On 21 January 2021, the Organisation for Economic Cooperation and Development (OECD) issued Updated guidance on tax treaties and the impact of the COVID-19 pandemic (Guidance) (available here).
The Guidance addresses the interpretation and application of the provisions of tax treaties during the COVID-19 pandemic when public health measures (including restrictions of mobility) are in effect. The Guidance focuses on:
- tax residence of companies and individuals;
- creation of permanent establishments;
- taxation of income from employment.
Although the Guidance is not binding, the OECD notes that the certainty to taxpayers is necessary and encourages tax authorities to issue national consistent guidance that would be applicable during this exceptional period. Seeking to share the best practice, the OECD presents examples of guidance already issued by individual tax authorities.
According to the updated Guidance:
- The exceptional and temporary change of the location where employees exercise their employment as a result of public health measures imposed or recommended by the government, (i. e. working from home) should not create new permanent establishment (PE) for the employer.
- An employee’s or agent’s activity in a jurisdiction should not be regarded as “habitual” if they have exceptionally begun working at home in that jurisdiction as a public health measure imposed or recommended by at least one of the governments of the jurisdictions involved. As a result, such activity would not constitute a dependent agent PE.
- Periods where operations of the construction site are prevented as a public health measure imposed or recommended by the government constitute a type of interruption that should be excluded from the calculation of time thresholds for construction site PE.
- A temporary change in location of board members or other senior executives is an extraordinary and temporary situation due to the COVID-19 pandemic and such change of location should not trigger a change in tax residence status.
- An exercise of employment in other jurisdictions due to a public health measure of one of the governments involved should not by itself affect the individual’s residence status for tax treaty purposes. If an employee is prevented from traveling because of COVID-19 public health measures and remains in another jurisdiction, COVID-related days of presence may be ignored in considering the 183-day limit. As a result, such employment-related income should not be taxed in the jurisdiction where the work was actually performed (taxation shall occur only in the state of tax residency).
The State Tax Inspectorate under the Ministry of Finance (STI) has not yet provided an official opinion regarding the interpretation and application of the provisions of tax treaties during the COVID-19 pandemic. Considering, that personal income tax return and corporate income tax return should be submitted until the middle of the year, an official opinion of the STI would be helpful.
If the STI does not publish guidance regarding COVID-19 impact on tax treaties, no exceptions regarding (i) tax residence of companies and individuals, (ii) creation of permanent establishments and (iii) taxation of income from employment could be applicable.
