The Covid-19 pandemic, and the consequent restrictions on freedom of movement imposed by the governments, are not likely to create changes to the determination of permanent establishment and to the tax residence status of companies due to the exceptional and temporary nature of the event.
This is what has been clarified by the OECD in its paper OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis, recently published on its website.
1. With regard to PERMANENT ESTABLISHMENT, the OECD notes that:
- the temporary home working of an employee, who is dislocated to a country other than the country in which he regularly works, does not create a permanent establishment for the employer in the country in which the employee is working from his home, since the home working is only exercised for a short period of time limited to the duration of the Covid-19 crisis, and it is due to force majeure and not to the enterprise’s directives;
- the temporary conclusion of contracts by an employee or an agent, on behalf of the foreign employer or principal, does not create an agency permanent establishment in the country in which the employee or the agent has concluded the contracts, since this activity is only performed for a short period of time limited to the duration of Covid-19 crisis, and it is not instead habitually exercised on behalf of the foreign company;
- the temporary interruption of the activities on a foreign construction or installation site due to the restrictions from Covid-19, should be computed in determining the duration test of the site (12 months or the shortest period of time set forth by the applicable international double tax treaty) and therefore will affect the determination whether the site constitutes a permanent establishment.
2. With regard to TAX RESIDENCE, the OECD notes that:
- he temporary physical presence on the Italian territory of foreign companies’ chief executive officers or other senior managers, who are unable to travel back to the foreign companies’ headquarters due to the restrictions from Covid-19, should not trigger a change in the residency status of the foreign company, provided however that the period in which the decisions relating to the business of the foreign company are taken in Italy by the aforementioned executives is limited to the duration of the Covid-19 crisis.