Remote working is here to stay! This is why the Swiss Tax Conference (STC) has analysed the risks of companies creating a permanent establishment by allowing their employees work from home. In comparison to other countries, Switzerland set high requirements on the definition of a permanent establishment.
In a recent opinion published by the STC (a union of all cantonal tax authorities and the Swiss Federal Tax Administration) the tax consequences were analysed if an employer may risk creating a permanent establishment in the canton of residence of the employee if the employer allows their employees to work from home permanently.
The opinion excludes any international aspects but focuses on the national consequences only. Nevertheless, the publication is also relevant for foreign employers as the concept and restrictions apply to Swiss and non-Swiss employers. Applicable double tax conventions may though change the treatment and conclusions under certain circumstances.
How does Switzerland define “permanent establishment”?
Under Swiss tax legislation, which is generally in line with the criteria according to the current OECD Model Tax Convention on Income and Capital, the term “permanent establishment ”means generally a fixed place of business through which the business activity of an enterprise is wholly or partly carried out. According to this definition, the following conditions must be met:
- The establishment must be fixed and permanent;
- A quantitatively and qualitatively important part of the activity must take place at this facility;
- The establishment must be part of the business.
Thus, the recognition of a permanent establishment requires a fixed and physical business facility with a permanent character at a specific situation over which the business must have certain access rights. The performed activity does not need to directly contribute to the profit of the company. Auxiliary activities performed in the establishment that support other operating units or the head quarter is already sufficient.
In so far, the number of employees is decisive for the assessment of the significance of the permanent establishment, the quantitative requirement can be interpreted in away that at least three employees are to perform an activity at the place to be qualified as permanent establishment. Although that counting the number of employees cannot be applied in every assessment, it is a simplistic but accurate approach according to the STC.
Can a home office be a fixed and permanent place of business?
Although a dedicated home office space may be seen as a fixed and permanent place of business, usually the employer has no access rights to the home office at the employee’s place of residence. In addition, the employee's work premises remains under the employee's control and the employer does not have a comprehensive right to use these premises (e.g., the employer does not have a key to the employee's home etc.). Consequently, from a Swiss perspective the criteria of a fixed place of business cannot be met for the employee's home to be classified as a permanent establishment due to lack of access by the employer to the employee’s work premises.
Is the home office activity of quantitative and qualitative importance?
In its jurisprudence, the Swiss Federal Supreme Court has established the principle, that a restrictive view on the definition of what activity is of quantitative and qualitative importance may lead to a fragmentation of corporate tax substrate. Therefore the STC is of the opinion that the recognition of a permanent establishment at the employee’s home office would lead to a situation that contradicts this principle. The argument is that the employer in most cases has only one employee at the same place and therefore the quantitative requirement cannot be fulfilled.
Even if several employees with the same employer reside in the same canton/community, a consolidated assessment of the number of employees is not appropriate as, in the opinion of the STC, each place of activity must be considered independently and must fulfil the criteria for a permanent establishment on its own.
The same assessment shall also apply to executive employees of a company or even to managing directors if they perform their activity from their home office space. However, it must be kept in mind that Switzerland recognizes the main tax domicile of a legal entity at the place, where the business is registered only, if the management and administration of the company (e.g., the managerial activities etc.) does not take place at another place. The management and administration of the company is executed where the essential decisions of the company are made and where the company has the actual, effective, and economic centre of its existence. This means that in case where the company is effectively managed from another place than the registered domicile, a permanent establishment is created at the place from where the company is effectively managed.
In larger corporations, a single executive employee or managing director who is working from home does not move the management and administration of the company to the employee’s place of residence. In smaller corporation, where the operation al management of the company is in the hands of a single person, the result may be different if this employee mainly or fully performs these managerial activities from the home office space.
What is the conclusion?
The opinion published by the STC concludes that the home office space does not create a permanent establishment for the employer at the employee’s place of residence (home office). This even applies to cases where an employer operates fully decentralized or virtually, and where all employees are required to work from home and the employer does not offer workspaces on its own premises.
In comparison to other countries (e.g., Austria, Germany etc.) Switzerland sets the permanent establishment bar relatively high for employers that has employees working from home office. In various countries it is interpreted that home office can exist in the form of a fixed place of business if the home office is regularly and permanently used by the employee for the employer’s activities and based upon the employer's request. It is assumed that the home office is available to the employer and that the power of disposal required to establish a permanent establishment exists. The tipping point is oftentimes if the employee has the option of using a workstation in the employer’s premises as in this case it is assumed that the employer does not have the power to dispose of the home office even if the employee performs the work in the home office, as the employer does not request the use of the home office.
However, as there is currently no coordinated approach and regulations amongst the countries, this creates uncertainties with the employer the residence country of where the employee is based may have a different view on the creation of a permanent establishment compared to the country where the employer is based.
Remote working has increased and will increase even further in a post-pandemic world and therefore, with the nature of cross-border relevance in mind, unilateral regulations issued by each country are not sufficient in our opinion. It would be important that an internationally coordinated approach is taken and manifested within the OECD to reduce the administrative burden for the employers and employees as well as avoiding potential double taxation due to the differing views by the countries on the creation of a permanent establishment of an employee working from home.
Various initiatives have already been introduced by industry leaders in various countries to encourage the OECD that guidelines on this topic are issued and implemented in the OECD Model Commentary with practice-oriented explanations.
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