August 28, 2025 — Permanent establishment is the legal concept that determines when a foreign enterprise becomes taxable in a jurisdiction by virtue of its activities there. Article 5 of the OECD Model Tax Convention, the foundational text of the modern doctrine, was drafted in 1963 and refined through several rounds of revision. The drafters, working in a world where employees of a foreign enterprise either travelled to a host jurisdiction or did not, where equipment had identifiable locations, and where business was conducted from offices identifiable as belonging to specific corporations, produced a doctrine calibrated to the operational realities of mid-twentieth-century international commerce.

The doctrine has been stress-tested by every subsequent technological development — the rise of e-commerce in the 1990s, the digitalisation of financial services in the 2000s, the emergence of platform business models in the 2010s. Each test produced administrative and judicial responses that adapted the doctrine without redesigning it. The pandemic-driven normalisation of remote work, beginning in 2020 and continuing through the present, has produced a stress test of greater magnitude. Employees who work from one jurisdiction for an enterprise headquartered in another, frequently for extended periods, frequently from accommodation rather than offices, frequently with no formal designation as cross-border workers, generate fact patterns that the historical PE doctrine did not contemplate.

The OECD Secretariat published guidance on the COVID-19 fact patterns in April 2020 and updated it in January 2021. National tax authorities have produced their own guidance, often inconsistently. The body of administrative practice and emerging case law on remote work and PE is still being constructed. This article describes the current state.

The historical PE doctrine

Article 5 of the OECD Model produces permanent establishment along three principal pathways. The first is the fixed place of business test: an enterprise has a PE in a jurisdiction where it has a fixed place of business through which the business of the enterprise is wholly or partly carried on. The fixed place test requires a physical presence of some duration, a degree of permanence, and a connection to the business of the enterprise.

The second is the dependent agent test: an enterprise has a PE where a person, other than an independent agent, acts in the jurisdiction on behalf of the enterprise and habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification. The dependent agent test was strengthened by the 2017 OECD Model revisions, which broadened the definition of habitual conclusion to capture activities that previously fell outside.

The third is a series of specific rules for particular industries and activities, including construction sites, services PE in some treaties, and the offshore activity provisions in some bilateral instruments.

The pre-pandemic application of these tests was reasonably stable. An employee who worked from a home office in a jurisdiction other than the employer's was, under the prevailing administrative practice of most major jurisdictions, generally not creating a PE for the employer, provided the activities were preparatory or auxiliary, the home office was not at the employer's disposal in the relevant sense, and the employee was not concluding contracts for the employer. The boundaries of the relevant administrative practice were consistent enough that multinational corporations could plan around them with reasonable certainty.

The remote work fact patterns

The post-2020 normalisation of remote work has produced fact patterns that strain each of the historical tests.

The most common pattern is the international remote employee. The employee is hired by an entity in jurisdiction A, is paid through that entity's payroll, but works from jurisdiction B for some or all of their time. The arrangement may be formal — with an explicit cross-border agreement — or informal — with the employer's awareness or without it. The duration may be temporary, extending for months, or indefinite, with the employee living permanently in jurisdiction B.

The fact pattern raises the fixed place of business test. The employee's home office in jurisdiction B is, in some interpretations, a fixed place of business of the employer. The OECD guidance of April 2020 stated that a home office of an employee would not generally constitute a PE if it lacked the requisite degree of permanence and was not at the disposal of the employer. The guidance was issued in the context of pandemic-driven temporary arrangements; its application to permanent remote work is less clear.

National authorities have responded to this ambiguity in varying ways. The German Federal Ministry of Finance issued guidance in 2022 stating that a home office of an employee may constitute a PE for the employer if the work is performed regularly from the home office over an extended period and if the employer has effective access to the location, even if no formal lease arrangement exists. The interpretation has been applied to several cases involving German employees of foreign employers and is being challenged in the German tax courts. The French DGFiP has taken a comparable but somewhat more permissive position, generally requiring more substantial indicators of disposal before finding a home office PE.

