Permanent Establishments

Permanent Establishment Risk and Home Working: OECD Developments and Practical Considerations

Permanent establishment (PE) remains one of the most significant international tax risks for businesses operating across borders.

As working practices evolve, tax authorities have increasingly focused on whether remote working arrangements, including home working, may contribute to PE exposure in overseas jurisdictions.

1. Overview of Permanent Establishment

The concept of PE is primarily derived from Article 5 of the OECD Model Tax Convention and relevant domestic law provisions.

Broadly, a PE may arise where a business has a sufficient taxable presence in another jurisdiction through:

• A fixed place of business
• A dependent agent concluding contracts
• Construction or project activity exceeding time thresholds

Where a PE exists, profits attributable to that PE may be subject to local corporate taxation.

2. Fixed Place of Business PE and Remote Working

A fixed place of business PE typically requires:

• A place of business (premises or facilities)
• That is fixed (geographically and temporally)
• Through which business activities are carried on

Historically, an employee working occasionally from home would not generally create PE exposure. However, the position becomes more complex where home working is:

• Continuous and long-term
• Required by the employer
• Integral to the business’s operations in that jurisdiction

3. OECD Commentary and Post-Pandemic Focus

The OECD has continued to clarify in commentary and administrative guidance that home working may contribute to PE risk depending on the facts.

In particular, tax authorities may consider whether:

• The home office is effectively at the disposal of the enterprise
• The arrangement reflects a deliberate business presence
• The activities performed are core revenue-generating functions

While pandemic-era remote working was often treated as exceptional, longer-term structural remote working models are increasingly scrutinised.

4. Dependent Agent PE and Contract Conclusion

PE exposure may also arise where individuals habitually conclude contracts or play the principal role leading to contract conclusion in the overseas jurisdiction.

This is particularly relevant for:

• Sales teams operating abroad
• Senior executives negotiating key contracts remotely
• Commissionaire or agency models

The dependent agent PE framework has been strengthened through BEPS-driven changes reflected in the OECD Model and many modern treaties.

5. Profit Attribution and Compliance Consequences

Where a PE is created, businesses may face:

• Local corporate tax registration and filing requirements
• Transfer pricing-style profit attribution analysis
• Potential double taxation if profits are taxed in both jurisdictions

PE disputes remain one of the most complex areas of cross-border audit activity.

6. Practical Risk Management for UK Businesses

UK companies operating internationally should proactively assess PE exposure where:

• Employees are based overseas on a long-term basis
• Home working becomes the default operating model abroad
• Contracts are negotiated or concluded internationally
• Overseas projects extend beyond short-term thresholds

Mitigation may involve:

• Clear contractual frameworks and authority limitations
• Review of overseas working arrangements
• Appropriate transfer pricing alignment
• Treaty-based planning and documentation

Advisory Support

We advise UK groups on permanent establishment exposure, including the evolving treatment of remote working arrangements under OECD principles and treaty practice.

Early PE risk assessment is essential in a world of increasingly international and decentralised business operations.