OECD Updates Tax Treaty Model – Implications for Remote International Work

International remote work has become far more widespread in recent years. Many employees perform their jobs from another country, sometimes temporarily and sometimes on a long-term basis. This situation raises a key question in international tax law: can the activities of employees working from home in another country create a permanent establishment (PE) for the company in that other country?

In November 2025, the OECD updated its interpretation of the OECD Model Tax Convention  to address current business practices for the first time since 2017. In practical terms, the new clarifications focus primarily on scenarios involving working from home or remote work outside the company’s country of incorporation. The update does not change the wording of the convention, but rather provides interpretive clarifications that may affect how countries and taxpayers assess the risks of creating a permanent establishment.

As a backdrop to this update, note that tax treaties are based on the principle that a company resident in one country is not subject to tax in another country on the basis of its business profits unless its activities in that other country create a permanent establishment. A permanent establishment may arise, inter alia, when a business carries out all or part of its activities through a fixed place of business located in another country and at its disposal. The OECD is thus expanding its interpretation regarding the creation of a permanent establishment for work performed in another location that is not the company’s offices.

Permanent Establishment When Working from Home

The update addresses situations in which employees or independent service providers perform activities for a company from another country, usually from their homes, but also from premises other than the company’s offices. Within this context, the OECD emphasizes that the question is not merely the physical location of the employee or service provider, but rather whether the premises from which the work is performed can be considered a “place of business of the enterprise” that is at the company’s disposal and thus may create a permanent establishment.

As a rule, the OECD update emphasizes that working from home does not automatically create a permanent establishment. Ascertaining the existence of a PE requires a factual analysis of the circumstances of each case, including the nature of the use of the premises, the duration of the activities, and the business ties of the activities to the country from which they are carried out.

Ascertaining the Existence of a “Place of Business” –  The Permanence Requirement

Similar to the traditional analysis of a PE as a “fixed place of business,” the first stage of the analysis is determining whether the location from which the activities are carried out has a sufficient degree of permanence.

Temporary or short-term use of a particular location, such as working from another country for a limited period, may not meet the permanence requirement necessary to give rise to a permanent establishment.

Quantitative Starting Point – Scope of Time Worked from Home

The update also includes a quantitative indicator that may help in assessing risk. According to the update, when employees or service providers perform less than 50% of their work for the company from a particular location in another country during a 12-month period (beginning or ending in the relevant tax year), the premises will generally not be deemed a place of business of the company, subject to exceptional circumstances.

On the other hand, when employees work at least 50% of their time from the same premises, this requires a more substantive and in-depth analysis of the facts and circumstances.

The OECD emphasizes that the assessment should be based on the actual conduct in practice, rather than solely on the employment contract or the company’s official employment policy.

Existence of a Commercial Reason for Presence in Another Country

When the scope of work from a particular location reaches a significant level, the key question becomes whether there is a commercial reason for conducting the activity from that specific country. In other words, whether the employee’s physical presence in a particular country contributes to or is necessary for the company’s business operations.

For example, an indication of a commercial reason may exist if the employee meets with local customers, develops activities in the local market, manages relations with local suppliers, or provides services requiring a physical presence in a particular time zone.

On the other hand, when working from home results mainly from the employee’s personal preferences, such as housing or comfort considerations, this may indicate that the premises do not actually function as a place of business of the company. In instances in which companies allow remote work as a matter of general policy or as a means to cut office costs, this also does not necessarily indicate a commercial reason for having a presence in another country.

However, the OECD notes that, even in the absence of a clear commercial reason, particular circumstances may still give rise to a permanent establishment, such as when the person working remotely is a central or key factor in the business’s operations.

It is important to note that, according to Israeli case law, the OECD’s interpretation does not constitute a binding legal source. However, since the explanatory notes to the Model Convention serve as a key interpretive source in the application of numerous tax treaties, the update may have practical implications for assessing PE risks in international structures involving employees working remotely from different countries.

Israel’s Position – Specific Reservations About Remote Work Creating a PE

Following the OECD update, Israel published several reservations regarding the new interpretation of the creation of a PE in instances of working from home. First, Israel reserves the right to implement an alternative test for determining whether the 50% threshold is met. This test compares days of attendance (full or partial workdays) in the home country with days of presence abroad, and also compares actual workdays from the home country with workdays abroad, selecting the stricter of the two.

Israel also reserves the right to recognize the existence of a commercial reason even when a significant concentration of employees exists in the country in which the home or relevant premises are located, relative to the relevant business unit in Israel. Israel also clarified that even in the absence of a commercial reason under the OECD tests, in instances where an employee performs a core activity of the business or an activity contributing significantly to the creation of value, Israel will consider these circumstances as potentially supporting the conclusion that a permanent establishment has been created in that other country.

Finally, Israel reserves the right to deem a home office used by a key individual in a business (such as a founder, partner, or senior executive) to constitute a permanent establishment. Israel also notes that under circumstances similar to one of the examples given in the OECD update – when one of the employees works from home in another country more than 50% of the time and periodically visits a customer in that country – Israel may reach a different conclusion than that drawn in the OECD interpretation. In such cases, the facts and circumstances may indicate the existence of a commercial reason for the presence in that other country, thereby strengthening the argument that a permanent establishment exists.

Potential Implications of the Creation of a Permanent Establishment

The creation of a permanent establishment may trigger additional repercussions at the local level. These include tax and reporting obligations for the employer, social security implications, and various operational and legal requirements, such as adjustments to local operations and issues relating to labor law, immigration, and corporate law.

Please also note that countries may adopt and implement the OECD clarifications differently within the framework of local law and relevant tax treaties. We therefore recommend that companies continue monitoring how these principles are interpreted and implemented in each relevant jurisdiction.

Barnea Jaffa Lande’s Tax Department is at your service to examine the implications of the OECD update for international operating structures, particularly in instances involving employees working remotely from different countries.

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Adv. Hanna Daher is a partner in our firm’s Tax Department.

Adv. Itiel Shloush is an associate in the department.

Barnea Jaffa Lande’s Tax Department is one of the leading tax practices in Israel and is consistently ranked in both local and international legal directories. Our tax team advises Israeli and international clients across a broad range of areas, including international taxation, corporate tax, individual and real estate taxation, transaction taxation, employee compensation, crypto taxation, and incentives and grants. The department provides creative and efficient tax solutions for complex transactions and strategic tax planning, and represents clients before the Israel Tax Authority and the courts, while working in close collaboration with the firm’s commercial departments.