When does working from home create a permanent establishment? – The OECD’s new guideline

The OECD has clarified the tax law conditions for the creation of a permanent establishment related to working from home. If your employees regularly perform their activities remotely from abroad, it is definitely worth familiarizing yourself with the new rules.

The relationship between home office and permanent establishment

It has now become common for employees to work full-time from home or from another country. However, cross-border remote work can carry tax risks, as it may create a permanent establishment for the employer in the country where the work is performed, which can result in tax obligations.

In previous practice, the key question in assessing a permanent establishment was the extent to which the employer exercised actual control over the employee’s home workplace. However, this approach often led to legal uncertainty, as it was not always clear from the legal relationship between the parties whether such control existed or to what extent. The OECD has now established more precise and clear criteria.

Three conditions for the creation of a permanent establishment due to home office work

In the future, remote work will give rise to a permanent establishment only if all three of the following conditions are met.

1. A Permanent and regularly used place of work

For a permanent establishment to arise, it is essential that the workplace is available to the employer on a permanent basis. It is not required that the employee works continuously from home, but the work must be carried out regularly. Temporary home office work lasting only a few months within a tax year does not, by itself, create a permanent establishment.

2. At least 50% of the working hours are spent working from home.

A permanent establishment can arise only if the employee spends at least half of their working hours in the relevant state working from home. This proportionality is a new element, as the assessment of a permanent establishment was not previously linked to a specific threshold.

3. Remote working serves the economic interests of the employer

A home office gives rise to a permanent establishment only if the place of work is also economically justified for the employer.

Examples of what may qualify as an economic justification include:

• establishing and maintaining local business relationships,
• maintaining contact with clients,
• serving, supporting, or training clients in the given country.

It does not qualify as an economic justification if working abroad serves solely the personal interests of the employee (for example, relocating abroad).

The responsibilities of companies in the case of remote work

With the spread of international remote work, it is becoming increasingly important for companies to:

• reviewing internal policies regarding remote work,
• proper documentation of the workplace and the economic justifications,
• assessing whether work performed from abroad may pose a tax risk.

Although the OECD’s new guidance provides a more consistent framework, the tax authority practices of individual countries still play a decisive role in assessing specific cases. Accordingly, it is advisable to monitor the guidance issued by the Hungarian tax authority (NAV) on this subject as well.

Glossary

• Tax residence
  A permanent business presence in a given state that may create a tax liability for the company there. A permanent establishment can arise, for example, through an office, a commercial premises, or, in certain cases, the employee’s home.
• Home office
  A form of work in which an employee performs their duties at a location other than the employer’s permanent establishment, typically at home, on a regular or permanent basis.
• Remote working
  A form of work carried out without geographic constraints, using digital tools, and potentially from another country.
• Economic interest
  The employer’s justified business interest in the employee performing their work in a specific country (e.g. customer service, presence in the local market, business relationships).
• Cross-border work
  A form of employment in which the employee performs their work in a country different from the employer’s registered seat.

The Global Mobility Business Unit of LeitnerLeitner specializes in international tax matters concerning global citizens. We support our corporate clients in developing the tax framework for global employment, in connection with the employment of foreign nationals in Hungary and Hungarian nationals working abroad.

In addition to tax and accounting matters, LeitnerLaw’s labor law and contracts lawyers are on hand to provide expert support.