Home office and permanent establishment during the (not only) coronavirus times
Anti-pandemic measures and the associated travel restrictions have affected many businesses and individuals, not just those whose business is closely linked to travel and thus, has been significantly reduced. Recently, we have been encountering more and more questions in this area from those entrepreneurs whose business, despite all measures, continued to thrive. However, their workers had to move from offices to their homes, often across borders, which could be either voluntary, often for family reasons or just to follow better weather but also forced due to the impossibility of returning to the country from where they usually work. Such a factual change of the place of work may cause the creation of a so-called permanent establishment in a country where the company did not plan to do so.
The permanent establishment (hereinafter referred to as the “PE”) created by the foreign entity in the Czech Republic is considered here as a separate subject liable to the Corporate Income Tax and all revenues having the source here shall be taxed through it. Its definition is stipulated in the legislation at the national level, i.e. in the Czech Income Tax Act, as well as at the international level via specific provisions of individual double tax treaties.
According to the Czech Income Tax Act, PE is defined predominantly as a fixed place of business through which the business of any enterprise is wholly or partly carried on, e.g. a workshop, an office, a place of mining natural resources, a place of sale (distribution place) or a civil engineering site.
According to the majority of double tax treaties, the term PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on. It includes especially a place of management, a branch, an office, a factory, a workshop, and a place of mining natural resources.
Especially in this respect, it is important to alert that the home office may also represent such a fixed place of business provided that the business of the enterprise is wholly or partly carried out from such place. Carrying on the business (wholly or partly) means predominantly that the core activity (in contrast to the activities of auxiliary nature) of any enterprise is performed by the employee from home office. Thus, the analysis of the business activity of the enterprise in question as well as the activities of the employee in question must be performed.
In general, such a place must have a certain degree of permanency and be at the disposal of an enterprise in order for that place to be considered a fixed place of business through which the business of that enterprise is wholly or partly carried on. On the other hand, even though part of the business of an enterprise may be carried on at a location such as an individual’s home office, that should not lead to the conclusion that that location is at the disposal of that enterprise simply because that location is used by an individual (e.g. an employee) who works for the enterprise. The carrying on of intermittent business activities at the home of an employee does not make that home a place at the disposal of the enterprise. A home office may be a PE for an enterprise if it is used on a continuous basis for carrying on the business of that enterprise and the enterprise generally has required the individual to use that location to carry on the enterprise’s business.
Further in this respect, it is also necessary to consider the specific situation of outbreak and duration of the current Covid-19 pandemic. In this respect, the OECD has issued a Guidance on tax treaties and the impact of the Covid-19 pandemic in April 2020 which was updated in January 2021. This guidance tackles the situation when, during the pandemic period, international travel was suspended or severely restricted resulting in temporary dislocation of employees which could have an impact on tax position of such employees and their employers. The guidance applies only to situations arising during the Covid-19 pandemic while relevant public health measures to restrict the spread of the disease are still in effect and thus, it is temporary in nature. In this respect, the guidance stipulates that the exceptional and temporary change of location where employees exercise their employment because of the Covid-19 pandemic, such as working from home, should not create new PE for the employer.
The guideline stipulates that during the Covid-19 pandemic, individuals who stay at home to work remotely are typically doing so as a result of public health measures, i.e. it is an extraordinary event, not an enterprise’s requirement. Therefore, considering the extraordinary nature of the Covid-19 pandemic, teleworking from home (i.e. the home office) because of an extraordinary event or public health measures imposed or recommended by the government would not create a PE for the business/employer, either because such activity lacks a sufficient degree of permanency or continuity or because the home office is not at the disposal of the enterprise. In addition, it still provides an office which in the absence of public health measures is available to the relevant employee.
If an individual continues to work from home after the cessation of the public health measures imposed or recommended by the government, the home office may be considered to have a certain degree of permanence. However, that change alone will not necessarily result in the home office giving rise to a fixed place of business PE. A further examination of the facts and circumstances will be required to determine whether the home office is now at the disposal of the enterprise following this permanent change to the individual’s working arrangements.
In this respect, the general rules stipulated by the double tax treaties must be applied. Recognized application rules indicate that whether the individual is required by the enterprise to work from home or not is an important factor in the determination of permanency of the home office. Thus, where a home office is used on a continuous basis for carrying on business activities for an enterprise and it is clear from the facts and circumstances that the enterprise has required the individual to use that location (e.g. by not providing an office to an employee in circumstances where the nature of the employment clearly requires an office), the home office may be considered to be at the disposal of the enterprise.
