Update to the OECD Model Tax Convention

Revised Commentary to Article 5 provides welcome clarification on when an employee’s home or another location unconnected to the employer in a different country could create a ‘fixed place of business’ permanent establishment (PE) for their employer. The changes to the Article 5 Commentary were necessitated by significant growth in employees working remotely across borders since the last updates to the MTC were made in 2017. As the wording of Article 5 itself is unchanged, the new Commentary is relevant, in principle, to the interpretation of existing bilateral treaties that incorporate the wording of Article 5, although the position of the courts can vary from country to country in this respect.

Some of the key points from the updated guidance are set out below:

Not every home office creates a PE

Simply working from home or another location in a different country does not automatically create a fixed place of business PE for the employer. The facts and circumstances of each case are critical.

Permanence and Use

The guidance notes that the ‘fixed’ requirement should be read in accordance with paragraphs 28 to 34 of the guidance which includes a general presumption that stays of not more than six months will not be ‘fixed’, but recurrent stays over a number of years may need to be accumulated and may risk breaching that threshold. 

What the guidance has helpfully clarified, however, is that where an employee works from home for less than 50 percent of their working time over any 12-month period, there is a general presumption that this will not create a ‘place of business’ and thus the home workplace should not give rise to a PE (where individuals choose to work from home for personal reasons any exceptions to this principle are anticipated to be very rare).

Commercial Reason Test

In cases where the individual works from home for more than 50 percent of their time, there must also be a commercial reason for the employee to work remotely from that location. Motives for supporting a home working arrangement, such as cost reduction and obtaining or retaining an individual’s services, would not by themselves constitute a commercial reason. The mere presence of customers or suppliers in the home working location should also not automatically lead to a conclusion that there is a commercial reason. However, the presence of any of the following factors is likely to suggest a commercial reason exists:

• Proximity to customers of the enterprise facilitates managing the customer relationships (e.g. through in-person meetings);
• The location facilitates cultivation of a new customer base, or identification of business opportunities;
• The location facilitates identification of new suppliers, managing relationships with suppliers, or undertaking, monitoring or managing contractual arrangements with suppliers;
• The location facilitates real-time, or near real-time, interaction with customers or suppliers in different time zone(s) (e.g. providing call centre services, or virtual IT support or medical services);
• The location facilitates access to business-relevant expertise that is used in the conduct of the activities of the enterprise, such as regular meetings with personnel of a university carrying out research relevant to the business of the enterprise;
• The location facilitates collaboration with other businesses;
• The location is important for the performance of services for customers or clients located in that other State where such services require the physical presence of employees or other personnel of the enterprise in that other State (e.g. training or repair services performed on the premises of the customer); and
• The location facilitates interaction with employees and other personnel of the enterprise, or of associated enterprises.

Nature and importance of activities relative to the enterprise as a whole 

Even if the location is a ‘fixed place of business’, if the activities performed are only preparatory or auxiliary (e.g. administrative support), a PE may still not arise – it is important to consider remoteness from realisation of profits for the enterprise. If the enterprise concerned is that of a sole trader, or where the employee working remotely is the primary person conducting the business of the enterprise as a whole, then, if they are conducting their business on an ongoing basis from a home office, that would likely give rise to a PE in that State.

The points above only relate to the new Commentary on fixed place of business PE considerations for remote workers so it is important to remember that remote workers who are negotiating commercial terms with customers may still create a dependent agent PE (DAPE).

For multinational businesses some of the implications to consider are:

• PE Risk Assessment: Businesses with employees working remotely across borders should reassess the PE risk position in light of the new Commentary and domestic law and practice in the host country;
• Documentation: Employers should keep clear records of the principal place of work of remote workers, the nature of their activities, and the reasons for their location (business or otherwise);
• Policy Review: Remote work policies should be reviewed and, if necessary, updated to manage and mitigate PE risks; and
• Tax Compliance: If a PE is created, the business may need to register, file tax returns and pay corporate taxes in the host country. There may also be knock-on consequences to consider in relation to payroll taxes and other taxes. In some countries there may be opportunities to obtain tax rulings on remote working arrangements to provide certainty and this may be most beneficial for senior management roles.

KPMG International’s Global Mobility Services (GMS) team has published a Flash Alert for employers on these changes.

The remaining key changes included in the 2025 update are as follows:

• Exploration and exploitation of extractible natural resources: The Commentary to Article 5 was also revised to add an alternative (optional) provision on activities in connection with the exploration and exploitation of extractible natural resources, together with related commentary. The alternative provision provides a lower PE threshold, which would be crossed after a non-resident enterprise has operated in a State for more than a bilaterally agreed time period;
• Dispute resolution: Changes were made to Article 25 and Commentary including the addition of a new paragraph that confirms the role of competent authorities in determining whether a matter falls within the scope of a tax treaty for purposes of the dispute resolution mechanisms provided under the General Agreement on Trade in Services (GATS);
• Transfer pricing aspects of financial transactions: Changes have been made to the commentary on Article 9 to clarify its application, especially as it relates to domestic laws on interest deductibility. Related changes were also made to the commentary on Articles 7 and 24;
• Amount B: Changes were made to the commentary on Article 25 related to Amount B that signpost specific language relating to tax certainty and the elimination of double taxation included in the report on Amount B. These changes are intended to ensure optionality is preserved in all dispute resolution mechanisms for non-adopting jurisdictions; and
• Exchange of information: Changes were made to the commentary on Article 26 to confirm that information received through exchange of information can be used for tax matters concerning persons other than those in respect of which the information was initially received. Changes were also made to guidance on taxpayer access to and disclosure of information.

It is important to note that not all tax treaties are based on the OECD MTC wording so the changes discussed above will not be applicable to all situations. Equally important, even where a treaty generally follows the model wording, local country advice will still be needed to confirm the position. Please speak to your usual KPMG contact if you would like help with this or have any questions on the impact of these changes.

For further information please contact:

• Phil Roper
• Glenn Rabnott