Two tax challenges of the novel coronavirus: permanent establishment and tax residency
With a large number of workers being asked to work from home due to the partial lockdown initiated in Switzerland, in-house tax teams may be faced with various tax questions.
One recurring questions appears to pertain to the tax liability of the employer in the event employees are sent home or are unable to travel to Switzerland and therefore have to work remotely: can this situation create the risk that the employer constitutes a permanent establishment (PE) in another Swiss canton or another jurisdiction with the result that a portion of the profits of the employer company being subject to tax in that location? Or is a company at risk of being considered being effectively managed from that location?
Permanent establishment (PE) and place of effective management
If a taxpayer creates a PE in another canton or jurisdiction, profit attributable to such PE is subject to tax in that canton or jurisdiction and also creates a filing obligation. Both in a domestic as well as international context, a permanent establishment is defined as a (i) fixed place of business (in another canton or jurisdiction) (ii) through which the business activity of an enterprise is wholly or partially carried on.
If employees are not allowed to travel to Switzerland or their usual work place and therefore have to work from home, solely due to the Covid-19 outbreak, does this create a PE of the employing company at the place of work of the employee? The short answer is that home office work solely caused by measures related to Covid-19 should not create a PE of the employer.
Firstly, the notion “fixed place of business” is generally interpreted in a broad manner and does not require that the company or employer owns real property or rents office space – meaning a home office can in principle be considered a fixed place of business. However, a PE requires a certain degree of continuance and is not triggered by temporary measures in order to prevent an excessive fragmentation of the tax liability. Secondly, from an international perspective, also the OECD believes that a home office should only be relevant if it is clear that the employer has requested the employee to constantly work from home (e.g., by not providing office space). Therefore, remote work or travel restrictions caused by measures related to Covid-19 should not create a PE.
Separately, one could also ask whether remote working or travel restrictions can create the risk that the place of effective management of a company is deemed to be in a different location, e.g. because key management meetings (or board meeting) cannot be held at the usual location. However, taking into account the relevant economic reality, it is difficult to see that a company would be deemed tax resident in another canton or jurisdiction solely due to the impact of Covid-19.
Finally, it is also worth pointing out that some foreign tax administrations have already published clarifying statements that they will not seek to argue the existence of a PE or even place of effective management for tax purposes solely due to the special circumstances under Covid-19. It remains to be seen whether this topic will also be clarified by Swiss tax authorities at some point in time.
Fabian SutterPartner Attorney at law, Swiss certified tax expert
Fabian Sutter, attorney at law and Swiss certified tax expert, is a partner in our Zurich office. He focusses on Swiss and international taxation, in particular corporate reorganizations and restructurings, M&A, financing and capital market transactions, transfer pricing, private equity, real estate transactions as well as tax litigation.T: +41434346700 E: [email protected]