As you may see from the above, the issue of the creation of PE in case when the employee is working from home office does not represent straightforward yes-or-no advice. On the other hand, creation of PE has significant consequences for enterprises. Thus, should you or your employees consider working from home office across the borders, do not forget to consider this carefully.
Of course, we will be more than happy to assist you in this respect.
According to the Czech Income Tax Act, PE is defined predominantly as a fixed place of business through which the business of any enterprise is wholly or partly carried on, e.g. a workshop, an office, a place of mining natural resources, a place of sale (distribution place) or a civil engineering site.
According to the majority of double tax treaties, the term PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on. It includes especially a place of management, a branch, an office, a factory, a workshop, and a place of mining natural resources.
Especially in this respect, it is important to alert that the home office may also represent such a fixed place of business provided that the business of the enterprise is wholly or partly carried out from such place. Carrying on the business (wholly or partly) means predominantly that the core activity (in contrast to the activities of auxiliary nature) of any enterprise is performed by the employee from home office. Thus, the analysis of the business activity of the enterprise in question as well as the activities of the employee in question must be performed.
In general, such a place must have a certain degree of permanency and be at the disposal of an enterprise in order for that place to be considered a fixed place of business through which the business of that enterprise is wholly or partly carried on. On the other hand, even though part of the business of an enterprise may be carried on at a location such as an individual’s home office, that should not lead to the conclusion that that location is at the disposal of that enterprise simply because that location is used by an individual (e.g. an employee) who works for the enterprise. The carrying on of intermittent business activities at the home of an employee does not make that home a place at the disposal of the enterprise. A home office may be a PE for an enterprise if it is used on a continuous basis for carrying on the business of that enterprise and the enterprise generally has required the individual to use that location to carry on the enterprise’s business.
Further in this respect, it is also necessary to consider the specific situation of outbreak and duration of the current Covid-19 pandemic. In this respect, the OECD has issued a Guidance on tax treaties and the impact of the Covid-19 pandemic in April 2020 which was updated in January 2021. This guidance tackles the situation when, during the pandemic period, international travel was suspended or severely restricted resulting in temporary dislocation of employees which could have an impact on tax position of such employees and their employers. The guidance applies only to situations arising during the Covid-19 pandemic while relevant public health measures to restrict the spread of the disease are still in effect and thus, it is temporary in nature. In this respect, the guidance stipulates that the exceptional and temporary change of location where employees exercise their employment because of the Covid-19 pandemic, such as working from home, should not create new PE for the employer.
The guideline stipulates that during the Covid-19 pandemic, individuals who stay at home to work remotely are typically doing so as a result of public health measures, i.e. it is an extraordinary event, not an enterprise’s requirement. Therefore, considering the extraordinary nature of the Covid-19 pandemic, teleworking from home (i.e. the home office) because of an extraordinary event or public health measures imposed or recommended by the government would not create a PE for the business/employer, either because such activity lacks a sufficient degree of permanency or continuity or because the home office is not at the disposal of the enterprise. In addition, it still provides an office which in the absence of public health measures is available to the relevant employee.
If an individual continues to work from home after the cessation of the public health measures imposed or recommended by the government, the home office may be considered to have a certain degree of permanence. However, that change alone will not necessarily result in the home office giving rise to a fixed place of business PE. A further examination of the facts and circumstances will be required to determine whether the home office is now at the disposal of the enterprise following this permanent change to the individual’s working arrangements.
In this respect, the general rules stipulated by the double tax treaties must be applied. Recognized application rules indicate that whether the individual is required by the enterprise to work from home or not is an important factor in the determination of permanency of the home office. Thus, where a home office is used on a continuous basis for carrying on business activities for an enterprise and it is clear from the facts and circumstances that the enterprise has required the individual to use that location (e.g. by not providing an office to an employee in circumstances where the nature of the employment clearly requires an office), the home office may be considered to be at the disposal of the enterprise.
As you may see from the above, the issue of the creation of PE in case when the employee is working from home office does not represent straightforward yes-or-no advice. On the other hand, creation of PE has significant consequences for enterprises. Thus, should you or your employees consider working from home office across the borders, do not forget to consider this carefully.
Of course, we will be more than happy to assist you in this respect.
