COVID -19 – Concerns related to permanent establishments (PEs) under Tax Treaties

The Organisation for Economic Cooperation and Development (OECD) has recently issued a report addressing the tax implications that COVID-19 will have on cross border employment.  Governments across the world (including Malta) have launched a number of packages to help employers which have been negatively effected by the pandemic, to maintain their employees on their books, as […]

Written By Stephen Balzan

On April 13, 2020
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The Organisation for Economic Cooperation and Development (OECD) has recently issued a report addressing the tax implications that COVID-19 will have on cross border employment.  Governments across the world (including Malta) have launched a number of packages to help employers which have been negatively effected by the pandemic, to maintain their employees on their books, as well as imposed certain restrictions with the aim of protecting their citizens and residents alike from the virus. What impact will such packages and measures have on cross border workers, on employees who are required to telework and on their employers?  

One of the main concerns raised by the OECD in its report is that related to permanent establishments.  When a foreign employee is required to tele-work from his home country due to such exceptional circumstances, will this create a permanent establishment for the employer in that foreign jurisdiction?  

Some businesses may be concerned that their employees who are now located in jurisdictions other than the country in which they regularly work in, for example when working from home due the COVID-19 crisis, will create a permanent establishment for them in these countries, which might trigger new filing and tax obligations.  The OECD report confirms that it is unlikely that the COVID-19 situation will create any changes to a PE determination.  This is an exceptional and temporary change of the location where employees exercise their employment because of the COVID-19 crisis and this should not create new PEs for the employer.  Similarly the conclusion of contracts in the homes of employees or agents because of the COVID-19 crisis should not create any PEs for businesses (Agency PE).  

The PE must have a certain degree of permanence and be at the disposal of the enterprise for it to be considered a fixed place of business through which the business is carried out.  Paragraph 18 of the commentary to Article 5 of the OECD MC confirms that even though part of the business of an enterprise is carried out from the home of an employee, this should not lead to the foregone conclusion that the home constitutes a permanent establishment for that enterprise  For it to be so, the home must be used on a continuous basis and not intermittently.  Individuals are currently required to work remotely from home as a result of Government directives, due to the extraordinary nature of the crisis.  Thus to the extent that it does not become the new norm over time, the home office would not create a permanent establishment for the employer.  Such an activity from the home office would lack a sufficient degree of permanency or continuity

Under Article 5(5) of the OECD MC, an employee acting as a dependent agent might create a permanent establishment for the employer if he habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts on behalf of the enterprise.   Due to the current crisis, an employee might be teleworking from his home country and concluding contracts from his home country on behalf of the enterprise.  Article 5(5) confirms that an agency PE is created if contracts are concluded habitually by the employee or the employee plays a principal role in concluding contracts on behalf of the enterprise.  The activity of an employee is unlikely to be regarded as habitual if the employee is working from that State for a short period of time because of Government directives.  The activities have to have a certain degree of permanency and must not be purely transitory or temporary. In fact paragraph 96 of the commentary to Article 5 of the OECD MC states that the presence which an enterprise maintains should be more than merely transitory for it to be regarded to maintain a PE in that state.  A different approach will be appropriate if the employee was habitually concluding contracts on behalf of the enterprise before the COVID-19 crisis.

The OECD report highlights the fact that domestic legislation might require threshold presence which may be lower than those applicable under a treaty.  This would necessitate new filing and registration requirements for foreign enterprises.  Tax administrations are therefore being encouraged to provide guidance on the application of domestic rules related to filing and registration requirements so as to minimise as much as possible unduly and burdensome compliance requirements for tax payers during the  COVID-19 crisis.

How can we help?  

For further information, please contact one of the firm’s tax partners, Stephen Balzan on [email protected] or Elaine Camilleri [email protected]. ACT can help you understand the changes to the tax rules and how these can impact your business.  

Apart from its offices in St. Julian’s Malta, ACT operates from a second office in Gozo, which is situated in the capital city of Victoria.  For an appointment in our Gozo office, please call on 00356 21378672 or send us an email on [email protected]. 

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