Home truths: what does the OECD’s rethink on the meaning of a ‘permanent establishment’ mean for businesses?

The OECD Model Tax Convention on Income and on Capital (MTC) is the widely accepted framework used by countries when negotiating tax treaties to allocate taxing rights and help prevent double taxation.

Article 5 of the MTC sets out the definition of a permanent establishment (PE). Broadly, a company could create a PE in a country by either having a fixed place of business in that country or by having an ‘agent’ exercising authority on behalf of the company in that country. A PE is a core international tax concept which determines when a company incorporated in ‘County X’ may become taxable in ‘Country Y’ as a consequence of its activities in Country Y. As such, any changes to what constitutes a PE can have wide-ranging consequences for businesses. 

Article 5 itself has not changed since 2017. However, its interpretation has evolved significantly. Driven by the rise of remote and cross-border working, in November 2025 the accompanying commentary to Article 5 was substantially amended to clarify when an employee’s home could create a ‘fixed place of business’ PE of the employing company.

The pre‑2025 position

Previously, the commentary gave only limited guidance on when an employee’s home or other informal workspace could amount to a ‘fixed place of business’. The analysis focussed on whether the company had the location “at its disposal”: a fact driven inquiry which was difficult to apply to remote working.

What changed in November 2025?

The 2025 changes to the commentary introduce a structured test to determine whether remote working locations (such as a home, or second home) can constitute a PE of the enterprise. The guidance is now clear that, in order for a home-working arrangement to constitute a PE, both of the following tests must be satisfied:

• A 50% working time threshold: if an employee works from an overseas location for less than half of their total working time in a 12-month period, the location is presumed not to be a PE of the enterprise.
• A “commercial reason”: where an individual’s overseas presence accounts for more than half of their working time, whether a PE is established hinges on whether there is also a commercial reason for their presence there. Commercial reasons could include regular meetings with clients or suppliers, or performing services in a customer’s local time zone.

Where the only reason a company has supported an individual to work from their home (and therefore create a presence in a particular country) is to retain the employee’s services, support a move to home-working, or reduce operational costs, a PE will not be established. 

From an employment perspective, some comfort can be gained with the newfound clarity that these factors may be taken into account when assessing PE risk (although, clearly this is not as helpful as a blanket rule that home-working can be disregarded for PE assessment purposes). On the whole, this additional clarity should offer employers more scope to embrace global mobility for overseas roles that are temporary and/or do not meet the ‘commercial reason’ threshold (e.g. individuals relocating solely for personal reasons). Particularly for companies that are competing for global talent, having flexibility around international location can increase the talent pool and act as a powerful recruitment tool. 

Each individual circumstance must, however, continue to be assessed on a case by case basis and by reference to the relevant local law definition of a PE (noting that the OECD materials are a ‘guide’ only and may be overridden by a different application of the PE test under domestic law). 

What does this mean for businesses?

We expect that the updated OECD Guidance will, in due course, trigger changes to domestic law and feed into local law interpretation of applicable international tax treaties. In light of this, businesses with a global workforce should be mindful of the following:

1. Remote working risk assessments may need updating

Companies employing internationally mobile staff may need to revisit previous PE assessments. The detailed 50% test and the new commercial reason analysis requires clearer evidence on:

• how much time employees spend working from home; and
• the reason for their presence in another jurisdiction.

2. Greater consistency - but also greater scrutiny

By providing a threshold test and examples, the updated commentary is likely to lead to a more consistent interpretation of Article 5. At the same time, companies may face more scrutiny as tax authorities have a clearer test to apply the PE test to real world home-working scenarios.

Looking ahead – impact on UK home-workers of overseas employers

HMRC has not yet reflected the updated MTC commentary in its own published guidance, nor has it indicated a timeline for doing so. Nevertheless, HMRC typically takes OECD developments into account when applying treaty principles. Non-UK companies with employees working from home in the UK should expect the updated OECD commentary to begin to influence HMRC’s approach to PE assessments.