The rise of remote and flexible working arrangements has fundamentally changed how and where business activities are carried out. For multinational businesses, this shift has created increased uncertainty around when an employee’s presence in a particular country may give rise to a permanent establishment (PE) and, as a result, corporate tax exposure in that jurisdiction.
In response to these evolving working patterns, the Organisation for Economic Co-operation and Development (OECD) has issued updated guidance clarifying how existing PE principles should be applied in the context of remote work. Understanding what constitutes a permanent establishment is critical for employers operating across borders. The OECD’s updated guidance provides important clarification and practical considerations.
What is a Permanent Establishment (PE) and Why Does it Matter?
A PE is typically defined as a fixed place of business. There must be a “place” (e.g. place of management, branch, office, factory, or workshop) and an element of permanence. While certain situations present a conclusive decision on whether there’s a PE, there are many instances where it is ambiguous.
Under most tax treaties with Canada, business profits of a resident enterprise will generally only be taxable in another country where the enterprise carries on business in that country through a PE. In such a case, the profits attributable to the PE will be taxable in that other country.
Under most tax treaties with Canada, business profits of a resident enterprise will generally only be taxable in another country where the enterprise carries on business in that country through a PE. In such a case, the profits attributable to the PE will be taxable in that other country.
Remote Work and the OECD’s Updated Guidance
Recognizing the global shift toward remote work, the OECD released updated guidance to provide clarity on when an employee’s home office — or other “relevant place” such as a cottage, short-term rental or a family member’s home — may be considered a PE of the employer. The guidance does not introduce new rules but rather clarifies how existing PE concepts should be applied to modern working arrangements.
The OECD introduces two new tests: the 50 per cent Working Time Test and the Commercial Reason Test.
1. The 50 per cent Working Time Test
A PE will generally not be considered to exist where an employee works at a remote location for less than 50 per cent of their total working time over a rolling 12-month period.
In contrast, if the working time exceeds 50 per cent, the Commercial Reason Test must be analysed to determine if a PE exists (i.e., exceeding 50 per cent alone does not automatically create a PE).
2. The Commercial Reason Test
If the 50 per cent Working Time Test is met, there must be a “commercial reason or rationale” for the employee to carry on business on behalf of their employer from that location.
Indicators of a commercial reason may include, but are not limited to:
- Engaging with customers or suppliers in Canada
- Developing or expanding markets in Canada
- Performing services requiring physical presence
- Real‑time collaboration due to time zones
How This Works in Practice
The OECD guidance includes five examples demonstrating how these principles apply in practice:
1
In a 12-month period, an employee works in a country for a period of three consecutive months. Due to a lack of permanence, there shouldn’t be a PE.
2
In a 12-month period, an employee works from a remote location equal to 30 per cent of their total working time. Although there is permanence to the location, there shouldn’t be a PE as the total working time is less than 50 per cent.
3
In a 12-month period, an employee works from a remote location equal to 80 per cent of their total working time and regularly visits clients in that location. There will likely be a PE as there is permanence to the location, the total working time is more than 50 per cent and there is a commercial reason.
4
In a 12-month period, an employee works from a remote location equal to 60 per cent of their total working time. They provide services virtually to clients around the world and, once a quarter, visit a local client for a day.
Although there is permanence to the location and the total working time is more than 50 per cent, there shouldn’t be a PE as there isn’t a commercial reason. The presence of local clients does not automatically mean there is a commercial reason.
5
In a 12-month period, an employee works exclusively from a remote location to enable them to be fully available (e.g. offering real-time or near real-time services around the clock) to clients located in different time zones.
There will likely be a PE as there is permanence to the location, the total working time is more than 50 per cent and there is a commercial reason.
These examples underscore the importance of evaluating all relevant facts and circumstances, rather than relying on any single factor in isolation.
Practical Considerations for Employers
The OECD’s updated guidance highlights the need for employers to proactively monitor remote working arrangements, particularly for employees working cross-border.
Employers should consider:
- Tracking where employees perform their duties and for how long
- Understanding the business rationale for remote working locations
- Assessing whether employee activities could give rise to a fixed place of business
- Reviewing payroll, corporate tax, and indirect tax implications in relevant jurisdictions
Failure to identify and address PE risks on a timely basis can result in unexpected corporate tax filings, penalties, and compliance obligations. Accordingly, and once identified, employers should seek professional advice for appropriate steps to address the obligations.
While not uncommon, the CRA has not commented on the application of the updated guidance from the OECD. The OECD commentary is generally accepted for guidance in interpreting tax treaties, but it is not the law.
Navigating What Comes Next
As remote and flexible work arrangements continue to evolve, so do the tax implications for employers with cross-border teams. The OECD’s updated guidance brings welcome clarity, but it also highlights how easily permanent establishment risks can arise without careful consideration.
Understanding the 50 per cent Working Time Test, the Commercial Reason Test, and how they interact is only the first step. The real challenge lies in applying these principles to real‑world situations—each with its own facts, nuances, and potential exposure.
That’s where Crowe Soberman can help. Our team works closely with employers to assess remote work arrangements, identify potential PE risks, and navigate the corporate tax obligations that may follow. With the right guidance up front, organizations can support employee flexibility while maintaining confidence that their tax position is sound and compliant.
Remote work isn’t going anywhere. With thoughtful planning and the right expertise, employers can stay ahead of the rules rather than reacting to them.
This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Please note that this publication should not be considered a substitute for personalized advice related to your situation.
Ananth Balasingam
Partner,
Tax
Ananth Balasingam Professional Corporation
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