As our article The Impact of COVID-19 Travel Disruptions on Your Tax Residency previously discussed, the Organisation for Economic Co-operation and Development (OECD) provided recommendations in early April 2020 on the implications of COVID-19 on cross-border workers and residence status of individuals and companies.
In summary, the OECD recommendations suggest that COVID-19 measures are generally exceptional and should not normally impact on a company or individual’s tax status under tax treaties in a particular country. This has been further clarified through countries’ own released guidance.
As COVID-19 continues to impact companies and the restrictions remain firm around international travel, there remains uncertainty and confusion around tax residency and cross border work for individuals and companies.
As of current, It seems that most countries have either stayed silent on the situation or adopted the OECD’s advice and allowed tax residency to basically be put on pause for the time that travel is still unknown.
The two main issues a digital nomad can expect to face during this pandemic would be the tax residency rules and the permanent establishment rules. Due to the pandemic’s impact, companies and individuals are finding themselves stuck in a country that they would not ordinarily consider to be their tax home. This becomes complicated when digital nomads are spending long periods of time in one place. Alongside residency there may be an unintentional development of a PE. It is important for taxpayers to have some clarity surrounding this complex issue while the circumstances seem currently overwhelming by an individual or company.
#Corporate Tax Residency
For a company to be considered a resident of a country for tax purposes, they must show that they are carrying on a business in that country or that they have central management and control (CMC) in that country. Rules may vary between different country guidelines so ensure you are up to date on your countries policies.
The problem that may occur for the digital nomad is where the pandemic has caused a company to not be able to carry on business in their tax country or where the directors are stuck in another country, causing the CMC to be temporarily moved. Characteristically, a company will have its CMC at the location where its directors attend board meetings.
Due to the global restrictions on travel, there have been abrupt and dramatic changes to where people work; in many cases directors may live across a border from their offices. In the present circumstances, boards of many foreign incorporated companies have temporarily suspended their normal board meeting procedures and made alternative arrangements such as online platforms. Directors of foreign companies are attending board meetings through online platforms such as Zoom, and Skype. When using online platforms such as video conferencing for meetings the CMC will depend on where the directors participating in the meeting are located.
Permanent establishment is created when there is sufficient business activity for a corporation to be viewed as having a stable and ongoing presence in a foreign country. The host country may impose corporate taxes at the local rate if the activity results in some type of locally created revenue. Permanent Establishment must have ongoing and persistent revenue creation, rather than sporadic or isolated business efforts.
In certain circumstances, a foreign company may be deemed to have a PE in another country, if it has even one employee present there. If the corporation falls under a PE in that country, then the profits attributable to that business are taxed there.
Due to the Covid-19 pandemic, most companies have found it necessary for their employees to work from home. For some people, home may be across another country’s border which may subsequently complicate the tax process for these businesses. Additionally, some people may have been caught off guard by the rapid travel restrictions and may consequently be stuck in another country. Regardless of the reason, a PE could have been accidentally created and must be carefully considered.
In our previous blog we focused the impact discussion around the USA, UK, and Australia. At the time we are publishing this updated blog, there have been no additional changes made to these countries. As the COVID-19 impact has lingered without any definite date of normalcy again, there has been no changes to the pandemic relief with tax residency in these countries. It has been re-iterated that we can expect a case-by-case approach taken in the future when deciding if and where these companies and individuals should be considered tax residents.
For example, in the UK the HMRC acknowledged that individuals who would find themselves unable to leave the UK as a result of the ‘lockdown’, would appear to be accepted by those circumstances that would count as exceptional. Where the conditions do not allow taxpayers to get back in or work in the countries that they are supposed to be in for tax purposes, Countries will be more lenient.
The most important reflection as a taxpayer affected by these rules is to always be ready to prove that ‘if it was not for the pandemic and the current travel circumstances then you/the company would be a taxpayer in another country’.
ADDITIONAL COUNTRY SPECIFIC GUIDELINES
The New Zealand tax office has clarified the guidelines around Corporate tax residency and PE. The COVID-19 pandemic will not cause corporate taxpayers to be tax resident because directors of a company are confined or stranded in New Zealand. Instead the New Zealand tax office will consider how a company is actually managed.
If directors are stranded because of COVID-19, then that will not change where the real business of a company is carried on. The occasional exercise of control by the directors from New Zealand, for example through a board meeting, will not make the company tax resident in New Zealand. Each case turns on its own facts and circumstances, but in terms of the director control test, then what is relevant is where control is ordinarily exercised. The tax residence of a company will not change because for a time directors exercise control from New Zealand when they would not normally do so.
