Taxing Covid

ME PoV Summer 2020 issue

With strict quarantine guidelines and so many restrictions in place as regards the movement of people, companies and individuals raised concerns about the tax implications on cross-border workers and other related cross-border matters such as tax residency, permanent establishment, and right to tax, among others.

The coronavirus crisis became a global issue that caused significant impact in the economy and placed a heavy strain on the health systems of many countries. Changes in the work routine have been seen in nearly all countries in the world due to social distancing and video conferences; digital signatures and the home office became the new normal. For most of us, 2020 will always be remembered as the year of the COVID-19 pandemic.

On 3 April 2020, the Organization for Economic Development and Development (OECD) published an analysis on the application of tax treaty rules and the impact of the changes in work patterns as a result of the COVID-19 crisis.

The OECD report addresses the following relevant tax issues arising from the COVID-19 crisis and provides suggestive interpretation on how the new work circumstances should be treated in light of the application of double tax treaties:

  • Permanent establishment (PE) exposure;
  • Residency status–directed and managed test; and
  • Shift in tax residency and personal income tax risks for
    stranded employees.


PE exposure  

Apart from the risk of denial of treaty benefits, a prolonged stay for employees in jurisdictions different to the country of residency of their companies may trigger PE exposure for their employers. Besides the eventual tax liability, the PE risk may further entail new tax filing and reporting requirements.

Many countries have, incorporated in their domestic tax laws, thresholds to determine whether foreign enterprises create a taxable presence in that territory. Depending on the domestic tax rules, a PE may be created if an employee of a company resident in Country A has a fixed place of business in Country B or acts as an agent of a foreign enterprise in Country B.

In addition, a PE may also be created when an enterprise of one state performs services in a construction site situated in another state for more than a certain period.

As a result of the global restrictions due to COVID-19, many employees had to stay and work from their home countries (or other jurisdictions), or were relocated to third countries and are working from temporary accommodations. Moreover, many construction projects had to be suspended due to governmental limitations.

Therefore, the OECD has provided their views on what should be the treatment applicable for such cases in respect of enterprises creating a PE in other jurisdictions during these unprecedented times.

Residency status–directed and managed tests

The imposed travel restrictions have increased concerns around a potential transfer of the “place of effective management” of a company as a result of the inability of its executive members (CEO, CFO) to travel. The potential consequence would be a risk of double tax residency in jurisdictions where the effective place of management is determined based on the tax residency of its decision makers.

The OECD argues that it is unlikely that the COVID-19 situation will create any changes to an entity’s residency status under a tax treaty. A temporary change in location of the executive members is an extraordinary and temporary situation due to global coronavirus pandemic and such change of location should not trigger a change in residency.

Shift in tax residency and personal income tax risks for stranded employees.

The OECD makes reference to guidance/circulars issued by countries such as the UK, Australia and Ireland to cover the impact of COVID-19 on the domestic and tax treaty determination of residency status of individuals given the extraordinary circumstances. The analysis includes the following cases that may be relevant:

  • A person is temporarily away from their home and gets stranded in a host country due to travel restrictions;
  • A person is working in a country and has acquired residency there, but temporarily returns to their previous home country because of the COVID-19 crisis. In this case, the individual may create cases of double tax residency (home country and country of employment).

Given the exceptional circumstances, the OECD outlines that it is unlikely that individuals may create a double tax residency. Nevertheless, the tie-breaker rule provided under tax treaties considers different factors (permanent home, center of vital interests, etc.) and should assist individuals in determining their tax residency.

What does this mean for the Middle East?

Middle East countries such as the UAE, Qatar and Saudi Arabia are known for having a number of expatriate residents. In view of this, foreign and local groups may be concerned about whether some of the employees working remotely in other jurisdictions may create an exposure from a tax perspective.

The overall message of the OECD report is positive. The unexpected shift in the work routines and office places should be taken as something temporary and extraordinary by the authorities when it comes to assessing any permanent establishment or tax residency.

In times like these, common sense should be the general approach adopted by countries since the current arrangements of home office are not habitual, but solely driven by a global emergency.

We expect tax authorities across the Middle East to take this rational approach.

As a practical example, Bahrain and the UAE have introduced the economic substance rules (ESR). In order to meet one of the requirements to demonstrate substance in the country, a company should have Board of Directors meetings held in the country with the local presence of the directors.

On the basis that many companies in Bahrain and the UAE have directors that are either foreign nationals or even residents of other jurisdictions, the worldwide travel restrictions may result in the meetings being performed remotely via videoconferences. As a result, the conditions to meet the economic substance test may not be observed.

Some territories that issued similar rules (such as Jersey and Guernsey) have announced that during the pandemic crisis, companies should not fail the ES test due to their inability to hold local Board of Directors meetings. Although both Bahrain and the UAE have announced COVID-19 measures on compliance obligations, neither of those jurisdictions have relaxed their provisions on the economic substance requirements. Therefore, any future developments should be closely monitored, although similar treatment would be expected.

Key takeaways for Middle East-based taxpayers

How long the restrictive measures to avoid movement of people will continue is still a big question mark. Some countries have gradually resumed their social activity and work routines but still have strict restrictions in place.

We all hope that the current situation will be indeed a temporary condition and the position adopted by OECD and tax authorities across the world seems to follow the same understanding. The changes in the work routine and places of where companies are being managed and operated are provisional arrangements that companies are adopting to keep their business operating.

Therefore, tax authorities should take a practical and sensible approach in advance of raising any risks of permanent establishment, dual tax residency or non-compliance of economic substance due to the direct consequences of COVID-19. In the meantime, we should all be concerned about keeping ourselves safe and healthy.


by Wissam Merhej, Partner and Fernando Costa, Senior Manager, Tax, Deloitte Middle East

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