Home Office Permanent Establishment: The 50% Threshold and the Commercial Reason

Concept

Working from a home abroad is the quietest of corporate tax exposures. No document is signed, no premises are leased, no registration is filed; a senior executive or a board member simply moves and carries on working. A year later the country of residence may conclude that a foreign enterprise has been carrying on its business there through a fixed place of business, and claim corporate tax on the attributable profit, local filings and penalties for the periods missed.

Before November 2025 the analysis rested on paragraphs 18 and 19 of the Commentary on Article 5. Both turned on a single question — whether the home was at the disposal of the enterprise — and answered it through employer requirement. Where the enterprise had provided no other office and had thereby effectively required the individual to work from home, the home office could be at its disposal; where the individual had chosen the arrangement, the enterprise had a defence. The 2025 Update deleted both paragraphs outright and replaced them with paragraphs 44.1 to 44.21, "Cross-border working from a home or other relevant place".

The change of model runs deeper than it looks. The old test asked what the employer had required; the new one asks how much time the individual spends there and why the business needs that presence in that country. Employer requirement is considered with the other facts. Cost saving alone does not establish the business need for presence in that particular country; it must not be treated as adverse merely because it fails the commercial-reason test.

The block reaches wider than the home office in the literal sense. Paragraph 44.1 extends it to an "other relevant place": a second home, a holiday rental, the home of a friend or relative — any place that is neither premises of the enterprise itself nor premises of another enterprise with contractual or other connections to it, such as a customer, a supplier or an associated enterprise. Working from the office of a subsidiary falls outside the block and is assessed under the general rules of Article 5.

The two-⁠stage model

First stage: share of working time

Paragraph 44.8 sets a quantitative filter. A home or other relevant place "would generally not be considered a place of business of the enterprise if the individual worked from that home or relevant place for less than 50 per cent of their total working time for that enterprise over the course of any twelve-month period commencing or ending in the fiscal year concerned". The same paragraph adds that exceptions to this approach are not anticipated to occur in most situations.

Three features of the wording do the work. The denominator is total working time for that enterprise, not calendar days and not days of presence in the country. The window is any twelve-month period commencing or ending in the fiscal year concerned, which makes it a rolling window: a mid-year move crosses the halfway mark considerably earlier than a calendar-year view shows. And the share comes from actual behaviour: paragraph 44.9 states that the actual conduct of the individual determines the calculation of working time, with contractual arrangements and enterprise policies of practical assistance only to the extent that they correspond with that conduct.

Second stage: commercial reason

At 50 per cent or above, paragraph 44.10 sends the question to the facts and circumstances, and paragraph 44.11 identifies the prominent consideration as whether there is a commercial reason for the activities to be undertaken in that Contracting State. The criterion is framed in terms of facilitation: a commercial reason exists where the physical presence of the individual in that State itself facilitates the carrying on of the business of the enterprise — for instance because there are people or resources in that State to which the enterprise needs access.

Paragraph 44.12 turns this into a workable test: a commercial reason will generally be present if the enterprise has a reason to have the individual physically present in that State for the conduct of its activities and the use of the home facilitates that. The practical marker given there is that, absent the home, the enterprise would make use of other premises in that State, such as a rented office.

Paragraph 44.17 lists the situations where a reason is usually found: meetings with customers; cultivation of a new customer base or identification of business opportunities; identification of suppliers and management of supplier relationships and contracts; real-time or near real-time interaction with customers or suppliers in different time zones, such as call centre services, virtual IT support or medical services; access to business-relevant expertise, such as regular meetings with university research personnel; collaboration with other businesses; performance of services for customers in that State where those services require physical presence, such as training or repair on the customer's premises; and interaction with employees and other personnel of the enterprise or of associated enterprises.

