• Daniel Foster, Director |

With borders closed around the world, the sheer volume of tax rule changes and guidance issued by tax authorities over the past two months has been overwhelming. By the time you read this there will be another update from somewhere, and indeed many employees will finally emerge from home and actually start working where they are supposed to be (or maybe not). I've tried to give a coherent overview of the current state of play in this article.

Let's start with the more general OECD views, reiterated on Tuesday afternoon (5 May) and then look at how some countries are specifically adapting their rules. I'll also provide an update on how European countries have agreed to treat commuters and frontier workers, for both tax and social security, which is really interesting (so let's leave that until last).

OECD treaty guidance

On 3 April, the OECD issued guidance on the COVID-19 tax situation which effectively supplements the Commentary to the Model Tax Treaty.

Corporate tax

There is a big focus, of course, on permanent establishments (PE) and corporate residency / place of effective management (POEM), given that employees and directors are "in the wrong country" carrying out their duties. The guidance is quite clear that, if these changes in location are exceptional/extraordinary and temporary, then there should not be a PE or POEM problem.

Under the PE test, the OECD reminds us of two important points:

  • A home office needs to be at the disposal of the employer (owned or rented) in order to constitute a fixed place of business PE; and

  • The temporary conclusion of contracts by dependent agents should not create a PE (i.e. it is not habitual, as the test requires).

However, this guidance is predicated on the assumption that the COVID-19 border closures have caused a change of normal location. If the company had a PE or POEM problem before the lockdowns and the border closures have exacerbated it, then I would not expect too much sympathy from the tax authorities.

With regards to individuals, the OECD guidance considers two main issues, explored below.

Individual residency status under the treaty tie-breaker tests

It is not up to the OECD to interpret domestic residency rules, so an individual will be judged resident of a state (or not) under existing local rules (some of which have changed - see below), and if they establish dual tax residency because of border closures then the treaty tie-breaker tests come into play as usual. In this case, the OECD comments that a person who acquires residence in a state where they are temporarily located, under extraordinary circumstances, should not be considered exclusively resident of that state for treaty purposes.

This guidance is clearly very limited in scope. It is unlikely that someone who is temporarily stuck somewhere would acquire tax residency in the first place. But perhaps it is comforting to business travelers camping in a hotel for three months longer than they intended. The more common problem will be medium-term moves that become longer-term, or commuters that become work-from-homers, between countries that have conflicting residency rules and/or no split-year rules. Each case will need to be considered on its own merits in the usual way - is there a permanent home available in one or both or neither state? If both or neither, where is the center of vital interests? If the center of vital interest test becomes relevant, then family units that are unable to relocate will be most impacted. Employees repatriating back to family should tie-break to the 'home' country I would expect.

Source of earnings when employment performed away from normal host state

For this topic it is best to break out four categories:

i) Government wage subsidies should be sourced to the country (i.e. may be taxed under Art. 15 of the treaty) where the individual would have normally worked before border closures. This is a textbook 'originating cause' source rule.

ii) Other regular employment income should be taxed where the employment is actually performed (even if this is not the usual location of employment). This is just restating the normal work-day apportionment rule - earnings from employment have an originating cause every day, in the country where that work is physically done, regardless of the location of the employer or the payroll. Some countries have announced they will be flexible on this rule - see my notes further below.

This strict work-day sourcing rule has perhaps the most far-reaching consequences for workers locked-down in the wrong country. For example:

  • New international local hires that cannot physically move to the host county are on-boarded remotely and start performing work for a foreign employer

  • Intended secondees and international transfers begin their new roles for foreign affiliates under new contacts but do not physically move

Quite apart from the sourcing issues, what are the wage tax withholding and social security obligations of the foreign employer? It is a minefield, to be blunt, but see iii) below.

So what to do about these cases? Ideally, postpone the change of employment entity / hire until the person can physically move. If that is not possible, employ them in a local entity in the new role (and new compensation if relevant) for the benefit of the foreign entity - in which case the transfer pricing implications need to be considered. Should there be an SLA and cross-charge? For a few weeks, maybe not. But will the local entity accept the cost? And can they be easier transferred abroad later (labour law may play a role here)?

Of course these cases also have corporate tax implications (see above), but these are perhaps less of a risk - which makes a pleasant change!

iii) The administrative burden of having employees working in a country they were never intended to work in can be a nightmare. Are you really going to register your Romanian subsidiary for Latvian wage withholding because one employee is stuck there for two months? The OECD is "working with countries to mitigate the compliance and administrative costs" of these unintended outcomes. Good luck to them (really).

I should note here the complexities experienced around shadow payroll at this time (as if it were not complex enough). When a secondee is posted but does not physically move, and remains paid at home, should compensation be shadowed in host, given there are no workdays? Probably not, although some countries will insist on reporting all employees. And certainly many countries want social security regardless of workdays - but in both countries? These and other questions are keeping expat payroll managers busy.

iv) Frontier workers (daily cross-border commuters) are excluded from this OECD treaty guidance because many countries have separate treaties with very specific rules applicable to this population, including non-returning day tests. I cover this topic further below.

