The US-Switzerland Income Tax Treaty, effective since 1998, aims to avoid double taxation and prevent fiscal evasion with respect to taxes on income. The treaty is a key resource for individuals and businesses navigating cross-border tax obligations between these two nations. Its provisions are designed to foster fairness, clarity, and relief from double taxation, with Articles 4, 15, and 23 playing pivotal roles.
Article 4 – Resident
Article 4 defines who is considered a "resident" of a Contracting State for treaty purposes. Paragraph 1 provides the basic definition, and tie-breaking rules are included for individuals who would otherwise be considered residents of both the US and Switzerland. These rules examine factors such as permanent home, center of vital interests, habitual abode, and nationality. If residency cannot be determined by these criteria, the competent authorities of both countries will settle the question by mutual agreement. Notably, if a Swiss resident elects not to be taxed in Switzerland on all US source income, they are not treated as a Swiss resident for treaty purposes. The protocol also clarifies that Swiss residents making a spousal election under IRC § 6013 are treated as Swiss residents and also subject to US taxation as residents.
Article 15 – Dependent Personal Services
Article 15 addresses the taxation of income from employment. Under this provision, salaries, wages, and other similar remuneration derived by a resident of one contracting state for employment exercised in the other state are generally taxable only in the state where the employment is performed. However, an exemption applies if the individual is present in the other state for no more than 183 days in any twelve-month period, the remuneration is paid by an employer not resident in that other state, and the cost is not borne by a permanent establishment there. This rule aims to prevent double taxation and clarify short-term cross-border employment scenarios, ensuring that tax obligations align with the location of economic activity and employer residency.
Article 23 – Relief from Double Taxation
Article 23 governs the relied of double taxation. Under this provision, Switzerland taxes US citizens residing in Switzerland on a worldwide income basis, while the United States grants a foreign tax credit for Swiss taxes paid on that income to avoid double taxation. The article also analyses the impact of the “saving clause,” which generally preserves the right of a country to tax its own citizens and residents as if the treaty had not come into effect, subject to limited exceptions. In practice, Article 23 ensures that taxpayers are not subject to excessive tax burdens by coordinating credit mechanisms between the two jurisdictions.
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PwC’s US Tax team in Zurich specialises in U.S. tax reporting and consulting services for individuals with cross-border tax obligations, delivering tailored solutions to individuals. Our experienced professionals’ continued work with US tax treaties around the world, ensures precise compliance and optimal tax positioning for our clients navigating the complexities of cross-border filing.
We invite you to reach out to our team for an initial call. This is your opportunity to learn how our tailored approach can address your specific needs and help you optimise your tax position. Contact us today to start a conversation about how we can assist you.
