SMART WORKING AND THE RISKS OF CONFIGURING A PERMANENT ESTABLISHMENT

The progressive rise of digitalization in businesses has led to an increased utilization of smart working for the performance of work by employees and/or collaborators. Therefore, a careful evaluation of all the risks associated with the potential configuring of a permanent establishment for a foreign company on Italian territory, or vice versa, a permanent establishment of an Italian company on foreign territory has become necessary.

The risk of configuring a permanent establishment has emerged following the publication of certain documents by the OECD and some responses to inquiries made by taxpayers to the Revenue Agency.

With the increasing adoption of technology, the OECD in the 2017 updated version of the OECD Model introduced the concept of “home office”. To determine whether a “home office” may or may not qualify as a place at the disposal of the company, a careful evaluation of the facts and circumstances of each case is required.

If the conduct of business activities at an individual’s residence (for example, an employee) is sporadic or incidental, it is not possible to configure a permanent establishment. However, if an office located at the employee’s residence is used continuously for business activities on behalf of a company, and it can be deduced from the facts and circumstances that the company has required the employee to use that location to perform the company’s commercial activities (for example, not providing an office to an employee when it is necessary for the nature of the work), the “home office” could be considered a permanent establishment.

In cases where the presence of a hidden permanent establishment could be identified (either in Italy or in a foreign country), the issue of correctly attributing the income generated by the permanent establishment to the “employer” company must be resolved. This should be determined according to the principles outlined in Article 7 of the OECD Model and Article 152, paragraph 2, of the Italian Income Tax Consolidation Act (TUIR). The employer (whether resident in Italy or abroad) would be responsible for paying taxes and penalties on the additional income determined, while the worker would not have direct tax consequences but could face indirect consequences such as the cessation of remote work, reallocation, etc.

Paragraphs 18 and 19 of the Commentary to Article 5 of the OECD Model Convention identify some necessary conditions for the existence of a fixed place of business within a state’s territory:

• The “availability” of the company’s residence located in the other state.

• The continuous use of that location.

• The conduct of activities falling within the core business of the parent company.

Technically speaking, regarding the first requirement, it cannot alone be useful to affirm or exclude the presence of control by the foreign company, given the progressive emergence of professions unburdened by the necessity of an “office”. Some indicators that, combined with other elements, could suggest control and the existence of a permanent establishment might include:

• Compensation paid to the worker for the use of a room.

• Reimbursement by the employer of expenses incurred by the worker (office furniture and computer equipment, light, internet connection, etc.) for the use of the residence.

• External signs of business activity – such as stationery, letterheads, stamps, signs outside the residence, a national bank account.

To prevent and reduce the risk of challenges from financial authorities, it could be beneficial for the parties to define, through a specific agreement, the scope, and limits of smart working. In particular:

• The transfer of the worker to a country different from that where the company is located should be based on personal reasons and not the company’s interest in expanding into foreign markets.

• No compensation or reimbursement should be provided for the use of spaces used as an office or for expenses incurred.

• The worker’s ability to return to the company’s premises should be specified, albeit with a lower presence percentage compared to smart working.

Considering what has been highlighted so far, it becomes evident that, in the presence of certain requirements, work conducted in smart working mode can configure a permanent establishment in the worker’s country of residence. It is important to note that the rules and criteria for establishing the existence of a permanent establishment vary from country to country and can be subject to different interpretations. Although there is currently no specific consolidated Italian practice, it is advisable to try to prevent the risks of potential disputes regarding the existence of a fixed place of business by structuring the objective methods of work performance and the contractual and organizational relationships with the worker adequately.

STS Legal Studio is available to assist its clients in the analysis, verification, and resolution of potential issues related to the use of smart working for professional activity performed by employees and/or collaborators.