Home Office - Tax treatment in the cross-border area

Federal tax law definition of permanent establishments

According to Art. 50 DBG, legal entities are taxable on the basis of personal tax affiliation if their registered office or actual administration is located in Switzerland. In the case of personal tax affiliation, the tax liability is unlimited; however, it does not extend to business operations, permanent establishments and real estate abroad (Art. 52 para. 1 DBG). This unilateral tax exemption applies irrespective of whether the permanent establishment abroad (so-called outbound permanent establishment) is actually taxed.01 Conversely, foreign companies are subject to limited tax liability in Switzerland if they maintain a permanent establishment (so-called inbound-establishment) here (Art. 51 para. 1 lit. b DBG). Thus, the unilateral concept of permanent establishment has both a tax-relevant (in the case of an inbound transaction) and an exempting (outbound transaction) function. If the concept of permanent establishment is interpreted broadly, Switzerland, as a capital exporting state, should02 tend to lose tax substrate. Therefore, from a macroeconomic and fiscal point of view, a narrow concept of permanent establishment is more appropriate. This statement must be put into perspective insofar as this only applies if no double taxation agreement (DTA) is applicable. If a DTA is applied, a (too) broadly understood concept of permanent establishment can be "corrected" by attaching less weight to the business activity of the permanent establishment and thus also allocating less profit to it. However, since Switzerland has a wide

network of DTAs, which covers almost all countries of economic relevance to Switzerland, and since DTAs are regarded in Switzerland as merely tax-limiting, they are not subject to any tax.03 the unilateral requirements for a permanent establishment should be rather low and therefore the unilateral definition of a permanent establishment should be interpreted broadly.04 Only in the context of cross-border profit differentiation between the parent company and the permanent establishment under the DTA is the relevance of the business activity carried out by the permanent establishment to be taken into account. Consequently, the business activity carried out must be seen as a corrective to a too extensive extension of the right of taxation.

This very delicate balancing of the advantages and disadvantages of a broad definition of permanent establishment can be dispensed with if the unilateral definition of permanent establishment is interpreted in the same way as the definition in the Convention, which is also required by the literature.05

Art. 51 Para. 2 Sentence 1 DBG defines both inbound and outbound business premises as fixed business premises in which the business activity of a company is carried out in whole or in part.06 The tax-exempted outbound permanent establishment is therefore defined in the same way as the tax-entitled inbound permanent establishment. Art. 52 para. 2 sentence 2 DGB contains a non-exhaustive list of examples of permanent establishments.07 This positive catalogue has no independent meaning. Accordingly, permanent representatives, for example, establish a permanent establishment only if they can be assigned to a fixed place of business. The two criteria (a) fixed business establishment and (b) business activity, which are in a funds-purpose relationship,08 will be examined in more detail below.

Permanent business equipment

Local component

Fixed business premises are defined as facilities or equipment located at a specific place.09 Since home offices represent premises, the local component is always fulfilled.

Time component

In addition to the local one, a time component is required:10 In or through the business facility11 the activity of an undertaking must be carried on permanently or at least for an indefinite period.12 If the activity is only temporary in nature, it cannot in principle establish a permanent establishment, even if it lasts several years.13 Conversely, the premature cessation of an originally permanent business activity does not prevent it from qualifying as a permanent establishment.14

An exception to this is construction or assembly sites.15 They may establish a permanent establishment for tax purposes if they have been in existence for at least twelve months. The question arises as to whether it may be concluded from this that the concept of a permanent establishment must be understood in the sense that, despite the temporary nature of an activity, a permanent establishment is always established when the time limit of twelve months is exceeded. Against such an extension of the concept of permanent establishment it must be objected that, unlike construction and assembly sites, there is no legal provision according to which a business activity qualifies as a permanent establishment if a certain time limit is exceeded. The legally regulated twelve-month limit for construction and installation sites was the result of a Federal Court decision of 2 November 1984 in connection with the construction site for the Emosson dam, which was set up for several years. Even under the regime of the Federal Council Decree of 9 December 1940 on the levying of direct federal tax (BdBSt), the Federal Supreme Court affirmed a permanent establishment at the site of the construction site, primarily because of its great economic importance and its nature and organisation.16

Another argument against an analogous application of the twelve-month limit to activities other than assembly and construction is that construction sites such as the building of a dam regularly make intensive use of state infrastructure such as roads or electricity, the roots with the community are correspondingly close and therefore a right of taxation of the state in question can be assumed to be quicker than in the case of a service activity.

