Summary
- The full 2025 OECD Model Tax Convention provides more detailed guidance on when an employee working remotely across a border may create a permanent establishment for the employer, including a 50% working-time indicator and an assessment of the commercial reasons for the employee’s location.
- A new optional provision allows countries to negotiate a lower permanent establishment threshold for activities connected with the exploration and exploitation of natural resources, potentially strengthening taxation rights in resource-rich source countries.
- Further changes clarify the relationship between Article 9 and domestic interest-deduction restrictions, update the mutual agreement procedure in relation to GATS disputes, and address other questions involving dispute resolution, exchange of information and treaty interpretation.
Extended article
On 30 September 2026, the OECD published the full version of the Model Tax Convention on Income and on Capital 2025. The publication is the eleventh full edition of the OECD Model and presents the Model Convention as it read on 18 November 2025. It brings together the Articles, Commentaries, positions of non-member economies, historical notes, background reports and the OECD Council Recommendation in a consolidated publication. [oecd.org], [oecd.org]
The OECD Model does not itself amend bilateral tax treaties or create a direct tax liability. Instead, it provides a reference framework used by OECD members and many non-members when negotiating, applying and interpreting tax treaties. The practical effect of the changes will therefore depend on the wording of the relevant treaty, the approach of the jurisdictions concerned and whether courts and tax authorities use the updated Commentary when interpreting treaties already in force. [oecd.org], [kpmg.com], [ey.com]
The full publication incorporates the changes contained in the https://www.oecd.org/en/publications/the-2025-update-to-the-oecd-model-tax-convention_5798080f-en.html, approved by the OECD Committee on Fiscal Affairs on 13 October 2025 and by the OECD Council on 18 November 2025. The changes respond to developments in international taxation since the previous 2017 update, notably the growth of cross-border remote working and continuing concerns about allocating taxing rights over natural-resource activities. [oecd.org], [ey.com]
Cross-border remote work and permanent establishments
One of the most significant developments is the expanded Commentary on Article 5 concerning employees who work from a home, second residence, holiday accommodation or another location in a country other than the employer’s jurisdiction.
The updated guidance confirms that an employee’s decision to work remotely from another country does not automatically create a fixed-place-of-business permanent establishment for the employer. The analysis continues to depend on whether the location is sufficiently fixed and whether the enterprise’s business is wholly or partly carried on through that location. The employee’s use of the location must therefore be assessed in light of all relevant facts and circumstances. [kpmg.com], [ey.com]
The new Commentary introduces a useful working-time indicator. If the employee uses the foreign home or other location for less than 50% of their total working time during a relevant 12-month period, that location will generally not be regarded as a place of business of the enterprise. This should reduce uncertainty for occasional cross-border home-working arrangements, although the threshold is an analytical indicator rather than an absolute safe harbour that replaces the broader Article 5 test. [kpmg.com], [ey.com]
Where the employee works from the foreign location for at least 50% of their working time, further analysis is required. A key consideration is whether there is a commercial reason for performing the work from that jurisdiction. Such a reason may exist where the location facilitates engagement with local customers or suppliers, development of business opportunities, delivery of services requiring a local presence, access to relevant expertise or collaboration with other businesses or group companies. [kpmg.com], [ey.com]
By contrast, an arrangement driven only by the employee’s personal preference will generally not establish the required commercial connection. The employer’s desire to recruit or retain a particular individual, or to reduce office costs, is not by itself sufficient. The mere presence of customers or suppliers in the country is also not automatically decisive. The analysis must establish a substantive link between the employee’s presence and the conduct of the enterprise’s business in that location. [kpmg.com], [ey.com]
Even if the foreign location constitutes a fixed place of business, no permanent establishment may arise where the activities performed there are only preparatory or auxiliary. Conversely, the risks may be greater where the employee performs core business functions, regularly negotiates commercial terms, manages local relationships or represents the principal person conducting the enterprise’s business. A dependent-agent permanent establishment must also be considered separately from the home-office analysis. [kpmg.com]
For multinational groups, the new guidance makes reliable information about international remote-working arrangements increasingly important. Employers should be able to identify where employees work, the proportion of time spent in each jurisdiction, the nature of their duties and the reasons for their presence. Remote-working policies, approval procedures and periodic PE risk assessments may need to be updated accordingly.
