The fixed establishment PE-risk inherent to cross-border telework

Ever since the COVID-19 pandemic, remote, flexible, and hybrid work models have become more common.

Amongst these hybrid work models, cross-border telework¹ brings specific challenges, including the risk that the teleworker's home office entails the creation of a fixed establishment permanent establishment (hereafter: 'fixed establishment PE'), which would be the case if the teleworker's home office is (or is deemed to be) at the disposal of his/her employer.

It would appear that there is a common understanding that a universe of micro-PEs should be considered undesirable from a practical and administrative tax perspective. Hence, the question is whether an update to the current legal framework – with special reference to the OECD Commentary to Article 5 of the OECD Model Convention – should be considered.

This is a 'hot topic' for tax administrations and governments around the globe. Global mobility is a priority project in the OECD's Programme of Work and Budget Exercise, and under its Presidency of the Council of the European Union, Belgium installed the informal "Cross-border Workers Teleworking Taskforce", which was presided by the Belgian Minister of Finance.

The Belgian-Dutch bilateral agreement (the "Agreement")

On 23 November 2023, the Belgian and Dutch income tax authorities concluded a bilateral agreement that aims to clarify the parameters that are relevant in determining whether an employee teleworking in one Contracting State for an employer established in the other Contracting State gives rise to the existence of a fixed establishment PE within the meaning of Article 5.1 of the Tax Treaty between Belgium and The Netherlands in the first Contracting State.

General principles

For a fixed establishment PE to exist within the context of cross-border telework, the employee's home office should be at the disposal of the employee's foreign employer.

When assessing this 'at the disposal of' criterion, the factual circumstances are to be taken into account. In this regard, and thereby considering the principles laid down in the OECD Commentary on Article 5.1 of the OECD Model Convention, the Agreement differentiates between the following 3 situations:

• Occasional telework

If the telework occurs irregularly or coincidentally, and is not part of the fixed working pattern of the employee concerned, the employee's home office cannot be considered at the disposal of the foreign employer and e the home office cannot constitute a fixed establishment PE;

• Structural telework that is voluntary

Structural telework covers the situation where telework is part of the fixed working pattern of the employee concerned.

In such case, the home office could, depending upon the circumstances, be at the disposal of the foreign employer. This is not considered the case if an employee, who structurally works from home, has the choice to also go to his/her office in the country of the foreign employer and if the foreign employer does not request that the employee work from his/her home office. Hence, such home office can as a rule not be deemed at the disposal of the foreign employer and such cross-border telework should as a rule not constitute a fixed establishment PE.

If, however, an employee uses his/her home office permanently and the foreign employer requests that the employee do so (e.g., because it appears from the facts that it is the intention that the employee's office in the country of the foreign employer will not or only hardly be used by the employee), said office could be considered to be at the disposal of the foreign employer, and thus constitute a fixed establishment PE.

• Structural telework that is mandatory

In case of structural mandatory telework, the home office could be considered at the disposal of the employer.

A home office will result in a fixed establishment PE when the home office could be considered a fixed place of business through which the business of an enterprise is wholly or partly carried on. This will depend upon whether the employer has the de facto authority to use the home office, can de facto determine to what extent the enterprise is present at said office, and determines what activities can be performed there. This does not require that the employer has a legal right to use the employee's home office.

As a rule, the home office will be considered at the disposal of the foreign employer if the structural telework is mandatory based on the employment contract or the factual circumstances (e.g., because there is no office for the employee in the country of the employer as a result of which the employee must in fact work from home), or in case the employee cannot unilaterally decide to no longer use his/her home office.

Practical application

Importantly, the Agreement further mentions that in any event and by way of practical measure, no fixed establishment PE is deemed to exist in situations where the telework does not exceed 50% of the teleworker's work time during any rolling 12 month-period.

In doing so, there is some alignment between the PE implications relating to cross-border telework and the social security implications resulting therefrom, and more specifically the EU Framework Agreement for social security affiliation of cross-border teleworkers. Based on said Framework Agreement, employees can work up to 49.99% in their state of residence, and still remain affiliated with the social security legislation of their working state (being the state where their employer is established). Similarly, the Agreement determines that no fixed establishment should arise if the telework does not exceed 50% of the employee's total working time.

Impact of the activities of the employee

The Agreement confirms that the telework will not result in a fixed establishment PE if the telework performed by the relevant employee relates solely to preparatory and auxiliary activities rendered to the benefit of the foreign employer.

On the other hand, the Agreement explicitly mentions that it does not preclude the application of the provisions regarding agency PEs. Accordingly, if a sales representative or any other person who is habitually concluding contracts on behalf of his foreign employer (a so-called dependent agent) is teleworking, this will still not result in a fixed establishment PE, but this may result in an agency PE within the meaning of Article 5 (5) of the OECD Model Treaty pursuant to which the dependent agent will be deemed to constitute an agency PE of his/her foreign employer.

Extension to other tax treaties?

Earlier this year, the Minister of Finance stated (in answer to a parliamentary question) that it may be expected that the Belgian Tax Authorities will consider the principles included in the Agreement to be applicable under all Belgian tax treaties containing "that same provision".

Though not explicitly mentioned, it would appear therefrom that the relevant provision is Article 5.1 of the Belgian-Dutch Tax Treaty, which contains the general PE definition that can also be found in the OECD Model Convention²: "For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on."

Since the vast majority of the tax treaties concluded by Belgium contains the same PE definition, the impact of that statement of the Minister of Finance is broad. Only the tax treaties that Belgium concluded with Bulgaria, Hungary, Kirghizstan, Moldovia, Tajikistan and Turkmenistan contain a PE-definition that differs from article 5.1. Belgian-Dutch Tax Treaty.

By lack of specific bilateral agreement with the other countries than the Netherlands, it should however be borne in mind that one cannot guarantee that the other contracting state would take that same position.

Our recommendations

Consult with your Baker McKenzie liaison to see how the Belgian Tax Authorities' point of view on the PE risk resulting from cross-border telework impacts your business. Our team has extensive experience in international tax matters and can provide tailored advice for your specific situation.

1 Such cross-border telework mainly concerns frontier workers (i.e., an employee resides and partially works in the country of residence and also partially works in the country where the employer is located) and satellite employees (i.e., an employee whose fixed place of working is in the residence country, which is different from the country where the employer is located).

2 Official French text: "Au sens de la présente Convention, l'expression 'établissement stable' désigne une installation fixe d'affaires par l'intermédiaire de laquelle une entreprise exerce tout ou partie de son activité." Official Dutch text: "Voor de toepassing van dit Verdrag betekent de uitdrukking 'vaste inrichting' een vaste bedrijfsinrichting met behulp waarvan de werkzaamheden van een onderneming geheel of gedeeltelijk worden uitgeoefend."