In another, unpublished case, the FTA affirmed a domestic permanent business establishment at a SAP consultant based in Germany, who worked for a company in Switzerland for thirteen months and was provided with a permanent workplace by the client to which he had access with his own key.17 Similarly, under the DBA with Italy, a permanent establishment of a branch of an Italian company entered in the Commercial Register, which had office premises which it rented for a maximum of two years in accordance with the lease agreement, was also approved. The Administrative Court of Lucerne justified this on the grounds that a branch office under commercial law is in any case a permanent establishment under tax law because a branch office is always established on a permanent basis.18 On the other hand, the FTA denied the existence of an outbound branch of a Swiss consulting firm, which was given a room by the German client (a hospital) for four months to view and copy documents.19

The practice of the FTA cited above suggests that a permanent establishment - provided the other criteria are also met - is regularly affirmed if the entrepreneurial activity lasts for twelve months or more, even if it is limited in time from the outset. Federal court rulings also point in this direction: In BGE 139 II 78, the existence of a permanent foreign business establishment rented for two years to provide financial services was explicitly not called into question in the outbound case. Consequently, the criterion of "permanent availability" should not be understood too narrowly.20 Temporary activities, provided they are economically significant, can also constitute a permanent establishment. Consequently, the criterion of permanency is not mandatory, but must be assessed in the light of the circumstances of the individual case in relation to the other criteria to determine whether a permanent establishment is set up.

Power of disposition?

General information

In addition to the local and temporal component, the majority of the teaching for the stock of the permanent establishment requires that the premises be permanently available to the company.21 The power of disposal is interpreted very widely: Ownership or a compulsory right of use of the business premises by the enterprise is not required for the establishment of a permanent establishment.22 Rather, according to doctrine and case law, it is sufficient if the business facility serves the company (directly), e.g. by virtue of an informal agreement on use.23 The question arises as to whether a permanent business establishment is already established if the employer tolerates or even prescribes that the employee work for the company from home.

According to the authors Agner/Jung/Steinmann, a permanent establishment is already assumed for acquisition agents if the acquisition agent does not carry out his activity in the business premises of the proprietary dealer but in his own.24 They justify their view by stating that it would be factually incorrect to reach a different conclusion from the OECD Commentary under unilateral law. The concept of a permanent establishment according to the OECD Commentary is discussed in more detail in Section 3 below.

A glance across the border shows that § 12 (1) of the German Tax Code (AO) defines the term "permanent establishment" very similarly to Art. 51 DBG: "Permanent establishment is any fixed place of business or installation serving the activities of the enterprise. [...].» The definition of a permanent establishment according to § 29 of the Austrian BAO (Bundesabgabenordnung) is also very similar: "Permanent establishment in the sense of the tax regulations is any fixed local installation or facility which serves to carry on a business or economic activity (§ 31)".

The German Federal Fiscal Court (BFH) had to decide on the following inbound case in 1974:25 The applicant was a corporation under American law. Its shareholder dealt with the sales promotion of a US-American manufacturing company. The applicant in Germany was considered to have limited corporation tax liability, although the shareholder rented the premises used in his own name. The court considered that it would be sufficient if the premises were available for the purposes of the company. The power of disposal could also be based on a rental agreement or on a gratuitous transfer.

Another case concerned a foreign management company which took over the external management of a hotel located in Germany. A general manager paid by her was appointed, who was allowed to have a working room in the hotel. The BFH also approved a permanent establishment of the foreign management company.26

According to the Austrian Independent Finance Senate (now the Federal Finance Court), the power of disposal over a business establishment is affirmed if the establishment employs employees of the proprietor.27 This is particularly the case where an employee places premises over which he/she has the power of disposal (but not the employer directly) in the service of the employer and thus provides the employer with the power of disposal. For example, office space rented by an executive on his or her behalf and made available to the company may be a permanent establishment of the company. Consequently, an employee's private home can also constitute a permanent establishment of the represented company if the employee regularly carries out professional activities there or has other employees of his employer work at his home. An employee's home would not qualify as a permanent establishment of the employer only if work for the enterprise is carried out there only in the evenings or at weekends.28 The mere fact that an employee occasionally telephones customers in his home or does certain work at home in the evening or on weekends does not make the home a permanent establishment of the company.

The German and Austrian case-law cited above all have in common that a permanent establishment was affirmed even if the company had no legal power of disposal over the premises. Nor was it assumed that the business facilities were used exclusively for business purposes. As a result, the requirements for the establishment of a right of taxation of the source state for company profits are reduced, which is also in line with the international trend towards "dematerialisation" of the concept of permanent establishment (softening of the definition of "fixed").29

However, this does not mean that every opportunity to use the premises for business purposes is eo ipso a business establishment. Rather, what the above cases have in common is that the entrepreneur had a de facto possibility of influencing the facilities and they therefore became part of the company.

