French tax impact of prolonged distance working during the quarantine

The current Covid-19 pandemic raises many questions for companies with employees required to work from home when located in a different jurisdiction from where their employer is established.

Many companies have therefore questioned - in recent weeks - the risks of recognition of a permanent establishment in France because some of their employees are forced to work remotely from their French home. In addition, could foreign companies whose directors are quarantined in France because of the emergency health measures adopted and/or travel bans, be considered as having transferred their tax residence by virtue of having a French place of effective management? Finally, should salaries received in respect of periods of remote work from France now be taxable in France?

Answers have been suggested by the OECD and various national tax authorities over the last few days and weeks to avoid the uncertainties associated with the reporting and tax obligations related to the recognition of a taxable presence in France².

Existence of a permanent establishment in the State from which employees remotely work

As a reminder, French domestic law provides that all companies operating a business in France are in principle liable to French corporate income tax¹. However, almost all double tax treaties signed by France restrict its right to tax the profits of foreign companies to those having a permanent establishment in France.

The term "permanent establishment" refers to:

• Any fixed place of business through which an enterprise carries on all or part of its activities outside the State in which it is established; or

• In the absence of a fixed place of business, a permanent establishment may be characterised in the State where a company is represented by a dependent agent who is authorised to conclude contracts in its name. In several recent tax treaties³ (or recently amended treaties⁴), a dependent agent may also constitute a permanent establishment where, in the absence of express authority to conclude contracts, it usually plays the principal role leading to the conclusion of such contracts by a foreign company.

The recognition of a permanent establishment creates a taxable presence outside the State of residence of the employer since profits attributable to a permanent establishment are exclusively taxable in that State. This local tax charge is computed and collected in accordance with the laws of that State (account-keeping obligations, filing of tax returns and payment of the corresponding taxes).

The continuous presence of employees forced to work remotely from their French home due to health emergency measures could therefore theoretically - according to these criteria - lead to the recognition of a permanent establishment in France.

Does a home office constitute a fixed place of business?

The OECD has recently reminded that an office located in the home of an employee may constitute a permanent establishment when the following conditions are met:

1. the home office has a certain degree of permanency and is at the disposal of the company which uses it; and
2. the activity carried out there is part of the core activity of that company (the activity is not merely preparatory or auxiliary).

In the first case, it can be noted that the use of an employee's home for the purposes of the employer's activity does not necessarily make this home a place at the “disposal” of the company.

However, French case law shows that a prolonged use of a home for the needs of the activity of a foreign enterprise may constitute a permanent establishment in France⁵.

Still, in the context of the current pandemic, the OECD⁶ has had the opportunity to clarify this position in view of the fact that remote work has been imposed by extraordinary circumstances (force majeure) and not by an employer's choice. In that respect, the OECD confirms that the recognition of a permanent establishment shall currently been rejected since even if the quarantined may create a presence of distance-working employees in their home abroad for a quite long period of time (objective criterion), the employer has never intended to create a fixed place of business in that State (subjective criterion). Absent of this subjective criterion, the OECD tends to recognise that the place from where the employee is working lacks some degree of permanency and does not hence generally constitute a permanent establishment. Besides, the OECD acknowledge that this "office" may not actually be considered as available and under the control of the employer.

Obviously, this assessment is only valid in the current context of a pandemic during which business travel is strictly controlled (when not prohibited) by the various affected States. It should nevertheless be stressed that if remote work from France (or any other State) became a pattern for foreign employers, through a prolonged presence of employees working beyond the term of the current crisis, the employers in question could then face an actual risk of recognition of permanent establishments in France (or in the relevant State).

The OECD guidelines have already been followed by the Irish Revenue ⁷ and the Australian Taxation Office ⁸.

The underlying OECD reasoning should also - in our view - apply mutatis mutandis to French tax law, which already takes into account force majeure in order to allow - to a certain extent - a bona fide taxpayer to be exempted from formal requirements or substantive rules⁹. This confirmation would also be in line with the orders issued on 25 March 2020 and aimed at mitigating - as far as possible - the effects of the pandemic on the taxation of French taxpayers.

