OECD Commentary 2025: New rules for determining a home office as a permanent establishment
The OECD updated the Commentary on the Model Tax Convention in November 2025. While the wording of Article 5 of the Model Convention remains unchanged, the revised Commentary provides new guidance on determining the existence of a permanent establishment (“PE”), particularly in relation to home office work performed abroad. These changes may also affect the conclusions of previous PE assessments.
The 2017 Commentary only briefly addressed the factors relevant to determining whether a foreign home office constitutes a permanent establishment of the employer. The new Commentary introduces a completely new analytical framework and provides far more detailed guidance, supported by multiple examples.
The concept of “home office” continues to include not only the employee’s own home but also any other relevant location (e.g., a friend’s residence, a holiday home or rented flat). A PE may arise only where the location has a certain degree of permanence – meaning that work is carried out there regularly over an extended period – and the activities performed are not of a preparatory or auxiliary nature. Where these conditions are met, it must then be assessed whether the location qualifies as a place of business of the enterprise.
In this respect, the Commentary introduces a new 50% threshold: if the employee works from the location for less than half of their total working time during any twelve-month period, the location will not be regarded as a place of business of the enterprise and, therefore, will not create a permanent establishment.
Conversely, the existence of a PE will largely depend on the outcome of the so-called “commercial reason” test, taking other relevant circumstances into account. Under this test, a permanent establishment can only arise if there is a compelling commercial reason for the employee’s physical presence in the other state – rather than mere personal preference or cost-saving considerations. Examples of valid commercial reasons may include regular in-person meetings with clients, the provision of services that require physical presence, or the delivery of real-time services from a different time zone.
Documentation
The updated Commentary provides a much clearer set of criteria for conducting PE assessments. Accordingly, maintaining proper documentation is essential to support the analysis. Such documentation should record, for example, the allocation of working time (in light of the 50% rule), the nature of the activities performed by the employee, and the existence (or absence) of a valid commercial reason.
Temporal Application – Why Revisit Previous Assessments?
The OECD Commentary is not legislation but an interpretative aid. This raises the question of whether, in practice, tax authorities and courts will take its guidance into account when reviewing cases relating to earlier periods. It is likely that the Hungarian Tax Authority (NAV) would already base its reviews on the updated Commentary, which means that prior PE analyses should be revisited wherever foreign home office arrangements played a role.
Should you have any questions on the above or require assistance in reviewing existing structures or assessing future arrangements, our advisors will be pleased to help.
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