The OECD secretariat has issued recommendations concerning the application of international double tax treaties during the Covid-19 pandemic

On 3 April 2020, the OECD Secretariat published recommendations concerning the procedure for applying international double tax treaties in the context of restrictions imposed by governments and aimed at preventing the spread of the COVID-19 infection.

Below the OECD Secretariat's main conclusions are set out concerning key cross-border issues.

1. Issues associated with the creation of a permanent establishment.

OECD clarifications

The OECD provided its conclusions in relation to the following three situations:

1) a permanent establishment is created at the location of an employee performing his/her job duties remotely.

An exceptional and temporary change of the location where employees are performing their job duties owing to the COVID-19 crisis, for example work from home, should not create a permanent establishment for the employer;

2) an agent-type permanent establishment is created.

If an employee of a foreign entity which is a non-resident, or if another person, enters into an agreement outside their usual (permanent) place of business owing to the COVID-19 crisis, this does not create an agent-type permanent establishment for the entity. However, another approach may be appropriate: namely, if an employee usually entered into agreements on behalf of the entity in his/her country before the restrictive measures had been imposed;

3) the restrictive measures affect the calculation of the period of a construction site's existence , which allows the issue to be resolved of whether a permanent establishment is set up.

The period when the activities at a construction site were temporarily suspended is included in the period of of such site’s existence for the purposes of a permanent establishment of a foreign entity being set up. This means that, in connection with the idle time caused by the pandemic, the duration of this period is not suspended.


The first OECD clarification applies to cases when an employee of a foreign entity stayed in Russia during the period of the restrictive measures, or, conversely, when an employee of a Russian entity found himself/herself ‘blocked’ in the territory of a foreign state but maintained the ability to work remotely. During the quarantine, work from home may be performed for an extended period of time; this entails the risk that the place of remote work will be recognised as a permanent establishment of a legal entity.

The second clarification applies to situations when an employee of a foreign entity which is a non-resident, or if another person, enters into agreements on behalf of a legal entity (e.g. an employee of a foreign entity who temporarily stays in Russia, or an employee of a Russian entity who is unable to return from abroad).

Taking into account the OECD clarifications, no permanent establishment of a legal entity is created in either case since the change of the place of work is temporary. In other words, such place of work cannot be treated as ‘usual’ or ‘permanent’.

The OECD recommendations regarding a construction site seem incomplete since they are justified by only one aspect: according to the general rule, when work is temporarily suspended, the existence of the construction site does not cease. The OECD exemplifies this by circumstances referred to in paragraph 55 of the commentary on article 5(3) of the Model Convention (seasonality, absence of material or labour resources).

However, in our opinion, to include the idle time caused by the COVID-19 pandemic in the overall period of a construction site's existence is unfair and goes against the general logic of the OECD recommendations. The examples of breaks in the construction process as set out in the Commentaries relate to circumstances which have been forecast or depend on the relevant company. The current situation cannot be classed as falling within such circumstances. Consequently, it would be more appropriate to rely on the period for performing the work at the construction site as set out in the relevant contract. Therefore, in our opinion, the issue of calculating the period of a construction site’s existence in the context of a pandemic needs to be further worked through and clarified.

2. Issues connected with a company’s residence status (place of effective management).

OECD clarifications

The temporary change of the location of the main executive directors and other officers of a legal entity is an emergency situation limited in time owing to the COVID-19 crisis. Therefore, such change should not lead to a change in the place of the relevant legal entity’s tax residence.


The OECD, with good reason, points out that the COVID-19 crisis may raise the question of changing the ‘place of effective management’ of a company as a result of the relocation of the main executive directors or other officers (or the impossibility of such relocation).

For example, the persons managing a company may, for the duration of the quarantine measures, fulfil their functions from the place where they have become caught up in the pandemic, rather than out of their usual office, since borders have been closed and air travel has been cut. For a director of a company, such a place is most likely the place of the director’s residence. Accordingly, it may happen that, during such period, a company is managed out of a country (or several countries at a time) other than the country of such director’s residence.

The document issues a reminder that, for residence status, the place is important where a company’s activities are usually managed. Managing a company out of another country owing to restrictive measures does not make the country in question the usual place of management. Where the opinions of the countries regarding this issue differ, the OECD calls for the differences to be resolved drawing on mutual agreement procedures and taking into account additional factors.

