New guidelines for assessing tax risks when an employee works remotely from abroad

Cases where an employee works remotely from another country have become commonplace, but for companies, this flexibility can create a permanent establishment (Eng.: permanent establishment or “PE”) with all the resulting tax consequences. 

Recently, the Organisation for Economic Co-operation and Development (OECD) published new guidelines for assessing the risk of permanent establishment (PE) in cases where an employee works remotely from abroad, for example, if an employee works: 

1. from their home in another country;
2. or from another “significant location,” such as:
   a. a second home,
   b. a short-term rental (Airbnb, etc.),
   c. relatives’ homes.

Specifically, the OECD explains in detail when such a location can become a permanent place of business for a company, through which business is conducted in another country.

Remote work does not automatically create a permanent establishment

According to the guidelines developed by the OECD, the mere fact that an employee works from home or another private location abroad does not automatically create a permanent establishment for the company. This applies equally to:  

1. digital and IT services;
2. online consultations;
3. call center work;
4. remote customer service, etc.

Decisive importance will be given to the actual circumstances, including:

1. how much the employee works remotely from another country;
2. and whether there is a commercial reason for the employee to work from abroad, where their home or another significant location is. Such a commercial reason will be seen in all cases where the employee’s physical presence abroad contributes to the company’s business operations in that country.

50% work time threshold

The new OECD guidelines introduce a quantitative benchmark that makes it easier to assess PE risks.

Specifically, if an employee works from home or another private location abroad for less than 50% of their total working time (in any 12-month period), this location will not be considered a place of business for the company abroad, and therefore, a permanent establishment will not arise.

Essentially, this threshold acts as a practical “safe harbor” for:

1. temporary work from abroad;
2. seasonal living in another country;
3. hybrid work arrangements.

Even if an employee works 50% or more of their working time from abroad, it does not automatically mean that the company will have a permanent establishment abroad, as it is also necessary to assess whether:

1. this location is sufficiently permanent (not just temporary);
2. business activities are carried out there, not just auxiliary functions;
3. there is a commercial reason for the work to take place specifically from this country.

The commercial reason is precisely the central criterion to be evaluated.

Commercial Reason

The OECD indicates that a plausible commercial justification for an employee’s presence in a particular country can be considered if this presence:

1. facilitates regular in-person or real-time collaboration with clients, suppliers, or group companies;
2. provides access to local resources or expertise;
3. replaces premises that the company would otherwise have to rent in that country;
4. allows for real-time service delivery across different time zones;
5. is necessary for services requiring physical presence (e.g., training, repairs).

In other words, if an employee’s activity in a particular country essentially facilitates or ensures the company’s economic activity, the risk of a permanent establishment significantly increases.

A commercial reason will not be identified if working from home is allowed only:

1. due to the employee’s personal considerations (residence, family, lifestyle);
2. to attract or retain an employee;
3. to reduce costs (e.g., by not renting an office).

The fact that clients are located in that country will not be sufficient to automatically assume the existence of a commercial reason.

What does this mean for businesses?

For companies that practice hybrid work models or allow employees to work remotely from different countries, it is essential to consider that:

1. the OECD has reduced the risk associated with temporary, lifestyle-motivated work from abroad, if it is controlled;
2. at the same time, the guidelines clearly support the identification of a permanent establishment (PE) if employees work from another country for an extended period to “serve” that market, even if the company does not have an official office there.

To mitigate risks, it is recommended to: 

1. review remote work and “digital nomad” policies;
2. implement time and location tracking;
3. document the reasons why work is performed in a specific country;
4. also assess the risk of an agent’s permanent establishment;
5. not forget other aspects: immigration, data protection, occupational safety, and foreign labor laws.

Special attention should be paid to cases where an individual is the sole or primary business operator (e.g., an independent consultant). In such situations, a home office can much more frequently be classified as a permanent place of business.