Analysis of tax treaties’ provisions in the context of COVID-19
COVID-19 | coronavirus (corona virus)
tax News, April 2020
The OECD Secretariat has issued an official document on analysis of application of certain provisions of tax treaties, during the coronavirus pandemic.
Namely, extraordinary circumstances caused by occurrence of coronavirus raise numerous tax issues, especially where there are cross-border elements – in which case occurs a need to determine the right to tax between countries.
We hereby provide you with the brief overview of the analysis of OECD Secretariat.
Creation of a permanent establishment (“PE”)
The exceptional and temporary change of the location where employees exercise their employment because of the COVID-19 crisis, such as working from home, should not create new PEs for the employer. Similarly, the temporary conclusion of contracts in the home of employees or agents because of the COVID-19 crisis should not create PEs for the businesses. A construction site PE would not be regarded as ceasing to exist when work is temporarily interrupted.
However, the threshold presence required by domestic law to register for tax purposes may be lower than those applicable under a tax treaty and may therefore trigger corporate income tax registration requirements.
Residence status of a company (place of effective management)
The COVID-19 crisis may raise concerns about a potential change in the “place of effective management” of a company as a result of a relocation, or inability to travel, of chief executive officers or other senior executives. The concern is that such a change may have as a consequence a change in company’s residence under relevant domestic laws.
It is unlikely that the COVID-19 situation and temporary change in location of the chief executive officers and other senior executives will create any changes to an entity’s residence status under a tax treaty, especially once the tie breaker rule is applied.
Where a government has stepped in to subsidize the keeping of an employee on a company’s payroll during the COVID-19 crisis, the income that the employee receives from the employer should be attributable, based on the OECD Commentary on Article 15, to the place where the employment used to be exercised. In the case of employees that work in one state but commute there from another state where they are resident (cross border worker), this would be the state they used to work in.
Residence status of individuals
Two main situations could be imagined:
1. A person is temporarily away from their home (perhaps on holiday, perhaps to work for a few weeks) and gets stranded in the host country by reason of the COVID-19 crisis and attains domestic law residence there
- It is unlikely that the person would acquire residence status in the country where the person is temporarily because of extraordinary circumstances; however, there are rules in domestic legislation deeming a person to be a resident; even if the person becomes a resident under such rules, if a tax treaty is applicable, the person would not be a resident of that country for purposes of the tax treaty, due to such temporary dislocation
2. A person is working in a country (the “current home country”) and has acquired residence status there, but they temporarily return to their “previous home country” because of the COVID-19 situation; they may either never have lost their status as resident of their previous home country under its domestic legislation, or they may regain residence status on their return.
- It is again unlikely that the person would regain residence status for being temporarily and exceptionally in the previous home country; even if the person is or becomes a resident under such rules, if a tax treaty is applicable, the person would not become a resident of that country under the tax treaty due to such temporary dislocation.