OECD’s new guidance on permanent establishment and remote work

On November 19, 2025, the Organisation for Economic Co-operation and Development (“OECD”) published long-awaited updates to the commentary on the Model Tax Convention regarding permanent establishment and remote work. The aim is to clarify when remote work may result in a company having a permanent establishment in another country.

An increasing number of employees are working remotely on their own initiative, which has created uncertainty about potential tax risks and how companies should set internal policies. The OECD’s new guidance now provides clarity: remote work from another country will most often not lead to unexpected tax consequences for the employer.

Two decisive factors are emphasized:

• Less than 50% remote work: If an employee works from home or another non-company location for less than 50% of their total working time over a twelve-month period, this is generally not considered to create a permanent establishment for the company.
  
  
• More than 50% remote work: Exceeding the 50% threshold does not automatically result in a permanent establishment. The activities at the relevant location must be of a commercial nature. If more than 50% of work is conducted remotely, a deeper analysis of the circumstances is required.

The update underlines that the assessment of whether a company has a permanent establishment should be based on the actual circumstances during the relevant period, not on previous or future periods.

Furthermore, it is explained that remote work from home or another location abroad normally differs from the company’s use of, for example, local offices or branches. Other relevant locations may include a holiday home, a rented apartment, or the home of friends/family. The main point is that the workplace should not have any connection to the company.

Most homes or other relevant locations are usually not accessible to other employees and have a stronger connection to, and are controlled by, the individual. Therefore, it can be difficult to determine whether the activities carried out at such a location constitute a fixed place of business through which the company’s business is conducted.

A permanent establishment is defined, according to the main rule, as a fixed place of business through which the business of an enterprise is wholly or partly carried on.

Criteria for a permanent establishment according to the main rule:

• There must be a place. The place can be premises, an office, machinery, or other equipment.
• The place must be used on a permanent basis (permanent usually means at least six months).

The business of the foreign company must be wholly or partly carried on from the place. The activity does not need to be productive in nature.

Activities of a merely preparatory or auxiliary character do not constitute a permanent establishment. An employee working from home or another location does not automatically create a permanent establishment for the company. Temporary or sporadic business activities from home or another location also normally do not give rise to a permanent establishment. Each situation requires an individual assessment.

An important factor according to the OECD’s update is whether there are commercial reasons for the employee’s presence in the country, for example, to facilitate business relationships with local customers or suppliers. Temporary customer visits, however, are not sufficient; there must be a clear connection between the employee’s presence, the location, and the company’s business activities in the country. Allowing remote work to retain an employee or reduce costs does not count as a commercial reason.

An individual may be the sole or main business operator for a company. For example, a foreign consultant who, over a longer period, performs the majority of their consulting work from a home office in the country may create a permanent establishment in that country.

The OECD’s updated guidance also includes several examples that clarify the applicability of the new guidance:

• Example A: A person works from a rented apartment in another country for three months during a year. The location is not considered “fixed” because the activity is not considered permanent.
  
  
• Example B: An employee works from home in another country 30% of the working time during a year. The home is “fixed” due to regular use, but the extent is too limited for the home to be considered at the company’s disposal.
  
  
• Example C: An employee works from home in another country 80% of the working time and makes regular local customer visits. The home is “fixed” and there are commercial reasons (local customer contact), which means the home is at the company’s disposal and thus constitutes a permanent establishment.
  
  
• Example D: An employee works from home in another country 60% of the working time and delivers services to customers in several countries, with only sporadic local customer visits. Despite more than 50% remote work, there are no commercial reasons for their presence, so the home does not constitute a permanent establishment.
  
  
• Example E: An employee works almost exclusively from home in another country and delivers virtual services to customers in different time zones. The home is “fixed” and there are commercial reasons (serving customers in different time zones), which means the home is at the company’s disposal and constitutes a permanent establishment.

The OECD’s updated guidance also elaborates on the concept of “commercial reasons” and when such reasons may exist due to physical presence in a state as a result of an employee working from home or another relevant location in the state.

Examples of commercial reasons:

• The employee holds meetings with the company’s customers
• The employee helps build a new customer base or identify business opportunities
• The employee finds new suppliers, is responsible for supplier relations, or manages supplier contracts
• The employee interacts with customers or suppliers in real time, for example via call center, IT support, or medical services across different time zones
• The employee participates in business-relevant expertise, for example through regular meetings with university researchers
• The employee collaborates with other companies
• The employee performs services on-site at the customer, such as training or repairs
• The employee interacts with employees or staff at the company or related companies

The mere presence of customers, suppliers, or related companies in the country where the home or location is situated does not automatically imply there are commercial reasons for business activity there. Nor is it sufficient to simply be in a different time zone. If there are no genuine commercial reasons for working from the location, it is generally not considered to be at the company’s disposal – unless other specific circumstances exist.

