Updated guidance on tax treaties and the impact of the COVID-19 pandemic

 Home office

14. Whilst noting that the issue of whether a PE exists is a test based on facts and circumstances, in general, a place must have a certain degree of permanency and be at the disposal of an enterprise in order for that place to be considered a fixed place of business through which the business of that enterprise is wholly or partly carried on.

15. Paragraph 18 of the Commentary on Article 5 of the OECD Model explains that 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 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. The carrying on of intermittent business activities at the home of an employee does not make that home a place at the disposal of the enterprise. A home office may be a PE for an enterprise if it is used on a continuous basis for carrying on business of that enterprise and the enterprise generally has required the individual to use that location to carry on the enterprise’s business.

16. During the COVID-19 pandemic, individuals who stay at home to work remotely are typically doing so as a result of public health measures: it is an extraordinary event not an enterprise’s requirement. Therefore, considering the extraordinary nature of the COVID-19 pandemic, teleworking from home (i.e. the home office) because of an extraordinary event or public health measures imposed or recommended by government would not create a PE for the business/employer, either because such activity lacks a sufficient degree of permanency or continuity or because the home office is not at the disposal of the enterprise. In addition, it still provides an office which in the absence of public health measures is available to the relevant employee. This applies whether the temporary work location is the individual’s home or a temporary dwelling in a jurisdiction that is not their primary place of residence.

17. If an individual continues to work from home after the cessation of the public health measures imposed or recommended by government, the home office may be considered to have certain degree of permanence. However, that change alone will not necessarily result in the home office giving rise to a fixed place of business PE. A further examination of the facts and circumstances will be required to determine whether the home office is now at the disposal of the enterprise following this permanent change to the individual’s working arrangements.

18. Paragraphs 18 and 19 of the Commentary on Article 5 of the OECD Model indicate that whether the individual is required by the enterprise to work from home or not is an important factor in this determination. Paragraph 18 explains that where 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 (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. As an example, paragraph 19 notes that where a cross-border worker performs most of their work from their home situated in one jurisdiction rather than from the office made available to them in the other jurisdiction, one should not consider that the home is at the disposal of the enterprise because the enterprise did not require that the home be used for its business activities.

19. In conclusion, individuals teleworking from home (i.e. the home office) as a public health measure imposed or recommended by at least one of the governments of the jurisdictions involved to prevent the spread of the COVID-19 virus would not create a fixed place of business PE for the business/employer.

 Agency PE

20. The question may also arise whether the activities of an individual temporarily working from home for a non-resident employer could give rise to a dependent agent PE. Under Article 5(5) of the OECD Model, the activities of a dependent agent such as an employee will create a PE for an enterprise if the employee habitually concludes contracts on behalf of the enterprise. Thus, in order to apply Article 5(5) in these circumstances, it will be important to evaluate whether the employee performs these activities in a “habitual” way.

21. An employee’s or agent’s activity in a jurisdiction is unlikely to be regarded as habitual if they are only working at home in that jurisdiction because of an extraordinary event or public health measures imposed or recommended by government. Paragraph 6 of the 2014 Commentary on Article 5 explains that a PE should be considered to exist only where the relevant activities have a certain degree of permanency and are not purely temporary or transitory. Paragraph 33.1 of the Commentary on Article 5 of the 2014 OECD Model provides that the requirement that an agent must “habitually” exercise an authority to conclude contracts means that the presence which an enterprise maintains in a jurisdiction should be more than merely transitory if the enterprise is to be regarded as maintaining a PE, and thus a taxable presence, in that jurisdiction. Similarly, paragraph 98 of the 2017 OECD Commentary on Article 5 explains that the presence which an enterprise maintains in a jurisdiction should be more than merely transitory if the enterprise is to be regarded as maintaining a PE in that jurisdiction under Article 5(5).

22. A different approach may be appropriate, however, if the employee was habitually concluding contracts on behalf of enterprise in their home jurisdiction before the COVID-19 pandemic.

