The first consideration of every employer to avoid withholding tax is to prove that the hired personnel is not in fact an employee with an employment contract, but a director, external consultant, independent agent, that they work only part-time or on a one-time basis.
The reason for this is that the withholding tax applies in principle only to the staff carrying out employed activity, the only exception being artists, sportsmen and conference holders, whose income may be subject to withholding tax even if they are self-employed. It is also up to the employer to withhold social security charges from the salary, whereas an independent entrepreneur has to do it for himself.
However, the definition of employed personnel in tax and social security law differs significantly from employment contract definitions and encompasses other types of personal services that may seem out of scope at a first glance. It is not required to have a formalized agreement, a long-term engagement or even an employment-type remuneration. As such, withholding tax and social security obligations of the employer arise in presence of directors, part-time contractors or even long-term independent consultants whose work schedule and duties resemble that of an ordinary employee.
“Employee tax applies to more than just employees”
Another common argument is that the fees or salary are not actually paid directly to the service provider, but are reinvoiced to a different company, which in turn employs these personnel.
Provided subjugation to Swiss taxes is a requirement for the withholding tax on employees, the Swiss Confederation has recently extended anti-abuse measures and thus may consider a Swiss beneficiary of services as a de facto employer, or even retain a staff rental agreement. From the perspective of Swiss social security, it is required that the personnel is either working or residing in Switzerland.
“It matters not who pays and how, but what is the nature of provided work”
Nevertheless, even when a service provider has no presence in Switzerland, directors and members of the board may still be subject to withholding tax and social security at the expense of a Swiss company, in some cases. Multiple international agreements precise different rules of international revenue allocation and the coordination of social security systems.
Besides, international double-taxation conventions only provide for an allocation of salaries and deductions, but do not impede the procedural application of rules. The employer still has to comply even if nothing is to declare.
“When it gets international, it gets complicated”
Every employer or beneficiary of an independent service provider must thus carefully assess the scope of application of the above rules at the moment of signature, upon each payment and every month, as well as to review the situation on an annual basis.