Country tax policy responses

By now almost every country in the world has announced some kind of tax policy response to the COVID-19 crisis. Mostly postponement of tax deadlines but also many tax breaks, from loss relief to payroll tax holidays. KPMG are keeping track of them here.

There have also been some changes to substantive tax law and practice. There are too many to consider them all, but two in particular are very instructive of the sort of responses that are possible with respect to tax residence, treaty relief, exemptions, sourcing and corporate tax.


The US has announced a number of tax policy responses, but there are three that concern us here:

  • relief from the Substantial Presence Test, for non-resident individuals present in the US during the 60-day COVID-19 Emergency Period

  • disregard days in the US during the Emergency Period for the purposes of satisfying the test for relief under the Dependent Personal Services article of a US tax treaty

  • for outbounds, waiver of certain requirements to qualify for the foreign income exclusion and foreign housing cost amount, where qualifying periods are interrupted by evacuation or repatriation


  • non-resident employees who usually work overseas but are performing that same employment in Australia as a result of travel restrictions for three months or less will not be taxable on those earnings in Australia

  • where this three month limit is exceeded, the tax authorities will consider all facts and circumstances and may extend the relief

  • if company board meetings are held in Australia only because of travel bans, that by itself will not impact a company's tax residency status

  • the unplanned presence of employees in Australia due to travel bans will not create a permanent establishment (provided there was no PE prior to the travel bans and there are no other changes in the company's circumstances)

  • foreign employers need not register for wage tax withholding merely because an employee is working in Australia only because of a travel ban (and will leave before 30 June)

I believe these are very sensible rules and perhaps models for other countries to follow, even retrospectively. I should also note here that the UK has relaxed its day count rule for the Statutory Residence Test (a test which I have often found to be excessively complex to begin with!).

Frontier workers

As I am currently based in Switzerland, I could not write this article without mentioning frontier workers, aka. "travailleur frontalier", "Grenzarbeiter" or "daily cross-border commuters" (the French phrase certainly sounds the best).

In Basel, Geneva and Lugano, in particular, we see a lot employees living and residing in Germany, France, Italy and working every day in Switzerland (not usually the other way around, given that wages are typically higher in Switzerland). The same happens all over Europe. Consequently, neighbouring countries have concluded special treaties applying to frontier workers. These treaties override not only the national rules but also the cross-border employment income rules in the main tax treaty, i.e. Art. 15.

The border closures have had an enormous impact on this population. Not the least of which is whether they even still qualify as frontier workers at all. Over the past few weeks the tax authorities of several nations (notably France and Germany) have announced or confirmed that, in terms of their frontier worker treaties, days spent working in the home country because of border closures will generally continue to be taxable in the host country where work would normally have been performed prior to lockdown.

While this is a very welcome clarification for frontier workers, what is most interesting is that this approach is also being taken with some other commuters (e.g. weekly not daily), who would otherwise be taxed in terms of Art. 15 of the regular treaty. We have seen this with Austria-Germany, for example, e.g. commuters resident in Germany with no current workdays in Austria may be taxed as if they do. Similarly, the Swiss cantons of Basel-Stadt and Zurich announced that they will accept non-resident wage withholding (quellensteuer) in respect of employees of Swiss employers who are not physically working in Switzerland. However, they would also refund such withholding if ultimately another country claimed taxing rights (given that Swiss tax is always lower). So a typically pragmatic Swiss approach!

EU Social Security

Finally, I want to mention the impact that the border closures have had on social security contributions and coverage for multi-state workers in Europe (EU + EFTA).

Workers posted from one EU/EFTA country to another may remain in their home country social security system, both in terms of contributions and benefits. This is facilitated by obtaining an A1 certificate from the home state, which exempts the worker from social security in the host state (the EU equivalent to a certificate of coverage).

For multi-state workers, individuals will remain in their home system if they work at least 25% in their country of residence. The same applies to self employed (which includes directors in many countries).

Since the border closures, most multi-state workers, who previously commuted, are working 100% in their country of residence (home office). Although 25% is an annual test, there was some concern that such workers would need to involuntarily switch social security systems under the multi-state rules. Fortunately, the EU has recommend and national authorities have stated that days worked at home because of lockdowns may be disregarded for this purpose.


I do hope the rules have not changed again in the time it took you to read this article! As can be seen, the tax landscape for cross-border workers is changing rapidly and it has become quite complex to navigate. It is comforting to note, however, that the tax policy response has generally been sensible and pragmatic. I can only hope that this attitude prevails well into next year's tax filing season, when we shall look back wearily at the chaos of 2020.

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