As corporations grapple with what the future of work looks like in an era of rapid change, remote work will certainly become an integral part of our society.
Organisations must adapt their business model to respond quickly to the evolution of work practices and in the meantime, the OECD1 and the European Union2 encourage countries to take a coordinated approach to tax individuals and corporate taxation when employees work remotely.
The main reason for this is that employees who work remotely can trigger a Permanent Establishment (PEs) under certain circumstances. PE is a term that describes an ongoing presence of a business in a country. If it is determined that a PE exists, the company becomes liable for corporate taxation in that country and is subject to tax filing requirements. The practical meaning of a PE is that it creates a taxable presence for a company outside the company’s country of establishment.
In general, employees who work from home can trigger a PE and employees can also trigger a PE through a so-called “Agency Permanent Establishment” (or “Agency PE”).
In a home-office situation, as a rule, a PE is triggered when all the following criteria are met: i) home office is a place of business; ii) home office is a fixed place of business (a certain degree of permanence) or iii) home office is at the disposal of the foreign company through which it conducts its business. When assessing the above criteria, authorities typically ask questions such as how much time is spent working from home, whether employees are voluntarily working from home, or if it is their employer that requires them to work from home. The authorities also examine the nature of work activity to determine whether it is preparatory or ancillary in nature.
Countries have largely implemented local law provisions or agreed to exempt certain activities from classification as PE, under double taxation treaties. The common feature of these exemptions is to prepare or assist in the conduct of business.
Agency PE refers to situations in which an employee normally conducts decision-making activities (such as negotiating or concluding sales contracts) in another country. One of the most important conditions of this rule is that a dependent agent’s activity is carried out regularly, constituting an assessment of the facts and circumstances. Employees are not required to conclude contracts themselves, but their involvement in contract activities will be considered when evaluating agency PE and if they conduct regular activities.
However, the agency PE concept exists regardless of the fixed place of business, and a PE can be triggered by the so-called dependent agent even if it does not operate from a location considered to be a “fixed place of business.”
As a result of the above, companies are implementing and reviewing their policies for cross-border remote work policies, although some companies have yet to take a proactive approach to including PE risk assessments in their policies. This is not surprising, as it is unclear in numerous countries when remote work will trigger a PE and thus taxation of the company in those countries. However, the current ambiguity should not be taken as a signal that local tax authorities will not take an interest in the issues surrounding corporate taxation when employees work remotely.
Another issue that is often seen in this context is dual residency, which is not identical to a PE. Countries commonly have the right to tax their resident individuals and resident companies on their worldwide profits, which is why several countries have broader definitions of who is a tax resident. Where the definitions overlap, the taxpayer may be considered a tax resident in two countries, the so-called “dual residence.”
In addition to incorporation, the place of effective management triggers tax residence for a company. In the case of dual residence, both or more countries will want to tax company profits.
When directors and executives work remotely in another country, this can represent a risk for a company to have dual residence. In case a director or executive works from a home office in another country and, for example, moves all or part of the board meetings online, the company may have a registered office and, therefore, multiple locations and thereby a corporate tax liability in more than one country.
During the COVID-19 pandemic, the OECD recommended that workers who were working from a jurisdiction other than the one where their employer was located due to pandemic restrictions should not trigger a PE. Still, restrictions on movement have largely been lifted, but some employees continue to work remotely. Therefore, it is important to further discuss the PE risk and dual tax residence, hence let’s look at some examples.
Finland’s Supreme Administrative Court has overturned a lower court’s ruling regarding the establishment of a PE in Finland by a Swedish biopharmaceutical company, concluding that three employees working from home in Finland did not trigger a PE3. The employees involved were responsible for promoting the company’s products and related research to Finnish healthcare professionals. All their work was done in their home office, where they kept their promotional materials and necessary equipment. However, they had no authority to take legal action, enter into sales agreements, or participate in the negotiation of such agreements.
Initially, Finland’s lower court4 ruled that although the employees were not directly involved in the sales contract, the activities to raise awareness of the company’s products in Finland were deemed to be more than mere preparatory and supportive activities. However, the Supreme Administrative Court took a different view, assessing the proportionality of employees’ activities compared to the overall operations of Swedish companies. Ultimately, the Supreme Administrative Court concluded that the work performed by Finnish workers was not substantial or significant enough to be classified as anything other than auxiliary in nature. As a result, the Supreme Administrative Court reversed the lower court’s decision and decided that the Swedish biopharmaceutical company did not have a PE in Finland.
Danish’s tax authority has issued a binding statement5 in a case concerning a managing director who worked partially from home (in Denmark) for personal reasons, concluding that the PE was not triggered. The conclusions focused on the fact that non-resident employers do not have a fixed place of business in Denmark and do not control the directors’ home offices. Furthermore, the tax authorities noted that the managing director was not involved in sales in Denmark and that his work there was sporadic.
In Spain, the tax authorities have issued a binding tax ruling6 explaining the circumstances under which the PE is not triggered. The authorities concluded that when: i) non-resident companies do not have access to workers’ home offices in Spain; ii) non-resident companies do not require workers to work in Spain; and iii) non-resident companies do not bear the costs that derive from the employee’s stay in Spain, a Spanish PE is not triggered.
Nuno Raposo Jacinto
June 2023
[1] OECD, “Implications of Remote Working Adoption on Place Based Policies: A Focus on G7 Countries” 22 June 2021.
[2] “Taxation of cross-border teleworkers and their employers” adopted 13 July 2022.
[3] Korkein hallinto-oikeus (Supreme Administrative Court of Finland), n.º 22072/2020, ECLI:FI:KHO:2021:171, December 2021.
[4] Päätös, jota valitus koskee Helsingin hallinto-oikeus 29.09.2020 n.º 20/1762/3.
[5] Skatteforvaltningen (Danish tax authorities), ”Ikke fast driftssted ved direktørs arbejde fra hjemmet i Danmark,” SKM2022.406.SR, 29 August 2022.
[6] Secretaría de Estado e Hacienda, Dirección General de Tributarios (Spanish tax authority), Doctrina Tributaria – Consultas Tributarias, n.º de consulta V0066-22, 18 January 2022.