Global Employer Services News

Belgium and the Netherlands on 23 November 2023 signed a competent authority agreement to offer guidance to employers regarding the determination whether employees working from a home office in their home country establish a permanent establishment for their employer in that home country.

Background

Since the Covid pandemic, working from home has become a permanent way of working for many employees. Together with an often expected (minimum) presence at the office required by many employers, this has resulted in a hybrid work pattern, with employees performing a part of their duties at home and the other part “at the office.”

In a cross-border context, however, working from home can have many -- sometimes undesirable -- consequences on the employee’s tax and/or social security position, as well as the employer’s tax position. For example, a home office can create a permanent establishment in the employee’s country of residence for the employing company abroad, giving rise to corporate income tax consequences and other administrative formalities the employer must address.

What is a permanent establishment?

Simply put, a permanent establishment or PE is the presence in a country (Country A) of a company that is resident in a different country (Country B), that meets certain conditions and in doing so, triggers local compliance requirements in Country A. When the conditions defined in double tax agreements are met, and a PE is deemed to be present, the right to tax profits of the company located in Country B will shift to Country A.

In the context of double tax agreements, the most common types of PE are:

• A material PE;
• A personal PE (also known as a dependent agent PE);
• A construction project PE; and
• A service PE.

A PE is described in article 5, paragraph 1 of the OECD Model Tax Convention as “a fixed place of business through which the business of an enterprise is wholly or partly carried on.” This definition requires the following components to be present:

• A place of business, such as premises, machinery, or equipment;
• A fixed place of business, meaning fixed geographically as well as for a certain duration in time; and
• The business of the company must effectively be carried on through this fixed place of business.

A personal PE is deemed to be present when a person or persons (employees or other persons) is/are present in a state other than the country where the employer company is located and habitually conclude contracts, or habitually play the principal role leading to the conclusion of contracts on behalf of the foreign company, who are authorised to do so and who do not qualify as independent agents.

A construction project PE typically relates to a building site lasting longer than a specified number of months during a tax year, as defined on the DTA involved.

A service PE is deemed to be present when certain services are performed in the other country. However, service PEs are included in the definition of permanent establishment in DTAs only rarely.

Regardless of the different types of PE that could be present in a jurisdiction, a PE will not be deemed to be present when only preparatory and auxiliary activities are performed in the other country.

Working from home & PEs

When employees work from home, the situation that is created in a cross-border context could appear to fall within the definition of PE. This topic has given rise to many questions that thus far have had to be resolved on a case-by-case basis.

New agreement

To provide guidance and some certainty to employers, the Netherlands and Belgium entered into a mutual agreement on 23 November 2023 on the interpretation of article 5 of the 2001 Belgium-Netherlands DTA, which includes the treaty’s PE definition.

In essence, the agreement introduces a framework to determine whether the home office of an employee who resides in Belgium and is employed by a Dutch employer (or vice versa) gives rise to a material PE in the employee’s country of residence:

1. The employee performs only preparatory and/or auxiliary activities:

• No PE will be deemed to be present.

2. The employee performs more than preparatory and/or auxiliary activities, i.e., the employee performs duties that are part of the employer’s core business:

• The employee works from home 50% or less of the time
  • No PE will be deemed to be present.
• The employee works from home more than 50% of the time
  • The employer provides a realistic alternative workplace in the country of residence of the employer and the employee is not obliged to work from home
    • No PE will be deemed to be present.
  • The employer does not provide a realistic alternative workplace in the country of residence of the employer or the employee is obliged to work from home
    • A PE will be deemed to be present.

The determination whether an employee’s presence in a country creates a PE should be made on an individual basis. Moreover, it is irrelevant whether or not the employer intervenes to facilitate working from home (for example, by providing financial or IT infrastructure support), but the exact wording of the employment contract will become more important in the future. The extent to which an employee works from home can affect not only their social security and income tax position, but also the applicable labour law legislation governing the employment relationship.

The new agreement does not affect the potential presence of a personal PE or other types of PE. Therefore, it is important to note that even though a material PE may not be present subsequent to assessing the case under this new agreement, there may still be a personal PE.

The agreement involves only the Belgian and Dutch tax authorities, and  even though it may suggest the position other tax authorities may adopt, it does not govern cases involving other jurisdictions.

Please contact your regular BDO contact or the author of this article if you have any questions.

Alexandra Martin
BDO in Belgium