What We Think

April 10, 2020

The increase of Permanent Establishments (PEs) as a result of the increase in Remote Working

Remote working has been on the increase during the last few years – more and more businesses are finally seeing the benefits of remote working, both for the employees, but also for the business itself.

Allowing employees to work remotely means that the business recruitment strategy is not restricted to a geographical location, but it can go beyond borders and literally recruit anyone, anywhere in the world. If the person is working remotely, it doesn’t make a difference whether they are working just down the road, or whether they are on a different continent (time zones must be managed, but that’s a separate issue). The number of hours saved as a result of the fact that an employee doesn’t need to waste time commuting is another added benefit, not to mention the cost of saving on fuel. These are just a few of the many benefits associated with remote working – like everything else, remote working doesn’t need to be either black or white, employees could work remotely for a couple of days per week, some could even decide to work from a coffee shop in the morning and from the office in the afternoon – the main objective is to allow employees to work from wherever they feel most productive whilst ensuring that work is planned around the rest of their lives, and not the other way round.

As remote working continues to become the norm, this means that businesses have more and more employees working from different cities, and sometimes also different countries – this could result in certain tax implications which need to be looked into. Firstly, it is important that the company is familiar with any tax and similar statutory deductions in each of these countries on salaries and similar remuneration. Secondly, it is important that the company obtains advice as to whether such individuals are creating a PE for the company by working remotely. The issue of the possible creation of a PE as a result of an employee working remotely, would be an issue only if the employee is working from a different jurisdiction to the country of tax residence of the business.

In accordance with the OECD Model Tax Convention, a PE means ‘a fixed place of business through which the business of an enterprise is wholly or partly carried on’, which includes an office.

The question is therefore, whether the work which is being carried out by the employee, remotely, will constitute a PE in accordance with the above definition. In order for the home office of the employee to be deemed to be a PE, it must be deemed to be at the disposal of the enterprise. Paragraph 18 of the OECD Model Commentary 2017 on Article 5 of the OECD Model Tax Convention specifically deals with this issue as to whether an individual’s home office could constitute a PE. Firstly, it is important to understand that even though part of the business may be carried on from an individual’s home, doesn’t automatically mean that that location is at the disposal of that enterprise. One would need to look at the fact and circumstances of each case, individually.

The important factor to assess, is whether the work being carried out by the individual from home is intermittent or incidental, or is continuous in nature. Where the home office is used on a continuous basis and the enterprise has required the individual to use his home office to carry on the enterprise of the business, the home office may be considered to be at the disposal of the enterprise, and therefore may constitute a PE. As mentioned above, the facts and circumstances of each case need to be considered, such as whether the individual has been provided an office or not. In an interesting court decision in Austria, in 2017, which dealt with the use of a home office in Austria, by an employee of a German company, consideration was given to whether the employee claimed any deductions related to business expense of the home office.

It is important to note that the above could be due to the long-term behavioural changes within companies, which start to embrace more the remote working option. It would not relate to the temporary remote working conditions being provided to workers during the current pandemic. Earlier this month, the OECD issued its analysis of Tax Treaties and the Impact of the COVID-19 Crisis. In accordance with this analysis, the fact that an employee is working from home for a temporary period, that is, during the pandemic itself, would not result in that home office being deemed to be a PE for the business, in view of the fact that it is temporary in nature,

The impact of the creation of a PE could be significant, since this could create a taxable basis for the business in another jurisdiction. All of a sudden, the profits of the enterprise are taxable not only in the country of tax residence, but also in the country (or countries, in case of multiple PEs) where a PE is present.

One needs to also understand how much of the profits of the enterprise should be allocated to that particular home office which constitutes a PE in the other jurisdiction for the enterprise, and how this should be calculated.

Whilst this is no reason to opt out of a remote working solution since the benefits heavily outweigh the possible issues, it is important to look into this issue to understand whether this would lead to a potential PE matter, and ensure one understands what the repercussions of such a PE are.

For further information on the above kindly contact:

Nicky Gouder
Luana Farrugia

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