Remote Working: PE risks of a Home Office in a Foreign Country

Employees Working From Home Office Remotely Overseas: Permanent Establishment (PE) Implications for Employers

The COVID-19 pandemic accelerated what was already a growing trend as a result of the digitalisation of the economy: remote working.

Many employees, whether as a result of being “stuck” in a country due to travel restriction or because of their employers wanted to offer a modern working environment which allowed their staff to have a better work-life balance, opted to operate from home offices across international borders.

Some employees even took this as an opportunity to be closer to their loved ones or perhaps to explore living in a country they had always dreamed of living in to learn the language, explore the culture, food and so forth.

Seizing on the opportunity to attract talents, reverse the trend of small towns decreasing in population and stimulate local economies, some countries even started offering various incentives such as:

• 1 EUR homes
• Nomad visas
• Huge tax breaks of up to 90% of taxable earnings if relocating to specific regions within a country

While offering the kind of work flexibility the previous generations of workers could only dream of, these arrangements (many of which have, if not formally, de facto transitioned to be on a permanent basis) raise complex tax issues for both individual employees and their employers.

We have already touched upon, at a high level, some of the main considerations for both employer and employees engaged in cross-border working arrangements in this previous article.

Today we are going to dive deeper into one particular aspect which is sometimes overlooked but that could have significant unintended repercussions particularly on the employer: permanent establishment (PEs) risks.

What is a Permanent Establishment (PE)?

There are various forms of PEs:

• Fixed Place of Business (FPB) PE: essentially whether there is: 1) a fixed base 2) at the disposal of the a foreign business and 3) the foreign company’s business is being carried on in that fixed base.

   

• Dependant Agent PE (including Commissionaires arrangements whereby a PE exist even though the agent does not conclude contracts in the name of the foreign enterprise)

   

• Construction PE: in general, applicable to construction projects abroad lasting more than 6 months at least.
  
• Service PE: where for instance a Company from Country X sells chemical products to customers in Country Y without creating a PE but then sends, for more than 6 months, its own employees to Country Y to advise customers on how to apply the chemicals to their products.

The common denominator being that the PE concept is crucial in determining a company’s tax liability in a particular country.

If a PE exists, the company may be subject to corporate income tax in that jurisdiction.

Cross Border Home Office PE Risks: a Case Study

Let us delve into a scenario which is becoming more and more commonplace for the reasons already mentioned in the introductory part of this article above.

An employee who agrees with his employer:

– to work indefinitely from a country in which the employer has no business presence;

– from a home office (which could be as basic as a desk in a bedroom at his/her parents home) that the employee has set up in that country;

Let us also assume that the employer has agreed to the arrangement as an incentive for the employee to remain with the company since he/she is a brilliant, creative professional who has invaluable marketing skills for the business but otherwise the company has no requirement whatsoever for the employee to be working from his chosen country.  

Tax Treaties Interpretation for Cross-Border Working From Home Arrangements

In a scenario like the one described above, companies must consider both domestic laws and applicable tax treaties when assessing PE risks.

Tax treaties in particular, which more often than not prevail over domestic laws, provide tiebreaker rules and clarifications to address situations where an employee’s home office could create a FPB PE in another country.

These rules can be complex and may require case-by-case analysis, however for our example, let us also assume the two countries in question have a bilateral tax treaty in place which is based on the OECD Model Tax Convention (MTC) on Income and on Capital.

The Commentaries to the applicable OECD MTC Article 15 for the above scenario, covers various examples of home office arrangements.

Of particular relevance to our case study is paragraph 18 of the Commentary to Article 15 which reads:

Even though part of the business of an enterprise may be carried on at a location such as an individual’s home office, that should not lead to the automatic conclusion that that location is at the disposal of that enterprise simply because that location is used by an individual (e.g. an employee) who works for the enterprise.

Whether or not a home office constitutes a location at the disposal of the enterprise will depend on the facts and circumstances of each case.

In many cases, the carrying on of business activities at the home of an individual (e.g. an employee) will be so intermittent or incidental that the home will not be considered to be a location at the disposal of the enterprise (see paragraph 12 above).

Where, however, a home office is used on a continuous basis for carrying on business activities for an enterprise and it is clear from the facts and circumstances that the enterprise has required the individual to use that location to carry on the enterprise’s business (e.g. by not providing an office to an employee in circumstances where the nature of the employment clearly requires an office), the home office may be considered to be at the disposal of the enterprise.

Paragraph 19 of the Commentary to Article 15 then goes on to say that:

the activities carried on at a home office will often be merely auxiliary and will therefore fall within the exception of paragraph 4 [of Article 5 which deals with defining what a PE is and the applicable exemptions].

In our example, the arrangement:

– is clearly continuous; but

– the Company has not required the employee to use that location (the home office the employee has set up in the other country) to carry on the enterprise’s business; although

– it might be argued that by not providing an office which clearly is required for the employee to do his job, the employee had no other choice but to set up his own home office and thus it might be considered at the disposal of the Company nonetheless; however

– the work is likely to be considered auxiliary in nature as marketing is usually not considered core business activity (unless of course the Company’s core business IS selling marketing services to clients).

How to Determine if Employees Working from a Home Office in a Foreign Country may trigger a Permanent Establishment (PE)

The Netherlands and Belgium at the end of 2023 went as far as issuing official guidance to assist in determining whether employees working from a home office in their home country might trigger a permanent establishment (PE) for their employer in that home country.

Their guidance is in line with the OECD MTC Commentaries and in essence provides that:

• working from home, but the employee can also choose to work in employer’s location = No permanent establishment (PE)
• working from home, and employer factually requires the employee to work from home = possible permanent establishment (PE)
• contractually obligated to work from home and absence of office location in employer’s country = possible permanent establishment (PE)
• working from home during 50% or less of the work time in a 12-month period = No permanent establishment (PE)
• work is of a preparatory or auxiliary nature = No permanent establishment (PE)

PE Risk Mitigation Strategies When Home-Working from Abroad

To mitigate PE risks, companies should implement robust policies and tracking mechanisms for cross-border remote workers. This may include:

1. Limiting the number of days employees work from other countries.

2. Restricting revenue-generating activities from home offices abroad.

3. Maintaining detailed records of employee locations and activities.

4. Seeking expert advice on domestic laws and tax treaty provisions.

5. Considering alternative employment structures or legal entities in high-risk jurisdictions.

The tax implications of cross-border remote work are nuanced and evolving.

By proactively managing PE risks, companies can ensure compliance and avoid potential penalties or double taxation issues.

How may a global mobility tax services specialist help with your remote working across borders issues

A specialist in global mobility and international tax services is well positioned to assist with:

• Reviewing your current remote-work arrangements and provide advice on whether employers and their working from home from overseas locations employees should take any actions.
• Evaluating new cross-border working arrangements requests and advise on best-practices when working remotely in other countries including advice on compliance obligations and what to do next.
• Helping employers monitor closely what their employees should / should not be doing vs what they are actually doing and assist with global mobility and relocation compliance matters such as applying for A1 certificates / Certificates of Coverage or shadow payroll administration.
• Supporting clients in reducing risks and avoiding misunderstandings between employers and their cross-border remote working employees acting as a reliable, trusted third party for both in reconciling any misalignments on their mutual expectations in dealing with unexpected tax compliance consequences.

Contact us should you require further clarifications on cross-border working from a home office type of arrangements and/or have a look at some of the other insights we have published.