Cross-Border Catch-Up: OECD’s New Temporal Test for PE Increases Flexibility for Remote Workers

Announcer: Welcome to the Ogletree Deakins podcast, where we provide listeners with brief discussions about important workplace legal issues. Our podcasts are for informational purposes only and should not be construed as legal advice. You can subscribe through your favorite podcast service. Please consider rating this podcast so we can get your feedback and improve our programs. Please enjoy the podcast.

Maya Barba: Welcome to the Cross-Border Catch-Up, the podcast for global employers who want to stay in the know about cutting-edge employment issues worldwide. I’m Maya Barba, and I’m here today with my colleague Shirin Aboujawde. We are cross-border attorneys at Ogletree, and today we’re going to talk about the Organization for Economic Cooperation and Development, or OECD’s, 2025 Model Tax Convention Update and what it means for cross-border remote work. Thanks for joining us today, Shirin.

Shirin Aboujawde: Thanks for having me, Maya. This is a really important topic, especially given how much remote work has evolved since the pandemic.

Maya Barba: Let’s get into it. The OECD released its 2025 update to the Model Tax Convention on income and capital back in November of 2025, and it’s the most substantial revision since 2017. What’s the deal here?

Shirin Aboujawde: Well, it’s a big deal. That’s because this update directly addresses the explosion of cross-border remote and hybrid work arrangements post COVID-19. It provides much-needed clarity on when an employee’s home office or other remote work location in a foreign country creates a taxable permanent establishment, or PE, as we call it, for their employer under Article 5 of the convention.

Maya Barba: PE sounds pretty serious. Could you write down what that actually means for our multinational employers?

Shirin Aboujawde: Absolutely. So, for multinational employers, these changes are really a double-edged sword. On one hand, they provide predictability for borderless workforces, but on the other hand, they underscore the need for robust tracking and policy frameworks to avoid unexpected tax liabilities, social security complications, and compliance pitfalls across jurisdictions.

Maya Barba: So, what does this new framework actually look like? How do employers know if they’ve created a permanent establishment?

Shirin Aboujawde: The updated commentary on Article 5 replaces outdated 2012 guidance with comprehensive facts and circumstances approached designed to prevent what we call “micro PEs” while still ensuring fair taxation. At its core, it’s a two-part test.

Maya Barba: A two-part test? Could you walk us through that?

Shirin Aboujawde: Yeah. So, the first part is what we’d call the temporal test or the 50% working time benchmark. If an employee spends less than 50% of their total working time for the enterprise at a remote location in another treaty country over any 12-month period, that location is generally not considered a fixed place of business, and no PE arises in the new rules.

Maya Barba: So that’s basically a safe harbor for incidental remote work?

Shirin Aboujawde: Exactly. So, this safe harbor accommodates incidental remote work stints like short-term relocations for family reasons or even digital nomad lifestyles without triggering tax exposure. However, if you exceed the 50% threshold, the analysis then shifts to a qualitative factors’ analysis in part two.

Maya Barba: So, what does part two look like?

Shirin Aboujawde: Well, the second part is the commercial reason test, which is a qualitative assessment. For arrangements over the 50% threshold, the OECD examines whether the employee’s physical presence in the foreign country serves as a genuine commercial purpose for the business beyond just personal convenience.

Maya Barba: What kind of factors do they look at?

Shirin Aboujawde: Well, they look at several things. They look at business ties to the location, like serving local clients, accessing regional markets, or supporting onsite operations. They also consider the continuity and permanence of the remote setup, whether the location is effectively at the enterprise’s disposal, and they exclude preparatory or auxiliary activities.

Maya Barba: So, if an employee is just working remotely for their own convenience, that’s probably not going to create a PE?

Shirin Aboujawde: That’s right. If the remote work is primarily for employee retention, cost efficiencies, or flexibility without a location-specific business link, a PE is unlikely, but conversely, client-facing or sales roles with strong jurisdictional ties could definitely create one.

Maya Barba: I understand that the commentary also includes some illustrative examples.

