Permanent Establishment and Remote Work: Updated OECD Guidance

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On November 19, 2025, the Organisation for Economic Co‑operation and Development (“OECD”) released updates to the Model Tax Convention and its Commentary, introducing a new analytical framework for assessing when a remote employee’s home office may constitute a “permanent establishment” (“PE”) of their employer in another jurisdiction. These changes are particularly relevant for organizations with cross‑border remote or hybrid work arrangements.

The updated OECD commentary to Article 5 introduces a two‑part test to be used in determining whether a PE exists in remote work scenarios. Where both elements of the test are met, a PE will generally be considered to exist. Those elements are set out below:

• Time Threshold: First, a remote employee works from a home office (or other relevant location) in a country for at least 50% of their working time over any rolling 12‑month period.
• Commercial Reason: Second, there is a “commercial reason” for the employee’s presence in that country, such as regular interaction with local clients or suppliers, or activities that materially facilitate the employer’s business in that jurisdiction.

The updated OECD Commentary clarifies that remote work arrangements driven solely by employee preference, talent retention or internal cost efficiencies (such as reducing office space) do not constitute “commercial reasons” that would give rise to a PE. The guidance further confirms that while the absence of a genuine commercial reason will generally weigh against the existence of a PE, it is not determinative. Even where no commercial reason exists for the enterprise to carry on its business from a home or other location in the other contracting state, the PE analysis must still take into account all other relevant facts and circumstances, which may nonetheless support a finding that a place of business exists.

While the OECD Commentary is not binding on Canadian courts, it is a valuable aid used in the interpretation of Canada’s tax treaties. Organizations with cross‑border remote employees should reassess their current arrangements in light of the updated OECD guidance. While the new framework may provide more certainty that a PE does not exist in many common remote work scenarios, careful analysis is required where employees are engaged in activities that could be viewed as facilitating or advancing the employer’s business in another jurisdiction.

The Tax Group at Aird & Berlis LLP is recognized for its expertise in cross-border tax planning and dispute resolution, ensuring optimal outcomes for clients. If you have any questions or would like more information on permanent establishment and remote work issues, please contact the authors or a member of the group.