Optional provision for natural-resource activities
The 2025 Model also includes a new optional provision addressing activities connected with the exploration and exploitation of extractible natural resources, including oil, gas and minerals.
The provision is designed to allow treaty partners to agree on a lower permanent establishment threshold than the ordinary Article 5 rules. A non-resident enterprise may therefore be deemed to have a PE when it conducts qualifying activities in the source country for longer than a bilaterally agreed period. The threshold can apply without requiring each activity to be linked to one specific project or customer. [oecd.org], [kpmg.com], [ey.com]
Countries may tailor the provision so that it applies only to offshore activities or more broadly to both offshore and onshore natural-resource activities. The accompanying Commentary also contains model approaches concerning gains from the disposal of extractive assets and resource-related interests, together with possible provisions for employment income connected with extractive operations.
Because the provision is optional, it does not automatically become part of existing treaties. Its significance will depend on whether countries adopt it in new treaties or treaty renegotiations and on the duration threshold and range of activities agreed bilaterally. Nevertheless, it provides resource-rich countries, including developing economies, with a recognised OECD treaty mechanism for strengthening taxation at source. [oecd.org], [kpmg.com]
Article 9 and domestic interest-deduction rules
The revised Commentary also clarifies the relationship between Article 9 on Associated Enterprises and domestic rules governing debt, equity and the deductibility of expenses.
The analysis first requires the transaction to be accurately delineated, including whether an instrument presented as a loan should properly be recognised as debt for tax purposes. Once the transaction is recognised as a loan, its conditions and pricing must be assessed under the arm’s-length principle and the OECD Transfer Pricing Guidelines.
However, Article 9 does not determine whether an expense is deductible when calculating taxable income. Deductibility remains primarily a question of domestic law, subject to the applicable treaty. Consequently, domestic interest-limitation measures, including fixed-ratio, group-ratio and other earnings-stripping rules, may continue to restrict a deduction even where the amount of interest satisfies the arm’s-length principle. [kpmg.com], [ey.com]
This distinction is important for multinational groups. Demonstrating that financing is arm’s length does not, by itself, guarantee full deductibility of the resulting interest expense.
Mutual agreement procedure and GATS
A new paragraph 6 has been added to Article 25 on the mutual agreement procedure. It clarifies the role of the competent authorities in determining whether a tax measure falls within the scope of a tax treaty for purposes of the dispute-resolution rules under the General Agreement on Trade in Services.
The change is intended to ensure that disputes concerning tax measures covered by treaty non-discrimination provisions are generally handled within the tax treaty framework, particularly through the mutual agreement procedure, rather than being addressed primarily through WTO/GATS dispute-settlement mechanisms. [kpmg.com], [ey.com]
The 2025 Update also contains changes relating to Amount B dispute resolution, exchange of information and the use of exchanged information in tax matters concerning persons other than those for whom the information was initially obtained. Together, these amendments seek to improve consistency in treaty administration and provide greater certainty in cross-border tax disputes. [kpmg.com], [ey.com]
Practical implications for multinational businesses
The full 2025 OECD Model provides welcome direction, but it does not remove the need for country-specific analysis. Groups should determine whether the applicable treaty follows the OECD Model, whether the relevant jurisdiction applies Commentary updates dynamically to existing treaties and whether domestic law imposes a different or additional taxable-presence threshold.
The most immediate action concerns cross-border remote work. Businesses should consider maintaining accurate working-location data, documenting whether the location serves a genuine commercial purpose, reviewing the nature of the employee’s activities and assessing potential corporate income tax, payroll and registration consequences.
Extractive-industry groups should monitor future treaty negotiations and renegotiations for adoption of the optional natural-resources provision. Treasury and transfer-pricing teams should meanwhile distinguish clearly between the arm’s-length analysis under Article 9 and separate domestic restrictions on interest deductibility.
The OECD’s 2025 Model ultimately reflects an international tax environment in which physical presence remains relevant but must be interpreted in the context of modern working arrangements and geographically mobile business activities. Its influence will become clearer as governments, tax authorities and courts begin applying the updated Commentary and incorporating the new provisions into bilateral treaties. [oecd.org], [oecd.org], [ey.com]
