The discussion on whether remote working could generate a permanent establishment (“PE”) dates back to 2012, when the OECD first suggested that an example covering a “home office” should be included in the commentaries (see here).
The pandemic boosted discussions on the topic, as companies adapted to the fact that workers were working remotely for sanitary/travel restrictions, leading to their businesses being conducted beyond borders. The OECD secretariat issued guidance on the impact of COVID-19 on (among other things) the PE risk (see here), emphasising the exceptional and temporary circumstances that justify a mitigation of the criteria that could lead to the creation of a PE.
After the pandemic, remote working is no longer imposed by temporary restrictions: it is becoming a new standard. Remote working is embedded in the work-life balance policies around the globe and workers remain outside the country of residence of their employers by choice, rather than in the interest/instructions of the employer. Remote workers may develop part of the company’s core activities, even if there is no intention of the company to carry out a business in that specific location. The challenge regarding the new norm created by remote working “for the benefit of the worker” is not solved by the methodology suggested by the OECD commentaries, international doctrine or case law.
Portugal has been a successful destination for digital nomads, but also for individuals seeking a good quality of life (considering the country’s education and health infrastructure and the tax benefits available for individuals, such as the non-habitual residents’ regime). In the absence of guidelines from the Portuguese tax authorities, we have been increasingly asked to perform PE risk assessments by companies that become aware their staff are working from Portugal – like in many other jurisdictions.
To mitigate a PE risk for foreign companies, we have performed a case-by-case analysis and have recommend some defensive measures to reduce the risk of a PE:
- Workplace: the worker’s (primary) workplace should be at the company’s premises; if the worker performs professional activities from abroad (e.g. Portugal), this should not be determined, nor funded by the employer – remote working is a prerogative of the worker, not at the interest of the employer;
- Remuneration: the employer should not bear any additional costs to cover the worker’s expenses. In our view, the PE risk increases if the employer bears any costs associated with remote working -this may lead to amendments of employment contracts and internal policies on fringe benefits for cross-border activities. In cases where a “standard worker” becomes a “mobile worker”, if remuneration remains unchanged it is a further indication that remote work is not part of the employer’s enterprise;
- Quality standards: in order to work remotely, the worker may need to bear costs strictly related to their professional functions (e.g. dedicated internet connection, hardware, etc.). The intervention of the employer should remain in standard terms (e.g. providing a laptop, mobile phone, etc.). If working remotely is at the worker’s discretion, it is their responsibility to ensure performance in a professional manner;
- Payroll services: except where legally required, the employer should not offer payroll services and other personal assistance outside its country of residence; paying income taxes, social security charged and/or undertaking tax compliance activities may require the employer to register in the other country and to interact with public authorities, indicating an intentional and permanent presence therein.
Irrespective of the above, global mobility should be addressed from a comprehensive and harmonised perspective at the OECD and EU level, and eventually future tax disputes will help to clarify how tax authorities and tax courts interpret the matter.
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