One reason among several is enough: paragraph 44.13 records that there may be several reasons for using a home, and if one of them is a commercial reason, the indicator is satisfied. No "productive character" of the activity has to be shown. Two filters restrain the test. Paragraph 44.14: engagement on an intermittent or incidental basis does not amount to a commercial reason — short occasional visits to a customer's premises, or engagement minor in the context of the overall relationship with that customer, will not do. Paragraph 44.18: the mere presence of customers, suppliers or an associated enterprise in the State does not lead to the conclusion that a commercial reason exists, and neither does the mere fact that the place is in a different time zone.

Cost saving and staff retention

The Commentary distinguishes reasons for permitting remote work from a commercial reason for presence in a particular country.

Paragraph 44.16: an enterprise that permits work from home "solely to reduce costs (for example, reduced expenditure on office space)" does so for that purpose, and not because there is a commercial reason for the individual to perform activities in the Contracting State where the home is located. Paragraph 44.15 requires a link between the individual's presence in that State and the carrying on of the business of the enterprise, and removes the case where the enterprise enables home working solely to obtain or retain the services of that individual.

Both formulations support the absence of a location-specific commercial reason. Under paragraph 44.19, that normally points away from a place of business unless other facts indicate otherwise. The word ‘solely’ matters: where a separate commercial reason exists alongside savings or retention, paragraph 44.13 requires it to be considered. A genuine factual explanation should be documented accurately.

The five examples

Paragraph 44.21 illustrates the application of paragraph 1 of Article 5 with five examples. Example A addresses whether a place of business is fixed; Examples B to E address whether a home or other relevant place is a place of business of an enterprise. In all five the individual works for RCo, an enterprise of State R.

Example A stands apart because it never reaches the quantitative test. Three months of work within a twelve-month period do not give the place the required degree of permanence, and the analysis stops there.

The Commentary adds three clarifications, each disposing of a separate practical question. The reason for the stay is irrelevant: the conclusion is the same where the individual remained in State S to care for a sick relative. Place of stay and place of work need not coincide: the conclusion is the same where the individual worked from some place other than the one where she was staying. And recurrence is measured over the long run: where a place is used for the enterprise's activities on a recurrent basis over several years, each period of use is considered in combination with the number of times the place is used over those years.

A separate point closes the argument from cost — the fact that the individual retains a holiday home and incurs upkeep costs throughout is not relevant; the determinative consideration is the time spent performing activities from that place.

Example B is the first stage in pure form. Thirty per cent, with the place fixed throughout, yields no place of business of the enterprise, and the qualifier "in the absence of other facts and circumstances showing otherwise" is the only opening left to a tax administration.

The real work is done by the pair C and D. In both, the home is fixed, both cross the threshold, and both involve clients in State S; the outcomes are opposite. For C, the presence in the State facilitates the provision of services to customers located there — a direct fit with paragraph 44.12. For D, clients in State S also exist, but he serves them remotely and on the same footing as clients in State R and third States; the only physical interaction is a single day each quarter. The Commentary gives two grounds for the refusal: the mere presence of clients in the State does not create a commercial reason (paragraph 44.18), and the quarterly visit is intermittent and incidental (paragraph 44.14). What separates C from D is one thing — whether the individual's presence in the State actually facilitates the carrying on of the business or merely coincides with it geographically. The share of time does not settle it, D being at 60 per cent, and neither does contact with local clients as such.

Example E marks the boundary from the other side. The individual has no customers in State S at all, and the only thing her being there provides is a time zone that lets her serve customers in other zones in real time. That is enough for a commercial reason. Read against paragraph 44.18, which says that a different time zone does not by itself establish a commercial reason, the line becomes visible: what counts is the specific benefit to the enterprise from round-the-clock availability, which the difference in zones alone does not supply.

For a family office the practical reading of the five is straightforward. A senior executive who moves to a country where the group has customers, suppliers or a team falls into the logic of C. A senior executive who moves for personal reasons and continues to serve the previous perimeter remotely falls into the logic of D — until the presence begins to be used: one regular local function shifts the case towards C.

