Permanent establishment and home-based work: the new OECD approach

Abstract

The increasing prevalence of flexible and remote working models in a cross-border context requires companies to assess more carefully the tax risks associated with employees working abroad. The update to the OECD Commentary on Article 5 of the Model Convention, published in November 2025, comprehensively addresses cross-border remote working, providing interpretative criteria to clarify the circumstances in which work carried out from an employee's home or other non-company location may constitute a foreign company's permanent establishment, paying particular attention to the temporal elements and commercial reasons underlying the company's presence in the foreign country.

The new guidelines

The OECD's focus is on the evolving nature of working patterns, which are characterised by the increasing prevalence of remote working and 'hybrid' arrangements, often involving cross-border elements. Previous guidance on home offices, set out in paragraphs 18 and 19 of the OECD Commentary, was fragmented and based on traditional assumptions which did not always adequately govern widespread phenomena. Paragraphs 44.1–44.21 address this issue by providing detailed guidelines based on a factual, case-by-case approach.

The new commentary reiterates that an employee's use of a dwelling or other 'non-business' location does not automatically constitute a place of business for the company. In accordance with the general principles of Article 5, the existence of a permanent establishment must be verified on the basis of the relevant facts and circumstances over a given period of time.

In this context, the criterion of the place being “at the disposal” of the enterprise, which in the past had played a pivotal role, is no longer of central importance. The fact that the company does not have free access to an employee's home is no longer sufficient to rule out a permanent establishment, particularly when other facts suggest otherwise[1].

One of the main innovations is the introduction of a practical, temporal-quantitative rule. In principle, if an employee works remotely from home or another relevant location (e.g. a second home, holiday home or relative's home) for less than 50% of their total working hours for the company over a 12-month period, that location cannot be considered a company place of business.

However, this threshold is neither absolute nor automatic; it is intended to serve as a presumptive criterion for excluding permanent establishment in most cases. If the 50% threshold is reached or exceeded, however, further analysis will be necessary. When calculating working time, an employee's actual behaviour is the main factor; contractual agreements (including relevant company policies) only apply insofar as they reflect this behaviour.

As expected, exceeding the time threshold alone is not sufficient to establish the existence of a permanent establishment. The Commentary clarifies that a second, functional requirement must also be met: namely, that there must be a commercial reason for carrying out the activity in the foreign country.

A commercial reason exists where the physical presence of the worker in a given state effectively facilitates the enterprise’s business activities[2] in the other contracting country. This may occur, for example, if the teleworker has direct and stable contact with customers, suppliers or associated companies in the foreign country; if they perform training, assistance or maintenance activities that require physical presence; or if they interact with other local employees or partners on an ongoing basis.

However, situations in which remote working is permitted solely to meet the personal needs of the employee, to retain qualified staff or to reduce company overheads are not considered to be commercial reasons. Similarly, the mere presence of customers or suppliers in a foreign country or in a different time zone is not sufficient to fulfil the functional requirement.

The Commentary pays specific attention to cases in which the remote worker is the main resource through which the company conducts its business. Such cases are typically attributable to sole proprietorships or non-resident consultants, and performing most of the business from a fixed place of business located in another country usually results in that place of business being classified as a foreign permanent establishment.

The examples provided in the commentary are central to the new interpretative framework. They demonstrate how the temporal and functional criteria must be applied together. Situations involving limited permanence or personal motivations (Example A) or remote working for less than 50% of the time (Example B) do not result in the identification of a permanent establishment. Conversely, a remote worker’s predominant presence abroad, accompanied by effective integration into the enterprise's commercial activity (examples C and E), may result in the establishment of a permanent establishment. Example D is particularly instructive in demonstrating that exceeding the time threshold alone may not be sufficient in the absence of a genuine commercial reason.