One of the issues that generates the greatest uncertainty in cross-border remote working arrangements is whether an employee’s home may constitute a Permanent Establishment (PE) of the employer.
In the latest update to the OECD Model Tax Convention, published on 18 November, new commentary has been introduced—among others, to Article 5 (Permanent Establishment)—clarifying that remote work carried out for personal reasons does not automatically convert an employee’s home into a fixed place of business.
According to the updated guidance, the existence of a PE must be assessed based on the facts and circumstances of each tax period, taking into account whether the place meets the requirement of permanence. Even if the space used by the employee is continuous, a PE will only arise if that place can be considered attributable to the enterprise. Furthermore, activities of a purely auxiliary or preparatory nature cannot give rise to a PE.
The mere fact that an employee uses their home abroad to perform tasks related to a Spanish company does not, in itself, mean that such home constitutes a place of business of the company. The OECD clarifies that incidental use is not sufficient, and that the analysis must focus on the continuity and functional relevance of the space. The indicative reference to use of less than 50% of the annual working time aligns with the need for a sufficient degree of connection between the business activity and the place in question.
The assessment must be based on the actual activities performed, and not solely on employment contracts or internal company policies. If the use exceeds 50% of the annual working time, the analysis should focus on whether there is a commercial rationale that objectively justifies the Spanish company carrying out business activities in that State through the employee.
Determining the existence of such a commercial rationale becomes a key factor. According to the OECD, a commercial rationale exists when the physical presence of the employee facilitates the company’s business activities, such as access to clients, suppliers, or business opportunities in the State of residence; the provision of real-time services; or collaboration with local entities. Sporadic or merely ancillary interactions do not constitute a commercial rationale.
Likewise, there is no commercial rationale where a Spanish company allows remote work solely to retain the employee or to reduce labour or real estate costs. Similarly, the mere existence of clients in the country of residence or time zone differences is not sufficient to attribute a PE to the company. A motive demonstrating that the company derives a relevant operational advantage from the employee’s presence in that State is essential. In the absence of such a commercial rationale, the home should not be regarded as a place of business of the Spanish company.
The update concludes with a series of illustrative examples:
- Short periods do not create permanence;
- Use below 50% excludes the existence of a PE;
- Intensive use with a commercial rationale may constitute a PE;
- Intensive use without a commercial rationale does not create a PE; and
- The continuous provision of real-time services from another country may justify the existence of a PE where there is a direct business advantage for the enterprise.
