By: Natalia Baigorri
On November 19, 2025, the Organization for Economic Cooperation and Development (“OECD”) released the 2025 update to the Model Tax Convention (“MTC”) and its Commentary.[1] The OECD MTC is not binding authority; rather, it serves as a non-binding recommendation to member countries to adopt their own bilateral tax treaties.[2] The role of the OECD Commentary is to serve as an interpretation guide for member states that have adopted the text of the MTC in bilateral tax treaties.[3] Article 5 of the MTC defines “Permanent Establishment” (“PE”) as it relates to corporate income taxation. This is relevant for companies that conduct business across borders and sets a minimum threshold presence under which the source country won’t attempt to tax the business’s income.[4] There weren’t changes to Article 5 itself, but the Commentary on Article 5 of the MTC was updated to clarify the circumstances in which cross-border working from home or a vacation home may be regarded as a fixed place of business.[5] This means that the updated Commentary will change how existing bilateral tax treaties that use the same wording as Article 5 will be interpreted under this new meaning.[6] Remote working has grown tremendously in the post-COVID era, and with this, people have increasingly started working from home, vacation homes, and other countries.[7] The OECD addresses this in the 2025 updated Commentary by clarifying what constitutes a PE as the world continues to shift to remote work and people spend more and more time working outside the office.[8]
The updated Commentary broadens what may constitute a PE to address increased cross-border mobility among workers.[9] The updated definition of PE leaves international businesses exposed to increased taxation when the bilateral treaties follow the wording of Article 5. If an employee’s remote work arrangement constitutes a PE, then the employer will be subject to corporate income taxation in that state, on top of the state where they regularly operate. Under the revised interpretation, a new test is introduced to determine if work-from-home arrangements may constitute a fixed place of business.[10] The new rules require that there be a “place of business” to constitute a PE.[11] A temporal test is established to qualify a “place of business[,]” requiring that the home or relevant place not be accessible to other staff of the company and that the individual have control over the place of work.[12] Further, it will not be considered a fixed place of business if the employee uses it for less than fifty percent (50%) of their total working time over a 12-month period, and will be determined by the individual’s actual conduct during the time spent working from there and not the contractual terms of their employment.[13]
If the individual works from home for more than fifty percent (50%) of their time, then a commercial reason must be established to constitute a PE, which is determined by the facts and circumstances. Commercial reason can be established if the employee is facilitating business with customers or suppliers in that place; in that case, it is likely to be considered a PE.[14] Other examples of commercial reasons include holding in-person customer meetings, using the location to facilitate collaboration with other businesses, or enabling real-time interaction with customers, such as through a call center or IT service.[15] There are also increased considerations of specific facts and circumstances; for example, if an enterprise is made up of a sole employee who now conducts more than fifty percent (50%) of their business in a new state, a PE has likely been established in that state.[16]
There are currently thirty-eight (38) OECD member countries across the world, including the European Union countries, Australia, Canada, Mexico, the United Kingdom (U.K), and the United States (U.S.).[17] The updated Commentary supports the finding that a PE exists when employees work long-term from other countries, even if there is no established office there.[18] Corporate income tax planners will need to plan for and work to mitigate increased corporate income tax exposure arising from the classification of a work-from-home employee as a PE.[19] Examples of countries where this will be impactful are the U.K. and Italy, among others. The U.K. Supreme Court established in 2020 that OECD Commentaries that post-date a tax treaty will be given significant consideration in the interpretation of said treaty.[20] The Italian Supreme Court does not give decisive importance to the Commentaries but considers them as a prima facie interpretation of tax treaties.[21] While it is not immediately apparent what impact the updated Commentary will have, each OECD member will now need to decide how they will interpret the update in existing tax treaties. What this does indicate is a shift in the treatment of cross-border remote workers and a crackdown on ensuring corporate income taxation is being fairly distributed.
[1] See OECD Releases Update to Model Tax Convention, EY Tax News (Nov. 25, 2025), https://taxnews.ey.com/news/2025-2367-oecd-releases-update-to-model-tax-convention [https://perma.cc/S2XR-HM7W].
