The OECD's new guidelines on home offices: A game changer?

The updated Commentary to the OECD Model Tax Convention introduces a two-step approach to determining the existence of a PE.

First, it must be determined whether, over a 12-month period, an employee spends at least 50% of their working time in another country. According to the authors of the update, contractual arrangements between the employee and the employer may help establish the proportion of work performed abroad, provided they reflect the actual working pattern.

Importantly, this test merely indicates the potential for a PE to arise. If the employee does not spend at least 50% of their working time in another country, a PE will generally not be created, unless other circumstances suggest otherwise. However, if this threshold is met, the so-called commercial reason test must then be applied.

The commercial reason test involves assessing whether the enterprise has a business interest in the employee performing their work from a given country. The fulfilment of this test indicates that a permanent establishment has been created unless other circumstances indicate otherwise.

This test is met where the mere physical presence of the employee in a given country facilitates undertaking the enterprise’s business – for example, where there are people or resources in that country which the enterprise needs to access in order to perform its business activities.

The test may also be satisfied where the employee regularly interacts with clients or suppliers on behalf of the enterprise in that country, and the location from which the work is performed facilitates such interactions. However, occasional contacts with such parties are not sufficient to meet the commercial reason test. It should be noted that this test is not met where the employee works from another country solely to reduce costs for the enterprise, or to recruit or retain that employee.

It is also worth noting that this test may be satisfied due to the employee’s geographical location, when it enables them to provide services more efficiently to clients within the same time zone. This may occur, for example, when a US-based consulting firm hires a consultant from Poland to serve its clients in Central Europe.

The changes introduced by the OECD have clarified the rules regarding the creation of a PE. Nevertheless, these tests are more indicative in nature rather than strict rules. Therefore, the issue of determining the existence of a PE remains ambiguous.

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Konrad Gańczarczyk has experience in ongoing tax advisory services to companies operating in the real estate, construction, and IT sectors.