International Remote Work

Globally, we are seeing more and more companies enabling remote work as it drives employee expectations of flexibility in a market where 71% of CEOs cite global labor/skills shortage as their top external challenge to business strategy¹, and where employee retention is increasingly challenging.

However, as companies consider rolling out international remote work policies to meet talent pressures, many organizations are experiencing tension when designing a policy due to competing priorities between talent demands and risk mitigation.

When considering risks, there are many aspects to consider, such as tax, social security coverage, and employment law just to name a few, and one big risk factor that looms over international remote work is the creation of a permanent establishment in the employee’s (remote) country of work. The creation of a permanent establishment may cause the company to inadvertently be liable for income tax in the foreign country, regardless of whether the company has established an entity there or not.

Under Norwegian domestic law, a foreign company is liable to tax in Norway when engaged in a business that is either conducted or managed in Norway (ref. §2-3, paragraph 1 (b) of the Norwegian Tax Act). If a company (or self-employed person) resides in a country with which Norway has entered into a tax treaty, the condition for tax liability in Norway is that the business income originates from business activity that is carried out through a permanent establishment in Norway. With respect to the tax treaties, the Norwegian tax authorities will, to a large extent, follow the OECD commentaries when interpreting the relevant tax treaty, provided the wording is similar to the OECD Model Tax Convention.

In short, a permanent establishment means that the company has a fixed place of business through which they run the business all or some of the time. Traditionally, this has meant a place of management, a branch an office, or a factory. However, with the increased demand for remote work and work-from-home, the question arises: What can constitute a fixed place of business, and can work from home create a permanent establishment for a foreign company?

For employees working remotely from Norway, the tax authorities have not yet given clear guidance on the matter. The tax authorities in other countries, such as neighboring Sweden, have recently given clearer statements. On May 13th, 2022 the Swedish Tax Agency released a statement made in light of the 2017 version of the OECD commentary to the Model Convention regarding home office-driven permanent establishments.

The 2017 OECD model commentary

Article 5 of the OECD Model Tax Convention gives a general definition of the term permanent establishment, defining it as a fixed place of business, through which the business of an enterprise is wholly or partly carried on. This definition, therefore, contains the following conditions:

• the existence of a “place of business”, i.e., a facility such as premises or in certain cases instances, machinery or equipment;
• this place of business must be “fixed”, i.e., it must be established in a distinct place with a certain degree of permanence;
• the carrying on of the business of the company through this fixed place of business, i.e. persons who, in one way or another, are dependent on the enterprise (i.e. personnel), conduct the business of the enterprise in the State in which the fixed place of business is situated.

Generally, the mere fact that an organization has a certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business. Whether a location may be considered to be at the disposal of a company in such a way that it may constitute a “fixed place of business” will depend on the company having the effective power to use that location as well as the extent of the presence of the company at that location and the activities that it performs there.

In 2017 a number of changes were made to the OECD model commentary, with the intention of clarifying the interpretation of Article 5 of the model convention. The commentary included an analysis of the interpretation of the “home office” as a place that is at the disposal of a company.

Even though part of the business activities of a company may be carried on at a location such as an individual’s home office, that should not automatically lead to the conclusion that the location is at the disposal of that company simply because that location is used by an individual (e.g., an employee) who works for the company, according to the Commentary. Whether or not a home office constitutes a location at the disposal of the enterprise will depend on the facts and circumstances of each case. Where the use of a home office by an employee is intermittent or incidental, the home will not be considered to be a location at the disposal of the enterprise. Where, however, a home office is used on a continuous basis for carrying on business activities for a company, and it is clear from the facts and circumstances that the enterprise has required the individual to use that location to carry on the enterprise’s business (e.g. by not providing an office to an employee in circumstances where the nature of the employment clearly requires an office), the home office may be considered to be at the disposal of the enterprise, and therefore constitute a permanent establishment.

Although not expressly stated in the Commentary, this leads to an understanding that an individual who is working from a home office abroad voluntarily (i.e., not at the request of their employer) would not be considered to be working from a location that is at the disposal of the company, and therefore would not be considered a “fixed place of business”. This is the approach the Swedish Tax Agency has taken.

Conclusion

Although the Norwegian tax authorities’ position on the creation of permanent establishments through remote workers is not yet clear, the 2017 commentary of the OECD model does provide some initial guidance. As the trend to meet employee expectations of flexibility through remote work solutions grows, and employers try to meet these expectations, it is important to create guardrails and clear eligibility criteria to mitigate risks for the company, including but not limited to, the creation of permanent establishments.

¹2022 Fortune/Deloitte CEO survey (175 leading CEOs within 15 industries)

Tjenester: Global Employer Services