Will home working employees trigger a PE? Agreement between BE-NL published

Will home working employees trigger a permanent establishment for the foreign employer?

Following the COVID-19 pandemic, businesses are more than ever concerned that employees, dislocated to jurisdictions other than the one in which they regularly work, working from their homes could create a “permanent establishment” (PE) in those jurisdictions, triggering filing requirements and tax obligations.

On 23 November 2023, Belgium and the Netherlands signed an agreement regarding the interpretation of article 5 of the current double tax treaty concluded between Belgium and the Netherlands on teleworking. This agreement provides additional guidance on the question of whether the use of an employee’s home office could trigger the existence of a PE and more specifically, whether or not the home office can be considered to be “at the disposal” of the employer.

The double tax treaty between Belgium and the Netherlands (defines a PE as ‘a fixed place of business through which the business of an enterprise is wholly or partly carried on’, which is in line with the concept included in the OECD’s Model Tax Convention. Referring to the OECD Commentaries, the definition of a PE can be broken down into three conditions:

1. the existence of a ‘place of business’ such as a facility, a premises or, in certain instances, machinery or equipment. This implies amongst other that the premises needs to be ‘at the disposal’ of the foreign entity;
2.  this place of business needs to be fixed, i.e., it must be established at a distinct place with a certain degree of permanence; and
3. the carrying on of business through this fixed place of business.
    

The Belgian domestic definition of a permanent establishment is broader than the scope of the permanent establishment definition under tax treaties concluded by Belgium with other countries, which are mainly based on the Organization for Economic Co-operation and Development (hereinafter “OECD”) model convention.

Only if a PE is deemed to be present in Belgium under the applicable double tax treaty, Belgium will have a right to tax the profit realized by this PE. Nevertheless, in case a Belgian establishment is present, but no PE according to the applicable double tax treaty, there will still be an obligation to fulfill certain compliance formalities in Belgium.
 

Agreement between Belgium and the Netherlands on home office PE’s

According to Belgian doctrine, jurisprudence, and the OECD commentaries, for a home office to constitute a place of business, it has to be at the disposal of the foreign employer. Generally, the mere execution of the employee’s activities from his home office should not automatically lead to the conclusion that the home office is at the disposal of the foreign employer. It will depend on the actual circumstances and activities.  Most guidance available to assess this is based on the pre-covid world.  In the post-covid environment the type of activities and the level of home working have substantially increased requiring for new and updated guidance to apply these rules.

The new agreement between Belgium and the Netherlands gives some guidance on how to apply these rules for cross border working between Belgium and the Netherlands.  Although this guidance is specifically applicable to the Belgium-Netherlands treaty, it may provide important general guidance on how tax administrations are looking at such cross-border home working.

The new agreement makes a distinction between the following three scenarios to clarify when home working employees will trigger a PE for the foreign employer. Important to note is that the factual assessment should be made for every employee.

1. Incidental home working

The second condition of the PE definition, i.e., “fixed” place, is not met if an employee only occasionally or incidental (no fixed number of home working days per week or month) works from his home office. In that case the homeworking has not a certain degree of permanence, i.e., it is of a purely temporary nature and no PE will be present in hands of the foreign employer.

2. Structural home working, with the option to work elsewhere

Based on the agreement, structural home working is considered to be part of a regular work pattern if the employee is working from home for a fixed number of days per week or month.

In case the employee uses his home office on a structural basis, but voluntarily (e.g., for convenience reasons), likely no PE is deemed to be present. However, in case it is contractually agreed that the employee should (partly) perform its work from his or her home office or if the employee is de facto ‘pushed’ to work from home (e.g., by not providing an easy access to an office to an employee in circumstances where the nature of this employment clearly requires an office), it should be accepted that the company has the home office at its disposal.

3. Structural and mandatory home working

When employees are using their home office on a continuous basis for carrying on the business activities of the foreign employer and that it is clear from the circumstances that the company requires employees to use that location to carry on the business, the home office may be at the disposal of the enterprise.

The following (non-exhaustive) elements may indicate that the home office is at the disposal of the foreign employer:

• The employee is, legally or factually, obliged to work from the home office;
• The employee does not have the practical availability to work in an office or other location;
• The employee cannot stop the use of its home office unilaterally, for example because the employee cannot perform its activities adequately or conform its employment agreement if not performed at its home office.

Consequently, a PE analysis remains highly fact dependent and discussions with the tax authorities cannot be excluded.

Practical guidelines

Finally, the agreement also provides practical guidelines for situations without a ‘permanent establishment’. First, if an employee works less or up to 50% of his/her working time from home for a 12-month period for the employer (located in another country), it can be presumed that the home office does not constitute a PE.

Secondly, if the foreign enterprise would be deemed to have a fixed place of business, as set out above, a taxable PE would still not exist if the fixed place of business would be maintained solely for the purpose of activities which have a “preparatory or auxiliary” character for the foreign enterprise. As mentioned above, the Belgian domestic concept of a PE is broader, and for example does not foresee in an exception of a Belgian establishment in case the activities carried out would only be auxiliary or preparatory in nature. Note that the agreement has no impact on the Belgian domestic concept of a PE.
 

Reporting obligations

In a cross-border context the authority to levy taxes is determined by the permanent establishment concept as included in the relevant double tax treaty, however the presence of a Belgian establishment may trigger certain reporting obligations e.g. annual nil or blank return and reporting and withholding tax obligations (with reference to the FAQ published by the Belgian tax administration in 2020).
 

Conclusion

With this agreement, Belgium and the Netherlands aim to provide more clarity to which extent a home office can be at the disposal of the employer, attracting additional PE requirements for the employer.

These rules are independent of the individual taxation rules based on article 15 of the double tax treaty between Belgium and the Netherlands.

EY as your trusted business advisor can help with:

• reviewing your remote working population
• analyzing the risks of a permanent establishment 
• advising on the new rules and framework of this agreement
• assisting with the tax compliance obligations relating to this remote working population.