On November 18, 2025, the OECD approved the 2025 update of the OECD Model Tax Convention. One of the most relevant changes for multinational enterprises concerns the updated commentary on Article 5 (Permanent Establishment), which addresses the growing reality of cross-border remote work.
Although existing tax treaties are not automatically amended, tax authorities and courts will increasingly use these new guidelines when interpreting the concept of a permanent establishment.
Home office as a permanent establishment: more clarity, but no free pass
The revised commentary clarifies when a home office or other relevant location (such as a second residence or temporary rental) in another state may qualify as a permanent establishment of an enterprise.
A key new feature is the introduction of a 50% work threshold. In principle, a location will not constitute a permanent establishment when an employee:
- works less than 50% of their total working time (over a twelve-month period),
- from a location in another state, and
- that location is not a company-provided facility.
If this threshold is reached or exceeded, a facts-and-circumstances analysis follows, focusing primarily on whether there is a commercial reason for the employee’s presence in that state.
The OECD emphasizes that a permanent establishment is more likely to arise when remote work is driven by business needs (e.g., proximity to clients, project requirements, or operational necessities) rather than purely personal preferences or cost savings.
Permanent establishment established? Profit allocation becomes crucial
Even if a permanent establishment is established, this does not automatically mean that a significant portion of the enterprise’s profit is taxable in the work state. In such cases, it remains crucial to conduct a thorough analysis of the profit attributable to that permanent establishment.
This profit allocation is based on Article 7 of the OECD Model Tax Convention, with the arm’s length principle at its core. Specifically, this requires:
- a functional analysis of the activities carried out through the permanent establishment;
- an assessment of the assets used and risks borne;
- delineation between routine and non-routine functions.
In many cases-for example, supporting or preparatory work performed from a home office-the profit attributable to the permanent establishment may be limited or even negligible. However, this does not change the fact that tax authorities increasingly expect enterprises to document and justify their profit allocation.
Impact on enterprises
While the new guidelines appear to provide greater legal certainty at first glance, permanent establishment risks remain real in practice, particularly in cases involving:
- commercial or sales-related activities;
- management or decision-making functions;
- multiple employees jointly performing non-routine activities in the same state.
In practice, tax authorities are becoming increasingly proactive in this area. For example, Belgian tax authorities are progressively asking targeted questions about foreign employees temporarily active in Belgium, including in the context of project-based assignments and Limosa notifications.
Conclusion
With the 2025 update of the Article 5 commentary, the OECD aims to adapt the concept of permanent establishment to the reality of modern work arrangements. The introduction of a 50% work threshold provides additional guidance but does not mean that cross-border remote work is automatically risk-free from a tax perspective.
Once a permanent establishment is established, the focus quickly shifts to profit allocation under Article 7, where a robust transfer pricing analysis is essential.
For enterprises, it therefore remains crucial to:
- Have a clear understanding of where and how employees work;
- document the commercial rationale behind cross-border presence;
- proactively assess both permanent establishment risks and profit allocation.
Your trusted HLB advisor can provide the necessary guidance and assist with permanent establishment analyses and any formalities that may need to be completed.
For further questions, do not hesitate to get in touch.
