Working from Abroad: When is It Considered a Permanent Establishment?
The updated Commentary on the OECD Model Tax Convention from November 2025 explains in greater detail for the first time how to assess cross-border work-from-home arrangements and what circumstances may lead to the creation of a permanent establishment.
Hybrid work and working from home abroad have become a common part of how many companies operate. Employees are increasingly requesting the option to work for several weeks or months from another country, or they may move abroad permanently and continue to perform work for their employer.
However, such flexibility can also have significant tax implications. One of the most significant risks is the creation of a permanent establishment (PE), which can lead to tax liabilities in the country from which the employee is working.
What is a permanent establishment?
A permanent establishment is a sufficiently fixed place of business through which an enterprise carries on its activities in another country.
If a company establishes a permanent establishment, it may be required to:
- register for income tax abroad,
- file a tax return,
- maintain appropriate records or accounting,
- tax a portion of its profits in the country where the permanent establishment is established.
This is therefore not merely an administrative formality, but obligations that can have a significant financial impact.
Does a permanent establishment arise with every work-from-home arrangement?
The mere fact that an employee works from abroad does not in itself mean that a permanent establishment has been established. The decisive factor is whether the place of work can be considered the company’s place of business and whether the company actually uses it to carry out its business activities
The OECD emphasizes that each case must be assessed individually.
When does working from home generally not create a permanent establishment?
In most common situations, there is no risk of a permanent establishment arising.
This applies in particular to cases where an employee works from abroad of their own volition—for example, because they have moved to be with their family, spend an extended period of time abroad, or take advantage of the opportunity to work remotely while staying outside Slovakia.
Similarly, the risk is low if the work from abroad is only occasional or short-term, and the employer neither controls the place of work nor provides it to the employee. If the company does not rent an apartment for the employee, does not cover their expenses, and does not specify where they are to work, it generally cannot be considered the company’s place of business.
When does the risk of a permanent establishment increase?
The situation changes if the home office becomes the primary place of work or if the company itself requires work to be performed from abroad. This includes, for example, situations where:
- the home office is the employee’s primary workplace,
- the company requires work to be performed from abroad,
- the employee performs key business duties,
- the employee enters into contracts.
An increased risk may also arise if the employee performs key business activities, such as managing the company, making strategic decisions, conducting business negotiations, or having the authority to enter into contracts on behalf of the employer.
In such cases, foreign tax authorities may conclude that the company is conducting business in their territory through a permanent establishment.
Practical Examples
Let’s consider a few typical situations.
- A software developer works for three weeks from Croatia during the summer and, upon returning, continues working from Slovakia. He chose his place of work himself, and the company does not provide him with any office space or reimburse his expenses. In such a case, the risk of establishing a permanent establishment is very low.
A different situation arises if a sales director permanently relocates to Germany, from where he manages sales activities for the entire region and regularly enters into contracts with customers. Such circumstances may lead to the creation of a permanent establishment.
- Special attention should also be paid to executives and top managers. For example, if the executive of a Slovak company manages the business from abroad on a long-term basis, this may raise not only the issue of a permanent establishment but also a change in the location of the company’s actual management, which can have even more serious tax implications.
It’s Not Just About Income Tax. Working from abroad can also have implications in other areas.
A company should review its obligations regarding the taxation of employment income, social security and health insurance rules, the host country’s labor laws, as well as any immigration or registration requirements.
In practice, it is not just a matter of assessing the existence of a permanent establishment, but of a comprehensive evaluation of all cross-border tax and legal aspects.
How to Reduce the Risk?
Companies that allow employees to work from abroad should have clear internal rules in place. We recommend:
- adopting an internal policy for working from abroad,
- approving work from a foreign home office in advance,
- keeping records of the countries and number of days worked outside the home country,
- regularly assess tax risks,
- verify employees’ authority to enter into contracts,
- and ensure cooperation between the HR, tax, and legal departments.
A timely assessment of a specific situation can prevent unexpected tax liabilities and disputes with foreign tax authorities.
