OECD Updates 2025 Model Tax Convention: implications for crossborder working

1. No automatic PE: Simply working from home does not automatically make that location a Fixed Place of Business (FPoB) PE for the enterprise. The Dependent Agent PE rules and commentary, however, remain unchanged. 

2. Analytical framework: The Commentary now sets out factors to assess whether a home or other location is a FPoB, including permanence, whether the premises are at the disposal of the enterprise, and the nature of activities carried out. 

3. 50% threshold test: As a general rule, if an employee works from a home or relevant place for less than half of their total working time over a rolling 12month period, that location will not usually be considered a PE. Where the threshold is exceeded, further analysis is required. 

4. Commercial reason test: Even where the 50% threshold is met, a PE may arise if there is a commercial reason for the individual’s presence in that State. Commercial reasons include (but are not limited to) facilitating client interaction, identification of business opportunities, accessing local resources, or performing services requiring physical presence. Internal reasons such as staff retention or cost savings are not sufficient to constitute a commercial reason for work.  

    

Practical implications for businesses

1. Monitoring arrangements: Tracking where employees spend their working time is now more important, particularly for those with crossborder responsibilities.  

2. Policy review: Employers should revisit flexible and remote working policies to ensure they do not inadvertently create PE exposure. This could include, but is not limited to: 

   1. Limits on the duration and/or nature of remote work being carried out overseas. 

   2. Approval and control processes for cross-border work arrangements. 

   3. The communication of the subsequent potential tax risks to stakeholders. 

3. Governance: Businesses may need to implement controls to manage PE risk, including approval processes for remote working abroad.

Following the OECD’s clarified thresholds, we recommend implementing the above protocols for both compliance and strategic purposes. Monitoring remote working patterns not only ensures adherence to the 50% threshold and commercial reason test, but also reveals potential opportunities to safely expand remote work arrangements without breaching the thresholds, particularly where current policies, work patterns or remote work arrangements fall well below the thresholds outlined in the most recent OECD guidance. 

Beyond PE considerations, crossborder working can also trigger payroll, social security, immigration, and employment law obligations that should be factored into planning. 

The below is not an exhaustive list, but should be considered:

1. Employment law - employees in many locations can gain day 1 employment rights. For employees on UK contracts, care must be taken that employment contract may need to align with host country rules. This is especially important in highly regulated locations where UK contracts may provide less protections than the host location.  

2. Social security – for remote working cases where an employee is expecting to remain being paid (and subject to tax and social security) in the home location, care must be taken that an employee does not create employer obligations in the host. This is especially important in the UK/EU relationship for social security which can be due by both employers and employees even where there is no permanent establishment.  

3. Other reporting - other obligations can arise from allowing an employee to remotely work, including payroll reporting, EU Posted Worker notifications and A1/Certificate of Coverage applications confirming the location where social security is due. These obligations are not removed through the OECD’s guidance on permanent establishments.  

Other OECD updates 

The OECD has also introduced broader guidance on natural resource extraction, optional treaty provisions for exploration activities, and refinements to transfer pricing and dispute resolution. 

For tailored advice on how the 2025 OECD update may affect your organisation, please contact our tax team.