Company workers who must work from home in a separate jurisdiction from where their business is based face a number of problems in light of the current Covid-19 outbreak.
Some of their staff are required to work remotely from their French homes, thus many businesses have begun to worry about the repercussions of obtaining permanent establishment designation in France. As a result of the emergency health measures taken and/or travel prohibitions, may foreign firms whose directors are quarantined in France as a result of a French place of effective management be judged to have changed their tax residence? Finally, should wages received from France during times of remote labor now be subject to French taxation?
Over the last few days and weeks, the OECD and different national tax authorities have provided answers to the questions surrounding the reporting and tax duties linked to the recognition of a taxable presence in France.
Workplaces in the State that allow workers to work remotely from a fixed location
For the record, all businesses doing business in France are subject to French corporate income tax under French domestic law1. France has signed double tax treaties with several countries, but virtually all of them limit France’s ability to tax the income of international corporations to those with a physical presence in France.
What is meant by a “permanent establishment”?
All or a portion of a company’s operations conducted outside of the state in which it is incorporated, via a permanent business location;
The state in which a firm is represented by a dependent agent authorized to complete transactions in its name may be considered to have a permanent establishment in the lack of a physical location. Dependent agents may also be considered a permanent establishment under several recent tax treaties (or recently updated treaties) when, in the lack of explicit permission to sign contracts, they perform the primary role in facilitating foreign companies’ dealings with their domestic counterparts.
Since earnings due to a permanent establishment are only taxed in the state in which it is located, the business’s recognition establishes a taxable presence beyond the employer’s home state. In line with the regulations of that state, this local tax levy is calculated and collected (account-keeping obligations, filing of tax returns and payment of the corresponding taxes).
Since these requirements take into account the ongoing presence of workers who must work from their French home owing to health emergency measures, it is possible that they may be considered permanent establishments in France.
Is a home office considered a place of business if it is located in your house?
When the following requirements are satisfied, an office in an employee’s home may qualify as a permanent establishment:
There is a degree of permanence to the main office, and the work that takes place there is part of the company’s core business (the activity is not merely preparatory or auxiliary).
For example, if an employee’s house is used by their employer for business reasons, this does not always mean that the firm has a “disposal” of this property.
A lengthy period of time spent at the house of a foreign company’s activities in France may constitute a permanent presence in France, according to French case law.
As a result of this outbreak’s pandemic-related conditions, the OECD has had the chance to clarify its position on remote employment, which was forced by circumstances beyond the control of the employer. To put it another way, despite the fact that the company may have a presence of distance-working workers in their home country for a lengthy period of time (objective criteria), the employer has never planned to build a fixed place of business in that State (OECD affirms this position) (subjective criterion). As long as there isn’t any subjective criteria in place, the OECD will typically recognize that the location where a person is working doesn’t always represent a permanent business. It is also acknowledged by the OECD, however, that this “office” may not truly be regarded to be accessible or controlled by the employer.
In the present setting of a pandemic, business travel is closely monitored (if not forbidden) by the many afflicted States, therefore this evaluation is obviously only true in the current environment. However, it should be noted that if foreign businesses continue to employ workers remotely from France (or any other country) for an extended period of time, they may face a real danger of being recognized as permanent establishments in France (or in the relevant State).
Irish Revenue and the Australian Taxation Office have already adopted the OECD standards.
A bona fide taxpayer may be excused from formal requirements or substantive restrictions by virtue of force majeure under French tax law, which already takes this into account, in accordance with the logic of the OECD. In accordance with the regulations announced on March 25, 2020, intended at minimizing the impact of the pandemic on the taxes of French taxpayers, this certification would be in line.
For VAT purposes, the permanent establishment (fixed establishment) must be of “a certain minimum size and both the human and technical resources necessary to provide the services must be permanently present” if a foreign company is liable for VAT outside the state where it has its registered office. In fact, a completely temporary home office would not fulfill the requirements to be considered a permanent establishment for VAT purposes during the present quarantine period.
The French tax authorities should thus reaffirm the OECD’s current guidance on this matter in order to clarify their stance on this matter.
Is a remote employee from France considered a “dependent agent” by the company?
An employee’s regular contract closings in his or her employer’s name and on behalf generate a permanent establishment for the business under the terms of double tax treaties constructed on an OECD model.
