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May 13, 2021

PE Watch: Latest developments and trends, May 2021

PE developments in response to COVID-19

Canada: Updated guidance on COVID-19 and PEs

On 1 April 2021, the Canadian Revenue Agency (CRA) updated its guidance on international income tax issues raised by the COVID-19 crisis. Among other items, the guidance clarifies the CRA’s position regarding the effect of travel restrictions on permanent establishment (PE) in Canada.

First, the relief period (from 16 March until 30 September 2020) is no longer applicable to cases  regarding whether a nonresident employer has a fixed place of business (e.g., home office or other workspace) in Canada. However, the CRA provides that the application of the relevant tax treaty provisions will not result in the finding of a PE because working remotely from home will generally not be sufficient to meet the PE requirements. Although this conclusion may change should the employee continue to work remotely after the lifting of the travel restrictions or if the employee and their nonresident employer take action to establish the workspace in Canada as an office of the nonresident employer.

Second, the updated guidance clarifies that the habitual requirement provided in the Agency PE provision would not be met where an individual has the right to conclude contracts on behalf of the nonresident employer and is doing so from Canada solely because of the travel restrictions. This conclusion could also change if the employee remains in Canada after the lifting of the travel restrictions and continues to exercise the right to conclude contracts in Canada.

Third, the guidance also addresses Service PE. In those cases, each individual needs to examine whether it meets the relevant tests (day test and gross active business revenue test). Most of the employees would not meet these tests if they are not working on projects for Canadian customers.

Finally, the guidance clarifies that these conclusions would also be generally applicable with respect to employees that, before the COVID-19 crisis, were employed in a country other than the United States.

The CRA, on 27 April, again updated its guidance on international income tax issues raised by the COVID-19 crisis. This update provides a list of questions and answers to clarify the application of the guidance to cross-border workers and other issues. Among others, the questions cover: (i) whether working from home may cause a taxable presence in Canada through the creation of a PE; (ii) whether days spent in quarantine should be counted as workdays; and (iii) how to determine the date of the lifting of the travel restrictions.

Finland: Guidance on COVID-19 and PEs

On 19 April 2021, the Finnish Tax Authorities released guidance on the impact of the COVID-19 restrictive measures and the interpretation of tax treaties. The guidance includes references to Home Office PE, Agency PE, and Construction PE. Employees from a foreign entity working from home in Finland due to entry restrictions in the jurisdiction of residence or recommendations from the government to telework from home, would not create a PE provided the work is not continued after the restrictions are lifted. Likewise, if a person acting on behalf of a nonresident entity exercises his/her authority to conclude contracts in Finland as a result of the restrictions arising from the pandemic and provided that such authority to conclude contracts does not continue after the COVID-19 related restrictions are lifted, the conclusion of contracts would not result in a PE. With respect to a Construction PE, interruptions at a construction or installation site due to government restrictions (either in Finland or another jurisdiction) would not be included to determine the time threshold for a Construction PE.

The guidance is applicable as long as the nonresident entity provides to the Finnish tax authorities specified clarification and supporting documentation, e.g., certificate that the construction site is closed due to government measures. A mere general reference to the pandemic would not suffice to apply the guidance.   

Germany - Switzerland: Updated mutual agreement on frontier workers

On 27 April 2021, Germany and Switzerland signed an updated mutual agreement on their 1971 tax treaty. The mutual agreement mainly revolves around frontier workers and it was initially concluded on 11 June 2020 as a response to the COVID pandemic. The mutual agreement was then updated on 30 November 2020 to extend its application until 31 March 2021. The latest update of the mutual agreement application extends it to 30 June 2021 and adds a new section on the application and interpretation of Articles 5(1) and 5(4) of the German-Swiss tax treaty (permanent establishment/fixed place of business) with respect to home office PEs. Accordingly, employees carrying out their activity in their home office in their country of residence solely as a result of the pandemic will generally not constitute a home office PE for their employers.

Other PE developments

Belarus: Guidance to clarify the taxation of PEs in Belarus

On 29 April 2021, the Belarusian Ministry of Tax and Duties issued guidance letter 4-2-15/00981 to clarify the taxation of nonresidents operating through a PE in Belarus. The guidance provides that when a nonresident renders services in Belarus for 180 days in a 12-month period, (whether continuously or in the aggregate) such presence would create a PE. Likewise, a building or construction site or installation project would be recognized as a PE if the time spent by the nonresident is 180 days in a 12-month period. Both preparatory or design work outside of Belarus or time spent on other sites or projects unconnected should not be taken into account in determining the time threshold for a Construction PE. Further, a building or construction site or installation project exists from the date when the certificate of transfer of the site to the contractor is signed or the work begins in Belarus. Conversely, it would cease to exist on the date of actual completion of work, i.e., the date when the client signs the certificate of acceptance of the work.

