Covid-19 and The International Double Tax Conventions

16 April 2020

Arne Riis, Partner, Tax |

The OECD Secretariat issued a guiding statement on the ways in which the double tax conventions are influenced by the fact that employees and managers of companies are working from home and perhaps even perform their jobs in another country than where they would normally do it.

In this statement, the OECD decides regarding the following questions, inter alia:

  • Will a new, permanent establishment in another country arise because the employees of the company are stranded there, performing their job – and if they are entering into binding agreements from their home, for instance, from the basis of the other country (Article 5 regarding permanent establishment)?
  • Will the company become liable to tax in another country pursuant to the provisions on the centre of management because the management is in another country and controls the company from there (Article 4)?
  • Are employees now liable to tax in their country of residence because of being stranded and working from home here - if they reside in one country and work in another under normal circumstances, for instance through daily commutes between Denmark and Sweden or Germany (Article 15)?
  • Will it have any consequence for the determination of the country in which a person is a tax citizen if this person temporarily resided in another country (Article 4)?

The statement only takes a stand regarding the principles covered by the double tax conventions. The Danish tax authorities did not yet make any statements regarding these matters.

Further, the Danish tax authorities did not yet issue guidelines as to whether involuntary stays in Denmark due to the government’s recall of Danes will count relating to the 42-day regulation of the Danish Tax Assessment Act, Section 33A. Nor have they yet issued guidance regarding the question whether the involuntary stays in Denmark will count relating to the 180-day regulation and the 3-month regulation in the case of a decision whether full tax liability will be the case.

Permanent Establishment (Article 5)

It is the general assessment of the OECD, that the limitation of the mobility of employees, a consequence of the measures against Covid-19 taken by the individual countries, should not be leading to the emergence of a permanent establishment in the country in which the employee is forced to reside temporarily. This applies, irrespectively whether it is a home office or an agent who enters into agreements from the other country on behalf of the client. The assessment of OECD is based on an interpretation of the comments already applicable to Article 5.

With regards to contract work the OECD decision was the following: The duration of a temporary break in the work because of Covid-19 will be included in the determination of how long the period of the contract work has extended past the 12-month period, following the OECD Model Convention.

Moreover, the OECD recommends for the countries to issue a guidance regarding the understanding of national provisions which potentially deviate from the double tax conventions. The purpose is to limit administrative burdens imposed on the taxpayers involved. 

The guidance from the OECD does not seem to state a direct answer to what the consequences might be to the size of the income, which can be attributed to an already existing permanent establishment in a country (pursuant to Article 7) if, as a result of the Covid-19 measures, an increasing or decreasing number of business activities are taking place in the relevant country as a consequence of more or fewer employees working in the country at the time compared to normal circumstances.

Centre of Management (Article 4)

In case two countries disagree which country is entitled to the taxation of a company, usually the determining factor for the right of taxation is the location of the actual management of the company.

In case the management of a company – following the restrictions against Covid-19 – is temporarily unable to manage the company from the country from which the company is controlled under normal circumstances, the following question can arise: Should the company be seen as having moved to the country from which the management actually takes place while the restrictions are still in force? This can have significant tax consequences to the company. Especially with regards to exit taxes of the country from where the company is seen as having moved out and concerning the future right to taxation of the company in the country from where the company is now controlled.

According to the perception of the OECD, such a temporarily changed management situation - as a potential consequence of the Covid-19 restrictions - should not be considered as moving of the centre of management of a company in the context of a double tax convention.

This applies even if the provision on the centre of management (Article 4) is made in accordance with the OECD Model Convention before or after the 2017-amendment. It is true for both cases that where each if the two countries (the temporary as well as the permanent country of management) claim to be entitled to tax the company, the attention must be drawn to the country from where the company would be controlled under normal circumstances. This assessment will usually lead to a decision that the country from where the company was controlled before the Covid-19 restrictions is determined as the home country of the company, even while the Covid-19 restrictions take place.

Mobile Employees (Commuters) (Article 15)

The distribution of the right of taxation according to Article 15 is based on the location at which the work was completed, on whether it is related to an financial employer in the country of work, and on the number of days in which the employee resides in the country of work.

In particular, this is applicable for commuters crossing Oresund and those commuting between Denmark and Germany.

The OECD states that to the extend to which the work is completed in the home country, and the residence here is involuntary and a consequence of the measures and restrictions performed by the countries following Covid-19, the taxation of the salary should still take place in the country where the work would normally be done before the crisis of Covid-19.

According to the statement from the OECD this applies to salary when the employee continues working for the company from home, as well as to cases in which the employee does not work but is merely returned to the home country still receiving salary.

In its statement the OECD encourages the countries to mitigate the consequences in cases where the employer becomes liable to a duty to withhold or report income, relating to a seemingly normal interpretation of the provisions of the country.

Furthermore, kindly refer to the previous section regarding permanent establishment.

Personal Tax Residency (Article 4)

Determination of a person’s tax residency or of the place to which the person is the most closely connected, personally as well as financially, is an exercise of utmost complexity. This exercise must be performed in all situations involving tax liability in two countries.

According to the OECD, some countries already stated that residence in a country different from the one in which a person would stay under normal circumstances – due to Covid-19 – will be determined as extraordinary, exceptional and similar to force majeure. On this background, the involuntary residence should not be included in the determination of the fiscal status of the relevant person in the country in question, and therefore it will not affect the determination of the tax determination of this person.

In particular, this will be applicable to the following two scenarios:

  1. An individual resides temporarily in a different country than the normal country of residence, due to vacation or work and ends up getting stranded.
  2. An individual normally resides and works in one country, but due to Covid-19 this person returns to his or her actual home country and stays there.

The OECD states that in both scenarios the personal tax residency should not be affected by the temporary Covid-19 inflicted stay in the other country.

Read the full statement from OECD

For concrete advice or further information please contact the specialised tax advisors of BDO, Finn Madsen or Arne Riis. Alternatively, please fill out the contact form below.

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