Due to the global situation of COVID-19, we analyse herein the case of individuals who were temporarily working abroad as employees of an enterprise of another country, different from the country of residence. We shall specifically refer to those individuals who have not been able to return to the countries where they live due to the pandemic and due to the quarantine measures declared in the second country. The question that arises is whether, in such case, according to the rules in force of a Double Taxation Agreement between both countries, a fiscal residency is acquired in the country of origin, according to Article 5 No. 3 of said Agreement.
The tax authorities can decide to apply the Agreement literally, by taking a formalist position. In this scenario, it can be established that, every time an individual who works for an enterprise based abroad and without a fixed base in the other country, exceeding the 183-day deadline in any twelve-month period, will be a permanent establishment in the other country for the enterprise that provides services. This will apply independently of the circumstances and, consequently, it would apply during the pandemic.
However, there are different ways to resolve this apparent conflict, whilst applying the rules established in said agreements. In fact, Article 4 of the OECD model sets out the rules of residency through the general principle that states that a person can only be a resident of one state at a time. To begin an analysis in this regard, local rules have to be considered. From a Chilean perspective, the rule of remaining more than 183 days in a twelve-month period in a country applies. In this sense, supplementary rules will have to apply to resolve the conflict.
In this sense, the secretariat of the OECD issued a technical letter on 3 April of this year that sets out the guidelines and criteria to resolve this residency conflict. Firstly, said secretariat states that carrying out economic activities of an enterprise from the sporadic place of residence of an employee in the other country, which is exceptional due to an extraordinary event such as COVID-19, does not necessarily mean that it should create PEs for the businesses.
For an enterprise to trigger a permanent establishment in a different country, there must be continuity and habituality in the use of the means available with a general character, not with an exceptional one, such as in this case. The fact that an employee of an enterprise must remain physically in a place of residence due to an emergency does not imply that said means are at the full disposal of the enterprise. “The exceptional and temporary change of the location where employees exercise their employment due to the COVID-19 crisis, such as working from home, should not create new PEs for the employer.”1
The OECD, in its analysis, specifies that the fact that an individual must necessarily remain in a place during the COVID-19 crisis, would be the result of a directive or government instruc-tion. Therefore, it is a force majeure and not a requirement of the employing enterprise.As a result of the foregoing, the analysis of the OECD secretariat encourages tax administra-tions to issue instructions and guidelines in relation to the application of internal rules on residence.
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1 OECD Secretariat analysis of tax treaties and the impact of the COVID-19 crisis © OECD 2020
