One of the features of the post COVID world is that many desk-based employees are no longer spending most of their time in the office of their employer. Many are choosing to take advantage of this newfound flexibility working in alternative locations, sometimes in different territories. This brings potential tax costs and risks for their employer which may find itself with an unexpected corporate taxable presence in these territories.
In many countries that operate under general international tax principles, often established by tax treaties, one of the conditions for a non-resident company to create a corporate taxable presence, or permanent establishment (PE) is where there is a fixed place of business in another territory through which the business is operated.
Companies are, therefore, having to consider whether their employees working from a home office in another territory could create a taxable presence with associated compliance requirements and potential tax costs for them – whether there is a risk of creating a taxable presence in the UK or elsewhere.
Employees working from the UK
Considering the risk of a UK taxable presence for foreign companies, HMRC issued guidance in the early stages of pandemic on their approach to UK PEs. Its view is that existing legislation and guidance already provides flexibility to deal with the changes in business activities necessitated by the response to the covid-19 pandemic. HMRC gives some comfort saying that it does not consider that a non-resident company will automatically have a taxable presence by way of a permanent establishment after a short period of time. However, the period for which we all expect to be working out of the office is getting longer and HMRC’s guidance means companies need to consider whether a permanent establishment might exist.
Unfortunately, there is no fixed time limit beyond which a fixed place of business is deemed to exist. HMRC refers to a six month yardstick in its international tax manual but it is also clear that the period of time needs to be considered in combination with other factors and a taxable presence can be created in a shorter duration.
This leads to considerable debate as to whether, how and when a home office might give rise to a taxable presence with no definitive UK (or international) test. Some of this debate focuses on whether a private home is “at the disposal” of an employer, one of the generally held tests for a fixed place of business. OECD guidance notes that while part of a business may be carried on at a home office this should not lead to the automatic finding of a fixed place of business. However, equally, the OECD notes there are circumstances where a home office could give rise to a taxable presence. In other words, the specific facts and circumstances of each case will be key.
There are a few places to look, though, for factors that can help:
- An understanding of the activities of the employee in the context of the business performed is important – there is generally an exemption where activities are preparatory or auxiliary. This applies where the services performed are remote from the actual realisation of profit by the company. Although some recently introduced anti-fragmentation rules may also need to be considered.
- It is also possible that the level of activity performed in the UK, while productive, does not rise to the level of carrying on a business in the UK which is also required for a PE to exist.
Once there is a presence in the UK, an exercise is required to determine how much of the profit of the non-resident company is attributable to the PE. If there is no significant presence this may be very limited but this will also be fact-dependent and, importantly, would not remove the need for appropriate compliance.
Employees working outside the UK
UK companies which have employees working outside the UK will need to consider the local rules, treaties and local tax authority approach (especially given the pandemic situation) in each and these will often differ.
It is important also to remember that there are other triggers of corporate taxable presence - the habitual conclusion of contracts outside the territory of corporate residence could also create a taxable presence irrespective of the existence of a fixed place of business.
Limiting the risks
As always managing and monitoring the arrangements of employees is essential, our recommendation to companies is:
- To ensure corporate tax issues are taken into account when developing policies and procedures around international home working so that the risk of creating a UK and/or other offshore PE is managed.
- To put in place a process to monitor PE risk by understanding where employees may be working in a different country to their employer, to allow the corporate tax risk in this area to be properly assessed and managed,
Finally, corporate tax exposure is not the only risk to consider for employees working outside of the territories of their employer. Among other things, companies and individual will need to consider income tax and payroll withholding as well as corporate legal aspects including local data protection requirements.
For help and advice on corporate tax residence issues please get in touch with your usual BDO contact or BDO’s Corporate tax team.