Greater clarity or increased complexity? New OECD criteria for home office permanent establishments

WHEN DOES A HOME OFFICE CONSTITUTE A PERMANENT ESTABLISHMENT?

The starting point is the unchanged definition of a permanent establishment under Article 5 of the OECD Model Tax Convention. Accordingly, a permanent establishment exists where the business of an enterprise is wholly or partly carried on through a fixed place of business over which the enterprise can legally or factually dispose. The key question is now under which circumstances a home office or another relevant place where activities are performed can qualify as such a fixed place of business.

To answer this question, the Updated Commentary to the OECD Model Tax Convention relies on three cumulative elements:

• the existence of a fixed place of business;
• the predominant use of that fixed place of business; and
• the performance of the activity for “commercial reasons”.

Fixed place of business

A home office permanent establishment first requires the existence of a fixed place of business over which – as mentioned – the enterprise can legally or factually dispose. The decisive element is the criterion of “fixed”. While the activity does not need to be carried out continuously, it must display a certain degree of permanence and regularity. Using a home office or another relevant place for a short period of time does not constitute a fixed place of business. The assessment may be different, however, where the same location is used regularly and repeatedly over a longer period of time.

Predominant use of the fixed place of business (50% threshold)

Where a fixed place of business exists, it must next be examined whether this place can be attributed to the enterprise. In this respect, the OECD has introduced a quantitative threshold in the updated Commentary. The decisive factor is whether, within a relevant twelve-month period, the employee performs less than 50%, or at least 50% or more, of their total working time from the home office or another relevant place.

• If the working time spent at the home office or another relevant place amounts to less than 50%, there is, in principle, no fixed place of business attributable to the enterprise.
• If the working time spent at the home office or another relevant place amounts to at least 50% of the total working time, a permanent establishment is to be assumed, provided that there are additional business reasons for performing the activity in the relevant state.
• Where the business activities of an enterprise are carried out predominantly or exclusively by a single individual, the 50% threshold generally does not apply. In such cases, a permanent establishment may be assumed even if the remotely performed working time amounts to less than 50%.

With regard to Swiss domestic law, reference should be made in this context to the analysis of the Swiss Tax Conference (STC) on teleworking. The STC acknowledges the possibility that a home office may, in principle, qualify as a fixed place of business. However, it denies the attribution of such a place to the enterprise due to the absence of the employer’s right of disposal over the concerned premises. Furthermore, the STC takes the view that the activity of a single employee – even on a full-time basis – does not constitute a quantitatively significant part of the enterprise’s overall activity, and that a home office therefore cannot give rise to a permanent establishment for this reason either. This position, however, primarily concerns purely domestic situations.

«Commercial reasons»

As mentioned above, where activities are predominantly carried out outside the employer’s premises – and outside its state of residence – it must be examined whether the activity in the home office or another relevant place is performed for business reasons. According to the OECD, such a reason exists where the physical presence of the individual in the relevant state facilitates the business of the enterprise. This is assumed to be the case where people or resources are located in the state in which the home office or remote-work activity is carried out, to which the enterprise requires access, without maintaining its own presence in that state. 

The OECD lists, in particular, the following examples as commercial reasons:

• meetings with customers of the enterprise and the development of a new customer base or the identification of business opportunities;
• identification of new suppliers, maintenance of relationships with suppliers, or the conclusion, supervision or administration of contractual arrangements with suppliers;
• access to business-relevant expertise used in the performance of the enterprise’s activities, such as regular meetings with university staff conducting research relevant to the enterprise’s business;
• the provision of services to customers or clients in the other state, where such services require the physical presence of employees or other personnel of the enterprise in that state (e.g. training or repair services performed on the customer’s premises);
• real-time or near real-time interaction with customers or suppliers in different time zones;
• substitution for business infrastructure that the enterprise would otherwise need to maintain if it were not able to operate through the home office or another relevant place.

By contrast, the mere fact that customers or suppliers are located in the state of the home office is not sufficient. Likewise, remote-work models that serve exclusively employee retention or cost-saving purposes do not, in the OECD’s view, generally constitute business reasons, as they do not facilitate the enterprise’s business activity. Finally, the existing exception for preparatory or auxiliary activities under Article 5 para. 4 of the OECD Model Tax Convention remains applicable.

Expected impact of the OECD update

The update of the OECD Commentary on Article 5 of the OECD Model Tax Convention does not entail a fundamental redefinition of the permanent establishment concept. Rather, it primarily serves to clarify and systematize existing principles in light of modern working arrangements. In particular, it aims to prevent cross-border home office activities from leading to the creation of so-called “micro permanent establishments” solely on the basis of formal criteria or minor connecting factors.

From a Swiss perspective, it should first be noted that the position taken by the STC with respect to the domestic permanent establishment concept is not directly affected by the OECD update. Currently it is not expected that home office activities in purely domestic situations will more frequently be classified as permanent establishments in the future. Nevertheless, it remains to be seen whether, and to what extent, the STC will review or refine its existing analysis in light of the updated OECD guidance. In this regard, it should be noted that the Austrian Ministry of Finance adopted the OECD position in an information notice dated 4 January 2026, resulting in a restriction of the permanent establishment concept as of 1 January 2026.

In a cross-border context, however, the OECD Commentary continues to be of considerable importance as an interpretative aid for double taxation agreements (DTAs). For newly concluded or future DTAs, it can be assumed that the updated Commentaries will be taken into account when interpreting the permanent establishment concept. With respect to existing DTAs, the relevance of the updated Commentary depends on whether the contracting states follow a dynamic or a static interpretation of the agreement. From a Swiss perspective, the Federal Supreme Court has repeatedly held that a dynamic interpretation may be permissible, particularly with regard to concepts whose understanding is subject to changes in economic and social conditions. In this context, the permanent establishment concept could be regarded as concept to be interpreted dynamically.

CONCLUSION

With the updated Commentary on Article 5 of the OECD Model Tax Convention, the OECD provides greater structure and clarity for the assessment of home office arrangements. The decisive criteria – fixed place of business, predominant use and business reasons – are now systematically set out.

Nevertheless, home office and remote-work arrangements in a cross-border environment continue to require careful analysis. Despite the guidance provided in the OECD Commentary, the assessment remains highly case-specific and requires an overall evaluation of the factual circumstances, including the organizational integration of the activity, the functional role of the individual concerned and the reasons for performing the activity in the respective state.

Finally, it should be kept in mind that the assumption of a home office permanent establishment may also have implications for transfer pricing. If a permanent establishment is recognized, the question arises as to which functions, risks and assets are to be attributed to it and which portion of the enterprise’s profits is taxable in the state where the activities are performed. Against this background, it is advisable to incorporate the findings of the OECD update into existing functional and risk analyses as well as into transfer pricing documentation.