# US/Swiss Tax treay -- re-sourcing income



## boxmiks (Jun 17, 2020)

Hi

This is specific to Switzerland and the US, but the wording in the treaty is pretty common. I am a US citizen working for a Swiss company paying Swiss income tax. I went on a business trip to the US for a week thus generating US-source income.

As I understand US-sourced income is liable for US income tax. (irs.gov/individuals/international-taxpayers/foreign-tax-credit-special-issues) mentions tax treaties to prevent double taxation in this case. So, now I have to read a tax treaty to figure out my taxes.
Based on that I thought I might be able to resource the income to Switzerland. However it seems from my reading of the treaty that, instead, Switzerland is responsible to exclude this income from tax. I can only resource income to cover any additional tax after the exclusion is taken.

Does anyone have knowledge whether that is the case? Does Switzerland provide this exemption? How do you apply for it?

For reference the parts from the treaty (irs.gov/pub/irs-trty/swiss.pdf) are mostly in Article 23, specially, paragraph 3 which says:

Where a resident of Switzerland is also a citizen of the US and is subject to US income tax in respect of profits, income or gains which arise in the US, the following rules apply:
a) *Switzerland will apply paragraph 1* as if the amount of tax paid to the US in respect of such profits, income or gains were the amount that would have been paid if the resident were not a citizen of the US; and
b) for the purpose of computing the US tax on such profits, income or gains, the US shall allow as a credit against US tax the income tax paid or accrued to Switzerland *after the application of subparagraph a)*, provided that the credit so allowed shall not reduce the amount of the US tax below the amount that is taken into account in applying subparagraph a); and
c) for the purpose of subparagraph b), profits, income or gains described in this paragraph shall be deemed to arise in Switzerland to the extent necessary to avoid double taxation of such income; however, the rules of this subparagraph shall not apply in determining credits against US tax for foreign taxes other than the taxes referred to in subparagraph 2 a) and paragraph 3 of Article 2 (Taxes Covered)


*Paragraph 1* just basically says the remedy is to exclude the income from Swiss tax


thanks!
michael


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## Moulard (Feb 3, 2017)

Actually the wording of the avoidance of double taxation clauses varies considerably between treaties when in comes to the taxation of US sourced income of a US citizen who is resident in the other treaty country.

For example, in the Australian treaty, it is how you hoped it would appear in the Swiss Treaty, the US provides a special tax credit of an amount equal to the amount of tax that would owed to the US, effectively resourcing all of the income.

The Swiss Treaty is quite different, and bearing in mind I have only had a quick skim of the treaty and the technical memorandum, its more complicated than your interpretation on a first reading.

If the Swiss deduction does not provide you with full relief then you the US will provide a partial tax credit for the difference.

If I understand it correctly, you would have to calculate the pro-rata impact of the deduction to determine the amount you could claim a US tax credit for...

Effectively what is happening is that the US and the Swiss are splitting the tax revenue on the income.

The technical memorandum actually has a worked example in it.

https://www.irs.gov/pub/irs-trty/swistech.pdf


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## Bevdeforges (Nov 16, 2007)

As Moulard says, each tax treaty has its own "tricks" and peculiarities. In very general terms, the US very often reverts to the Foreign Tax Credit as its primary method of "avoiding double taxation." Which means that you pay your tax in your country of residence and then you take a credit for the amount of income tax you paid on the US sourced income. 

The mechanics of the Foreign Tax Credit, however, can be a little obtuse and difficult to follow. In theory, if the tax rate in your country of residence is higher than in the US, then your US tax on the amount is wiped out and you may actually have a carry over credit you may be able to use one day. If the tax rate on the income is lower where you live than in the US, you pay only the difference to the IRS. In practice, it's not usually that easy.

I know nothing of the Swiss tax system, but it may be worthwhile to approach the Swiss tax office (or their website) directly to see if they can explain how Swiss tax law handles the double taxation issue for foreign source income like this. (They may just refer you to the tax treaty - but it's worth a shot to at least ask the question.)


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## Nononymous (Jul 12, 2011)

Given my cavalier approach to US tax compliance this suggestion won't come as a surprise. Why go jump through all these hoops for one short business trip? It's not like the IRS can somehow magically look at your passport stamps and figure out what you were up to. If you were sent to the US for several months then maybe it's worth doing, but not for a week.


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## boxmiks (Jun 17, 2020)

For completeness, I'll add what else I've worked out from the treaty and the technical explanation. I think I was wrong about the remedy applying Article 23(1).

In article 15(2) (Dependent Personal Services), the treaty says essentially this income _[being a Swiss resident]_ is taxable only in Switzerland if the time in the US is less than 183 days and the employer isn't American. This isn't income "that may be taxed in the US" under the treaty then and so the article 23(1) remedy doesn't apply, ie Switzerland doesn't exclude it. And so, I could take a foreign tax credit for all of it vis-a-vis Article 23(3)(c).

What still bothers me is the technical explanation of Article 15 points out explicitly that US citizens who are residents of Switzerland and meet the conditions for Article 15(2) are nonetheless taxable in the US under the savings clause "subject to" Article 23(3) on this income. But again Article 23(3) says to treat the US citizen who is a resident of Switzerland as a Swiss citizen in this case which -would come under article 15(2). Is this just spelling out what Switzerland should do versus the US?

So, I guess the interpretation is that under Article 15(2), Switzerland treats me like a Swiss citizen, ie taxes me, and so does the US -but under Article 23(3)(c), I get to follow the special re-sourcing rule? Did I actually get to the bottom of this? 


Btw, does anyone know if that re-sourced earned income is still considered US-sourced for IRA contributions?

Thanks!
michael


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## boxmiks (Jun 17, 2020)

Also, thanks for the other replies!


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