The guidance also clarifies Agency PE. Accordingly, there would not be a PE if an agent is acting in the ordinary course of his/her business. An agent is acting in the ordinary course of his/her business depending on the independence of the agent (e.g., if the agent is not subject to detailed instructions by the nonresident and he/she bears the entrepreneurial risk). Moreover, preparatory and auxiliary activities, which for example include storage, display, or delivery of goods belonging to a nonresident, would not create a PE in Belarus.

In addition, the guidance explains the registration and taxation of PEs. For the registration of PEs, the guidance lists different scenarios, including the registration of a PE before carrying on activities in Belarus. With respect to taxation, PEs are subject to Value Added Tax (VAT) and Corporate Income Tax (CIT). For CIT purposes, the guidance provides that expenses incurred by the nonresident outside Belarus and allocated to the PE must be confirmed by an auditor or a tax adviser from the nonresident’s jurisdiction and submitted to the Belarusian tax authorities.

Denmark: Employee working from home does not create a PE for a nonresident employer

On 16 April 2021, the Danish Tax Board (DTB) issued a binding tax ruling analyzing whether an employee working from home in Denmark creates a PE for a nonresident employer. In this case, an employee of a United Kingdom (UK) entity develops software and his role can be performed anywhere. In addition, the employee’s role does not have a sales function or any connection with Denmark or the Nordic region, i.e., no interaction or intention to approach Danish or Nordic customers. Due to personal reasons, the employee (Danish citizen) wants to return to Denmark permanently and live with his family. Hence, the nonresident entity in the UK asked the DTB whether the employee would create a PE. The DTB concluded, in line with previous rulings, that the employee would not create a PE for the nonresident entity since the nonresident entity has no interest or benefit from the work being performed from Denmark. Furthermore, the decision to live in Denmark was based on personal reasons and never imposed by the nonresident entity.

India: Thresholds for the Significant Economic Presence (SEP) provision

On 3 May 2021, India published in the Official Gazette a notification (the Income-tax (13th Amendment) Rules, 2021) prescribing the revenue and user thresholds for applicability of the Significant Economic Presence (SEP) provisions under Indian tax laws with effect from 1 April 2022 (i.e., tax year 2021-22 onwards).

The SEP provisions may trigger taxable nexus of a nonresident in India where such nonresident carries out transaction in respect of goods, services or property with any person in India, including digital transactions such as provision of download of data or software, if the aggregate of payments arising from such transactions during relevant tax year exceeds the prescribed threshold of INR20 million (approximately US$280,000). Alternatively, SEP may also be triggered if the nonresident undertakes systematic and continuous solicitation of its business activities or engages in interaction with more than 300,000 users during the tax year. If one of the two thresholds is met, the business profits of a nonresident will be subjected to source-based taxation in India. However, the SEP provisions do not override a tax treaty, which follows the traditional PE definition. Hence, unless the tax treaty is renegotiated to include provisions similar to the SEP, the SEP provisions in the Indian domestic laws may not impact nonresident taxpayers from treaty jurisdictions.

See EY Global Tax Alert, India issues thresholds for triggering “significant economic presence” in India, dated 10 May 2021.

Saudi Arabia: Circular on the force of attraction to PEs

On 12 April 2021, the Saudi General Authority of Zakat and Tax published a circular clarifying the application of the force of attraction (FoA) rule in the context of PEs. The circular addresses the following three scenarios: (i) application of the FoA when there is no tax treaty between the head office’s jurisdiction and Saudi Arabia; (ii) application of the FoA when the tax treaty between the head office’s jurisdiction and Saudi Arabia includes an FoA provision; and, (iii) application of the FoA when the tax treaty between the head office’s jurisdiction and Saudi Arabia does not include an FoA provision.

Regarding the first scenario, since there is no tax treaty, only the Saudi domestic law applies which contains an FoA rule. Accordingly, income that is facilitated by the PE for similar activities or for sales directly realized by the nonresident could effectively be attributable to the PE and taxed in Saudi Arabia. For the second scenario, Saudi Arabia has 14 tax treaties with an FoA provision which is similar to the one provided in the United Nation Model Tax Convention. In those cases, Saudi Arabia may tax the profits directly attributable to the PE, the sales in Saudi Arabia by the nonresident of the same or similar goods sold through the PE and profits from other business activities in Saudi Arabia rendered by the nonresident which are of the same or similar kind to those rendered by the PE. Lastly, in the third scenario, the Circular explains that only income directly attributable to the PE can be taxed by Saudi Arabia.

See EY Global Tax Alert, Saudi Arabia clarifies permanent establishment force of attraction rules, dated 30 April 2021.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, Rotterdam

Ernst & Young Belastingadviseurs LLP, Amsterdam

Ernst & Young Solutions LLP, Singapore

Ernst & Young LLP (United States), Global Tax Desk Network, New York


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