Remote Working and Permanent Establishment Risk: An Updated Guide

Most countries will look to tax non-residents who have a threshold level of presence in their territory, referred to as a "permanent establishment" (PE), on the profits of that establishment. Many countries define PE in line with the OECD's approach, as set in the Model Treaty. Broadly, this provides for two types of PE: (i) a fixed place of business (such as an office), and (ii) a dependent agent that has sufficient authority over the business of the non-resident.

It is necessary to consider both types of PE when putting in place remote working arrangements, but the level of authority necessary for being a dependent agent PE is pretty high, and it is typically straightforward to manage that risk for most individuals. The November 2025 changes in the OECD's guidance on home working and home offices (as set out in its commentary on the Model Treaty) relate only to the fixed place of business PE concept.

Before turning to the substance of the new rules, it is worth noting that the term "home office" applies broadly and encompasses any place that is not the premises of the non-resident business, nor of another business with contractual or other connections to it (such as a customer, supplier or associated business). This includes not only an employee's home, but also a second home, a holiday rental or any similar location. Everything said below about "home offices" applies equally to these "other relevant places".

The new guidance preserves the existing requirement that a home office must have a sufficient degree of permanence to be considered a "fixed" place of business (something that is likely to be the case where home working is undertaken on a regular basis).

However, the OECD has added that, even where a home office would otherwise constitute a fixed place of business PE, it will still fall outside the PE definition if the activities carried on there are purely preparatory or auxiliary in character (for example, a support function that does not form part of the essential and significant activity of the non-resident business as a whole).

Stage 2 – "place of business"

Under the previous guidance, the determining factor for the second stage appeared to be whether the individual was required by the non-resident to work from their home office.

By contrast, the new guidance replaces the "requirement" concept with a two-step test.

Firstly, if the individual spends less than 50% of their working time for the non-resident working from their home office (tested over any twelve-month period commencing or ending in the fiscal year concerned), no fixed place of business PE should arise. This is expressed as a general, rather than absolute, rule — but the OECD appears to consider that it will apply in most cases.

Crucially, it is the actual conduct of the individual that determines the calculation of working time. Formal contractual arrangements and home working policies may be useful evidence, but only to the extent that they correspond with what the individual does. Therefore, businesses that rely on such policies to demonstrate compliance should ensure they reflect the individual's actual working pattern.

Secondly, if that 50% threshold is breached, the focus turns to the particular facts and circumstances to determine whether there is a fixed place of business PE. A prominent consideration here is whether there is a "commercial reason" for the individual to work from the country where the home office is located. In the absence of such a reason, there should be no fixed place of business PE, unless other facts and circumstances indicate otherwise.

What is a "commercial reason"?

A commercial reason will be considered to exist where the physical presence of the individual in the country will itself facilitate the carrying on of the business of the non-resident, such as where there are people or resources in that country to which the non-resident needs access to carry out its business. A useful practical indicator is where, if the home office were not available, the non-resident business would have made use of other premises in that state (such as a rented office).

Helpfully, the guidance confirms that a commercial reason will not exist (i) just because a non-resident business enables an individual to work from home solely to obtain or retain that person's services, or (ii) where the business permits home working solely to reduce costs, for example by reducing expenditure on office space.

The guidance sets out several examples of activities that may indicate the presence of a commercial reason if they take place and are facilitated by the individual working from their home in a state. These include meetings between the individual and customers of the business, and performance of services for customers located in that state where such services require the physical presence of personnel of the non-resident's business (e.g. providing training at the customer's own premises).

However, the guidance states that a commercial reason would not be present if the engagement is purely intermittent or incidental (such as short occasional visits to a customer's premises, or involvement that is minor in the context of the overall business relationship).

The updated guidance provides welcome clarity on the OECD's view as to when home working will give rise to a PE, with the 50% test providing a helpful threshold. The "commercial reason" test may, in practice, give the same answer as the OECD's previous "requirement" test (as a business is unlikely to require an individual to work from home unless there is a commercial reason for doing so) but the overlap is not exact.

A business may, therefore, find that it now has a PE in a state under the new OECD guidance when previously it did not. This is relevant in two linked ways.

Firstly, if the remote worker's home jurisdiction has a fixed place of business PE concept in its domestic law based on that in the Model Treaty, the guidance may impact on the extent to which that jurisdiction seeks initially to tax the non-resident business (i.e. before you get to the stage of considering whether relief under a double tax treaty (DTT) is necessary).

Secondly, even if that jurisdiction does not have a fixed place of business PE concept in its domestic law based on the Model Treaty, if its DTTs are based on the Model Treaty, then the guidance may impact on the availability of treaty relief. This is because, under the Model Treaty, a state can only tax the business profits of a non-resident to the extent they derive from a PE in that state.

A key issue in relation to these changes will be whether the remote worker's jurisdiction will change its policy in light of the updated guidance. Potentially affected businesses will want to ascertain this, and, if there is a policy change, review their home working arrangements.   In the UK, this issue has been partly addressed. With effect for chargeable periods beginning on or after 1 January 2026, the UK domestic law definition of a PE was amended to more closely align with the Model Treaty, and it has been enacted that UK provisions in this area must, so far as possible, be interpreted consistently with the OECD commentary. Therefore, businesses should treat the new guidance as applicable for UK corporate tax purposes.

Overall, it is important to emphasise that the question of PE is only one piece of the puzzle in the UK – other tax, social security, immigration and regulatory obligations may still arise for overseas employers.  For example, a non-UK employer may be required to operate a payroll under the UK's Pay-As-You-Earn (PAYE) scheme for its home workers if it has sufficient PAYE 'presence' in the UK. Compared to PE, this is a lower threshold, based on case law, which simply requires enough of a presence for HMRC to collect PAYE effectively from the non-UK employer (irrespective of whether it also creates a PE). Whilst, in most cases, an employee working from a UK home office is unlikely, in itself, to create sufficient PAYE presence, this should be considered alongside the PE analysis rather than treated as an automatic consequence of it.  In the case of social security, the UK has reciprocal agreements with a number of jurisdictions (including the EU Member States) which could treat the overseas employer as having a deemed place of business in the UK for social security purposes, even if it does not have a PAYE presence or a UK PE.  Home workers who are not UK nationals or do not otherwise have the right to work in the UK will face immigration challenges that they, and their employers, may not necessarily be aware of.  Specialist advice in this area is therefore recommended. Finally, if the non-UK employer's business involves regulated activities, it must understand what its UK home workers can and cannot do in the UK from a regulatory perspective before employing them and/or permitting home work from the UK.