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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I am a US citizen living in Switzerland. I receive a salary

Customer Question

I am a US citizen living in Switzerland. I receive a salary from a Swiss state entity. My understanding of Article 19 of the convention between the US and Switzerland is that this income should be taxable only in Switzerland. The US-Swiss convention does not mention anything specific for US citizens.
In contrast, the US-Germany convention stipulates specifically that salaries to US citizens employed by German government entities are not exempt from US taxes.
Thank you for your help.
Submitted: 5 years ago.
Category: Tax
Expert:  Merlo replied 5 years ago.
Hello metro,

As a US citizen, you are subject to US taxes on your income earned worldwide. Even when a tax treaty is in place, the main purpose of that tax treaty is to define which country has the first right of taxation.

Since you are a US citizen living in Switzerland and working in Switzerland, then Switzerland is the country that has the first rights to tax your income. You are, however, still required to report that same income to the US on your annual tax return.

If you live overseas for a period of at least 330 days in a 12 month consecutive period, then the US will allow you to claim the foreign earned income exclusion, before any additional earnings from your job would be taxable. The current amount of that exclusion is $91,400. So the first $91,400 of your income is exempt from US tax as long as you meet the 330 day residency requirement.

If you do not meet the residency requirement to take the foreign earned income exclusion, then you would still report your income to the US, however, you would be given a credit for the tax you already paid to Switzerland on that same income.

If this was helpful please press the Accept button.

Thank you metro, and please let me know if you have additional questions.



Customer: replied 5 years ago.
Hello Merlo,

Thank you for your answer. It summarizes the general obligations of US citizens abroad . However, my question is wheter article 19 of the US-Swiss tax convention applies to US citizens employed by Swiss state entities.

Regards

Metro
Expert:  Merlo replied 5 years ago.
Hello metro,

Let me put your question back on the open board to see if one of the other experts in this forum is more familiar with that treaty.

I do not want to risk giving you the wrong answer on this.

Thank you metro, and hopefully someone here can help you, although I am not sure if we have anyone in this forum who is totally familiar with that treaty.

Let's see if you get another response.

In the meantime, please do not Accept this question, that way your account will not be charged until you have a satisfactory answer.

Expert:  Lev replied 5 years ago.

Hi,

please see for reference the text of the Convention - http://www.irs.gov/pub/irs-trty/swiss.pdf - page 30:

ARTICLE 19 Government Service and Social Security

1. a) Salaries, wages and other similar remuneration, other than a pension, paid by a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State.

b) However, such salaries, wages and other similar remuneration shall be taxable only in the other Contracting State if the services are rendered in that State and the individual is a resident of that State who:

i) is a national of that State; or

ii) did not become a resident of that State solely for the purpose of rendering the services.

So - if you either did not render services in the US or are not a US resident for tax purposes - your compensation should be taxed in Swiss only.

See also the IRS publication 901 - http://www.irs.gov/pub/irs-pdf/p901.pdf - page 32:

Income, other than a pension, paid by Switzerland or its political subdivisions or local authorities to an individual for services performed for the paying governmental body is exempt from U.S. income tax. However, the exemption does not apply to payments for services performed in the United States by a resident of the United States who either:

-- Is a U.S. citizen, or

-- Did not become a U.S. resident only to perform the services.

Pensions paid by Switzerland for services performed for Switzerland are exempt from U.S. income tax unless the recipient is both a resident and citizen of the United States.

 

So far - you may claim Tax Treaty exemption because services were performed outside the US.

Let me know if you need any help.

Customer: replied 5 years ago.
Hello

Thank you for your answer. As I said in my question, I understand Article 19 of the treaty the same way you do. The reason I am asking the question is to know if there is, for example, any provision like in publication 901. This publication seems to concern only residents of foreign countries. The passage you refer to is in a section that starts on page 28, first column, and seems to concern "...residents who are present in the United States as nonresident aliens generally are exempt from U.S. income tax." So my question is if there is a provision somewhere in the treaty or elsewhere, or law cases that would contradict our understanding of Article 19.

All the best

Metro
Expert:  Lev replied 5 years ago.

Hi Metro,

if we read the full paragraph on the page 28,

Wages and Pensions Paid by a Foreign Government. Wages, salaries, pensions, and annuities paid by the governments of the following countries to their residents who are present in the United States as nonresident aliens generally are exempt from U.S. income tax. The conditions under which the income is exempt are stated for each of the countries listed.

As you see that statement do not address US citizens at all... and doesn't contradict the Tax Treaty

 

Exemption under U.S. tax law. Employees of foreign countries who do not qualify under a tax treaty provision and employees of international organizations should see if they can qualify for exemption under U.S. tax law.

This statement advises to verify the Tax Treaty provision to verify qualification for exemption - that is what we actually did above.

If you work for a foreign government in the United States, your foreign government salary is exempt from U.S. tax if you perform services similar to those performed by U.S. government employees in that foreign country and that foreign government grants an equivalent exemption. If you work for an international organization in the United States, your salary from that source is exempt from U.S. tax.

This statement point to the situation if you were working in the US - it doesn't relate to you.

 

Honestly I do not see any contradiction, but I understand your concern.

I suggest you to call the IRS hotline for clarification - 1-800-829-1040 and confirm the answer provided.

You may also request a private letter ruling from the IRS to backup your decision.

 

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