23. Likewise, if the employee continues to work from home for a non-resident employer after the COVID-19 pandemic, on a habitual basis and continues to conclude contracts on behalf of the enterprise, it would be more likely that the employee would be considered to habitually conclude contracts on behalf of the enterprise. As noted in paragraph 98 of the Commentary on Article 5 of the OECD Model, the extent and frequency of activity necessary to treat an agent as acting “habitually” depends on the nature of the contracts and the business of the enterprise. In that respect, the same sort of factors considered in paragraphs 28 to 30 of the Commentary on Article 5 of the OECD Model would be relevant. For example, those paragraphs, among other things, note that whilst the practices followed by member countries have not been consistent in so far as time requirements are concerned, experience has shown that PEs normally have not been considered to exist in situations where a business had been carried on in a country through a place of business that was maintained for less than six months (conversely, practice shows that there were many cases where a PE has been considered to exist where the place of business was maintained for a period longer than six months).

24. In conclusion, the agent’s activity in a jurisdiction should not be regarded as “habitual” if they have exceptionally begun working at home in that jurisdiction as a public health measure imposed or recommended by at least one of the governments of the jurisdictions involved to prevent the spread of the COVID-19 virus and, therefore, would not constitute a dependent agent PE provided the person does not continue those activities after the public health measures cease to apply.

 Construction site PE

25. It appears that many activities on construction sites are being temporarily interrupted by the COVID-19 pandemic. The duration of such an interruption of activities should, however, be included in determining the life of a site and therefore will affect the determination whether a construction site constitutes a PE. In general, a construction site will constitute a PE if it lasts more than 12 months under the OECD Model or more than six months under the UN Model. Paragraph 55 of the Commentary on Article 5(3) of the OECD Model explains that a site should not be regarded as ceasing to exist when work is temporarily discontinued (temporary interruptions should be included in determining the duration of a site). Examples of temporary interruptions given in the Commentary are interruptions caused by bad weather, a shortage of material or labour difficulties.

26. The Commentary does not include a bright line test on the meaning of “temporary” interruption, thus jurisdictions may have different views of the duration of a “non-temporary” interruption and on other conditions that make the interruption of a different nature than the examples of interruptions in paragraph 55 of the Commentary. Accordingly, some jurisdictions may consider that particular periods of interruption required by domestic COVID-19 restrictions in their jurisdiction should not be included in the calculation of the time thresholds for construction PEs. Such an approach would result in those jurisdictions not asserting the existence of a PE if the duration test would only be satisfied by including days during which operations were prevented on the construction site as a result of COVID-19 restrictions. As noted above, this guidance cannot be relied on to create instances of double non-taxation.

27. In conclusion, a construction site PE would not be regarded as ceasing to exist when work in the site is “temporarily” interrupted, but jurisdictions may consider, in light of the extraordinary circumstances of the COVID-19 pandemic and based on the facts and circumstances, that certain periods where operations are prevented as a public health measure imposed or recommended by the government where the site is located to reduce the spread of the COVID-19 virus constitute a type of interruption that should be excluded from the calculation of time thresholds for construction site PEs.

 Concerns related to a change to the residence status of individuals

37. Despite the complexity of the rules, and their application to a wide range of potentially affected individuals, it is unlikely that the COVID-19 restrictions to travel will affect the treaty residence position.

38. Jurisdictions have already issued useful guidance and administrative relief on the impact of COVID-19 on the domestic and tax treaty determination of the residence status of an individual. A sample of that guidance is included in Box 3 below.

39. Two main situations could be imagined:

• A person is temporarily away from their home (perhaps on holiday, perhaps to work for a few weeks) and gets stranded in the host jurisdiction by reason of the COVID-19 pandemic and attains domestic law residence there.

• A person is working in a jurisdiction (the “current home jurisdiction”) and has acquired residence status there, but they temporarily return to their “previous home jurisdiction” because of the COVID-19 situation. They may either never have lost their status as resident of their previous home jurisdiction under its domestic legislation, or they may regain residence status on their return.

40. In the first scenario, it is unlikely that the person would acquire residence status in the jurisdiction where the person is temporarily because of extraordinary circumstances. There are, however, rules in domestic legislation causing a person to become a resident if they are present in the jurisdiction for a certain number of days. But even if the person becomes a resident under such rules, if a tax treaty is applicable, the person is unlikely to be a resident of that jurisdiction under the treaty’s tiebreaker rule. Such a temporary dislocation should therefore have no tax implications in the vast majority of cases.

