Are Companies’ Remote Workers Creating Permanent Establishments?

The acceleration of digitalization and cross-border telework, especially since Covid-19, has challenged traditional international tax rules. When employees work remotely from their home country for a foreign employer, tax authorities are increasingly questioning whether the home office creates a permanent establishment for the employer, which is crucial for determining tax liability in the source state. Such teleworking risks a rise in “micro PEs” across multiple countries, meaning companies may face complex administrative requirements wherever their staff work remotely. The uncertainty over applying the PE concept to home offices is significant, prompting the OECD to revise its guidance expected in 2026.

When a Home Office Might Be a PE

The determination of a PE for a home office primarily revolves around the definition of a fixed place of business under Article 5(1) of the OECD Model. This definition requires three conditions:

• the existence of a “place of business";
• that is “fixed";
• carrying on the business of the enterprise “through” the fixed place of business.

In the context of cross-border telework, a place of business is broadly interpreted and includes almost any physical location from which an enterprise’s business can be carried out, including a home office.

The fixed criterion means the place must have a geographic connection and a certain degree of permanence, requiring continuous use, usually for at least six months. Whether the home office is carrying on the business of enterprise “through” the fixed place of business depends on if the home office is “at the disposal” of the enterprise (that is, the enterprise has the effective power to use the location). There is no requirement for the enterprise to have a formal or legal right to use the location.

Critical “at the Disposal Test”
The most complex aspect in determining a home office PE is establishing whether a private residence home office is at the employer’s disposal. Paragraphs 18 and 19 of the OECD Model Commentary on Article 5 clarify that an individual’s home office shouldn’t automatically be considered at the disposal of the enterprise simply because an employee works there. The conclusion depends entirely on the facts and circumstances of each case.

A home office may be considered to be at the employer’s disposal and therefore constitute a PE in these circumstances:

• Continuous use requirement: The office is used on a continuous basis (not intermittent or incidental) for business activities, and the facts and circumstances are clear that the enterprise has required the individual to use that location to carry on the enterprise’s business. For example, the home office constitutes a location at the disposal of the enterprise when a nonresident consultant is present for an extended period in a given state, where they carry on most of the business activities of their own consulting enterprise from an office in their home in that state.
• Lack of alternative workspace: The employer doesn’t provide another office to an employee in circumstances where the nature of the employment clearly requires an office. For example, the home office may be considered to be at the disposal of the enterprise when it is used on a continuous basis for carrying on business activities for an enterprise and it’s clear from the facts and circumstances that the enterprise has required the individual to use that location to carry on the enterprise’s business, such as by not providing an office to an employee in circumstances where the nature of the employment clearly requires one.

In addition to the OECD guidance, under state practice, a home office may be considered to be at the employer’s disposal and therefore constitute a PE if the employer covers costs related to the home office or pays rent for its use. For example, the Polish tax authority identified a PE where employees were allowed to work from their state of residence using employer-furnished laptops, noting the decisive factors were that the initiative came from the employer and the laptops were provided. Polish Tax Administration, No. 0111-KDIB1-2.4010.655.2021.2.BD (Feb. 17, 2022).

According to the Swedish Tax Agency, a PE is constituted if there is a benefit or interest for the company in having the work performed specifically in the employee’s resident state, especially concerning implicit requirements (for example, a salesperson covering the local market from home).

When a PE Is Less Likely

Several common factors derived from the OECD Commentaries and state practices mitigate the risk of a home office constituting a PE.

Employee Choice and Voluntary Arrangements
A critical factor is whether the employee’s use of the home office is required by the employer or is merely voluntary and based on personal preference. The OECD Commentary on Article 5 states clearly that where a cross-frontier worker performs work from home rather than the office made available by the employer in the other state, the home shouldn’t be considered at the disposal of the enterprise, as the enterprise didn’t require it to be used for its business activities.

