OECD 2025 Update: New Rules on Permanent Establishment for Remote Work

Key highlights

On November 19, 2025, the OECD released the 2025 Update to the Model Tax Convention, marking significant changes to Article 5 (Permanent Establishment “PE”) in nearly a decade. The update clarifies when remote or home working arrangements may create a PE, introduces a new analytical framework and establishes a 50% working time benchmark along with a commercial reason test. These changes are crucial for multinational businesses with cross-border remote workers, affecting treaty interpretation, compliance and audit risk.

We encourage those involved in global mobility within organizations to evaluate their current cross-border workforce, particularly frontier workers, temporary and permanent remote workers, digital nomads and international business travelers. This assessment will help determine whether the updated Commentary introduces any new risks or requirements for the organization. By taking a proactive approach, companies can confidently navigate the evolving guidance as it is adopted in local jurisdictions.

Commentary on Article 5 (Permanent Establishment): Working from home

The 2025 Update addresses the rise of cross-border remote work by introducing a framework to clarify when a home or relevant place can be deemed a fixed place of business. Previously, the Commentary suggested that working from home alone did not imply the home was at the enterprise’s disposal. The Commentary emphasizes that the existence of a permanent establishment depends on the facts and circumstances during a given period, requiring a degree of permanence. Activities deemed short-duration or incidental do not qualify.

Once permanence is established, the framework assesses whether the location is a place of business. If an individual works from home for less than 50% of his or her total working time over 12 months, this is generally not considered a place of business. If the threshold is met, the determination relies on overall facts and circumstances. The presence of an individual must be justified by a commercial reason, which arises when their location enhances business operations, such as interacting with local customers or suppliers. It is important to note that minor or incidental engagements do not qualify as a commercial reason. Additionally, allowing an individual to work from home or another location solely for employee convenience, talent retention, cost savings related to office space, or providing financial support for a home office should not be regarded as valid commercial reasons.

The Commentary provides five illustrative examples to clarify these concepts, highlighting various scenarios regarding the fixed nature of a place and the percentage of working time. Several jurisdictions have expressed reservations about the new Commentary. For instance, India does not accept the new tests, while Israel has specific criteria for measuring the 50% threshold and considers additional factors for determining commercial reasons. Other countries, like Nigeria and Malaysia, have also indicated differing interpretations or conditions regarding home working and permanent establishment. Thus, relying solely on the new OECD Commentary is not recommended, since OECD member states may still apply deviating rules on a local basis.

When addressing employer-specific elements, companies should reflect on the following critical topics:

Employer tax compliance considerations:

• Reporting and withholding obligations: Assess the requirement for your company to report and withhold taxes for employees based in the local Permanent Establishment (PE) and identify the necessary steps for compliance.
• Local social security contributions: Determine whether your company and local employees are obligated to contribute to the local social security system, and understand the compliance requirements. Consider any additional employer obligations, such as medical insurance.
• Cross-jurisdictional tax and social security requirements: Evaluate whether your employees are subject to tax or social security obligations in other jurisdictions. Identify actions needed to ensure compliance and mitigate potential double taxation or contributions for both the company and employees.

Infrastructure considerations:

• Local infrastructure requirements: Identify the necessary local infrastructure to meet downstream tax obligations, including the need for a local bank account, office space, address, representative or branch.
• System functionality needs: Evaluate whether your company requires enhanced system functionalities to accurately calculate, report and remit taxes, considering local profit and loss, payroll, employee data, treasury and currency management.
• Vendor and specialist capabilities: Assess whether you have the appropriate vendors and internal specialists to effectively address local compliance requirements.

Other considerations:

• Labor and employment laws: Review applicable labor and employment laws, including any specific local benefits and provisions that the company must offer.
• Immigration: Consider the relevant immigration requirements that may impact your workforce.
• Local statutory and corporate law requirements: Identify any local statutory requirements and corporate law aspects that need to be addressed.

These downstream tax implications are vital to evaluate whenever an individual works across borders, particularly when a PE is established. It is important to recognize that having a PE may inadvertently bring additional employees into the local compliance framework. Therefore, it is prudent to address these questions early on – ideally before a PE is triggered – to fully understand the broader implications.

Familiarity with the OECD’s updates, along with the considerations outlined above, equips those managing an enterprise’s cross-border workforce with the necessary awareness to:

• Develop appropriate policies, working rules and protocols for cross-border work, especially considering the OECD updates regarding home office PEs;
• Oversee cross-border workers in alignment with the enterprise’s risk tolerance;
• Advise the business on the costs and efforts associated with cross-border work arrangements;
• Manage risks and compliance related to cross-border work, engage the right subject matter experts and vendors for compliance.