Permanent Establishment – Working from Home Abroad – OECD Updates for 2026

Working from home abroad is no longer limited to senior executives or short periods between flights. More employees are asking – and sometimes being allowed – to work in a hybrid arrangement from another country: a month in Israel and a month in Spain, fixed periods with family, or a work season in a convenient European country. At first glance, this sounds like an HR decision and a flexible-work policy. In practice, it can also become a tax question: could working from home in a foreign country create a “permanent establishment” (Permanent Establishment, PE) for the company in that country?

At the end of 2025, the OECD published an interpretive update aimed at clarifying cross-border work-from-home situations and other work performed from an employee’s residence. The update does not treat every work-from-home arrangement as a risk, but it does highlight checkpoints and clarifies that the analysis is based on facts and circumstances, not only on the number of days or the wording of the employment agreement.

In this article, we will present, in an accessible way: what is examined in practice, which red flags tend to arise, and how to build a policy and documentation that reduce exposure.

Why It Matters Now – Even Without Opening an Office Abroad

Many companies assume that if they do not have an office, local employees, or a subsidiary in the target country, then there is “no presence.” In international taxation, that assumption is not always safe. In certain countries, even an employee’s consistent activity from a foreign country may raise questions about business presence – not necessarily because the home is an office, but because tax authorities examine whether the company is effectively operating within the country through people and processes.

The practical impact is not limited to tax. Sometimes the exposure begins with information requests, reporting questions, or a need to explain why the company is not subject to corporate tax there. Companies that identify risk points early can build a process that reduces surprises.

What is a Home Office PE

A permanent establishment is a concept derived primarily from tax treaties, intended to determine when the country where the activity is carried on has the right to tax part of the profits of a foreign company. A “Home Office PE” is a case where it is argued that working from home (or from another residence) in the target country is, in effect, a “place of business” of the company, or a place that is at its disposal.

The OECD’s interpretive update places particular emphasis on situations involving a home or other relevant place – not only the employee’s primary home, but also another residence within the employee’s private sphere, such as a second home or other private accommodation.

What The Law and Tax Authorities Look At In Practice

The analysis does not stop at where the employee is physically located. It examines whether the company is actually using that place for its business activities in a manner that rises to the level of being “at its disposal.”

The OECD proposes a practical analytical framework that focuses mainly on two dimensions:

Quantitative test: the intensity of use of the place for work purposes. The updated interpretation includes a quantitative threshold of around 50% of working time as a reference point.

In addition, a practical question arises that concerns many companies: how do you measure “working time” when there is hybrid work, business travel, vacations, or time split between countries?

Qualitative test: whether there is a commercial justification (Commercial Reason) for the employee’s presence in the country.
Even if the time is significant, it is still necessary to consider whether there is a business reason why the company needs the employee to be in that country for purposes of its activities. For example:

• Is the employee there to support activity in a local market?
• Does the presence in the country contribute materially to the business model?
• Or is it primarily a personal or family decision by the employee, with the company effectively indifferent to the location?

This is exactly where gaps tend to arise between what is written in policy documents and what happens in practice.

Less than 50% of working time in the target country is not necessarily the end of the analysis. Even when the scope of working from home is below half of the time, a permanent establishment analysis may still be triggered based on the overall circumstances – the nature of the role, the type of activity, and the actual pattern. Therefore, it is recommended not to base policy or risk management on a single numeric threshold.

Red Flags That Tax Authorities Tend to Focus On

To assess exposure, it is helpful to think like a tax authority: they are not looking for intent – they are looking for a pattern.

Common red flags:

• Regular and ongoing work from a single country (for example, month-on/month-off, or 2-3 days every week in a fixed country).
• The employee operates from a residence that in practice enables routine business activity (client calls, project management, supplier coordination).
• Lack of documentation: no record of workdays/location, no exception approvals, no policy.
• Use that may create the appearance of a local presence (for example, using a local address as a business address, or marketing that implies local activity).

It is important to emphasize: even when dealing with a “regular employee” (not management), the question is not only seniority – but consistency, the nature of the activity, and the company’s ability to present an orderly factual narrative.

Key risks in working from home abroad

Tax risk: reporting, profit attribution questions, and disputes in the target country

If the target country asserts the existence of a permanent establishment, this may lead to reporting requirements and discussions about what portion of profit is attributable to the local activity. Profit attribution is complex and sometimes overlaps with transfer pricing (Transfer Pricing) in groups with related companies.

Regulatory-operational risk: compliance costs and difficulty maintaining a consistent policy

Even before reaching a tax assessment, friction may appear as costs: local consultations, updating employment agreements, policy changes, the need to monitor, and sometimes business delays due to uncertainty.

Evidentiary risk: without a documentation system, it is difficult to defend the position

In our experience, the common weak point is not that the employee worked from home, but that the company cannot explain consistently: how much time in practice, what the nature of the work was, who approved it, and what the control mechanism and boundaries were.

Example: An Employee Splitting Her Working Time Between Israel and Spain

An Israeli technology company allows a developer to work one month in Israel and one month in Spain for six months. Most of her work is internal development, with no customer-facing activity, no supplier management in Spain, and no participation in commercial negotiations. The company approves in advance, documents the periods, and maintains a policy clarifying that the location is driven by the employee’s personal considerations and that there is no business requirement for presence in Spain.

In such a scenario, the risk of a permanent establishment discussion may be lower than in cases involving local business activity. Even so, it is important to remember: the outcome is determined by the circumstances, and it is important to ensure that the pattern does not gradually extend to roles or activities that increase exposure.

Our Clients: An Anonymized Client Story

A young Israeli company allowed several employees to work intermittently from various European countries, on a month-in-Israel/month-abroad basis. At the beginning, this was seen as a one-off benefit, without the need for a formal process. At a certain point, the company’s management realized that the accumulation of stays, together with the lack of a centralized picture and consistent documentation, could create unplanned exposure in tax and compliance aspects in the target countries – and approached us for advice.

As part of the engagement, we mapped the actual work patterns (countries, length of stay, and frequency), categorized roles and activities by sensitivity level (for example, meetings with clients, business representations, contracting authority), and pointed out areas where a gap could arise between the company’s intentions and how the situation might be perceived by authorities abroad. We then developed a remote-work-from-abroad policy, including a pre-approval mechanism, minimum documentation requirements, caps that trigger a re-assessment, and practical guidance on participation in external meetings and client-facing representations while abroad.