The 2025 update to the OECD Model Tax Convention, published in November 2025, is the first comprehensive revision since 2017. The update notably provides clarification to the Commentary of Article 5 on when a home office of a cross-border worker may constitute a permanent establishment.
Why this update matters
When an employee resides in a different country from their employer and works from home, a key question arises: can that home office constitute a permanent establishment (“PE”) of the employer, giving the employee’s state of residence a right to tax the enterprise’s profits?
Moving on from the 2017 Commentary
The 2025 update replaces earlier guidance from the 2017 Commentary (former paragraphs 18 and 19), adding paragraphs 44.1 through 44.21. The 2017 framework had established that an individual carrying on business from a home office does not automatically mean the location is at the disposal of the enterprise; that intermittent or incidental use would not be sufficient for the home to be considered a place of business; and that, where a home office was used on a continuous basis, the facts and circumstances of each case would need to be examined. The 2025 update replaces this approach with a more structured analytical framework centred on two key criteria under which employers with cross-border remote workers should reassess PE exposure.
The two key criteria
The 50% working time threshold
A home or other relevant place would generally not be considered a place of business of the enterprise if the individual worked from it for less than 50% of their total working time over any twelve-month period commencing or ending in the fiscal year concerned. Updated Commentary adds that the actual conduct of the individual - rather than formal contractual arrangements alone - determines the calculation of working time.
The commercial reason
If the 50% threshold is met, whether a PE exists depends on the facts and circumstances and prominently, whether there is a commercial reason for the individual’s physical presence in that state. A commercial reason exists where the individual’s presence itself facilitates the enterprise’s business, such as access to local customers, suppliers, or resources. Minor or incidental engagements do not qualify. Conversely, no commercial reason exists where the enterprise enables remote work solely for employee convenience, talent retention, cost savings related to office space, or the provision of financial support for a home office.
The updated Commentary goes beyond clarifying Article 5(1) of the OECD Model Tax Convention, introducing criteria, such as the 50% threshold and the commercial reason, not referenced in Article 5 itself.
Practical illustrations
The updated Commentary includes five examples with two being particularly instructive:
Example C: An employee works from home in State S for 80% of working time and regularly visits local clients. Since the 50% threshold is exceeded and a commercial reason exists (facilitating service delivery), the home constitutes a PE of the employer in State S.
Example D: An employee works from home in State S for 60% of working time but visits a local client only once a quarter. Although the threshold is exceeded, the visits are intermittent and incidental, so no commercial reason exists, and the home does not constitute a PE.
Key takeaways
These comments are especially relevant for Luxembourg given the important number of cross-border workers. However, their application by Luxembourg and its treaty partners remains to be seen depending on whether they follow the static or dynamic approach to treaty interpretation theory.
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