Cross-border Remote Work and the Creation of a Permanent Establishment

The original wording of the Commentary to the OECD Model Tax Convention addressed the issue of home office arrangements only at a general level and was based on the premise that the mere use of a home office by an employee does not automatically result in the creation of a permanent establishment. The assessment was always based on an individual evaluation of the specific situation, without more precise reference indicators being available, which in practice led to a higher degree of uncertainty when assessing comparable cases across different states.

New OECD Interpretation: Emphasis on the Extent of Work and Business Reasons

The updated OECD Commentary introduces a more structured approach based on the assessment of two key aspects: the extent of work performed from home abroad and the existence of a business reason for performing such work in the relevant state.

Under the new interpretation, an employee’s home office abroad should not be considered a permanent establishment of the employer if the employee performs less than 50% of his/her total working time from that location within a twelve-month period. However, exceeding this threshold does not in itself result in the automatic creation of a permanent establishment.

Even in cases where an employee works from home abroad for more than half of his working time, it is necessary to further examine whether the employee’s presence in the relevant state has a business character. The OECD emphasises that there must be a clear link between the work performed at that location and the business activities of the enterprise. This may typically include regular contact with local customers, suppliers or other business partners, servicing the local market, or performing activities where physical presence in the relevant state facilitates the conduct of the enterprise’s business.

Conversely, a business reason is not considered to exist where an employee works from home abroad solely for personal reasons, or due to general flexibility, cost savings or a workforce acquisition strategy without a link to a specific market.

Illustrative Examples in the OECD Commentary

The updated Commentary is supplemented by practical examples illustrating the application of the new approach. For example, the OECD states that an employee working from home abroad for approximately 30% of his/her working time generally does not create a permanent establishment. By contrast, an employee who works from home for the majority of the year and simultaneously regularly serves local clients may create a permanent establishment of the employer. A different conclusion is drawn by the OECD in situations where an employee spends more than half of his/her working time in a given state but provides services predominantly on a remote basis to clients in other countries and where the employee’s presence in that state does not have a clear business significance.

Reservation of the Czech Republic to the Updated Interpretation

It is important to emphasise that the update to the OECD Commentary is not binding on all member states in its entirety. The Czech Republic has entered a reservation with respect to this part of the Commentary and does not agree with the application of the newly formulated quantitative and qualitative criteria, in particular the use of the 50% working time threshold.

From the perspective of the Czech Republic, the decisive factor therefore remains the assessment of the specific factual circumstances exclusively under the relevant double taxation treaty. It can thus be expected that the Czech tax authorities will continue to apply their existing, rather restrictive approach and that remote work performed by employees of foreign companies from the territory of the Czech Republic may result in the creation of a permanent establishment, unless the activities are of a preparatory or auxiliary nature.

Practical relevance for employers

The update to the OECD Commentary represents a significant step towards greater legal certainty in the area of cross-border remote work. However, its practical relevance will vary between individual states depending on their approach and any reservations applied. Companies with international remote working arrangements should therefore not rely exclusively on the general OECD interpretation but should always carefully assess the risk of creating a permanent establishment in the context of the specific jurisdiction and the applicable treaty framework.

Given the differing approaches of individual states and the potentially significant tax implications, we recommend discussing any uncertainties or specific cross-border working arrangements with our tax professionals.

Authors:

Gabriela Ivanco, Tax Department Manager

Anna Klímová, Newsletter Editor