The Organisation for Economic Corporation and Development (OECD) has updated its guidance to clarify when remote work across borders, such as from a home office, creates a taxable presence for a business.

As cross-border remote working continues to grow in popularity, businesses need to understand its impact on their tax position. Failure to do so may result in additional tax liabilities and penalties.

What is a permanent establishment?

A taxable presence, also known as a permanent establishment (PE), can arise where an entity that is resident in one jurisdiction operates in another jurisdiction. Generally, a PE can arise where an entity has either:

• A fixed place of business in another jurisdiction through which the business of the entity is wholly or partly carried on.
• An agent, who is not independent, acting on behalf of the entity who has, and habitually exercises in another jurisdiction, authority to do business on behalf of the entity.

If a director or employee of a UK company works remotely overseas, or vice versa, this may result in the company creating a PE, as the remote working arrangement could give rise to a fixed place of business or dependent agent.

What’s in the new OECD guidance?

The OECD has published updates to its model tax convention’s commentary, covering the circumstances in which a home office would qualify as a fixed place of business. This enables the changes to apply to treaties already covered by the commentary without requiring the treaties themselves to be updated. The new guidance will also be incorporated into UK domestic law from 1 January 2026, if the current Finance (No. 2) Bill is passed.

Where an individual works from home in an overseas jurisdiction for less than 50% of their working time during a 12-month period, the OECD confirms that the individual’s home office should generally not be considered a fixed place of business. The commentary does not rule out limited cases in which the facts clearly indicate a fixed place of business, but in most cases, no such PE should be created in the overseas jurisdiction.

Where an individual works from home in an overseas jurisdiction for 50% or more of their working time over a 12-month period, whether their home office is a fixed place of business depends on the facts and circumstances. This includes if there is a commercial reason for the individual to undertake business activities in the overseas jurisdiction, such as directly engaging with customers or suppliers which is facilitated by their presence.

Where there is no commercial reason for the individual’s presence in the overseas jurisdiction, the home office is unlikely to create a fixed place of business PE. The commentary states that cost savings or talent retention through home working would not be considered ‘commercial reasons’. However, having an employee in a particular time zone could be relevant.

What does the OECD’s new guidance mean for businesses?

The new OECD guidance is likely to be welcomed by businesses that allow employees to work from home without restriction on location. The need for in-house tax functions to track and monitor where individuals work may be somewhat diminished for the purposes of the PE rules. However, it is still important to document where employees and directors are working from, for how long and why, and the activities they undertake overseas, so that businesses can demonstrate whether a PE has arisen. It will often be necessary to track the location of employees for other purposes, such as insurance and other taxes, as outlined below.

This will be particularly welcome news for technology businesses, which often need to attract skilled talent and offer flexibility. However, while the updated guidance should ease some of the complexity of managing potential PE risks, it does not fully remove the need for consideration.

Businesses will need to consider how, and if, the new guidance is to be applied in the territories they operate within and the location their employees work from. Domestic law, and potentially a relevant tax treaty, remain applicable in each location and in some cases, this will differ from the latest OECD guidance.

The updated guidance referenced here is limited to home working arrangements that could create a fixed place of business. It does not apply in other cases, such as when an entity’s premises create a fixed place of business, or when a dependent agent has authority to do business on behalf of an entity. This may be particularly relevant where individuals working overseas negotiate with customers on behalf of the business. The OECD has also published additional guidance on PEs for the extractive industries as part of this update.

These updates may allow businesses to reconsider their work from home or international working policies where they have been designed to limit PE risk. Increased flexibility is likely to be well received by employees and act as an additional attraction factor for potential recruits. However, while the enhanced guidance is helpful, businesses should still consider domestic rules and the relevant tax treaty, as well as their own specific facts and circumstances.

What other tax risks arise from cross-border remote working?

While the new OECD guidance clarifies when cross-border remote working creates a PE, there are other tax implications of overseas remote working that businesses need to consider.

Cross-border working brings into focus an individual’s tax liabilities and those of businesses.

The starting point for where an individual should be taxed is where they physically carry out their work, and not where they are legally employed, or what payroll they are paid from. This means cross-border remote working brings additional complexities at payroll and individual taxation level.

Business travel and cross border working do not always create a tax liability in the host location, as agreements exist that allow people to travel and not pay either employment or social taxes there. It is important to understand that those agreements contain several different conditions that must be met for exemption to apply, whether that is for personal taxes, payroll taxes or social taxes.

However, an individual can still be resident in a host country and liable to pay tax even if the employer does not have a PE. Likewise, the lack of a PE does not mean that there are no payroll obligations for the employer. Some jurisdictions have a lower threshold requiring a payroll to be operated and some social security agreements require social security to be collected even if there is no presence in the host country.

The new OECD guidance is unlikely to fundamentally alter the income tax position for an individual, but the PE position is often a starting point to determine whether payroll taxes should be withheld from an individual's pay by the host employer, so a review of the position would still be recommended in all cases.

These agreements are in place to mitigate double taxation, and remote working is becoming a key driver when candidates seek out their next opportunity. It is becoming more prevalent in talent attraction and talent retention conversations, so a thorough understanding of the risks and opportunities from cross-border remote working is essential to maximise the people experience.

Next steps for businesses with directors or employees working remotely overseas

Businesses should seek advice from specialists at the earliest opportunity, both in the UK and overseas. This is a complex area, so engaging with an adviser with strong credentials for providing cross-border tax advice, can help to ensure that UK and overseas advice is appropriately aligned.

If you have employees or directors working remotely overseas, now is the time to review your position. Get in touch with Simon Taylor, David Field or your usual RSM contact to assess your exposure and identify practical next steps.

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