Can remote work create a permanent establishment (PE)?
For multinational businesses and mobile employees, this area of uncertainty has significant implications regarding cross-border tax risk. We now have additional clarity, thanks to a long-awaited update from the Organisation for Economic Co-operation and Development (OECD).
Two key tests for determining a PE
The OECD’s Model Tax Convention on Income and on Capital (OECD Model) is a widely respected publication, used as a basis for interpreting bilateral tax treaties.
The update introduces a clearer analytical framework to determine whether a home or particular location could be considered a fixed place of business.
Time benchmark test
If, over a 12-month period, an individual works from home for less than 50% of their total working hours (not contractual), this is a strong indicator that the home does not establish a fixed place of business or PE.
Commercial reasoning test
Even if the 50% threshold is met, a PE is not automatically created. The business must have a commercial reason for the individual’s presence in that location.
Only the facts and circumstances relevant to the period of account are considered and the analysis must be based on actual conduct rather than hypothetical alternatives.
Qualifying commercial reasons
A commercial reason may exist if the physical presence of the individual is fundamental for the business to perform as normal. This may include:
- Attending client or supplier meetings on behalf of the business
- Cultivating a new customer base or exploring local business opportunities
- Managing relationships with suppliers or undertaking, monitoring or managing contractual arrangements
- Providing a real-time interaction with customers or suppliers in a different time zone e.g. a call centre or virtual IT support
- Accessing expertise relevant to, and used within the conduct of, the business e.g. meeting regularly with university researchers
- Collaborating with other local businesses
- Performing services that require a physical presence e.g. repairing machines
Non-qualifying commercial reasons
The following are not considered commercial reasons:
- Performing activities of a preparatory or auxiliary nature
- Performing activities of an irregular, intermittent, or incidental nature e.g. short irregular visits to a client site
- Talent retention or employee preference
- Cost reduction e.g. saving on office space
- Time zone differences
- Mere presence of clients or suppliers
To PE or not to PE? Examples
The OECD Model update includes these practical examples:
- An individual working remotely 80% of the time, and visiting client regularly in that location, would likely create a PE
- An individual working remotely 60% of the time, but only visiting clients occasionally or incidentally, would not create a PE
- An individual almost exclusively working remotely and providing real-time services in a different time zone would likely create a PE
Our comments
The OECD Model update offers welcome guidance, but applying these rules in practice remains complex – particularly when each jurisdiction, including the UK, may interpret the new tests differently. For businesses with cross‑border or UK‑based remote workers, understanding whether a homeworking arrangement could create a PE is a critical part of managing tax exposure.
To explore how the OECD changes may impact your UK corporation tax position, please get in touch with Kate Gott or send us an enquiry.