This conclusion should also apply to a greater extent to VAT, where the permanent establishment (“fixed establishment” under the VAT legislation) must be "of a certain minimum size and both the human and technical resources necessary for the provision of the services must be permanently present" ¹⁰ for a foreign company to become liable for VAT outside the State in which it has its registered office. Indeed, a purely temporary home office used during the current quarantine period would not meet the conditions to be a fixed establishment for VAT purposes.

It would therefore be relevant for the French tax authorities to take an explicit position on this issue by confirming the guidelines issued so far by the OECD.

Is an employee remotely working from France a dependent agent?

Double tax treaties based on the OECD model provide that the activities of a dependent agent such as an employee may create a permanent establishment for an enterprise if the employee habitually concludes contracts in the name and on behalf of his employer¹¹.

In these circumstances, it will be important to assess whether the employee carries out these activities on a "regular" basis. In this respect, both the French tax authorities and the OECD consider that the presence of a dependent agent must present a certain stability. A purely temporary assignment does not automatically generate a permanent establishment risk¹².

More specifically, in the current context, the OECD also considers that it is unlikely that the activity of an employee (or another dependent agent) in a State is considered sufficiently "usual" if they work from their home in that State only for a short period of time and due to a force majeure case and/or regulations imposing a certain degree of permanence on the activity carried out in France (quarantine at home for the employee, place of work inaccessible due to a travel ban).

Consequently, the presence in France of employees who are either authorised to sign contracts in the name of their employer or, in other cases, whose activity is decisive in the conclusion of such contracts, should not create a permanent establishment for their employer, provided that their activity in France is strictly linked and limited to the current pandemic.

Again, if such activity were to be carried out by these employees in France after the end of the current crisis, a substantial risk of recognition of permanent establishments in France could exist for their employer.

Corporate tax residence issues

The current pandemic may also raise doubts about corporate tax residence. Indeed, a company is a resident of the State in which its place of effective management is located. The place of effective management is the place where key management and commercial decisions are taken that are necessary for the conduct of the business as a whole.

The current concern is therefore that the remote location of the management bodies of many companies (boards of directors, supervisory boards, general meetings) may call into question their tax residence. However, it is - in our opinion - unlikely that the Covid 19 pandemic will lead to such changes.

First of all, the French tax authorities generally consider that the effective management headquarters of a company is primarily understood to be the one indicated in the company's articles of association, and that it is only in the case of fictitious circumstances that a different location should be used¹³. Consequently, a temporary change in the location of a company's management bodies does not make the location of a company's registered office fictitious, a fortiori when that change is imposed by the current state of health emergency.

Furthermore, the OECD recalled that all relevant facts and circumstances must be examined to determine the "usual" and "ordinary" location of the actual seat of management, including specific circumstances such as the current pandemic. Similarly, the Irish tax authorities agree to disregard temporary presence in Ireland (for foreign companies) or in other jurisdictions (for Irish companies) where this is directly related to the current pandemic, in particular international travel restrictions (travel bans).

After the current crisis has passed, it will be necessary to ensure more strictly that the members of the management bodies of companies meet and make strategic decisions concerning the companies at their headquarters. Absent such precautionary measures, the tax residence of the said companies could be called into question by the tax administration(s) of the State(s) which would want to attract the profits of these companies in their respective jurisdiction in order to tax them.

Possible impact of distance work on the taxation of salaries

When an employee is a resident of State A for tax purposes and works in State B, the tax treaties entered into between the different States generally provide that the salaries received by the employee are taxable in only one State, the State of which the employee is a resident, provided however that the three cumulative conditions of the so-called "temporary assignment" clause are met:

• the employee stays less than 183 days per year in State B (state of activity);
• his employer is not a resident of State B; and
• his remuneration is not borne by a permanent establishment of his employer in State B.