[2] See Maarten van der Weijden, Yves Rutschmann & Victor Camatta, To What Extent Can Post-Dated OECD commentaries Be Taken Into Account In Interpreting A Double Tax Treaty?, Eur. Tax Blog (Apr. 8, 2021), https://www.europeantax.blog/post/102gv3w/to-what-extent-can-post-dated-oecd-commentaries-be-taken-into-account-in-interpre [https://perma.cc/YX7T-K82H].
[3] See Michael Lang & Florian Brugger, The Role of the OECD Commentary in Tax Treaty Interpretation, 23 Aus. Tax Forum 95, 96-97 (2008) (citing ATO TR 2001/13 para. 108) (establishing that common practice is for updated OECD Commentaries to be considered when interpreting previously established tax treaties).
[4] See What Is Permanent Establishment, Bloomberg Tax (May 14, 2024), https://pro.bloombergtax.com/insights/international-tax/permanent-establishment/#what-triggers-a-permanent-establish [https://perma.cc/KT7G-YTCX].
[5] See Ravi Ahlawat, Sorina van Kommer & Juan Pablo Osman Moreno, OECD’s 2025 Model Tax Convention Update: What It Means for Multinationals, DLA Piper (Nov. 27, 2025), https://www.dlapiper.com/en/insights/publications/2025/11/oecds-2025-model-tax-convention-update [https://perma.cc/9FCJ-UXGR].
[6] See Phil Roper, Update to the OECD Model Tax Convention, KPMG Insights (Nov. 27, 2025), https://kpmg.com/uk/en/insights/tax/tmd-update-to-the-oecd-model-tax-convention.html [https://perma.cc/CRB8-PZSD].
[7] See Anna Desmarais, Five Years On, Did the COVID Pandemic Have a Lasting Effect on How We Work in Europe?, Euronews (Mar. 24, 2025) https://www.euronews.com/next/2025/03/22/how-did-the-covid-19-pandemic-affect-remote-work-in-europe [https://perma.cc/B8HN-95XK].
[8] See Roper, supra note 6.
[9] See id.
[10] See Conrad Turley et al., OECD Model Tax Convention – 2025 Update, KPMG, Dec. 2025, at 1, 2, https://assets.kpmg.com/content/dam/kpmgsites/xx/pdf/2025/12/kpmg-insights-into-new-oecd-mtc.pdf [https://perma.cc/Z6GE-FUUQ].
[11] See id.
[12] See id. at 2.
[13] Org. for Econ. Corp. Dev., The 2025 Update to the OECD Model Tax Convention 15 (2025), https://www.oecd.org/content/dam/oecd/en/publications/reports/2025/11/the-2025-update-to-the-oecd-model-tax-convention_c7031e1b/5798080f-en.pdf (on file with the American University Business Law Review).
[14] Eduardo Abad, Cross-Border Remote Work and International Taxation: The OECD Updates Its Model Tax Convention, Garrigues (Dec. 15, 2025),
https://www.garrigues.com/en_GB/new/cross-border-remote-work-and-international-taxation-oecd-updates-its-model-tax-convention [https://perma.cc/7KUW-QAX2].
[15] See Roper, supra note 6.
[16] See id.
[17] Id.
[18] See Ahlawat, van Kommer & Moreno, supra note 5.
[19] Lukas Naef & Markus Kaemf, OECD 2025 Update: New Rules on Permanent Establishment for Remote Work, EY (Dec. 19, 2025)
https://www.ey.com/en_ch/technical/tax-alerts/oecd-2025-update-new-rules-on-permanent-establishment-for-remote-work [https://perma.cc/546U-AEVQ].
[20] See OECD Commentaries – How They Affect Interpretation of Double Tax Treaties After Adoption, De Brauw Blackstone Westbroek (Apr. 15, 2021), https://www.debrauw.com/articles/oecd-commentaries-how-they-affect-interpretation-of-double-tax-treaties-after-adoption [https://perma.cc/FE66-9NA7]; see also Fowler v. Comm’rs for Her Majesty’s Revenue & Customs (2020) UKSC 22, [2020] 1 W.L.R. 2227 at 18.
[21] See De Brauw Blackstone Westbroek, supra note 20.
