The ongoing digitalization of the economy has undoubtedly allowed individuals to carry out work activities from their home without being physically present in an office, and in some cases to live in Countries where their employer has not a formal presence.
In this context, a relevant question arises on whether a “home office” in a Country different from the one where the employer carries out its business can lead to a claim – by local tax authorities - of Permanent Establishment (“PE”).
The issue of “home office” was dealt with by the OECD. Notably, the OECD Commentary points out that a home office does not rise a PE when “the carrying on of business activities at the home of an individual (e.g. an employee) will be so intermittent or incidental that the home will not be considered to be a location at the disposal of the enterprise”.
From an Italian tax perspective, the presence of a “remote worker”, who interfaces exclusively with its foreign employer, possibly using digital tools and devices, should not necessarily constitute a PE within the definition under Italian Tax Law.
However, this view might not be accepted by the Italian Tax Authority, as shown below.
On a preliminary basis it is also worth stressing, very in brief, that Article 162 of Italian Income Tax Code states that “1. (…) the term “permanent establishment” means a fixed place of business through which a non-resident enterprise carries on all or a part of its activity in the territory of the State (…). 2. the term “permanent establishment” includes in particular: a) a place of management; b) a branch; c) one office; d) a workshop; e) a laboratory; f) a mine, an oil or gas field, a quarry or other place of extraction of natural resources, including in areas outside territorial waters where, in accordance with customary international law and national law concerning the exploration and exploitation of natural sources, the State may exercise rights over the sea-bed, its subsoil and natural resources; f-bis) a significant and continuous economic presence within the territory of the State, built in such a way as not to result in its physical presence within that territory. 3. A construction, assembly or installation site, or the exercise of supervision activities related thereto, shall be considered a “permanent establishment” only if such site, project or activity has a duration of more than three months. (…) 6. (…) if a person acts in the territory of the State on behalf of a non-resident undertaking and habitually concludes contracts or acts for the purpose of concluding contracts without substantial modifications by the undertaking and those contracts are in the name of the undertaking, or relating to the transfer of ownership, or the granting of the right of use, of goods of that undertaking or that the undertaking has the right to use, or relating to the provision of services by such an undertaking, such an undertaking shall be deemed to have a permanent establishment within the territory of the State in relation to any activity pursued by such an undertaking on behalf of the undertaking (…)”.
Art. 162 applies only in the absence of a Tax Convention between Italy and the foreign Country involved, otherwise reference must be made to the PE definition found in the relevant Tax Treaty.
Looking at the various indications reported in the OECD Commentary, it appears that a “material” PE in the form of a home office may exists when the business activity made at home is carried out “on a regular and continuous basis”, and if that activity is part of the core business of the foreign enterprise.
On the contrary, the mere working activity at the employee’s home is not enough to conclude that that place is at the company’s disposal.
In the case of a large scale “remote-working” scenario, the question arises as to whether smart workers’ activities performed in a foreign Country can create a PE for a foreign enterprise, either in a form of a material or personal PE, which might trigger new tax obligations for that business.
On April 2020 and January 2021, the OECD issued two documents providing guidance on the impact of COVID-19 pandemic on tax treaties. The OECD considered whether employees working from home in a country other than the one they normally worked in, could create a PE for their employer in that jurisdiction. The two OECD documents essentially conclude that the exceptional and temporary switch of locations where employees exercise their employment because of the COVID-19 pandemic should not create new PE for the employer.
Obviously, whereas pandemic situation is gradually coming to an end, work location changes may no longer be considered “exceptional and temporary”.
Indeed, if an individual continues to work from home (in a foreign Country) after the cessation of the public health measures imposed or recommended by the government in these last two years, the home office may be considered to have a certain degree of permanence.
Moreover, it should be properly assessed whether employee’s private dwelling is at the disposal of the foreign employer or not.
Even though part of the business of an enterprise may be carried on at a location such as an individual home office, that should not lead to the conclusion that that location is at the disposal of that enterprise simply because that location is used by an individual (e.g. an employee) who works for an enterprise.
The carrying on of intermittent business activities at the home of an employee does not make that home a place at the disposal of the enterprise. A home office may be rise a PE issue for an enterprise if it is used on a continuous basis for carrying on business of that enterprises and the enterprises generally has required the individual to use that location to carry on the enterprise’s business.
So, further examination of the facts and circumstances are required to determine whether the home office is now at the disposal of the enterprise following this permanent change to individual’s working arrangement.
It seems reasonable to assume that a home office can rise a PE issue for a foreign enterprise, especially if the employer provides the employee with office equipment.
Apart from the way in which the working activity is carried out, it is also necessary to remind that the existence of a PE cannot be claimed if the activities performed are of preparatory or auxiliary nature.
Likewise, in case of a “personal PE”, it is necessary to examine whether the employee habitually concludes contracts on behalf of the enterprise from his office on a temporary basis.
In case of an employee working from his home in another State for a short period of time due to force majeure as the COVID-19 emergency and in this situation concludes contracts on behalf of his company it is unlikely that said activity may be considered as “habitual”.
The Commentary to article 5 of the OECD Tax Model explains that the power to conclude contracts may be considered as habitual in case the presence in the other State is not merely temporary or transitory. However, OECD underlines that different conclusions may be reached in case the execution of contracts on behalf of the enterprise within his home was already carried out before the COVID-19 emergency.
The view of Italian Tax Authorities
The relocation or the hiring of personnel living and working in Italy, could draw the attention of Italian Tax Authorities concerning the potential existence of a “hidden PE”, as specified in many circulars, especially in these years of pandemic.
In this regard it is worth noting that, Italian Tax Authorities recently reminded the potential correlation between smart working and permanent establishment in some working documents (i.e. Circular Letter n. 33/2020 and Ruling No. 596 of September 16, 2021).
Indeed, in the field of the analysis of certain favorable tax regimes (i.e. “Impatriates workers”), Italian Tax Authorities argued that in view of the increasing use of smart working procedures by employees, also enabled by the growth of digitalization economy, it is necessary for the employers to carry out an overall assessment of all the risk related also to the possible configuration of a permanent establishment of a foreign company in Italy.
It is also important to note that Italian tax authorities (and Italian tax Courts) tend to rely on a “substance over form” approach, during tax audits, that can lead to claim an hidden PE.
Last, it is worth mentioning that the permanent establishment issue must be carefully evaluated taking also in consideration tax criminal law implications.
As a matter of fact, under Italian tax criminal code (Legislative Decree n. 74/2000), failure to file the income tax return when due is classified as a tax crime, whenever the unpaid tax due exceeds a certain threshold (currently set at euro 50.000 per year), and is punished with imprisonment for a minimum of 2 years up to a maximum of 5 years.
Edited by Giulia Sorci and Gabriele Giardina