The dependent agent test creates additional concern. An employee who concludes contracts on behalf of the foreign employer from their home jurisdiction may, depending on the level of activity and the formality of the contract conclusion process, create a dependent agent PE. The 2017 OECD revisions of the dependent agent test broadened the relevant activities to capture employees who play the principal role leading to contract conclusion, even if formal signing occurs elsewhere. The revisions had been intended principally to address commissionnaire arrangements but operate equally on remote employees who participate in sales processes.

The case law that informs current PE analysis

The case law that informs the current PE analysis includes several pre-pandemic decisions that have acquired renewed relevance. The European Cadbury Schweppes line of cases, while principally about CFC and freedom of establishment, addressed the meaning of substance in ways that have been applied in PE analysis.

The 2012 Spanish Supreme Court ruling in the Roche case (Tribunal Supremo, judgement of 12 January 2012, sometimes referred to as Roche Vitamins Europe), where the court found that a Spanish marketing entity created a PE for its Swiss principal under the dependent agent rule, has been cited in administrative practice in several jurisdictions as authority for an expanded reading of the dependent agent test. The 2002 and 2013 Italian Philip Morris decisions of the Italian Corte di Cassazione — the 2002 ruling establishing the framework for finding PE in arrangements involving Italian distributors and foreign principals, and the 2013 follow-on decision refining the application — have similar significance for the Italian context.

Among more recent decisions, the December 2020 French Conseil d'État ruling in the Conversant case (formerly known as ValueClick) is significant. The court found that the French subsidiary of a US technology group created a PE for the US parent under the dependent agent test, on the basis that French employees played the principal role in negotiating and concluding contracts with French customers, even though formal contract execution occurred outside France. The decision has been cited as authority for an expanded application of the post-2017 dependent agent test in the French context, with influence extending to administrative practice in other European jurisdictions.

The OECD Secretariat's pandemic guidance

The OECD Secretariat issued guidance on the implications of COVID-19 for international tax matters on April 3, 2020, and updated it on January 21, 2021. The guidance addressed several questions, including the PE implications of pandemic-driven remote work.

The Secretariat's principal position was that a temporary change in the location where employees exercise their employment due to COVID-19 should not, by itself, create a PE for the employer. The position rested on the proposition that pandemic-driven remote work was generally not durable, was not at the disposal of the employer in the relevant sense, and did not have the requisite degree of permanence.

The guidance has been criticised for being insufficiently granular and for being calibrated to a temporary situation that has, in significant respects, become permanent. The pandemic-driven shift to remote work has, for many employees and many employers, ceased to be temporary; it has become a feature of the operating model. The Secretariat's guidance does not directly address the application of the doctrine to permanent remote work arrangements, though some commentators have argued that the underlying reasoning extends to such arrangements.

The Secretariat is understood to be developing further guidance on the post-pandemic application of PE concepts to remote work. The development has been slower than some practitioners would prefer, and national authorities have, in the interim, developed their own positions.

The corporate response

The corporate response to the PE risk created by remote work has taken several forms.

The first is the formalisation of remote work policies. Multinational corporations have, in the post-2020 period, developed explicit policies governing employee work locations. Microsoft, IBM, and Salesforce, among others, have published frameworks that specify which roles are eligible for international remote work, which jurisdictions are permitted, and which restrictions apply. The frameworks typically include limits on duration of work in any single jurisdiction (often 30 to 90 days per year for non-residence cases), restrictions on contract-concluding activities by remote employees, and requirements for tax department review of any extended international arrangement.

The second is the use of formal cross-border employment structures for permanent remote workers. Where an employee will work permanently from a jurisdiction other than the employer's, multinational corporations are increasingly transferring the employment relationship to a local entity in the employee's jurisdiction, using a local subsidiary, a branch, or an employer-of-record arrangement. The transfer eliminates the PE risk while creating other compliance considerations.

