Totalization agreements are among the most under-utilized tools against double taxation that expats have. You likely already know about the Foreign Earned Income Exclusion and Foreign Tax Credit to eliminate double taxation. But if you haven’t read up about the US-Switzerland totalization agreement, you could be getting double taxed. Expats living in Switzerland, get the facts you need about the US-Switzerland totalization agreement.
Totalization Agreements: What Are They?
The US and Switzerland have an agreement in place to avoid double taxation of the same earnings for Social Security purposes. The agreement provides guidelines to help with determining whether income is subject to social security tax in the US or Switzerland.
How Does the US-Switzerland Totalization Agreement Determine Which Country Receives Your Social Security Tax?
In most cases, if your US employer sends you to work in Switzerland for less than five years, then you (and your employer!) will pay into the US social security system. Conversely, if you work in Switzerland for upwards of five years or if you were hired in Switzerland, then you’ll pay into the Swiss social security system.
Further, expats who are self-employed and work only in the US or who transfer their business to Switzerland for five years or less will pay US Social Security taxes. Those who are self-employed and work only in Switzerland or transfer their business to the US for less than five years will pay into the Swiss social system.
How Do I Obtain an Exemption From the System?
If you have identified where you should remit social tax, you can then obtain a certificate of coverage (from that country) in order to serve as proof of exemption from social tax on the same income in the other country.
How Can I Apply for a Certificate of Coverage?
Employees who are seeking an exemption from Swiss social tax, please note that your employer is required to request a certificate of coverage, or form USA/CH 10, from the Social Security Administration via mail or at the SSA website.
Those who are seeking an exemption from US Social Security, note that your employer should request a certificate of coverage, or form CH/USA 10, from the compensation fund in Switzerland.
The information below is necessary to request an exemption:
- Full name of worker;
- Date and place of birth;
- Country of worker’s permanent residence;
- US Social Security Number (or Swiss Social Security Number if requesting a certificate from Switzerland);
- Date of hire;
- Country of hire;
- Name and address of the employer in the US and Switzerland; and
- Date of transfer and anticipated date of return.
How Can I Apply for a Certificate of Coverage If I’m Self-Employed?
The process is similar to the one for employees. Self-employed individuals may write to either the US Social Security Administration or Swiss compensation fund of the canton in which you live to request a certificate of coverage. You should write to the country where you pay social tax. Should that happen to be the US, you may request that online.
If you submit a request in writing, don’t forget to include the information below:
- Full name;
- Date and place of birth;
- Country of permanent residence;
- US and/or Swiss Social Security Number;
- Nature of self-employment activity;
- Dates the activity was or will be performed; and
- Name and address of your trade or business in both countries.
When Does the Certificate of Coverage Go Into Effect?
Commonly, the date you began working in the other country is when the certificate will take effect. Keep in mind: this can be retroactive. We advise requesting a certificate of coverage as soon as you can, ideally before you begin work in the other country to avoid risking double taxation.
After I Receive the Certificate, What Are My Next Steps?
For employees, your employer should retain certificates issued by Switzerland in case of an audit by the IRS. Neither you nor your employer is obligated to file a copy of the certificate with the IRS unless requested. Keep in mind that self-employed individuals should attach a copy of the certificate from Switzerland to his/her US income tax return every year as proof of the US exemption from social (self-employment) tax. This step is crucial because self-employed individuals are often subject to approximately 15% in self-employment tax on their US income tax return.
US-issued certificates of coverage are provided to both the employer and employee, or to the self-employed individual. At that point, you or your employer should ensure the certificate is given to the Swiss authorities when required. To read more about the US-Switzerland totalization agreement, please visit the Social Security Administration website.
Using the info above, American expats can use this agreement to execute efficient tax planning in Switzerland.
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