The Organisation for Economic Corporation and Development (OECD) has updated its guidance to clarify when remote work across borders, such as from a home office, creates a taxable presence for a business.
A taxable presence, also known as a permanent establishment (PE), can arise where an entity that is resident in one jurisdiction operates in another jurisdiction, explains RSM Consulting.
If a director or employee of a UK company works remotely overseas, or vice versa, this may result in the company creating a PE, as the remote working arrangement could give rise to a fixed place of business or dependent agent.
The new guidelines
The OECD has published updates to its model tax convention’s commentary, covering the circumstances in which a home office would qualify as a fixed place of business.
This enables the changes to apply to treaties already covered by the commentary without requiring the treaties themselves to be updated, RSM Consulting said.
The firm notes that new guidance will also be incorporated into UK domestic law from 1 January 2026, if the current Finance (No. 2) Bill is passed
“Where an individual works from home in an overseas jurisdiction for less than 50% of their working time during a 12-month period, the OECD confirms that the individual’s home office should generally not be considered a fixed place of business.
“The commentary does not rule out limited cases in which the facts clearly indicate a fixed place of business, but in most cases, no such PE should be created in the overseas jurisdiction,” RSM said.
“Where an individual works from home in an overseas jurisdiction for 50% or more of their working time over a 12-month period, whether their home office is a fixed place of business depends on the facts and circumstances.”
This includes if there is a commercial reason for the individual to undertake business activities in the overseas jurisdiction, such as directly engaging with customers or suppliers which is facilitated by their presence.
“Where there is no commercial reason for the individual’s presence in the overseas jurisdiction, the home office is unlikely to create a fixed place of business PE. The commentary states that cost savings or talent retention through home working would not be considered ‘commercial reasons’. However, having an employee in a particular time zone could be relevant,” RSM said.
Changes likely to be welcomed
The new OECD guidance is likely to be welcomed by businesses that allow employees to work from home without restriction on location, RSM said.
“The need for in-house tax functions to track and monitor where individuals work may be somewhat diminished for the purposes of the PE rules.
“However, it is still important to document where employees and directors are working from, for how long and why, and the activities they undertake overseas, so that businesses can demonstrate whether a PE has arisen. It will often be necessary to track the location of employees for other purposes, such as insurance and other taxes.”
It added that businesses will need to consider how, and if, the new guidance is to be applied in the territories they operate within and the location their employees work from.
Domestic law, and potentially a relevant tax treaty, remain applicable in each location and in some cases, this will differ from the latest OECD guidance.
“The updated guidance referenced here is limited to home working arrangements that could create a fixed place of business. It does not apply in other cases, such as when an entity’s premises create a fixed place of business, or when a dependent agent has authority to do business on behalf of an entity.
“This may be particularly relevant where individuals working overseas negotiate with customers on behalf of the business. The OECD has also published additional guidance on PEs for the extractive industries as part of this update.”
RSM noted that these updates may allow businesses to reconsider their work from home or international working policies where they have been designed to limit PE risk.
“Increased flexibility is likely to be well received by employees and act as an additional attraction factor for potential recruits. However, while the enhanced guidance is helpful, businesses should still consider domestic rules and the relevant tax treaty, as well as their own specific facts and circumstances.”
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