The new Social Security Totalization Agreement with Switzerland replaces the 1980 U.S.-Switzerland social security agreement and accounts for recent changes to U.S. and Swiss laws. This agreement helps to eliminate double social security taxes and “totalizes” benefits for those on international assignment in one country or the other.
A new Social Security Totalization Agreement (“the Agreement”) between the United States and Switzerland enters into force today.1 The Agreement replaces the 1980 U.S.-Switzerland social security agreement and accounts for recent changes to U.S. and Swiss laws.
Totalization agreements help to ensure that workers will not pay double social security taxes while on international assignment in one country or the other, which helps to mitigate international assignment costs. Agreements also provide for coordination of benefits payments for workers who have paid social security taxes in both countries during their careers.
The Agreement covers chapters 2 (Tax on Self-Employment Income) and 21 (Federal Insurance Contributions Act (FICA)) of the Internal Revenue Code (the “Code”). The Agreement does not cover the Net Investment Income Tax which is not a part of FICA. However, the Agreement will apply to the 0.9-percent Additional Medicare Tax payable by certain higher-income taxpayers since this tax is part of FICA.
The provisions with respect to employment are substantially similar to the 1980 agreement. A worker will be covered by the social security system of the country in which he is working. Under the “detached worker” provision, when an employee who normally works for an employer in his home country is temporarily transferred to work in the other country for the same employer (or a foreign affiliate of the employer described in Code section 3121(l)) he will continue to pay social security taxes to his home country. This rule applies only if the employer expects the transfer to last five years or less.
Under the Agreement, if the employee is first sent to work in a third country and then to the host country, the detached worker provision will still apply provided the employee’s service in the third country was subject to mandatory coverage in the home country.
The Agreement eliminates dual coverage where the laws of one country consider a person’s work activity self-employment, but the laws of the other consider it employment. A person who is a resident of the country that considers the work self‑employment will pay social security taxes only under that country’s laws. If a person is not a resident of the country that considers the work self‑employment, she will pay social security taxes under the laws of the other country.
The Agreement provides specific rules for crew members of aircrafts and ships.
1 Donald S. Beyer, Jr., U.S. Ambassador to Switzerland, and Jürg Brechbühl, Director of the Federal Office of Social Security, signed the Agreement on December 3, 2012, in Bern. See: http://bern.usembassy.gov/event_12032012.html.
For the text of the Agreement, please see the U.S. Social Security Administration website at: http://www.ssa.gov/international/Agreement_Texts/switzrld.html.
The information contained in this newsletter was submitted by KPMG LLP’s Washington National Tax practice.
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