On 3 April 2020, OECD issued guidance to prevent such consequences on (1) permanent establishment, (2) tax residency, and (3) cross-border workers taxation.
When an employee works remotely from a country that is not the country of residence of the company employing him/her, there would be a risk that the tax authorities of the employee's country of residence would recognize a permanent establishment of the company and, consequently, tax a part of the company's profit.
It should be noted that the permanent establishment is defined by the international tax treaties as (i) a fixed place of business having a certain degree of permanence and available to the enterprise, or (ii) a dependant person acting on behalf of the company and has an authority, in his/her country of residence, to habitually conclude contracts on behalf of the company.
The OECD stated that "the exceptional and temporary change of the location where employees exercise their employment because of the COVID-19 crisis, such as working from home, should not create new permanent establishments for the employer". Besides, "an employee’s or agent’s activity in a State is unlikely to be regarded as habitual if he or she 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".
Consequently, no permanent establishment should be characterised because of the lack of (i) disposal of the employee's location and (ii) a sufficient degree of permanency.
Concerning the construction sites, in general, they will constitute a permanent establishment when they last more than 12 months. The OECD specified that the temporarily interruption due to the COVID-19 crisis should be including in the determination of the duration of the site.
The restrictive measures taken by governments may also result in:
(i) a change of the directors' place of effective management and consequently a change of company's residence; and
(ii) a change of individual's residence. Indeed, a person can be away from his/her home and get retained in this state due to Covid-19 crisis, or a person working in a country where he/she acquired the residence status may be forced to go back to his/her previous home country because of Covid-19 crisis.
The OECD stated that the temporary dislocation due to Covid-19 crisis should have no tax residence implication.
Concerning individuals' tax residency, in a recent publication, the French tax authorities stated that a temporary stay in France as a result of confinement in France or travel restrictions decided by the country of residence will not impact the individual's tax residency.
When a state grants subsidy to companies to maintain the employees' payroll during the Covid-19 crisis, the salaries received by the employees will be subject to taxation in the state where they used to be employed or to work in.
In the same way, the French tax authorities have stated in a press release dated 19 March 2020 that, in agreement with Germany, Switzerland, Belgium and Luxembourg, the teleworking will not impact the tax regime applicable to cross-border workers.
However, contrary to other countries (e.g. the UK or Australia), the French tax authorities have not published other statement. Thus, broader guidelines would be appreciated especially when the tax treaty concluded with another country does not follow the OECD model.
Authored by Xenia Legendre