Financial Services

Mobility restrictions and their impact on tax residency rules

Published on 26th May 2020

Many people have seen their freedom of movement restricted as a result of the health crisis caused by COVID-19. Governments have adopted various measures preventing workers' access to workplaces located in other countries. Moreover, the tax residency of companies has also been affected, since one of the criteria to determine such residency is the seat of effective management; in other words the place where the strategic decisions for the business are taken.

In Spain, the tax residency of individuals is determined in accordance with the rules in article 9 of Law 35/2006, dated 18 November, on Personal Income Tax ("PIT"). Under such article, an individual will be deemed to be resident in Spain in either of the following three cases:

  • When the individual stays on Spanish soil over 183 days in a calendar year;
  • When the centre of his or her business or economic interests is in Spain; or
  • When his or her spouse (not legally separated) and dependent underage children are deemed to be resident in Spain (rebuttable presumption).

Therefore, under a literal interpretation of these rules, a person who remains in Spain for more than 183 days during 2020 as a result of the COVID-19 crisis, would be treated as a tax resident in Spain no matter how exceptional and incontrollable the circumstances.

In this context of international uncertainty, the Secretariat for the OECD published, on 3 April 2020, an "Analysis of Tax Treaties and the Impact of the COVID-19 Crisis", in which the OECD focusses essentially on issues relating to the tax residency of both individuals and companies, the risk of permanent establishment creation and the situation of cross-border commuters.

The analysis is particularly relevant for people whose work place is located in a State and who have been forced to work from a home located in another State. In these circumstances, the OECD Secretariat refers to two situations which may arise as a result of COVID-19:

  • Individuals who, due to different reasons, have seen themselves stranded in a country that may not be their actual place of residence; and
  • Individuals, who were displaced to another country, in which they were already tax resident, but who temporarily returned to their country of origin during the COVID-19 crisis.

In these cases, the OECD takes the view that such temporary dislocation derived from the crisis should not be taken into account in calculating days of presence in the country where such individuals carry out their work.

Some countries, such as the United Kingdom, have updated their guidance on this matter, and will disregard days spent in the UK by an individual due to exceptional circumstances linked to the reduction of mobility as a result of the COVID-19 crisis (closing of international borders, quarantine, etc.).

With respect to the tax residency of a company, the general rule in Spain is that a company will be considered tax resident in Spain if its place of effective management is on Spanish soil. The place of effective management is taken to be the location where central management and control abides.

Control is usually exercised by the highest level of management who sets the strategy for the company. The location of such executives in other countries as a result of the COVID-19 crisis could give rise to double residency disputes for companies. The tie-breaker rules in the OECD Model Convention (MC), article 4.3, should provide guidance for solving these disputes. In this context, the OECD Secretariat highlights:

  • On the one hand, Tax Treaties following the 2017 OECD MC refer to the mutual agreement procedure for competent authorities to solve residency disputes concerning a company. This determination will take into consideration all of the facts and circumstances in each case (e.g. (i) where the meetings of the company’s board of directors or equivalent body are usually held; (ii) where the chief executive officer and other senior executives usually carry on their activities; (iii) where the senior day-to-day management of the company is carried on; (iv) where the headquarters are located; etc.); and
  • On the other hand, Tax Treaties which follow the OECD MC prior to 2017 (which will include most of the Spanish Tax Treaties), tax residency issues are solved, through article 4.3, by reference to the place of effective management. The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made.

The OECD defines the COVID-19 pandemic as an unprecedented and extraordinary situation. Therefore, the temporary relocation of certain directors to a different State should not result in a change to the place of effective management of the company. According to the OECD, the place of effective management should be determined by regard to the “usual” and “ordinary” place of management, and by reference to circumstances which pertain to an exceptional and temporary period such as the COVID-19 crisis.

Another equally important issue arising as a result of the COVID-19 crisis is that relating possible permanent establishment ("PE") risks. As a general rule, tax treaties determine that business profits are taxed in the state of residence of the company deriving such profits and source states would only have jurisdiction to tax profits derived by a non-resident company if such company has a PE therein.

As mentioned, the COVID-19 pandemic has led governments to adopt several measures curtailing workers' ability to travel to their places of work. Such workers must, therefore, temporarily work from their home, possibly in a different country. However, the OECD has declared that such extraordinary situation should not lead to the creation of a PE in a second State, since such circumstances are temporary and due to force majeure. Moreover, the activity carried out in the home of an employee would lack a sufficient degree of permanency or continuity, nor could the home be deemed to be at the disposal of the employer. The requirements for such home to amount to a PE would not be fulfilled.

The same reasoning should apply where an employee may enter into contracts or negotiate such contracts from a different State to that of residency of the company. The activity of an employee or an agent in a State is unlikely to be regarded as habitual if he or she is only working at home in that State for a short period because of force majeure or government directives extraordinarily impacting the normal routine.

So far, Spanish tax authorities have not issued any guidance over the impact of the COVID-19 health crisis, as regards issues of tax residency status in Spain for either individuals or companies. It would be helpful for taxpayers to be able to rely on such guidance, in the same way as taxpayers in the UK, Ireland or Australia can rely on guidance from their local authorities. It would be advisable for companies which have been forced to adopt decisions remotely or hold virtual meetings and for individuals who have been temporarily stranded in Spain, to justify that such circumstances are due to mobility restrictions imposed by governments, so that such exceptional situations may not prevail over usual patterns of behaviour and decision-making.


* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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