The definition of Russian tax residence is based on similar criteria: executive bodies ‘regularly’ performing their activities, and management functions being ‘mostly’ fulfilled within the territory of Russia. If a company’s executive bodies perform their activities in Russia in a volume which is ‘significantly less’ than in other countries, then Russia is not treated as the place of management of the entity in question (article 246.2 of the Russian Tax Code).

This entails at least two potential problems for foreign companies with regard to their tax status being determined in connection with the adoption of restrictive measures.

  1. First, if the quarantine measures are extended and, based on the year-end, it turns out that the company’s officers, nevertheless, ‘mostly’ managed it out of Russia;
  2. Second, if, after the end of the quarantine measures, the entity is unable to resume its normal activities, including the functions of its executive bodies and officers (suspends its activities, is liquidated, etc.). This will mean that, in the first half-year (i.e. during the quarantine measures), the company had been managed out of Russia but then was not managed at all (with reference to its current, operating activities).

In both cases, a foreign entity being recognised a Russian resident leads to serious implications: for tax purposes, it is equated to Russian business entities and should fulfil all the obligations incumbent on a Russian taxpayer.

3. Issues associated with employees who work in one country but travel to the place of work from another country where they live (border workers)

OECD clarifications

If the state grants financial aid (subsidies) for companies to keep an employee’s job during the COVID-19 pandemic, then the income that such employee received from the employer should be attributed to the place where the work was previously done.


The OECD considers the situation from quite a narrow perspective: how payments to border workers should be taxed if the state grants subsidies for companies to maintain such workers’ salaries. According to the OECD, the payments that the employees receive under such circumstances most of all resemble severance payments. Therefore, by virtue of paragraph 2.6 of commentary on article 15 of the Model Tax Convention, such payments should be attributed to the place where the employee could have performed his/her duties under different circumstances. In most cases, this is the place where the person was working prior to the COVID-19 crisis.

For example, an employee travels to Finland to work but returns to Russia for the weekend. For the period of the pandemic, the employee stays in Russia. If, in such case, Finland subsidises the monies the employer uses to pay the salary, then, according to the recommendations, this income will have to be taxed in Finland.

However, contentious situations are not limited to this example. The OECD does not answer the following questions:

  1. how will such payments be taxed if the employee continues working at his/her place of residence (i.e. in the case of a forced stay)?
  2. will the recommendations change if the salary and other types of remuneration payable to such employees are paid out by the employer itself without any governmental aid?

The answers to these questions will depend, among other things, on the nature of the payment itself (to what extent it resembles severance payments) and whether the work was organised in the country of the employee’s stay (whether forced or not). Depending on the specifics of each situation, it becomes less clear whether the contentious payments should be attributed to the place where the employee had worked previously.

4. Issues associated with the place of residence of individuals being determined

OECD clarifications

The temporary stay of an individual in a state caused by exceptional (extraordinary) circumstances should not result in the individual receiving the status of a tax resident.


The OECD considers two situations.

1) First, an individual has temporarily entered another country and, owing to restrictive measures, is forced to stay there because of the COVID-19 situation.

This is hardly applicable to Russia as it is a stretch of imagination that foreign taxpayers will have to remain quarantined for over half a year. However, in some cases, even a short stay may result in a person being treated as a tax resident of a country where such person is temporarily isolated. This especially applies to European countries. For example, if a Russian citizen stays in the territory of the UK for over a month, he/she may automatically become a UK tax resident;

2) second, when a foreign employee has become a resident of his/her employer’s country but, owing to restrictive measures, has to stay in the country of his/her previous tax residence and again runs the risk of becoming a resident of it.

For example, when a foreign citizen has entered Russia with a view to taking up permanent work but has returned to his/her country of origin for the period of the restrictions.

In both cases the OECD believes that, if double taxation is eliminated, tax authorities should, when assessing the status of a tax resident, determine such status without taking into account the effect of any restrictive measures. For foreign citizens who have left for their country of origin this means, for example, that they should still be treated as Russian residents and that they should not restore the status of a tax resident of their country of origin.

What to think about

Formally, the OECD clarifications concerning COVID-19 are not binding on tax administrations. Still, in our opinion, they will be applied as a reliable source for the interpretation and application of international treaties.

At the same time, each specific situation needs a thorough analysis, taking into consideration effective legislation and the position of Russian financial and tax authorities.

To mitigate their risks, individuals and companies should document the circumstances proving that their stay (or the stay of their employees) in ‘another’ country was forced and temporary. If any disagreements occur, special attention should be given to the pre-trial settlement of a dispute, or the tax authorities should initiate the application of mutual agreement procedures. 

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