Your Living Room Could Be a PE: The Hidden Side of Remote Work

A Portuguese Perspective with Global Context

Remote work has transformed modern business, but it also blurs legal and tax lines. In Portugal—and internationally—the key question arises: Could an employee’s home office create a Permanent Establishment (PE) for a foreign employer?

What Is a Permanent Establishment (PE)?

Under Article 5 of Portugal’s Corporate Income Tax Code (IRC), a PE is defined as a fixed place of business through which a foreign company carries out part or all of its business activities. This can include:

• Space at Disposal: A physical or virtual space used by the company, even without a formal right to use it.
• Authority to Bind: Power to negotiate or sign contracts, or perform core functions.
• Regular Business Activity: Operations that are central to the business, beyond preparatory or auxiliary roles.

Consequences of Having a PE:
If a PE is found to exist, the foreign company will be subject to Portuguese corporate income tax on the profits attributable to the PE. The tax authorities will determine the portion of the company’s overall profit linked to the activities carried out through the PE—such as the work performed from the home office in Portugal.
This allocation generally considers the functions performed, assets used, and risks assumed by the PE. If the work is minor or supportive, the tax exposure may be limited. However, if the employee in Portugal carries out core or high-value activities, a larger share of the company’s profits could be taxed locally.

Portuguese Tax Authority Rulings

• Process No. 7502/2020 (06/01/2021): A Portuguese public institution hired an Irish national to work fully online from Ireland. The Portuguese Tax Authority concluded that the exclusive taxing right belonged to Ireland, as the work was performed physically there.
• Process No. 461/2018 (29/05/2018): This ruling confirmed that a foreign employer without a physical establishment in Portugal may still need to register for tax and social security purposes when hiring remote workers. However, the mere fact that work is performed from home does not automatically create a PE, especially if the worker lacks authority to bind the company.
• Process No. 25329 (30/10/2023): A Portuguese resident entered into an employment contract with a Spanish company, performing duties remotely from Portugal. The AT concluded that, since the work is physically performed in Portugal, the remuneration should be taxed exclusively in Portugal.

OECD Guidelines

• Definition of Place of Business: Space used for business, at the company’s disposal, even if no formal legal right exists.
• Home Office Rule: A home office is not automatically at the employer’s disposal simply because an employee works there.
• When Home Office May Be PE: If the employer explicitly or implicitly requires the use of the home office and the work performed there is essential and continuous, it may create a PE.
• Exclusions: Activities of a preparatory or auxiliary nature—such as storage, display, advertising, or information gathering—are excluded from PE classification under treaties like the UK-Portugal DTT.

International Perspectives Beyond OECD Guidelines

• Spain: Recent rulings emphasized that a home office is unlikely to be a PE if the employee’s role didn’t change due to remote work, relocation was a personal decision, the employer did not cover relocation costs, and the employer had an alternative office available.
• Belgium: The Belgian tax administration has taken a cautious approach to home office PEs, focusing on whether the home office is genuinely required by the employer and integral to the company’s operations.
• United Kingdom: HMRC guidance reflects the view that a home office does not typically constitute a PE if used at the discretion of the employee and if the company maintains suitable alternative workspace elsewhere. Specific facts and circumstances can affect this conclusion.

How to Minimize Risks

• Clarify Role of Remote Work: Specify in contracts that remote work is for the employee's convenience, not mandated by the company.
• Offer Office Option: Make alternative office space available, even if not used.
• Avoid Contract Authority: Do not grant remote workers power to bind the company.
• Seek Expert Advice: Local tax guidance is essential for compliance with Portuguese and international rules.
• Request Binding Ruling: Consider requesting a ruling from the Portuguese Tax Authority to confirm the situation.

Conclusion

While remote work offers flexibility and productivity gains, it introduces complex tax questions. The Portuguese Tax Authority’s rulings and OECD guidance suggest that home offices do not automatically constitute a PE if they are used at the employee’s discretion and lack authority for core business decisions. However, each case depends on its unique facts and circumstances, and evolving interpretations call for careful evaluation.

Note: Laws and tax interpretations are evolving. Companies with remote workers in Portugal should stay informed and seek professional advice to navigate these complexities effectively.