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On November 19, 2025, the Organization for Economic Co-operation and Development ("OECD") released an update to the OECD Model Tax Convention on Income and on Capital (the "2025 Update").
Among the changes are important clarifications to the Commentary on Article 5, dealing with the meaning of Permanent Establishment ("PE") – and more specifically directed at helping determine when an individual's home office may constitute a PE of the enterprise engaging the worker.
In a world increasingly shaped by remote work, changes like these are timely and likely only the beginning of further developments – and tax audits!
2025 OECD Update: Remote Workers & Home Offices
The 2025 Update clarifies when an individual's home may be treated as a PE of the business engaging the worker – including employees AND certain contractors or agents acting on behalf of the business (but not independent agents carrying on their own business). While each case will be assessed on its own facts, the revised commentary seems to provide that a home will constitute a PE only where two conditions are met:
- Duration of Work: The individual works from the home for at least 50% of their total working time over the course of a 12-month period; and
- Commercial Reason: There is a "commercial reason" for the activities to be carried out by the individual at the location of the home (i.e., where the physical presence of the individual in the jurisdiction of the home will itself facilitate the carrying on of the business).
The Commercial Reason Condition
Examples where a commercial reason will generally exist include where (1) absent access to the individual's home, the engaging enterprise would be required to use another premises in that same country (i.e., a rented office); or (2) the individual directly engages with clients, suppliers or others on behalf of the business, and that engagement is facilitated by the individual's presence in that country.
By contrast, a commercial reason will generally not exist where a business permits work-from-home arrangements solely for worker preference or to reduce operating costs (i.e., office overhead). Although a PE may arise in other circumstances, the existence of a commercial reason is considered a "prominent consideration".
What Comes Next?
While the OECD Commentary is not binding domestic law in Canada, one believes that Canada and its provinces will likely soon be following the OECD lead and modernizing outdated rules. For example, many tax laws in Canada remain designed for a brick-and-mortar economy, where PE looks for brick-and-mortar offices. Ontario's Employer Health Tax ("EHT") is one example (see our blog here), and payroll taxes like the EHT are a great example of a problematic system.
Might it make for better tax policy to focus on where employees actually live and work?
Key point
OECD is responding to modern remote-work realities.
For businesses with cross-border workers in Canada, Experienced Tax Counsel can help sort out issues.
Takeaways
Remote work continues to be a challenge under many legacy tax rules in Canada. The OECD's 2025 Update is probably a step in the right direction and businesses with cross-border or interprovincial remote employees should assess how employee location might affect tax exposure. Experienced Indirect Tax Counsel can help.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
