Tax Hotline: The Home Office Permanent Establishment in the age of Remote Work – Decoding The 2025 OECD Update

December 16, 2025

The Home Office Permanent Establishment in the age of Remote Work – Decoding The 2025 OECD Update

The Organization for Economic Co-operation and Development (“OECD”) has released the 2025 Update (“2025 Update”) to the OECD Model Tax Convention on Income and on Capital (“MTC”)¹ and the Commentary to the articles of the MTC (“Commentary”). Among the various amendments, the 2025 Update notably provides comprehensive guidance on the application of Permanent Establishment (“PE”) rules to cross-border remote working arrangements.

Introduction

The surge in flexible and remote working arrangements has transformed the global employment landscape. While this has enabled multinational companies to access talent across jurisdictions, it has also given rise to certain tax risks. Global mobility may result in personal and employment income tax implications and, from an employer’s perspective, may also create a risk of establishing a PE in the employee’s home country. Further, depending on the nature of the employees working remotely and the activities performed by them, there may also be implications for the employer’s tax residence, particularly in cases where domestic residence tests or treaty tie-breaker provisions are based on the place of effective management.²

In this hotline, we focus on PE related aspects arising from global mobility of individuals.

International experience

There has been no direct judicial precedent in India that specifically addresses whether an employee’s remote working arrangement can create a PE for the foreign employer in India.³ However, internationally, several tax authorities and courts have examined this issue. For example, Danish tax authorities typically focus on the employee’s job function, the company’s interest in having a presence in Denmark, and the nature of work performed from the home office to determine whether such workspace is effectively at the disposal of the foreign employer.⁴ They have also held that a PE is not created where an employee works from a home office in Denmark solely for personal reasons and where the foreign company derives no commercial benefit from the arrangement.⁵ Similarly, the Austrian Federal Ministry of Finance issued a ruling in 2023 confirming that no PE exists when non-executive employees work two days a week from home in Austria, based on criteria such as: (1) the activities being ancillary in nature, (2) the work being performed only occasionally from home, and (3) the employer not mandating remote work, particularly where a dedicated workspace is available at the office.⁶

Other jurisdictions have followed comparable reasoning. The German Federal Ministry of Finance has indicated that a home office does not constitute a fixed place PE unless the employer requires the employee to work from home and has a right to use or control the premises.⁷ The Dutch tax authorities have taken a similar view, noting that when remote work is optional and performed for the employee’s convenience, the home office cannot generally be regarded as being at the employer’s disposal.⁸

These international approaches illustrate a common theme: a home office may create a PE only where the foreign employer benefits from, relies on the workspace on employee’s home country. Occasional or convenience-based remote working, without employer compulsion or business necessity, typically does not give rise to a PE.

OECD Model Convention and commentary

Against the above backdrop, the 2025 Update to the MTC and Commentary provide useful guidance on factors which may be relevant to determine whether remote working arrangements can constitute PE.

The 2025 Update removes the traditional “at disposal” requirement and acknowledges the practical difficulty of applying PE principles to home offices, which are ordinarily private spaces outside the enterprise’s control. Instead, the revised Commentary introduces a two-step analysis:

(i) Test of Permanence:

A home office can qualify as a fixed place PE only if it exhibits a “certain degree of permanency.” Activities that are merely intermittent or incidental do not satisfy this requirement. Conversely, continuous use of a home office over an extended period for business activities may meet the permanence threshold. By way of illustration, the Commentary notes that an employee’s use of a rented workspace in another location for only three months within a twelve-month period would not constitute sufficient permanence.

(ii) Place of Business:

Where permanence exists, the next inquiry is whether the home constitutes a “place of business” of the enterprise. This involves two tests:

• Quantitative Test:

  At the outset, the 2025 Update reiterates that mere fact that a place is used by an individual (e.g. an employee) to carry out activities related to the business of an enterprise should not lead to the automatic conclusion that that place is a place of business of that enterprise. Whether or not such a place constitutes a place of business of the enterprise will depend on the facts and circumstances of each case. As such, an intermittent or incidental use of a place should not result such place being a ‘place of business’ of the enterprise.

  Acknowledging that an individual will typically spend time at home or other place in private context and may also undertake activities in relation to business of employer, the 2025 Update provide a general rule that a home office will generally not be regarded as a ‘place of business’ if the employee works there for less than 50% of their total working time for the enterprise over any twelve-month period.

• Qualitative “Commercial Reason” Test:

  In case where the quantitative test is satisfied, whether the foreign enterprise has a place of business at such a place will be determined by the facts and circumstances. In this regard, the 2025 Update provides that a prominent consideration is whether there is a commercial reason for the activities to be undertaken by that individual in the Contracting State where the home or other relevant place is located.

