Income tax and social security - employee or independent?
The definition of employment contract in the Code of Obligations, although similar, is not opposable to tax authorities – a case-by-case assessment is necessary. Whether the activity is registered or not as a business, full or part time, formalized in a contract or not, of a short or long duration, the tax law distinguishes between dependent and independent activity. Nevertheless, the authorities will tend to accept a self-employed activity as soon as a taxpayer is entered in the Commercial Register, and this should only be departed from in cases of abuse.
The central criterion is the economic and legal dependency on the employer. Indeed, an employee is generally working for one single employer, is included in his hierarchy, must follow orders and specific instructions, whereas the employer is required to cover all the associated costs and equipment, while also bearing the risk of any business losses.
The directives on the social security contributions state that, in the service sector, a taxpayer who has only a very limited number of clients cannot be qualified as self-employed. In fact, if the economic risk is limited to dependence on a given activity, the entrepreneur's risk lies in the fact that, if the mandates are revoked, the person finds himself in a situation similar to that of an employee who loses his job, which for the authorities is a typical characteristic of an employed activity. A benchmark of 5 clients is generally decisive.
The relationship of dependence manifests itself above all in a relationship of subordination and in the employer's right to give instructions to the employee, which is also valid in employment law. For example, IT specialists who formally act as sole traders but who are active in a client's long-term projects have been considered as employees because they are integrated into the client's organization in terms of time and place, are subject to instructions to a large extent and benefit from the holiday scheme, this last element being very atypical for the self-employed. For this reason, a non-compete is an indication of a subordinate relationship, and the social security department is of the opinion that the employee does not employ staff. It should be noted in this respect that the director responsible for the subcontracted staff carries out his work personally, the staff being hired by the company. Conversely, the function of company consultants implies, by its very nature, an independent situation with regard to the mandating company, and they will thus be considered as independent insofar as they are not manifestly in a subordinate relationship in the organization of work.
Moreover, the self-employed person's client must be able to recognize that he is acting on his own behalf and not on behalf of an employer, but the organization does not have to be recognizable by everyone and can remain confidential for anyone other than clients. An employee does not procure mandates himself, but this does not prevent him from procuring mandates for his employer, as a director, broker, or agent, regardless the fact that agents are generally considered as non-employees in the civil law.
Tax practice considers an employee to be someone who is not only subject in some way to a relationship of subordination, but who also runs no entrepreneurial risk, which would be the case if he works exclusively for an employer, has made no or limited investments and does not have his own premises. Indeed, an entrepreneur uses labor and capital, whereas the dependent worker provides only his labor and his employer provides the material and financial resources (capital) needed to transform this labor into products or services; no matter how small the share of invested capital may be, particularly in consultancy activities.
Another frequent confusion is the status of the director of owned company. Despite large independence, this constitutes employed activity for the purpose of income tax and social security.
Value added tax – notion of an enterprise
In order to be a taxable person, the taxpayer must operate a business, i.e. carry out a professional or commercial activity (entrepreneurial field), generate income from services that is of a permanent nature, and also act in his own name vis-à-vis third parties. The analysis is done from purely economic standpoint, regardless legal structure.
Examples include concluding contracts, issuing invoices, placing orders, contacting customers, booking advertising, operating a homepage, etc. Active participation in the market is required. Of course, the presence of changing and different clients is an indication of this, but it makes little difference whether an activity benefits only closely related persons or whether these persons are domiciled in Switzerland or abroad.
Qualification from VAT standpoint is also important due to the fact that an employee cannot voluntarily register with the VAT and therefore should not be able to benefit from the input VAT refund.
