The conclusions of the study conducted by the OECD Secretariat regarding the applicability of the Double Tax Treaties regarding the COVID-19 pandemic were that, taking into consideration the exceptional and temporary situation of the pandemic, there should not be any tax impact on the creation of permanent establishments, neither concerns related to the residence status of a company or individuals. Below, you can find the main guidelines offered by the present study.
Concerns related to the creation of permanent establishments
Taking into consideration the actual situation, there might be cases where employees of an entity are dislocated to countries, other than the country in which they regulary work or work from home in those countries during the COVID-19 pandemic.
In this regard, this concern rises the question if this temporary situation could conduct to the creation of a permanent estalishment by that entity at the residence of the employee, fact that would trigger new filing requierments and tax obligations.
Similarly, another concern could be the creation of permanent estalishments for the company in case of conclusion of contracts in the home of employees or agents located in a tax jurisdiction other than the one in which they normally operate.
Hereof, the guidelines of the OECD Secretariat are as follow:
- Given the exceptional and temporary situation of this pandemic, OECD explains that such cases would not generate the creation of permanent estalishments in countries where the employees / agents are residents, based on the double tax treaties.
Thus, in case of employees who stay at home and telework during this period, OECD considers that as far as this routine does not become the new norm over time, the employee’s home could not become a permanent estalishment of the employer as it lacks a sufficient degree of permanency and continuity. Also, the entity does not have access or control over the employee’s home. In addition, it has to be taken into account the fact that the entity provides the employees with an office that is available to them in normal circumstances.
Alike, OECD considers that employers would not create permanent establishments at the employee’s home in such cases neither on the ground that they would become dependent agents of the entity in that jursidiction – for this, the employee should habitually conclude contracts on behalf of the entreprise in the respective jurisdiction, however, given the transitory context of the pandemic, this criteria would not be fulfilled.
- In case the domestic law provides for a treshold presence for the creation of a permanent establishment in that tax jurisdiction (lower than that applicable under a tax treaty), OECD recommends that countries issue provisions or guidelines regulating such cases so that the physical presence imposed by COVID-19 in that country does not generate an additional tax and administrative burden for taxpayers.
The same recommendations apply to income taxes not covered by the double tax treaties.
Another aspect analyzed by the OECD Secretariat concerns the permanent establishments related to construction sites. Thus, the guidelines provided by the OECD Secretariat in this regard mention the following aspects:
- A construction site should not be regarded as ceasing to exist when work is temporarily discontinued;
- The period of time when the work is temporarily interrupted should be included in the determining the duration of the life of a site which, consequently, will have an impact on the determination whether it constitutes a permanent estalishment.
Concerns related to the residence status of a company (place of effective management)
The COVID-19 crisis may raise concerns regarding a possible change in the place of effective management of an entity as a result of relocation or inability to travel of chief executive officers or other senior executives.
In other words, OECD analyses whether such change could result in a change in the tax residence of a company.
OECD considers that the COVID-19 pandemic is unlikely to determine changes in the tax residence of a company, taking into consideration the provisions of the double tax treaties and the temporary and extraordinary nature of this situation.
In this regard, OECD refers to the tie-breaker rules for determining the tax residence of a company, underlining that the tax residence should be determined based on all the factors and circumstances that could help determine the usual and ordinary place of effective management of a company – not only those that pertain to an exceptional and temporary period should be analysed.
Also, OECD recommends that states should issue provisions or guidance in domestic laws including these particular guidelines.
Concerns related to cross border workers
In case the Government has stepped in to subsidise the keeping of an employee on an entity’s payroll during the COVID-19 crisis, the income that the employee receives from the employer should be attributable to the place where the employment used to be exercised.
OECD points out that certain double tax treaties impose certain limits on the number of days a cross border employee could work outside the jurisdiction he/she regularly works before triggering a change in his/hers tax residence status.
In such cases, OECD recommends exceptional coordination between states, in order to eliminate the administrative and tax costs that may arise as a result of applying these provisions in the actual context of the COVID-19 pandemic.
Concerns related to a change to the residence status of individuals
OECD appreciates that the COVID-19 situation should not affect the tax residence of individuals, given the exceptional and temporary situation, as well as the tie-breaker rules for establishing the tax residence provided for in the tax treaties.
On the other hand, OECD recommends that countries issue guidelines to eliminate the administrative burden that could result from the COVID-19 pandemic, setting the example of countries that have already taken steps in this direction – i.e. UK, Australia, Ireland.
Also, in the short term, OECD recommends that the tax authorities should take into consideration a normal period of time when determining the tax residence status of individuals (not the one related to the COVID-19 pandemic).