OECD Clarifies Home Office Permanent Establishment Rules: Part 2

The rapid spread of cross-border telework has left multinational enterprises grappling with uncertainty regarding their exposure to permanent establishment risk. This risk involves tax authorities in source states increasingly challenging whether an employee’s remote home office constitutes a fixed place of business for a foreign employer, potentially triggering corporate tax liability and complex administrative burdens—the so-called micro PE risk. In response to this ongoing uncertainty, on Nov. 19, the OECD issued crucial revisions to the Commentary on Article 5 of the Organization for Economic Cooperation and Development Model Tax Convention. These revisions clarify when an individual’s home, or another non-employer-owned location, constitute an enterprise’s “place of business.” For multinational enterprises and tax practitioners, the 2025 OECD Commentary update represents a significant, though partial, move toward greater predictability in an area previously dominated by abstract principles of control and disposal.

Why This Matters

The OECD’s update fundamentally shifts the framework for assessing PE risk associated with cross-border working, replacing a highly subjective criterion with objective, quantitative, and operational metrics.

The determination of a PE for a home office traditionally revolved around three conditions under Article 5(1): (1) the existence of a “place of business,” (2) that is “fixed,” and (3) the business of the enterprise is carried on “through” it. The most complex aspect of the third factor has historically been the critical “at the Disposal Test"—whether the enterprise had the effective power to use the employee’s private residence.

The update replaces paragraphs 18 and 19, adding new detailed guidance (paragraphs 44.1 to 44.21) addressing “Cross-border working from a home or other relevant place.” The guidance explicitly recognizes that arrangements involving an individual’s home or another relevant place, for example, a holiday rental or friend’s home, have unique features, such as limited accessibility by other enterprise personnel and greater control by the individual. The revised framework establishes a quantitative safe harbor—the 50% threshold test—based on working time and prioritizes the assessment of commercial reason over formal legal rights, offering multinationals a clearer, though still fact-intensive, roadmap for risk management. Finally, the update clarifies the example of a self-employed consultant (“digital nomad”) working from home.

Home Office as PE

The updated OECD Commentary integrates permanence, continuity, working time, and commercial necessity into the PE determination for cross-border working from a home or “other relevant place.”

Fixed Place and Continuity Requirements. First, the location must meet the “fixed” criterion, meaning it must have a sufficient degree of permanence. The use of a home or relevant place must be continuous during an extended period, rather than intermittent or incidental.
However, even if the individual’s working pattern is set to be recurring, if the business activity is carried on for only very short periods, such a place may lack permanence. For example, working from a place in a foreign state for a period of only three consecutive months lacks permanence (see Ex. A in the OECD update).

50% Quantitative Threshold Test. The most significant revision is the introduction of a quantitative test for the allocation of working time. The 2025 OECD Commentary of Article 5 provides that a home or other relevant place would generally not be considered a place of business of the enterprise if the individual worked from that location for less than 50% of their total working time for that enterprise over the course of any 12-month period.

This 50% threshold provides a critical objective metric, although the calculation of working time is determined by the actual conduct of the individual, not just formal contractual arrangements.

Commercial Reason Test. If an individual works from a home or other relevant place for at least 50% of their total working time, the determination depends on whether the enterprise has a place of business at that location, which is determined by the facts and circumstances. A prominent consideration in this analysis is whether there is a commercial reason for the activities to be undertaken by the individual in the contracting state where the home or place is located.

Under the 2025 OECD revision, “a commercial reason for the performance of the individual’s activities related to the business of the enterprise in a Contracting State will be considered to exist where the physical presence of the individual in that State [the Source State] will itself facilitate the carrying on of the business of the enterprise, such as where there are people or resources in that State to which the enterprise needs access for the performance of its business activities” [emphasis added]. This standard implies that if the home or relevant place were not available, the enterprise would likely use other premises in that state. This will be the case, for example, when an individual directly engages with customers, suppliers, associated enterprises, or other persons on behalf of the enterprise, and this engagement is facilitated by the individual’s presence in that state (the source state).

Key indicators of commercial reason (PE likely):

• Meetings between the individual and customers of the enterprise.
• Cultivation of a new customer base, or identification of business opportunities.
• Identification of new suppliers, managing relationships with suppliers, or undertaking, monitoring or managing contractual arrangements with suppliers.
• Real-time, or near real-time, interaction with customers or suppliers in different time zone(s), such as providing call center services, or virtual IT support or medical services—Ex. E in the OECD update illustrates a PE arising from time-zone advantages.
• Access to business-relevant expertise that is used in the conduct of the activities of the enterprise, such as regular meetings with personnel of a university carrying out research relevant to the business of the enterprise.
• Collaboration with other businesses.
• Performance of services for customers or clients located in that other state where such services require the physical presence of employees or other personnel of the enterprise in that other state, for example, training or repair services performed on the customer’s premises.
• Interaction with employees and other personnel of the enterprise, or of associated enterprises.