The home office as a (part) inventory of the employee's premises is usually at the employee's disposal and not at the employer's: The company does not have free access, in particular no key, does not require the employee to work from home and therefore has neither a legal nor a de facto power of disposal over the premises. Therefore, a home office cannot, in principle, establish a permanent establishment.30 An exception applies in international relations if the entrepreneur has a de facto possibility of influencing the home office. The following use cases will illustrate this:

Anwendungsfälle

Pure telework

In the case of pure teleworking, i.e. an activity based on information and communication technologies, the work is performed exclusively at a workplace outside the company. The employee (e.g. the foreign correspondent of a media company) works entirely at home, i.e. place of work and place of residence coincide.

If the employer no longer provides employees with their own office space, even though they are dependent on a fixed workplace, but instead requires them to work from home, the home office used by the employee is put at the service of the company. Assuming a workplace at home is equivalent to an order to work from home. Therefore, both can constitute a permanent business establishment - but not necessarily a permanent establishment. The same should apply if the employee (e.g. a sales representative) uses the home office regularly only during one day per week, because the requirements for establishing a permanent establishment are all the less stringent the more the business activity takes place outside a fixed local institution. Whether or not the company compensates the employee separately for the use of the home office should not be the only decisive factor in the assessment, especially since the remuneration of the employee should always include a share of the costs for the use of the home office.31

Dwelling of posted workers

When employees of international companies are sent abroad (so-called expatriates), the employer or company often provides living space at the place of assignment. If the employee regularly uses the residential premises for business purposes as a home office, the question could rightly be raised as to whether this constitutes a permanent establishment.

In practice, however, even this should regularly be denied, especially since expatriates are only sent by the employer for a temporary period of time, which is why the time component is missing. In addition, expatriates regularly work in the interest of the company to which the employee is assigned and not for the company sending him/her. If there is a lack of a resource-purpose relationship between the home office and the business activity of the sending company, no permanent establishment can be established.32 On the other hand, in such cases, the employing company is often assumed to be the de facto employer, despite continued wage payments by the sending company. The salary payments made to the posted employee are subject to Swiss withholding tax due to the employment performed in Switzerland.33

Volunteer work from home

If, for example, an employee moves abroad for an indefinite period of time following his partner and works from his home office for his previous Swiss employer, whereby it is no longer expected that he will return there due to the distance to the parent company, the question could again be raised as to whether he will establish a permanent establishment abroad.

In this case, the employee places the home office at the service of the company, i.e. the home office promotes the purpose of the company. If the company also bears the costs of the home office, it expresses that it wants to use the private premises (partly) for business purposes. The question is whether an explicit order to use a home office is required or whether the employer's toleration of the use of a home office is not enough to establish a permanent business establishment. The necessity of an order could be argued, for example, that it should be up to the company - and not the employee - to decide whether a permanent establishment for tax purposes is set up, especially since it is the company, and not the employee, who must expect the tax consequences. However, this argument should not be given too much weight, as the use of a home office always requires the employer's consent. Consequently, it cannot be decisive whether the use of the home office is ordered or merely tolerated. According to the present view, a home office always constitutes a fixed place of business - but not necessarily a permanent establishment - if the home office completely replaces a workplace in the office for a longer period of time. Accordingly, the entrepreneurial use of the home office is likely to regularly prevail over its private use. On the other hand, if the employee retains an office workstation and uses the home office only occasionally, there is no fixed business arrangement.34 In the latter case, there is a lack of a particularly intensive relationship between the institution and the company, or the company's actual ability to influence the home office.

Business activity of the company

In addition to the fixed place of business, the permanent establishment presupposes the activity of a company (i.e. a business activity). Therefore, a company that does not carry out any business activity (e.g. a company that merely manages its own assets) cannot establish a permanent establishment under unilateral law.35 A permanent establishment then presupposes that the business activity is carried out for the company of the parent company, which is always fulfilled in the case of salaried employees due to their subordination relationship. This is not the case for self-employed persons: As they are not in a subordinate relationship, they are independent taxable entities and therefore do not constitute a permanent establishment.

