OECD model tax convention: Key updates multinational enterprises need to know

The Organisation for Economic Co-operation and Development (OECD) recently released its long-awaited update to the OECD model tax convention. This is the most significant revision since 2017. The OECD model tax convention and its commentary form the basis for most double tax treaties used by developed countries and influence how many nations design their international tax rules.

The 2025 update responds to the sharp rise in cross‑border remote working, international mobility and changes in global business practice. One of the most important areas for multinational enterprises is the expanded guidance on permanent establishment. This is particularly relevant in relation to home‑office and remote‑working arrangements.

This article summarises the key changes to the OECD model tax convention and highlights the practical steps for companies with employees working abroad.

When does a business create a permanent establishment under the OECD model tax convention?

Under international tax rules, a company can be taxed in a country where it is not resident if it has a permanent establishment (PE) in that country. The OECD model tax convention sets out two main ways a permanent establishment can arise:

• Fixed place of business in that country, for example, an office, factory, or other workplace; or
• Dependent agent permanent establishment – an agent such as an employee habitually concludes contracts on behalf of the company in that country

During the Covid-19 pandemic, many employees were forced to work remotely. To avoid permanent establishments being created unintentionally, the OECD issued temporary guidance throughout 2020 and 2021. This created flexibility for businesses where employees were temporarily working outside of the country where the employing company is already taxed.

However, as remote-working has now become a long term trend. As a result, the OECD has issued updated guidance within the OECD model tax convention for situations where an employee works in a different country from the one in which their employer is tax resident.

Updated home office permanent establishment guidance in the OECD model tax convention

The 2025 update does not change the model itself. Instead, it introduces new sub-paragraphs to the commentary that expand the guidance on when home office or remote‑working arrangements can create a PE.

Under the new guidance, a home-office PE may be created only if both the following tests are met:

• The quantitative test – The individual works at least 50% of their total working time in the country over a rolling 12-month period
• The qualitative test: The individual’s presence must be driven by a commercial reason linked to the business. Examples include
  • Customer-facing roles
  • Regular engagement with local suppliers
  • The need for local expertise
  • Work that requires physical presence

Crucially, the OECD states within the OECD model tax convention that substance overrides contractual form. Simply labelling home‑working as optional in an employment contract will not prevent a PE being created if the actual working pattern indicates otherwise. By contrast, where remote‑working is employee‑driven, incidental, or not required for the business, a PE is generally not created.

India’s divergent position

While the OECD’s updated commentary reflects broad international agreement, India has formally reserved its position. India does not accept either the 50% working‑time threshold or the commercial‑reason requirement. Instead, India applies a much broader interpretation of when an employee’s home is considered “at the disposal” of the enterprise, consistent with its approach since 2017. This results in significantly higher PE risk for businesses with India‑based remote workers.

This means companies with Indian remote workers must therefore review role responsibilities, intragroup activities and working‑time patterns to avoid inadvertently creating a taxable presence in India.

Other changes in the OECD model tax convention update

The update incudes additional clarifications across several articles in the OECD model tax convention:

• Article five: Extractive industries – An optional provision allows countries to adopt a lower PE threshold for natural‑resource exploration or extraction
• Article nine: Associated enterprises – Updated commentary clarifies interactions between transfer pricing rules for financial transactions and interest‑limitation regimes
• Article 25: Mutual agreement procedure (MAP) – A new paragraph addresses competent authority responsibilities in resolving cross‑border disputes
• Article 26: Exchange of information – Expanded guidance clarifies how information may be reused for different tax matters

These changes strengthen improve treaty interpretation, dispute resolution and cross‑border tax transparency.

If you require support reviewing remote-work exposures, treaty positions, or cross-border policies, please reach out to our international tax specialists.