Within the EU, Regulation 883/04 on social security applies. The EEA and Switzerland have joined this regulation through separate agreements. This means that an employee working within these areas is socially insured in only one country, and the employer pays social security contributions to that country. The country in which an employee is socially insured is shown on the A1 certificate.

Main rule: Employees are socially insured in the country where they work.

Multistate work 

The regulation has a provision for employees who normally work in several countries (multistate). If the employee lives in one country and is employed by an employer based in another country:

• More than 25% work in the country of residence → socially insured there.
• Less than 25% → socially insured in the employer’s country.

If the employee does not work a substantial part in the country of residence, the employee is socially insured in the country where the employer is based (place of business). If there are two or more employers, the multistate article also guides what applies in those cases.

The number of people working remotely across borders has increased alot the last couple of years. To address this, the EU has drafted Telework Framework Agreement. The agreement specifies when an exemption for teleworking under Article 16 of Regulation 883/04 may be granted. The purpose is to create common and clear rules for when an employee can retain social insurance in the country where the employer is based during cross-border remote work.

What does the agreement mean?

• It applies to employees who live in one country and work remotely for an employer based in another country.
• It guides when it is possible to be granted an exemption so that the employee can be socially insured in the employer’s country, even if the work is performed from home in another country.
• To invoke the agreement, both countries must have accepted the Telework Framework. Sweden joined on July 1, 2023, and over 20 countries have done the same.

Conditions for exemption under the Telework Framework include:

• The employee works less than 50% remotely in the country of residence.
• It does not apply to job roles that normally involve work in several countries (multistate work), where other rules apply.

The OECD’s updated guidance is a welcome addition to the existing, but limited, guidance on remote work and provides increased clarity and flexibility for companies with cross-border remote work.

The new guidance provides better predictability, reduces the risk of unexpected tax claims, and gives employers better opportunities to set internal policies.

However, it is important that companies continue to consider a country’s national legislation regarding remote work, as national law and practice may differ from the OECD’s guidance. The guidance may therefore create some confusion in countries with stricter rules on remote work, where a permanent establishment may arise even if there are no commercial reasons. There are also countries with more generous domestic laws and guidelines on when a permanent establishment may be deemed to arise. KPMG therefore recommends that companies document remote work and continuously monitor the development of international tax rules to avoid future risks.

The new guidance is largely in line with the Swedish Tax Agency’s legal guidance on work from home (Ref: 8-1677220), in which the Tax Agency also places great emphasis on whether there are commercial reasons for the arrangement (circumstances considered in the assessment include, for example, whether there is any benefit for the company in having the work performed in Sweden, or if the company has customers in Sweden that the employee works with, and whether there is any connection between the company’s activities and the geographical location).

One difference, however, is that the Tax Agency considers whether there is any benefit for the company in having an employee’s work performed in another country. This means, among other things, that Example E above, depending on the circumstances, could potentially be assessed differently by the Tax Agency. The OECD, however, seems to consider that an employee providing virtual services to customers in different time zones is a commercial reason, even if the company does not have any direct benefit from the employee’s work being performed in the country concerned.

It is also likely that the Tax Agency will update its legal guidance in line with the OECD’s new guidance, as a permanent establishment should arise in fewer situations than before.

Even though the OECD’s new guidance is clarifying, there are still situations where the assessment remains complex, as in Example E. We therefore particularly emphasize that it is always important to make an assessment in each individual case based on both national laws, the applicable double tax treaty, and the OECD. The same applies in situations where companies have people in senior positions, such as CEOs, working remotely.

If an exemption is granted under the Telework Framework, the employee is covered by social insurance in the country where the employer conducts its business. Without an exemption, EU regulations may instead mean that the employee is socially insured in their country of residence.

Normally, a company reports social security contributions on employees’ compensation in the country where the business is conducted. If no exemption is sought and social security contributions must be reported in a country where the company does not conduct its business, this is usually perceived as a resource-intense and a costly extra task. An exemption under the Telework Framework is therefore a welcome simplification for employers, where applicable. The conditions for applying for an exemption are aligned with the OECD’s updated guidance on whether remote work from home should be considered a permanent establishment or not.

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The article in Swedish