Is employment income from a Swiss company taxable in Switzerland if you work abroad?

Employment income from a Swiss company is not subject to Swiss income tax, if you are neither resident in Switzerland nor work physically in Switzerland.

Art. 5 Cyph 1 lit. a of the Swiss Federal Tax Act (“DBG”) states the following:

Individuals without tax domicile or residence in Switzerland are subject to tax on the basis of economic affiliation if they carry out a gainful activity in Switzerland

Art. 91 DBG further defines the method of taxation:

Anyone who is gainfully employed here for a short period of time or as a cross-border commuter or weekly resident in a dependent position without tax domicile or residence in Switzerland pays withholding tax on his income from employment in accordance with Articles 83-86.

In the past there have been some inconsistent interpretation of whether employees that are physically not working in Switzerland would be captured by the above source tax. However the Federal Court has clearly state in its decision BGE 137 II 246, that physical presence is required for a taxation at source:

[…] the exercise of gainful employment in Switzerland requires a physical presence in accordance with Art. 5 para. 1 lit. a DBG and Art. 4 para. 2 lit. a StHG.

This decision made in 2011 has changed the former practice according to which no physical presence was required. The Federal Court ruled this case against the Cantonal Tax Authorities of Zurich. Unfortunately, in my experience, not all tax authorities are familiar with this new practice and still assume that income from a Swiss employer is taxable. Therefore it is recommended to pre-discuss such a set-up with the tax authorities.

Please note: This court decision only applies for employment income. If a self employed person generates profit in Switzerland, he might become subject to source tax even without physical presence, since the wording of the law is broader.