PROBLEM AREA 1

Permanent establishment when working from home

When a Nordic company is deemed to have a permanent establishment in another Nordic country, there are financial and administrative consequences. This can happen, for example, because the employee works from their home in another Nordic country.

Assessment practices are complicated and vary from country to country. This creates uncertainty and makes it less attractive to hire employees from other Nordic countries and/or to allow these employees to work from home. In other words, it limits mobility and opportunities for Nordic citizens.

The recommendation for removing this barrier is to agree on clear conditions for when work in the country of residence should be considered a permanent establishment for tax purposes. The criteria should be as objective as possible. If you want to maximise mobility, they should also be as lenient as possible. To provide additional security for businesses, it should be possible to obtain a fast, simplified and binding pre-authorisation.

Example

An employee residing in Denmark is employed by an employer in Norway but works part of the time from his or her residence in Denmark.

If the Norwegian employer is deemed as having a permanent establishment in Denmark because the employee works from home, the implications include:

The Norwegian company becomes subject to limited tax liability in Denmark and must prepare a Danish corporate tax return.
An employer must be registered in Denmark for payroll reporting and withholding tax on the employee's Norwegian salary income.
The principles for allocating income to the permanent establishment must be determined.

The barrier to mobility

The concept of permanent establishment is generally interpreted in accordance with Article 5 of the OECD Model Tax Convention

The OECD Model Tax Convention, a model for countries concluding bilateral tax conventions, plays a crucial role in removing tax related barriers to cross border trade and investment. It is the basis for negotiation and application of bilateral tax treaties between countries, designed to assist business while helping to prevent tax evasion and avoidance. The OECD Model also provides a means for settling on a uniform basis the most common problems that arise in the field of international double taxation. Jf OECD,

. A permanent establishment exists in this context when a company carries on business wholly or partly through a permanent establishment in another country.

Legislation and practice concerning permanent establishment is extensive and complex. The focus below is therefore limited to the significance of the home office in a Nordic context.

There is a significant variation in the practices of individual countries, which can easily create uncertainty and doubt for businesses. As seen in the example above, a permanent establishment can also have significant consequences for the company.

The issue is thus a barrier to hybrid and remote working in the Nordic region, and the same issue has been identified at the EU level

The issue of permanent establishment has also been identified as a barrier at EU level, cf. the European Economic and Social Committee's encouragement to the Commission of 18 July 2022.

. However, the EU has limited competence in the tax area. The high level of uncertainty, combined with the potential consequences, may mean that employers choose to restrict the possibility of remote work for employees residing in another Nordic country, and potential employees may turn down the work. Alternatively the company may incur significant costs by investigating the practice and/or registering a permanent establishment.

Overall, Norway is the strictest country when it comes to having a home office constitute a permanent establishment for tax purposes. Denmark and Sweden are moving in a more lenient direction, where working from home constitutes a permanent establishment for tax purposes to a lesser extent than previously. In Finland, practice is not yet as clear on the boundaries of when a home office results in a permanent establishment for tax purposes. The differences between countries are detailed at the end of this section.

The scope of the barrier

Any company that hires an employee who resides in another Nordic country and performs all or part of his or her work in the country of residence should consider whether or not to establish a permanent establishment in the employee's country of residence. The issue is thus a significant barrier for businesses and remote working across borders in the Nordic region

The issue of permanent establishment has also been identified as a barrier at EU level, cf. the European Economic and Social Committee's encouragement to the Commission of 18 July 2022.

Solution

It is recommended that the Nordic countries establish common conditions to determine when work in the country of residence, including from a home office, should be considered a permanent establishment for tax purposes. As far as possible, this should be done in the form of relatively objective criteria.

The rules should be as lenient as possible when the remote work is driven by the employee's own wishes and not driven by the employer's business interest in the employee's country of residence.

To give the employer added security, it would be beneficial to provide the option to quickly obtain a simplified and binding pre-authorisation. To ensure that circumstances do not change over time, including the foreign employer's business interests in the employee's country of residence, an annual renewal of the prior authorisation may be required.

Benefits for citizens/businesses

For Nordic companies, it will be easier to assess when they can allow employees from other Nordic countries to work remotely. This reduces the risk of unexpected costs and more administration. It also makes it more attractive to hire citizens from other Nordic countries while allowing them to work from home.

The recommended solution will also increase the mobility of Nordic workers, who will have greater opportunities to take jobs in other Nordic countries – even if they want to do part of their work from a home office, for example.

Implications for the Nordic countries

The tax revenue derived from working days performed by a single employee in another country is extremely limited. If the recommended solution is implemented, it will not have a significant impact on an individual country’s tax revenues.