Art. 51 (2) DBG does not impose any requirements regarding the qualitative and quantitative materiality of the business activity.36 This was in contrast to the concept of permanent establishments under the BdBSt, which still required a qualitative or quantitative relevance.37 Nevertheless, the Federal Supreme Court and practice also under the DBG presuppose - albeit only in intercantonal cases - that a qualitatively and quantitatively substantial part of the company's business activities is carried out in the permanent business establishment.38 The Federal Court interprets the requirement of qualitative and quantitative materiality broadly:39 The qualitative relevance is affirmed in constant case law if the activity is part of the actual business operation. According to practice, the quantitative element is considered to be fulfilled if the activity is not of minor or secondary importance.40 The qualitative relevance can be assumed quickly, because every activity belonging to business operations is qualifying, even if it is only a cost centre and does not generate its own profit (e.g. legal service of a bank).41 Quantitative relevance is intended to avoid excessive fragmentation of (cantonal or communal) tax sovereignty.42 It is judged by the Federal Supreme Court on the basis of the importance of the permanent establishment activity as such (absolute) and not on the size ratio to the overall operation (relative).43

In BGE 139 II 78, E. 3.1.2 (in an international outbound-case without DTAs), the Federal Supreme Court stated at the beginning that Art. 51 para. 2 DBG did not place any requirements on the business activities carried out in the permanent establishment and that "in principle all activities connected with the fulfilment of the statutory purpose in the broadest sense" were to be subsumed, irrespective of their significance within the company as a whole.44 In this respect, the concept of permanent establishment in Article 51(2) of the DBG goes beyond that of the old federal tax law or intercantonal law.45 This would in fact indicate that even minor, insignificant or insignificant activities which do not directly contribute to the generation of profits may constitute a permanent establishment. The Federal Supreme Court also stated that the requirements for permanent establishments abroad were somewhat higher than those for permanent establishments in Switzerland. It justified this mainly with the different interests of the Swiss tax authorities in relation to permanent establishments with the subjective tax liability in the inbound case and the unilateral exemption in the outbound case, as well as with the fact that double taxation agreements only have a restrictive effect. In case of doubt, permanent establishments abroad "tend to be interpreted in favour of Switzerland's right of taxation".46 The Federal Supreme Court also examined whether the alleged foreign permanent establishment of a group company can be assigned "a tax-relevant part of the business" in the financial sector.47 It compared the annual salaries of a total of USD 50,000 paid to the four part-time employees on the Cayman Islands, each with a workload of 20%, who were expressly permitted to pursue other gainful activities under their employment contracts, with the figures in the annual financial statements (assets of around CHF 647 million, interest income of around CHF 18 million). The Federal Court concluded that, in view of the "lean structures" and the "marked contrast" between the annual salaries and the other figures in the annual accounts, it remained unclear what the facilities available in the Cayman Islands had actually contributed in detail to the creation of value.48 In summary, the Federal Court held that the activities in the Cayman Islands lacked sufficient substance and thus did not meet the criterion of carrying on business in a foreign permanent establishment. For this reason, the Federal Court refused to exempt interest income in Switzerland.

Without wishing to go into this decision in detail, it must be criticised in that the Federal Supreme Court imposes different requirements on inbound and outbound operating sites, although it still explicitly stated in E. 2.4.2 and 2.4.2 that a uniform concept of operating site must be assumed.49 Had it been an inbound case, the existence of a domestic permanent establishment would most likely not have been doubted, especially since the international concept of permanent establishment is generally interpreted broadly.50 The decision also fails to deal in depth with the concept of a permanent establishment under Art. 5 of the OECD Model Convention (OECD-MA), although the Federal Supreme Court regularly interprets the unilateral concept of a permanent establishment in the light of convention law.51 As already explained in Section 2 above, the problem of the double relevance of the concept of permanent establishment means that the unilateral concept must be interpreted in the same way as the concept under treaty law. The concept of a permanent establishment according to Art. 5 OECD-MA will therefore be dealt with in more detail below.

Definition of business premises according to OECD-MA

In cross-border situations, the analysis of whether a home office establishes a permanent establishment in Switzerland or abroad must be based on the relevant double taxation agreement (DTA), if one exists at all. This takes precedence over state law according to doctrine and practice.52 Since the DTAs do not have a tax-establishing function but only a tax-restricting function, they are able to limit the unilateral definition of permanent establishment for inbound cases and to extend the unilateral definition of permanent establishment for outbound cases, provided that the foreign state also has an extended definition of permanent establishment.

