The OECD has published the 2025 update of the Model Tax Convention (MTC) and its accompanying Commentary. This update contains tightened guidelines on the concept of a permanent establishment, particularly in situations where employees work cross‑border and remotely.
When a company has a permanent establishment in another country, this can have consequences for corporate income tax in both countries. In addition, payroll tax obligations may arise in other countries, and there may be implications for the employee’s personal income tax. The question of whether a home office or other workplace abroad constitutes a permanent establishment is therefore fiscally significant.
The main changes are found in the Commentary on Article 5 of the MTC, which focuses on the definition of a permanent establishment: a fixed place of business of an enterprise in another treaty state. The update specifically addresses situations where employees work from locations not controlled by the employer, such as a private residence or holiday home.
An important change is that the previous criterion – whether the employer explicitly or implicitly required employees to work from home – has been abandoned. The concept of an implicit requirement created uncertainty in practice and led to divergent interpretations by tax authorities. By removing this criterion, the update provides greater clarity.
The new guidance also extends beyond home offices. Other workplaces – such as rented flexible workspaces or other locations where work is performed on a structural basis – can also be relevant when assessing whether a permanent establishment is created.
The update further clarifies when a workplace should be regarded as ‘fixed’. If an employee works at a location for less than 50% of their working time over a twelve‑month period, that location will generally not be considered a permanent establishment. If the employee works more than 50% of their time there, the assessment depends on the specific facts and circumstances. A key factor is whether the foreign work location serves a commercial purpose for the enterprise, such as client contact or other outward‑facing activities.