On 19 November 2025, the OECD published the long-awaited update to the OECD Model Tax Convention (OECD-MC). The update includes, on the one hand, an addition to Article 25 OECD-MC and, on the other hand, various amendments to the Commentary. The following article focuses on the key question of whether and – if so – under which conditions – remote work by an employee can constitute a permanent establishment of the employer in the state in which the employment is exercised.
Relevance
A permanent establishment created by an employee working remotely can result in direct tax consequences for employers as well as additional procedural obligations and compliance costs. While remote work within Switzerland generally does not constitute a permanent establishment (see analysis of the Swiss Tax Conference of 26 April 2022), the legal situation in cross-border scenarios is less clear. The OECD update relates exclusively to cross-border constellations.
OECD Model Tax Convention
Article 5(1) of the OECD-MC defines the general treaty-based concept of a permanent establishment as a fixed place of business through which the business of an enterprise is wholly or partly carried on. If only preparatory or auxiliary activities are carried out at the relevant place, pursuant to Article 5(4) OECD-MC, this does not constitute a permanent establishment.
Previous OECD Model Commentary
The previous Commentary stated that it cannot automatically be assumed that a place such as a home office is at the disposal of the enterprise merely because it is used by an employee. However, if a home office is used on a continuous basis for business activities and the circumstances clearly indicate that the enterprise has required the individual to use that location for its business (e.g., by not providing an office even though the nature of the work requires one), the home office may be regarded as a place at the disposal of the enterprise and may therefore constitute a permanent establishment.
Update to the OECD Model Commentary
With the newly published update, the OECD has taken an in-depth look at the question of whether cross-border work from home (home office) or from another relevant location (e.g., secondary residence, holiday home, or the home of friends or relatives) can constitute a permanent establishment. The key points can be summarised as follows:
- Fixed place: A permanent establishment requires the presence of a fixed place. The activities carried out at the relevant place do not need to be performed without interruption, but they must occur on a regular basis. This is not the case, for example, if the employee works from that place only once for a consecutive period of three months within a twelve-month period. The situation is different if a home office or another relevant location is used regularly throughout an entire twelve-month period.
- 50% threshold (“place of business”): If a fixed place exists, the next step is to assess whether the location is attributable to the enterprise. For this purpose, the OECD introduces a 50% threshold: The decisive factor is whether the employee performs less than 50% or 50% and more of their total working time for an enterprise from the relevant place within a given twelve-month period.
- Less than 50% working time: If the individual performs less than 50% of their total working time for an enterprise from the home office or another relevant location, that place generally does not constitute a place of business and therefore not a permanent establishment of the enterprise, unless other circumstances justify an attribution to the enterprise.
- At least 50% working time + commercial reason required: If the individual performs at least 50% (i.e., 50% or more) of their working time for an enterprise from the home office or another relevant location, a permanent establishment may be deemed to exist if there is a commercial reason for carrying out the activities in that state. This is particularly the case where the individual interacts directly on behalf the enterprise with customers, suppliers, affiliated companies, or other persons in that state and this interaction is facilitated by their physical presence in that state.
- No commercial reason in certain constellations: Explicitly no commercial reason exists, where remote work is permitted solely for employee retention purposes or for cost-saving reasons (e.g., reducing office space). In such cases, the home office does not serve the business activities in the other state.
- No commercial reason = generally no permanent establishment: If there is no commercial reason, the place in the other state is not considered a place of business and therefore generally does not constitute a permanent establishment of the enterprise, unless specific circumstances indicate otherwise.
- Exception: Individuals who alone or primarily carry out the business of an enterprise: The 50% threshold does not apply in situations where the individual is the only or the primary person conducting the business of an enterprise. In such cases – for example, a non-resident consultant who performs most of the business activities of her own consulting enterprise from her home office – a permanent establishment is to be assumed regardless of the 50% threshold.
Assessment and Outlook
The update to the Commentary on the OECD-MC represents an important step toward adequately addressing the modern working reality. It is particularly noteworthy that the 50% threshold is aligned with the rules on habitual cross-border telework for determining social security affiliation within the EU/EFTA, thereby contributing to a certain degree of harmonisation.
However, it should be noted that the new explanations refer solely to the general definition of a permanent establishment under Article 5(1) OECD-MC. Other permanent establishment risks that may arise in the context of remote work – such as dependent agent permanent establishments – are not addressed.
Furthermore, the Commentary serves as an aid to interpreting the respective Double Taxation Agreements. It should be noted that the updated Commentary represents a deepening and systematisation of the previous principles and is now more strongly oriented toward considerations of practicability. The aim is, in particular, to avoid the creation of so-called micro permanent establishments, which would unnecessarily impede cross-border work by employees. It can be expected that the Swiss tax authorities will take the updated Commentary into account not only when interpreting new Double Taxation Agreements but also existing ones. The same is likely to apply to most other OECD member states. Only Israel, the Czech Republic and Chile have announced positions that deviate in certain respects.