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Telework from abroad:
tax consequences for employers?

As employers face growing calls to allow employees to ‘work from anywhere’, they should also consider the possible tax consequences of inadvertently creating a permanent establishment in another country. But what counts as permanent establishment? Here we explain some of the rules, and provide comments from our experts in 10 countries.


The pandemic led to unprecedented circumstances in the workplace, with millions of people having to work from their homes. With teleworking gradually becoming the new normal, the question is whether organisations and workers are aware of and able to deal with potential tax consequences that can arise when employees occasionally or even permanently work remotely from a country other than that in which their employer is based.

The permanent establishment issue

One important concern for companies is the potential creation of a permanent establishment for tax purposes in another country, through the presence of employees working remotely.

The concept of ‘permanent establishment’ (PE) is generally used in international tax law to determine whether or not a foreign company has sufficient presence in a country to be subject to corporate tax liability in that country. Most states have concluded bilateral tax treaties, which include a definition of a PE. While there is no international or EU standard that countries are required to follow, many countries refer to the OECD’s Model Tax Convention for guidance. It is important to note, however, that each country can interpret the OECD guidelines differently and apply its own internal rules.

Generally, a PE is defined as a ‘fixed place of business through which the business of an enterprise is wholly or partly carried on’.

Physical permanent establishment

Physical PE covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise.

The physical location used by the company to conduct its business should however have a degree of fixity and permanency.

The OECD’s Model Tax Convention lists examples of physical permanent establishments: a place of management, branch, office, factory, workshop, mine, oil or gas well, quarry or any other site for the extraction of natural resources. This list is not exhaustive.

Personal permanent establishment

When an individual, other than an independent agent, has the authority to sign binding contracts on behalf of the company and regularly exercises this right, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material change by the enterprise, this may be considered evidence that the individual is carrying on business through a fixed place of business in a foreign country, therefore creating a personal permanent establishment.

The contracts must be either in the name of the enterprise or for the transfer of ownership (or granting of the right to use) of property owned by that enterprise (or that the enterprise has the right to use) or for the provision of services by that enterprise.

The authority to conclude contracts must in any case cover contracts relating to operations which constitute the enterprise’s own business.

Services permanent establishment

Some double-taxation treaties (‘DTTs’) specifically address the concept of ‘services’ permanent establishment in order to clarify the tax treatment of services provided by a non-resident company in a foreign country.

A services PE is generally considered to exist when a non-resident company provides services in a foreign country through an individual who is present in that country for a certain period of time, or when a non-resident company provides services in a foreign country through a fixed place of business. This can include activities such as consulting, engineering, management, or similar services. In some DTTs, the definition of PE specifically includes the provision of services in order to capture services-based activities that would not typically be considered a PE under the traditional definitions. These DTTs may also include specific provisions to limit the period of time that an individual can provide services in a foreign country without being considered to create a PE, as well as specific provisions to limit the tax liability of a non-resident company providing services in a foreign country.

Some excluded activities

Some activities, said to be of a ‘preparatory or auxiliary character’, may be disregarded for the purpose of determining permanent establishment. Activities of preparatory or auxiliary nature are typically considered to be those that are necessary for the overall operation of a business, but are not its main or core activities. Examples of activities of preparatory or auxiliary nature include:

  • Administrative activities such as bookkeeping, accounting, and personnel management;
  • Support activities such as purchasing, storage, and distribution of goods;
  • Research and development activities that are not directly related to the production of goods or services; and
  • Marketing and sales activities that are not directly related to the negotiation or conclusion of contracts.


Is a remote worker’s home office a permanent establishment?

An employee working remotely may (inadvertently) create a material permanent establishment of their employer if the employee’s home office is considered to be a fixed place of business through which the employer’s business is conducted.

With respect to home offices, the main question that arises is whether or not the home office in question is at the disposal of the company. In principle, if the employee acquired their house or apartment independently (i.e. if the employer does not make it available to them or pay the rent), there will be no power of disposal over the home office because the employee can refuse the employer access and use.

However, there could be an implied power of disposal, even if the company does not have access to the home office. This is the case, for example, when the use of the home cannot be stopped unilaterally by the employee, and the actual decision-making power lies with the company (e.g. if the employee cannot freely decide to move). In addition, an implied power of disposal can also be presumed from the fact that the home office is an essential condition of employment. It is generally accepted that if the employee is not required to work from the home office (e.g. they are free to determine the place of work) then there is no power of disposal (and thus, in principle, no permanent establishment). It is therefore desirable not to explicitly include the employee’s address in the employment contract, but to indirectly indicate that the employee may work from their home office, as notified to the employer.

Depending on the importance of working from the home office, an implied power of disposal can also be presumed. For example, if an employee is hired locally, specifically to identify potential customers in their own home country (where the company is not otherwise present), a PE may arise. It is thus important to assess appropriateness of hiring the employee locally in the remote country.

In addition, it is also advisable not to intervene in the possible costs of the home office (e.g. by paying rent, electricity, gas, etc.). Also, it is desirable to avoid placing the home office address or phone number on business cards, websites, or any other communication channel, and to avoid organising meetings with clients in the home office.

Even if there is no material PE, any person (with the exception of an independent agent acting in the ordinary course of business) who has and habitually exercises the power to conclude contracts on behalf of the company will be deemed to be a PE of that company. Note that a PE can even be established if the employee concerned has the power to negotiate (most of) the elements of contracts, but does not have the actual power to sign it. In summary, if the employees have no power to negotiate or conclude contracts on a regular basis, then, in principle, there will be no personal permanent establishment. This could potentially cover the case of an employee working as a business developer.

As remote work becomes more prevalent, what does the future hold?

At the time of the pandemic, the OECD argued that the unique and temporary circumstances of the crisis should not lead to the creation of new permanent establishments, with many countries following that advice throughout the pandemic. It remains to be seen how the rise of telework in a post-COVID world will be perceived by national tax authorities in the long term.

In December last year, the European Parliament raised the issue of the tax challenges of cross-border teleworking, calling on EU member states to adopt a more coordinated approach. With personal and corporate income taxes at stake, we can only hope to gain clarity on the treatment of home offices for PE and tax purposes in the coming years.

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Sylvie Dumortier
Sylvie Dumortier
Partner - Belgium
Claeys & Engels