As we approach year-end employees might be turning their thoughts to holidays. Some might be looking for a “change of scene”. Perhaps an extended holiday combined with remote work. Depending on the role and employee’s performance, agreeing to a request for work from anywhere aka WFA or a working holiday might be a great option for employee retention. Or it might be a way to access talent that is not available in the country where the entity is resident. 

However, what might be a win for talent retention might create unforeseen consequences if the WFA flexibility creates a permanent establishment (“PE”) with resultant tax obligations for the employer. 

From an Indonesian tax perspective, the likelihood that foreign employees that WFA in Indonesia create a PE for their foreign employer depends on: 

  1. whether that employer is resident in a country that has concluded a double tax agreement with Indonesia (“DTA”), and if so 
  2. the nature and extent of the activities performed by that employee 

Generally, if the foreign employer cannot rely on a DTA then the risk of a PE is quite high since the relevant criteria is whether there is a fixed place of business through which activities are conducted (and it is not necessary that the activities are revenue producing). 

If the foreign employer can rely on a DTA then more careful analysis is necessary. This analysis should take into consideration ‘The 2025 Update to the OECD Model Tax Convention’ (“the OECD Commentary”) . 

The analysis starts with assessing the level of permanence - is it a “fixed” place? If there is no permanence (e.g. if an employee only stays in Bali for two weeks every two to three months) then that is unlikely to create a PE irrespective of the activities. 

If there are indications of permanence then the next question is whether the foreign employer has a right to use the location where the employee lives or works. This could exist if an employer pays for a home office or reimburses the employee for a suite in a co-work office. However, the fact the employee creates a dedicated workspace at their holiday rental does not mean it is “available” for the employer. This is where the OECD Commentary becomes important to assess whether there might be a place of business even if there is no space “available” for the employer. 

The OECD Commentary adds 2 additional tests that need to be met otherwise there is no PE (“unless other facts circumstances indicate otherwise”): 

  1. does the employee spend at least 50% of their working time during any 12 month period in Indonesia and, if so 
  2. is there a commercial reason for the employee to work in Indonesia 

Notwithstanding the above, even if these tests are satisfied, there will not be a PE provided the activities performed are preparatory or auxiliary in nature and the provisions of the DTA exclude these activities from creating a PE. 

So without pouring water on the fire of WFA freedom, employers should carefully consider if the employee’s request for an extended working holiday creates unforeseen tax consequences. And, as a final note, even if the working holiday does not create a PE for the employer, the care-free employee should remember an extended stay might create tax residence issues for them. Happy holidays! 

 

Contributor: Nicholas J Graham, Business Services Practice