The Nordic tax authorities will experience a reduced administrative burden in relation to enquiries about permanent establishment assessments for employees working from home. It also provides an overview of the number of people who work from home.

Practices for the home office and permanent establishment

Below is a description of the different Nordic countries' practices in relation to the significance of a home office in the assessment of whether foreign companies must establish a permanent establishment in the country in question.

Denmark

In Denmark, the tax law practice for when a home office constitutes a permanent establishment for tax purposes for a foreign employer company has primarily been created through binding answers. It is thus the foreign companies' doubts about when a permanent establishment (for tax purposes) will be established that have given rise to most of the published practice on the home office and permanent establishment. A review of all permanent establishment decisions from 2019 - 2021 shows that 75% of the binding responses were related to home offices, illustrating the uncertainty in this area.

When looking at the latest Danish practice on permanent establishment as a home office, including SKM 2020.298.SKTST, it is a condition that the employee's work for the company is ongoing and long-term. In addition, the following factors favour a home office as a permanent place of business for the company:

The employee has no other permanent workplace available where the work is usually performed.
The company agrees that the employee performs part of their work from home. This can be stated directly in the employment contract or implied.
The employee’s work from home does not occur randomly and sporadically, but is planned or can be planned.
It is beneficial for the business activity performed from the home office to be performed from Denmark, whereby the employer has an interest in the work being performed from Denmark.

To summarise, Danish practice is moving in a more lenient direction. This means that, to a greater extent, it is accepted that working from home does not constitute a permanent establishment in cases where the employee wishes to work from home for personal reasons and employers do not have a commercial interest in the employee working in his or her country of residence.

Sweden

In Sweden, the Swedish tax authority issued a statement on 13 May 2022 (Dno.: 81677220), in which the Swedish Tax Agency explains its position on the question of when an employee working from home risks creating a permanent establishment for the foreign employer.

This statement supersedes a previous statement from 2015. In the newer version, the Swedish Tax Agency places greater emphasis on whether there is a requirement from the company that the employee works from home or whether working from home is due to other reasons (e.g. personal reasons). This is expected to result in a permanent establishment being set up in fewer situations. Below are two examples from the statement that show situations where working from home either does not or does create a permanent establishment status:

Alice lives in Lund and works in Copenhagen for a Danish employer (Company A). Company A only operates in the Danish market. When it comes to the ability to work from home, Company A has a policy under which employees must meet the deadlines set out in the Øresund Agreement. According to the Øresund Agreement, a Swedish Øresund commuter can work a maximum of half of their working hours from home in any three-month period and still only be taxed in Denmark for the entire salary. However, this only applies if the salary is not charged to a permanent establishment that the company has in Sweden. Alice wants to reduce her commute and will work from home two days every two weeks and three days every two weeks.

The Swedish Tax Agency considers that working from home does not result in company A establishing a permanent establishment in Sweden. Alice's home is not considered to be at the company's disposal. The company has not required Alice to work from home, nor does the company have any interest or benefit from the work being done in Sweden.

Even if Alice were to end up working from home up to five days a week, the Swedish Tax Agency does not consider that this would result in Company A establishing a permanent establishment in Sweden. This applies as long as there is no requirement from Company A for Alice to work from home. However, this means that the Øresund Agreement no longer applies.

Frank works for the Danish company F. Company F is a travel agency that sells ski holidays and beach holidays, primarily to Danish customers. During the COVID pandemic, the company was forced to reduce their space in Copenhagen. Company F has decided to keep the smaller premises size even after the pandemic and has arranged for employees to work from home two days a week on a set schedule to adjust staffing to the new location. Frank therefore works from home two days a week at his residence in Malmö. Frank sells trips to the company's customers, both as package holidays and individual solutions.

The Swedish Tax Agency considers that company F is establishing a permanent establishment in Sweden. Frank's work at his residence is due to an explicit requirement from the company, and the home must therefore be considered to be at the company's disposal. Frank is performing the core business of the company, not a preparatory or supporting activity.

Finland

As of December 2022, there is no published case law on the influence of remote work on the assessment of the existence of a permanent establishment. There is no clear published practice on when working from home may or may not result in a permanent establishment for tax purposes in Finland. Since the report's cut-off point, Finland has published a guide.

Norway

In an opinion from April 2022, the Norwegian tax authorities have stated that the use of a home office can result in a permanent establishment in Norway for the foreign company. This is especially true if the company does not provide the employee with another office and the use of a home office is a fixed arrangement that the company has accepted. In the opinion of the tax authorities, it is irrelevant whether the use of a home office is at the employee's request.