The third is the limitation of contract-concluding activities by remote employees. Where an employee works from a jurisdiction other than the employer's, the employer may restrict the employee's ability to negotiate, conclude, or significantly influence contracts on the employer's behalf. The restrictions reduce dependent agent PE risk but may constrain the employee's productivity in roles where contract activity is central.

The fourth is the engagement with national tax authorities for advance certainty. Several jurisdictions offer ruling procedures or other mechanisms for obtaining certainty on PE positions in advance. The use of these mechanisms has expanded as the PE risks of remote work have become more visible. The processes are time-consuming and produce certainty only on the specific facts presented, but they provide a level of comfort that practitioners often find worth the investment.

The competing view: PE doctrine has not changed

An alternative view, held by some practitioners and by some national tax authorities, is that the PE doctrine has not changed materially and that the post-2020 fact patterns can be analysed under the existing framework without significant doctrinal innovation. The argument is that the existing tests — fixed place of business with permanence and disposal, dependent agent with habitual conclusion — were always factual tests that adapted to the relevant facts, and that remote work facts can be analysed under the same tests.

The argument has merit. The tests are factual tests, and the courts and authorities have, over a long period, adapted their application to changing operational realities. The integration of remote work into the doctrine may, on this view, occur incrementally without requiring doctrinal restructuring.

The counterview, equally credible, is that the volume of cross-border activity that remote work has produced is sufficiently large that piecemeal factual application is creating inconsistent outcomes across jurisdictions and across employers. The case for more granular guidance, whether from the OECD or from national authorities, rests on the volume rather than on the doctrinal novelty of the fact patterns.

The current administrative practice tends toward the first view: a factual application of the existing tests, with each authority developing its own interpretation. The trend toward more granular guidance is visible but has not yet produced consolidated doctrine.

The implications for the cross-border individual

For the individual remote worker, the PE considerations operate at one remove. The PE risk falls on the employer, not on the employee directly. But employers respond to PE risk by constraining employee behaviour, with the consequence that employee mobility options are increasingly shaped by employer PE concerns.

The principal effect on the individual is the constraint on duration of work in any single foreign jurisdiction. An employee who would prefer to work for extended periods from a particular foreign location — to be near family, to enjoy a particular climate, to access a particular cultural environment — may find that their employer's policies limit the duration of any single stay. The limits often align with the boundaries below which PE risk is generally manageable: 30 to 90 days in most jurisdictions, with exceptions for jurisdictions where the employer has an existing presence.

An additional effect is on the choice of permanent residence. An employee considering a permanent move to a foreign jurisdiction may find that the employer requires the employment relationship to transfer to a local entity in the destination jurisdiction. The transfer may have implications for compensation, benefits, and career trajectory. The cumulative effect is that the choice of residence is increasingly intertwined with the structure of the employment relationship.

The trajectory through the second half of the 2020s

The trajectory of PE doctrine in the post-pandemic period is one of gradual adaptation rather than redesign. The OECD Secretariat will continue to issue guidance addressing remote work scenarios. National tax authorities will continue to develop their own positions, with the German and French approaches being among the more aggressive and the British and Dutch approaches being among the more permissive. The case law will continue to develop, with the December 2020 French Conseil d'État ruling in Conversant providing one anchor and other jurisdictions producing comparable decisions over time.

The corporate practice will continue to evolve in response. Remote work policies will tighten in some respects and loosen in others as employers calibrate the costs and benefits. The use of local entities for permanent remote employees will continue to expand. The market for employer-of-record services that allow employers to onboard cross-border employees without establishing their own local presence has grown substantially since 2020 and is likely to continue growing.

The cross-border individual will continue to experience the consequences of these adjustments through the policies of their employers. The freedom of remote work that briefly seemed available in the early pandemic period has been progressively constrained as employers and authorities have understood the tax consequences. The constrained version, with carefully managed durations and structured cross-border employment relationships, is the version that will define the remainder of the decade.