On 3 April 2020, the Secretariat of the Organisation for Economic Co-operation and Development (“OECD”) published some guidance on certain tax issues arising when applying international tax treaties based on the OECD Model Convention (“OECD Model”) when, as a result of the COVID-19 crisis, governments have implemented travel restrictions and strict quarantine rules. The OECD’s guidelines specifically address concerns relating to (i) the recognition of permanent establishments (“PE”), (ii) the tax residence status of companies, (iii) tax treatment of cross-border workers as well as (iv) the change of individuals’ residence status.
1. Permanent Establishments
The first issue relates to potential recognition of a PE in the residence country of employees for companies having employees currently working from home in a country other than the country they usually work in, which would trigger new filing requirements and tax obligations.
As reminded by the OECD in order for a home office to be considered a PE, meaning a fixed place of business through which the business of an enterprise is wholly or partly carried on, it must have a certain degree of permanency and be at the disposal of an enterprise.
According to the OECD, a PE should not arise when the change of the employee’s location is due an exceptional and temporary situation, like COVID-19, which has been mandated by governments. Furthermore, the home office lacks a sufficient degree of permanency and the enterprise has no control over the employee’s home office.
The same approach applies for employees or agents working in another country as a result of COVID-19 measures and who currently habitually sign contracts on behalf of the employer. The OECD takes the view that an employee’s or agent’s activity carried out in a State is unlikely to be regarded as habitual if such employee or agent is only working at home in that State for a short period because of force majeure and/or government directives extraordinarily impacting his or her normal routine.
However, where the employee already habitually concluded contracts on behalf of the enterprise in his or her home country prior to the COVID-19 crisis, this should still constitute a PE according to normally applicable rules.
Furthermore, construction site PEs should not be regarded as ceasing to exist due to temporary interruptions as a result of COVID-19 measures but are to be assimilated to temporary interruptions such as a shortage of material or labour difficulties.
2. Residence status of a company
The second issue addressed is the potential change of a company’s state of residence under relevant domestic laws as a result of the company’s senior executives’ relocation or inability to travel to the company’s country of incorporation.
While according to Luxembourg tax law, a company should be considered resident by virtue of its incorporation under Luxembourg law or its central administration, treaties usually includes a tie-breaker rule in case of dual tax residence which provides that a company is deemed resident for tax purposes in the country in which its place of effective management is located (i.e. meaning the place where the main day-to-day management takes place and key decisions are taken). According to the OECD, all relevant facts and circumstances must be considered when assessing the tax residence of a company, in particular where the company is “usually” or “ordinarily” managed. As such, the OECD takes the view that it is unlikely that the COVID-19 measures will create any change in residence for companies since the travel restrictions and relocations of the company’s senior executives constitute exceptional and temporary measures that should not impact the company’s usual and ordinary place of effective management.
3. Cross-border workers
The tax residence status of cross-border workers that used to commute to another jurisdiction to carry-out their employment but are now unable to do so because of COVID-19 restrictions may lead to tax issues for both the employer and the employee. According to most of the double tax treaties an employment remuneration is only subject to tax in the employee’s state of residence unless the employment is performed in another State (the “source state”) and the employee has worked for more than 183 days of the year in the source state and the employer is either resident or has a PE in the source state bearing the remuneration.
Frequently, double tax treaties concluded between countries provide for special provisions regarding employment income of cross-border workers and may contain limits on the number of days that a worker may work outside the jurisdiction he or she regularly works in before triggering a change in his or her status. This is the case for instance of double tax treaties signed between Luxembourg and Belgium, France and Germany. In times of COVID-19, this may lead to employers having new withholding obligations or enhanced liabilities in different countries. The OECD therefore calls on countries to ensure an exceptional level of coordination between them in order to mitigate the compliance and administrative costs for employers and employees associated with involuntary and temporary change of the place where their employment is performed. Luxembourg has already taken steps to address this issue and has agreed with its neighbouring countries to temporarily suspend the normally applicable thresholds for cross-border workers in their countries of residence laid down in the respective tax treaties as of 11 March 2020 (for Germany) and 14 March 2020 (for France and Belgium). (For more information, please refer to our Newsflash dated from 19 March 2020).
In addition, the tax treatment of subsidies given by governments in order to maintain an employee on a company’s payroll during the COVID-19 crisis is also considered by the OECD. In this respect, in the absence of special agreements made between countries, the OECD suggests that any income received by employees from the employer following stimulus packages adopted by governments should be considered as ‘termination payments’ under the OECD Model and subject to tax in the place where the employee would otherwise have worked.
4. Change of individuals’ residence status
The final concern relates to individuals whose residence status may change due to the COVID-19 crisis. This could happen either if individuals who were temporarily away from their home country and got stranded in a host country due to the travel and quarantine restrictions attain domestic law residence there or individuals working in their current home country and who have acquired residence there, but who temporarily return to their previous home country due to COVID-19 and regain residence status in their previous home country.
In sum, the OECD takes the view that even if an individual may be considered as tax residence under domestic laws by virtue of the fact that he has exceeded a certain number of days in that jurisdiction, that individual should not be considered resident for the purposes of applying a tax treaty since such temporary dislocation is attributable to extraordinary circumstances.
In light of the above, the OECD Secretariat suggests that the COVID-19 measures taken by governments should not have any impact on the tax status of individuals, employers or companies since the COVID-19 crisis represents an unprecedented and exceptional circumstance amounting to force majeure. While the OECD’s publication has no formal legal status, it provides nonetheless valuable guidance for countries and taxpayers concerned about the impact of COVID-19 on their tax status.
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