Remote Employees and Permanent Establishment (PE) Issues for Employers

Can Remote Employees Create a Permanent Establishment for an Employer in a Foreign Country?

Remote work in 2025 and 2026:

Mobility is now part of the employment model

Remote work in 2025 and heading into 2026 is no longer a temporary accommodation. It has become an operating model for many professional roles. The post‑pandemic workplace is built around distributed teams, digital workflows, and “remote-capable” job design. This reality has changed employee expectations and, importantly, employee mobility.

For Canadian employees, the discussion about where to live is increasingly shaped by economics. Housing affordability pressures and broader cost‑of‑living constraints have become hard to ignore. When commuting is no longer a daily requirement, some employees reassess whether staying in their current city, or even staying in Canada, makes sense.

At the same time, governments are competing for internationally mobile workers. Digital nomad and remote worker visa programs have expanded since 2020. These programs vary widely, but the policy direction is clear: many jurisdictions want to attract foreign earners who bring spending power without necessarily entering the local job market.

OECD (2022), “Should OECD countries develop new Digital Nomad Visas?”No. 27, OECD Publishing, Paris. 

Tax policy is part of that competition. Some countries operate with no personal income tax, while others offer targeted tax relief programs for new residents, returning nationals, or skilled inbound workers. In Europe, several countries market inbound worker incentives that reduce taxable income or provide relief for a limited period, subject to strict eligibility conditions. The message received by employees is simple, even if the underlying rules are not: mobility is possible, and some destinations are intentionally making it financially attractive.

Remote work is here to stay, but what does it mean for employers?

For employers, cross‑border remote work is not only an HR decision. It can change the employer’s tax footprint and compliance obligations. Allowing an employee to work from another country may create exposure to corporate tax filings, profit attribution, payroll withholding, and local reporting requirements in the employee’s host country.

The most technical question is often the most consequential: could an employee’s remote work location be treated as a permanent establishment of the employer in that foreign country?

If the answer is yes, the employer may be viewed as carrying on business there for treaty purposes, and the host country may assert taxing rights over business profits attributable to that permanent establishment. Many employers, for the same reason, restrict such movements using specific clauses in employment contracts.

What is a permanent establishment?

A permanent establishment (PE) is a treaty concept that sets the threshold for when a host country may tax the business profits of an enterprise resident in another country. In most tax treaties based on the OECD approach, business profits are generally taxable only in the enterprise’s home country unless the enterprise carries on business in the host country through a PE.

The classic form is a fixed place of business PE. It is built around three core elements: there must be a place of business, the place must be fixed with a degree of permanence, and the business of the enterprise must be carried on through that place. Traditionally, this covered offices, branches, factories, warehouses, and similar locations. Caution: PE is a broader concept much more than this simpler statement. 

Employees can also create PE risk through other treaty mechanisms, particularly dependent agent PE rules, where a person in the host country habitually concludes contracts, or plays a principal role leading to the conclusion of contracts, on behalf of the enterprise.

Before remote work became widespread, employee‑driven PE concerns were usually tied to planned business activity in the host country. That might include a sales presence, client delivery teams on the ground, or personnel operating from employer‑arranged premises. Remote work changed the fact pattern by creating situations where an employee’s home, or another personal location, is used for enterprise activities in a foreign country without a traditional “market entry” decision by the employer.

OECD Commentary on Remote Work

The 2025 analytical framework

In November 2025, the OECD updated the Commentary to Article 5 (Permanent Establishment) to address cross‑border remote work. The update is aimed at clarifying when an employee’s home or another relevant place outside the employer’s home jurisdiction could become a fixed place of business PE for the employer.

A practical feature of the guidance is that it is not limited to a traditional home office. It contemplates other relevant places such as a second home, a holiday rental, or the home of a friend or relative, if the employee carries on enterprise activities from that location.

Read: Full text of OECD 2025 Update to the Model Tax Convention (PDF)

The Commentary introduces an analytical framework using a two‑step approach.

Step 1: time spent test

The Commentary uses a “50 percent of total working time” reference point as a general benchmark. Where an employee works from a home or other relevant place in a foreign country for less than 50 percent of their total working time for the emplouer over any 12‑month period, that place will generally not be treated as a place of business of the employer for fixed place PE purposes. This is not presented as a mechanical rule that replaces all analysis, but it is intended to reduce uncertainty where the foreign work pattern is limited.

The Commentary also makes an important practical point: the calculation is driven by actual conduct. Formal schedules and employment contracts can be relevant only to the extent they accurately reflect how work is performed in practice.

Step two: commercial activity and “commercial reason” analysis

If the 50 percent threshold is met or exceeded, the analysis returns to facts and circumstances.

