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Temporary Employees Creating Permanent Establishment

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Multi-national businesses are increasingly embracing flexible and remote working arrangements for employees. However, uncertainty around whether international employees temporarily working in other jurisdictions may trigger permanent establishments and create unexpected tax liabilities has been an area of concern. HMRC recently published helpful examples on this issue to clarify typical scenarios. However, the limited guidance still requires businesses to carefully analyse the specific facts and circumstances of their operating models and personnel arrangements.  

What is a Permanent Establishment?

A permanent establishment (PE) is a fixed place of business of an enterprise through which business activities are carried out in a jurisdiction. This may be a place of management, an office, a factory, a workshop or a mine site, as examples. A PE in a jurisdiction typically gives that jurisdiction taxing rights over the business profits attributable to that PE. Therefore, multi-national businesses must carefully analyse where their arrangements with respect to property, employees, and agents may inadvertently create PEs and expose them to tax and filing obligations in additional countries.

Concerns with Globally Mobile Employees

Traditionally, analysis of potential PEs arising through overseas arrangements focussed heavily on aspects like subsidiary entities, dependent agents and server locations. However, increasingly flexible working practices and demand for international mobility from employees require greater attention to the implications of internationally mobile employees. For example, scenarios may arise involving employees seeking to work remotely from overseas jurisdictions, using office facilities of related offshore enterprises, or simply spending time working on holidays or family visits abroad. The uncertainty around whether and in what circumstances such employees might create PEs has required urgent clarification. It has also been recognised that this uncertainty can actively discourage businesses from embracing mobile working and create unnecessary barriers to workforce agility and retention.

While multilateral guidance at the OECD and UN levels is anticipated eventually, HMRC’s recent domestic guidance represents a helpful, albeit limited, attempt to clarify typical scenarios involving employees.

HMRC Guidance and Examples 

In broad terms, the fundamental pillars that determine a PE involve:

  1. A place of business 
  2. That is fixed in that it has a sufficient degree of permanence
  3. Through which the business activities are carried on

HMRC’s examples focus only on the permanence test rather than the full analysis required.

In summary, the key examples suggest:

  • Short extensions of holidays for work will only sometimes create PEs based on lack of permanence. However, annual recurrences by individuals may cumulatively create risk.
  • Contractual rights for individuals to have repeated extended presences in locations abroad can indicate sufficient permanence. 
  • Using an affiliate’s premises offshore won’t automatically create a PE if the overseas employee’s presence is short-term and sporadic.  
  • Having successive employees on rotation for an aggregated substantial presence can satisfy permanence from the entity’s perspective. The focus is the continuity of operating presence, not the permanence related to individual employees in isolation. 
  • In HMRC’s view, sustained secondments of even a single employee for prolonged periods like six months could indicate a sufficiently permanent presence to warrant further analysis for PE implications.

While helpful as an indication of HMRC’s general thinking, over-reliance on the limited examples would be unwise for businesses and multi-nationals assessing their operating models for potential PE risks. As the guidance stresses, determining PE status requires full factual analysis in each case.

Considerations Beyond HMRC Examples

The examples focus on the permanence of employee presence as one isolated factor when assessing any potential fixed place of business PE. However, businesses should not conclude that just because an arrangement may have permanence, a PE is automatically triggered under UK domestic law or Double Tax Agreement interpretations in other jurisdictions. As HMRC notes, permanence creates potential PE risk that requires full factual analysis of the arrangement against wider PE tests. 

Two key considerations beyond permanence include:

  1. Whether the activities conducted could be considered preparatory and auxiliary only rather than constituting the “business” itself, generally, preparatory and auxiliary activities will not create PEs. However, the dividing line between activities of a preparatory nature and those constituting the essential business operations is only sometimes clear-cut.
  2. The company could have a location in the UK at its disposal. Factors like rights of access and extent of control exercised could be relevant in determining if offshore enterprises have UK locations at their disposal under employee arrangements. Inherent complexity exists in the analysis here, too. Just because an employee carries out activities from the UK office of a related party does not automatically mean that an offshore employer has the location at its disposal. 

In any case, overemphasising the fixed place of business PE risks distracting from another fundamental form of PE – the Dependent Agent PE. Under Dependent Agent PE rules, companies can find themselves with PEs due to employees or other agents concluding contracts on their behalf overseas. Mere sales contracts don’t generally trigger Dependent Agent PEs, but contracts involving delivery of services or intangibles could. Analysis of potential Dependent Agent PEs requires an entirely separate assessment based on the authority exercised by the individuals.

Unfortunately, HMRC’s guidance offers no clarity on this issue.

The Need for Ongoing Caution by Businesses

While HMRC’s recent examples provide helpful guidance, more is needed for multi-national businesses to conclude robustly that their globally mobile employees present no PE risks. The permutations around operating models are extremely varied in real business practice. Group companies frequently have staff spend time supporting affiliates or working from overseas branches while mobile. Home working internationally for prolonged periods is also increasingly embraced. These sorts of arrangements demand bespoke analysis against the specifics of each business rather than cursory reliance on HMRC’s high-level illustrations of principles.

Mitigating PE Risks Arising from Employee Mobility

Given the inherent uncertainty around temporary overseas employee presences triggering PEs, businesses should consider the following:

  1. Contractual terms with staff that strictly limit the degree of permanence of overseas operational presences and clarify the expected nature of activities. While such terms may not always be definitive, they aid the overall factual assessment.
  2. Seek pertinent Double Tax Treaty relief as appropriate. Many treaties provide an exemption from PE recognition where activity days stay below prescribed thresholds. Again, such treaties must be carefully analysed against specific situations.  
  3. Review insurance arrangements to ensure exposure to unexpected overseas tax liabilities that may arise if arguments by tax authorities overseas regarding PE status ultimately succeed. 
  4. Consider if advanced agreements with tax authorities may be warranted in more complex or higher-risk situations to provide the required comfort around PE treatment.

Businesses must carefully analyse potential PE risks related to international secondments and mobile working, as determining PE risk should be part of the formal process around approving international travel and remote working proposals.

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