The proliferation of remote work has fundamentally changed how organizations operate—and with it, how tax authorities think about where a business exists for tax purposes.
What started as a temporary response in 2020 to the COVID-19 pandemic is now a lasting part of how companies are structured, as many employees now work across borders and time zones on a permanent basis.
But these arrangements—especially those with sustained cross-border operations—come with tax risks that could be overlooked.
One area of concern is the concept of permanent establishment (PE)—a threshold that, once crossed, can expose an employer in one country to corporate tax obligations in another country. Tax authorities could argue that the remote presence of an employee constitutes a permanent establishment for the employer and is therefore subject to taxes.
These determinations are often subjective judgments based on high-level commentary from the Organisation for Economic Co-operation and Development (OECD), the wording of tax treaties and the positions taken by tax authorities of different countries.
In response to this growing uncertainty, on Nov. 19, 2025 the OECD released updated guidance on when cross-border remote work arrangements may create a PE for tax purposes. These revisions to the OECD Model Tax Convention and its Commentaries aim to provide greater clarity and distinguish between remote work driven purely by employee preference and arrangements that may give rise to a taxable presence for the employer in a foreign jurisdiction.
Businesses with employees who work remotely across borders should consult the appropriate advisors to review their policies and underlying facts to determine whether they may be exposed to additional taxation under the OECD’s updated guidance.
What is a permanent establishment?
A PE exists when an organization has a fixed place of business through which it wholly or partly carries on its operations. Common examples outlined in tax treaties include a place of management, a branch, an office, a factory or a workshop.
Various tax treaties also make it clear that simply owning or controlling a company in another jurisdiction does not—on its own—create a PE.
Prior to the OECD’s updates, there was limited guidance and few examples on whether a remote work location, such as an employee’s home, could constitute a PE. Based on the previous guidance, if a home office was used on a continuous basis and required by the individual to carry out business activities, it could qualify as a PE—depending on specific facts and circumstances.
The revised commentary from the OECD provides additional guidance by introducing a clearer analytical framework and a series of practical examples to help taxpayers assess when cross-border remote work arrangements may give rise to a PE exposure.
The two-step PE test
The updated guidance features a two-step test to determine whether an employee’s home or other remote-work location constitutes a PE for the employer. Both steps must be satisfied for a PE to arise:
