Both the OECD and HMRC have released guidance on the implications of the COVID-19 outbreak for businesses in terms of permanent establishment (PE) and tax residency.
The OECD guidance offers some comfort for businesses affected by travel restrictions for their employees, stating that ‘it is unlikely that the Covid-19 situation will create any changes to a PE determination’. The OECD believes that neither exceptional and temporary change of the location where employees exercise their employment, such as working from home, nor the temporary conclusion of contracts in the home of employees or agents, should create new PEs. In particular, the requirement for individuals to work from home under government directives is a ‘force majeure, not an enterprise’s requirement’.
Similarly, the OECD regards Covid-19 as unlikely to cause changes to an entity’s residence status under a tax treaty. The guidance states that the temporary change in the location of a CEO and any other senior executives is an extraordinary and temporary situation arising from the Covid-19 pandemic, and should not trigger a change in residency, especially in light of the application of treaty tie-breaker clauses (such as effective management).
HMRC states in its international manual (INTM120185) that it does not intend to update its legislation and guidance, which already give it the necessary flexibility to respond to Covid-19. In particular, HMRC’s guidance already confirms it will take a holistic view when determining tax residency, and that a few board meetings or strategic decisions made in the UK over a short period of time should not affect its assessment of central management and control.
HMRC also notes that operations of a non-resident in the UK over a short period of time should not give rise to a UK PE (as it would not lead to a fixed place or business or habitual carrying on of business, and where a UK PE does arise, this would be unlikely to give rise to significant additional UK taxable profits). Even where a PE is found to arise, the attribution of profits would depend on the level of UK activity and any additional UK taxable profits may not be significant given the circumstances (INTM261010).
Both the OECD and HMRC have released guidance on the implications of the COVID-19 outbreak for businesses in terms of permanent establishment (PE) and tax residency.
The OECD guidance offers some comfort for businesses affected by travel restrictions for their employees, stating that ‘it is unlikely that the Covid-19 situation will create any changes to a PE determination’. The OECD believes that neither exceptional and temporary change of the location where employees exercise their employment, such as working from home, nor the temporary conclusion of contracts in the home of employees or agents, should create new PEs. In particular, the requirement for individuals to work from home under government directives is a ‘force majeure, not an enterprise’s requirement’.
Similarly, the OECD regards Covid-19 as unlikely to cause changes to an entity’s residence status under a tax treaty. The guidance states that the temporary change in the location of a CEO and any other senior executives is an extraordinary and temporary situation arising from the Covid-19 pandemic, and should not trigger a change in residency, especially in light of the application of treaty tie-breaker clauses (such as effective management).
HMRC states in its international manual (INTM120185) that it does not intend to update its legislation and guidance, which already give it the necessary flexibility to respond to Covid-19. In particular, HMRC’s guidance already confirms it will take a holistic view when determining tax residency, and that a few board meetings or strategic decisions made in the UK over a short period of time should not affect its assessment of central management and control.
HMRC also notes that operations of a non-resident in the UK over a short period of time should not give rise to a UK PE (as it would not lead to a fixed place or business or habitual carrying on of business, and where a UK PE does arise, this would be unlikely to give rise to significant additional UK taxable profits). Even where a PE is found to arise, the attribution of profits would depend on the level of UK activity and any additional UK taxable profits may not be significant given the circumstances (INTM261010).
