Will coronavirus cause the home office to become a permanent establishment?
Basic classification
Generally, the question as to whether or not a home office (HO) creates a permanent establishment can only be determined via an overall assessment of the national regulations of the respective individual countries and of the international regulations (including double taxation agreements as well as OECD pronouncements) and, thus, would have to be examined separately for each country.
If the work that is performed for a company is place-specific and has a degree of constancy then a permanent establishment could be deemed to exist if the employer had sufficient authority to dispose over the place. According to settled case-law, this would not normally be the case for an HO, unless the employer has been granted an actual or legal possibility in this respect.
Please note: If the service that is provided for the company is ‘merely’ preparatory in nature or constitutes an ancillary activity, even then the HO would not normally become a permanent establishment.
Exceptions: agency permanent establishments and permanent establishments as the place of effective management
However, the situation would be different if it involved persons who, in relation to third parties, were authorised to represent the company and conclude contracts. In such a case, the HO could create a so-called agency permanent establishment. If a company’s management works exclusively or almost exclusively in an HO then the place of management could have been shifted to the HO and would constitute a permanent establishment for each managing director.
Please note: In both these cases – an agency permanent establishment and a permanent establishment as the place of effective management – business facilities are not required to create a legal basis for a permanent establishment.
Tax consequences when the HO is classified as a permanent establishment
If the HO becomes a permanent establishment across a border then this would result in tax liability in the foreign country via the permanent establishment prerogative – with the risk of double taxation. Moreover, there are obligations in respect of registration and tax declaration in the foreign country with separate determination of income for each permanent establishment.
The trend and changes due to the coronavirus
In recent times, it has been possible to discern a trend with respect to the question of whether or not a permanent establishment exists, namely, that the power of disposition requirement is no longer taken into account. The commentary on the OECD model, from 21.11.2017, (still currently applicable, please see: https://doi.org/10.1787/mtc_cond-2017-en) identified, for the first time, the conditions under which an HO could constitute a permanent establishment. This would be the case
- if employees regularly or continuously use an HO when instructed to do so by the employer, or
- if no office is made available to them even though this is required for the activity.
Last year, in a circular from 3.4.2020, the OECD published a policy response to the changed circumstances in the work environment; in this, the OECD stated that, considering the extraordinary nature of this global pandemic, working temporarily or permanently from a home office for the purpose of reducing contacts and, thus, for public health reasons would not generally create a permanent establishment because a pandemic is, in principle, a case of force majeure.
Please note: It should be noted that the OECD’s statements have no legally binding effect. Generally, HOs will however become increasingly important for cross-border taxation even in the post-coronavirus future. Therefore, we will have to await further developments when the pandemic over.