Through the introduction of new paragraphs 44.1 - 44.21 in the Commentary on Article 5 of the model convention, the OECD has sought to clarify the circumstances that give rise to the presence of a permanent establishment in the case of workers operating from a location in a country other than that of residence of the enterprise to which they are employed.
This intervention not only removes the existing guidelines – now outdated and no longer in line with the evolution and spread of flexible working – contained in paragraphs 18 and 19 of the Commentary removed, but the criterion of the employer’s availability of or access to the employee’s home, which had previously played a central role in determining whether a permanent establishment existed, has also been superseded.
Firstly, the initial new paragraphs reiterate that the mere use of a home or other 'non-business' location by an employee does not automatically constitute a permanent establishment. Instead, this must be assessed on a case-by-case basis, taking into account the relevant facts and circumstances and, consistently with the elements that define the concept of a permanent establishment, the regularity, continuity and nature of the business activities carried out from that location by the employee.
The rules introduced by the OECD Council
To guide this assessment of whether or not a permanent establishment exists in individual cases, the OECD Council has introduced the following practical rules of a temporal and qualitative nature.
Temporal requirement
If the employee works from home (or another location abroad) for the enterprise for less than 50% of the total working time over a 12-month period, that location cannot be considered a fixed place of business (it is worth noting that this threshold operates as a presumptive criterion capable of excluding the existence of a permanent establishment in most cases, but not as an automatic or absolute rule).
Business purpose requirement
Otherwise, where this threshold is reached (or exceeded), it will be necessary to assess whether the employee’s presence abroad responds to a business need of the company—for example, the employee’s direct and stable contact with clients or suppliers, access to local resources, or the need for a physical presence to facilitate the enterprise’s activities—thereby concretely supporting the employer’s business activities in that location. If, on the other hand, the presence abroad meets the worker’s personal needs, is implemented to retain qualified resources or to reduce the company's overheads – unless other facts and circumstances indicate otherwise – the functional requirement in question will not be met. Likewise, the mere presence of clients or suppliers, as well as time-zone differences, represent examples which in themselves are not sufficient to demonstrate a business purpose underlying the presence of the employee abroad.
In order to set up a permanent establishment, in addition to the temporal threshold and the business purpose described above, it will finally be necessary to evaluate the type of activities carried out locally by the employee on behalf of the employer and whether these are core activities (i.e. related to the generation of income or to the management of relationships with clients and suppliers) or merely auxiliary and/or preparatory in nature.
Finally, it should be emphasised that, from a practical standpoint, the assessment of whether or not a permanent establishment exists will be based on the actual facts and conduct, even though formal documentation (such as company policies and employment contracts) will also be taken into account.
The update to the Commentary described above has the undoubted merit of introducing criteria that are more in line with the evolution of working models, which will therefore help to provide greater clarity in determining the existence (or otherwise) of a permanent establishment in cases of cross-border remote working.
At the same time, it is easy to foresee that these same guidelines will represent the “new” benchmark against which companies will reassess the flexible working arrangements currently in place and will allow cross-border remote working to be carried out with the objective of avoiding any risk of creating a permanent establishment.
