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Revised OECD tax treaty guidance as “temporary” COVID-19 travel restrictions continue to impact business operations

The OECD has issued updated guidance on tax treaties and the impact of the COVID-19 pandemic which adopts broadly similar views on questions around the creation of permanent establishments and changes in tax residence as the guidance issued in April 2020.

It does, however, expand on the earlier version with the inclusion of further sample guidance issued by tax authorities in a number of jurisdictions including Australia, Germany, the UK and the US. The OECD has also added a note of caution: companies’ tax positions may be affected when temporary changes to working practices take on a more permanent character.  

Permanent establishments

As is likely to be a familiar problem, travel restrictions as a result of COVID-19 will prevent some directors, employees and other individuals from working in the jurisdiction in which they would normally work.

The OECD’s updated guidance maintains the view expressed in the April version that “the exceptional and temporary change of the location where employees exercise their employment” should not create new permanent establishments (PEs) for the employer. It has, however, deleted the assertion that “it is unlikely that the COVID-19 situation will create any changes to a PE determination” – being a possible hint that some tax authorities may take a stricter view in this respect than others.

Whilst reiterating that where public health measures force employees to work remotely from their homes this should not create PEs for their employer, the updated guidance adds a note of caution. If, after the cessation of COVID-19 restrictions, an employee continues to work from home outside of the jurisdiction they would normally work in, the PE determination could be impacted. Absent COVID-19 restrictions, it would be more likely that a home office could be considered to have a sufficient degree of permanence, or the employee be considered to habitually conclude contracts on behalf of the enterprise, so as to create a PE in a separate jurisdiction.  

Businesses should continue to facilitate working from home where possible, so long as COVID-19 restrictions persist. In preparing a return to work following the end of COVID-19 restrictions, and in light of a possible change to flexible working policies, businesses should be alive to the possibility that working from home in other jurisdictions may impact a PE determination.

Tax residence 

The updated guidance follows the earlier version in considering it unlikely that a “temporary change in location of board members or other senior executives” as a result of the “extraordinary and temporary situation due to the COVID-19 pandemic” should trigger a change in tax residence.

The additional examples of country-specific guidance which have been included in the updated version are, however, of interest. Whilst HMRC has agreed to take a flexible position on tax residence (see this earlier post), other jurisdictions have gone a step further. Australia, Canada, Greece, Ireland, and New Zealand tax authorities have issued guidance stating that the presence of board meetings or members of key management (for example) outside a company’s normal place of residence as a result of COVID-19 restrictions, will be disregarded for the purposes of a tax residence determination. This is clearly stronger than HMRC’s position that a “holistic view of the facts and circumstances of each case” will be taken.

It is unclear for how long the OECD (and tax authorities more generally) can maintain the position that the COVID-19 restrictions (and resulting business practices) are ‘temporary’. As we approach the one year anniversary of the beginning of COVID-19 restrictions in the UK, business practices may begin to look more ‘normal’ than temporary or extraordinary. Businesses should take care to review their practices as COVID-19 restrictions continue into Spring 2021 and as we slowly begin to transition out of COVID-19 working conditions.

Meanwhile, in terms of practical steps, if a meeting is to be held remotely, it is advisable that the board minutes and other ancillary documents explain the COVID-19 situation and its impact on travel. Where appropriate, non-resident directors could attend board meetings as observers and not exercise their voting rights, or alternate directors present in the relevant jurisdiction could be appointed.


slaughterandmay, kmehmood, oecd tax, oecd, tax treaties, permanent establishment, residence, tax residence, covid-19, coronavirus, teleworking, homeworking, cross-border