Tax matters related to global workforce and remote working

During the COVID19 pandemic, workflows in many companies changed because of travel restrictions and restrictions on employees' access to their usual workplace. Since COVID19, work patterns in many companies have not returned to the previous norm but have evolved towards work being more frequently conducted from locations other than the ‘traditional workplace’ (so-called "remote working").

Especially in recent years, global companies have established policies for hybrid workplaces, giving the employees the opportunity to work fully or partially from their home address or another relevant location.

Hybrid workplaces are especially common in highly digitalized industries such as consulting, technology and finance. However, working from home is also becoming increasingly prevalent across a wide range of other industries as well.

Furthermore, it is increasingly seen that companies are recruiting managers and specialists who are based in a different country from where the company itself operates.

In 2024, PwC Global Workforce conducted a survey in which 56,000 people across 50 countries, focusing on work patterns, with a particular focus on remote working. The survey revealed that approximately half of the respondents have the ability to work remotely, that many respondents actually work remotely fully or partially, and that in the last 12 months more than half of these respondents have worked remotely in a country other than the one where their workplace/-employer is located:

The survey also reveals that the proportion of respondents working remotely in other countries is highest among chief executives, senior executives and other employees who have management or decision-making authority.

Finally, the survey shows that especially 'Gen Zs' and 'Millennials' use the hybrid way of working to work from another country, which indicates that the trend of hybrid work across borders is expected to grow in the future.

Although there is an increased tendency to allow hybrid and cross-border work in many companies, our experience shows, attention is not always paid to the unintended tax consequences that may be involved. Neither international nor national tax rules have yet fully adapted to the new working patterns that have gained ground in many companies.

Thus, there is no common approach among the tax authorities in different countries to assess when remote working constitutes a permanent establishment that will trigger tax liability for the company. In various cases, this can result in double taxation of companies with employees working in other countries. This creates significant challenges for companies in the determination of when, how and to what extent remote working can be allowed without incurring risks of double taxation for the company and the employees who work remotely. Additionally, there are risks of non-compliance with reporting obligations, etc.

The tax rules on remote working in a Danish context

The determination of whether remote working constitutes a permanent establishment in Denmark is based on Danish tax legislation and practices, as well as the double tax treaty between Denmark and the country where the company employing remote workers in Denmark is based. The assessment also takes into account the commentaries to the OECD Model Convention.

As a general rule, the rules on permanent establishments define a permanent establishment as a place from which a company's commercial activities are wholly or partly carried out.

A permanent establishment arises in particular if the following conditions are met:

• there is a place of business,
• the place of business is fixed/permanent, and
• the business is carried out through the fixed place of business, and/or
• there is a "dependent agent" who exercises a power of attorney to enter into agreements on behalf of the company for the sale of the company's products or services, etc.

During COVID19, the Danish Tax Agency published guidelines on the handling of permanent establishments during the period of travel restrictions, etc. These guidelines laid out principles for determining when work conducted from a home office constitutes a permanent establishment. This determination relies on an overall assessment whether a permanent establishment is established due to work in a home office. In this assessment, the following factors suggesting the existence of a permanent establishment:

• The employee does not have any other permanent workplace available where the work is usually performed.
• The company agrees that the employee performs part of his or her work from home. This may be stated directly in the employment contract or be implied.
• The employee's work from home office does not occur randomly and sporadically but is planned or can be planned.
• The business activity carried out from the home office is advantageously carried out from Denmark, whereby the employer has an interest in the work being carried out in Denmark.

Since the publication of these guidelines, the Danish tax authorities have continued to apply these factors. In recent years, numerous decisions on permanent establishment related to home office work have been published.

The Danish interpretation of the rules on home office is more expansive compared to the commentaries to the OECD Model Convention. Furthermore, Danish case law demonstrates a clear tendency for the Danish tax authorities to take a significantly stricter approach in cases involving persons with managerial authority than in other cases concerning permanent establishments in connection with work in a home office. This more strict approach also extends to employees directly engaged in the sale of the company's products or services – as opposed to employees who perform purely internal functions.

As mentioned above, companies recruit – to a higher extent than earlier – managers and specialists who are based in a country other than the country’s base of operations. This may lead to unintended tax consequences, as the decisions indicate that the risk of a permanent establishment is higher the heavier the employee's managerial role.

Tax rules in other countries

When considering permanent establishment risks abroad, it is important to recognize that each country has its own internal tax rules and interpretation practices. These variations can lead to significantly higher or lower risks of establishing a permanent establishment when employees work from a home office or other location for a foreign company. For instance, it is our experience that there are different thresholds for how long it takes before an activity is considered permanent, as well as the types of job functions that will typically result in a permanent establishment. This uncertainty poses challenges for companies in determining the extent to which employees can be offered to perform their work in whole or in part in other countries. Similarly, the implications of recruiting executives, managers and specialists based abroad require careful case-by-case evaluation.

How can PwC assist?

PwC has extensive practical experience in advising companies on permanent establishment risks, both in Denmark and abroad, related to remote working and the employment of executives, managers and specialists based abroad. Our services include:

• Assistance with mapping and documenting remote work patterns and specific risks
• Assistance in developing remote working policies abroad to reduce permanent establishment risks (do's and don'ts, etc.)
• Assistance with communication to employees to ensure that they are aware of obligations, etc.
• Assessment of whether remote working in a home office can be expected to constitute a permanent establishment
• The handling of a possible permanent establishment in relation to Danish and foreign compliance rules
• Assessment of transfer pricing issues related to remote working and permanent establishment and determination of the most appropriate remuneration method for a permanent establishment
• Advice on and handling of employees' tax liability.