Permanent establishment risk from remote employees: what the OECD's 2025 rules change

What a permanent establishment actually is

A permanent establishment (PE) is a legal concept embedded in double tax treaties and domestic tax law. It means a company has enough of a physical or human presence in a foreign country that the country can tax profits attributable to that presence. The classic examples are a branch office, a factory or a warehouse, but a PE can also arise from a single person acting on behalf of the company.

Most bilateral tax treaties follow the OECD Model Tax Convention, specifically Article 5, which defines a PE in two main ways. The first is a "fixed place of business": a location that is at the company's disposal and through which its business is wholly or partly carried on. The second is a "dependent agent": a person who habitually exercises authority to conclude contracts in the company's name. Either limb, if triggered, gives the host country taxing rights over the profits connected to that presence.

The reason this concept matters so much now is straightforward. Remote and hybrid work has scattered employees across borders in a way that was rare before 2020. A developer living in Lisbon, employed by a London company, can inadvertently create a taxable presence in Portugal if the facts line up badly.

How a remote employee creates one: fixed place, dependent agent, time in-country

Under the fixed-place limb, a home office or co-working desk can qualify as a "place of business" if it is used regularly and the employer requires or permits the arrangement. The test looks at actual conduct, not just what the contract says. If your employee works from a flat in Berlin five days a week for 14 months, that flat may be treated as a fixed place at your disposal, even if you never asked them to be there.

Under the dependent-agent limb, a sales director based in Singapore who routinely signs customer contracts on behalf of the parent company can create a PE in Singapore regardless of whether they have a fixed office. The two limbs operate independently, so clearing one does not clear the other.

Time in-country is the variable most companies track, but it is not the only one. The nature of the work matters too. Back-office support functions historically fell under the "preparatory or auxiliary" exemption in Article 5(4), but this exemption has been narrowed by BEPS Action 7, and many treaties now include anti-fragmentation rules.

The OECD 2025 update: the under-50% benchmark and the commercial-reason test

On 19 November 2025, the OECD released its 2025 Update to the Model Tax Convention, adding new commentary to Article 5 on remote and home working. The update introduces a two-part analytical framework that applies specifically to the fixed-place PE limb.

Part one is quantitative. If an employee works from a home or remote location in a foreign country for less than 50% of their total working time over any rolling 12-month period, that location is generally not treated as a fixed place of business. The assessment is based on actual conduct, not the employment contract. A contract saying "London-based" is irrelevant if the employee actually works from Milan three days a week.

Part two is qualitative and only applies if the 50% threshold is met or exceeded. Even then, the location is a place of business only if there is a commercial reason for the employee's presence in that country: for example, engaging local customers or suppliers. Employee convenience, talent retention and office-cost savings are expressly excluded as commercial reasons. This is a significant carve-out because those three motivations describe the majority of remote work arrangements.

What it does not cover: the contract-signing (dependent-agent) trap

Here is the part that trips people up. The 2025 safe harbour covers only the fixed-place limb of Article 5. It says nothing about the dependent-agent limb. If your employee in another country habitually concludes contracts on behalf of your company, they can still create a dependent-agent PE regardless of how few days they spend there.

This distinction catches sales teams especially hard. A regional sales manager based in Dubai who signs customer agreements for a UK parent could trigger a PE in the UAE, even if they spend only 30% of their time there. The under-50% rule simply does not apply to that analysis.

It is also critical to remember that the OECD Model is guidance that informs treaty interpretation, not binding law. The outcome depends on the specific bilateral treaty and each country's domestic rules. Some countries, India being a notable example, do not accept the new commentary tests and maintain broader PE definitions. You need treaty-by-treaty and jurisdiction-by-jurisdiction analysis, which is exactly where generic advice fails.

What a triggered permanent establishment costs you

The financial consequences of an unintended PE are not theoretical. Once a tax authority determines that your company has a PE in its jurisdiction, it can assess corporate tax on the profits attributable to that establishment. In many OECD countries, corporate tax rates sit between 20% and 30%.

