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Tax
Taxing times with remote working
By Paul McGonigal, Senior Manager, PwC
The global pandemic has resulted in an increasing number of employees working from home either on a part- time or full-time basis. This change in working pattern has principally been the result of “lockdown” and other restrictions imposed by governments around the world in response to the pandemic. However, it is likely that a number of employers will continue to provide employees with the flexibility to work from home post Covid-19. The seismic shift to remote working may result in unintended tax consequences for employers particularly in the context of cross-border or frontier workers. Could employees working from home inadvertently create a permanent establishment for tax purposes or impact on the corporate residence position of a company? The tax residency of individual employees may also be impacted.
Could remote working create a permanent establishment? The increase in home working raises the question as to whether a company could be deemed to be carrying on its business in another country as a result of employees working from home and create a “permanent establishment” in the country where the employees live? A permanent establishment may result in tax liabilities and other compliance obligations for the non-resident company. This may be relevant for Gibraltar companies with employees working from home in Spain, the UK or other countries.
A company may create a permanent establishment if it wholly or partly carries out business via a fixed place of business in a country. Employees or other authorised person(s) regularly concluding contracts in another country on behalf of a non-resident company could also create a permanent establishment. OECD guidance suggests that exceptionally working from home or
exceptionally concluding contracts from an employee’s home as a result of Covid-19 restrictions, should not in itself create a permanent establishment.
As with many areas of international tax, the rules relating to permanent establishment are complex and the answer may not be straightforward. Governments are likely to show some flexibility towards the strict application of permanent establishment rules as a result of the unprecedented circumstances which have arisen as a result of the pandemic. Consequently, employees working from home, meetings being held and / or contracts being concluded in a particular country on a temporary basis as a result of Government restrictions may not trigger a permanent establishment.
However, the longer that the pandemic continues, working from home arrangements become more habitual in nature increasing the risk of a permanent establishment being created.
The position is further complicated by the fact that the level of Government restrictions has changed during the course of the pandemic with working from home being compulsory during some periods and optional in others. The roles being undertaken by employees working from home also needs to be taken into account. The risk of a company creating a permanent establishment is likely to be higher if for example company directors and other senior staff members are working from home in another country.
Tax residency for companies
The definition of residency varies across jurisdictions. In Gibraltar there is no incorporation test and a company is considered to be resident in Gibraltar for tax purposes if:
l the management and control of its business is exercised from Gibraltar; or l the management and control are exercised outside Gibraltar by persons who are ordinarily resident in Gibraltar.
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26 Gibraltar International
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