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Permanent Establishment Issues Under COVID-19 Analyzed by Deloitte

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The tax division of global consultancy Deloitte in May 2020 published an analysis of permanent establishment and corporate residency issues in the context of the COVID-19 crisis.

In a nutshell, employees stranded in a foreign country and performing remote work from there could unwittingly create a “permanent establishment” and/or a de-facto “corporate presence” in that country, which in turn would trigger tax consequences, potentially making their employer liable for employment taxes, payroll taxes, corporate income tax, VAT/sales tax, etc. Furthermore, running a business without proper registration or licensing could carry stiff penalties. The “force majeure” defense in relation to COVID-19 remains untested in court and would not prevent the upfront payment of taxes and penalties anyway.

So, should employers direct stranded employees to stop working at once? It may be too late in any case.

Hence the importance of the guidance that the Organization for Economic Cooperation and Development (OECD) issued in April 2020 “related to potential cross-border corporate taxation issues triggered by employees stranded and performing services in non-employment countries as a result of the coronavirus (COVID-19)”.

Here are some key points highlighted by Deloitte:

“Until specific country guidance is published with respect to COVID-19, the scenarios included in the OECD’s recommendations and analysis yield some learning and insight for parties seeking to navigate the complexities related to cross-border work and related PE considerations for employers.”

“Two issues noted by the OECD are described below –

  • Impact to the determination or creation of a PE resulting from activities being performed in a country as a result of COVID-19; and
  • Impact to the residency status of a company as a result of a change in the “place of effective management” due to the displacement of key executives.”

The scenarios discussed in the OECD guidance documents are fairly typical; they are summarized and commented in Deloitte’s analysis.

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