The 2025 Update to the OECD Model Tax Convention

On 18 November 2025, the OECD Council approved the contents of the 2025 Update to the OECD Model Tax Convention on Income and on Capital (the OECD Model). The 2025 Update, which was previously approved by the Committee on Fiscal Affairs on 13 October 2025, will be incorporated in a revised version of the OECD Model that will be published in the next few months.

Key update relating to cross-border home working

One of the key updates concerns revisions to the commentaries on Article 5, which addresses Permanent Establishment in the context of cross-border remote work and other non-traditional work locations. This update became necessary following the significant rise in individuals working from home, often across borders. Such arrangements can create uncertainty under existing PE rules, which were originally designed for traditional physical workplaces. As employees increasingly perform business functions, sometimes even core activities, from home, companies may face the risk of unintentionally creating a taxable presence outside their country of residence. The clarification aims to ensure consistency in international interpretation and align the commentary with modern, flexible working arrangements.

The updates guidelines begin to describe that for a Permanent Establishment to arise, a place of business must be fixed, requiring that such place of business has a certain degree of permanency.   One other thing to consider is the type of activities which are being conducted. In line with the current text of the OECD Model if the activities are limited to activities of a preparatory or auxiliary character, that place will not constitute a permanent establishment.  To constitute a permanent establishment, a home or other relevant place must be a place of business of the enterprise. The mere fact that a place is used by an individual (e.g. an employee) to carry out activities related to the business of an enterprise should not lead to the automatic conclusion that that place is a place of business of that enterprise. Whether or not such a place constitutes a place of business of the enterprise will depend on the facts and circumstances of each case.  In many cases, the carrying on of activities from home of an employee or other relevant place, will be so intermittent or incidental that the place will not be considered to be a place of business of that enterprise.  

50% threshold test

The revised guidelines state that an individual’s use of their home or another relevant location to perform activities related to an enterprise’s business will generally not give rise to a Permanent Establishment (PE) if the individual works from that location for less than 50% of their total working time for the enterprise during any 12-month period commencing or ending in the relevant fiscal year.

If this threshold is exceeded, the determination of whether a PE exists will depend on the specific circumstances of the case.

Commercial reason Test

An important consideration is whether there is a genuine commercial rationale for the activities being carried out by the individual in the Contracting State where the home or other relevant location is situated. A commercial reason will be deemed to exist where the individual’s physical presence in that State directly facilitates the enterprise’s business operations, for example, where access to people or resources located in that State is necessary for the performance of the enterprise’s activities.

A commercial reason requires a clear link between the individual’s presence at the home or other relevant location and the conduct of the enterprise’s business. This would not apply where the enterprise permits an individual to work from home or another location solely to retain or secure that individual’s services. The guidelines give examples of what such commercial reasons could be.

These include:

1. meetings between the individual and customers of the enterprise
2. cultivation of a new customer base, or identification of business opportunities;
3. identification of new suppliers, managing relationships with suppliers, or undertaking, monitoring or managing contractual arrangements with suppliers;
4. the real-time, or near real-time, interaction with customers or suppliers in different time zone(s) (e.g. providing call centre services, or virtual IT support or medical services)
5. access to business-relevant expertise that is used in the conduct of the activities of the enterprise, such as regular meetings with personnel of a university carrying out research relevant to the business of the enterprise;
6. collaboration with other businesses;
7. performance of services for customers or clients located in that other State where such services require the physical presence of employees or other personnel of the enterprise in that other State (e.g. training or repair services performed on the premises of the customer);
8. interaction with employees and other personnel of the enterprise, or of associated enterprises.

Where there is no commercial rationale for carrying out the enterprise’s business activities from a home or other relevant location in the other Contracting State, that location would not constitute a Permanent Establishment, unless other facts and circumstances indicate otherwise.

The points above only address the recent updates to the commentary. It is important to keep in mind that the current text of the OECD Model concerning the creation of a Permanent Establishment (PE) in the case of a Dependent Agent who concludes contracts still applies.

Forvis Mazars' view 

This update is a welcome development. Remote working has evolved from a temporary solution into a core component of global business models, creating uncertainty around tax obligations and Permanent Establishment risks. 

The OECD’s revised commentary provides clarity by introducing set criteria that indicate the circumstances when a Permanent establishment could arise.  For multinational enterprises, this guidance is particularly valuable as it helps manage risk without discouraging remote work strategies that enhance productivity and talent retention