As detailed in part one of this two-part series, the COVID-19 pandemic has resulted in significant disruption to international travel and business operations, including the location of directors, employees and other individuals.

With that in mind, KPMG firms across Europe recently took part in an internal survey to understand how local tax authorities expect to deal with cross-border employee situations in the new reality. With the possibility of telework continuing after the current restrictions are lifted, either as a choice of the employee or as a requirement of employers, this survey focuses on two main tax topics – the permanent establishment exposure triggered for the employer and dual corporate tax residence risks. The responses received should be read in conjunction with the recent Organisation for Economic Co-operation and Development (OECD) guidelines on interpretation of tax treaties. For additional information on this, please refer back to the first part of the series. 

Survey results

This informal survey was conducted in February 2021 and covered 20 European countries, namely Austria, Belgium, Croatia, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Iceland, Italy, Luxembourg, Malta, Norway, Portugal, Romania, Slovakia, Sweden and the UK.

Permanent establishment exposure triggered by using a home office (fixed placed of business test)

In the first section of the survey, there was a strong focus on country specific risks triggered by remote work. Questions were aimed at assessing the likelihood of individuals working from home offices passing the fixed place of business test, and the resulting permanent establishment exposure in the country in which they are based.

Existing PE rules will continue to apply

A vast majority of jurisdictions are expected to follow existing guidance or apply general permanent establishment rules. Only 20 percent of the respondents, representing four countries, reported that their local government or tax authorities issued opinions on the fixed place of business exposure triggered by teleworkers, illustrating a degree of certainty. Out of these, only two countries mentioned measures specifically targeted at exceptional situations, where travel is limited due to governmental restrictions. For the other two jurisdictions, it is expected that the guidance in place before COVID-19 will continue to apply. A further 30 percent of respondents, representing six countries, expressed uncertainties on how their local tax authorities would approach the topic in a post COVID-19 world.

When asked about the general criteria that should be considered when analyzing the permanent establishment exposure triggered by teleworkers, almost all respondents reported that they are likely to follow the OECD Model Treaty and the related Commentary to some extent. Depending on the jurisdiction, this approach may be based on existing domestic guidance based on OECD guidelines, pre-COVID-19, due to clear indications that tax authorities and local courts are likely to refer to these, or simply by virtue of the country being an OECD member. While the specifics differ from country to country, and the facts and circumstances must be analyzed for each case, in practice, the following scenario appears to lead to an increased risk that a home office may be deemed to be a permanent establishment:

  1. a place of business
  2. that is fixed (implying a certain degree of permanence and continuity) and
  3. at the disposal of the foreign employer,
  4. through which the foreign company conducts its business.

Further factors may be relevant in assessing the above scenario, such as whether the home office is an essential condition of the employment contract, whether the employee is free to choose the location, or whether the employee is remunerated for the rent, as an example. When looking at how the permanent establishment exposure differs based on who decided to implement the teleworking structure, 40 percent of the countries reported that risk is reduced when the decision to use a home office comes from the employee, as opposed to being a mandatory requirement from the employer’s side. This approach is consistent with OECD’s recommendations included in the Commentary to the Model Treaty.

It is important for such factors – or any other factors that local tax authorities consider relevant based on local law, guidance and case-law – to be considered on a case-by-case basis in light of the facts and circumstances surrounding each case. 

Permanent establishment exposure triggered by a dependent agent 

Countries were then surveyed to understand local rules and tax authority approaches when it comes to individuals acting as dependent agents for their foreign employer.

Work from anywhere

A large majority (90 percent) of respondents confirmed that, under domestic tax rules, an agency permanent establishment is typically triggered when an individual has the power to habitually conclude contracts or where they habitually play the principal role leading to a conclusion. Of course, facts and circumstances should be taken into consideration, but this approach reflects the OECD’s guidance, which reiterates that the “habitual” element of the dependent agent permanent establishment test will need to be considered carefully in cases where individuals working from a different jurisdictions conclude contracts on behalf of the company.

In instances where employees will continue to work in their home jurisdiction after COVID-19, the OECD states that it would be more likely for the individual to be considered to meet the “habitual” criterion. The report further makes reference to the Commentaries applicable pre-COVID-19, where the OECD recommends that the facts and circumstances of each case are considered. This includes the involvement of the individual in contracting activities, and the specifics of the contracts once concluded.

Case by case analysis

Consistent with the OECD Commentary to the Model Treaty, countries reported that, under their domestic rules, the length of time spent by individuals working in a jurisdiction other than the one where their employer is based is not relevant, if taken into account by itself. It may represent a risk factor for 65 percent of the responding countries, but only in conjunction with other elements being met. And again, a case by case analysis is required before concluding on this factor.

Dual residence considerations

Lastly, the third part of this survey placed focus on the residence status of a company. 

permanent establishment and dual tax residence impact

Chief Executive Officers or other senior executives working remotely, from a country other than the one in which the company is tax resident, are likely to trigger dual residence issues in 65 percent of the responding countries. On the other hand, 10 percent of countries would not face this risk, as they do not use the concept of effective place of management to determine the tax residence of a company. For these latter countries, a permanent establishment might nevertheless be triggered.

All responding countries noted that under their domestic rules, there are no quantitative criteria to be used when determining the place of effective management, such as permanency, percentage of time or number of days per week spent working from a home office. Instead, a case-by-case analysis, taking into account all facts and circumstances, should be performed.


The main preliminary conclusion of this high-level exercise is that a detailed case-by-case analysis should be performed to assess potential permanent establishment exposures or dual residence risks and that all facts and circumstances applicable (e.g. role of the personnel in the organization, contractual provisions included in the individual employment agreement, etc.) should be considered. Whilst existing guidance included in the OECD Commentaries may be useful in evaluating the “new normal,” the Commentaries were designed to address an environment where office work was the norm and employees had little influence on deciding their location during the work week. As such, additional guidance on the tax implications of teleworking arrangements would be highly welcomed, as this would bring more clarity and also facilitate a risk analysis when implementing organizational changes.

Businesses may also consider undertaking assessments on the implications on their obligations related to VAT, personal income tax and social security contributions. There may be instances where, even if the conclusion of the permanent establishment analysis is that no taxable presence is triggered for the non-resident employer in a country where an individual is permanently based, the employer nevertheless has payroll reporting and payment obligations in that country. A holistic assessment is therefore preferable.


Raluca Enache, Director, KPMG's EU Tax Centre

Ana Puscas, Manager, KPMG’s EU Tax Centre