OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis


The COVID-19 pandemic has forced governments to take unprecedented measures such as restricting travel and implementing strict quarantine requirements. As a result of these restrictions, many cross-border workers are unable to physically perform their duties in their country of employment. These employees would have to stay at their home country and work through telework, and could even be laid off because of the non-performance of duties.

In the wake of these international issues,  the Organisation for Economic Co-operation and Development  (“OECD”) has issued an analysis called “OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis”(referred as the “OECD Analysis” in this this newsletter) on 3 April 2020. Mr. Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration, said “The exceptional circumstances of the COVID-19 crisis calls for an exceptional level of coordination and co-operation between countries, notably on tax issues, to mitigate the potentially significant compliance and administrative costs for employees and employers”.

This tax newsletter summarizes the OECD Analysis and discusses the potential tax implications that both Chinese enterprises and individuals should be aware of if they have to temporarily perform business activities or render employment services elsewhere as a result of the COVID-19 pandemic.

In detail

The OECD Analysis provides guidance on the application of international tax treaty rules in the following four areas:

  1. The residence status of individuals;
  2. Subsidized employment income of temporarily dislocated cross-border workers;
  3. The residence status (place of effective management) of a corporation;
  4. The issue relating to Permanent Establishment (“PE”).


The issues can be illustrated in the following examples:

- Mr X is stranded for a period in a country that is not his country of residence due to the travel restrictions and quarantine measures. Would Mr X become a resident of the country in which he is stranded? For example, in Canada, under the domestic law, an individual will be deemed a resident of Canada if he sojourns in Canada for a period of 183 days or more in the year.  In addition, once this deemed resident rule applies, he would be deemed to be a resident of Canada throughout the year.

In this regard, the OECD recommends that the tie-breaker rules in the relevant tax treaty applies to determine in which country the individual be a resident of, his home country or the country where he is stranded.

- Ms Z, a cross-border worker, is quarantined in her home country and as such cannot perform her duties in the “employer’s” country.  She would be working at home but receiving her employment income from the employer.  In addition, she may be subsidized by the government in the country of the employer. The question becomes what the source of the employment income is, in the home country where she is working or in the employer’s country where she usually performs her duties.

In this regard, the OECD recommends that the “source” of employment income is the place where the employment used to be exercised by the individual before the COVID-19 pandemic. In this case, it would likely be the country where the employer is, unless, the employment requires the individual employee to perform his/ her services in where the individual is residing.  The “source” also applies to the subsidies being provided by the government of the employer’s country. In the view of the OECD, such subsidies closely resemble termination payments.


Residence status (the place of management) of a corporation

Company A (a Chinese company)’s senior management and the board of directors are mostly resided and working in China, but because of the COVID-19 pandemic, the senior management and the board meetings are held in Hong Kong. Would Company A become a resident of Hong Kong in the year of the COVID-19 pandemic?

It is the view and recommendation of the OECD that temporary relocation of the place of management of a corporation should not trigger a change in the tax residence of the corporation, especially when the tie-breaker rule for dual residency in tax treaty applies.  The OECD Analysis points out that all relevant facts and circumstances should be considered to determine the “usual” and “ordinary” place of effective management and not only those facts and circumstances that pertain to an exceptional and temporary period such as the COVID-19 pandemic.

Creation of a PE

The OECD Analysis provides the following guidance on the creation of PE in respect of the COVID-19 pandemic.

(i) Fixed Place PE – Paragraph 1 of Article 5 of the OECD Model Convention defines PE as a “fixed place of business through which the business of an enterprise is wholly or partly carried on”.  The question is whether the exceptional and temporary change of the location where employees exercise their employment because of the COVID-19 pandemic creates a PE in the country where employees are stranded.

The OECD Analysis notes that such a circumstance would not create a fixed place PE, as a fixed place PE must have certain degree of permanency and be at the disposal of the enterprise which employs those employees.

(ii) Dependent Agent PE – Paragraph 5 of Article 5 of the OECD Model Convention defines an Agency PE as being created when three conditions are met. One of the conditions is that a dependent person, e.g., dependent agent or employee, habitually concludes contracts on behalf of the non-resident enterprise or plays a principal role leading to the conclusion of contracts that are routinely accepted by the non-resident enterprise without any material modifications.

Because of the COVID-19 pandemic, dependent agents or employees could be working temporarily from home and concluding contracts in their home jurisdictions on behalf of their non-resident employers or principals on a “habitual basis” or concluding contracts as a normal routine.  Will a dependent agent PE be created?

The OECD Analysis concludes that entering of contracts on behalf of the non-resident employers or principals for a short period of time because of force majeure and/or government directives are unlikely to be regarded as “habitually concludes contracts on behalf of the enterprise”. Therefore, an agency PE should not have been created.

(iii) Construction site PE –  Under Paragraph 3 of Article 5 of the OECD Model Convention, a construction site will constitute a PE if it lasts more than 12 months (in many tax treaties entered, e.g. those entered by China, the threshold is six months).  It appears that many activities on construction sites are being temporarily interrupted by the COVID-19 pandemic. The duration of such interruption of activities would however be included in determining the life of a site and would impact the creation of a construction site PE.

Unfortunately, the conclusion of the OECD Analysis is that temporary interruption of activities on a construction site due to the COVID-19 pandemic should not be excluded.

 Mazars’ Thoughts

1.  A number of countries such as Australia, Ireland and the UK have issued their own guidance and/or relief measures to address potential double taxation or unintended tax exposure due to exceptional arrangements as a result of the COVID-19 pandemic. In the case of Hong Kong and China, the respective tax authority will generally follow the OECD’s views and commentaries in interpreting and applying tax treaties unless they are contrary to the provisions in the domestic tax laws. Nevertheless, it is still up to various jurisdictions to decide whether to follow the OECD Analysis in applying the tax treaties.

2.  The OECD Analysis only deals with the above issues, i.e. the tax treaty context. The domestic law of the relevant jurisdictions will apply if there is no tax treaty.

3.  One item in the creation of PE which has not been dealt with is the Service PE. This is because the Service PE is not included in the OECD Model Tax Convention.  It is not clear whether the period of temporary interruption and inability to render service in light of travel restrictions and quarantine measures due to the COVID-19 pandemic during the project can be excluded. In this regard, on the premises that generally, the period of temporary dislocation of workers should be excluded in determining the duration of the project would indicate that the travel restrictions and quarantine measures can be excluded. Nevertheless, the workers should not be working during the days that they are quarantined. Otherwise, those days of quarantined should be counted.

4.  The OECD Analysis will not affect the compliance and filing obligations under the domestic law of a jurisdiction. The affected enterprises and individuals should be mindful of such filing obligations. In addition, enterprises should keep sufficient supporting document as evidence of exceptional and temporary changes in working arrangement during the COVID-19 pandemic.

In particular, in China, non-resident enterprises with no PE in China should still follow the “self-assessment and claim” mechanism stipulated in the Administrative Measures on Non-resident Taxpayers Claiming Tax Treaty Benefits to enjoy treaty benefits.

We, as Mazars, can assist in filing the relevant forms to claim treaty benefits, advising on what relevant supporting documents should be retained and obtaining the relevant documents including the Tax Resident Certificate.  We can also advise the Chinese enterprises going abroad on the announcement made by the source jurisdictions to avoid any un-warranted tax risks in the wake of the COVID-19 pandemic.