The STA have recently issued a binding ruling with reference number V0066-22, dated on 18 January 2022, which analyses whether an UK resident entity was deemed to operate in Spain through a Spanish PE in fiscal year 2020 due to the fact that one of its employees worked from his Spanish home since the COVID-19 lockdown until February 2021.
In this case, the UK resident employee was in March 2020 in Spain and he was unable to return to the UK due to COVID-19 restrictions. Once the restrictions were lifted, he voluntarily decided to stay in Spain working from home and requested his UK employer to continue working from Spain. The UK entity, who did not paid any expenses related to the home office or any additional remuneration for working from Spain, refused the employee´s request and, as a consequence, the employee resigned in February 2021. The employee had a senior role and generated business for the group in Europe, but he did not have sufficient authority to sign contracts on behalf of the UK entity.
Following the provisions of article 5 of the tax treaty signed between Spain and the UK, the Commentaries to the OECD Model Tax Convention and, particularly, in light of OECD Secretariat analysis of tax treaties and the impact of the COVID-19 crisis issued on 3 April 2020 and its updated version issued on 21 January 2021, the STA analyse whether the UK entity was deemed to operate in Spain through a PE not only during the COVID-19 lockdown and travel ban but also once these restrictions were lifted, in particular whether the UK entity was deemed to either (i) have at its disposal a fixed place of business in Spain which does not carry out activities of a preparatory or auxiliary character (“Fixed Place” requirement); or (ii) have an agent who acts in Spain on behalf of the UK entity and has, and habitually exercises, an authority to conclude contracts in the name of the UK entity (“Dependent Agent” requirement) :
- In relation to the Fixed Place requirement, the STA distinguish between two periods: (i) work carried out in Spain during the COVID-19 lockdown and travel ban and (ii) work carried out once the travel restrictions were lifted, and conclude that:
- Teleworking from home during the lockdown does not have a sufficient degree of permanency or continuity to create a PE for the UK entity; but
- Teleworking from home once the restrictions were lifted implied that this is continuity, and in this case the STA analyse if the home office was at the disposal of the UK entity in view of the Commentaries to the OECD Model Tax Convention.
In this case, after the examination of the factual circumstances of the case, the STA take the view that the employee´s home office is not at the disposal of the UK entity, because: (i) the employee´s activity did not change during his stay in Spain, (ii) the decision to stay in Spain was voluntarily made by the employee due to personal reasons, (iii) the UK entity had an office in the UK which was available to the employee (so it did not oblige the employee to work from home), and (iv) the UK entity did not pay any cost related to the home office or additional remuneration for working from Spain.
- With regards to the Dependent Agent requirement, the STA follow the OECD recommendations and consider that an agent’s activity in a jurisdiction should not be regarded as “habitual” if he exceptionally begun working at home in that jurisdiction as a public health measure imposed by at least one of the governments of the jurisdictions involved. If the employee stays in Spain after the lockdown, the activity should be considered as "habitual" and then the STA analyse whether the employee acts in Spain on behalf of the UK entity and has, and habitually exercises, an authority to conclude contracts in the name of the UK entity, concluding that the employee does not constitute a dependent agent.
In our view, this ruling is useful to determine the existence of a PE in Spain in cases of remote working during extraordinary and temporary situations such as the COVID-19 pandemic, but more importantly in cases of full time remote employees, since the said ruling follows the Commentaries to the OECD Model Tax Convention and provides clear guidance on the technical analysis to be carried out in these cases.
However, the fact pattern analysed in this ruling is very specific (it is clear from the facts that the employee decided to stay in Spain unilaterally without the consent of the UK entity which requested the employee to work at the UK office) and, in our view, these conclusions cannot be directly extrapolated to all teleworking cases after the COVID-19 pandemic, which should be analysed on a case-by-case basis. For instance, more doubts could arise in relation to new hires who agree with the foreign company to work on a full remote basis when it is not clear whether the company requires the employee to work from home or offers her/him to work at the company's facilities.
Non-Spanish resident entities having employees teleworking from Spain should analyse whether their employees may create or not a PE for Spanish tax purposes in order to correctly assess their tax obligations in Spain.
Hogan Lovells can provide practical guidance and assistance on the analysis of the existence of a PE for Spanish tax purposes and other compliance obligations which may arise from the PE analysis. Please contact us for more information on how we can help.
Authored by Javier Gazulla, Alejandro Moscoso del Prado and María Santana.