The OECD’s 2025 update to the Model Tax Convention is the first comprehensive revision since 2017 – and it arrives at a moment when global hiring has outpaced the legal concepts originally designed to govern it. What began as exceptional remote work during the pandemic has settled into a permanent feature of how multinationals operate. The new OECD Commentary to Article 5 brings that reality into the core of international tax law.
For the first time, the OECD sets out a detailed framework for cross-border home-office and remote work. The update introduces:
- a clarified fixed place of business analysis for non-traditional work locations (homes, second homes, holiday rentals, friends’ houses and other relevant places in another State);
- a new 50% working-time threshold, which determines when a home or other relevant place becomes a candidate for being treated as a place of business of the enterprise; and
- a substantive “commercial reason” test, which asks whether the worker’s presence in that State actually facilitates the enterprise’s business there.
These elements operate sequentially. First, a place must satisfy the classic requirement of being a fixed place of business with sufficient permanence.
Second, if the worker spends at least 50% of their working time at that place over a twelve-month period, the location may be treated as a place of business of the enterprise.
Only then does the third step decide the outcome: whether there is a commercial reason for the worker’s presence in that jurisdiction. If there is, the home or relevant place may become a permanent establishment (PE). If there is not, it will typically remain outside PE territory even when the worker is there most of the time.
Fundamental Shift in PE Risk Assessment
This is a fundamental shift in how risk is assessed. Historically, employers could often argue that a worker who chose to live abroad was acting for personal reasons, with no meaningful consequence for corporate tax. Under the new framework, that is no longer enough.
If the worker’s presence in the other State helps maintain client relationships, cultivate a local market, work in the same time zone as key customers, or interact in person with suppliers or affiliates, tax authorities are now equipped with detailed OECD guidance to argue that the employer has a taxable presence there.
For global employers, this has three immediate implications. First, remote-work and relocation decisions are now tax decisions. HR, global mobility, and people managers can no longer make case-by-case exceptions without triggering a need for PE and corporate tax analysis. Second, facts will override policy.
Third, cross-border work patterns must be monitored and governed, including where people work, how often, and for whom they interact locally.
In this environment, Employer of Record (EOR) solutions take on a more strategic role. Properly structured EOR arrangements can separate the non-resident enterprise from direct employer status in the worker’s jurisdiction, reduce the risk of creating a PE, and ensure that payroll, income tax, and social security are managed under local rules. EOR is no longer just a way to hire quickly in a new market; it becomes part of a broader framework for controlling PE exposure, misclassification risk, and regulatory visibility.
This article explains the 2025 OECD changes in detail, focusing on the new cross-border home-office rules and their consequences for multinational employers.
OECD Examples A–E: Practical Boundaries of Cross-Border PE Risk
OECD unpacks the three-step test (fixed place, 50% threshold, commercial reason), analyses the OECD’s five practical examples, and translates them into concrete scenarios that HR, global mobility, finance and legal teams can use in 2026 planning.
Example A: Temporary, Short-Duration Work Abroad
The OECD presents an employee who normally works in her home country but spends three months working from another State after a holiday or for personal reasons such as caring for a relative. Even though she performs genuine work during that period, the location does not acquire the permanence required under Article 5. The decisive point in the OECD’s wording is that three months within a twelve-month period is not enough to be considered a “fixed” place of business, regardless of the reason for the stay.
The Commentary goes further: even if the individual owns the property or pays for its upkeep year-round, those private factors do not affect the analysis. What matters is the time spent performing business activities there, not the time she maintains the property. Temporary work conducted during travel or personal stays remains outside PE scope.
This example illustrates that short blocks of work abroad, whether planned or incidental, do not meet the permanence requirement and cannot, on their own, create a permanent establishment.
Example B: Hybrid Work Below the 50% Threshold
The OECD describes an employee who works from her home in another State one or two days a week, totalling around 30% of her annual working time. Because she uses the same place consistently throughout the year, the location is considered fixed in the technical sense. But the Commentary stops the analysis here. Her home does not become a place of business of the enterprise because she performs most of her work elsewhere.
The OECD is explicit: unless additional facts point to a business-driven reason for her presence, the location remains a private setting, not part of the enterprise’s corporate footprint. The working-time threshold is doing the analytical work. At 30%, she does not cross it, so the question of commercial justification never arises.
This example shows that regular hybrid work, even when performed year-round, does not create PE exposure when the employee spends less than half of her working time in the other State and there is no business need for her to be located there.
Example C: Client-Facing Activity in the Worker’s Host Country
The OECD presents an employee who spends around 80% of his working time at his home in another State and regularly visits local clients to provide services. The location is considered fixed because the work is carried out there on a continuous basis over a twelve-month period. In this scenario, the analysis does not stop at the 50% threshold.
