Long-awaited OECD Commentary simplifies home office rules and permanent establishment risk

Through this update, the OECD responds to the long-term increase in remote work, including cross-border home office arrangements, which brought a number of uncertainties – particularly with respect to tax implications for employers. Employees working remotely from abroad represented a risk of triggering an obligation to pay local income taxes in a country where the company has no physical office. The updated Commentary introduces clearer rules offering a more favourable interpretation for employers, while at the same time giving employees greater flexibility to work from abroad.

Three key criteria for cross-border home office

In the updated Commentary, the OECD identifies three key conditions that determine whether a permanent establishment arises:

1. Fixed place of business

A permanent establishment may arise if an employee works from a place that is considered fixed, i.e. used regularly for the purpose of performing work activities. If only preparatory or auxiliary activities are carried out, even if the place is used regularly, a permanent establishment does not arise. The mere permanence or regularity, however, does not automatically result in the creation of a permanent establishment abroad, and the other relevant conditions must also be assessed.

2. Extent of work performed from abroad

• If an employee performs less than 50% of their working time from abroad within a 12‑month period, no permanent establishment arises for the employer.
• If an employee performs more than 50% of their working time from abroad, a permanent establishment does not arise automatically. The decisive factor is the third criterion, namely the nature and purpose of the activities performed abroad.

3. Purpose of working from abroad

Once the threshold of more than 50% of working time performed from abroad is met, the decisive factor for the creation of a permanent establishment is the commercial nature of the employee’s activities in the relevant state. This implies that the company derives a benefit from the employee’s presence in that country, for example through business meetings with customers, suppliers, clients or other parties. The OECD Commentary explicitly mentions, as a reason for the creation of a permanent establishment, a case where home office is performed from a country in a different time zone, enabling the employee to provide services to clients more efficiently. Conversely, if an employee performs home office from abroad for personal reasons or for the employer’s cost-saving purposes, no permanent establishment arises for the employer.

Practical examples

Review the specific situations in which a permanent establishment arises, or does not arise, through the following practical examples:

Example A:
An employee performs home office from a rented apartment abroad for three months during the year. No permanent establishment arises, as the performance of work activities from this apartment is not regular or permanent.

Example B:
An employee works from their home abroad on a regular basis one to two days per week, which in total represents 30% of their working time. In this case, the place of activity is considered permanent, as it is used regularly. However, no permanent establishment arises for the employer, as the employee performs less than 50% of their working time from abroad.

Example C:
An employee performs their work duties from their home abroad for 80% of their working time. They regularly visit the employer’s clients in that country in order to provide services. A permanent establishment arises for the employer in that country, as work performed from abroad represents more than 50% of working time and, at the same time, the employee’s activity is considered to be of a commercial nature.

Example D:
An employee performs home office from their home abroad for 60% of their working time, while carrying out their activities almost exclusively remotely and only occasionally visiting a client in that country. No permanent establishment arises for the employer, as there is no commercial reason for the employee’s presence in that state.

Example E:
An employee works almost exclusively from their home abroad and provides services to customers in different time zones. The place of activity is considered permanent, the employee works more than 50% of their working time from abroad, and the employee’s activity in that country has a commercial nature (i.e. providing services to customers in real time across different time zones), and therefore gives rise to a permanent establishment.

The updated OECD Commentary brings clearer rules for assessing the creation of a permanent establishment abroad, helping companies to evaluate whether cross-border home office arrangements represent a tax risk.

At the same time, we draw attention to the approach of tax authorities, for example in the Czech Republic, where it is expected that stricter rules will continue to be applied when assessing the creation of a permanent establishment in connection with home office. Read more at the following link. 

Does your company monitor the number of days employees work remotely in order to comply with these new criteria? Do not hesitate to contact us – we will be happy to help you set up internal rules, assess risks and prepare for changes in practice.