Remote working – yes, the immigration considerations are paramount – but, before sending an employee to legally work in a foreign country, what else should be considered? Well… lots! Top of the agenda should be the tax considerations.
By sending an employee to work in a foreign jurisdiction, an entity may form a “Permanent Establishment” (PE) rendering it subject to foreign tax. If this is not the intention, it is essential that companies assess the PE risk before undertaking a remote working policy.
Permanent Establishment
Determining if a company, through its presence/conduct, has formed a PE varies from jurisdiction to jurisdiction, as there is no formal international standard that they are required to follow. A definition of PE usually comes into play through jurisdictions’ double tax treaties. In practice, many refer to the Organization for Economic Cooperation and Development (OECD) Model Tax Convention – it is not necessarily interpreted in the same way though.
Article 5 of the OECD Model Tax Convention provides two primary ways to trigger a PE:
- physical PE – a company will trigger a PE if it carries out business in an office, factory, or other physical space on an extended or recurrent basis; and
- agency PE – hiring someone who regularly concludes contracts on behalf of the organisation.
Definitions also address the concept of services PE, which generally occur when a foreign company provides services in a foreign country for a certain period (usually for at least 183 days in a given tax year or 12-month period, but this can vary) through an individual or a fixed place of business.
Overall, local tax laws alongside any relevant double tax treaties will form the definition, interpretation and treatment of PEs. In the absence of any tax treaty, local law will determine if a PE has been triggered.
Double tax treaties
Double tax treaties are agreements between two jurisdictions which are designed to protect against the risk of double taxation where the same income is taxable in two jurisdictions. An entity may find itself with two tax residencies, but, if there is a double tax treaty in place, one jurisdiction’s rule may supersede the other meaning the company is only tax resident in one jurisdiction. If a company is tax resident in two jurisdictions and there is no applicable double tax treaty, the company may be taxed twice.
If a double tax treaty is applicable, it will usually provide a higher threshold for taxation than the domestic tax laws, i.e., it will be more difficult to create a PE under the treaty definition. Double tax treaty definitions of PE usually take precedence over the domestic definition and are typically based on the OECD’s definition (described above). However, treaties differ – the applicable definition of PE and its specific interpretation should always be scrutinized closely.
How can Remote Working create a Permanent Establishment?
A physical PE can be triggered if an employee’s home is a fixed place of business where the foreign company’s business is conducted. Whether an employee’s home is considered a physical PE will depend on the connection between the premises and the company. For instance, if the company is financing the employee’s home and/or the employee’s home address is stated as their “place of work” in their employment contract, then this will more likely trigger a physical PE.
Further, a physical PE may be presumed if an employee’s purpose of being abroad is to gain foreign clients/investment for the company and the company has no other presence within such foreign country.
Even in the absence of a physical PE, if a remote worker is acting on behalf of a foreign company with the power to conclude business contracts, the company will likely be considered to have created an agency PE.
Lastly, a service PE can be created through a remote worker conducting their activities, such as consulting, financial services, management, etc, for a specific period of time (usually for at least 183 days in a given tax year or 12-month period, but this can vary).
Will a Permanent Establishment always trigger a tax liability?
Broadly speaking, most jurisdictions PE definitions are fundamentally based on the definition contained in Article 5 of OECD Model Tax Convention, albeit with slight discrepancies depending on the jurisdiction. However, creating a PE will not always trigger a tax liability and vice versa.
Hong Kong SAR
Creating a PE will not necessarily render an entity subject to Hong Kong tax as Hong Kong has a territorial based tax system. Corporate residency is not always relevant in determining the taxability of an entity (but usually is in a tax treaty context). Hong Kong’s domestic rules are that a person is subject to profits tax if they carry on “trade, profession or business in Hong Kong; the trade, profession or business derives profits; and the profits arise in or are derived from Hong Kong”.
In contrast, even if an entity’s activities do not constitute a PE, it may still be deemed as “carrying on business” in Hong Kong for profit tax purposes. This was the situation in the case of Commissioner of Inland Revenue v Bartica Investment Ltd (4 HKTC 129) where a company placed deposits with financial institutions as security for back-to-back loans, held investments and purchased shares in a listed Hong Kong company. It was held that the company carried on a business in Hong Kong, despite the fact it may not have reached the PE threshold.
The United Kingdom
In the UK a company incorporated overseas will generally have a UK tax residency if the entity has formed a PE. However, there are some exceptions where a non-UK entity may still be subject to UK tax despite no PE being present. These exceptions are mainly in relation to profits/gains arising from the trade, disposal and rental of UK property/land (e.g., the profits of a UK property rental business).
Summary
The starting point for a definition of PE is usually the OECD Model Tax Convention’s definition. The meaning of PE and interpretation that applies in a particular circumstance will commonly be determined by a double tax treaty, but in the absence of a double tax treaty the domestic legal definitions will likely apply.
Appropriate tax advice should be sought to determine the applicable definition of PE and any nuisances to consider. This can then be bolstered and tackled with effective legal advice, which will consider aspects such as the employment contract and its potential impact on an interpretation of a PE. For example, not explicitly including the employee’s address in the employment contact and indirectly indicating that the employee may work from their home office, as notified to the employer.
PE determination is a notoriously “grey area” that is continuously expanding to account for changing economic realities. Companies should be extremely vigilant when sending their employees to work abroad.
Obtaining advice from the outset and planning before undertaking remote working policies will likely save headaches and financial hits down the line.
If you require assistance or have any query related to remote working, please do not hesitate to contact our Employment & Business Immigration team.
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.
