The PE Home Office: Insights from the 2025 OECD Model Tax Convention Update

Introduction

The 2025 Update to the OECD Model Tax Convention introduces significant clarifications regarding when an individual's home or other relevant place may constitute a "fixed place of business" - and thus a Permanent Establishment (PE) - for the enterprise they work for. These changes reflect the evolution of global working arrangements, especially the rise of remote and cross-border work, and aim to provide greater certainty for taxpayers and tax authorities. 

Key Principles from the Updated Commentary

1. No Automatic PE from Home Office Use

The mere fact that an employee or individual works from home does not automatically create a PE for the enterprise. The determination depends on the specific facts and circumstances of each case. In many instances, home office activities are too intermittent or incidental to be considered a location at the disposal of the enterprise. 

2. Continuous and Required Use

A home office may be considered at the disposal of the enterprise - and thus a PE - if:

• The home office is used on a continuous basis for carrying on business activities for the enterprise.
• The enterprise requires the individual to use that location (e.g., by not providing an office when the nature of employment clearly requires one). 

3. The 50% Threshold

The updated Commentary introduces a practical threshold: if an individual works from their home or another relevant place for less than 50% of their total working time for the enterprise over any twelve-month period, that place would generally not be considered a place of business of the enterprise. If the threshold is met or exceeded, further analysis of the facts and circumstances is required.

4. Commercial Reason for Presence

A critical factor is whether there is a commercial reason for the individual’s physical presence in the State where the home office is located. This includes situations where the presence facilitates business activities, such as direct engagement with customers, suppliers, or access to resources. If the enterprise’s business is genuinely advanced by the individual being in that location, the home office may be considered a PE. 

5. Examples and Application

The Commentary provides several examples:

• Example B: An employee works from home 30% of the time - no PE arises.
• Example C: An employee works from home 80% of the time and regularly visits clients - PE is likely, due to permanence and commercial reasons.
• Example D: An employee works from home 60% of the time but only occasionally visits clients - no PE, as the commercial reason is lacking.
• Example E: An employee works almost exclusively from home to provide real-time services to clients in other time zones - PE is likely, as the arrangement facilitates business. 

Practical Implications

• Enterprises must carefully assess remote work arrangements, especially for cross-border employees, to determine PE risks.
• Tax authorities are encouraged to apply the updated guidance flexibly, focusing on substance over form.
• Documentation of working patterns, contractual arrangements, and the commercial rationale for remote work is essential for both enterprises and employees.

Conclusion

The 2025 OECD Model Tax Convention update provides a nuanced framework for evaluating when a home office constitutes a PE. The focus is on continuity, the enterprise’s requirements, the proportion of working time spent at home, and the commercial necessity for the individual’s presence. These clarifications are especially relevant in today’s environment of flexible and remote work, helping to balance certainty for taxpayers with the need to prevent unintended tax exposures.