A new era: working from home and the permanent establishment risk
On 19 November, the OECD released a significant update to its Model Convention and accompanying Commentary. A key feature of this update is the newly added guidance addressing the risk of creating a permanent establishment (PE) in cross-border work-from-home situations. As remote and cross-border working have become an integral part of modern employee benefits packages, employers are increasingly seeking clarity on the tax implications of such arrangements. The new Commentary provides practical guidance and fills an important gap, as previous OECD Commentaries offered little detail on these pressing issues.
What are the tax consequences of remote working?
When employees work in a country different from where their employer is based, this can trigger tax implications for both parties, especially if the arrangement results in the creation of a permanent establishment (PE).
A PE typically arises when there is a fixed place of business through which the company’s activities are wholly or partly carried out. If an employee’s foreign workplace constitutes a PE, the employee may be required to pay income tax in that country on the portion of their salary earned while working there. For employers, the existence of a PE can bring additional obligations, such as the need to allocate part of their profits to the host country and potentially file corporate income tax returns there.
Working from home and remote working abroad: new developments
In its latest Commentary, the OECD reiterates that for a foreign workplace to qualify as a permanent establishment (PE), it must be both fixed and possess a sufficient degree of permanence. This could include working from a home office in another country, a vacation property, or even the residence of a family member or friend. However, the OECD clarifies that if the workplace is used only occasionally or for a limited period—such as during a summer stay—it generally does not meet the threshold for a PE. Additionally, a workplace will not be considered a PE if the activities conducted there are merely preparatory in nature. With regard to the framework for assessing whether working from home and remote working at a foreign location can lead to a PE, the OECD uses a two-step approach in the new Commentary.
First, if an employee spends less than 50% of their working hours at a foreign workplace over a 12-month period, remote work is unlikely to result in a PE. The OECD stresses that this assessment should be based on the actual time spent working, rather than what is stated in employment contracts.
However, if an employee works abroad for 50% or more of their working hours within a year, a more detailed analysis is required. In such cases, the facts and circumstances must be examined to determine whether a PE exists. The OECD highlights the importance of considering both the commercial nature and the type of activities carried out. Specifically, it must be assessed whether the employer has a genuine commercial reason for allowing the employee to work remotely from abroad.
Practical consequences
The OECD’s new Commentary offers employers clearer guidance and greater flexibility when it comes to managing cross-border work-from-home arrangements. In practice, these updates mean that remote or home-based work is now less likely to result in the creation of a permanent establishment (PE). However, it remains essential for employers to evaluate each situation individually and ensure that the specific requirements set out by the OECD are met. This increased clarity gives organizations the opportunity to revisit and update their remote work policies with more confidence.
For more information about the risk of a PE in cross-border scenarios, please contact us or reach out to your usual Meijburg advisor.
