Tax, COVID-19, and international structures and work patterns
The COVID-19 crisis and restrictions on international mobility affect a number of tax rules relating to international structures and work patterns. The Danish Tax Agency has now issued guidelines describing how the crisis affects Denmark’s interpretation of double taxation treaties in relation to permanent establishment, place of management, natural persons’ tax residence, and income from employment earned by natural persons working in more than one country.
With the guidelines (SKM2020.298.SKTST, in Danish), the Tax Agency generally consents to the OECD's conclusions about the effect of the COVID-19 crisis on rules in the four areas. The guidelines are subject to the reservation that specific conflicts between Denmark and another country can still be solved by other means than provided in the guidelines.
Foreign entities and associations, etc. are liable to tax in Denmark if they carry on business from a permanent establishment in Denmark (see section 2(1)(a) of the Danish Corporation Tax Act and Article 5 in the OECD Model Tax Convention).
In the Tax Agency’s view, the fact that employees work from another jurisdiction than they normally would as a result of the COVID-19 crisis does not create a permanent establishment abroad if the company does not already have a permanent establishment in the relevant country.
Article 5(5) in the OECD Model Tax Convention provides that where a person, including an employee, acts on behalf of an undertaking and, in doing so, habitually concludes contracts or plays the principal role leading to the conclusion of contracts, that undertaking may in some cases be deemed to have a permanent establishment.
Where such persons, in exceptional and temporary circumstances, perform their work from another jurisdiction than they normally would due to the corona virus crisis, the undertaking will not – in line with the above – be deemed to have a permanent establishment abroad, unless these persons already meet the conditions for a permanent establishment.
Building, construction or installation projects
Article 5(3) of the OECD Model Tax Convention provides that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than 12 months. Under section 2(1)(a), sixth sentence, of the Danish Companies Act, a building, construction or installation project is deemed to create a permanent establishment from the first day.
The corona situation makes it relevant to consider the impact of temporary interruptions of construction works, etc. The OECD notes in this respect:
“A site should not be regarded as ceasing to exist when work is temporarily discontinued. Seasonal or other temporary interruptions should be included in determining the life of a site. Seasonal interruptions include interruptions due to bad weather. Temporary interruption could be caused, for example, by shortage of material or labour difficulties.”
According to the Tax Agency, temporary interruptions caused by the corona virus crisis should be included in the duration of the work and may therefore be taken into account when assessing whether a permanent establishment exists.
Companies – place of management
Foreign companies and associations, etc. are subject to full tax liability in Denmark if the management is based in Denmark (see section 1(6) of the Danish Corporation Tax Act and Article 4(3) of the OECD Model Tax Convention).
If, due to the corona situation, the company’s effective management is affected by travel restrictions and temporarily has to make its decisions in another jurisdiction than it normally would, then the place of management will, according to the Tax Agency, not be deemed to have been changed considering the temporary and extraordinary nature of the situation.
Natural persons – residence
According to Article 4(1) of the OECD Model Tax Convention, a natural person has tax residence in a country if that person is liable to pay tax in the country by reason of his domicile, residence or any other similar criterion. The tax residence is important when determining each country’s taxing rights for persons who are resident in more than one country.
Natural persons with a dual residence who, due to the corona situation, are staying temporarily in a country will, according to the Tax Agency, “probably” not be deemed a tax resident in that country. When determining where a natural person is resident for tax purposes, the decision will be based "on an assessment of the factual circumstances in the specific situation…".
As regards the length of the stay, it is, however, stated in the guidelines that “where a person, due to the corona situation, stays temporarily in a country, such stay will not be deemed by the Agency to constitute a habitual stay...”.
Income from employment
In situations where an employee is resident in one country and works in one or more other countries, the Tax Agency refers to the general rules on taxation of income from employment, noting that it will “depend on the specific circumstances whether the taxation of remuneration for personal work in an employment relationship will be changed in practice as a result of the new work situation caused by the corona virus crisis.”
In situations where the employee has been temporarily furloughed due to the corona virus crisis with no right to work and where the employer is reimbursed for part of the salary to avoid a layoff, the income should, according to the Tax Agency, be taxed as if the employee had been given notice of termination. The right to taxation will then be divided between countries “based on the historical work pattern” in the current employment and the employee’s job function at the time when he is furloughed.
If the employee performs work during the furlough period, the general rules will apply.