Managing PE risks in cross-border remote work: OECD’s November 2025 update explained

Managing PE risks in cross-border remote work: OECD’s November 2025 update explained

The concept of permanent establishment (PE) is significantly important in the area of international taxation and especially with changed working patterns and ways of doing business.

A country’s domestic law provides right of taxation based on the concept of residency as well as nexus to the source of income. Double taxation occurs when a country taxes based on the residency of the corporation and another country taxes the same income based on source.   What constitutes a PE (and what does not) as enshrined in a tax treaty between two countries provides the solution on the question of who has the primary taxing rights.

The OECD Model Tax Convention is commonly used as the framework for negotiating tax treaties. Article 5 provides some criteria for determination of a PE in a state such as the existence of a place of business, degree of permanence for such place and carrying on of the business through that fixed place of business. OECD Commentaries on the articles of model tax convention discusses the fundamentals in vast detail.

Update to OECD commentary on Article 5

On 19 November  2025, the OECD published an update to the Commentary on Article 5 providing vital clarifications on the topic of PE occurrence due to employees working remotely from home (or other relevant places such as second home, a holiday rental, the home of a friend or relative etc.) in a country or location that is outside the resident state of the employer.  The guidance is not exhaustive, and it is highly important to apply the principles to specific situations, keeping in mind the spirit behind the updates rather than literal wording.

The key takeaways from the update:

1. A home from where the employee is working can be a PE only when it passes the test of being a ‘place of business of enterprise’, mere carrying out of activities relating to the business of the enterprise can not automatically make that home a PE.
2. Use of home to carry out activities related to business for extended periods of time may indicate it to be considered as place of business.
3. Generally, a home will not be considered as a place of business if the individual worked for less than 50% of their total working time in a year and the actual conduct will be important over the contractual arrangement in computing such time.
4. If the individual works for more than 50% of their total working time from home, then if that home constitute a place of business of enterprise will be decided based on facts and circumstances indicating existence of a commercial reason.
5. Existence of a commercial reason for the individual to work from home will be an important consideration. Examples of such commercial reasons are need for physical presence in the country to facilitate the carrying on of business including engagement with customers, suppliers, associated enterprises etc. with due materiality considerations for short occasional visits.
6. When an enterprise enables an individual to work from home solely for the purpose of reducing cost (say of office space) or to obtain or retain services of the individual then that can not be considered as a commercial reason.
7.  It is important to observe that any one of the following reasons can trigger a commercial reason:
   • Meetings between individual and customer.
   • Cultivation of new customer base or identification of business opportunities.
   • Identification of new suppliers, including relationship management monitoring/managing contractual arrangement with suppliers.  
   • Real-time or near-real time interaction with customers in different time zone, access to business related expertise.
   • Collaboration with other businesses.
   • Performance of services at a customer location. 
   • Interaction with other employees or other personnel of the enterprise, as well as associated enterprise. 
8. Having customers, suppliers or affiliated entities in the country where a home or other location is situated does not, by itself, create a valid commercial reason for operating from that place. Likewise, simply being in a different time zone is insufficient commercial reason. If there is no apparent justification for working from that location, it typically will not qualify as a place of business for the company, unless specific circumstances indicate otherwise.
9. When a person is the only or primary person conducting the business of an enterprise and carries on business from the home office in another state, such home office constitutes a place of business.

The update provides few examples which help in understanding the above-mentioned criteria, though, in real life applications, there could be many more nuances and interpretation challenges to decipher what is a commercial reason and what is not.

Our insights

The update provides much-awaited guidance to resolve the question regarding PE risk with two broad points:

1. If an employee works from home in another country for less than half of their total working hours within a 12-month period, this typically does not establish a fixed place PE of his employer in that country.
2. Furthermore, even when the 50% threshold is surpassed, a fixed place PE is not automatically created; it must also be demonstrated that the home working arrangement in another country has a commercial reason.

It is critical for the MNEs to evaluate their current and envisaged arrangements considering the domestic tax regulations, applicable tax treaty and the updated OECD Commentary on Article 5, identify the PE risk and include implications such as attribution of profits and tax outcomes.

Forvis Mazars Ireland’s tax team is ready to help you navigate the complexities of cross-border working arrangements, assist in managing PE risks and establishing a strong defence for future audit challenges from tax authorities.