Impact of governmental measures on the application of double taxation treaties

In response to the extraordinary governmental measures adopted in the context of the COVID-19 pandemic (e.g. restriction of travel, quarantine), the OECD has released a recommendation to address certain tax implications of a temporary change of the place of work or residence. Indeed, the measures might affect the State’s taxation rights under international tax treaties.

Tax domicile

The OECD recommends that for the purposes of double taxation treaties, cross-border employees should not be considered tax residents of the country where they have temporarily dislocated only for reasons related to the COVID-19 measures.

In determining the tax domicile of legal entities, the temporary governmental measures related to the COVID-19 pandemic should not, according to OECD, affect the determination of the place of actual management of the company if, for these reasons, the company is temporarily managed from another country.

Permanent establishment

The OECD contends that temporary work from home in a country other than the employer’s domicile should not create new permanent establishment. Activities performed by a dependent representative who temporarily concludes contracts on behalf of a taxpayer from another country should not give rise to a permanent establishment in the country where the contracts are temporarily concluded either. This, however, does not apply if the dependent representative already regularly concluded contracts on behalf of the taxpayer in his home country before the adoption of the COVID-19 measures. On the other hand, temporary interruption of work on construction and assembly projects should not interrupt the running of the period decisive for assessing whether a permanent establishment has been created, i.e. whether the construction site is a permanent establishment, and should thus be included in this period.

Place of taxation of financial compensation or other contributions in lieu of wages

Where the employer provides a financial compensation or some other contribution in lieu of wages under a State aid program in the framework of governmental measures to mitigate the impact of COVID-19, such income should be considered income from employment and taxed in the country where the employee usually performed his/her work before the crisis.

The analysis is based on the wording of the OECD Model Tax Convention; nonetheless, the interpretation of the term “temporarily” will be important in specific cases and it will also be necessary to take account of the wording of the relevant bilateral treaty and applicable national legislation.

Some Member States (e.g. Slovakia) have already confirmed that they will proceed in accordance with the above-mentioned OECD recommendations. As far as we are aware, the Czech tax administration intends to proceed exclusively based on double taxation treaties for the time being and does not plan to change this approach, not even temporarily.

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