41. In the second scenario, it is again unlikely that the person would regain residence status for being temporarily and exceptionally in the previous home jurisdiction. But even if the person is or becomes a resident under such rules, if a tax treaty is applicable, the person is unlikely to become a resident of that jurisdiction under the tax treaty due to such temporary dislocation if their connections to the current home jurisdiction are stronger than those to the previous home jurisdiction.

42. For the purpose of a tax treaty – which governs the allocation of taxing rights over employment income – an individual can be resident of only one jurisdiction at a time (their “treaty residence”). The rules are set out in Article 4 of the OECD Model. The starting point is domestic law. If the person is resident in only one jurisdiction, that is the end of the matter. If they are resident in both jurisdictions being tested, the tie-breaker rules in Article 4 of the OECD Model are applied. There is a hierarchy of tests, starting with the question in which jurisdiction does the person have a permanent home available to them.

43. In the first case above, it seems likely that the tie-breaker test would mostly award treaty residence to the home jurisdiction. This is because it is probably unlikely that the person would have a “permanent home” available to them in the host jurisdiction. But if they did (and an apartment rented for a sufficiently long period would count), and they had rented out their dwelling in their home jurisdiction, they would be treated as treaty resident of the host jurisdiction. Where the person had a permanent home in both jurisdictions, it seems likely that the other tie-breaker tests (centre of vital interests, place of habitual abode, and nationality) would award residence to the home jurisdiction.

44. In the second case, the same treaty rules apply, but their application produces a more uncertain result because the person’s attachment to the previous home jurisdiction is stronger. In cases where the personal and economic relations in the two jurisdictions are close but the tie-breaker rule was in favour of the current home jurisdiction, the fact that the person moved to the previous home jurisdiction during the COVID-19 pandemic may tip the balance towards the previous home jurisdiction. This would usually be decided using the test of “habitual abode”. According to paragraph 19 of the Commentary on Article 4 of the OECD Model, however, the habitual abode of a person is where the individual lived habitually, in the sense of being customarily or usually present; the test will not be satisfied by simply determining in which of the two contracting jurisdictions the individual has spent more days during that period. “Habitual abode” refers to the frequency, duration and regularity of stays that are part of the settled routine of an individual’s life and are therefore more than transient. Days spent in a person’s previous home jurisdiction because of travel restrictions imposed as a public health measure by one of the governments of the countries involved should not result in a change to the person’s habitual abode. The determination of habitual abode must cover a sufficient length of time for it to be possible to ascertain the frequency, duration and regularity of stays that are part of the settled routine of the individual’s life.

45. In conclusion, because the COVID-19 pandemic is a period of major changes and an exceptional circumstance, tax administrations and competent authorities will have to consider a period where public health measures imposed or recommended by the government do not apply when assessing a person’s residence status. If in the context of and as a result of the COVID-19 pandemic, an individual’s temporary presence in a jurisdiction results in them becoming dual-resident, that person’s place of residence for the purposes of the tie-breaker included in the applicable treaty is unlikely to change, given that the tie-breaker provision requires consideration of factors that shall also be assessed in a more normal period. A dislocation because a person cannot travel back to their home jurisdiction due to a public health measure of one of the governments of the jurisdictions involved should not by itself impact the person’s residence status for purposes of the tax treaty. A different approach may be appropriate however, if the change in circumstances continues when the COVID-19 restrictions are lifted.

 Days of presence test in Article 15(2)(a)

46. Article 15 (Income from employment) of the OECD Model governs the taxation of employment income, distributing the right to tax between the employee’s jurisdiction of residence and the place where they perform their employment.

47. The starting point for the rule in Article 15 of the OECD Model is that “salaries, wages and other similar remuneration” are taxable only in the person’s jurisdiction of residence unless the “employment is exercised” in the other jurisdiction. The Commentary on Article 15 explains that this means the place where the employee is “physically present when performing the activities for which the employment income is paid.” But there are conditions attached to the place of exercise test. That other jurisdiction (the source jurisdiction) may exercise a taxing right only if the employee is there for more than 183 days2 or the employer is a resident of the source jurisdiction, or the employer has in the source jurisdiction a permanent establishment that bears the remuneration.