A clear example of a PE is provided by Ex. C in the OECD update: If an employee works 80% of their time from home in State S and regularly visits clients in State S to provide services, the 50% threshold is met, and the need to facilitate local client service constitutes a commercial reason, resulting in a PE.

Self-Employed Consultant Rule. Where an individual is the only or primary person conducting the business of an enterprise (for example, a nonresident consultant) and carries on most of those business activities from a home office for an extended period, that home office constitutes a place of business of the enterprise.

When PE Less Likely

The updated Commentary provides several clear exclusions and limitations that mitigate the risk of creating a fixed place PE through cross-border home working.

Failure to Meet 50% Threshold. The primary safe harbor established by the new guidance is the 50% threshold. If an individual works from home or other relevant place for less than half their total working time for the enterprise over any 12-month period, the home generally avoids being classified as a place of business.

Ex. B in the OECD update illustrates this: an employee working from home in State S (the source state) for one or two days per week, totaling 30% of their working time, would be considered fixed. But because the 50% threshold is not met, the home would not be a place of business, absent facts showing otherwise. This aligns with interpretative agreements seen in practice, such as the Belgium/Netherlands agreement which assumes no PE for 50% or less of working time. On 23 November 2023, Belgium and the Netherlands signed a Competent Authority Agreement concerning the interpretation of Article 5 of the Belgium-Netherlands Income Tax Treaty.

Absence of Commercial Reason. Even if an individual exceeds the 50% working time threshold, a PE will generally not be created if there is no commercial reason linking the individual’s physical presence in that state to the carrying on of the enterprise’s business. The connection must be sufficient and not intermittent or incidental.

Factors that preclude a commercial reason (PE unlikely):

• Personal choice/retention: The enterprise permits work from home solely to obtain or retain the services of that individual.
• Cost reduction: The enterprise permits work from home solely to reduce costs, such as reduced expenditure on office space.
• Incidental presence: The mere presence of customers or suppliers in the state, or the fact that the location is in a different time zone, does not automatically create a commercial reason.
• Remote-only roles with minimal contact: If the individual’s role is exclusively remote or client-facing but services are provided virtually, and any physical engagement is intermittent or incidental, a commercial reason is absent.

Ex. D in the OECD update highlights this: an employee works 60% from home (exceeds 50%) but provides services remotely, with only one-day visits each quarter to a local client. Because the visits are intermittent and incidental, no commercial reason exists for the required presence in State S, meaning no PE is established.

Preparatory or Auxiliary Activities. Consistent with existing rules, a PE will not arise if the activities carried on at the home office are merely of a preparatory or auxiliary character (Article 5(4)). The 2025 OECD Article 5 Commentary notes that home office activities will often fall into this exception. Activities such as internal accounting, human resources, or secretarial duties are common examples of preparatory or auxiliary functions that do not trigger PE creation, regardless of working time or disposition. This exception applies even if the location meets the definition of a fixed place of business under paragraph 1.

Implications for Multinationals

• Shift from “disposal” to “operational necessity": Enterprises must understand that the key factor is no longer primarily who pays for the office or the strict legal right of access (which was the focus of older, stricter interpretations like those in Germany). Instead, the focus is on quantifying the individual’s work time and assessing the operational necessity for that individual to be physically present in the host state to facilitate the enterprise’s business activities (the commercial reason test).
• Importance of quantitative monitoring: Companies should proactively monitor and document cross-border working arrangements, paying particular attention to the 50% working time threshold over a 12-month period. Policies must be consistent with the actual conduct of the employee, not merely the formal contractual agreement.
• Review of contractual obligations: While the OECD has moved past the strict “required by employer” test, it remains critical to document who required the home office and the rationale. If the employee works from home purely from personal preference, even exceeding 50% of their time, a PE is generally not triggered unless a commercial reason exists for that presence.
• Activity analysis: Enterprises must assess whether the work performed remotely is core to the business or merely preparatory or auxiliary. If the activities fall under Article 5(4) (auxiliary activities), the PE risk is minimized, regardless of working time.

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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