The Federal Fiscal Court (Bundesfinanzhof) in Germany has ruled that the German tax authorities cannot made it a criterion that an executive employee’s function is registered in the relevant Swiss Commercial Register, before the executive employee is regarded as an “executive” (leitender Angestellte) in the sense and for the application of the specific provisions of the German-Swiss double tax treaty.
Recommended action
“Executive employees” residing in Germany and working in Switzerland and who have had their “executive employee” status challenged by the German tax authorities should contact their relevant German tax office (Finanzamt) for a reopening of their assessments, when possible. Subsequently, they may have to contact the Swiss cantonal tax authorities in case they have stalled the final Swiss assessments for the same reason.
Background
“Executive employees” working for Swiss companies in Switzerland, who have their main residence in Germany, are as a main principle taxable in Switzerland on their Swiss employment income,irrespective of where they physically perform their duties. This principle follows from the provisions of the double tax treaty between Germany and Switzerland.
An important criterion for allowing the beneficial taxation for the “executive employee” has been the registration by the Swiss employer in the relevant Swiss Commercial Register (Handelregister), providing the employee with sole signing rights(Einzelunterschrift) or collective signing rights (Kollektivunterschrift zu zweien). This would often, but not always, be added by the employee’s function, e.g., Director or Vice Director. Other criteria are considered as well, but the above has been a key aspect for defining an employee as “executive employee”.
However, since 2011 the German tax authorities have increasingly been challenging the definition of the “executive employee” and this would in particular be the case, when the function of the executive employee was not registered in the relevant Swiss Commercial Register. This meant that the ordinary split of taxation between the countries would apply, which, due the higher German taxation, would leave the executive employee in a less favourable tax position.
A case in Baden-Württemberg was escalated to the German court system, with the initial decision made by the Fiscal Court (Finanzgericht) Baden-Württemberg in 2017. The German tax authorities lost but escalated the case to the higher court, the Federal Fiscal Court (Bundesfinanzhof). The Federal Fiscal Court’s ruling now confirmed the outcome of the lower court. The decision is final.
Please do not hesitate to contact us if you have questions or comments on this matter. In case you are impacted by this and you may need assistance with the German tax authorities, we are happy to connect you with our corresponding German tax firms.
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