  A commercial reason is deemed to exist where the physical presence of the individual in that State will itself facilitate the carrying on of the business of the enterprise, such as where the enterprise needs access to “people or resources in that State”. A commercial reason will be present where the individual directly engages with customers, suppliers, associated enterprises or other persons on behalf of the enterprise and that engagement is facilitated by the individual being located in that State. Illustrative examples wherein commercial reason may exist if any of the following take place and are facilitated by an individual working from a home or another place in other State: (i) meetings between the individual and customers of the enterprise; (ii) cultivation of a new customer base, or identification of business opportunities; (iii) identification of new suppliers, managing relationships with suppliers, or undertaking, monitoring or managing contractual arrangements with suppliers (iv) performance of services for customers or clients located in that other State where such services require the physical presence of employees or other personnel of the enterprise in that other State (e.g. training or repair services performed on the premises of the customer) etc.

  However, the 2025 Update clarifies that short occasional visits to the premises of a customer, or engagement that is minor in the context of the overall business relationship with that customer, would not be sufficient to conclude that there was a commercial reason for the performance of the individual’s activities related to the business of the enterprise in a Contracting State. Evaluating whether there is a commercial reason will require a consideration of the business of the enterprise and how the specific activities of the individual relate to that business. In nutshell, a commercial reason requires a link between the individual’s presence at a home or other relevant place in that State and the carrying on of the business of the enterprise.

  Interestingly, the 2025 Update notes that arrangements made solely to obtain or retain the services of that individual, i.e., for their personal preference do not constitute a commercial reason. Furthermore, an enterprise that permits work from home “solely to reduce costs” (such as reduced expenditure on office space) does not trigger the commercial reason test.

• Other considerations: The 2025 Updates notes that different considerations may be presented in circumstances where an individual is the only person, or the primary person, conducting the business of an enterprise. A clear example is that of a non-resident consultant who is present for an extended period in a given State where she carries on most of the business activities of her own consulting enterprise from an office set up in her home in that State; in that case, that home office constitutes a place of business of the enterprise.

  This is an important distinction and may specifically impact individual/ founder led business models. 

NDA comments

The OECD 2025 Update seeks to reshape the analysis of whether a remote worker’s home office constitutes a permanent establishment by reducing the emphasis on the “at disposal” test and placing greater focus on (i) the permanence of the arrangement and (ii) the existence of a place of business, thereby providing clearer guidance for assessing PE risks in modern remote-work scenarios.

Arguably, the 2025 amendments reflect a shift towards a substance-over-form approach, under which the mere physical presence of an employee in their home jurisdiction, by itself, is not sufficient to create a PE. Instead, the focus is on the underlying commercial reality — whether the home-based activities have functional significance for the enterprise, whether the employee’s presence contributes to the enterprise’s business in that jurisdiction, and whether the work performed exhibits the necessary degree of permanence and business integration. Global mobility can take multiple forms, including employees who work remotely across borders on a temporary or regular basis, individuals who reside and work in a country different from that of their employer while travelling periodically to the employer’s jurisdiction, cross-border commuters (frontier workers), and digital nomads or self-employed professionals who perform their activities from multiple jurisdictions using digital technology. The 2025 Update makes it clear that there is no straight-jacket formula for assessing whether the presence of employees in another State may result in the constitution of a PE.

The quantitative test provides a meaningful threshold; however, it remains unclear whether a place of business may still be regarded as existing in cases where an employee does not meet the quantitative test but is present in the other State on a recurring, year-on-year basis to perform activities that require physical presence in that State. A purposive interpretation of the OECD guidance would suggest that such sustained and recurring presence should nevertheless result in the creation of a PE. Such interpretation is also aligned with the Supreme Court’s decision in case of Hyatt International Southwest Asia Ltd. vs. Additional Director of Income Tax.⁹

Different types of PE

The 2025 Update provides useful illustrations demonstrating different scenarios wherein a fixed place PE may or may not be created. These examples clarify that determination hinges on the degree of permanency, the volume of time spent, and whether the location facilitates business through local client interaction or essential time-zone coverage.

While the 2025 Update focuses on the “Fixed Place PE”, taxpayers must recognize that a remote worker can trigger different forms of PE simultaneously. From a tax liability perspective, the specific classification of the PE, whether fixed place PE, services PE, or dependent agent PE matters less than the binary outcome: the existence of any PE triggers profit attribution in the source state.

Illustratively, consider an employee of a foreign company (R Co.) resident in State R who travels to State S and works from his home in State S. If this employee provides services to clients of the company from State S, the activity may independently constitute a Service PE. Similarly, in case where such employee negotiates or concludes contracts from his home jurisdiction, a dependent agent PE may be constituted. In such circumstances, the fixed-place PE analysis may largely academic, as a PE would arise irrespective of whether the home office qualifies as a fixed place of business or not.

What should MNCs do?

MNCs should at the outset have a work from home / work from anywhere policy. Such policy should clearly specify the situations (inter-alia being family exigencies, medical needs, or short-term personal reasons etc.) wherein the employee may avail for such flexibility. The policy should also specify the maximum duration for which an employee can work from home / work from anywhere. Importantly, the policy should clarify that remote work is temporary and employee-driven, and not a business-mandated arrangement.

