The OECD clarifies when home offices create a permanent establishment
The OECD has recently published updated commentary in the 2025 Update to the Model Tax Convention, providing a more detailed guidance on when the use of a home office or other relevant place in another state should be considered a permanent establishment (PE).
As cross-border remote work becomes increasingly common, many employees wish to work from a country other than then one in which their employer is located. These arrangements are often driven by personal preferences, such as family considerations or the desire to spend time abroad and may be temporary or long-term. In many cases, the employer has no commercial need for the employee to perform work from the other country.
Businesses with employees working from a home office in other countries often face the risk that such arrangements could create a permanent establishment and thus the company being tax payable in the other country.
With the new commentary, the OECD provides a more modern and detailed framework that better reflects modern working arrangements. Importantly, it clarifies situations where a home office will not constitute a PE, even when work is performed cross-border.
Key elements from the New OECD commentary
The updated OECD commentary highlights several important considerations when assessing whether a home office constitutes a permanent establishment. A fundamental requirement is that the place of business must have a sufficient degree of permanence, meaning that short‑term or sporadic work from another country will normally not result in a PE. The commentary also makes clear that the mere fact that an employee uses a place to carry out activities related to the employer’s business does not automatically mean that the place is a place of business of the employer; this determination depends on the specific facts and circumstances of each case.
As a general indicator, the OECD notes that a home office should not be regarded as a place of business if the employee works less than 50 percent of their total working time from that location during any 12‑month period.
When the employee works more than 50 percent of their time from the home office, a more detailed analysis is required. In such cases, a key factor is whether there is a commercial reason for the employee to work from the other country. A home office is more likely to be considered a place of business for the employer if the employee’s presence in the other country serves a commercial purpose, such as:
- engaging directly with customers, suppliers, associated enterprises, or colleagues in that country
- cultivating a new customer base or identifying business opportunities
- identifying new suppliers
- collaborating with other businesses
- monitoring or managing contractual arrangements
- requiring real‑time interaction with customers or suppliers in different time zones
- performing services that require physical presence in the other country
Ultimately, the assessment must be based on an overall evaluation of all relevant circumstances, and no single factor is determinative.
Conclusion
The OECD’s 2025 Update represents a significant modernisation of the PE rules in light of widespread remote work. The new commentary clarifies that the use of a home office in another country does not automatically result in a permanent establishment. As a result, some businesses previously considered to have a PE may now fall outside of the PE scope, which could potentially also have positive tax consequences for the employer.
Given the potential impact of the new commentary, businesses with cross‑border employees should reassess their current arrangements and consider whether earlier PE conclusions should be revisited. The updated framework may open opportunities to reduce tax risk and simplify reporting obligations.
It is important to note that the United States has reserved the right not to follow the new commentary, meaning the updated guidance does not apply for U.S. treaty interpretation.
If your business has employees working remotely across borders, or if you are uncertain how the new commentary affects your current or past PE exposure, we are ready to assist. Our team can help you evaluate your situation, interpret the updated commentary, and ensure that your tax position is aligned with the latest OECD guidance. Feel free to reach out to us for an assessment.
