a result, Switzerland would have the right to tax the corresponding earned income for this period. Switzerland therefore only has a limited right of taxation. Germany, on the other hand, retains the unlimited right of taxation, as Germany would be considered the tax domicile. Due to the fact that Germany has the unlimited right of taxation, the employee must declare his worldwide income, including the income for the Swiss activity, in the German tax return. In order to avoid double taxation, the income earned in Switzerland is only taken into account when determining the tax rate.

Here, too, it is important to consult the relevant double taxation agreement to find out how double taxation can be avoided.

Tax equalisation

If an employee suffers a higher tax burden due to their assignment in another country, the employer usually bears the additional tax costs. There are various approaches for calculating the assumption of additional tax costs. It is recommended that a company always uses the same approach, regardless of the type of assignment, country combination or hierarchical level of an employee. Otherwise, this opens the door to many discussions.

Conclusion

It may be possible to avoid taxation of earned income from a project or installation assignment, but it is advisable to check the individual case carefully so that there are no unexpected surprises later on. In most countries, a limitation period of 5 years applies, in some cases and countries the period is 10 years.