MNCs should also maintain robust documentation and monitoring mechanisms. This would include maintaining clear records of the employee’s role, seniority, and decision-making authority, particularly to demonstrate that core revenue-generating or management functions are not being performed from the remote jurisdiction. Detailed travel and stay records, time-sheet data evidencing the quantum of time spent working remotely, internal approvals for remote work, and contemporaneous communications evidencing the nature of activities undertaken are critical to support the factual analysis under the OECD framework. There should be periodic internal reviews of remote working arrangements, especially those extending year-on-year, to assess whether the permanence threshold is being met or not.

It is also common for MNCs to engage independent contractors or hire personnel through an employer-of-record (EOR) in jurisdictions such as India. Depending on the availability of talent and the operational model of MNC, MNCs should undertake a comparative risk assessment between (i) permitting remote work arrangements that may trigger home-office PE risks, and (ii) engaging contractors or EOR structures, which carry their own PE risks. Such assessment should be fact-specific and revisited periodically as business needs evolve.

What should individuals/ founder-led businesses do?

The OECD 2025 Update underscores that different considerations apply where an enterprise is effectively carried on by a single individual or a small group of key persons, particularly in the case of consultants, professionals, freelancers, and founder-led businesses. Such individuals should be mindful that where most or all core business activities are conducted by them from a home office in another jurisdiction over an extended period, that home office may be regarded as a place of business of the enterprise. Accordingly, individuals and owner-managed businesses should carefully assess the location from which substantive business activities are performed, and avoid long-term or recurring arrangements that result in the business being effectively operated from a single foreign jurisdiction.

Clear distinctions should be maintained between personal presence and business activity, supported by documentation evidencing the temporary or incidental nature of work performed abroad. Where cross-border presence is sustained or recurring, individuals should consider either setting up presence in other State or restructuring operating models.

In practice, many such individuals—particularly digital creators, influencers, and founder-led personal brands—operate through personal holding companies (PHCs) and contract with multiple agencies, platforms, or brand partners in India and other jurisdictions. Where a significant portion of content creation, strategic decision-making, or commercial negotiations is undertaken from India, this may not only give rise to PE risks under the fixed place of business or agency PE principles, but may also trigger place of effective management (POEM) risks for the PHC. In particular, if key management and commercial decisions are habitually made from India, the PHC could be regarded as being effectively managed from India, resulting in potential Indian tax residence exposure.

What does India’s reservation mean?

India has recorded a reservation against the ‘Quantitative Test’ and ‘Qualitative commercial reason Test’ for regarding an individual’s home where activities related to the business of an enterprise are carried out, a place of business of the enterprise. India considers that in such a case, individual’s home can be considered as being at the disposal of the enterprise, and it constitutes a place of business of the enterprise.¹⁰ The Supreme Court of India (“SC”) in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT ¹¹ held that the Commentary on OECD Model would have persuasive value with respect to the interpretation of the tax treaty. Further, India’s reservations to the commentary would not affect its relevance unless the reservations were incorporated into the treaties through bilateral negotiation with the respective countries. In the case of ITO v. Right Florists (P.) Ltd.¹², the Kolkata tribunal held that the Government of India’s (“GOI”) reservations on the OECD Commentary are relevant only to the extent that OECD Commentary and cannot be used as evidence of India’s intentions when interpreting a tax treaty, unless the treaty text itself adopts or aligns with the OECD position. Consequently, the updated Commentary may be considered useful for interpreting the fixed place PE test in Indian tax treaties.

In conclusion, in an increasingly global and flexible working environment, MNCs must proactively assess how and where their business activities are carried out and continuously monitor the tax implications of cross-border working arrangements.

Authors

Dhairya Jain, Ipsita Agarwalla and Parul Jain

¹OECD (2019), Model Tax Convention on Income and on Capital 2017 (Full Version), OECD Publishing, Paris. https://doi.org/10.1787/g2g972ee-en.

²https://www.oecd.org/content/dam/oecd/en/events/public-consultations/2025/11/global-mobility-of-individuals/public-consultation-document-global-mobility-of-individuals.pdf

³The Indian Finance Ministry issued Circular No 2 of 2021 clarifying the determination of residential status of individuals, particularly in light of COVID-19 related travel disruptions, by specifying how periods of stay in India should be counted for tax residency purposes

⁴Danish Court Ruling: SKM2024.432.SR. Available here.

⁵Danish Court Ruling: SKM2021.213.SR. Available here.

⁶EAS ruling from the Federal Ministry of Finance, EAS 3445. Available here.

⁷German Federal Ministry of Finance dated 5 February 2024. Available here.

⁸ATR 000011, 21 February 2023. Available here.

⁹Civil Appeal No. 9766 OF 2025/ SLP (C) No. 5710 of 2024

¹⁰Paragraph 55 of the Positions on Article 5 and its Commentary.

¹¹[2021] 125 taxmann.com 42 (SC)

¹²[2013] 32 taxmann.com 99 (Kolkata – Trib.)

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