The question of tax residency has become highly relevant for Ukrainians who have obtained temporary protection and/or a migration status abroad similar in nature. Determining tax residency is crucial for establishing the jurisdiction where an individual must pay taxes. This issue is particularly relevant in European countries (where the majority of Ukrainians reside after the full-scale invasion by Russia), as these countries have not enacted any legislative acts or clarifications regarding the residency status of Ukrainians with temporary protection. There are also no specific approaches at the EU level for determining the residency status of Ukrainians who migrated abroad due to the war. This gives rise to a range of problems related to establishing the tax residency status of Ukrainians in practice. We attempted to explore the approaches applied in Switzerland.
Eugene Smychok and Sergiy Broyakov examined this issue for the Legal Practice publication.
Specifics of the migration status of Ukrainians in Switzerland
Switzerland is not an EU member state but has implemented special rules regarding the regulation of the migration status of Ukrainians who migrated due to the war. In Switzerland, the equivalent of temporary protection is the “Schutzstatus S” (Protection Status S). Ukrainians obtaining this legal status can legally stay in Switzerland. However, the rules for determining tax residency status have an individualized character.
Legally established criteria for determining the tax residency status of individuals in Switzerland
An individual is considered a tax resident of Switzerland if they:
a) are employed in Switzerland and stay in the territory of Switzerland for more than 30 days;
b) do not have paid employment in Switzerland and stay in the territory of Switzerland for more than 90 days.
In the case of a person with the protected S status, even if they are not employed in Switzerland, they will become a tax resident of Switzerland under national legislation if they stay in Switzerland for more than 90 days.
In this regard, such a person is considered a resident of Switzerland from the first day of arrival in Switzerland (Article 8 of the Federal Law on Direct Federal Taxation).
Enshrined in Article 3 of the Federal Law on Direct Federal Taxation (Bundesgesetz über die direkte Bundessteuer).
Administrative practice in Switzerland regarding the determination of tax residency for Ukrainians with protected status S
On the official website of the canton of Bern (tax department), the following is noted: “Protection status ‘S’ is a return-oriented residence regulation. For this reason, refugees with an S permit do not currently constitute a tax residence in Switzerland” [1]. This position was first articulated on April 14, 2022. A similar legal position was reiterated on the official website of the canton of Bern on January 12, 2023.
At the same time, tax authorities in other cantons do not provide similar comments on their official websites. The Swiss Federal Tax Administration (Eidgenössische Steuerverwaltung) has not publicly expressed its position on the tax residency status of Ukrainian citizens.
Explanations from Swiss tax authorities regarding individual inquiries about approaches to determining the tax residency status of Ukrainians with protected status S
In Switzerland, taxpayers pay taxes at the federal, cantonal, and municipal levels. Similarly, Switzerland has a hierarchical system of tax authorities. We decided to investigate the issue of approaches to determining the residency status of Ukrainians by sending individual inquiries to tax authorities. The key wording in our inquiry was as follows:
“… is Ukrainians with protected status S are not considered tax residents in Switzerland (general approach)?”
In our inquiry, we noted that we are aware of the approaches mentioned on the official website of the canton of Bern.
Key points from the response of the Federal Tax Administration:
“… People who have fled from Ukraine to Switzerland – according to current knowledge – typically do not move their centre of life to Switzerland, as they want to return to Ukraine as soon as the situation allows. Should the current “circumstances” in Ukraine be of a longer duration, this position might have to be reviewed. We therefore assume a so-called limited tax liability in the present case. This means that these persons do not automatically receive a tax return…”.
In essence, it was noted that, at present, Ukrainians who migrated to Switzerland have not changed the center of their life interests, which is one of the key criteria for determining residency status under international double taxation avoidance treaties. It is emphasized that this position may be reviewed if the situation does not change over time.
Key points from the response of the cantonal tax administration:
“… Please note that the practice in the Canton Zurich is similar to the publication issued by the canton of Berne. Ukrainians with S status are registered in the municipality’s tax register since they are principally tax resident based on Zurich tax law. However, during the first year of their tax residence in Switzerland they were not subject to unlimited tax liability in Switzerland. Afterwards, it is examined for the individual whether he/she still has a house in Ukraine and/or whether the centre of life is in Ukraine or in Switzerland. If there is no house in Ukraine or the centre of life is now in Switzerland, he/she will be tax resident in Switzerland and subject to unlimited tax liability…”.
In essence, it was noted that in the first year after arriving in Switzerland, Ukrainians do not have “unlimited tax liabilities” (a characteristic of tax residents). It is also stated that the approach is similar to that mentioned in the canton of Berne (reminding that the official website of the canton of Berne states that Ukrainians with protected status S currently do not acquire the status of tax residents). However, a reservation is made that individual assessment may be conducted in each case: whether the residence in Ukraine is retained, whether the center of life has changed, etc.
Key points from the response of the municipal tax administration:
“…Please be informed that in general Ukrainians with protected status S will qualify as tax residents in the Canton of Zurich. This is based on the assumption that their space of living in Ukraine is not available at the moment and they spend more than 30 days (with employment) or 90 days (without employment) in Switzerland. Should these criteria not apply the case needs to be reviewed individually…”.
In other words, at the municipal level, it was stated that as a general rule, Ukrainians with protected status S acquire the status of tax residents in Switzerland. However, at the same time, a reservation was made that the question of tax residency should be determined on an individual case basis. This approach is quite logical since a simple temporal criterion is not always valid.
Residents or non-residents?
Naturally, the question of tax residency is characterized by a high degree of subjectivity. It is positive that at the federal and cantonal levels, there is a position that Ukrainians with protected status S do not immediately acquire the status of tax residents. The public position outlined on the official website of the canton of Berne also inspires hope that the issue of tax residency for Ukrainians in Switzerland will not be approached formally (based solely on a simple temporal criterion).
We hope that in the future, the prevailing approach will be in line with which Ukrainians who, while staying in Switzerland, continue to work remotely for a Ukrainian employer or operate as a Ukrainian individual entrepreneur, will continue to be considered exclusively tax residents of Ukraine. This will allow these individuals to continue paying taxes exclusively to the respective budgets of Ukraine and thereby support the national economy.