Approval of cantonal expense regulations

Scope of the Swiss Federal Supreme Court Decision 2C_804/2021 of 14 October 2022

Executive Summary

In this decision, the Swiss Federal Supreme Court confirmed that an expense regulation, approved by the canton of the seat, is binding on the tax authority of the employee’s residence. The latter is not entitled to examine the adequacy of the reimbursed expenses versus the expenses actually incurred by the employee. This decision raises the question of supplementary expense regulations for senior employees, which are linked to the basic expense regulations and are generally approved at the same time. One may wonder whether the same considerations should also apply to flat-rate representation allowance, although this type of allowance is not expressly mentioned in the judgment.

By analogy, we are of the opinion that this judgment implies that supplementary expense regulations agreed by the canton of the seat of the employer are also binding on the authority in charge of taxation of the employees. However, although the judgment in question gives excellent arguments to taxpayers, it does not expressly address the issue of flat-rate representation allowance and can therefore not be considered as a guarantee that the tax authorities of cantons other than Geneva (generally the most generous) will accept this treatment of expenses without objection.

The Facts

The Federal Supreme Court decision 2C_804/2021 of 14 October 2022 relates to a taxpayer resident in the canton of Vaud who worked for a company based in Geneva as “Regional Manager for Valais” for the branch office in Martigny. He received a lump-sum allowance of CHF 18,000 for the use of his private vehicle for business trips. This allowance was listed under point 13.2.2. of his salary certificate (Flat-rate expenses - Car). The principle of this allowance is based on the employer's expense regulations, approved by the canton of Geneva, the canton where the headquarters are located. Nevertheless, the Vaud authority decided to reject the deductions for professional transport costs, claimed by the taxpayer in his tax returns, and to add to the taxpayer's taxable income the part of the allowance paid by the employer that exceeded the professional deductions allowed at the cantonal and federal level. The Vaud authority considered that the contested flat-rate allowance had in fact served to reimburse the taxpayer's travel expenses between his home and his place of work, so that they could not be deducted in accordance with Art. 26 para. 1 let. a LIFD, and that the unused balance of the flat-rate allowance should also be taxed as income.

The Decision of the Federal Supreme Court

For employees working in Switzerland, the Guide to the preparation of the salary certificate and the pension certificate (hereinafter, the Guide to the preparation of the salary certificate) sets out limits for the reimbursement of actual and flat-rate expenses. If these limits are exceeded, the company must have an expense reimbursement regulation approved by the tax authorities.

According to Swiss labour law, the employer is obliged to reimburse the employee for all costs incurred in the performance of his work. Work-related costs are costs that are incurred as a result of the employee's work on behalf of and at the behest of the employer and are therefore in the employer's interest. This applies to journeys made by private vehicle between the place of work and the place of performance of the mission (intervention trips). According to established case law, the reimbursement of these intervention expenses is not income from a gainful activity, as long as it does not imply an increase in net assets but only compensates for expenses actually incurred by the employee in the interest of his employer.

On the other hand, if the reimbursement exceeds the actual or flat-rate expenses allowed according to the Guide to the preparation of the salary certificate, then the excess part is treated as taxable income according to art. 17, para. 1 LIFD.

These intervention expenses are distinct from the costs of commuting to and from work, which are professional expenses. The employee bears his or her own professional expenses but may potentially claim them as a deduction, within the cantonal and federal limits, provided that they are considered necessary for the acquisition of income.

The situation is different if the flat-rate reimbursement of intervention expenses is based on an expense regulation approved by the tax authority of the canton of the company's headquarters. In such a case, the relation between the flat-rate sum and the actual costs is regulated by agreement between the employer (for all its employees) and the tax authority. During the tax assessment process for each employee, the administration can only check that the lump sum allowance corresponds to the expense settlement. In other words, expenses paid on the basis of an agreed expense reimbursement regulation, in particular flat-rate expenses, must be accepted without reservation by the tax authority when assessing each employee individually. With regard to the deduction of professional expenses, the tax authority remains free to verify that the deductions claimed are in accordance with the cantonal law applicable to the taxpayer as well as with federal law. 

The Federal Supreme Court has confirmed that the above also applies when the authority in charge of the employee’s taxation is not the one that has accepted the employer's expense regulation. In accordance with the principle of good faith, the approval by the tax authority of the canton where the employer is based is recognised and binding on all cantons. The Model Expense Reimbursement Regulations for Companies and Non-Profit Organisations (hereinafter, the Model Expense Reimbursement Regulations), developed by the Swiss Tax Conference (hereinafter, the STC) and valid since 13 December 2021, clearly states in its 1^st chapter: "The cantonal tax authorities recognise the expense reimbursement regulations approved by the canton of the seat of a company (...). Consequently, a company only needs the approval of the canton where it has its registered office". The same applies to the Guide to Salary Certificates (marginal figure 54): "The approval issued by the canton of the seat covers both the actual reimbursement of expenses and the flat-rate expense regulation allowances. Once approval has been obtained, the employer only has to declare the flat-rate expense allowances in the salary certificates (...). The expense reimbursement regulations approved by the canton of the seat of the employer are recognised by all cantons"). It follows from the above that the approval of the cost reimbursement regulation by the canton of the seat of the employer means that all other cantons must comply with it.