As a result, it’s critical to determine whether or not the employee engages in these actions on a frequent basis. Both the French tax authorities and the OECD believe that the existence of a dependent agent provides a certain level of stability in this situation.. A danger of permanent installation does not arise immediately from a temporary assignment.
The OECD also believes that if an employee (or another dependent agent) works from their home in France for a short period of time and only due to a force majeure case and/or regulations imposing a certain degree of permanence on the activity carried out in France, the activity is not considered “usual” (quarantine at home for the employee, place of work inaccessible due to a travel ban).
The presence of personnel who are authorized to sign contracts on behalf of their company or whose activity is important to the completion of such contracts in France should not constitute a permanent establishment for their employer if their activity in France is confined to the present period.
In other words, if these workers continue to engage in this activity in France after the present crisis has ended, their firm faces a significant danger of identification as a permanent presence in France.
Tax residency dilemmas for corporations
Concerns concerning business tax residency may potentially arise as a result of the present epidemic. It’s true that a firm is a resident of the state where its seat of effective management is situated. In order to run a successful firm, essential management and commercial decisions must be made in one central location.
Since many firms’ boards of directors, supervisory boards, and general meetings gather in distant locations, there is fear that their tax residency may be in doubt. However, we doubt that the Covid 19 epidemic will bring about such a shift.
For starters, the French tax authorities typically believe that a company’s effective management headquarters is the one mentioned in its articles of organization and that it is only in the event of fictional circumstances that a different address should be used. As a result, the location of a company’s registered office is not fictional even if the company’s management bodies relocate temporarily due to the present condition of health emergency.
In addition, the OECD reminded that all relevant facts and circumstances, even unique circumstances like the present epidemic, must be evaluated in order to ascertain the “usual” and “ordinary” location of the real seat of administration. Ireland’s tax authorities agree to overlook temporary presence in Ireland (for foreign enterprises) or in other jurisdictions (for Irish companies) if this is directly tied to the current epidemic, such as international travel limitations (travel bans).
Companies’ management bodies will need to convene and make strategic decisions at their headquarters more rigidly when the present crisis has passed. There is a risk that the french taxes for non residents of these firms might be questioned by the tax administrations of States that would want to tax these companies’ earnings in their respective jurisdictions if such preventive steps are not taken.
Taxation of wages may be affected by working from home.
When an employee works in State B but is tax resident in State A, tax treaties between the two states generally stipulate that the employee’s wages are only taxable in the state in which the employee is a resident, provided, however, that the three cumulative conditions of the so-called “temporary assignment” clause are met:
There are no permanent establishments of the employer in State B, and the employee spends fewer than 183 days per year working in State B (the state of activity). If this is the case, the State of activity may theoretically tax the wages associated with “local” working days, resulting in a tax credit that the employee may use to balance his or her tax bill in the State where they live.
Cross-border workers may also benefit from special provisions in several tax treaties (France-Germany, France-Switzerland and France-Luxembourg treaties in particular). Since January 1, 2020, French cross-border employees may work remotely for their Luxembourg employer for up to 29 days without being taxed in France for the corresponding salary.
As a result, quarantine in one or both states may have the following outcomes, depending on the specifics of the situation:
It’s possible that if any of the above time limitations are breached, the workers and employers involved might face a variety of tax implications, including a move to the state where they spent their quarantine days (a quarantine overseas). If this is the case, employers may be required to withhold income tax in a different manner (e.g. PAYE).
In the first instance, it’s safe to assume that the days spent in quarantine won’t be taken into account when determining one’s tax residency. Temporary stays in France, whether due to quarantine or travel limitations imposed by the nation of residence of specific persons, should not result in tax residency being recognized in France, according to French tax authorities.
The thresholds for “temporary assignment” provisions and the particular thresholds for cross-border employees may not be modified by the new regulations. The French and Luxembourg governments, for example, have decided not to consider the days spent in quarantine in this maximum 29-day time period, so order to maintain – as much as possible – the status quo for the employees in issue.
Simple tax issues may be avoided if the “temporary freezing” alternatives for taxpayers and employers working in good faith were made more widely available. It would be really appreciated if the French tax authorities could affirm this idea.