OECD update on tax treaties in times of COVID-19

The Organisation for Economic Cooperation and Development (OECD) published an updated Guidance on the impact of the COVID-19 pandemic on tax treaties.


    The current pandemic has brought many disruptions which have resulted in unprecedented measures and restrictions on travel and business imposed in most jurisdictions. On January 21, 2021, the OECD released a revisited version of its Guidance published in April 2020 to provide more certainty to taxpayers. It should be noted that the Guidance applies to situations arising during the COVID-19 pandemic and is meant to be only temporary. The updated Guidance cover the following issues: (1) the creation of permanent establishments (PE), (2) construction site PEs , (3) concerns related to change of residence , (4) concerns related to income from employment.

      The creation of PEs   

      Given the extraordinary nature of the COVID-19 pandemic, individuals working from home as a consequence to public health measures imposed or recommended by governments would not create a PE for the business or the employer. Similarly, the temporary conclusion of contracts in the home countries of employees or agents because of COVID-19 should not trigger the creation of PEs.

        Construction site PEs   

        The temporary interruption of the activities of construction sites might affect the duration in which such sites operate in a given jurisdiction. Generally, a construction site PE would not be regarded as ceasing to exist when work is temporarily interrupted. In light of the pandemic, the OECD encourages jurisdictions to exclude interruptions resulting from public health measures from the calculation of time thresholds for construction site PEs.   

        Concerns related to change of residence    

        The pandemic has raised concerns that the inability of board members or other senior executives to travel during these times may result in a change in the “place of effective management”. As per the OECD Guidance, given the extraordinary nature of the situation, it is unlikely that these temporary changes will impact the company’s residence.

        Similarly, it is unlikely that COVID-19 travelling restrictions will affect the treaty residence position of individuals. Many jurisdictions - Australia, Canada, Finland, Greece, France, the UK, the US among others - have already responded to growing concerns by publishing Guidance and administrative relief on the impact of COVID-19 on people’s residence status. The OECD Guidance encourages that competent authorities do not take into account a period in which public health measures were imposed or recommended when assessing a person’s resident status.   

        Concerns related to income from employment

        In principle, changes in the jurisdiction where an employee exercises their employment can impact where their employment income is taxed. The “place of exercise” test states that the source jurisdiction may tax the employee if the latter resides in the source jurisdiction more than 183 days. One exception under which days spent in the source jurisdiction would not count is when the employee is prevented from leaving and he would have otherwise qualified for the exemption. That being said, the OECD Guidance points out that it would be reasonable for a jurisdiction to disregard the additional days which a stranded worker spent in that jurisdiction as a result of COVID-19 measures. Note, however, that jurisdictions are free to take a different approach than the one recommended by the OECD.

        Lastly, the OECD Guidance has also confirmed that where an employee, resident in jurisdiction A, but who formerly worked in jurisdiction B, receives COVID-19 related government subsidy from jurisdiction B to maintain his relationship with the employer, the payment would be attributable to jurisdiction B (i.e. the work jurisdiction).

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