• The temporary presence of an employee in a jurisdiction due to COVID-19 generally should not result in a permanent establishment for the employer under existing tax treaty principles;
• The temporary presence of a business’s officers and directors in a jurisdiction due to COVID-19, should not result in a change in place of residence for the taxpayer; and
• An individual’s temporary presence in a jurisdiction related to COVID-19 is unlikely to affect the individual’s place of residence for treaty purposes.

As a result of the spread of COVID-19 across the globe, many jurisdictions have implemented travel restrictions and quarantines in an attempt to control the spread of the virus, and individuals may also be temporarily present in a jurisdiction due to the virus, for example, to care for an ill family member, even if not subject to a formal quarantine or travel restriction. Temporary presence in a jurisdiction due to COVID-19 potentially raises a wide range of tax issues for both businesses and individuals.

The OECD Secretariat, issued analysis (the OECD Analysis) addressing some of the more significant concerns, building on existing guidance provided by several jurisdictions. The OECD Analysis encourages the issuance of country specific guidance, consistent with the principles set forth therein. To date, the United States has not addressed in published guidance the considerations related to individuals who are present in the United States as a result of the COVID-19 pandemic, although, as discussed below, such guidance has been requested.

Employees, officers or directors who are temporarily present in a jurisdiction during the COVID-19 crisis may wish to perform their regular jobs remotely. If the business does not have a presence in the jurisdiction in which the employee plans to work remotely, this potentially raises two concerns: whether an employee’s performance of his or her job functions would create a permanent establishment (PE) in the remote work jurisdiction, and whether performance of the functions of an officer or director could create a “place of effective management” in the remote work jurisdiction which could change the residence of the entity for treaty purposes.

Remote work by an employee potentially implicates two types of PE, a “fixed place” PE or, if the employee’s duties involve contracts, an “agency” PE.

A fixed place PE exists if the business of the enterprise is carried out at a fixed place within a jurisdiction, typically for a specified period. Paragraphs 5, 8 and 9 of the OECD Analysis provide that under existing treaty principles it is unlikely that a business will be considered to have a fixed place PE in a jurisdiction as a result of the temporary presence of its employees during the COVID-19 crisis.

Income tax treaties generally require that a fixed place PE have a degree of permanence and be considered “at the disposal” of the business. For a home office to be considered a PE of an enterprise, the home office must be used on a continuous basis for carrying on the business of the enterprise, and the enterprise must require the individual to use that location to carry on the enterprise’s business.

In the OECD’s view, work from home that is incident to the COVID-19 crisis is not to the result of a requirement of the enterprise. Rather, this remote work is typically a result of force majeure, i.e., government travel restrictions or work from home directives which are imposed during the COVID-19 pandemic. The OECD Analysis also notes that, in a typical remote work from home scenario, the enterprise has no access or control over the employee’s residence. Where the employee works remotely due to COVID-19, the business employee’s residence is not be treated as “at the disposal” of the employer, but rather is at the disposal of only the individual.

The OECD Analysis further recognizes that remote work typically lacks the requisite degree of permanence, so long as remote work from home “does not become the norm.”

Eversheds Sutherland Observation: The OECD Analysis relies on well-established principles regarding intermittent remote work from home, which is not considered to create a PE because the employee’s home is not considered “at the disposal” of the enterprise, the home office location lacks permanence, and work from home is not at the request of the employer. These principles should also encompass situations where the employee is present in a jurisdiction due to personal reasons related to COVID-19, even if travel restrictions may not actively prohibit the employee from leaving the jurisdiction.

• Agency PE

The OECD Analysis also addresses the potential that a business could have an agency PE in another jurisdiction as a result of an employee “habitually” exercising the authority to conclude contracts in the name of the enterprise in such jurisdiction. The guidance reasons that if the individual employee is present in the jurisdiction as a result of the COVID-19 pandemic, such employee is not likely to be regarded as “habitually” concluding contracts. As in the case of remote work, the execution of contracts is the result of force majeure (the COVID-19 pandemic) and the impact of government directives on the employee’s normal routine. The OECD Analysis of course cautions that this applies only to the remote execution of contracts by employees as a result of responses to the pandemic. The result may differ if the employee had previously concluded contracts in the name of the business in the jurisdiction, or if the employee continues to do so after the force majeure no longer exits.

Eversheds Sutherland Observation: The OECD Analysis was issued at the request of certain countries, which may now rely on the analysis or issue guidance of their own now that the OECD interpretation is available. Although the OECD Analysis may be considered persuasive in many jurisdictions (and may be considered persuasive even in the absence of a treaty in some jurisdictions), the ultimate decision as to whether an employee’s presence in a jurisdiction creates a PE depends on the jurisdiction, its domestic law, and any relevant treaty.

