Understanding Permanent Establishment (PE): A Remote Work Tax Explainer

The Organisation for Economic Co-operation and Development (OECD) is the world’s leading architect of economic policy, bringing together 38 member countries to address important worldwide standards, especially about corporate taxation, as set out in the OECD Model Tax Convention. In keeping with this aim, the OECD has now released what is clearly a highly significant 2025 Guidance on Permanent Establishment (PE), which is, arguably, the most pressing international tax development for companies with cross-border remote workers, now that a different style of working has evolved because of the pandemic.

The rule brings vital clarity to the core question: In what circumstances, precisely, does an employee's foreign home office constitute a "taxable presence" (PE) on behalf of the employer? This is critical for multinationals that want to navigate the complicated, cumulative tax jurisdictions in a fully distributed workplace setup.

Definition of Permanent Establishment (PE):

The Permanent Establishment (PE) is the most basic concept in international taxation, which is essentially the floor that determines when a state has a right to tax the corporate profits of a business that originates from a different state. The definition of a PE is essentially embodied in Article 5 of the OECD Model Convention, which states that a PE is a "fixed place of business" where the business of an enterprise is wholly or partly exercised in a different state.

The emergence of a PE is the major force that generates a corporate tax liability in a foreign state, because once a PE is set up, such as when a sales office, factory, or research laboratory is established, the corporate entity is obliged to pay a corporate income tax on the income earned attributable to that particular activity in a foreign state.

In short, a PE means that a business has developed a taxable presence abroad that is of a certain level of importance sufficient to warrant a proportionate share of profits being attributed to the host country.

The Remote Work Problem the OECD Solved

Prior to the pandemic, a clear set of regulations existed with regard to what constitutes a Permanent Establishment (PE), namely that a fixed property, a separate office high-rise, a factory, an immobile branch office qualifies as a PE. The sudden explosion of worldwide teleworking has destroyed this definition, throwing international taxation law into a state of crisis.

The problem: Was such a person, a mid-level employee, sitting at his kitchen computer in Spain, with his own internet connection, capable of putting a legally binding PE together for his Canadian or United States-based employer?

This uncertainty posed a massive risk to MNCs. They were threatened with the frightening possibility of embarking on a complicated, spontaneously generated, and costly corporate tax compliance nightmare in every foreign country where a teleworking employee wanted to live. The OECD’s 2025 guidelines  specifically address this existential dilemma, providing a crystal-clear, universally accepted answer to effectively preserve international trade continuity.

What Are the Effects of the OECD’s 2025 Guidance on PE Risk for Telecommuters?

A. The Default Rule: Home Offices Don't Create a PE

The most important lesson from the 2025 guidelines is that in virtually all cases of teleworking, a worker’s home office cannot per se constitute a Permanent Establishment (PE) of his employer. This is because such treatment is based on the principles of control and necessity:

No Right of Access: The employer lacks the legal right of access to the home office of the employee. This is because the home office belongs to the employee, not the employer, and cannot be used for the employer’s purposes.

Employee Choice: This is where the agreement is based on the employee’s choice, convenience, or need. It is not a requirement of the business.

For instance, consider a software programmer working from his apartment in Lisbon, Portugal, for a software company in the U.S. Since the software company is not leasing the apartment, it has no rights to that premise, which is merely used for the programmer’s convenience, so a PE is not generated in Portugal.

B. The 50% Working Time Threshold: A Clear Safe Zone

The following significant issue that should be taken into consideration is that of the working time threshold. Under the new rules, the likelihood of becoming a PE is small when the employee spends fewer than 50% of the overall working hours in the jurisdiction within a 12-month period at a distance from the workplace.

Under 50%: If the employee spends less than 50% of his/her working hours in the foreign country (for instance, two days a week), the PE risk is reduced. It is categorized as the "safe zone" because the PE risk is less.

