Covid-19, Travel Restrictions And Their Impact On Dividing The Tax Pie

In recent months, we have witnessed far-reaching changes in the Israeli and global market. Travel restrictions and work-from-home policy may have tax implications, since employees working from home may establish for their company “presence” in the country in which they are located physically, thus might create tax obligations in that country on the company, even if it has no intention to operate in that country | Adv. & SPA Roni Shraiter


Due to the coronavirus outbreak, in recent months, we have witnessed many social and economic changes in Israel and worldwide, while travel restrictions and quarantine forced employees in multiple industries – in the hi-tech sector in particular – to work from home.

Those engaged in hi-tech are familiar with working from home; however, the reasons this time are different: following the COVID-19 outbreak, many organizations are encouraging their employees to work from home for the sake of their health and wellbeing, as well as, for higher efficiency.

In some cases, employees reside in a different country than the one in which the company is based, in other cases, employees, who have relocated to another country, now want to return to their country of origin until the pandemic passes. Board meetings were replaced by video conferences, and the participating board members are not necessarily located in the same country.

Employees’ relocation from one country to another has tax implications, since those employees may establish “presence” of the company they are working for in the country, in which they are physically located, thus creating tax liabilities of that country on the company, either as a result of creating a “permanent establishment” or due to the change of the company’s control and management location, while the company has no intention of operating in that country, and don’t have any economic benefit from that.

Control & Management and Permanent Establishment

In general, a resident of Israel, whether an individual or a company, is subject to taxes in Israel by virtue of his residency. A company is considered a resident of Israel for tax purposes if it was incorporated in Israel and/or the control and management of its business is carried out from Israel. This definition may create tension between the taxing rights of various countries, e.g., if a company was incorporated and operates in a foreign country with laws similar to those of the State of Israel, while the control and management of its business is carried out from Israel. In such case, a question may arise with regard to the residency status for tax purposes in each country, where is the company subject to taxes, as well as, what is the applicable tax rates.

Moreover, when employees operate in a country other than the company’s country of residence, the company may be liable not only to pay taxes, but also to report in that country due the income generated on its territory. In case there is a tax treaty between the relevant countries, the business activity will be subject to taxation in the country where the company’s employees are located only if a “permanent establishment” was created in that country, within the meaning of that term in double tax treaties. It should be noted that while a company is subject to taxes on all its income in its country of residence, the taxes that apply to “permanent establishment” in the country in which the income is generated, will apply only with respect to the activities of the permanent establishment. Allocating the income to the permanent establishment should be carried out in accordance with an economic analysis that takes into account the contribution of functions that form the permanent establishment.

It should be noted that in most cases, the answer to the question of whether a corporation’s activity in any country can be considered a permanent establishment is not always clear, and requires a per-case review.

Many Israelis hold long-term positions in foreign companies and reside outside of Israel. Due to the coronavirus pandemic and having the option to work from homes, some of them preferred to return to Israel until the storm passes. This raises the question of whether the employees working from their homes in Israel during this period could create a permanent establishment in Israel for the foreign companies they are working, in which case the companies will be liable to report and pay taxes for the income generated in Israel.

A similar question arises with regard to company shareholders, who often fly to executive meetings in a country, in which their company is based, while currently they hold meetings from Israel via video conferences, and therefore, it might be argued that the “control and management” are in Israel, and thus the company should be considered as an Israeli resident.

The OECD addressed these heavy issues in April 2020 in a guidelines document regarding the effects of the COVID-19 pandemic on the tension arising between different countries with connection to their right to tax corporations and individuals operating on their territory. Among other things, the document defines COVID-19 as a force majeure, and accordingly, it appears that the presence of corporate employees in another country as a result of the coronavirus should not, in itself, create a permanent establishment for that corporation in countries where its employees reside. In addition, holding executive meetings by way of video conferences due to COVID-19 related travel restrictions, should not affect the company’s residency status.

It should be noted that although Israel an OECD member country, and is supposed to act in accordance with the organization’s official guidelines, there is uncertainty with regard to the Israel Tax Authority’s possible interpretation of such guidelines. Recently, our firm has been approached extensively by multinational groups, the employees of which have returned to Israel and continue to work from here, as well as from Israeli shareholders who are forced to “manage” the foreign companies they own from Israel, remotely, while many aspects of these issues remain unclear.

*The author is a Partner and Head of the Tax Department at RSM Shiff &Hazenfratz Co. CPA

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Roni Shraiter (Adv.) C.P.A
Partner and Tax Department Manager