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OECD analysis of Tax Treaties and the impact of COVID-19

On 3 April 2020 OECD Secretariat released its “Analysis of Tax Treaties and the Impact of the COVID-19 Crisis”. Therein, the OECD addressed some tax matters, which may arise while applying international tax treaties based on the OECD Model Tax Convention (OECD Model), especially those, where there are cross-border elements in the equation, such as for example cross-border workers, or individuals who are stranded in a country that is not their country of residence. We sum up certain of them below.

Notwithstanding that the legal status of this document is not clear due to the fact that it is not a part of the OECD Model or the Commentary to it, we believe that the Analysis may affect law enforcement practice in the application of the international tax treaties based on the OECD Model as well guidances on the application of the domestic law issued by the tax administrations.

Concerns related to the creation of permanent establishments

In this section of the Analysis, the OECD considers the dislocation of employees to countries other than the country in which they regularly work. In most cases, such employees continue to work from their homes, which consequently, might create a permanent establishment (PE) for their employer in the employee’s country location.

The general OECD’s output here is that 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 employers. This conclusion is based on the para. 18 of the Commentary on Article 5 of the OECD Model, which states 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. In addition, for a home office to be a PE for an enterprise, it must be used on a continuous basis for carrying on business of an enterprise and the enterprise generally has to require the individual to use that location to carry on the enterprise’s business. Consequently, the degree of permanency as well as criteria of being at the disposal, which in general PE must have, are not met.

It should be noted though that 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. This should be checked separately.

Concerns related to a change to the residence status of individuals

In this section of the Analysis, the OECD considers the rules, which should apply for the determination of the residence status of an individual. Two main situations are provided as the examples here: 

(i) A person is temporarily away from her 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.

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

The general OECD’s output here is that in these scenarios a person would acquire a residence status for purposes of the tax treaty in the country where the person is temporary staying because of extraordinary circumstances. But even if a person becomes a resident under domestic rules of a country where he temporary stays, if a tax treaty exists, a person would not be a resident of that country for purposes of the tax treaty due to such temporary dislocation based on the art. 4 of the OECD Model (tie-breaker test). 

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