Adelle Greenwood explains why a recent update to the commentary on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention has helped clarify the circumstances in which cross-border working can give rise to a permanent establishment (PE).
Cross-border remote working has become much more common since the COVID-19 pandemic and international working guidance now forms part of many employers’ policies and remuneration packages.
For the most part, employers have taken a conservative approach to such policies – restricting both the number of days and the number of times individuals can work in another country other than their usual base, to minimise risks to both the employer and employee. Key factors to consider when employing cross-border remote workers include:
- immigration and right to work;
- employment law obligations, including health and safety;
- social security and payroll taxes withholding obligations; and
- the risk of creating a PE.
What is a PE?
Article 5 of the OECD Model Tax Convention on Income and Capital explains what is meant by the term “PE”. The OECD Model Tax Convention is a template for bilateral tax treaties. It is the model primarily used between developed countries and seeks to provide a common set of rules for taxing rights, prevention of double taxation and administrative cooperation. An alternative model, the United Nations (UN) model, is used in some other bilateral treaties as it is more focused on source-based taxation, which aligns with the needs of developing countries.
The general definition of PE, as provided by Article 5, is that a PE is “a fixed place of business through which the business of an enterprise is wholly or partly carried on”. The Article then explains what the term does and does not include and introduces the possibility that an enterprise that does not have a place of business in a State may have a PE if a person acts on its behalf in that State. However, in this article we are primarily concerned with a fixed place of business PE.
As explained by HMRC at INTM264300, the UK definition of PE “is almost identical to the OECD Article 5 definition” and “the vast majority of the UK’s double tax treaties will be based on the OECD model tax treaty”. Legislation included in the Finance Bill 2025-26 (cl 49, Sch 7) is intended to bring the statutory definition of a PE into line with the definition in the most recent version of the OECD model (the 2025 version) with effect for periods beginning on or after 1 January 2026.
In November 2025, the OECD published approved revisions to the commentary on Article 5 which elaborate on the definition and grounds for determination of a PE in the context of cross-border remote working. The revisions will be incorporated into the updated OECD Model Tax Convention in due course. This is the first update to the OECD Model Tax Convention since the inclusion of base erosion and profit shifting (BEPS) in 2017 and the goal is to provide increased certainty to both tax authorities and businesses as the scale of cross-border remote working continues to grow globally.
Consequences of creating a PE
Creating a PE is a significant risk because it would mean that the employer has a corporate presence in that country and is exposed to potential corporate tax liabilities depending on the nature of its activities, as well as other possible requirements such as operating a payroll. Most EU countries impose a payroll obligation if there is a PE in that location, and in a small number of cases, a payroll obligation may be imposed due to tax nexus or residence. There are different rules for social security purposes due to the overarching EU social security coordination regulations and bilateral treaties, which often impose an employer obligation regardless of the PE and payroll position.
What has changed?
The commentary to Article 5 has been updated to clarify the circumstances in which an individual’s home office (or other relevant place) results in a PE. The commentary has also been updated to include an alternative optional provision on activities related to the exploration and exploitation of extractible natural resources; however, the focus here is on the updates in relation to cross-border remote working and PE.
The updated commentary introduces an objective temporal measure as well as various qualitative commercial tests. There are no changes to the wording of Article 5 itself and therefore the guidance included in the commentary can be applied immediately where the bilateral tax treaty is based on the OECD Model Tax Convention.
New commentary on cross-border working
The commentary has been expanded to include a section entitled ‘Cross-border working from a home or other relevant place’.
This section describes the now commonplace scenario of an employee choosing to work in a different country from that in which their employer is based. This may be from their own residential home, a holiday home, a short-term rental or even a property belonging to family or friends. Typically, other persons working for the same employer will not have access to the place from which the individual is carrying out the work and the individual employee will exercise some kind of control over the residence or property. Where the employer has no existing presence in that jurisdiction, the question then arises as to whether such arrangements create a PE.
When deciding whether a PE is created, consideration must only be given to the period of time in question without reference to past or future periods.
Degree of permanence
As previously noted, Article 5 has long defined a PE as “a fixed place of business through which the business of an enterprise is wholly or partly carried on”. Building on these existing principles, the commentary continues to outline that there must be a degree of permanence for a place of business to be fixed. Temporary interruptions will not mean that a PE will cease to exist, yet activities carried out from there do not need to be permanent in nature but must be carried out on a regular basis for a PE to arise.
In addition, for the arrangements to amount to a PE, the activities carried out by the individual must not be limited to preparatory or auxiliary tasks, and the place of business must not be used by the individual on an intermittent or incidental basis. The commentary on Article 5 includes detailed guidance on the meaning of “preparatory” and “auxiliary” in this context at paragraph 58 onwards. Continuous use of the same workplace over an extended period of time is more likely to point towards a PE. However, it is still necessary to consider whether the arrangements give rise to a dependent agent PE.
Time indicator
Most significantly, the updated commentary outlines that, where an individual spends less than 50% of their total working time for that enterprise working from home or other relevant place in the course of a 12-month period starting or ending in the fiscal year, this will not create a PE. The commentary goes on to reinforce the value of this new time-based test by declaring that exceptions are not anticipated in most situations.
The OECD confirms that this clear and certain approach is intended as a relatively simple first step that deals with the question for the most common cross-border remote working situations effectively and conclusively. It should be noted that this is based on actual conduct not contractual terms. Further, the threshold test applies to the percentage of working time – not to days of presence – in order for it to also be applicable to part time workers and those working variable schedules.
Exceeding the 50% working time threshold does not create an automatic PE – the facts and circumstances of the case will determine whether a PE exists. In particular, there needs to be a commercial reason for the activities to be undertaken by the individual in that country for a PE to exist.
A commercial reason
A substantial new section has been added explaining what constitutes a commercial reason. A commercial reason may exist where engagement of the business is facilitated by that individual being physically present in that other country, (eg, access to certain people or resources which are located in that other country). The use of the individual’s home or other relevant place does not need to be productive in nature but a commercial reason requires a link between the individual’s presence at a home or other relevant place in that country and carrying on the business. The mere presence of customers in that other country does not in itself create an automatic PE unless other factors bring the arrangement into scope.
The following non-exhaustive factors are given in the commentary as indicative of a commercial reason:
Similarly, the commentary describes scenarios which are specifically excluded as commercial reasons:
The commentary provides several illustrative examples including a workation (working during a holiday), caring for a sick relative, visiting clients in person and the use of employees located in different time zones to facilitate the full employer offering, while also using different percentages of working time to demonstrate the permanence element, as well as the commercial reasoning test.
Summary
These are very useful updates to the commentary on the OECD Model Tax Convention and a welcome response to the ongoing and significant trend of cross-border remote working. This new guidance should help to inform international working policies, including allowing employers greater authority over their processes, greater certainty over their tax administration requirements and the ability to simplify some procedures for those working cross-border.
It is also beneficial that the modifications are to the guidance in the commentary only and not to Article 5 itself meaning this guidance can be applied immediately to tax treaties based on the OECD Model Tax Convention without needing to change the text of the treaty.
Adelle Greenwood, Technical Manager – Employment Taxes and National Insurance, ICAEW
