New cross-border commuter agreement between Switzerland and Italy

Stephen Turley Director, Tax and Legal Services, PwC Switzerland 27 Sep 2023

On 11 August 2021, the Federal Council adopted the dispatch on the new agreement regarding the taxation of cross-border commuters between Italy and Switzerland. The cross-border commuter agreement was signed on 23 December 2020 and entered into force on 17 July 2023. It replaced the existing agreement dating from 1974, and is a significant improvement on the previous regulation. The new agreement will be applicable from 1 January 2024.

Under the previous agreement from 1974, Italian cross-border commuters with employers in Switzerland are taxed exclusively in Switzerland. The cantons in question forward 40% of the revenues to the commuters' home municipalities in Italy in return.

An original new draft of the agreement was drawn up in 2015, but was not signed. As a result, the talks between the two countries resumed in 2020 and the draft was amended – in close cooperation with the authorities of the cantons of Grisons, Ticino and Valais as well as the trade unions and the association of Italian border municipalities. With this approach, a solution was found which is satisfactory for both countries and which will contribute towards maintaining good bilateral relations.

New cross-border commuters

Under the new Agreement, cross-border commuters are defined as people who commenced employment in Switzerland in the border region as of 17 July 2023 and who are also resident in Italy. In addition the Agreement requires cross-border commuters to have their place of residence less than 20 kilometres away from the border and to return over the border each day. For these people, Switzerland will levy 80% of the withholding tax on the income of cross-border commuters by means of new tariff codes (R, S, T, U and V), whereby the total compensation will determine the individuals source tax rate. In addition, the ‘new’ cross-border commuters will be taxed in Italy, thereby mitigating double taxation. As part of the process the employment income will be reported to Italy every year by means of an electronic data exchange.

Existing cross-border commuters

Existing cross-border commuters are those who worked in the cantons of Graubünden, Ticino or Valais between 31 December 2018 and 17 July 2023. These cross-border commuters will continue to be fully taxed in Switzerland – now at the ordinary withholding tax rates instead of tariff code F – but Switzerland will transfer a sum of money amounting to 40% of the taxes paid by the cross-border commuters to the Italian border municipalities until the end of the 2033 tax year. From 2034 tax year onwards.

The newly defined concept of a cross-border commuter will also apply to these people once it has entered into force.

General information

The new agreement in its entirety is based on the principle of reciprocity, meaning that it also applies to cross-border commuters who live in Switzerland but work in Italy. It will be reviewed every five years and adapted if necessary, especially with regard to the very current topic of a home office. At the moment, it is still unclear how the 45 non-return days will be dealt with. It is conceivable that corresponding forms (residence certificate/employer’s certificate of non-return days) will be introduced, as is the case in other countries such as Germany and France.

For payroll accounting the new agreement means an adjustment to the withholding tax rate codes, which must be implemented correctly from 1 January 2024 onwards. The employer must find out when the employee was first employed in Switzerland and forward this information to the tax authorities, as this is the only way to determine whether the employee is a ‘new’ or ‘existing’ cross-border commuter.