Shirin Aboujawde: Yes. The commentary highlights scenarios like short-term internal work, which would not create a PE, versus long-term market-serving activities that likely would. These examples are really going to help employers anticipate outcomes.

Maya Barba: So, this is all happening in a world where talent crosses borders pretty seamlessly. What are some of the key cross-border implications that employers should be thinking about?

Shirin Aboujawde: Great question. Think about U.S. tech-based firms with EU remote workers, or even very commonly within EU countries, those multinationals that live in one EU jurisdiction but are employed in another. These updates intersect with those bilateral treaties; social security coordination like EU Regulation 883-2004 or U.S. totalization agreements; and immigration rules.

Maya Barba: And what are some key risks that employers face?

Shirin Aboujawde: Well, there are several. First, tax and withholding obligations. A PE could trigger corporate income tax, profit attribution under Article 7 of the Model Tax Convention, and employee withholding in the host country. This complicates payroll and increases costs.

Maya Barba: What about social security implications?

Shirin Aboujawde: Yeah, that’s another big one. So, exceeding time thresholds might reassign social security affiliation, affecting contributions and coverage. This is especially relevant under multilateral agreements that currently exist at the moment in Europe, which allows an employee to work in one jurisdiction up to 49.9% of the time, even though they’re employed in another jurisdiction.

Maya Barba: And I imagine global mobility is also impacted.

Shirin Aboujawde: Yep, exactly. Digital nomads or hybrid teams risk creating unintended location discrimination, particularly in high-enforcement jurisdictions like India or non-OECD countries that may deviate from the model where the temporal test just doesn’t apply.

Maya Barba: And I’m guessing compliance is becoming more burdensome.

Shirin Aboujawde: Yes. So, tax authorities are increasingly scrutinizing remote arrangements, and the OECD’s guidance is influencing interpretations even before the treaty amendments. These changes also build on 2026 trends, like the EU AI Act’s high-risk HR obligations and expanding digital nomad visas, which amplify the need for integrated strategies.

Maya Barba: So, what should multinational employers actually be doing right now to navigate this landscape?

Shirin Aboujawde: There are several practical steps. First, auditing your current cross-border remote setups, focusing on time splits and commercial justifications, is very important. Second, consider implementing AI power tracking tools like geofencing apps integrated with payroll for accurate day logs and automated alerts.

Maya Barba: What about policies and documentation?

Shirin Aboujawde: Absolutely. You’ll want to look at and revise your work-from-anywhere policies if you have them or your remote work policies, employment contracts, and the approval process to incorporate the 50% benchmark in any remote work application and the documentation requirements related to it. Also, critically, coordinating with tax, HR, and legal teams for treaty-specific advice is key, including obtaining A1 certificates for social security.

Maya Barba: Are there any other options for employers in high-risk situations?

Shirin Aboujawde: Yes. So, employers could consider an employer record solution or entity restructuring to minimize PE exposure in high-risk scenarios, like becoming a non-resident employer in the jurisdiction. The key takeaway is that proactive compliance not only mitigates risk but also enhances talent attraction in a competitive global market.

Maya Barba: Got it. So, there’s a lot for employers to think about with this new OECD guidance. It sounds like the 50% safe harbor is helpful, but the qualitative commercial reason test is where things can get tricky.

Shirin Aboujawde: That’s right. And remember, no automatic PE arises from mere employee-driven remote work in another country, at least not usually. There’s a relief for many multinational employers managing hybrid and distributed teams, but the need to track working time splits across borders to avoid unintended tax nexus, social security shifts, or withholding obligations is critical.

Maya Barba: Well, you’ve definitely given employers considering cross-border remote work arrangements a lot to think about. Thank you for joining us for today’s Cross-Border Catch-Up. Follow us to stay in the know about cutting-edge employment issues worldwide.

Announcer: Thank you for joining us on the Ogletree Deakins podcast. You can subscribe to our podcast on Apple Podcasts or through your favorite podcast service. Please consider rating and reviewing so that we may continue to provide the content that covers your needs. And remember, the information in this podcast is for informational purposes only and is not to be construed as legal advice.