Covid-19 - OECD Guideline on Determination of Permanent Establishment and Tax Resident Status

Recently, the World Organization for Economic Cooperation and Development (OECD) released the report on “Tax Treaties and the Impact of the Covid-19”. The analysis report aims to provide guidance on possible cross-border tax issues in the circumstance of the current global epidemic in accordance with relevant international tax agreements. The relevant key issues are summarized below:

An enterprise should not be considered to have created a new PE if its employees are temporarily home-based or unable to work in their regular workplace and tax jurisdictions due to the crisis.

An employee or agent abroad who temporarily works from home and signs a contract on behalf of his non-resident employer or principal in the tax jurisdictions where he resides should not be regarded as "regularly exercising the duty to sign contracts under the name of the enterprise", nor should the enterprise be regarded as creating a PE of agents in that tax jurisdictions.

In the determination of whether a construction project created a PE, the time of suspension of work for reasons such as shortage of materials or labor is generally included in the duration of construction of the construction project. Therefore, temporary downtime due to pandemic should also be included.

In accordance with the tax treaty, the determination of tax resident status (or the location of the actual management) of an enterprise should not be changed if the enterprise's management is temporarily relocated as a result of the pandemic. Under most current tax treaties, when an enterprise is a resident of both tax jurisdictions, it is deemed to be a resident of the country in which the "actual management" is located.

If an individual is temporarily residing in a foreign country affected by the epidemic, his or her tax resident status will generally not be changed.

According to the OECD version of the tax treaty, the determination of PE of all types requires that the activities meet a certain level of permanence and sustainability. The situation of being held in a place or unable to work across the border under normal circumstances due to the epidemic is a sudden, temporary situation that is not controlled by the subjective intent of the enterprise concerned. Such a stay would be inconsistent with the spirit of the OECD's official interpretation of the provisions of tax agreements if it would lead to the formation of permanent establishments and result in additional tax burdens and tax compliance burdens for companies.

Similarly, the factors that determine the enterprise and individual tax resident status are still based on normal circumstances. Temporary changes in work and place of residence due to the pandemic generally will not affect the determination of tax residence status. From our current experience, only when individuals employed across the border have to stay in their home country due to the pandemic and are unable to work and live in the country of employment (e.g. for Germans employed by a Chinese employer are unable to work in China), their tax resident status for the year may belong to the home country rather than the country of employment, especially when their permanent residence in the home country is retained.

Due to the complexity of cross-border activities, a comprehensive consideration of local and domestic law and the provisions of tax treaty shall be made in order to reach a reasonable assessment to meet tax compliance requirements.