COVID-19-related restrictions and their effects on the taxes on foreign corporate entities’ income
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The English translation below is unofficial. It has been made for the purpose of facilitating the understanding of the Finnish tax system and legislation. The original guidance text is released on our website in Finnish and Swedish, the official languages of Finland.
This statement presents the Finnish Tax Administration’s views on the impact of the COVID-19 pandemic and related public health measures, focusing on how to interpret tax-treaty articles on permanent establishments and on change of fiscal residence.
To prevent the spreading of the COVID-19 pandemic, many countries have imposed a number of public health measures including restrictions and various recommendations that have affected business circles everywhere and prompted international enterprises to arrange their operations in new ways. An example of the restrictions in Finland concerns travel across national borders. This measure has also had an impact on business trips and cross-border commuting.
The Secretariat of the Organisation for Economic Co-operation and Development released its recommendations in April 2020 on the proper interpretation, from the Secretariat’s perspective, of treaty articles under the current circumstances. On 21 January 2021, the OECD released a revised version of its guidance and recommendations. For more information, see the OECD website: Updated guidance on tax treaties and the impact of the COVID-19 pandemic (oecd.org).
On the subject of corporate taxation, the OECD’s guidance discusses the circumstances where a foreign corporate entity can be treated as having a permanent establishment in the other Contracting State, and the circumstances where the tax residency of a corporate entity can change from one Contracting State to the other. As COVID-19-related measures have been imposed or recommended by governments, including travel restrictions and curtailment of business operations, the Secretariat of the OECD has found it appropriate to release a guidance text, intended to provide a degree of fiscal certainty to corporate taxpayers during this exceptional period (when the public health measures are applicable). The purpose of the OECD guidelines on tax treaties is the general avoidance of double taxation without giving rise to any instances of double non-taxation where neither one of the Contracting States can impose taxes. However, every country, i.e. each jurisdiction, may adopt its own guidance to provide certainty to its taxpayers and make the appropriate decisions independently.
The OECD Secretariat’s guidelines coincide with the Finnish Tax Administration’s views on the impact of the pandemic on taxes to be imposed on the income of foreign corporate entities. Some issues and questions having to do with permanent establishments and the place of effective management as the tie-breaker rule for residence are discussed below. Another statement of the Finnish Tax Administration is posted on the tax.fi website regarding individual taxpayers: Effects of the coronavirus pandemic on taxes on income received under an employment contract in a foreign country (the six-month rule and forces majeures).
The definition of 'permanent establishment’ is found in Article 5 of the OECD Model Tax Convention. A permanent establishment is a fixed place of business through which the company runs some or all of its operations. Provisions of the tax treaties in force require that a permanent establishment (PE) must have a degree of stability both geographically and in terms of time. If the pandemic causes exceptional and temporary changes to a foreign corporate entity’s circumstances, these new circumstances do not automatically mean that the corporation would be treated as having a new PE in Finland. Correspondingly, if the pandemic causes a temporary standstill in activity at a construction site, the interruption does not affect the counting of time in order to determine whether a permanent establishment is formed; however, the days of interruption can be excluded from the total period of activity.
If an employee or director of a business enterprise works from home, a PE may be formed at the home office. This requires that the employee or director has a space at home where he or she works on a permanent basis. It may be that a Finnish-resident individual taxpayer is an employee of a foreign company. In normal conditions, they are stationed in the company’s country of residence, physically working there. However, due to entry restrictions for travellers imposed in that country, or due to other reasons such as public health measures including work-from-home recommendations, they stay in the family home in Finland, working there. This means that public health measures, not employer rules, are the reason for the exceptional work situation. In this case, the foreign company would not be treated as having a PE in Finland at the Finnish employee’s home unless, after the public health measures are lifted, the employee/director keeps working from Finland.
If an individual is authorised to represent a foreign company so that the authorisation extends to making commercial and other contracts on the company’s behalf, and this mandate is exercised habitually in Finland, i.e. the representative signs contracts from time to time, the circumstances may give rise to a permanent establishment. However, the above activity of a dependent agent will not be deemed “habitual” within the meaning of treaty provisions if, by way of exception, he or she has started working from home in Finland only because of public health measures, and will not continue to work from home when the measures are lifted.
Construction and installation projects
A building site or a construction or installation project gives rise to a permanent establishment for the company only if the activity lasts longer than the time threshold laid down in the applicable tax treaty. In the OECD Model Tax Convention, the threshold is set at 12 months. However, many of Finland’s treaties have a threshold different from 12 months. For example, under the treaty between Estonia and Finland, any construction job that lasts longer than 6 months gives rise to a permanent establishment on the site. Normally, the time of any short, temporary interruption is included in the calculation of time thresholds as if the construction were ongoing as usual.
However, if either Finland’s or the other Contracting State’s public health measures have caused an interruption on a site located here, the interruption can be excluded from the calculation of time. After the public health measures are lifted and the construction workers have returned to the site, the calculation of time thresholds is resumed immediately. As a result, for a site located in this country, the thresholds – that vary from one tax treaty to another – are calculated in terms of the total period of activity; adding the time preceding an interruption to the time when work goes on again.
Place of effective management
Starting 2021, if the place of effective management of a foreign corporate entity is in Finland, the entity can become a resident taxpayer here. If a tax treaty on income taxes has been signed between Finland and the corporate entity’s country of residence, any questions relating to possible double residence are resolved as laid down in the treaty. In the majority of Finland’s treaties, the tie-breaker rule for resolving double residence is at least partially based on the location of the place of effective management. However, if it is due to the pandemic that a corporate entity’s place of effective management has temporarily been relocated, it does not mean that the entity’s place of effective management has transferred to the other Contracting State.
How documentation should be presented
Foreign corporate entities must maintain a record of facts and circumstances of the events they encounter and how changes taking place in them are attributable to the pandemic. This documented and justifiable record must be presented to the Tax Administration. For example, a document signed by a representative of the main contractor at a building site could be regarded as evidence that the coronavirus situation had halted all work at the site. A mere general reference to the pandemic or a general reference to public health measures is not sufficient.