As noted in our Short Read of 31 March 2020, multiple states have been implementing travel restrictions and mandatory quarantines in an effort to stop the spread of the corona virus (COVID-19). Governments have also taken measures to mitigate the economic impact of the virus (we refer to our Tax Alerts of 17 and 19 March 2020 regarding measures taken by the Dutch government in this context).
The COVID-19 restrictions affect many people and businesses and could raise tax issues, especially in cross-border situations where employees are unable to physically perform their duties in their country of employment (but for example need to work at home or are stranded). These issues may have an impact on the right to tax between countries, usually governed by international tax treaties. Recognizing this, the Organisation for Economic Cooperation and Development (OECD) Secretariat has issued guidance on several tax issues arising from the COVID-19 crisis. In this short read, we summarize this guidance.
Permanent establishments (PE)
In general, a state cannot tax profits of an enterprise of another state unless that enterprise carries on its business through a permanent establishment situated therein. As a result of the current unprecedented COVID-19 crisis businesses may be concerned that their employees will create a PE for them in another jurisdiction because of a change in working location, which would trigger new filing obligations and tax obligations. In the guidance issued the OECD Secretariat addresses the following situations, hereby also making clear that the threshold presence required by domestic law may be lower in domestic situations.
A PE must have a certain degree of permanency and be at the disposal of an enterprise to be considered a fixed place of business through which the business of that enterprise is wholly or partly carried on. In the guidance the position is taken that an employee who because of the extraordinary nature of the COVID-19 crisis (i.e. force majeure) stays at home to work remotely (i.e. home office) should not create a PE for the business / employer to the extent that it does not become the new norm over time. This, either because such activity lacks sufficient degree of permanency or continuity or because the enterprise has no access or control over the home office (and the enterprise in normal circumstances provides an office which is available to its employees).
Another question that may arise is whether the employee temporarily working from home for a non-resident employer could qualify as a dependent agent PE. The activities of an employee may create a PE for an enterprise if the employee habitually concludes contracts on behalf of the enterprise. According to the guidance, however, it is unlikely that the employee who, only temporarily and forced by governmental measures (i.e. force majeure), works from home could be considered to ‘habitually’ conclude contracts in his home state on behalf of the enterprise (i.e. a PE should be considered to exist only where the relevant activities have a certain degree of permanency and are not purely temporary or transitory). This may work out differently if the employee already was habitually concluding contracts on behalf of the enterprise in his home state before the COVID-19 crisis.
Construction site PE
A building site or construction or installation project of an enterprise in another state will in general constitute a permanent establishment only if it lasts longer than a certain period (under the OECD Model more than 12 months). According to the OECD Secretariat, the duration of a temporary interruption of activities on those sites or projects due to the COVID-19 crisis should be included in determining the time those sites or projects last, and therefore will affect the determination whether a construction site constitutes a PE.
Place of effective management
The COVID-19 crisis may raise concern about a potential change in the “place of effective management” of a company (for example because of inability to travel of chief executive officers and other senior executives). According to the guidance, it is however unlikely that the COVID-19 crisis will create any changes to an entity’s residency under a (tie breaker rule of a) tax treaty, in essence because all relevant facts and circumstances should be examined to determine the “usual” and “ordinary” place of effective management, and not only those that pertain to an exceptional and temporary period such as the COVID-19 crisis.
We also refer to our Short Read of 31 March 2020 for more information on this subject from a Dutch perspective.
The measures to mitigate the economic impact of the COVID-19 crisis may contain stimulus packages adopted by governments (e.g wage subsidies to employers) to keep employees on a company’s payroll. According to the issued guidance by the OECD Secretariat, these payments should in a cross-border situation be attributable to the place where the employment used to be exercised. The guidance further makes clear that a change of place where cross-border workers exercise their employment may also affect the application of the special provisions in some bilateral treaties that deal with the situation of cross-border workers, and that may contain limits on the number of days that a worker may work outside the jurisdiction he or she regularly works.
A question not specifically addressed by the OECD Secretariat is whether the COVID-19 crisis may have an impact on the “183-days rule”. Income of an employee working in another state should not be taxable in the source state if (amongst others) the employee is not present in that state for more than 183 days in any twelve-month period. Travel restrictions due to the COVID-19 virus, may potentially have an impact on the 183-days rule and taxing rights between jurisdictions.
Residence status of individuals
Finally, the guidance addresses the impact of the COVID-19 crisis on the residence status of individuals. Issues could arise when individuals are, for example, stranded in a host country due to travel restrictions or temporarily return to their previous home country. It is, according to the guidance, however unlikely that in these specific temporarily and extraordinary circumstances, the COVID-19 crisis will affect the treaty residence position of the individuals.
We note that the guidance issued by the OECD Secretariat does only reflect the view of the OECD Secretariat, and does not cover domestic (tax) law (although various countries already have issued specific (tax) guidance lines in view of the COVID-19). In view hereof, it may be recommended to perform a case-by-case analysis, also in view of specific provisions included in tax treaties, which we are more than happy to discuss with you.
More about the corona virus
You can read more publications on the impact of the corona virus on our website.