Home Office Part I - Shift of tax nexus


Background

In the course of the current corona epidemic, many employees have been instructed by their employers to work from home in their so-called home office. Employers are thus following the latest recommendations of the BAG (Federal Office of Public Health). Daily working life has in result changed rather dramatically for all those that are affected. However, it is not only in times of the corona virus that the term home office is increasingly popular. Decentralized working from home office is becoming more and more common. From a tax point of view, one of the questions amongst other that arises within this context is whether the home office will create a permanent establishment of the company.

Tax liability due to permanent establishment

Companies are generally taxable at their registered office. However, they may establish secondary tax domiciles in other places if they have so-called permanent establishments there, i.e. a „fixed place of business“ in which their business activity is at least partially carried out. In principle, private premises may also qualify as such fixed place of business. In addition to the criterion of „fixed place of business“, it must be examined in particular who has the power of disposal over the corresponding (private) premises.

Particular view on the home office situation

Prevailing doctrine is of the opinion that under both, unilateral and DTC law, a home office may only lead to a taxable permanent establishment if the employee is not provided with a working space in the employer’s office premises, although he or she would be dependent to have such working space to carry out his or her work for the company, and if he or she makes a significant contribution to the company’s business activity from his or her home office for an indefinite longer period of time. As far as can be seen, and according to our experience from enquiries with the competent cantonal tax authorities in various cases, the cantonal administrative practice, guided by considerations of practicability, seems to share this, in our opinion, reasonable and cautious approach so far.

Home office in times of the corona virus

Due to the current corona epidemic companies are instructing their employees to stay at home and work for the company out of their home office. Home office activities are being carried out due to the current emergency and corresponding government regulations. Temporary work from home in times of the corona pandemic cannot be attributed to the employer and therefore, in our opinion, cannot lead to an adverse permanent establishment for Swiss tax purposes. Furthermore, such setup is in principle not envisaged to be of a permanent nature, which means that another essential constitutive element of the „permanent“ fixed place of business seems not fulfilled. Moreover, it is unlikely that the employer has the (legal or de facto) power of disposal over such premises, which is a further prerequisite for the existence of a permanent establishment.

Foreign administrative practice regarding home office

Foreign administrative practice regarding the qualification of a home office as a fixed place of business generally seems less reserved than the Swiss point of view. In a specific case, for example, the Austrian Federal Ministry of Finance has affirmed the qualification of a home office as a permanent establishment. The case concerned a sales manager with a working place in his private home. Attention should be paid therefore to cross-border situations, although it can generally be assumed that a home office – even following the (current) guidelines of the OECD – only leads to the creation of a permanent establishment in rather exceptional cases. However, the situation becomes problematic in turn if an employee can conclude contracts for a company in a foreign home office and has a corresponding authorization to do so. The employee residing abroad could thus possibly trigger a so-called dependent agent permanent establishment for the Swiss company abroad.

Conclusion

The current home-office activity of many employees due to the current emergency situation and corresponding governmental regulations should usually not lead to an undesired tax domicile of a company for Swiss tax purposes.

In an international (cross-border) situation if, for example, cross-border commuters or international weekly commuters are instructed to work from their home office at their foreign place of residence, the assessment through the foreign tax authorities might be different. We would assume, however, that the foreign tax authorities might currently also act rather with caution in this regard, taking into account the present special circumstances.