OECD 2025 update: Guidance on permanent establishment risks in cross-border remote work arrangements

On 19 November 2025, the Organisation for Economic Co-operation and Development (OECD) released its 2025 update to the Model Tax Convention (MTC) and accompanying commentary (Commentary), introducing pivotal changes to increase tax certainty amid modern digital work arrangements. A primary focus of the update is the revision of the Commentary on Article 5, which pertains to the concept of taxable presence known as permanent establishment (PE). The new guidance addresses uncertainties surrounding employees working remotely from locations not affiliated with their employer. By providing illustrative examples and clarifying the role of ‘commercial reasons’ for an employee’s physical presence, the OECD has refined the interpretation of when a home office creates a PE, ensuring the MTC reflects contemporary working patterns.

The core issue addressed by the Commentary is the growing trend of employees choosing to work from locations other than the office space provided by their employer entity, such as their home, a holiday rental, or a relative’s residence. The OECD recognises that these arrangements differ fundamentally from traditional business expansions. A home is private, under the employee’s control, and generally not accessible to the employer entity.

Accordingly, the Commentary establishes that the mere fact that an employee carries out business activities from a home office does not automatically make it a ‘place of business’ of the employer entity. Instead, this determination relies on a facts-and-circumstances analysis, based on two pivotal concepts: permanence and the commercial reason for the presence.

To provide immediate certainty for incidental remote work, the OECD has introduced a quantitative threshold guideline with respect to the time spent working from a remote location.

According to the Commentary, a home or other relevant place will generally not be considered a place of business of the employer entity if an employee works from that location for less than 50% of their total working time over the course of any 12-month period.

However, if an employee works from a home office for at least 50% of their working time, the analysis may differ. While breaching this 50% threshold would not automatically create a PE of the employer entity, it would necessitate a deeper assessment as to whether the employer entity has a valid commercial reason for an employee’s presence.

When an employee spends significant time (say, 50% or more) working remotely, the decisive factor then becomes the commercial reason. The Commentary clarifies that a commercial reason exists where an employee’s physical presence in a jurisdiction facilitates the employer entity’s business. This may include the presence of people or resources in that jurisdiction to which the enterprise needs access to perform its business activities. On the other hand, a commercial reason would not be considered present if that engagement is on an intermittent or incidental basis. For example, short occasional visits to a customer’s premises.

The Commentary notes that a commercial reason requires a link between the individual’s presence in a particular jurisdiction and the carrying on of the business of the enterprise. In this context, the OECD distinguishes between business facilitation and employee retention:

The Commentary provides for several scenarios that indicate the existence of a commercial reason, including:

The Commentary provides for a different standard for situations where an individual is the sole or primary person conducting the business of an enterprise. For example, if a non-resident consultant operates their own consulting enterprise from a home office in a different jurisdiction for an extended period, that home office constitutes a place of business of the enterprise. In this scenario, the individual is the enterprise, and their home is effectively the headquarters of that business activity.

To aid in interpretation, the Commentary provides five specific examples.

The application of the Commentary in India requires nuanced analysis, considering India’s status as a non-OECD member, its specific treaty negotiation policies, and the interpretive approach of its judiciary.

India is not a member of the OECD and has expressed its own positions, reservations, and disagreements on various articles of the MTC and the accompanying commentary, including on Article 5. The Commentary specifically notes that India does not agree with the conditions, including time threshold and commercial reason, for regarding an individual’s home, where activities related to the business of an enterprise are carried out, as a place of business of the enterprise.

However, Indian courts have consistently held that the OECD commentary has high persuasive value in the interpretation of double taxation avoidance agreements (Tax Treaty), especially where the language of the Tax Treaty is aligned with the OECD MTC. The courts have held that Tax Treaties should be interpreted in good faith and in light of their object and purpose, acknowledging the Vienna Convention on the Law of Treaties as relevant customary international law. Relatedly, the Supreme Court in the landmark case of Engineering Analysis¹ ruled that India’s positions on the OECD commentary do not unilaterally alter the provisions of a concluded Tax Treaty unless it is formally renegotiated bilaterally.

The new, detailed guidance on home office PEs could be influential in India. It provides a structured framework that may bring greater predictability to a contentious issue. However, the Indian tax authorities have historically adopted a stringent view on PE creation. Indian jurisprudence has also set out tests for PE determination, such as stability, productivity, and dependence, which may not align perfectly with OECD standards and may result in divergent outcomes.

Therefore, while the 50% threshold and the ‘commercial reason’ test from the Commentary will likely be cited in Indian litigation, their dispositive weight will depend on the specific wording of the relevant Tax Treaty and the extent to which the judiciary views them as a clarification of existing principles versus a substantive change.

Consequently, for multinational enterprises with remote employees in India, the OECD’s new framework serves as an influential benchmark rather than a definitive safe harbour. The ultimate determination of a PE will continue to depend on the specific language of the applicable Tax Treaty and the evolving jurisprudence of Indian courts (substance over form approach). Therefore, proactive risk management, including meticulous documentation of the employee’s time in-country and the commercial rationale (or lack thereof) for their location, would be paramount for defending against potential PE challenges by the Indian tax authorities.