Teleworking Abroad: When Does It Trigger a Permanent Establishment?
The rise of teleworking — accelerated by the global pandemic — has redefined workplace norms. For companies, allowing employees to work remotely is no longer unusual. But when that remote work crosses borders, it can carry unexpected tax implications.
In particular, having staff telework from a foreign country may trigger the creation of a permanent establishment (PE) — a concept in international tax law that can subject a company to local taxation and administrative obligations.
🏢 What qualifies as a permanent establishment?
According to the OECD Model Tax Convention, a PE is a “fixed place of business through which the business of an enterprise is wholly or partly carried on.” To meet this definition, all of the following conditions must be satisfied:
Place of Business – There must be a physical location (e.g., office space).
Permanence – The location must have a reasonable degree of permanence.
Disposal by the Company – The space must be at the disposal of the foreign enterprise (i.e., made available to the company).
Business Activity – All or part of the company’s business must be conducted from this space.
In the case of teleworking, especially from an employee’s home, these criteria become relevant.
⚠️ The critical factor: control over the workspace
While several conditions are structural, the one most within a company’s control is the third: whether the workspace is considered to be made available to the company.
A home office may be considered “at the disposal” of the company if:
The employee is required or expected to work from home, and has no workplace available at the company’s premises; or
The company pays rent or provides compensation for the home workspace, giving it a right to use the premises.
Similarly, if the company rents office space in a foreign country for an employee or maintains a long-term arrangement where the company directs the use of the space, the threshold for PE may be crossed.
📝 Employment contracts and tax compliance
To avoid unintended PE consequences, companies should carefully draft employment contracts and evaluate their teleworking policies. It’s crucial to assess each situation and determine whether a recurring remote work setup could trigger taxable presence in another jurisdiction.
As teleworking becomes the norm, cross-border employment should be approached with caution, not just from an HR perspective, but also through a tax lens.
