Remote working and key risk areas
Luxembourg is the jurisdiction with most fund activity within Europe and most fund manager companies are based there as well. However, many employees of the fund manager companies often work remotely from other countries. This can pose certain risks for the fund manager companies from employment and tax law perspectives.
Tax risks in France
There is a risk that the fund manager company is considered to have a permanent establishment (PE) in France and therefore becomes subject to tax in France.
According to OECD guidelines, the fund manager may be deemed to have a permanent establishment if it meets one of the two tests: the fixed place of business test or the dependant agent test. Between the two, remote working among the employees of the fund managers poses a greater risk of creating a permanent establishment through the dependant agent route, although a case by case analysis will have to be performed in either case. For example, a mere office space in the personal home of the employee (in France) may qualify as a fixed place of business. However, the key question would be whether this place of business is at the disposal of the fund manager company and this will take into account factors such as the responsibility for bills and rent.
With respect to the dependant agent test, there is a risk that this will be met where the fund manager employee makes strategic decisions and enters into arrangements that are binding on the company from their home office in France. It must be noted that where the decisions and arrangements entered into are of auxiliary or preparatory nature, then the test will not be triggered (e.g., back office work).
Tax risks in Spain
Spain has traditionally been very aggressive in its regulation of PEs, using a mixture of the OECD guidelines and domestic legislation. However, following a binding ruling passed earlier in the year specifically in relation to the fixed place of business test, the authorities have shifted towards a more flexible approach in such cases.
In particular, the authorities concluded that if the following three conditions are met, then there would be no PE under the fixed place of business test.
- The decision to work from Spain was a personal choice of the employee.
- The employer has an office in its country of operation (i.e., Luxembourg) from which the employee may work.
- There is no additional cost assumed by the employer and no additional remuneration paid to the employee as a result of their remote work in Spain.
While there are no similar rulings in relation to the dependant agent test, our recommendation would be for the fund manager company to hold all meetings relating to investment decisions and other key business decisions in Luxembourg to avoid the risk of a PE arising through the dependant agent test.
Key risks in Luxembourg
Apart from tax implications, fund managers who work remotely outside of Luxembourg at least 10% of their time will be regarded as cross-border employees and this will trigger certain employment law considerations. For example, cross-border workers are subject to the convention of remote working passed in October 2020.
However, the rules around the tax and social security implications of remote working have not evolved fully to meet the needs of remote working and this poses a challenge to a Luxembourg fund that is looking to implement a more flexible working policy. As a starting point, where an employee works more than 25% of their working time in a member state, it is with this state's social security authorities that they ought to be registered.
Some key questions that arise in this context are: the identity of party who is responsible for withholding payments; whether there is a need to comply with the regulations of the jurisdiction from where the cross-border employees are working and the applicable law that frames the employment relationship.
As such, there is a degree of uncertainty that arises as a result of remote working and international mobility.
Given the impending ATAD 3 directive, having "minimum substance" in a jurisdiction is another key area to consider when looking at the international mobility of fund managers.
There are three indicators of minimum tax substance:
- Directors who are tax resident locally
- Local premises
- Local bank account
The text of ATAD 3 is yet to be agreed and there are ongoing discussions to include an exemption for subsidiaries of funds but we will need to wait and observe how this takes effect.