COVID-19 and international tax law: OECD on permanent establishments and residence status
The measures to control the COVID-19 pandemic have caused severe restrictions on international mobility. In international tax law, this could lead to unintended changes in the right to tax between countries, such as through the creation of a permanent establishment (PE) or a change in the place of effective management for companies operating internationally. The OECD Secretariat has addressed these issues in its analysis of 3 April 2020. The key points are as follows:
The permanent presence of employees or senior executives abroad could lead to a threshold being crossed, which would allow states to exercise their right to tax. For example, increased activities from a home office due to the COVID-19 pandemic may risk creating a foreign PE of the company. If senior company executives habitually work abroad, this could even lead to a change in the tax residency of the company. Of course, in addition to other criteria, one prerequisite is a degree of permanency of several months. But the inherent risks of the present situation should not be ignored. Regular monitoring will be essential so that appropriate measures can be introduced in a timely manner.
OECD on permanent establishments and COVID-19
According to the OECD, the consequences of government directives to combat COVID-19 should not, in general, lead to the creation of a PE.
- Home office PE: If employees work from a home office for a non-tax-resident employer during the COVID-19 crisis, this should not lead to the creation of a PE for the employer, as there will not be a sufficient degree of permanency, nor will the home office be at the disposal of the employer to a sufficient degree.
- Agency PE: If (remote) employees conclude contracts on behalf of their non-tax-resident employer from a home office for the duration of the COVID-19 restrictions, this should not lead to the creation of a PE as the activities on behalf of the enterprise are not performed in a “habitual” way.
- Construction site PE: The period for a construction site to constitute a PE (usually 12 months, depending on the applicable double taxation convention) will not be affected by the COVID-19 restrictions and will continue uninterrupted. If work on the construction site is discontinued for several months and the 12-month period is exceeded as a result, the company will have created a construction site PE abroad.
OECD on the tax residence of natural and legal persons and COVID-19
- Residence status of legal persons: A temporary change in the location from which the chief executive officers and senior executives of a company carry out their activities due to COVID-19 measures should not affect the place of effective management of the company. When evaluating the tax residence status of a company, reference should be made to a time period which was not affected by the extraordinary situation due to COVID-19.
- Residence status of natural persons: The same ought to apply to the tax residency of individuals. Consequently, the tax treaty residence status of individuals should not change due to COVID-19.
Consequences in practice
- The analysis of the OECD Secretariat constitutes a specialist opinion and a recommendation, which is in no way binding for individual states. National tax authorities may take a different view. Some countries have already issued guidelines on international issues, e.g. Ireland, UK and Australia.
- It remains to be seen whether Austria will support the OECD interpretation on a bilateral level. According to the information available to us, consultations with neighbouring states are currently ongoing.
- The OECD opinion does not constitute an aid to the interpretation of national law, as in the following cases:
- PE for corporate income tax purposes, if no double taxation convention is in place;
- PE for municipal tax purposes, if no double taxation convention is in place or municipal tax is not covered by an applicable tax treaty;
- PE for wage tax purposes, without the existence of a PE for corporate income tax purposes in Austria;
- Mandatory wage tax deductions from 1 January 2020 for employees subject to unlimited taxation in Austria, as no reference is made to the tax treaty residence status of individuals in this case.
- In our view, a detailed analysis of PE risks is highly recommended if the activities were (at least in part) carried out from a home office prior to the COVID-19 restrictions.
- Similarly, the OECD analysis does not apply to dependent agents who concluded contracts in their state of residence on behalf of the foreign employer before the COVID-19 crisis and whose presence abroad therefore began at an earlier date.
- As regards the residence status of legal persons, the OECD analysis clearly assumes that it is possible to unambiguously determine where board meetings or meeting of senior executives usually took place before the COVID-19 restrictions. In a time in which awareness of virtual collaboration is increasing, this could lead to problems in practical implementation.
This welcome opinion of the OECD Secretariat helps to reduce PE risks in connection with the COVID-19 crisis. However, it remains to be seen how individual national tax authorities respond to the international issues in question. For this reason, ongoing monitoring of where employees are located and where they carry out activities on behalf of the company is highly recommended, particularly during and after the COVID-19 travel restrictions. Regular review of PE risks in cross-border situations is especially recommended for new employees and any changes to existing set-ups, in order to make use of potential arrangements early and fulfil all registration and compliance requirements in a timely manner.
Authors: Katharina Königseder / Nikola Breinhölder