On 23 November 2023, the tax authorities of Belgium and the Netherlands reached a significant agreement, referred to as "the Agreement," addressing the interpretation of Article 5 within their tax treaty. This agreement specifically focuses on the concept of permanent establishment (PE) in cases involving employees working from home (WFH). A copy of this Agreement published in the Belgian official gazette on 12 December 2023 can be found here [French ꘡  Dutch].

Outlined below is a summary of the key points covered in the Agreement.

For an in-depth analysis of the potential tax and social security implications of cross-border WFH arrangements, please refer to our previous article [English]. Additionally, for detailed insights into the New Tax Treaty concluded between Belgium and the Netherlands, please consult our dedicated article [English ꘡ Dutch ꘡ French].

Introduction

The primary objective of the Agreement is to provide clarity to employers in both countries regarding the criteria used to assess whether an employee's WFH in their country of residence establishes a permanent establishment (PE) as defined by Article 5 of the treaty.

As per the Agreement, the assessment for PE (i.e., determining whether an enterprise has a fixed place of business through which the business is wholly or partly carried on) should consider a comprehensive evaluation of all relevant facts and circumstances.

The Agreement outlines specific scenarios for this assessment:

• Occasional WFH: Generally, this situation does not create a PE as it lacks the necessary continuity to consider the place of work at the employer's disposal.

• Structured WFH with the option of working On-Site: While this scenario might lead to a PE, if WFH is a free choice by the employee and not mandated by the employer, it usually does not constitute a PE. However, a different conclusion might arise from a factual assessment if the home office is continuously used at the employer's behest, demonstrating the employer's disposal over the home office (e.g., in case the employer requires part of the work being systematically done from the home office).

• Structured and Mandatory WFH: In this situation, a PE could be implied if the home office is at the employer's disposal. This determination is based on factual inquiry and does not mandate a formal agreement (lease or property contract) for the use of the home office. According to the Agreement, the employer might be considered to have control over the home office (triggering the PE) if contractual obligations or lack of alternative workspace options leaves the employee no choice but to WFH; or if the employee does not have the possibility of freely deciding to end the home working situation. Importantly, the PE assessment does not hinge on whether the employer provides the necessary IT tools for WFH.

Practical application

The Agreement also provides practical guidance in scenarios where no permanent establishment is assumed:

• The “50% or less” rule: If an employee works 50% or less from home in their country of residence (assessed over a 12-month period), a permanent establishment is not to be considered. It is remarkable that this threshold aligns closely with, but not entirely matches, the threshold outlined in the framework agreement on EU cross-border telework for coordinating social security systems in cross-border employment situations (which uses the "less than 50%" rule rather than the "50% or less" threshold).

• The exception for preparatory or auxiliary activities: This exception under the Tax Treaty may apply to prevent PE recognition in situations where WFH might otherwise trigger a PE because the home office is at the employer's disposal. The Agreement clarifies that only auxiliary or preparatory activities benefiting the employer may fall within this exception.

Administrative guidelines from Belgian tax authorities are expected shortly to provide further details on this Agreement.

Should you have any questions, we are available to discuss the impact of this Agreement on your situation.