Decoding Home-Office PE: OECD’s 2025 Framework and India’s Reservations

Since the onset of COVID-19, remote working arrangements have expanded rapidly, leading to widespread acceptance of work-from-home models. While this shift has resulted in several operational advantages, the simultaneous restrictions on cross-border travel have compelled many Multi-National Corporations (‘MNCs’) to reassess their workplace strategies and transition from traditional physical setups to predominantly virtual modes of functioning.

With the rise of remote working arrangements across organizations, it becomes pertinent to determine whether such arrangements by employees in India would result in the creation of a Permanent Establishment (‘PE’) of the MNCs in the Indian soil. The article maps what has been laid down by the Organization of Economic Cooperation and Development (‘OECD’) and India’s position and the distinction between the two in determination of a PE in context of remote working arrangements. 

Evolution of Home-Office PE

With regard to home-office PE, in the past, OECD in their Commentary to the Model Tax Convention on Income and Capital, 2017 (‘Convention’) laid down a largely subjective test to determine whether a home-office constituted a fixed place PE. In Para 18, there is a discussion on whether an employee’s home would qualify as a location which is at the disposal of the enterprise. Where the carrying on of business activities at the home of an individual are intermittent or incidental then the home will not be considered as a location which is at the disposal of the enterprise. Whereas, when the home office is used on a continuous basis for carrying on business activities for an enterprise and it is clear from the facts and circumstances that the enterprise has required the individual to use the location to carry on its business (i.e. by not providing an office to an employee in circumstances where the nature of the employment clearly requires an office), then such home office may be considered to be at the disposal of the enterprise.[1]

This position continued until the OECD’s 2025 Update, which introduced clear and objective criteria. Firstly, a time‑based test wherein an individual is required to work from home for more than 50% of his total working time over a 12‑month period. Secondly, a commercial reason test from the perspective of the employer requiring a reason for activities being undertaken from the employee’s home. These include collaboration with other businesses; cultivation of a new customer base, or identification of business opportunities; etc. However, if the individual is opting to work from home or is being made to work from home to reduce costs, the same will not amount to a commercial reason.[2] This objectivity provides greater leeway for MNCs to allow the option of cross border work from home especially for employees working in a country away from their families. Essentially, scenarios that were previously scrutinized more strictly due to potential fixed place PE exposure find some respite now.

At this juncture, it is also worthwhile to note that in the past, international practice has also showed that much weightage was given to commercial reason test put forth in the 2025 Update despite the earlier Updates being silent on it. The Danish Tax Board, in the Aska GmbH, held that a German employer had a PE in Denmark because its Scandinavian sales manager was contractually required to work from his home office there. Although most of his duties involved travelling to meet clients, the Board ruled that his regular administrative work from home—without reimbursement—constituted a fixed place PE. It was considered irrelevant whether the home office was owned, rented, or formally provided by the employer; what mattered was that the foreign company’s business was carried out there effectively, habitually, and beyond merely preparatory activities. The decision stressed that recurring, not sporadic, work from the home office is required to create a PE. In another instance, in a private advice given in March 2024 by the Australian Taxation Office, a home-office used by the CEO in Australia was held not to be a PE for the non-resident entity of which he was an employee despite key management decisions being undertaken from a fixed place of business. The reason being two fold – 1) the home was not ‘at the disposal’ of the entity and that there was no commercial interest for the said entity in Australia i.e., the entity did not have any clients/customers.[3] The private advice relied on previous ATO decisions and international case laws wherein due weightage was given to the commercial reason test. 

India’s position 

Interestingly enough, India has made a reservation against application of the above objective criteria. This can indeed affect Indians working abroad who in certain instances might be undertaking core functions for the foreign MNCs from India. The same may trigger a fixed place PE as India considers a home-office to be at the disposal of the foreign enterprise.[4]

Judicial precedents in India also indicate similarities to the international practice discussed above. For instance, in Carpi Tech[5], a director’s residence was treated as a PE as key business correspondence and project activities were routed through such director. Additionally, in Sutron Corporation[6], a country manager’s residence was held to constitute a PE as he was using the said premises to undertake the activity of collecting market information, notice inviting tenders by various institutions and Government departments relating to non-resident company’s products and services, supply such information to the company, submit bid proposal to the respective customers prepared by the company and execute contracts for the enterprise and perform other tasks as authorized by the company. 

While India has reserved the 2025 Update, it continues to adopt the commercial reason test to evaluate the PE implications.

Effect of India’s position

The larger question which still remains is – what would be the fate of those scenarios where the commercial reason test gets satisfied but the time based test fails? While countries which have in principle agreed to the changes brought about by OECD may deny the existence of a PE, it is quite possible that India can take a contrary position given their express reservation. This can result in potential double taxation for the non-resident enterprise. 

In situations of double taxation, a person is entitled to relief of credit of the taxes paid in the source country in their resident jurisdiction if the source country has taxed the income in accordance with the DTAA. However, if such double taxation arises merely due to different interpretations of the DTAA by the two countries or application of different DTAA provisions to the same income, there is a possibility that the resident jurisdiction may deny the relief.[7]

Further, should India’s reservation be construed so strictly that the Courts should ignore the time based test while evaluating the home office PE? The Hon’ble Tribunal in the undernoted[8] case, in the context of determining the residential status of fiscally transparent entities, observed that since India has rejected the OECD’s remedial commentary changes, the interpretation that originally caused those unintended consequences must also be discarded. Otherwise, the Tribunal held, India’s reservation would result in absurd and unintended outcomes.

Conclusion

India’s refusal to adopt the OECD’s objective time based test means that remote work from India may still trigger a PE even where other jurisdictions would not, thereby heightening the possibility of double taxation and interpretational conflict under DTAAs. As remote work becomes permanent, this divergence underscores the need for careful planning and, potentially, future policy recalibration.

[The authors are Associate Director and Associate, respectively, in Direct Tax practice at Lakshmikumaran & Sridharan Attorneys, Chennai]

[1] Commentary on Article 5, Paragraph 55, Model Tax Convention on Income and on Capital 2017 (dated 25 April 2017).

[2] Commentary on Article 5, Paragraphs 44.1-44.21, The 2025 Update to the OECD Model Tax Convention (dated 19 November 2025).

[3] Private Advice Authorization Number: 1052235761896 dated 27 March 2024, as available here.

[4] Position on Article 5, Paragraph 55, The 2025 Update to the OECD Model Tax Convention (dated 19 November 2025).

[5] Carpi Tech SA v. ADIT (International Taxation), ITA No. 1742/Mds/2011 dated 24 August 2016 (Chennai-Trib.) 

[6] In Re: Sutron Corporation, [2004] 268 ITR 156 (AAR). 

[7] Commentary on Article 23A and 23B, Paragraph 32.3 and 32.5, Model Tax Convention on Income and on Capital 2017 (dated 25 April 2017).

[8] Linklaters LLP v. ITO, [2010] 40 SOT 51 (MUM.)