How to manage the risk of a permanent establishment when working remotely

As we reported in the previous article, KPMG conducted a two-part survey amongst member countries on how 63 jurisdictions apply the 2025 Commentary on the OECD Model Tax Convention in relation to cross-border remote working. The findings show that the concept of ‘working from anywhere’ creates complex situations regarding the establishment of a permanent establishment. The second instalment therefore focuses on specific scenarios and their practical tax implications.

Working from home abroad

Only a small number of countries have clear rules on the establishment of a permanent establishment due to home working. Most rely on the OECD commentary and general principles. The assessment focuses in particular on:

• whether the company actually serves clients or other local entities in the country in question,
• whether this is a long-term, regular arrangement, rather than just occasional work from home,
• the level of responsibility and decision-making authority held by the employee,
• whether remote working is a personal choice or is actively facilitated/organised by the company,
• whether the company actually makes a home workspace available (reimbursement of costs, listing of the address in internal systems, work meetings at the employee’s home).

It is therefore the actual activities and their significance for the business that are decisive, not the address itself.

Dependent agent

Most countries recognise the concept of a ‘permanent establishment through an agency’, but the specific rules vary. A risk arises in particular if a person in a given country:

• regularly negotiates or concludes contracts on behalf of a foreign company,
• has a significant influence on the conclusion of a transaction,
• acts more as part of the company’s organisational structure than as a truly independent intermediary.

Digital nomads

Special visas or residence schemes for digital nomads already exist in several countries, but for the most part they only address immigration and residence issues, not the establishment of a permanent establishment. Only in exceptional cases (e.g. under certain rules in Malta) is it explicitly stated that, provided the conditions are met, a permanent establishment will not be established. In general, therefore, the standard tax rules apply.

Implications for businesses

Around a third of respondents perceive that tax authorities are paying greater attention to the risk of a permanent establishment arising from remote working, particularly in the case of:

• senior and decision-making positions,
• long-term and planned home office arrangements abroad.

If a permanent establishment is established, the company must, as a rule:

• register for corporation tax and file tax returns,
• fulfil its obligations regarding payroll and social security contributions as a local employer,
• allocate an appropriate share of profits to the permanent establishment in accordance with the arm’s length principle,
• and often deal with VAT and local accounting matters.

Incorrect assessment may result in fines, penalties, interest, and in serious cases, criminal liability, back-payment of wages and social security contributions, and an increased number of audits.

Tax residence of a company

Most countries do not assess a company’s tax residence solely on the basis of its place of incorporation, but also on the basis of where:

• day-to-day management takes place,
• key strategic decisions are taken,
• senior managers are physically and for tax purposes resident, and from where they attend meetings.

Formal ‘day counts’ are the exception – what matters is where the company’s actual place of management is.