The OECD recently published updated guidance on the Permanent Establishment (PE) article of the Model Tax Convention, including specific guidance on cross-border working from home or other relevant place and its impact on the PE analysis. Please provide an overview of the guidance and the implications for businesses with employees working remotely from different jurisdictions.
Contributor: Michelle Adams, Director, Financial Services Tax, BDO
With the rise of remote and cross-border working, determining whether an individual’s home or another relevant place outside the enterprise’s jurisdiction constitutes a permanent establishment (PE) has become increasingly complex. The key consideration under Article 5(1) of the OECD Model Tax Convention is whether the location can be regarded as a “fixed place of business” of the enterprise.
This assessment involves several factors: the permanence of the arrangement, whether the location is effectively “at the disposal” of the enterprise, and the nature and regularity of the business activities performed there. Notably, if an individual works from a particular location for less than 50% of their total working time in a 12-month period, that location is generally not considered a PE. However, if the 50% threshold is met or exceeded, further scrutiny is required.
A critical aspect is the existence of a commercial reason for the individual’s presence in the host country—meaning that the individual’s physical location facilitates the business of the enterprise beyond personal convenience or simple cost-saving measures. Examples include engaging directly with local customers, managing supplier relationships, providing real-time support across time zones, accessing local expertise, or fulfilling regulatory requirements.
Additionally, even if a fixed place of business exists, it will not qualify as a PE if the activities performed are merely preparatory or auxiliary in nature, per Article 5(4). Each situation must be evaluated on its specific facts and circumstances, including the actual conduct of the individual and the commercial necessity for their location.
The guidance includes a number of illustrative examples on the application of paragraph 1 of Article 5 in the context of cross-border working from a home of other relevant place (e.g. holiday home, or home of a friend or relative). For instance, if an employee works from their home in another State for more than 50% of their time and regularly meets or services local clients, a PE may be created due to the permanence and commercial rationale for the arrangement. Conversely, if the same employee works from home only occasionally or interacts with local clients incidentally, a PE is unlikely. If an individual provides real-time support to customers in other time zones and their presence in the other State enables this, a commercial reason can be established, increasing PE risk. However, if remote work is driven solely by personal preference, family reasons, or cost savings, there is generally no PE.
To manage PE risks, enterprises should implement robust policies for tracking employee work locations and time spent, clarify the commercial rationale for any cross-border remote work, and ensure contractual arrangements reflect actual working practices. Regular reviews and clear documentation are essential to demonstrate compliance and mitigate potential tax and regulatory exposures.