HMRC has issued guidance providing some comfort in respect of the question whether employees who do not normally work in the UK, but are stranded here as a result of the travel restrictions imposed due to COVID-19, could create a permanent establishment (PE) in the UK. Guidance has also been issued by HMRC in respect of tax residence, confirming the position set out in my earlier post.
UK companies with employees stuck abroad may be interested in the OECD Secretariat's analysis of the impact of COVID-19 on tax treaties which, amongst other things, provides similar comfort around creating a PE. Like HMRC's guidance, the OECD analysis also covers tax residence.
Travel disruptions due to COVID-19 may prevent some directors, employees and other individuals from working in the jurisdiction in which they normally work.
Individuals who are temporarily stuck somewhere where they do not usually work due to the current COVID-19 ‘lockdown’ and are therefore working from this other jurisdiction and potentially concluding contracts in that jurisdiction, ought not, absent unusual circumstances, create a PE in that jurisdiction for employers.
Whether a PE is created will depend on the domestic laws in the relevant jurisdiction and any relevant double tax treaties entered into by that country. A company will only create a PE in the UK if it has one of the following in the UK:
- a business which is wholly or partly carried on through a fixed place of business; or
- an agent acting on behalf of the company who has and habitually exercises their authority to do business on behalf of the company.
HMRC has confirmed that it considers that ‘a non-resident company will not have a UK fixed place of business PE after a short period of time as a degree of permanence is required. Similarly, whilst the habitual conclusion of contracts in the UK would also create a Dependant Agent PE in the UK, it is a matter of fact and degree as to whether that habitual condition is met.’
The OECD analysis provides that ‘it is unlikely that the COVID-19 situation will create any changes to a PE determination. 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.’
The OECD analysis points out, however, that the threshold presence required by domestic law to register for tax purposes may be lower than that applicable under a tax treaty and so the domestic rules will need to be checked to get comfortable.
Clearly, whether a PE is created will be fact and jurisdiction dependent but at the moment the exceptional circumstances surrounding, and the temporary nature of the arrangements in place as a result of, COVID-19 should usually mean that neither the degree of permanence required for a fixed place of business PE, nor the habitual condition for a dependent agent PE, are met.
The longer that travel restrictions remain in place, the greater the risk in this area, so employers ought to monitor the situation and consider whether any changes to operations are required if the travel disruption continues longer term.
HMRC has also issued guidance on tax residence, and the OECD guidance referred to above also covers tax residence, both confirming the position set out in my earlier post.
HMRC confirmed that it does ‘not consider that a company will necessarily become resident in the UK because a few board meetings are held here, or because some decisions are taken in the UK over a short period of time. HMRC guidance makes it clear that we will take a holistic view of the facts and circumstances of each case.’
The OECD analysis says that ‘it is unlikely that the COVID-19 situation will create any changes to an entity’s residence status under a tax treaty’ noting that ‘all relevant facts and circumstances should be examined to determine the “usual” and “ordinary” place of effective management, and not only those that pertain to an exceptional and temporary period such as the COVID-19 crisis.’