If your dream is to work remotely from Tuscany or the French Riviera as an employee of an organisation based somewhere else in the world, you may be pleased to know that there is now more clarity than ever before on when this is achievable without triggering a major tax headache for the employer.
This is the result of several updates made by the OECD to its popular Model Tax Convention. Included are some critical changes to the commentary on Article 5 on permanent establishments, clarifying the circumstances in which an individual’s home in another country could constitute a place of business of the enterprise for which the individual works.
Employers were reluctant to allow employees to work where they have no taxable presence
Global shift
It is not an exaggeration to argue that the updates and clarifications in question could trigger a major global shift towards a much more flexible working environment.
There are two reasons for this. Firstly, the Model Tax Convention has been widely used, for over 60 years, by OECD members to design bilateral tax conventions and remove tax-related barriers or double taxation in crossborder situations.
Secondly, employers around the world have so far been reluctant to allow employees to work from places where the organisation does not have a taxable presence, due to the lack of certainty as to when a permanent establishment will, or will not, be created.
Permanent establishment
The most significant changes relate to the specific criteria to determine whether a permanent establishment is created by using a home of an employee as place of work.
For a start, the Model Tax Convention now states that the mere fact that a place in another country is used by an individual (eg an employee) to carry out activities related to the business of an enterprise ‘should not lead to the automatic conclusion that that place is a place of business of that enterprise’.
Did an individual work from such place over 50% of the time?
Furthermore, it explains that an important indicator to decide whether somebody’s home should be considered a place of business of the enterprise is whether an individual worked from such place for over 50% of their total working time for that employer ‘over the course of any twelve-month period commencing or ending in the fiscal year concerned’.
However, even if that was the case, another consideration should be taken into account: whether there is a commercial reason for the activities to be undertaken by that individual in the country where the home is located. A positive answer would indicate the creation of a taxable presence of the employer.
A question of value
And here comes perhaps the most important addition to the Model Tax Convention: ‘A commercial reason requires a link between the individual’s presence at a home or other relevant place in that State and the carrying on of the business of the enterprise. This would not be the case where an enterprise enables an individual to work from home or another relevant place solely to obtain or retain the services of that individual.’
In other words, if, for example, your Germany-based employer allows you to work from your holiday home in Spain solely because it doesn’t want to lose your services, there will be a good chance that no permanent establishment is created in Spain, provided that the Spain-Germany double-taxation treaty was designed using the OCED Model Tax Convention and you do not work in a client-facing role interacting with Spanish customers or suppliers, among other conditions.
Working in a back-office role could make a significant difference
In this regard, working in a back-office role as opposed to a front-office position could make a significant difference, with the latter being more susceptible to the creation of a permanent establishment of the employer.
In fact, where employees meet, negotiate and conclude contracts with customers in the country where they now work, it can be argued that there is a strong commercial reason for the employer to be treated as based in that country, with the effect of creating a taxable presence.
For qualified accountants working inhouse for a corporate, this risk is probably moderate in most situations but still needs to be assessed on a case-by-case basis. For those working in practice, particularly in senior positions with management responsibility and client-facing roles, the risk could be much higher.
Time zones
Another aspect to consider is the ‘the real-time, or near real-time, interaction with customers or suppliers in different time zone(s)’. If that is deemed a commercial reason for the presence of an employee in a certain country, a permanent establishment for the employer may be triggered. This could be the case where, for example, the employer is based in Canada and the employee moves to Australia, as the time difference between the two countries is significant.
Now, before people start packing suitcases or buying beachfront properties on the Mediterranean, employers and employees – assuming the organisation allows remote working arrangements – should verify a couple of things as a minimum.
First, check that the relevant double-taxation treaty between the two countries concerned (the one where the employer is incorporated and the one where the employee plans to work from permanently) is based on the OECD Model Tax Convention. Secondly, ensure that neither of the two countries has expressed any reservations regarding the application of the new principles. These are listed in the recently published OECD update.
If anything is still unclear, liaising with the tax authority of the OECD country where the employee would like to relocate is recommendable, as is obtaining an opinion from a firm specialising in international and crossborder tax matters.