But the tax bill itself is only the start. You face:

• Retroactive filing obligations, often going back three to five years
• Penalties and interest on unpaid tax for each open year
• Local payroll registration and social security contributions for the employee
• Transfer pricing documentation requirements to justify the profit attribution
• Potential double taxation if the home country does not grant full treaty relief

For a scaling company, these costs can be substantial and disruptive. A single senior employee earning USD 200,000 in a country with a 25% corporate tax rate could generate an attributable profit assessment well into six figures annually, before penalties.

The UAE and GCC angle

The UAE's corporate tax regime, introduced under Federal Decree-Law No. 47 of 2022, defines PE in Article 14. A non-resident company has a UAE PE if it maintains a fixed place of business (including a place of management), has a dependent agent who habitually concludes contracts, or runs a qualifying construction project exceeding the treaty threshold.

A non-resident with a UAE PE pays 9% corporate tax on profits attributable to that establishment. While 9% is low by global standards, the compliance burden is real: registration with the Federal Tax Authority, maintenance of transfer pricing documentation, and annual filing obligations. For GCC-headquartered groups with employees working across borders within the region, the PE risk from hiring abroad requires careful mapping, especially as Saudi Arabia, Bahrain and other Gulf states develop their own direct tax frameworks.

If your company is incorporated in a UAE free zone and claims the 0% qualifying income rate, an unintended PE in mainland UAE or another GCC state could undermine that position entirely.

How to avoid or fix it, and when your own entity beats an EOR

Start with a PE risk assessment for every cross-border employee. Track actual working days by jurisdiction, not just contract terms. The OECD's 50% threshold gives you a measurable benchmark, but you need systems to record and evidence it.

Practical steps to reduce exposure:

• Cap remote working time in any single foreign jurisdiction below 50% of total working time over a 12-month period
• Restrict contract-signing authority so that no single employee in a foreign country habitually concludes contracts on the company's behalf
• Document the arrangement: written remote work policies, time-tracking records and board resolutions showing the employee's location is for personal convenience, not commercial necessity
• Review each relevant bilateral tax treaty individually, because the OECD commentary is interpretive, not binding

For companies with a growing headcount in one country, an employer of record (EOR) can handle payroll and employment compliance, but an EOR does not eliminate PE risk. If the employee performs core business functions from that country, the PE analysis still applies to the client company. When you reach a critical mass of employees, or when the nature of the work involves customer-facing or contract-signing activity, setting up your own local entity is often the cleaner solution. Cosmos coordinates incorporation and payroll through licensed local partners in multiple jurisdictions, which can simplify that transition, though the decision on entity structure should always be taken with qualified tax advice based on your specific facts.

Frequently asked questions

What is a permanent establishment? A PE is a taxable business presence in a foreign country, typically arising from a fixed place of business or a dependent agent. It gives that country the right to tax profits attributable to the presence.

Can one remote employee create a permanent establishment? Yes. A single employee working regularly from a foreign country can create a fixed-place PE if the facts satisfy the relevant treaty and domestic law tests. The OECD 2025 commentary provides a framework, but it is not a blanket exemption.

Does the OECD 2025 under-50% rule mean I am safe? Not necessarily. The under-50% threshold applies only to the fixed-place PE limb and only where the relevant treaty follows the OECD Model. It does not protect against dependent-agent PE, and some countries do not adopt the new commentary. You need jurisdiction-specific advice.

What does a permanent establishment cost? Corporate tax on attributable profits, retroactive filings, penalties, interest, local payroll obligations and transfer pricing compliance. Total exposure for a single employee can reach six figures annually in a high-tax jurisdiction.

How do I remove permanent establishment risk? Track employee working days, restrict contract-signing authority, document the commercial rationale (or lack of one) for each location, and review each treaty individually. Where headcount or activity levels justify it, incorporate a local entity. Cosmos can help coordinate that process through its network of licensed partners, but always take qualified tax and legal advice on the specific facts of your situation.

This is general information, not tax or legal advice. Confirm your position with a qualified adviser before acting.