The Spanish General Directorate of Taxes (SGDT) published a binding ruling, issued on Jan. 18, 2022 (V0066-22) containing express reference to permanent establishment matters for the first time, following the OECD Updated guidance on tax treaties and the impact of the Covid-19 pandemic. This ruling is significant because of the soft law nature of the OECD guidance and the uncertainty of the Spanish tax authorities’ position on this matter.
To put this into context, due to the Covid-19 pandemic, the OECD’s guidance released on April 3, 2020 included guidelines to determine taxpayers’ residence when, due to unseen and involuntary circumstances such as the travel ban, they had had to remain in a territory. The guidelines also determined that states had to implement the necessary mechanisms so as not to compute the days of residence in the territory as a result of Covid-19, and not altering the tax residence that the person would have had in the absence of the pandemic.
Despite the guidance mentioned above, the SGDT published a binding ruling on June 17, 2020, concerning a resident of Lebanon who came to Spain and stayed because of Covid-19 and the limitations on international mobility. The SGDT, disregarding the OECD guidance, concluded that the fact of spending more than 183 days in Spain was sufficient to determine that the resident of Lebanon would be considered tax resident in Spain in fiscal year 2020 as a result, even if it was due to Covid-19 restrictions.
In this situation, no tie-breaker rules could be applied since Spain has no double tax treaty with Lebanon and in addition Lebanon is a black-listed jurisdiction for Spanish purposes.
The first of these rulings relates to the tax residence of a citizen from Morocco who became “trapped” in Spain as a consequence of the travel ban, and its conclusion differed from the earlier ruling of June 17, 2020, discussed above.
In this ruling, reference is made to the updated version of the OECD guidance released in January 2021 and the door is opened to the need to evaluate all circumstances for determining tax residence, and not exclusively the number of days spent in Spain. The SGDT also expresses doubts about the potential Spanish “win” if the double tax treaty tie-breaker rules were to be applied.
According to the SGDT, the main differentiating point between the two cases is the fact that Morocco is a double tax treaty jurisdiction and Lebanon is not, and therefore the interpretation of tax residence differs, because article 4 of the double tax treaty can or cannot be applied in those scenarios where Spain intends to attract the tax residence.
With this in mind, Spanish tax professionals were interested in whether the Spanish tax authorities could also disregard the OECD guidance on the existence of permanent establishment because of the Covid-19 pandemic for employees working remotely in Spain as a consequence of the lockdown and travel ban.
Ruling of January 2022
The facts relating to this ruling are as follows: An English employee (resident in the U.K.) working for a U.K. company, exercised a senior role and his functions were not preparatory or ancillary in nature—business generation for the group in Europe, and membership of the project finance team.However, he did not have sufficient authority to conclude contracts and sign for and on behalf of the U.K. company.
The employee frequently traveled to Spain, where he has a house, and on one of those visits he was unable to leave Spain due to the Covid-19 shelter-in place restrictions. For this reason, he continued working remotely for the U.K. company from his home in Spain.
Once the lockdown and travel ban were lifted, the employee unilaterally, and for personal reasons, decided to remain in Spain. As the employee stayed more than 183 days in Spain during calendar year 2020, he became a Spanish tax resident.
The employee subsequently requested the U.K. company to continue to work from home in Spain, but the company denied his request. As a result of this refusal, the employee resigned from his position with the U.K. company.
The U.K. company assumed no cost related to the employee’s accommodation in Spain and had not granted any additional remuneration because of his working from home in Spain. After the resignation, the U.K. company did not employ any other worker in Spain.
Within this context, the U.K. company requested the SGDT to confirm that no Spanish permanent establishment was deemed to exist in Spain in 2020 by application of either the fixed place of business or dependent agent clause, as discussed below.
Content of the Ruling
Fixed place of business—The SGDT, following article 5 of the double tax treaty signed between Spain and the U.K., the Commentaries to the OECD Model Tax Convention and, in particular, the OECD Secretariat analysis of tax treaties and the impact of the Covid-19 crisis issued on April 3, 2020 (and subsequently updated on Jan. 21, 2021), differentiates between the following two possibilities:
During Covid-19 lockdown and travel ban: The SGDT makes express reference to the OECD updated guidance and confirms that, considering that the employee was working remotely as a result of an extraordinary event, the time period of lockdown and travel ban would not create a permanent establishment for the U.K. company because there is no sufficient degree of permanency or continuity. In this sense, the SGDT expressly acknowledges that “it is clear that the use of employee housing in Spain is discontinuous and incidental.”
After Covid-19 lockdown and travel ban: Considering that the stay in Spain continued after the Covid-19 extraordinary measures, the SGDT also analyzes whether the employee’s home office is at the disposal of the U.K. company.
In this regard, the SGDT establishes that, in order to consider a place where the activity of the company is carried out as a permanent establishment, it must have a certain degree of permanence and be at the disposal of the company.
In this sense, the SGDT confirms that the employee’s home office was not at the disposal of the U.K. company and there is no sufficient degree of permanency because:
- It was a personal decision from the employee to move to Spain and not a requirement from the U.K. company, even when the travel ban was not imposed.
- The U.K. company has an office in the U.K. which could have been used by the employee instead of his working from home in Spain. Therefore, this had not been a requirement made by the U.K. company.
- No cost derived from the stay in Spain of the employee had been assumed by the U.K. company, and no extra remuneration had been paid to the employee.
Dependent agent—Regarding the existence of a dependent agent, the SGDT, following the OECD guidance, considered that the activity of an agent cannot be considered as habitual if the person is exceptionally working from home in a different jurisdiction as a result of a public health measure imposed by a government as a consequence of the Covid-19 outbreak.
If after the Covid-19 lockdown and travel ban the employee continues working from that jurisdiction, the agent’s specific case should be analyzed. In the view of the SGDT, and according to the information provided in the ruling, the activity of this employee does not imply the existence of a dependent agent in Spain. However, it is expressly recognized in the ruling that this is a matter of facts, the proof of which was not checked by the SGDT.
This is the first ruling issued by the SGDT in which an express reference is included to the OECD guidance on tax treaties and the impact of the Covid-19 pandemic, which was not binding on governments, thus creating an element of uncertainty on the criteria to be followed by the SGDT.
Even if permanent establishment exposure is a casuistic matter which should be analyzed on a case-by-case basis, considering all the surrounding facts and circumstances, it seems clear that the SGDT will follow the guidance issued by the OECD and will acknowledge that displaced employees teleworking from home due to the Covid-19 situation will not create a permanent establishment exposure in Spain.
However, these conclusions cannot be extrapolated to every employee working from home in Spain for a nonresident entity, after the Covid-19 pandemic. The key point would be, what about if the employee does keep working indefinitely from Spain but is not dismissed? Would the SGDT criteria remain unchanged? The binding ruling helps during Covid restrictions but does not solve the uncertainty over post Covid-19 scenarios.
Hence, it should be analyzed, on a case-by-case basis, whether a displaced worker working from home in Spain after the Covid-19 lockdown and travel ban, could constitute a permanent establishment for the foreign company, on the basis of the possible existence of a fixed place of business or the employee’s acting as a dependent agent in Spain.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Javier Blázquez is a senior associate and Pablo Fernández is an associate with Baker McKenzie Spain.