Update to the OECD Model Tax Convention clarifies home office permanent establishments

The OECD has recently published an update to the Commentary on the OECD Model Tax Convention which, in particular, provides long-awaited clarification on when a home office constitutes a permanent establishment (PE).

Key elements of the revised Commentary to Article 5 of the OECD Model are:

No PE will be considered to exist where the employee performs less than 50% of their total working time for the enterprise from a home office in the other state over any twelve-month period.
Where the home office share is at least 50%, the analysis will depend, inter alia, on whether there is a commercial reason for the activity to be performed from that particular state.

1) Key elements in detail

a) Key element 1: 50% threshold

The starting point remains the classic definition of a permanent establishment in Article 5 of the OECD Model Tax Convention: There must be a fixed place of business through which the business of an enterprise is wholly or partly carried on. The update clarifies how this is to be understood in the context of home office situations.

If the activities carried out from the home office are limited to preparatory or auxiliary functions, there is still no permanent establishment (para. 44.5).
A permanent establishment generally requires a sufficient degree of permanence. Under the OECD’s previous approach, a PE was, as a rule, not considered to exist where a business was carried on through a fixed place of business in the other state for less than six months. This benchmark is now confirmed in the home office context but, as before, remains a case-by-case assessment (para. 44.21, Example A).
Specifically for home office situations, the update clarifies: If an individual uses their home office or another relevant place in the other state for less than 50%of their total working time for the enterprise during any twelve-month period, that place will, in general, not be regarded as a place of business of the enterprise (para. 44.8).
Once the individual works from the home office for at least 50% of their total working time, a permanent establishment is not created automatically. Instead, the existence of a PE must be assessed on the basis of the specific facts and circumstances (para. 44.10). This is where the second key element comes into play: The test of whether there are “commercial reasons”.

b) Key element 2: Commercial reasons test – Is there a commercial reason for working in a particular state?

The updated Commentary places particular emphasis on the concept of a commercial reason (paras. 44.11, 44.12). Such a commercial reason exists where there is a clear, business-driven link between the activities performed from the home office and the business of the enterprise in the relevant state.

A commercial reason for the activities in the other state will in particular be considered to exist where:

The physical presence of the individual in that state facilitates or enables the conduct of the enterprise’s business, for example, because there are people or resources in that state to which the enterprise needs access for the performance of its business activities.
The enterprise would use other premises in the same state (e.g., a rented office) if the home office were not available;

The individual directly engages with customers, suppliers, related parties, or other relevant persons and that engagement is facilitated by the individual being based in that state.

The Commentary also lists a number of examples in which a commercial reason will typically be present if activities are carried out from a home office in the other state (para. 44.17), such as:

holding meetings with customers of the enterprise,
developing a new customer base or identifying new business opportunities,
sourcing and managing suppliers or continuously managing contractual arrangements with suppliers,
real-time or near-real-time interaction with customers or suppliers in other time zones (e.g., call centre services, IT support, telemedicine),
accessing business-relevant expertise (e.g., regular meetings with researchers at a local university engaged in projects relevant to the business),
collaboration with other businesses located in that state,
providing services to customers in the other state that require the physical presence of personnel in that state (e.g., training or repair work on the customer’s premises),
intensive interaction with employees or other group companies located in the same state.

The Commentary also addresses single-person scenarios: If an individual is the only or primary person conducting the business of the enterprise in the other state, there is a strong indication that the home office will be regarded as a place of business of the enterprise and thus will potentially constitute a PE (para. 44.20).

The Commentary also clarifies that no commercial reason for a home office in the other state is considered to exist if (paras. 44.14 - 44.16):

interaction with customers, suppliers or partners is only incidental, occasional or of minor importance (e.g., short occasional visits to a customer, engagement of minor importance in the context of the overall business);
the enterprise allows home office purely for employment-related reasons, for example, to attract or retain a particular employee;
the enterprise primarily intends to reduce costs, without it being functionally or operationally necessary for the individual to be located in that state (e.g., to save on office space).

2) Previous administrative practice in Austria on home office permanent establishments

The Austrian tax authorities have so far taken a broad approach in concluding that home offices constitute permanent establishments by assuming a factual power of disposal of the enterprise over the home office of one of its employees. In line with the OECD’s long-standing view, the enterprise must in some way be entitled to use the individual’s premises on a permanent basis; no formal legal right is required, instead the practical ability to use the premises for the conduct of the business is sufficient. Such power of disposal would generally be denied if the employer does not require the employee to work from home because a permanent workplace at the employer’s premises is available and actually used and home office is generally seen as optional; this approach was explicitly adopted by the Austrian authorities (Express Answer Service 3445). In the reverse, however, that could have meant that if the employee is allowed to work from home and is not offered office space at the employer’s premises in the other country, the home could become a permanent establishment. Especially in such situations, the defined OECD approach brings some clarity.

Further, in the view of the Austrian tax authorities, the home office must be used on a permanent basis and merely occasional use does not give rise to sufficient power of disposal. As a rough quantitative guideline, the Austrian tax authorities , up until now, took the view that if around 25% of an employee’s total working time is performed from the home, this can no longer be regarded as merely occasional use and a PE may have arisen (Express Answer Service 3323); in other rulings, 50% of home office work has likewise been regarded as not merely occasional (Express Answer Service 2966; 3415). Also in this regard, the OECD approach outlined above provides guidance that will hopefully bring more certainty.

3) Outlook

The OECD update introduces a practical 50% threshold and a commercial reason concept for home office in another state, and thereby provides a significantly improved framework for classifying cross-border remote work models for tax purposes. Ultimately, however, the actual facts and circumstances of each individual case remain decisive for the assessment. It also remains open whether, and to what extent, the Austrian tax authorities will follow this OECD approach or adopt a more stringent view in certain constellations.

The Link to the update can be found here:
https://www.oecd.org/en/publications/the-2025-update-to-the-oecd-model-tax-convention_5798080f-en.html

Please note: This blog is for general information purposes only and in no way constitutes legal advice from Binder Grösswang Rechtsanwälte GmbH. The blog cannot replace individual legal advice. Binder Grösswang Rechtsanwälte GmbH accepts no liability of any kind for the content and accuracy of the blog.