Restrictions and other measures to limit the spread of coronavirus have been in place in most countries throughout all or part of the past year, and many are set to continue for some time yet. These measures include travel restrictions which in some cases have led to individuals being unable to return to their usual country of residence or place of work. This can have an impact on the tax residency status of individuals and in turn can, in some cases, affect the residency of the employing business by creating a permanent establishment in another country where an employee is working. This can result in unwelcome increases in tax liabilities for individuals and their employers.
In April 2020 the OECD issued guidance which, together with government guidance, confirmed that residency status under double tax treaty clauses was unlikely to be impacted by individuals being unable to travel. Fast forward another nine months however, and the situation was becoming less clear, as the temporary presence in other countries became much longer than anticipated.
New guidance issued by the OECD in January 2021 confirms its view that an individual who is temporarily away from their home country, and becomes stranded in another country, may become tax resident under that country’s domestic rules but the individual is unlikely to be resident in the other country under the tie-breaker provisions of a tax treaty. Similarly, individuals who have returned home from assignment overseas may regain their original residency under domestic law, but the tax treaty is likely to determine that they continue to be resident overseas.
The new OECD guidance provides some comfort to those concerned about their residence status and the possibility of creating a permanent establishment. The OECD guidance is simply guidance, and it is keen to point out that it cannot be guaranteed how a particular tax jurisdiction will determine status, particularly in contentious cases.
This means there will still be cases where residency status remains unclear, and individuals and employers alike will need to tread carefully over the coming months to avoid creating any unwelcome and unexpected tax liabilities and reporting requirements.