The sole or primary person

Paragraph 44.20 carves out the case where an individual is the only person, or the primary person, conducting the business of an enterprise. The Commentary's example is a non-resident consultant present for an extended period in a State, carrying on most of the business activities of her own consulting enterprise from an office set up in her home there; that home office constitutes a place of business of the enterprise. The two-stage logic softens nothing here: the paragraph is written as a statement of result.

For ownership structures this is the most underrated paragraph of the block. The director of a management company, the sole partner of a consulting firm, the manager of a family investment vehicle — each falls within this separate consideration only if the individual is the only or primary person conducting the enterprise's business; the job title alone does not establish that condition. Israel has reserved the right to treat a home office used by one of an enterprise's primary persons, such as a founder, partner or relatively significant senior executive, as a PE.

What the threshold does not decide

Fifty per cent is a presumption. Below it the Commentary says "generally"; above it the assessment opens up on the facts, where the commercial reason remains the prominent consideration among others, and paragraph 44.19 records the symmetry: where there is no commercial reason, the place would not be a place of business of the enterprise unless other facts and circumstances indicate otherwise.

Two independent filters continue to operate alongside. The requirement that the place be fixed, under paragraphs 28 to 34 of the Commentary — the filter Example A turns on. And the preparatory or auxiliary exception in paragraph 4 of Article 5, to which paragraph 44.5 refers expressly: even where a fixed place of business under paragraph 1 would otherwise exist, paragraph 4 deems it not to constitute a permanent establishment where the activities carried on there are limited to a preparatory or auxiliary character. A home office used exclusively for auxiliary functions stays outside the definition at any share of working time.

The 50% threshold and corporate residence

The 50 per cent threshold answers the permanent establishment question and does not answer the question of the company's tax residence. The first determines whether the enterprise has a place of business in the country where the individual lives, and how much profit is attributable to it. The second determines where the company is resident as a whole, and is settled under Article 4 of the treaty — through the place of effective management and the treaty tie-breaker, with no quantitative thresholds.

A director working from a home abroad falls within both tests at once, with different consequences. The ordinary working-time and commercial-reason analysis must be distinguished from paragraph 44.20 where the director is the only or primary person conducting the enterprise's business; a shift in where key management and commercial decisions are habitually made is assessed on its own terms and can move residence even where the time threshold has not been crossed. The reverse is equally real: a fully remote ordinary employee may create a permanent establishment without touching the company's residence at all. The update of 19 November 2025 gave both questions a common model framework and a common date, but not a common test. The residence side of the boundary is covered in corporate tax residence, and the general mechanics of Article 5 in permanent establishment.

The domestic layer: Germany, Spain, Austria, the Netherlands, Switzerland and Italy

National guidance and the applicable bilateral treaty determine how the Commentary is used. The dates and territorial scope of the instruments below differ; Austria expressly updated its practice for 2026.

Germany has gone furthest. The BMF letter of 5 February 2024 (GZ IV D 1 - S 0062/23/10003 :001) rewrote the application decree to the Fiscal Code, and the new AEAO on § 12, paragraph 4, states that an employee's activity in their domestic home office generally does not create a Betriebstätte of the employer, and that the same holds at treaty level from the German application-state perspective — a fixed place under paragraphs 1 and 4 of Article 5 of the Model Convention generally does not arise.

The answer is expressly preserved in three situations, each of which cut against the enterprise under the old model: where the employer bears the costs of the home office and its equipment; where a lease over the employee's domestic premises is concluded between employer as tenant and employee as landlord; and where the employer provides the employee with no other workplace.

The reason given is that the employer typically has no sufficient power of disposal over the employee's domestic premises. On the lease there is one qualification: the answer changes where the employer is in fact entitled to use the premises otherwise, for example through a right to send other employees there or a right of entry beyond occupational safety inspections.

The German exception is drawn narrowly and lands precisely on the scenario this article is written for: the position may differ where an employee exercises management functions and those functions convey power of disposal to the enterprise. Paragraphs 6 and 7 of the same AEAO on § 12 reinforce the line from the other side: a place-of-management Betriebstätte may be located in the premises of a third party who manages the business, and where no other fixed facility exists, the manager's dwelling is usually that place. The ordinary employee in Germany is protected; the executive is not.

