Remote working has increased significantly since the beginning of COVID-19. The conducting of professional activities in a location other than the worker’s official workplace raised several challenges, namely a risk of a foreign permanent establishment (PE). OECD recognised the potential impacts on cross-border situations and issued specific guidance suggesting harmonised solutions (link). At the time, OECD assumed remote working would create issues ‘during this exceptional period’. Reality showed that remote working lasted longer than the pandemic and is now a key aspect of companies’ work-life balance policies.
According to the OECD commentaries to the Model Tax Convention, where ‘a home office is used on a continuous basis for conducting business activities for an enterprise and it is clear […] that the enterprise has required the individual to use that location to conduct the enterprise’s business […], the home office may be considered to be at the disposal of the enterprise’, i.e. a PE.
Remote working for the benefit of the employer?
VdA has been facing several requests for tax analysis/PE risk assessments regarding companies that hire workers who are physically present in Portugal, not necessarily upon instructions or for the benefit of the employer, but as a result of their own personal interest. Companies would nonetheless be confronted with the question to confirm whether the employee’s choice (to work from Portugal) creates any tax liability for the employer.
In our view, the PE risk should be primarily linked with an interest of the company, and not a discretionary decision of the worker. Thus, although a case-by-case analysis is recommendable, we take the view that it is possible to mitigate a PE risk in Portugal considering the following:
- Workplace: the worker’s (primary) workplace should be at the company’s premises; if the worker performs professional activities from abroad (e.g. Portugal) not upon request or instruction by the employer, but remote working is a prerogative of the worker, this should mitigate a PE risk;
- Regularity: if the employee performs its activity from home on a case-by-case basis (rather than on a regular basis), this may also mitigate the PE risk;
- Remuneration: the PE risk is also mitigated if the employer does not bear any costs to cover the worker’s remote working. The PE risk increases if the employer bears costs associated with the remote working, hence we suggest reviewing employment contracts and/or internal policies on fringe benefits regarding cross-border activities. In cases where, under a standard relationship, a worker becomes ‘mobile’, the PE risk may be mitigated if the remuneration remains unchanged, as it is an indication that remote working is, in principle, not part of the employer’s business purpose;
- 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 should be their responsibility to ensure the conditions to act 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.
Even though the above points are merely indicative, we think their observance and monitoring could help to mitigate a PE risk in Portugal.