Additionally, the COVID-19 pandemic will not cause non-resident companies to have a PE in New Zealand because their employees are confined or stranded in New Zealand. The New Zealand Tax office is taking into account the current circumstances and will not insist on PE where it is uncontrollable by the resident to return to a working foreign company. A non-resident company will not derive New Zealand income because of a PE after only a short period of time instead of intentionally establishing a business in New Zealand.
Hong-Kong is expected to take the OECD’s suggested approach on the Permanent Establishment and corporate tax residency guidelines during the pandemic but within consideration to tax treaties. The OECD considers it unlikely that an individual’s residence would be affected by the COVID-19 situation. They note that this is only the case where there is a treaty in place – absent a treaty, a simple “days-present” test may well result in residency and it would be a matter for the host country to determine what relief to grant. They note that the UK, Ireland and Australia have already done this.
The tax revenue predicts two basic scenarios. The first, is where a person stranded overseas having travelled on holiday or a short business trip. The second, is more complex, where someone who normally lives abroad and has residence there has returned to their previous jurisdiction of residence. When those questions arise it will likely be the tie-breaker tests that determine the residency rules with consideration to the current circumstances. Ultimately, the competent authorities would need to consider the habitual abode of the individual and the OECD’s view is that this should be considered over a sufficiently long period of time.
While the guidance should provide a degree of reassurance for taxpayers during the disruption, it is important that taxpayers and their advisors work together to understand what their exposures might be, which are likely covered by treaties and what the approach of the relevant jurisdictions concerned will be.
For example, the double tax treaty between France and Hong Kong of 21 October 2010 provides that, even in the absence of a fixed place of business or a dependent agent, a French or Hong Kong company will have created a permanent establishment in the other state once it has provided services for a period of more than six months in that state. Therefore, foreign companies established in countries where the tax treaties signed contain certain provisions derived from the United Nations tax treaty model (which includes China, Hong Kong, Singapore, etc.), the risk of recognition of a permanent establishment remains real.
To date, neither the Spanish Government nor the Spanish tax authorities have introduced exceptional rules to address the impact of travel restrictions on the taxable presence of foreign corporations in Spain, in particular related to an effective management in Spain.
The Spanish Government has adopted new measures to relax certain legal obligations and formalities applicable to Spanish companies, such as certain obligations of the boards of directors or the deadline for approving the financial statements, among others. In particular, these new measures state that the sessions of the government bodies of the companies will be understood to be held at the domicile of the legal entity. Therefore, the effective place of management of the companies should not be affected.
Taking into account the lack of guidance, situations should be analysed on a case-by-case basis in order to determine the Spanish tax implications that could arise as a consequence of the restrictions on travelling and quarantine requirements.
As a general rule, pursuant to Italian domestic law and subject to the relevant double tax treaties, a foreign corporation may be considered an Italian tax resident if its place of effective management is in Italy, similar to the approach described above.
To date, the Italian Government has not adopted exceptional rules to address the impact of travel restrictions on the taxable presence of foreign corporations in Italy.
The Canadian Revenue Agency (CRA) has extended the application of its recent guidance, which generally provides that prolonged stays in Canada that solely result from travel restrictions due to COVID-19 will not necessarily affect the tax residency or permanent establishment of a non-resident entity. The guidance also clarifies that these travel restrictions may not affect the tax residency of a non-resident individual, or the ability of a cross-border employee to qualify for treaty benefits on employment income.
Previously, the CRA indicated that its guidance would only apply from 16 March 2020 to 29 June 2020, but that it was prepared to extend its relief measures when needed. The CRA further stated that U.S. residents who are present in Canada for more than 183 days solely due to travel restrictions will not have those days counted towards the 183-day test in the Canada-U.S. income tax treaty to determine whether they are taxable in Canada on their employment income.
In addition, the CRA stated that it will not consider a corporation to become resident in Canada solely because a director of the corporation must participate in a board meeting from Canada because of travel restrictions, where the relevant tax treaty contains a corporate residency tie-breaker rule based on the corporation’s effective place of management. For corporation’s resident in non-treaty countries, the CRA generally noted that it will determine corporate residency on a case-by-case basis.
RESEARCH OR REACHOUT
While this blog may allow some clarity around your current situation, the stages of COVID-19 are unpredictable and the tax offices are reluctant to make any permanent decisions.
Ensure you are keeping up to date with any guideline changes made by your local tax office. If you need further clarification around tax residency or permanent establishment for yourself or a company, then reach out to Wanderer’s Wealth.
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NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.