Remote work and permanent establishment: What your business needs to know
Hillary Green & John C. Barka
by Hillary Green & John C. Barka
As cross-border remote work becomes standard practice, tax authorities are reconsidering how traditional rules apply to modern workplaces. The key issue is the topic of permanent establishment (PE), which defines when a company's activities in a foreign country trigger tax obligations.
The challenge of remote work
PE has traditionally been tied to physical locations: offices, warehouses, manufacturing plants. But remote work has changed everything. What starts as a simple arrangement – allowing an employee to work from abroad – can evolve into complex compliance issues including corporate tax filings, payroll obligations, and local penalties.
Understanding permanent establishment
Under Article 5 of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention, PE is defined as “a fixed place of business through which the business of an enterprise is wholly or partly carried on”. If your company conducts meaningful activity in another country, that country may claim the right to tax profits from those operations.
Tax authorities evaluate PE through three criteria: a fixed place of business must exist, it must be at the disposal of the enterprise, and actual business must be conducted there. Beyond this, two other triggers matter: dependent agent PE (when someone habitually concludes contracts on your behalf), and service PE (when employees spend significant time delivering services locally).
How remote work creates risk
The shift to remote work has blurred jurisdictional boundaries. Before 2020, taxable presence resulted from deliberate choices like leasing offices or hiring local staff. Now, international teams collaborate from home offices worldwide, and inadvertent decisions can create PE exposure.
Common scenarios include executives relocating abroad while maintaining their roles, remote workers in countries where the company has no presence, and distributed teams serving global clients. The key distinction is between incidental presence (temporary, convenience-based) and business presence (ongoing, strategic, revenue-generating).
When home offices become PEs
A home office isn't automatically a PE, but it can be. Tax authorities focus on the “at the disposal” test, examining whether the company controls the work premises. Warning signs include the employer subsidising rent, listing the home address on company materials, or requiring specific home office setups.
Risk increases when employees regularly perform core duties from home, the company directs them to work there, substantive activities occur at the location, or the home is used for client meetings and contract negotiations. We've seen clients face audits when employees abroad signed contracts or conducted revenue-generating activities from home.
The strongest defence is documentation. Maintain records showing home offices exist for employee convenience, not employer direction, and that strategic decisions remain with the principal entity.
OECD guidance
The OECD's Article 5 Commentary clarifies that home offices don't normally constitute PE unless used regularly for enterprise activities and the enterprise directs their use. The 2021 update confirmed temporary teleworking for convenience or safety wouldn't create PE, but permanent arrangements require case-by-case evaluation.
Outcomes vary by jurisdiction based on treaty networks, domestic practices, and functions performed. One country might emphasise arrangement permanence while another focuses on company control. This variability demands ongoing monitoring and professional judgment.
Minimising PE risk
Effective PE management requires systematic compliance. Consider remote work through the lens of tax risk management, not just HR convenience.
Key strategies include:
Draft employment agreements defining residence, remote work status, and clarifying no fixed business location exists on the company's behalf;
Track work locations to monitor patterns that could indicate permanent presence;
Conduct regular reviews of remote workers' roles, contract authority, and foreign presence duration;
Build robust documentation including policies, correspondence, and agreements demonstrating voluntary remote arrangements;
Engage tax advisors proactively to identify obligations before audits;
Educate management and employees on cross-border implications; and
Evaluate whether establishing local entities makes more sense than risking unintended PE.
Remote work has transformed how businesses approach tax risk. PE, once associated with factories, now concerns any organisation with cross-border employees. Understanding where your business operates, who acts on its behalf, and how activities are documented prevents costly disputes.
As work patterns evolve, so must your tax strategy. Professional advisors like Prager Metis International Services can help you navigate OECD PE guidance and develop policies balancing compliance with flexibility, ensuring your organisation manages these challenges with confidence.
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Prager Metis International LLC is a top accounting firm providing a full range of accounting, audit, tax, and advisory services to domestic and international clientele in a wide range of industries. With 25 offices worldwide, they have a level of expertise and a unique global presence that makes their clients’ world worth more.
John C. Barka is a Partner in the Tax Department of Prager Metis CPAs, a member of Prager Metis International. John also leads the banking and financial institution niche. He has been in the accounting profession for more than 14 years. Contact John.
Hillary Green, Juris Doctorate, is a senior manager for the international tax department of Prager Metis, a member of Prager Metis International Group. She has extensive expertise in international taxation and mid-market client services. Contact Hillary.