50% or More: If the employee surpasses the 50% threshold, a closer analysis of the situation is necessary. It is at this stage that the OECD guidelines bring a closer assessment of whether a commercial reason exists for the employee’s presence in a foreign state.

C. The Qualitative Test: Is the Location a Place of Business?

Having satisfied the 50% threshold, the following major consideration is whether the employee’s presence in the foreign country is of benefit to the enterprise from a commercial perspective, rather than simply being a location that is for the employee’s convenience. The employee’s presence is of a commercial nature when the arrangement of working remotely facilitates a strategic aim, thus placing that location at the disposal of the enterprise.

High PE Risk (Commercial Reason Exists):

The presence of the employee at the foreign location increases the likelihood of a PE because it provides a direct advantage to the business enterprise. This includes, but is not limited to, the following:

Direct Engagement with Local Customers: Interacting with customers, suppliers, or related parties in the foreign jurisdiction to facilitate business activity.

Building/Growing the Market: Efforts to enter a new market or increase the presence of the company in that area.

Strategic Time-Zone Placement: This is positioning an employee in a particular time zone that helps them serve clients effectively from different time zones, giving a competitive advantage to the business.

On-Site Service Performance: The performance of tasks that require the presence of the employee physically, such as the performance of training, repair work, or other on-site services that serve as a business reason for the employee's presence.

Low PE Risk (Non-Commercial Reason):

Conversely, a low PE Risk situation may arise when the employee is merely working from a distant location on non-commercial grounds, such as convenience, cost-cutting arrangements, and so on. This can encompass:

Internal Cost Savings: The use of teleworking purely for internal cost savings, such as minimizing the need for office accommodation, falls within the realm of internal efficiency, which is not a requirement from a business perspective within the foreign country.

Talent Retention Benefit: In situation where the remote work privilege is given with a minimum goal of keeping the staff satisfied as an employee benefit, but with no aim of facilitating a strategic activity within the foreign country, such might not amount to a commercial purpose.

Limited Local Engagement: Occasional or sporadic engagement with local clients or parties, which may not add to the strategic goals of the business, would not amount to a commercial reason.

Main Operator Exception

This means that a different definition is used when one individual is essentially conducting the entire activity of a business. For example, a non-resident consultant conducting his own consulting business from a home office in another country will make such a location a fixed place of business for that enterprise. This is because when such a non-resident conducts his own business, his home is essentially the base of his business, thereby making a PE come into existence.

Conclusion

The OECD’s 2025 guidelines serve as a benchmark for businesses and employee heads who find themselves entangled in the complexities that come with a PE in the context of remote work. So long as employees are not spending a cumulative total of 50% of their time in a foreign country, with no purpose to serve a business within that foreign country, the likelihood of creating a PE is slim. Where businesses are engaging in international employment, these are fundamental thresholds that can serve to mitigate potential risks.

At Water & Shark, we assist businesses in tackling such challenges with confidence. We assist our clients with cross-border remote work arrangements, PE risk evaluations, international mobility solutions, as well as adherence to current international tax regulations. We provide expert guidance to help your business navigate the evolving modern worldwide workplace and protect and preserve what matters most.

FAQ – Frequently Asked Questions

1. Does remote work automatically create a Permanent Establishment (PE)?

2. When can a home office create PE risk for an employer?

PE risk may arise when an employee spends 50% or more of their working time in a foreign jurisdiction and their presence serves a clear commercial purpose for the business.

3. What is the 50% working time threshold in the OECD guidance?

The OECD uses a 50% benchmark over a 12-month period as a key indicator. Staying below this threshold generally places the arrangement in a lower PE-risk zone.

4. Does employer control over the home office matter?

Yes. If the employer has no legal right of access or control over the employee’s home office, it is less likely to be considered a PE.

5. How can businesses reduce PE risk with remote employees?

By monitoring working time, defining remote work policies, limiting commercial activity in foreign locations, and conducting periodic PE risk assessments.