Otherwise, the State of activity may in principle tax the salaries corresponding to "local" working days, this taxation giving rise to a tax credit that could be offset by the employee against his tax charge in his State of residence.
Some tax treaties also contain specific clauses for cross-border employees (France-Germany, France-Switzerland and France-Luxembourg treaties in particular). For example, since 1 January 2020, French cross-border workers can work remotely from France for up to 29 days for their Luxembourg employer without the related remuneration being taxed in France.

Consequently, quarantine in one or other of the States can potentially lead to, depending on the case, the following consequences:

• a transfer of tax residence to the State where the days are spent in quarantine (quarantine spent abroad); or
• where any of the above-mentioned time limits are exceeded, varying tax consequences could be triggered depending on the exact situation of the concerned employees and employers. In such a case, the employers could have different income tax withholding obligations (e.g. PAYE).

In the first case, the risk of a change of tax residence solely because of days spent in quarantine should in principle be remote. Indeed, the French tax authorities have issued a statement confirming that temporary stays in France - whether imposed by quarantine or by travel restrictions by the country of residence of certain individuals - should not create a risk of the recognition of a transfer of tax residence of the relevant employee to France¹⁴.

Moreover, the thresholds for "temporary assignment" clauses and specific thresholds for cross-border workers could remain unaffected. Indeed, as distance work is currently imposed by circumstances classified as force majeure, the French and Luxembourg governments have for example agreed not to count the days spent in quarantine in this maximum 29-day time period¹⁵, in order to preserve - as far as possible - a status quo for the workers in question.

A generalisation of these solutions of "temporary freezing" of these time periods for taxpayers and employers acting in good faith could make it possible to avoid complex tax situations. A confirmation of this principle by the French tax authorities would be most welcome.

¹ Article 209-I of the French tax code
² Article 5(1) of the OECD Model Tax Convention, notwithstanding the specific rules on income/gains from immovable property and passive income (interest, dividends, capital gains)
³ France has accepted Article 12 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, which means that several treaties entered in by France will include this new, wider definition of the dependant agent permanent establishment (except typically if such treaty is not covered by this multilateral convention or if the other contracting State has made a reservation to this provision)
⁴ Treaties based on the 2017 edition of the OECD Model Tax Convention, typically the new France-Luxembourg treaty of 20 March 2018
⁵ French tax courts for example held that a Togolese company had a French permanent establishment due to the fact that its managing director operated a car purchase/resale business from his French home (Administrative Court of Appeals of Lyon, 29 December 2009, No. 07LY01942). The same solution is applied in criminal matters when the French tax and social securities authorities prosecute tax fraud and concealed work cases (e.g. Court of Appeals of Amiens, Criminal Chamber, 19 March 2008 – Nos. 07/00804 and 07/00813)
⁶ OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis, 3 April 2020
⁷ www.revenue.ie/en/corporate/communications/covid19/corporation-tax.aspx
⁸ www.ato.gov.au/Individuals/Dealing-with-disasters/In-detail/Specific-disasters/COVID-19/?page=10
⁹ On this point, the conclusions presented to the French Administrative Supreme Court by AG Bokdam-Tognetti point out that force majeure is a "possible exonerating cause of non-compliance with a particular requirement of substance or form imposed by law [...] far from being an unknown factor in French tax matters" (RJF 12/16, No. 1094)
¹⁰ ECJ, 4 July 1985, C-168/84, Gunter Berkholz v Finanzamt Hamburg-Mitte-Altstadt, §18
¹¹ Article 5(5) of the OECD Model Tax Convention
¹² BOI-INT-DG-20-20-10 No. 50, and OECD Comments C(5), Nos. 33 and 98
¹³ BOI-IS-CHAMP-60-10-20 No. 1
¹⁴ Press release by French Directorate of Non-Resident Taxpayers "COVID-19 and Non-Resident Tax Residence"
¹⁵ Press release by the Luxembourg Minister of Finance, dated 19 March 2020