Concerns also have been raised as to whether the actions of officers or directors of a business taken while temporarily present in a jurisdiction due to COVID-19 may change the residence of a business, as some jurisdictions determine a business’s residence by its place of management. The OECD Analysis reasons that it is unlikely that temporary presence of officers or directors will impact a business’s place of residence since the change in location of a business’s officers or directors is temporary and an income tax treaty’s tiebreaker rules ensure that a business is only a resident of one state.

The OECD Analysis recognizes that the threshold presence required by domestic law to register for tax purposes may be lower than under tax treaties, and tax registration requirements may be triggered under local law. There also are taxes that are not covered by treaties, including sub-national taxes (e.g., state and local income taxes) and indirect taxes such as sales tax or value-added taxes. Tax administrations are encouraged by the OECD to provide guidance that would minimize or eliminate unduly burdensome compliance requirements for taxpayers during the COVID-19 crisis.

To this end, certain jurisdictions have issued guidance as to whether an individual’s presence in the jurisdiction due to COVID-19 related travel restrictions constitutes a PE for the individual’s employer. For example, Australia has provided that if an employee of a foreign company is present in Australia due to COVID-19, the employee’s presence will not in itself create a permanent establishment in Australia if: (1) “[t]he foreign incorporated company did not have a permanent establishment in Australia before the impacts of COVID-19” (2) “[t]here are no other changes in the company’s circumstances”; and (3) “[t]he unplanned presence of employees in Australia is the short-term result of them being temporarily relocated or restricted in their travel as a consequence of COVID-19.”

Ireland has also provided guidance under which an employee’s presence in Ireland will be ignored for corporate income tax purposes if the individual is an employee, executive or director of a corporation and the individual’s presence results from COVID-19 related travel restrictions. However, the United States has not provided guidance on the issue at this time.

Eversheds Sutherland Observation: Other jurisdictions have also released tax-related guidance, and as the COVID-19 pandemic continues, jurisdictions are likely to issue additional guidance. For an up-to-date list of guidance by jurisdiction, see our newsletter on Coronavirus Tax Developments.

An individual’s presence in a jurisdiction due to the COVID-19 pandemic may potentially raise an issue regarding a change in the individual’s place of residence. In addition, there may be payroll and similar tax considerations for the individual and his or her employer.

The OECD Analysis provides that an individual’s presence in a foreign jurisdiction due to COVID-19 is unlikely to affect the individual’s place of residence. Where a tax treaty applies, an individual can only be a resident of one country, since a tiebreaker rule applies if an individual is considered a resident of both contracting jurisdictions. If there is no income tax treaty is in effect between the foreign jurisdiction and the individual’s home jurisdiction, domestic laws are controlling. The OECD encourages local jurisdictions to provide relief from unduly burdensome filing and administrative requirements.

United States domestic law provides a “medical emergency" exception to the “substantial presence” test applied to determine whether an alien is a US resident alien. The US regulations provide that if a person is unable to leave the United States due to a "medical condition or medical problem" that arose while the person was present in the United States, the days on which the person is prevented from leaving are not counted for determining whether the substantial presence test is met. See Treas. Reg. 301.7701(b)-3(c). Although this guidance was not developed with a pandemic in mind, the language is arguably broad enough to encompass a pandemic. On March 22, 2020, a group of international tax lawyers and accountants requested IRS guidance on this issue.

Eversheds Sutherland Observation: Some jurisdictions have released guidance on this issue. For example, the France-Luxembourg income tax treaty provides that a resident of either France or Luxembourg who works in the other contracting state may work from their home jurisdiction for up to 29 days before becoming subject to tax in their home country. The French and Luxembourg authorities have announced that the 29-day period in this provision has been extended indefinitely. France and Belgium made a similar announcement with respect to their cross-border workers, and the U.K. updated its guidance regarding its statutory residence test. Under U.K. law, an individual is considered a tax resident of the U.K. if the individual is present in the U.K. for at least 183 days in a year. The guidance provides that if an individual is present in the U.K. due to COVID-19 related travel restrictions, these days are disregarded for purposes of the 183-day requirement. As noted above, for an up-to-date list of guidance by jurisdiction, see our newsletter on Coronavirus Tax Developments.

The right to tax the income of workers that are temporarily present in the jurisdiction due to COVID-19 also is addressed by the OECD Analysis. Referring to existing commentary to Article 15 of the OECD Model Treaty, the OECD reasons that the income of the employee while working remotely should be attributable to the home jurisdiction. Continuing to treat employees as earning income in their home jurisdiction while performing remote work during the COVID-19 crisis also furthers the objective of reducing administrative burdens at this time.