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Founded in Geneva in 1996 under the auspices of the Council of Europe, FEDRE has always focused on cross-border regions. In 2023, it formed a partnership with Crédit Agricole next bank to study the border effect along Switzerland’s periphery in various fields, some of which go unnoticed by the general public. Following the first issue, which addressed food aid, the Founded in Geneva in 1996 under the auspices of the Council of Europe, FEDRE has always focused on cross-border regions. In 2023, it formed a partnership with Crédit Agricole next bank to study the border effect along Switzerland’s periphery in various fields, some of which escape the attention of the general public. Following Issue 1, which addressed food aid; Issue 2, which explored challenges in the healthcare sector; Issue 3, which presented a vital topic for our regions—water; Issue 4, focused on culture; Issue 5, addressing the sensitive issue of who compensates unemployed cross-border workers; Issue 6 focused on the idea of creating a cross-border resident card, Issue 7 addressed sustainable mobility in cross-border urban areas, this issue is devoted to the European aspects of cross-border cooperation, issue 8 was devoted to the European aspects of cross-border cooperation, and in this issue 9, we examine the advantages and disadvantages of direct taxation systems for cross-border workers.
Curiously, there are no European rules governing the direct taxation of cross-border workers, whereas such rules do exist, for example, for unemployment benefits (see our Issue 5). The issue is addressed by bilateral agreements that are far from uniform across Switzerland’s borders. These different systems have their own characteristics, which include advantages and disadvantages that we will attempt to better identify.
As many bilateral agreements, as many systems
The 1971 agreement between Switzerland and Germany provides for a 4.5% withholding tax at the workplace, followed by payment of the tax at the place of residence, with the 4.5% already paid being deducted. The 2007 agreement between Switzerland and Austria provides for a withholding tax at the workplace, followed by a 12.5% credit against the amount collected, which is refunded to the country of residence. The agreement between Switzerland and Italy, recently revised in 2020, follows the German model for new cross-border workers starting in 2024, while others continue to be taxed at source while remaining non-taxable in their country of residence.
There are no fewer than two agreements with France. The first, which applies only to the canton of Geneva, has provided since 1973 for withholding tax, followed by a 3.5% refund of the gross payroll to the municipalities and departments of residence. The second, which applies to all other cantons, has in place since 1983 a system that is exactly the opposite, since the tax is paid in the state of residence, which then transfers 4.5% of the gross payroll to the place of work.
Which system is best?
There is no single "best" system. Each has advantages and disadvantages that continue to be debated, given that what some find satisfactory will not necessarily be appreciated by others. But we can agree on two general criteria: fairness, on the one hand; and the system’s suitability for the intended goals, on the other.
All these mechanisms are the result of international agreements negotiated in detail. One might therefore assume that, as a general rule, a minimum level of fairness exists, though this does not preclude the possibility of specific situations where this is not the case. But fairness cannot be assessed solely from a legal perspective, as one must also consider the economic aspect of the matter, marked by enormous wage disparities—particularly compared to France and Italy—and the “siphon effect” this triggers, draining neighboring regions of their skilled workforce to the benefit of Switzerland, a phenomenon that has intensified since the entry into force, in June 2002, of the Agreement on the Free Movement of Persons between the European Union and Switzerland. Finally, the political dimension must be taken into account—that is, the manner in which we wish to regulate the flow of cross-border workers to Switzerland.
How to better manage the increase in the number of cross-border workers: the example of Ticino
Driven in particular by the two factors mentioned (wages and the agreement on the free movement of persons), the number of cross-border workers has tripled over the past twenty years with Italy and France, and doubled with Germany, leading to tensions particularly in Ticino, where they account for one in three jobs, and to a lesser extent in Geneva (one in four).
This led to the revision, in 2020, of the 1974 agreement with Italy, stipulating that, starting in 2024, new cross-border workers—defined as those living within a 20-kilometer zone of the border—will also be taxed in Italy according to the Italian tax scale. The goal is to limit the number of cross-border workers without, however, harming the Ticino economy, which vitally needs this workforce. It is therefore all a matter of balance. Since the new provisions did not take effect until January1, 2024, it is too early to judge their effectiveness in relation to the intended goal. Only with hindsight, around 2030, will we realize whether we went too far or not far enough.
How to treat municipalities fairly: the example of Geneva
A few years ago, FEDRE conducted a comparative study of the various tax systems for cross-border workers in Belgium, Switzerland, Luxembourg, and Germany. This study served as the basis for a report adopted in 2019 by the Congress of Local and Regional Authorities of the Council of Europe.
It became clear that the system established around Geneva is the envy of other French municipalities, as Pascale Schmidiger, mayor of Saint-Louis near Basel, recently confirmed to us, because Geneva’s revenue-sharing funds go to municipalities of residence that bear additional infrastructure costs, whereas in the rest of the Jura Arc—where cross-border workers are taxed in France— their taxes are paid into the central government’s budget. Nevertheless, there remains debate within France regarding the share allocated to municipalities compared to that received by the departments of Ain and Haute-Savoie. And in Geneva, there is sometimes a desire for assurance that municipalities are using the revenue for expenditures truly related to the cross-border phenomenon. However, although it could be improved, the 1973 tax agreement has stood the test of time and can serve as an example of a mechanism that addresses the need for a fair sharing of burdens and resources on both sides of the border.