The key focus becomes whether there is a commercial reason for the employee to perform activities in that country, meaning the employee’s physical presence there facilitates the carrying on of the enterprise’s business.

The Commentary indicates that a commercial reason may exist where the enterprise needs the employee to be in that country to access customers, suppliers, or other resources, or where the employee’s location supports timely delivery of services. By contrast, the Commentary indicates that remote work arrangements that exist solely for employee convenience, retention, or purely internal office cost reduction do not necessarily amount to a commercial reason.

Time zones illustrate the nuance. Being in a different time zone is not automatically treated as a commercial reason. However, a time zone difference may support a commercial reason if it enables real‑time, or near real‑time, service delivery or interaction that the enterprise relies on.

The OECD framework is supported by examples that contrast limited or incidental foreign remote work with arrangements that connect the enterprise’s business to the employee’s host country. The guidance also recognizes that positions are not uniform across jurisdictions.

Certain countries have reservations or stated positions that depart from aspects of the new framework. For employers, that means the treaty relationship and the host country’s interpretive approach remain central to risk assessment.

The update also does not replace other PE pathways. Even where the fixed place guidance reduces risk, an employee with contract authority or similar agency‑type functions may still create PE exposure under dependent agent rules.

How this Commentary helps Canadian employers and remote workers

The practical significance of the 2025 update is that it addresses a common modern arrangement: employees working abroad from personal locations without the employer establishing traditional premises in that country.

The Commentary provides a clearer sequence for analysis by introducing a time‑based reference point and then directing attention to whether the enterprise’s business has a meaningful connection to the employee’s presence in that country.

For employers, this structure supports more consistent internal governance. It also highlights documentation needs. If an employer wishes to apply the framework in a defensible way, employees’ time spent working in each jurisdiction and the nature of their duties performed there must be tracked with discipline. This is especially important where an employee’s foreign presence becomes regular, substantial, or commercially connected to customers or suppliers.

The Commentary also reinforces that permanent establishment is not the only cross‑border remote work concern. Payroll obligations, reporting, labour and employment requirements, immigration status, and data privacy rules may all be engaged by the mere presence of an employee in another country. Those exposures can exist even where no PE is created.

Is the Commentary binding on Canada?

CRA positions and treaty interpretation

The OECD Model Tax Convention and its Commentary are not Canadian law by themselves. Canadian treaty outcomes are determined by the text of the relevant bilateral tax treaty as implemented through Canadian legislation.

However, OECD materials matter in practice. Canadian courts have treated the OECD Model and Commentary as highly persuasive tools when interpreting treaties that follow OECD language. The Canada Revenue Agency has also historically relied on OECD Commentary when applying treaty concepts, including permanent establishment analysis.

From a Canadian employer perspective, the binding effect is therefore indirect. The Commentary can influence how treaty language is understood and applied, but it does not override the treaty text. The role of the Commentary can also depend on whether a jurisdiction applies treaty interpretation in a “dynamic” way (considering later OECD Commentary updates when interpreting older treaties) or a more “static” way (focusing on materials available at the time the treaty was signed).

The 2025 update itself acknowledges that treaty practice varies by jurisdiction, which makes host‑country analysis essential.

The CRA has also published guidance in the context of COVID‑19 on international income tax issues, including permanent establishment considerations, showing that PE analysis remains fact‑driven and sensitive to the reason for an employee’s presence and the nature of activities carried on in Canada or abroad. While that guidance was designed for a specific period and context, it illustrates how administrative positions can evolve to address real‑world mobility patterns.

Final word

Remote work has created a new kind of cross‑border presence: one that can arise from individual mobility rather than corporate expansion.

The OECD’s 2025 update to the Commentary on Article 5 provides a structured approach for evaluating when a remote employee’s home or other relevant place abroad could be treated as a fixed place of business permanent establishment of the employer. The framework centres on a time reference point and, where that reference point is met, a facts‑and‑circumstances analysis that focuses on commercial reasons and how the enterprise’s business is carried on.

Canadian employers implementing work‑from‑anywhere policies should treat permanent establishment risk as part of the policy design, not as an afterthought. The outcome often turns on disciplined tracking of where employees work, what they do in the host country, and whether their presence supports the enterprise’s commercial activities there. It is strongly recommended to consult a local Corporate tax accountant in the foreign country in these situations.

Maroof HS CPA Professional Corporation is a Toronto-based professional accounting firm providing tax compliance services for corporations. We assist Canadian businesses with corporate tax compliance, cross‑border remote work reviews, and permanent establishment risk assessments, helping employers manage international employee mobility with clear documentation and treaty‑focused analysis.