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Normalisation of new working conditions in a post-covid world

tax impacts


As the crisis extends, the exceptional measures pertaining to work conditions, implemented for directors and employees as a result of compulsory telework or travel bans remain in place. In addition, there are many directors and employees who now want their employer to normalise these new working habits.

Faced with such requests, companies must assess the multiple impacts and especially the potential tax consequences. Tax risk occurrence will generally depend on director/employee’s responsibilities, time spent abroad, tax rules of the relevant State and applicable tax treaties’ provisions.

1) Creation of a permanent establishment

In France, the place of operation determines the taxation of a company. When the presence of the employee or director in France reflects the habitual performance of an activity of the company in France, the profits associated with this activity are taxable there[1]. The activity might not be regarded as performed in a habitual manner if the presence of the employee or manager results from exceptional circumstances relating to the Covid crisis. But if the situation persists, the argument carries less weight. The provisions of a tax treaty signed by France may however prevent taxation. Such tax treaty will generally follow the OECD Model.

In April 2020, at the request of countries concerned by the impact of the crisis on international taxation, the OECD Secretariat published guidelines based on an analysis of the comments on the OECD Model Convention in April 2020.[2] Basing itself on the exceptional and temporary nature of the crisis, the Secretariat concluded that it was unlikely that the permanent criterion, necessary for characterising a permanent establishment (PE) leading to taxation of the company in the country where the employee works, would be fulfilled. However, in an update last January, the Secretariat stated that its analysis only applies to situations caused by the pandemic and while public health measures, imposed or recommended by public authorities (including travel restrictions), are in place.

Therefore, if an employee continues to work from home after the end of these public health measures, the situation could be regarded as sufficiently permanent to characterise a PE in the form of a fixed place of business. However, in order for a PE to be created, it would also be necessary for the home office to be considered as available to the company. This would be the case, a priori, if the company has required the person to work from home, for example by not providing an office to the employee in circumstances where the nature of the job would require it. The same criteria apply when the employee works from the premises of another subsidiary of the group or from shared offices.

The risk of creating a PE also exists when an employee habitually concludes contracts on behalf of the company or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise. Such an activity, carried out from abroad due to the Covid crisis, could be considered transitory and hence not habitual. However, the longer the situation persists, the more difficult it will be to justify the transitional nature, particularly if the activity is ultimately continued after public health measures are lifted. When assessing the risk of a PE, consideration must be given to the extent and frequency of the employee’s activity, the nature of the contracts and the activity of the company. In this regard, the OECD Secretariat invites States to refer in particular to the 6-month period generally adopted in practice by States to ascertain whether or not a PE exists.

2) Change in the tax residence of the company

The application of tax treaties is subject to the condition of residence of the company, which notably rests on its place of effective management, i.e. the place where strategic decisions are taken in terms of management and industrial or commercial policy and where, de facto, its management, administration and control bodies are located[3].

The relocation of company directors to a country other than that of their company’s registered office may therefore change the tax residence of this company for the application of the treaties. According to the OECD Secretariat, relocations due to the crisis should have no impact as this place of effective management should be understood as habitual or ordinary. A temporary situation would therefore not have to be considered. Here again, the time element is essential and time is playing against companies.

3) Risk relating to remuneration of employees

Companies will also have to pay attention to changes affecting the tax residence of their employees and the taxation of their remuneration. The social/tax obligations of these employees, as well as those of their employer, could be affected. Employees whose tax regimes are subject to a number of days spent in a State have a risk profile.

These in particular include employees seconded or assigned abroad within international groups. The tax treaties that follow the OECD Model provide that their remuneration is taxable in the State in which their activity is carried out when the employee spends more than 183 days there, the remuneration is paid by an employer who is a resident of that State, or the remuneration is paid by a permanent establishment which the employer has in this State[4]. In practice, withholding tax is often due in the State of activity by the subsidiary or permanent establishment of secondment and the double taxation eliminated in the employee's country of residence.

A review of the breakdown of days spent in each country and a review of the employee's residence may be necessary. These two criteria are likely to change the tax treatment applicable to salary and may require the revision of the pay procedures in place. It should be noted that in case of teleworking, the remuneration is considered to be sourced in the State where the activity is physically carried out.

Any changes could also have consequences in terms of social protection (social security rules being territorially applicable) and immigration.


These tax considerations should lead companies, after an in-depth analysis, to adopt rapid measures in order to avoid a tax risk. In particular, it is important to adapt the legal structure to these new working conditions (implementation or revision of staff provision contracts, service contracts), to implement internal procedures governing the functions of certain employees (particularly sales staff), to review the Group’s transfer pricing policies and, where applicable, to formalise the creation of a PE.

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Portrait of Agathe D'Aubigny
Agathe D'Aubigny