Teleworking from Spain for abroad due to Covid19: has a permanent establishment (PE) been created for the company?

Workers “trapped” in Spain because of Covid and teleworking from Spain for abroad: is it understood that a permanent establishment has been created in Spain? The Directorate General for Taxation has ruled on this question (in a case involving a UK company) in a very recent Binding Ruling by Spanish Directorate General for Taxation (Dirección General de Tributos, the “DGT”) (V0066-22, dated 18 January 2022).

The specific case

The taxpayer is an entity resident in the United Kingdom, with the possibility of obtaining the corresponding certificate of residence for the purposes of the Convention.

During the year 2020 and before, the applicant had an employee with a British nationality (hereinafter referred to as the employee) who was resident for tax purposes in the United Kingdom. He worked in London, where he exercised senior powers within the Consultant such as generating business for the Group in Europe and being a member of the project finance team.

He never undertook, nor had sufficient power to do so, the signing of contracts in the name and on behalf of the consultant.

The employee usually moved during weekends and holidays to Spain for personal reasons. In previous years, the employee worked from Spain on some days (usually Fridays). He owns a house in Spain.

As a consequence of the COVID-19 pandemic, the employee, who was in Spain in March 2020, was temporarily confined in Spain.

Once the confinement ended, he decided, unilaterally and for personal reasons, to stay in Spain. In these circumstances, he stayed more than 183 days in Spain during the calendar year 2020, carrying out his work as a consultant remotely.

During this time, the consultant did not bear any expenses related to accommodation in Spain, nor did she provide any additional remuneration for carrying out her work in Spain.

At the end of this period, the employee asked the consultant to be able to continue working from Spain, which the consultant refused, so the employee resigned in February 2021, terminating his status as an employee.

The consultant has not hired any other employee to move to Spain.

The question arises as to whether the consulting company is deemed to have a permanent establishment in Spain in 2020 by virtue of the fact that its employee remains in Spain in the circumstances described.

Application of the UK-Spanish Double Taxation Convention, Article 5.

Directorate General for Taxation Binding Ruling: teleworking (home office) from Spain and permanent establishment

If a person were to continue working from home after the cessation of the public health measures imposed or recommended by the government, such a home office could be considered to have a certain degree of permanence.

However, such a variation alone would not determine that the home office constitutes a fixed place of business (PE). Further analysis of the facts and circumstances of the case would be necessary to determine whether that home office is now at the disposal of the company following a permanent change in the mode of provision of services of that worker.

The DGT recalls that paragraphs 18 and 19 of the Commentaries to Article 5 of the OECD Model Convention note that whether or not the enterprise requires the employee to work from home is an important factor in making this determination.

Paragraph 18 explains that where the home is used on an ongoing basis to carry out an activity for an enterprise and it is clear from the facts and circumstances of the case that the enterprise has compelled that person to use that location (for example, by not providing an office to an employee when the circumstances of his or her work clearly require it), the home office may be considered to be at the disposal of the enterprise.

By way of example, paragraph 19 notes that where a cross-border worker carries out most of his work from his home in one jurisdiction, rather than from the office made available to him in the other jurisdiction, the home office should not be considered to be at the disposal of the company as the company has not required him to use his home for the conduct of his business.

Therefore, home-based teleworking by a natural person (i.e. home office) as a public health measure imposed or recommended by at least one of the governments of the jurisdictions concerned in order to prevent the spread of the COVID-19 virus, does not constitute a fixed place of business (PE) for the company/employer.

If, as in this case, the stay is extended beyond what the circumstances caused by COVID 19 required, the specific circumstances must then be analyzed, since there is now continuity. Accordingly, it must be determined whether the employee’s home office is at the disposal of the consulting company.

In this case, it should be noted that there has not been a permanent change in the way in which the employee provides his services to the company, since it is specified that this was the employee’s intention, not accepted by the company, which results in the termination of the employment relationship between the two.

On the other hand, there are a number of circumstances in this case:

– That the employee unilaterally decides to continue in Spain, when the measures that prevented him/her from leaving the country have disappeared,

– That the company has at the employee’s disposal a place that allows work to be carried out in person in the United Kingdom, and therefore has not required the employee to work from home,

– That the employer does not bear any costs, nor does it pay any special remuneration to the employee for the use of the home to carry out his work.

These facts lead to the conclusion that the office is not at the disposal of the company.

In conclusion, the Binding Ruling considers that, the stay of an employee in a home office, (teleworking from home), during the three months duration of the public health measures imposed or recommended by the relevant Government, to prevent the spread of the COVID-19 virus, would not create a fixed place of business for the company in Spain on its own, (along the same lines, the conclusion suggested in paragraph 19 of the OECD Secretariat’s report).

If such a stay were to be prolonged, it should be borne in mind that the existence of a permanent establishment is a matter of proof, based on the specific facts and circumstances, and that a place where the company’s business is conducted must have a certain degree of permanence and be at the disposal of the company, in order to be considered as such.