Spain gave a narrower answer. In binding ruling V0066-22 of 18 January 2022 the DGT considered a UK employer whose employee spent more than 183 days in Spain in 2020 working remotely, with the company bearing no accommodation costs there and paying no additional remuneration for working from Spain. Relying on the OECD Secretariat's pandemic-period position, the DGT concluded that discontinuous use of the employee's home does not place a place of business at the enterprise's disposal and does not produce the required degree of permanence.

Three circumstances carried the conclusion: the employee stayed in Spain voluntarily, the employer kept a workplace available for him in the United Kingdom, and the employer funded nothing about the Spanish arrangement. Agency PE was dismissed separately: the employee had no authority to conclude contracts, and the DGT treated activity arising from an extraordinary event as unlikely to be habitual.

The closing qualification is the operative one: if the employee's stay in Spain continues beyond the duration of the pandemic measures, the possible existence of a permanent establishment must be analysed case by case. That open assessment is what the 2025 model structures.

The divergence between the two administrations reflects the limits of the Commentary's own reach. The German answer is given for the domestic concept of Betriebstätte and at treaty level at once, and rests on power of disposal; the Spanish answer is given on the facts of a specific pandemic episode and leaves post-pandemic remote working open. Neither is displaced by the 2025 Update, and in a dispute with either administration the argument is built on both layers at once.

Austria’s BMF Information of 4 January 2026 applies the new Commentary from 2026 to Austrian treaties with a corresponding Article 5(1). It treats fifty per cent as the point for a factual assessment, not an automatic PE finding, and reproduces Example D’s no-PE conclusion at sixty per cent without a commercial reason. The prior practice could still be used through the end of 2025. The 20 July 2020 pandemic information, including its fifty-per-cent Example 7, is therefore historical rather than the current Austrian rule.

Switzerland requires a territorial distinction. The Swiss Tax Conference analysis of 26 April 2022, sections 1 and 3, concerns inter-cantonal and inter-municipal allocation and expressly excludes international cases. Ordinary employee home working generally creates no inter-cantonal PE because disposal and significance are lacking; compensation or required home working does not alone change this. Wider use rights require examination. Effective management remains separate, particularly in a small business controlled by one person. This analysis supplies no blanket exemption for a foreign employer with staff in Switzerland.

Italy’s Circular 25/E of 18 August 2023, section 4.3, applies the ordinary treaty conditions: a place at the business’s disposal, spatial and temporal fixity, and business conducted through it. Remote delivery does not remove those conditions. Its example is a self-employed architect spending part of the year working from Italy; a fixed base must be assessed, not automatically attributed to every remote employee. The circular sets no general percentage safe harbour and predates the 2025 Commentary. It also preserves the separate statutory investment-management exemption subject to its conditions.

The Swiss–Italian telework protocol, effective 9 February 2026, permits eligible frontier workers to telework up to 25% without changing their frontier-worker treatment, applying from 1 January 2024. Its text concerns employee status and remuneration allocation. That percentage is not a PE safe harbour for the employer.

The Netherlands and Belgium fixed a separate safe harbour bilaterally. Their competent authorities agreed on 23 November 2023 how Article 5 of the 2001 treaty applies to employees working from home (Staatscourant 2023, 33856). Incidental home working creates no permanent establishment. Structural home working generally does not create a permanent establishment where the employee may choose an available workplace in the employer's State; depending on the facts, the home may be at the enterprise's disposal where the employer requires home working by contract, where in fact no workplace exists for that employee in the employer's State, or where the employee cannot stop working from home unilaterally. The test is applied per employee, and it is irrelevant whether the employer funded equipment for the home workplace or carries health-and-safety duties there. As a practical application, a home workplace is in any case not a permanent establishment where the employee works from home for 50% or less of working time for that employer over a twelve-month period beginning or ending in the tax year concerned.

