Working from Home in an International Context: When Does a Home Office Become a Permanent Establishment?

Key Points

A home office can, in principle, constitute a permanent business facility and thus a permanent establishment of the employer. The term “employer” here refers to the company for which the individual in question works. The decisive factors are the permanence of the arrangement, the employer’s control over the home office space, and the nature of the work performed. The 2025 update to the OECD Model Commentary (OECD MC) clarifies the assessment process through two specific tests: the Working-Time Test and the Commercial-Reason Test. If the proportion of work performed from home is less than 50% over a twelve-month period, the OECD-MK generally does not consider the home office to be a business establishment—while this update simplifies the practical assessment, it does not automatically guarantee legal certainty (no technical safe harbor). If the proportion reaches 50% or more, an in-depth case-by-case review based on the commercial reason (Commercial-Reason Test) is required. The implications under social security law must be assessed separately.

Definition of the Term "Permanent Establishment"

In international tax law, the concept of a permanent establishment is of central importance. The existence of a permanent establishment can result in limited tax liability in the country where the permanent establishment is located and can both establish and limit Switzerland’s right to tax in relation to other countries.

In the context of international relations, the definition is generally based on Article 5 of the OECD Model Tax Convention for the Avoidance of Double Taxation (OECD Model Tax Convention) or on the relevant double taxation treaty. In the context of domestic relations, Article 51(2) of the Federal Income Tax Act (DBG) is decisive, which is largely based on the definition of “permanent establishment” in the OECD Model Tax Convention.

Requirements for a Home Office Permanent Establishment in an International Context
According to Article 5(1) of the OECD Model Tax Convention, a permanent establishment requires a fixed place of business through which the business activities of an enterprise are carried on, in whole or in part. The following aspects are particularly relevant when assessing a home office permanent establishment.

Permanent Business Premises

Business premises include spaces, facilities, or equipment available to a company for the conduct of its business activities. They do not have to be specifically designated for business purposes. Rather, what matters is their actual use. Thus, in principle, home offices, shared offices, or coworking spaces can also constitute business premises within the meaning of the definition of a permanent establishment.

Durability

Furthermore, a permanent establishment requires a certain degree of permanence. Merely occasional or temporary use of a home office is generally not sufficient. While the requirement of a fixed physical location is usually met in the case of a home office, the time component is of greater importance. The OECD Model Agreement does not specify a rigid minimum duration; in practice, however, a period of approximately six months is often used as a guideline.

Employer's Authority to Dispose of Assets

Another key factor is whether the employer has sufficient actual control over the business facility in question. This requirement is not expressly stipulated in either the OECD Model Tax Convention or Swiss law, but is generally understood to be an unwritten element of the definition of a permanent establishment. Formal legal control is not a prerequisite in this context. Rather, the decisive factor is whether, given the specific circumstances, the home office can be attributed to the employer’s business as a separate business facility.

A particularly strong argument in favor of this is when the employer requires the employee to work from home or does not provide the employee with a reasonable alternative work arrangement. Merely permitting work from home, however, is often not sufficient. Whether sufficient authority exists must be determined based on the specific circumstances of each individual case.

Skilled Work

Finally, it must be determined which functions are actually performed from the home office. According to Article 5(4) of the OECD Model Tax Convention, purely preparatory or auxiliary activities generally do not constitute a permanent establishment. In contrast, activities of significant operational or managerial importance, as well as sales functions or the regular negotiation or conclusion of contracts, may constitute a permanent establishment or a representative office.

Therefore, when assessing a work-from-home arrangement in an international context, the extent of work-from-home activity alone is not the decisive factor. The employee’s role and the specific importance of their work to the employer are equally crucial.

Key Points of Current OECD Practice

The 2025 update to the OECD Model Tax Convention provided further clarification regarding work from home. In particular, it highlights the extent of work performed from home and the business reason for working in the relevant country as additional criteria.

Working Time Test

If, over a twelve-month period, a person works less than 50% of their total working hours from their home office or a comparable location, that location shall generally not be considered a permanent establishment of the company. This is the actual change and the major simplification that the update brings in practice. Below this threshold, the presumption of a permanent establishment under the OECD Model Convention is already ruled out at this stage—according to the commentary—without the need for a comprehensive overall assessment. Nevertheless, this is not a true technical safe harbor. The OECD deliberately uses the term “generally,” meaning that in exceptional cases with special circumstances, even if the home office proportion is below 50%, other factors may justify a different assessment.

