New OECD Guidance: Homeworking, Overseas Employees And When A PE Is Created

The issue of whether an inpidual working in an overseas country, but for the benefit of an employer/engager in another country, creates a taxable presence (a "permanent establishment" or "PE") in the country in which the inpidual is working has always been a fundamental consideration for businesses. The Organisation for Economic Co-operation and Development ("OECD") has just published welcome guidance to help clarify these rules. In particular the guidance helps employers who are trying to apply these complex rules while faced with employees who expect to have the flexibility to work from different countries.

As a starter for 10, a business will have a PE where it's presence in another country becomes substantial enough for that country to tax the profits connected to those local activities. In most tax systems and treaties based on the OECD Model, this happens when an enterprise has either (i) a "fixed place of business" overseas; or (ii) a representative who acts as a "dependent agent (which is broadly someone who habitually concludes contracts or plays the principal role leading to their conclusion). Once a PE exists the host country may tax the profits attributable to it. In practice, this usually means registering for local corporate tax and allocating profits to the overseas PE (determined through a transfer pricing exercise). It can also give rise to other tax implications such as a requirement to operate payroll or pay social security. While the global network of double tax treaties goes some way to mitigate double taxation, having an overseas PE can create an administrative headache for businesses, and so they generally seek to avoid creating them where possible.

Historically, the position taken by authorities in crafting their local legislation on this matter has often followed guidance issued by the OECD. However, with the increase in remote working for employees overseas, as well as the uptick in the use of employers of record and overseas contractors, the issue of inpiduals working from home and how this marries with the assessment of PE overseas has led to the OECD issuing updated commentary (available here) clarifying when cross border homeworking may create a PE.

Summary of the OECD updated commentary

The commentary recognises modern working patterns and provides a structured approach to home offices and other private work locations, focusing on permanence, proportion of working time, and whether there is a commercial reason for an employee's presence overseas.

In short, a "fixed place of business" PE should not be created in the overseas country the employee is working from if an employee works abroad: 1) on a temporary basis deemed to be if they spend less than 50% of their working time in the overseas country working; and/or 2) are working in the overseas country mainly for personal reasons.

Stage 1 of the test: A place of business must be fixed

A place of business is "fixed" only where there is a sufficient degree of permanence and regularity of use. Short, ad hoc stays, such as three months in a holiday rental, generally lack permanence and do not create a fixed place.

The commentary introduces a practical benchmark: if an inpidual works from the overseas home or other relevant place for less than 50% of total working time in any twelve month period, that place will generally not be a place of business of the enterprise. In determining the percentage of time, actual conduct is decisive rather than policy, contracts, or (say) the period the premises are available or paid for.

Stage 2 of the test: There must be a "commercial reason"

Once the 50% threshold is reached, the home or private location is a place of business only if there is a commercial reason for the inpidual's presence and activities in that jurisdiction.

A commercial reason exists where being physically located there facilitates the enterprise's business, such as direct engagement with customers or suppliers, access to local markets or resources, or work that would otherwise require the enterprise to use other premises in that jurisdiction. By contrast, presence driven solely by personal preference, HR retention or recruitment aims, or generic cost saving without a business need to be in that jurisdiction would not be treated as a commercial reason. Incidental overlap with clients or a different time zone, without substantive engagement, is similarly inadequate.

Examples in the commentary illustrate the boundary. The test turns on substantive, recurring business facilitation rather than convenience or isolated contacts.

For completeness, even where a fixed place of business exists, a PE will not arise if the activities performed there are limited to those that are "preparatory or auxiliary". However, given the new thresholds for permanence and commercial reason, it will often be difficult to argue that activities are preparatory or auxiliary where those thresholds are met.

Conclusion

In practice, particularly given the new "commercial reason" requirement, this guidance may give licence for businesses to permit more ad hoc overseas working. However, risks remain, especially for senior employees because the "dependent agent" PE test must still be considered separately. As such, businesses should continue to exercise caution and seek inpidual advice where appropriate.

This commentary provides clearer guardrails for assessing PE exposure and documenting decisions. In light of this, it is more important than ever for businesses to:

1. Track the days employees spend working outside of their "home" jurisdictions and have processes in place to identify where an overseas workplace might be treated as "fixed" or used.
2. Record the purpose of overseas working and understand and manage client facing activities undertaken abroad.
3. Have a global mobility policy so employees and internal stakeholders understand when and where they might be permitted to work from abroad, and the potential consequences of overstepping those thresholds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.