These instruments are not interchangeable. The Dutch-Belgian agreement has a treaty-specific fifty-per-cent safe harbour; Austria now follows the 2025 Commentary from 2026. Germany’s stated rule rests on disposal, Spain’s cited decision concerns pandemic facts, the Swiss analysis is inter-cantonal, and Italy’s circular applies ordinary treaty criteria. A Dutch employer cannot export the Belgian agreement to an employee in Austria, Switzerland or Italy.

The evidence side

Both stages are tested against facts the enterprise either records from the outset or cannot reconstruct afterwards.

The share of working time is determined by actual conduct (paragraph 44.9). The primary sources are a presence calendar by country, time records, access-system and corporate-service data, travel documents and flight records. Employment contracts and remote-work policies help only where they match that data; a divergence between policy and actual pattern is read in favour of the actual pattern. A separate difficulty is the method of counting itself: the Commentary makes total working time the denominator rather than days, and does not fix how one converts into the other. Israel has reserved the right to test the threshold by the greater of two measures — a comparison of full or partial working days of presence in the home jurisdiction against full working days spent outside it, or a comparison of full or partial days actually worked from the home jurisdiction against full days actually worked outside it. Until such divergences are resolved, enterprises with a material cross-border perimeter calculate the share both ways and keep both computations.

The second stage calls for evidence of why the individual is present in that country: customers and suppliers served there, meeting records, local-team duties and any time-zone business rationale. Preserve the actual reason for the arrangement, including personal choice, cost saving or retention. Documents showing only the latter motives may support the absence of a commercial reason; contrary operational facts still need to be assessed. Documents should accurately record the arrangement, not be removed or rewritten to fit a preferred tax conclusion.

Enterprises that have faced an audit should expect three things. The rolling twelve-month window is tested in every position, not only across calendar years. The share is calculated for each individual separately, not as a team average. And the absence of time records in a cross-border arrangement is not neutral — it leaves the administration free to compute on its own data.

What counts against the enterprise and what supports it

The indicators below orient the second-stage assessment; they are not a verdict, and each line is tested against the facts of the case and the text of the applicable treaty.

Reservations and positions

Paragraphs 44.1 to 44.21 were not adopted unanimously, and the reservations cluster around two things: the threshold and Example D.

The Czech Republic reserves its position on the whole block, disagreeing that the category of premises should be so determinative and thereby limit the possibility of a permanent establishment in home-working cases. Chile does not adhere to all of the interpretations in paragraphs 44.6 to 44.21. India disagrees with the block outright — with both the time threshold and the commercial-reason condition — considering that the individual's home can be regarded as at the disposal of the enterprise and constitutes a place of business of it. Malaysia reserves the right to agree bilaterally on a percentage of its own in place of fifty.

Nigeria disagrees with paragraphs 44.14 and 44.15, and will find a commercial reason where intermittent or short occasional visits to a customer's premises relate to an activity lasting more than six months. It disagrees with paragraph 44.16, treating the reduction of an enterprise's costs as a valid reason for not acquiring office space and therefore a commercial reason. And it disagrees expressly with the conclusion in Example D: it regards the quarterly visits to the client's premises in State S as a commercial reason and the home as a fixed place of business permanent establishment of RCo.

Israel, besides the day-counting method and the application of paragraph 44.20 to founders, partners or senior executives who are one of the primary persons conducting the enterprise’s business, reserves the right to find a commercial reason where a number of employees in the home jurisdiction create a meaningful group relative to their business unit, and to take into account, under paragraph 44.19, whether the individual performs activity that is core to the business or significantly contributes to value creation; on Example D it reserves the right to read the same facts as indicating that the employee's presence facilitates his quarterly client visits or enables service in a different time zone.

The practical effect of this list is that Example D stops being a reliable guide wherever one of these administrations sits on the other side. Its fact pattern — the threshold crossed with no commercial reason — is what almost every defensive position rests on, and it is the one most often contested.