Remote work abroad: appealing flexibility or hidden tax risk?

When the first signs of spring appear—longer days and hints of returning warmth, the idea of relocating the “office” to a place where the season feels a little further along can become especially tempting. For employees, whose roles allow it, working remotely abroad has become increasingly accessible, and many employers now include it in their benefits package to retain talent and support employee well-being and work–life balance.

However, before employees book their flights and pack suitcases, companies should recognise that this seemingly personal lifestyle choice can give rise to unexpected tax consequences - not quite the souvenir anyone intends to bring home. Considering the above, this article explores the OECD´s updated commentaries to the Model Tax Convention (MTC) on remote work with a particular focus on the associated permanent establishment risk.

Why could working abroad be a problem?

Tax authorities around the world pay close attention to when foreign companies may be considered as operating within their borders. In some situations, an employee working from their home or temporary accommodation abroad may unintentionally create a permanent establishment (PE) — a fixed place of business for the employer in the other country. A PE may arise if the employee’s work location abroad becomes a fixed place of business of the company. Once a PE exists, the company may face additional registration, extra reporting, profit allocation and potential corporate tax obligations in the other country. 

What changed in the commentaries to the OECD Model Tax Convention?

In November 2025, the Organisation for Economic Co-operation and Development (OECD) issued updated commentaries to the MTC to better reflect today’s flexible working patterns. A key change is that the older concept of whether a home office was “at the disposal of the enterprise” no longer drives the PE analysis for remote-work scenarios. Instead, the updated guidance uses a practical two‑step test to determine whether remote work from abroad could create a PE.

The first step is the working‑time test, which examines how much time an employee spends working from another country. If the employee works there for less than 50% of their total working time in any twelve‑month period, that location is generally not viewed as a place where the company conducts business, and therefore does not give rise to a PE.

If the 50% threshold is exceeded, the business-purpose test, which examines the reasons the employee is staying abroad, is applied. In that regard, the OECD’s 2025 update frames a straightforward question: Is the employee abroad for personal reasons, or does their presence in the foreign country facilitate the company’s business?

When the arrangement is driven purely by personal motives—such as better weather/sun-seeking, family considerations, or lifestyle —the employee´s presence generally does not support the company’s commercial activities, and no PE risk arises. Importantly, the assessment must focus on the employee’s actual working pattern rather than what is stated in contract or company policies.

PE risk becomes more relevant when the employee’s presence abroad serves a genuine commercial purpose, such as meeting customers, providing services that require physical presence or identifying business opportunities. Conversely, no commercial purpose exists where business engagement is incidental, the arrangement aims mainly to retain the employee, or to reduce business costs.

Only when the employee’s presence abroad provides real value for the business and the location is used with sufficient regularity and continuity might it become a place of business for the employer in the other country. The exception for activities of preparatory or auxiliary character outlined in paragraph 4 of Article 5 of the OECD Model, continue to apply also under cross-border remote work scenarios.

What about remote‑working board members and senior leaders?

While the two‑step test works well for employees, additional layer of caution is needed when key decision‑makers — founders, executives, or board members — work remotely from abroad. Especially considering that according to the “PwC Global Workforce Hopes & Fears Survey” presented during January 20^th 2026 OECD public consultation meeting: global mobility of individuals, senior executives are the most likely to work fully remote and to have crossed borders.

These senior leaders often carry out strategic or high-value business decisions that are more likely to create a PE. However, the OECD’s updated commentaries do not clearly address how remote work by such individuals should be treated, despite the increased PE risk associated with their strategic decision‑making.

The OECD's updated commentaries however emphasise that when someone is the primary person conducting the business, e.g. sole owner, their home office abroad may more easily be considered a place of business.

Given the higher risk and limited guidance, companies should assess these situations carefully and where necessary, seek tailored tax advice from professional advisors.

Practical steps for companies

The OECD's updated commentaries to the MTC on remote-work provide a common framework by introducing a structured test for remote-work scenarios. According to the OECD, the updated commentaries apply from November 19^th, 2025, to all existing treaty provisions that are based on Article 5(1) of the OECD Model. At present, neither the Ministry of Finance nor the Estonian Tax and Customs Board has issued any guidance on the application of the OECD updates.

Nonetheless, in a regulatory landscape that continues to evolve, companies should take practical steps to manage potential tax exposure, including:

• Monitoring the percentage of working time employees’ actually work abroad on a rolling 12-month basis;
• Documenting whether remote work is driven by personal choice or business needs;
• Aligning employment agreements and internal policies with actual working practices as reality—not paperwork—drives tax outcomes.