The worker’s presence in that State supports the enterprise’s business there: he interacts with clients, provides services locally, and his proximity facilitates service delivery. Because these activities have a clear commercial rationale tied to the State where his home is located, the home is treated as a place of business of the enterprise and therefore a permanent establishment, unless other facts indicate otherwise.
This example shows how quickly PE can arise when the worker’s presence directly supports client service or customer relationships in the host State. The decisive factor is not the home itself, but the commercial connection between the worker’s activity and the enterprise’s business in that jurisdiction.
Example D: Remote Client Work Without Local Commercial Justification
Here, the employee works from his home in another State for about 60% of his time and has an exclusively client-facing role, but the clients are located in multiple jurisdictions, including his home country. He provides services remotely and does not meet those clients in person. His occasional quarterly visit to a client in the host State is brief and incidental in the context of the overall business relationship.
The location is fixed because he works there throughout the year, and his time exceeds the 50% threshold. However, the OECD makes clear that this does not automatically create a place of business.
The enterprise has no commercial reason for him to be located in that State, and the limited, intermittent in-person contact is not enough to establish one. With no commercial rationale linking the worker’s presence to business activity in the host country, the home does not become a place of business and no PE arises.
This example shows that time alone is insufficient: even with more than 50% of work performed in the host State, a PE does not arise when the worker’s presence has no operational relevance to the enterprise in that jurisdiction.
Example E: Time-Zone-Driven, High-Availability Roles
In this example, the employee works almost entirely from her home in another State and provides real-time or near real-time services to customers located in time zones different from her own. Her presence in the host State allows her to deliver continuous, high-availability support to customers elsewhere.
The home is fixed because she works there throughout the year, and her time easily exceeds the 50% threshold.
The OECD treats this as a commercial reason: even though the customers are outside the State where the worker resides, her location enables the enterprise to provide around-the-clock service. Because her presence in that specific State facilitates the business activity of the enterprise, the home becomes a place of business and therefore a permanent establishment, unless other facts suggest otherwise.
This example shows that commercial rationale is not limited to direct in-country business. If the worker’s location materially enhances service delivery, such as through time-zone coverage, PE exposure can arise even without local clients or physical meetings.
What Does Not Create a Permanent Establishment
While the 2025 Commentary expands how cross-border work is analysed, it also establishes clear boundaries. The examples make these limits explicit. Temporary or sporadic periods abroad still fail the permanence test.
A home or private location remains outside Article 5 unless sustained activity turns it into a functional extension of the enterprise.
Occasional or incidental meetings do not amount to a commercial link, and internal HR motives, such as retaining talent, offering flexibility, or reducing office costs, do not qualify as commercial reasons under the OECD test.
Across all examples, the principle is consistent: time alone is not determinative. The worker’s presence must materially advance the enterprise’s business in that jurisdiction before a home can be treated as part of the enterprise’s corporate footprint.
What the OECD Updated
The recent OECD revision introduces several adjustments to the Commentary of the Model Tax Convention to bring it into closer alignment with contemporary business practice. The changes affect multiple parts of Article 5, clarifying how different types of activity, locations, and operational structures should be analysed when determining whether an enterprise is treated as carrying on business in another jurisdiction.
One part of the update introduces new guidance for situations in which an individual performs their work from a private location in another country.
This is set out in paragraphs 44.1–44.21 of the Commentary. The new text does not alter the definition of a permanent establishment but provides a clearer interpretive framework for analysing work performed away from an employer’s premises.
In addition to this new guidance, the OECD has made targeted refinements to several adjacent areas. The Commentary now offers a more consistent approach to natural-resource activities, including an optional rule for short-duration offshore and onshore work.
It also clarifies how premises used within multinational groups should be assessed when different entities rely on the same physical location. Finally, the guidance on digital operations has been updated to distinguish more clearly between third-party hosting arrangements and servers that are owned or operated directly by the enterprise.
Taken together, these adjustments do not change the structure of Article 5, but give tax authorities and enterprises clearer reference points when applying it to modern operational models.
Special Note for Energy, Engineering and Extractives Companies
The 2025 OECD update contains a second major development that is particularly relevant for companies working in energy, oil and gas, engineering, seismic, offshore services, and other extractives-related activities.
Beyond the remote-work changes, the Commentary introduces an optional, lower permanent establishment (PE) threshold for offshore and onshore natural-resource activities (paras. 170–203).
This allows States, through bilateral treaties, to deem a Permanent Establishment to exist purely based on time spent in the jurisdiction, even where activities:
- are short-duration,
- are mobile,
- do not occur at a geographically fixed place of business, or
- previously fell outside Article 5 because the work was too temporary or too dispersed (e.g., offshore maintenance, seismic surveys, mobile engineering teams).
