OECD updates: remote work and Permanent Establishments

Since the pandemic many people have been working from home and continue to do so.  In the extremes some employers now have staff working remotely in another country. The OECD has recently updated its Commentary on the Model Tax Convention, introducing a more structured approach to remote work and its potential to create a Permanent Establishment (“PE”) in a foreign jurisdiction. While the treaty text itself was amended only in relation to Article 25 (Mutual Agreement Procedures), the revised Commentary significantly impacts the interpretation of Article 5, offering practical criteria for determining whether a home office abroad could qualify as a fixed place of business.

Moving beyond traditional criteria

Historically, PE assessments for home-based work relied on general principles of availability and permanence. However, these proved inadequate in addressing widespread remote work practices. The updated Commentary introduces two key cumulative tests:

• Temporal Criterion: How much of the employee’s work is habitually performed outside the enterprise’s premises?
• Functional Criterion: Is the employee’s presence abroad driven by the enterprise’s business needs rather than personal choice?

The traditional notion of “availability” is no longer decisive.

Quantifying Permanence

A major innovation is the introduction of a minimum presence threshold. As a general rule, no PE exists if remote work accounts for less than 50% of total working time over any 12-month period. Employment contracts matter but only if they reflect actual practice.

Exceeding the threshold does not automatically create a PE; a qualitative review is needed.

Commercial reasons matter

The functional test focuses on whether the worker’s foreign presence serves operational or commercial needs of the business, such as:

• Maintaining relationships with customers or suppliers in the foreign State.
• Providing training, assistance, or coordination services locally.
• Regular interaction with foreign-based employees.
• Covering critical time zones for service delivery.

Conversely, personal preferences, flexible work policies, or cost-saving measures do not qualify as commercial reasons.

Special note on Sole Proprietorships

For individual entrepreneurs, performing most business activities from a fixed location abroad generally constitutes a PE.  This is consistent with long-standing principles for professionals operating internationally.

Illustrative examples

The OECD provides practical scenarios:

• Case A: Three months abroad for personal reasons → No PE.
• Case B: One or two remote days per week (≈30% annually) → No PE.
• Case C: 80% presence abroad with client visits → PE exists.
• Case D: 60% abroad without clear business rationale → No PE.
• Case E: Remote work abroad serving clients in another time zone → PE likely.

The revised Commentary offers a nuanced framework aligned with modern work realities. PE determination now hinges on both the intensity of territorial presence and the business relevance of the worker’s location, avoiding automatic proliferation of PEs while addressing genuine cases of foreign business presence.

How can we help?

If you require tailored advice on how these changes could affect your business or have any further enquiries, please get in touch with a member of our International Services team on 01293 227670.