Conclusion and Practical Perspectives

In this case, the Federal Supreme Court confirmed that the expense regulations approved by the canton of Geneva were binding on the canton of Vaud. The latter was not entitled to examine the adequacy of the expenses reimbursed versus the expenses actually incurred by the employee. Since it was paid in accordance with the regulation, the allowance for intervention expenses should not be taxed and the professional expenses could be deducted in accordance with cantonal and federal law.

In the light of this decision, one may wonder about the treatment of supplementary regulations for high-level employees which are tied to the expense regulations and are generally approved at the same time. Indeed, the question arises whether the above considerations should also apply to lump-sum representation allowance, although this type of allowance is not expressly mentioned in the judgment.

Applicability in Practice :

Until now, although a company based in Geneva had its supplementary expense reimbursement regulations for employees in managerial positions validated by the Geneva tax authorities, the Vaud cantonal administration did not recognise the amounts thus accepted by Geneva for employees domiciled in Vaud. The impact is significant since the maximum amount of lump-sum representation allowance recognized by the Geneva administration is set at CHF 100,000, whereas the Vaud maximum is limited to CHF 24,000. Thus, the application of the present decision to the supplementary regulations should imply that the canton of taxation of the employee, regardless of its practice, is not entitled to review the flat-rate representation allowance insofar as they are paid to the employee in accordance with the regulations approved by the canton of seat. Concretely, this means in our example that if Geneva (canton of the seat) recognises lump sum representation allowance of CHF 100,000, the canton of Vaud (canton of taxation of the individual) must accept these expenses as tax-free amounts.

What are the Arguments for Such a Position?

The general terms and conditions of the STC's model expense reimbursement regulations specify that "the regulations", which only require the approval of the canton of the seat, include the model supplementary expense reimbursement regulations for employees in managerial positions. This model determines the annual amounts of flat-rate expense allowances which, according to the general conditions of the model, should only be validated by the employer's home canton and which, according to the present decision of the Federal Supreme Court, should be binding on tax authorities outside the home canton.

In practice, a company based in Geneva generally has two options. Firstly, it can simply adopt the guidelines on reimbursement of expenses of the FER-Geneva. In this way, it does not receive any formal validation from the authorities as it confirms that it follows the Geneva practice. The second option is to have its own expense regulations validated, for example, the STC model. If a company decides to have its regulations validated, it is common for the Geneva administration to approve the basic and complementary expense regulations with the following reservation: "The company may grant to members of its management and executives a flat-rate allowance for representation expenses determined in accordance with the practice published by the Geneva Tax Administration". The question here is therefore whether the fact that the Geneva tax administration does not formally approve the regulations (basic or supplementary) but merely refers to its practice may open a loophole for other tax authorities, given that the Federal Court's ruling refers to "the approval of the tax authorities". In our view, this reference to practice, whether for a FER or STC regulation, should not call into question the approach we advocate. However, in view of the significant stakes for certain cantons, it is to be expected that the administrations concerned will use every possible loophole to refuse the deduction of these costs.

On the other hand, the strict and extensive application of this decision may also be bad news for Geneva taxpayers who work for a company outside the canton of Geneva. In fact, although the Geneva administration recognises the expense regulations approved by other cantons, it was previously possible to apply the Geneva practice to employees residing in Geneva for representation allowances. In view of the above, if the Geneva authority must apply without reservation the additional regulations validated by the canton of the seat, this means that the lower amounts recognised by the other cantons are henceforth the only ones that can be deducted for Geneva taxpayers.     

To Sum up

With regard to the basic expense reimbursement regulations, this decision is absolutely clear that the taxing authority is bound by the regulations approved by the tax authority of the canton where the employer is based. It does not deal with the issue of flat-rate representation allowance for executives. By analogy, we are of the opinion that this ruling implies that supplementary regulations approved by the canton of the seat are also binding on the cantons of taxation. Of course, and considering the fact that the issue at stake is a major one regarding the differences in treatment on the subject between the canton of Geneva and the neighbouring cantons, it is likely that the tax authorities will try to challenge the "Geneva" deduction of representation expenses. The judgment in question gives excellent arguments to taxpayers but does not expressly validate the issue of flat-rate representation allowances and therefore cannot be considered as a guarantee that the "non-Geneva" administration will accept these allowances without objection. The arguments of non-Geneva tax administrations could in particular address the issue of the "approval" given by the canton of Geneva, which in practice is often lacking.