Author: Olivier Michiels, Partner BDO Tax
The OECD states that a company is taxable in the country where it is a tax resident unless it has a taxable permanent establishment in another treaty country. The location of the company’s directors/senior management/employees is a crucial element for determining a company’s tax residence and the presence of a permanent establishment . Due to the COVID-19 measures and mandatory teleworking, they (possibly partly) carry out their activities abroad – even if this is at the employee’s home. This raises the question whether that has an impact on the place where the company’s profits will be taxed.
Tax residence of the company
In an international tax context and under most treaties, the tax residence of companies is determined by taking the place where the company is managed into account. This is the place where
the company’s policy decisions are made;
the Board of Directors holds its meetings;
senior executive management carries out its activities;
important commercial decisions are made;
the company’s daily management takes place;
the headquarters of the company (group) is located.
Obviously, none of these criteria is decisive per se and all of the factual circumstances must always be taken into account.
But what happens when the company’s management is no longer centralised in one place, due to travel restrictions or because of voluntary teleworking, and when managers carry out their activities and make decisions from their country of residence? The company’s tax residence (and the place where the company is primarily taxable) may change as a result. Several countries could also claim taxing rights over the company’s profits, thus potentially culminating in a situation of double taxation (or double non-taxation).
Moreover, directors/employees performing activities abroad on behalf of the company can also imply that the company is considered to have a permanent establishment abroad. This will mainly be the case if:
the company has a fixed place of business which is used to carry out the company’s business – in whole or in part – in another country. Examples include a place of management, a branch, an office, a factory, a workshop, etc.;
the company has a dependent agent abroad. This person who is economically and legally dependent on the company, usually plays the most important role in negotiating and concluding agreements that are then systematically concluded by the foreign company without substantial changes to the agreement;
the activities carried out by the fixed place of business and/or the dependent agent are not of a preparatory or supporting nature.
The question that subsequently arises is whether the home office of a foreign employee/director must be regarded as a fixed place of business, or whether the negotiation/signing of contracts from this home office implies that the company has a dependent agent and would thus become (possibly partly) taxable abroad.
The OECD’s position
“Unforeseen and temporary change, as a result of COVID-19, including telework, should not have any adverse consequences for the company’s taxability and the country where that happens.”
Both the issue of the tax residence of companies and that of the permanent establishment are raised in the recommendations of the OECD, which state that the unforeseen and temporary change, as a result of COVID-19, should not have any adverse consequences for the company’s taxability.
With regard to tax residence, a change in the company’s place of management should not give rise to a change in the company’s tax residence.
With regard to the issue of permanent establishment, the OECD recommendation states that a home office can, under certain circumstances, qualify as a permanent establishment. If the teleworking situation arises as a result of the COVID-19 measures, however, the use of the home office is a consequence of a temporary and exceptional situation and/or a decision by the government, not by the company. This implies that neither the condition of permanence (requiring the establishment to be available to the company in a more or less permanent manner), nor the condition of disposal (requiring the company to have a right of disposal over the establishment) have been satisfied.
The OECD adopts a similar position with regard to the dependent agent. Due to the temporary and exceptional nature of the measures/situation, the dependent agent cannot be expected to usually conclude agreements in the name and on behalf of the company.
Several countries – including Australia, Canada, Greece, Ireland and the United Kingdom – have issued guidelines in line with the OECD’s recommendation, confirming the application of the aforementioned principle.
What is the relevance for Belgian companies with foreign employees?
No specific guidelines were issued in Belgium. Nor do the bilateral agreements with Germany, France, Luxembourg and the Netherlands contain any specific provisions. Given that Belgium is an OECD member, it is likely though that the OECD’s recommendations will be followed. Formal confirmation of this is still lacking, however. A discussion with the Belgian Tax Administration may therefore be on the cards.
With regard to the qualification of a home office as a permanent establishment in particular, reference can be made to the position of the Office for Advance Rulings. The Office has indeed already provided a number of criteria in various rulings to assess whether or not there is a permanent establishment:
Is the use of the home office an essential condition in the employment contract?
Does the employment contract stipulate that the employee’s work must be performed from his or her home office or is the employee free to decide from where he or she will perform his or her work?
Is the employee directly/indirectly reimbursed for the costs associated with setting up/using this home office?
Is there an indication of the employer’s presence at the employee’s address (name plate, home address listed on business cards, listing on the website, etc.)?
What is the employee’s position in the company? Does his or her position relate to internal business operations (preparatory or supporting activities) or to the employer’s core activities?
Obviously, these criteria are mainly considered when determining whether the employee’s home office can qualify as a permanent establishment in Belgium. For the assessment abroad, the point of view of the tax authorities in the country of residence on the qualification of a home office as a permanent establishment must always be considered.
However, the story doesn’t simply end if the existence of a taxable permanent establishment can be excluded under the treaty. An assessment will have to be made whether the Belgian company is subject to certain tax obligations in the employee’s country of residence. Foreign companies, for example, may not have a permanent establishment under the double taxation treaty, but can still be deemed to have a Belgian establishment based on Belgian tax legislation.
The conditions for this are considerably stricter than those under the treaty. For example there is no exclusion for preparatory/supporting activities (the so-called negative provisions), it is sufficient that the company’s employees in Belgium provide services for more than 30 days over a 12-month period and the employee/representative does not require an authorisation to conclude contracts in Belgium on behalf of the foreign company. The mere presence of a representative is sufficient.
Although the presence of a Belgian establishment will not give rise to (possibly additional) taxation in Belgium – given that there is no taxable permanent establishment under the treaty -, the company will have to comply with certain tax obligations (for example, submitting a tax declaration for the foreign company) and can also be fined if they are not complied with.
Besides this obligation to declare, the foreign company will have to join a Belgian social insurance fund for the self-employed and will have to pay an annual contribution for companies.
In the converse situation, Belgian companies must always check whether certain tax obligations apply to them in the employee’s country of residence, even if they do not have a taxable permanent establishment there under the applicable double taxation treaty. In practice, we note that this aspect is often forgotten, resulting in needless financial consequences.
What about after COVID-19?
As for the taxation of companies, the impact of a more permanent teleworking situation must also be considered. As mentioned above, the OECD places particular emphasis on the temporary and exceptional nature of the COVID-19 measures, concluding that there may be no impact on the place where the profits of the company will be taxed.
If teleworking no longer is the result of temporary and exceptional measures imposed by the government but of a decision by the company or the employee, the company must also take the tax consequences of this decision into account.
If the directors/employees regularly work from home or regularly conclude contracts in their country of residence, the tax impact of the new situation on corporate tax residence and/or the presence of a taxable permanent establishment abroad must certainly be considered.
If the tax consequences of teleworking are insufficiently or not taken into account, this may give rise to discussions with the (Belgian) Tax Administration, which in turn can result in double taxation and costly and time-consuming procedures. Not just for the company itself, but also for the employees. Even if there is no taxable permanent establishment in the country of residence, this does not guarantee that the Belgian company/employer is not obliged to fulfil local tax obligations in the country of residence. We therefore recommend mapping out the job descriptions of cross-border workers who work from home and analysing whether their activities in their country of residence could potentially give rise to the creation of a permanent establishment in that country.
Do you want to know more about the impact of teleworking on the permanent establishment for foreign activities?
Don’t hesitate to contact our Tax experts via firstname.lastname@example.org.