OECD 2025 Model Tax Convention Update

As per the provisions of the tax laws globally, an entity may constitute a Permanent Establishment (‘PE’) in an overseas jurisdiction if conducts business activities from a fixed place of business. If PE is constituted, then the profits attributable to such PE would be taxable in the jurisdiction in which PE is constituted as per the domestic tax laws of the country read with the applicable Double Tax Avoidance Agreements (‘DTAA’), if available.

The recent trend of remote working and global mobility has created additional challenge and complexity in determining the tax implications of such arrangements.

Previous OECD Model Commentary

The OECD Commentary available previously provided limited guidance on the PE characterization of home offices which stated that it cannot automatically be assumed that the home office of an employee is at the disposal of the employer. However, if home office is used for business activities on a continuous basis which indicates that the employer has required the employee to use that location for its business, it may constitute a PE.

OECD 2025 Model Commentary update

The OECD's 2025 update to the Model Tax Convention published on 18 November 2025 delivers long-awaited clarity on remote work PE risks and other key areas.

• 50% Threshold Test: Activities in a home office or relevant place count as "intermittent" (no PE) if employee works under 50% of total working time over 12-month period form the said location, aligning with standard permanency benchmarks.

• Commercial Reason Test: Above the threshold, PE is constituted if there exists commercial reason for carrying out the activities in the said jurisdiction e.g. employee presence facilitates business, such as direct engagement with customers, suppliers, or associates in that state.

• Key Shift: Eliminates "at disposal of employer" criterion and prioritizes activity continuity and business purpose over employer mandates.

Key Takeaways

• The Update clarifies that remote workers providing services exclusively to their employer, without dealing with customers or suppliers, do not create a PE, providing reassurance to companies hiring remote talent abroad.

• The introduction of a 50% working time threshold means that if remote work is below this percentage over any 12-month period, no PE is constituted, although interpretation of "total working time" in special situations remains to be clarified.

• Once the 50% threshold is exceeded and commercial reason test is triggered, it may constitute risk of establishment of PE.

• Some countries applying the OECD Commentary dynamically may assess fixed place PEs retrospectively, making it important for companies to review PE positions and monitor upcoming guidance on profit attribution and transfer pricing, slated for 2026.

• Overall, the Update enhances tax certainty for taxpayers but its interplay with future PE profit attribution work remains to be seen, emphasizing the need for ongoing monitoring and reassessment.

The 2025 update to the OECD Model Tax Convention marks a significant advancement in providing clearer, more practical guidance on remote work and PE risks, enhancing global tax certainty while setting the stage for future developments in profit attribution and transfer pricing. Taxpayers and advisers should closely monitor these changes and upcoming consultations to effectively manage their international tax positions.

The existence of Permanent Establishment is subjective and the tax implications arising due to the same are complex and can vary from case-to-case basis. Accordingly, it is important to carefully analyze the same to determine tax implications appropriately. In case any assistance is required from our side, please feel free to reach out to us.