Swiss agreement policy follows the OECD-MA in defining the permanent establishment. Art. 5 OECD-MA contains a separate definition of permanent establishment. Paragraph 1 defines the term permanent establishment as a fixed place of business through which the business of an undertaking is wholly or partly carried on. This definition largely corresponds to that of Art. 51 para. 2 sentence 1 DBG, which (even if the legislative materials do not contain any corresponding indications) suggests that Art. 5 OECD-MA53 was the inspiration for Art. 51 para. 2 DBG.54 On the other hand, Art. 5 paras. 4 to 6 OECD-MA contains additional provisions on activities of a preparatory or ancillary nature (para. 4) as well as the dependent (para. 5) and the independent (para. 6) representative, which are missing in the federal legal description.

Permanent business equipment

On 12 October 2011, the OECD Committee on Fiscal Affairs published a public discussion draft and, following a public consultation procedure, a revised public discussion draft on 19 October 2012 on the interpretation of the concept of permanent establishment according to the OECD-MA.55 The OECD commentary, which plays a central role in the interpretation of DTAs, is to be revised,56 a point 4.8 should be added, which states, as follows: "Although it is possible for the activity of a company to be carried out wholly or partly from the home office of a natural person (e.g. an employee), the fact that the premises are available to a natural person working for the company does not automatically mean that the premises are available to the company. Whether a home office is available to the company or the individual depends on the facts and circumstances of each individual case. In many cases, the exercise of the professional activity is an activity of such secondary importance that it cannot be assumed that premises are available to the company. If the home office is used regularly and continuously and it is clear from the factual circumstances that the enterprise has encouraged the employee to work from his home (e.g. because the employee is not provided with office space although an office is required given the nature of his work), the home office could be considered to be available to the enterprise".

According to the proposed addition to the commentary on Art. 5 OECD-MA, a permanent business establishment establishes, for example, an adviser who stays in the foreign state for a longer period of time and provides his advisory services from his home office.57 However, no fixed establishment is established for a cross-border commuter who does most of his work from home, even though the employer provides him with working space at the location of the head office, because in this case the use of the home office is not required by the company.58

The above proposed additions have not yet been included in the official commentary of the OECD-MA (version of 15.7.2014).59 The OECD Council, the supreme decision-making body, would have to decide on the new commentary. Assuming that the proposed additions to the commentary on Art. 5 OECD-MA will be approved by the OECD Council, it can be stated that Art. 51 para. 2 DBG should be identical with the term "fixed place of business" used in the Convention: A fixed place of business presupposes that the home office completely replaces a workplace in the office for a longer period of time.

Corporate activity of the company

According to the official OECD commentary, a permanent establishment is established if the business establishment carries out all or part of an activity of the enterprise.60 On the other hand, according to Article 5 para. 4 lit. e OECD-MA, auxiliary or preparatory activities, such as facilities for the storage, exhibition or delivery of goods, cannot establish a permanent establishment, even if they are carried out by a permanent business establishment. The rationale behind this is that such services are so far removed from actual profit that it is difficult to attribute any profit to the business entity concerned.61 This is intended to avoid the constitution of a permanent establishment and the associated administrative costs being incurred in at least two countries, without any significant profit being allocated to the permanent establishment in the context of profit accrual.62

Consequently, only activities that constitute an essential and significant part of the company as a whole may qualify.63 It is further assumed that a profit can be allocated to the permanent establishment.64 However, this does not mean that business activities only qualify if they contribute directly to the generation of profit.

The distinction between qualifying corporate activity and ancillary activity is very difficult and can only be assessed on a case-by-case basis. It is sufficient for the establishment of a qualifying business activity if the activities constitute a material and significant part of the business as a whole.65 The direct provision of services to customers regularly qualifies as a significant business activity.66 Therefore, one or more permanent establishments at the location of the home office(s) is to be assumed if, for example, a law firm only has meeting rooms and the lawyers carry out client work from home, because in this case one cannot speak of a subordinate business activity. Conversely, according to the author's view, an in-house legal counsel of a bank, for example, who works exclusively from home and who has no working space at the bank, cannot establish a permanent establishment, because he does not provide any actual banking services, has no customer contact, does not charge the customer for any services, and his share of the company's profit cannot be determined reliably or at all, even though his activity is indispensable for the operation of a bank.

Bottom line

Under both unilateral and DTA law, a home office should not in principle be allowed to establish a permanent establishment. On the other hand, a home office can, according to the present view, become a permanent establishment for tax purposes if the employee - for whatever reason - is not provided with a workplace although he or she would be dependent on one for his or her work for the company, and if he or she makes a significant and decisive contribution to the provision of the company's services from his or her home office for an indefinite and long period of time. If a home office becomes a permanent establishment, the source State has a right of taxation.