The OECD explicitly notes that:
- Short-duration offshore services can be highly profitable yet not create a PE under the standard rules, prompting States to adopt this alternative test.
- The provision can be applied offshore only, or offshore and onshore, depending on the bilateral agreement.
- The threshold is flexible: treaties using this model currently range from 30 to 183 days in any rolling 12-month period.
Checklist for Employers: How to Apply the New OECD Framework
The new OECD guidance changes how employers must evaluate cross-border work. The following checklist translates the Commentary into operational steps that employers can implement immediately.
1. Map where people actually work, not where contracts say they work
Identify all employees who spend time working in countries other than their contractual work location.
Track:
- annual working-time distribution by jurisdiction;
- whether time abroad is intermittent, seasonal, or sustained;
- any pattern of repeat returns to the same location.
The OECD analysis is built on actual conduct. Written policies cannot override facts.
2. Apply the permanence test to recurring foreign work
Determine whether the foreign location meets the OECD’s concept of permanence:
- recurring use throughout a twelve-month period;
- repeated use over multiple years;
- continuous or predictable work patterns in the host State.
Short blocks of work (e.g., three months) or incidental stays do not meet this test.
3. Identify anyone exceeding or approaching the 50% threshold
Flag employees who spend:
- 50% or more of total working time in another State;
- or are trending toward that level on a rolling basis.
This threshold is the OECD’s entry point to determining whether a private location can become a place of business of the enterprise.
4. Assess whether there is a commercial reason for the worker’s presence
Evaluate whether the individual’s location materially contributes to the business in the host State.
Commercial reasons may include:
- regular interaction with customers or suppliers in the host State;
- local service delivery that requires physical presence;
- collaboration with local partners or affiliates;
- time-zone alignment that enables continuous or near real-time service.
The question is not “Does the employee meet clients?”
The question is: Does the enterprise’s business benefit from the employee being in that State?
5. Exclude motives that do not constitute commercial reasons
Confirm whether the worker is abroad solely because of:
- personal preference or lifestyle choices;
- talent retention arrangements;
- cost-saving decisions such as reducing office space;
- work-from-anywhere policies without business need.
The OECD explicitly states that these motives do not create a commercial reason and therefore do not create PE exposure.
6. Review any in-country interactions for substance
For workers above the 50% threshold, document whether the following occur:
- substantive client or supplier engagement;
- initiation or development of business opportunities;
- delivery of services requiring on-site presence.
Isolated or incidental interactions do not count.
7. Reassess cross-border roles annually
Working patterns shift. A role that had no PE risk last year may acquire one if:
- customer distribution changes;
- a new supplier relationship forms;
- hybrid patterns evolve into sustained foreign-based work.
The OECD makes clear that PE must be evaluated based on the facts of each relevant twelve-month period.
8. Formalise internal approval for remote work abroad
Create an internal review mechanism that prevents:
- ad-hoc approvals,
- unmanaged long-term stays abroad,
- spontaneous holiday extension periods turning into sustained foreign work.
Every cross-border request should trigger a tax/PE review.
9. Evaluate when to use an EOR model
Use Employer of Record arrangements when:
- the enterprise has no commercial reason to operate in the host State,
- the worker’s presence may otherwise be viewed as serving the enterprise’s business,
- local payroll and tax obligations cannot be met directly, or
- the role requires sustained presence but the company does not wish to establish a legal presence or risk creating PE.
EOR provides a compliant alternative to direct cross-border employment and reduces Article 5 exposure.
10. Coordinate HR, Legal, Tax, Finance, and Global Mobility
The OECD update eliminates the old separation between HR flexibility and tax exposure. Ensure the following functions share a single cross-border workflow:
- HR: remote work approvals,
- Legal: contractual frameworks,
- Tax: PE analysis,
- Finance: cost modelling,
- Global Mobility: tracking and compliance.
Any request to work from another country should now be analysed across tax, payroll, immigration and PE risk at the same time, because the OECD framework links these elements more directly than before.
Closing Note: Where EOR Fits Into the New OECD Framework
Employer of Record (EOR) does not remove PE risk when a company’s own business activity is present in a State. The OECD tests still apply. What EOR can do is prevent a company from creating that presence in the first place.
If the worker’s role has no commercial link to the host State, engaging them through an EOR keeps the employment relationship local and prevents the company from being viewed as operating there. Payroll, tax, and social security sit with the EOR, and the worker is not treated as carrying out the enterprise’s business on foreign soil.
If the role does have a commercial link to the host State, for example, direct client service on the ground, then EOR cannot shield the company from PE exposure. In that case, the activity itself, not the employment structure, triggers Article 5.
EOR therefore has a precise and limited function: it protects against accidental taxable presence, not deliberate market activity.