Conversely, if the 50% threshold is reached or exceeded, this does not automatically mean that a business establishment or permanent establishment exists. In this case, it must instead be determined—based on the surrounding circumstances, particularly the business reason for the activity in the relevant country—whether the home office can be attributed to the company as a business establishment. This determination is made using the “commercial reason” test described below.

Commercial Rationale Test

In addition to the extent of work performed from home, it must be determined whether there is a business reason for working in the respective country. For example, consideration must be given to whether the employee serves customers, suppliers, or other group companies there, or must be physically present for other business reasons.

Conversely, it is considered a factor against the existence of a permanent establishment if working from home is permitted solely based on the employee’s personal preferences and the company derives no independent business benefit from the activity carried out at that location. The OECD clarifies that allowing employees to work from home solely for the purpose of employee retention or to achieve cost savings for the employer does not, in and of itself, constitute a business reason. Therefore, even when a significant portion of work is performed from home, a comprehensive assessment of all relevant circumstances is always required.

Application to Existing Double Taxation Agreements

Since the update constitutes a commentary rather than an amendment to Article 5(1) of the OECD Model Tax Convention, the question arises as to what extent the new principles also apply to existing double taxation treaties concluded prior to 2025. According to the principle of static interpretation of a treaty, new commentary positions generally have only limited interpretive significance for existing treaties. It must therefore be examined on a case-by-case basis whether and to what extent the competent authorities and courts will apply the updated commentary to existing treaties.

Practice in Switzerland: Alignment with OECD Guidelines

Whether a permanent establishment is established must always be assessed based on a comprehensive evaluation of all relevant circumstances. The primary basis is domestic law (Art. 4, para. 2, and Art. 51, para. 2, of the Federal Income Tax Act (DBG)), and the OECD Model Convention is used to interpret it. There is not yet an established body of case law regarding the international context. However, the focus is on the employer’s power of direction, which is generally denied in the case of working from home, even if it is contractually agreed upon. According to statements from the tax administration (Cantonal Tax Office of Zurich), the 2025 OECD update does not change this. The new tests serve only as an aid to interpretation in atypical situations. Nevertheless, international developments should continue to be monitored.

Example of a specific case: Employer in Italy, employee in Switzerland
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Barbiero S.r.l. is a technology company based in Milan. It operates a software platform for the Italian insurance market and has neither customers nor a branch office in Switzerland.

X has been working as a product manager at Barbiero S.r.l. for five years. She is moving to Switzerland for personal reasons. Going forward, she will work from home in Switzerland four days a week and one day in Milan. Her employer does not rent any office space and does not cover the costs associated with her home office.

Does this constitute a permanent establishment of Barbiero S.r.l. in Switzerland?

Under Swiss law, the employer lacks the necessary power of control. The apartment is under X’s sole control, and working from home is based on her personal decision.

The OECD Model Tax Convention 2025 does not change this conclusion. With approximately 80% of work done remotely, X does indeed exceed the 50% threshold. However, there is no business justification: Barbiero S.r.l. does not operate in the Swiss market, and the desire to retain an employee is not sufficient grounds for this.

Consequently, despite the fact that X works from home 80% of the time, his activities do not constitute a permanent establishment of Barbiero S.r.l. in Switzerland.

Tax Consequences and Social Security Implications

Establishing a home office as a permanent establishment can have tax implications for both the employer and the employee working from home. For the company, a permanent establishment in the relevant country may, in particular, result in limited tax liability with respect to the corporate profits attributable to it. For the employee as well, working from home may trigger tax liability in the country where the work is performed. The specific tax consequences in each case are determined by the domestic laws of the countries involved and the applicable provisions of the respective double taxation treaty.

Furthermore, the social security law aspect must be considered separately, as distinct rules and thresholds apply to determining social security coverage that differ from those used for tax purposes.

Conclusion
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The growing prevalence of working from home raises new questions for international tax law. However, working from one’s private residence does not automatically constitute a permanent establishment for the employer. Rather, a comprehensive assessment of the specific circumstances is decisive.

The requirements for a qualified activity and the employer’s authority to direct and control result in a very restrictive application of the home office permanent establishment concept. The 2025 update to the OECD Model Convention further restricts the presumption of a home office permanent establishment when the proportion of work performed from home is less than 50 percent. However, reaching or exceeding this threshold does not automatically result in the creation of a permanent establishment. In such cases, the decisive factor is, in particular, whether there is a business reason for carrying out the work in the relevant country.

Companies are therefore advised to assess cross-border work-from-home arrangements early on and to document the actual workdays as well as the general conditions under which the work is performed. In addition to the permanent establishment risk and the associated tax consequences, the implications under social security law must also be taken into account.