The Spanish tax authorities have recently published a binding tax ruling (V0066-22 dated 18 January 2022) which concluded that, in certain circumstances, an individual working in Spain remotely during and after the COVID-19 restrictions should not create a permanent establishment (PE) for their non-Spanish tax resident employer.

The ruling provides a degree of certainty on how to deal with the significant amount of cross-border workers that have been performing their duties from home since the start of the COVID-19 pandemic and helps to determine whether an individual’s home office would constitute a PE for the employer. The ruling is not only useful in relation to circumstances during the pandemic, when public health measures were in effect, but also clarifies the treatment of working from home after the end of the travel restrictions.

For the time being, this is the only administrative ruling in Spain that follows the recommendations of the OECD Secretariat on the impact of the COVID-19 pandemic, which state that the exceptional and temporary change of the location where employees exercise their employment because of the COVID-19 pandemic should not, in and of itself, create new PEs for the employer.

The facts of the case

The binding tax ruling refers to an employee of a British company resident for tax purposes in the United Kingdom who arrived in Spain in March 2020 and, as a consequence of the lockdown and the national state of emergency, was temporarily unable to leave Spanish territory.

Once the restrictions ended, the employee decided, unilaterally and for personal reasons, to stay in Spain. In these circumstances, he stayed more than 183 days in Spain during the calendar year 2020 (i.e. he became Spanish tax resident), carrying out his work remotely from his home. During this time, the British company did not bear any expenses related to the accommodation of the employee in Spain, nor did the company provide any additional remuneration to the employee for working remotely. With respect of his functions, and although the employee exercised a senior role generating business for the company, he never concluded contracts on behalf of the company or had the power to do so.

The analysis by the Spanish tax authorities

In order to determine if the employee's home office constituted a PE for the British company, the Spanish tax authorities analysed the two definitions of the concept of “permanent establishment” included in the Spain-UK Tax Treaty: the first one, linked to the existence of a fixed place of business; and the second one, linked to the existence of a dependent agent. The analysis in the ruling also distinguishes between two moments to determine whether the employee’s situation could give rise to a PE: during the COVID-19 pandemic, when the employee was forced to work remotely from Spain as a result of public health measures and, after the cessation of the public health measures, when the employee continued to work from home in Spain by choice.

Working from Spain during COVID-19 restrictions

The Spanish tax authorities examined and followed the OECD's recommendations in the note published on 3 April 2020 by the OECD Secretariat entitled «Analysis of Tax Treaties and the Impact of the COVID-19 crisis» and the updated guidance issued on 21 January 2021. They concluded that, during the pandemic crisis, individuals who stayed at home to work remotely were typically doing so as a result of public health measures; this was a force majeure situation rather than a requirement of the employer. Therefore, considering the extraordinary nature of the COVID-19 pandemic, the fact that the employee worked remotely from home while the public health measures were imposed by the Spanish government would not, by itself, create a PE. The view of the Spanish tax authorities (which we share) was that this interim situation lacked a sufficient degree of permanence or continuity to lead to the conclusion that the employee's home office could be deemed a fixed place of business of the British company.

For the same reasons, the Spanish tax authorities also concluded that the employee working from home could not give rise to a dependent agent PE: the relevant activities could not be deemed to be performed in a “habitual” way when the employee was working from home due to the COVID-19 outbreak.

Working from Spain by choice after COVID-19 restrictions had been lifted 

The Spanish tax authorities also analysed whether the home office could be considered to be at the employer's disposal (i.e. a fixed place of business) if the employee keeps working from home after the cessation of the public health measures imposed or recommended by the Spanish government. In light of the commentaries on the OECD Model Convention 2017, the ruling concluded that the home office could be considered to have a certain degree of permanence and, consequently, a further examination of the facts and circumstances was required.

The following circumstances, however, led to the conclusion that the employee's home office did not constitute a fixed place of business at the disposal of the British company

• the employee unilaterally decided to work from Spain after the cessation of the public health measures without having been instructed to do so by the employer;
• the company had not asked the employee to use their home to carry out the company’s business and actually provided an office in the UK; and
• the company did not bear any costs, nor did it pay any special remuneration to the employee for this purpose.

As regards the dependent agent, the binding ruling concluded that, in light of the information provided, the functions of the employee should not be deemed to be those of an agent. Nevertheless, in other cases, this possibility cannot be ruled out since it is highly dependent on the factual circumstances.