Many businesses and workers may continue to engage in remote work arrangements as we emerge from the pandemic. Are there any tax risks for companies and employees if the remote work becomes permanent? Perhaps! We will evaluate some of these potential risks in a series of blogs, starting with the concept of permanent establishment. Stay tuned for upcoming blogs covering personal tax and social security risks.
The term “permanent establishment” (“PE”) is used in tax to convey the connection of a business to a country. Generally, this connection provides a country the right to tax the income earned in or allocated to the country, triggering filing requirements and tax obligation. Whilst tax rules are enacted by a country’s government, income tax treaties are negotiated and agreed to between trading partners to govern cross-border activities. Treaties for developed countries generally follow the model provided by the Organization for Economic Co-operation and Development (OECD). Because the pandemic has displaced many workers, the OCED issued updated guidance on interpreting the model treaty’s article covering remote workers.
Can an employee working in a country where the company does not have a presence trigger a permanent establishment? OECD guidance suggests two ways this could occur:
- if the employee’s personal home office is a fixed place of business for the company
- if the employee is a dependent agent of the company
To be a fixed place of business, the company must require the employee to use the home office on a continuous basis to carry out the company’s business. Hence, a home office in a country where the employee does not normally work may trigger PE status if 1) the employee continues to work there permanently and 2) the employee’s work requires an office, but the employer no longer provides that office for the employee after health measures are eased.
A dependent agent is an individual who is authorized to sign contracts, or otherwise act, on behalf of the company. A dependent agent may trigger PE in a country other than where the company operates if that individual regularly signs contracts in that location. For example, if the remote work arrangement for such an employee becomes permanent after health measures are lifted, the dependent agency PE may be triggered simply by the employee’s carrying out their normal, company authorized activities.
Whilst the OECD provides guidance about the model treaty, be aware that member states do amend articles in their negotiations with each other and may interpret permanent establishment differently based on facts and circumstances.
As global circumstances change, more employees may request to permanently change their work arrangements. It is prudent for organizations to evaluate PE risk as part of their approval process when considering such requests. Employers will want to avoid the risk of triggering corporate filing requirements or tax obligation in countries where their companies do not normally operate.