OECD Update: Important clarification on international remote work

Why is this update important?

An increasing number of employees work (partly) from a country other than where their employer is based. This can have implications for corporate tax, payroll and income tax, and social security regulations. The lack of uniform international application has often led to uncertainty, double taxation claims, and disputes with tax authorities.

The new commentary on Article 5

The update includes a detailed explanation of a “home office” as a permanent place of business for a company. Whether a home or other location is “permanent” is initially assessed according to standard criteria. There is no permanent establishment if activities are merely preparatory or auxiliary in nature.
According to the new commentary, an employee’s home office does not automatically constitute a place of business for the enterprise simply because the employee works there. A clear link is required between the individual’s presence in that state and the company’s business activities.

The commentary introduces a ‘two-step test’ for a home office as a permanent establishment:

Step 1: The 50% criterion

The commentary provides a general reference point based on the time worked from home. The actual activities performed are of key importance in this regard.

• If an individual works less than 50% of their total working time (over a 12-month period) from home or a similar location, this is not considered a business location of the enterprise.
• If someone works 50% or more of their time from home, the assessment of that location as a permanent establishment still depends on other facts and circumstances.

Step 2: Commercial reasons for remote work

Another important indicator clarified in the OECD commentary update concerns whether there is a commercial reason for performing activities from home in another country.

To determine if commercial reasons are related to the working activities, it should be assessed whether the enterprise benefits from the employee’s physical presence in the home-work state, for example for client contact, suppliers, group entities, or other business relationships. The commentary indicates: if the home were not available, the enterprise would likely rent another location in another country.

Examples of commercial activities mentioned in the update include:

• Meetings between the individual and clients.
• Building a new client base or identifying business opportunities.
• Identifying new suppliers, including relationship management and monitoring contractual arrangements.
• “Real-time” or near “real-time” interaction with clients in different time zones.
• Collaboration with other businesses.
• Performing services at a client site.
• Interaction with other employees or personnel of the enterprise, as well as related entities.

Having clients, suppliers, or affiliated entities in the country where the home or other remote work location is situated does not in itself create a valid commercial reason to operate from that location. Nor is there a commercial reason if:

• Business interactions are incidental or sporadic.
• The reason for remote work is to attract or retain the employees’ services.
• The location is used solely to reduce costs.

What does this mean for employers?

By clarifying international rules on remote work, this update helps countries and businesses to navigate in a rapidly changing global landscape, according to the OECD’s explanation of the new commentary.
The update provides clear guidelines on how cross-border “home office” arrangements are treated under tax treaties, offering greater certainty for employers and employees. It introduces new indicators to help assess whether remote work affects a company’s tax liability in a country.

The update creates more certainty in a work environment where flexibility is the norm. At the same time, it clarifies that international remote work arrangements cannot be implemented without additional obligations. Business justification and documentation are more important than ever. Organizations with international remote work arrangements should:

• Review existing policies against the new criteria.
• Update contracts and compliance processes.
• Reassess risk inventories per country.