48. The application of Article 15 to the following fact patterns is considered below:

• Wage subsidy and similar income received by cross-border workers that cannot perform their work due to restrictions

• A worker who is stranded in a jurisdiction where they are not resident but previously exercised an employment

• A worker who works remotely from a jurisdiction for an employer who is resident in another jurisdiction

 Income of cross-border workers that cannot perform their work due to COVID-19 restrictions (e.g. wage subsidies to employers)

49. Where a government has stepped in to subsidise the keeping of an employee on a company’s payroll during the COVID-19 pandemic despite being unable to work, the income that the employee receives from the employer should be attributable to the place where the employment used to be exercised. In the case of employees that work in one jurisdiction but commute there from another jurisdiction where they are resident (cross-border workers), this would be the jurisdiction they used to work in.

50. Some stimulus packages adopted or proposed by governments (e.g. wage subsidies to employers) are designed to keep workers on the payroll during the COVID-19 pandemic despite restrictions to the exercise of their employment. To the extent these may be the last payments received in respect of the employment, the payments resemble termination payments. These are discussed in paragraph 2.6 of the Commentary on Article 15 of the OECD Model, which explains that they should be attributable to the place where the employee would otherwise have worked. In most circumstances, this will be the place the person used to work before the COVID-19 pandemic. Alternatively the payments may resemble those which are routinely received during paid periods of absence the entitlement to which arises in connection with where the work was performed. Examples of such other routine payments include vacation pay, paid sick leave, or paid furlough, none of which have been known to cause difficulties in international taxation.

51. Where the source jurisdiction has a taxing right, the residence jurisdiction must relieve double taxation under Article 23 of the OECD Model, either by exempting the income or by taxing it and giving a credit for the source jurisdiction tax.

52. In conclusion, where an employee resident in one jurisdiction and who formerly exercised an employment in another jurisdiction receives a COVID-19 related government subsidy from the work jurisdiction to maintain the relationship with the employer, the payment would be attributable to the work jurisdiction under Article 15 of the OECD Model.

 Stranded worker: exceeding days of presence threshold due to travel restrictions

53. The COVID-19 pandemic has caused individuals who are resident in one jurisdiction and exercised an employment in another jurisdiction to become stranded in that other jurisdiction. Where an individual resident in one jurisdiction and exercising employment activities in another jurisdiction:

1. a)

   is prevented from leaving that other jurisdiction by COVID-19 restrictions, and

2. b)

   would otherwise have left that other jurisdiction and qualified for the exemption from source taxation in Article 15(2),

some jurisdictions believe it is appropriate, given the exceptional circumstances, to disregard days to which these conditions apply when asserting a taxing right under the 183-day test (see Box 4).

54. Where a person is resident in one jurisdiction and is exercising an employment in the other jurisdiction (the source jurisdiction), the source jurisdiction may tax the remuneration from the employment in certain circumstances – one of which is where the employee is present in the source jurisdiction for more than 183 days. Paragraph 5 of the Commentary on Article 15 explains that all days of presence count (working days or not) – and provides several examples, one of which is “days of sickness”. But it contains an exception: if those days of sickness “prevent the individual from leaving and he would have otherwise qualified for the exemption”, they do not count towards the days of presence test in Article 15(2)(a).

55. Given the nature of the COVID-19 public health measures of many governments, the exception can be understood to apply where conditions (a) and (b) above are satisfied. This may cover situations where an employee is prevented from travelling because they are in quarantine due to exposure to the COVID-19 virus. In addition, it may cover situations where either government has banned travelling and cases where it is, in practice, impossible to travel due, for example, to cancellation of flights. This may not cover the situation where an individual does not travel based on a mere recommendation by the governments involved to avoid unnecessary travel. Any decision to disregard days spent in a source jurisdiction as a result of COVID-19 restrictions may result in the source jurisdiction not exercising taxing rights allocated to it under the terms of a double tax treaty which it would be entitled to do.

56. In conclusion where an employee is prevented from travelling because of COVID-19 public health measures of one of the governments involved and remains in a jurisdiction, it would be reasonable for a jurisdiction to disregard the additional days spent in that jurisdiction under such circumstances for the purposes of the 183 day test in Article 15(2)(a) of the OECD Model. Some jurisdictions may however take a different approach or may have issued specific guidance outlining their approach to such circumstances.3 Taxpayers in this situation are encouraged to contact their local tax authority.