Several jurisdictions reflect this principle in their practice:

• Sweden, Finland, and Denmark: The tax agencies in these countries base their assessments on similar criteria, concluding that if a person works from home for purely personal reasons, this doesn’t trigger a PE. The Swedish Tax Agency notes that even if an employer accepts an employee’s request to work from home, this acceptance isn’t interpreted as a requirement by the employer.
• Spain: Spanish tax administration guidance aligns with the OECD, ruling that no home office PE exists when remote work is initiated by the employee, the employee has access to an alternative workplace, and the employer doesn’t cover related expenses.
• Netherlands/Belgium Agreement: This interpretative agreement simplifies the assessment for frequent teleworking situations and establishes that a PE won’t exist in cases of “occasional home working” or “structural home working with the possibility of working on location.”

Auxiliary and Incidental Exceptions
A PE won’t arise if the activities carried on at the home office are of a preparatory or auxiliary character (Article 5(4) of the OECD Model). The OECD Commentary on Article 5 emphasize that the activities carried on at a home office will often be merely auxiliary, thus falling within this exception.

• Swedish Practice: The Swedish tax authority notes that if the work performed in the home office is out of scope of the core business (auxiliary), a PE won’t exist, regardless of whether rent is paid.
• Finnish Practice: To constitute a PE, the work must not be of a preparatory or auxiliary character. In a Finnish Supreme Administrative Court case, activities such as promoting a product and keeping materials and necessary equipment at home were found to be of an auxiliary nature and didn’t give rise to a PE.
• Netherlands/Belgium Agreement: This agreement explicitly repeats that there will be no PE if the employee’s work is merely preparatory or supportive in nature, listing examples such as internal accounting, human resources, or secretarial activities.

Quantitative Thresholds as a Safe Harbor
In the search for greater certainty, some jurisdictions are moving toward defining quantitative thresholds. The interpretative agreement between Belgium and the Netherlands offers a practical safe harbor, assuming no PE will exist if the employee works 50% or less of their working time for the employer from home in any 12-month period. This aligns with similar thresholds used for social security contributions within the EU, making administrative compliance simpler. Austria also uses similar guidelines, suggesting that “home working time” of less than 25% is purely occasional, while exceeding 50% likely results in a PE.

Divergent Views

Despite the OECD’s guidance, divergent interpretations persist regarding the “effective power of disposal.” German policy is notably stricter than the OECD guidelines requiring more than a mere contractual obligation to work from home. German courts have required evidence of the enterprise’s “rootedness,” implying that the employer must have an undisputed right of disposal—such as the right to send other employees there or to enter the home office at any time. The Belgian Office for Advance Tax Rulings commission historically followed a similarly strict approach, requiring the obligation to work from home to be an essential part of the contract and requiring it at a specified address.

Key Takeaways

The current application of the PE concept to home offices remains highly challenging for global businesses due to the inherent uncertainty and lack of consistent interpretation across jurisdictions.

There is no “one-size-fits-all” rule in this area. Instead, the assessment must be rooted in a detailed case-by-case evaluation of each situation’s unique facts and circumstances. This approach is necessitated by the variety of interpretations and thresholds adopted by different jurisdictions, as well as the divergent judicial and administrative practices observed across Europe and beyond.

Of particular importance in the analysis are several guiding questions, each of which can be decisive in the outcome:

• Who required the home office? Understanding whether the home office arrangement was mandated by the employer or initiated by the employee is critical in evaluating the degree of control the business has over the workspace and may directly influence the PE determination.
• Who pays for it? The allocation of costs, such as rent, utilities, and other expenses associated with the home office, can indicate the extent of the employer’s involvement and investment, further impacting the analysis of disposal and control.
• Is the work central to the business? Assessing whether the activities performed from the home office are core to the business’s revenue-generating functions, rather than merely preparatory or supportive, is essential and in line with both case law and OECD guidance.

Employers should pay particular attention to identifying cross-border telework cases, as these often present heightened risks and require careful handling to avoid unintended tax consequences.

It’s also important for employers to review employment contracts and other relevant agreements, scrutinize their accounting records, and ensure that remote working policies are clearly articulated and consistently applied.

By taking these precautionary steps, organizations can better safeguard against the inadvertent creation of a PE and the associated liabilities. Only through such proactive and tailored risk management can organizations hope to minimize exposure and ensure ongoing compliance in this complex domain.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Christos Theophilou is a tax partner at STI Taxand in Cyprus.

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