 Special provisions in some bilateral treaties that deal with the situation of cross-border workers

57. A change of place where cross-border workers exercise their employment may also affect the application of the special provisions in some bilateral treaties that deal with the situation of cross-border workers. These provisions apply special treatment to the employment income (and in some cases replacement income such as short-time work compensation) of cross-border workers and may often contain limits on the number of days that a worker may work outside the jurisdiction they regularly works before triggering a change in their status.

58. Some jurisdictions have agreed special treaty provisions with neighbouring jurisdictions to which employees frequently commute for work. These provisions allocate the taxing rights in a different way to Article 15 of the Model Convention. For example, under some of those provisions employees commuting to a neighbouring jurisdiction are taxable on their employment income only in the home jurisdiction provided any employment activity carried on elsewhere is limited to a maximum stated period (typically ranging from 4 to 6 working weeks). Some of those treaties include provisions according to which teleworking days are considered working days within the work jurisdiction. Some jurisdictions have agreed to treat the COVID-19 pandemic as force majeure or an exceptional circumstance and, accordingly, the time spent by the employee teleworking in their home jurisdiction will not be included in the calculation of the maximum work days outside the work jurisdiction limitation for the purposes of the treaty.4

 Teleworking from abroad i.e. working remotely from one jurisdiction for an employer of the other jurisdiction.

59. A change in the place where the employment is exercised may give rise to a change in the allocation of taxing rights under the current treaty rules.

60. Accordingly, if the jurisdiction where employment was formerly exercised should lose its taxing right following the application of Article 15, additional compliance difficulties would arise for employers and employees. Employers may have withholding obligations, which are no longer underpinned by a substantive taxing right. These would therefore have to be suspended or a way found to refund the tax to the employee. The employee would also have a new or enhanced liability in their jurisdiction of residence, which would result in new filing obligations.

61. Some examples illustrating changes in allocation of taxing rights over employment income are included below:

• Before the COVID-19 pandemic, an employee resident in Jurisdiction A normally exercised their employment in Jurisdiction B. The employee began to exercise his employment from Jurisdiction A due the COVID-19 pandemic. According to Article 15:

  • if the employer was resident in Jurisdiction B, Jurisdiction B is entitled to tax the income derived from the period during which the employee was physically present in Jurisdiction B (i.e., a reduction in Jurisdiction B’s taxing right);

  • if the employer was not resident in Jurisdiction B or did not bear the cost of the employee’s remuneration through a PE in that jurisdiction, Jurisdiction B would likely lose its taxing right under a treaty if the employee spent less than 183 days there (i.e., a complete loss of Jurisdiction B’s taxing rights).

• Before the COVID-19 pandemic an employee was resident in Jurisdiction A, became stranded in Jurisdiction B and began to exercise his employment there. Under Article 15, Jurisdiction B would be permitted to tax the employment income if the employer was also resident in that jurisdiction or bore the cost of the employee’s remuneration through a PE in that jurisdiction. In cases where the employer was resident elsewhere, Jurisdiction B would be entitled to tax the employment income only if the employee exceeds the 183 day threshold.

62. Exceptional circumstances call for an exceptional level of coordination between jurisdictions to mitigate the compliance and administrative costs for employees and employers associated with an involuntary and temporary change of the place where employment is performed. Where relevant, MAP should be applied efficiently and pragmatically to help resolve issues arising out of the COVID-19 pandemic. Jurisdictions have issued useful guidance and administrative relief to mitigate the unplanned tax implications and potential new burdens arising due to effects of the COVID-19 pandemic. A sample of that guidance is included in Box 4.

63. In conclusion, changes in the jurisdiction where an employee exercises their employment can impact where their employment income is taxed: new taxing rights over the employee’s income may arise in other jurisdictions and those new taxing rights may displace existing taxing rights. As payroll taxes are often withheld at source, addressing the change will result in compliance and administrative costs for the employer and employee. Some jurisdictions have issued guidance and administrative relief to mitigate the additional burden.