Employees Working From Home Office Remotely Overseas: Permanent Establishment (PE) Implications for Employers
The COVID-19 pandemic accelerated what was already a growing trend as a result of the digitalisation of the economy: remote working.
Many employees, whether as a result of being “stuck” in a country due to travel restriction or because of their employers wanted to offer a modern working environment which allowed their staff to have a better work-life balance, opted to operate from home offices across international borders.
Some employees even took this as an opportunity to be closer to their loved ones or perhaps to explore living in a country they had always dreamed of living in to learn the language, explore the culture, food and so forth.
Seizing on the opportunity to attract talents, reverse the trend of small towns decreasing in population and stimulate local economies, some countries even started offering various incentives such as:
- 1 EUR homes
- Digital Nomad visas
- Huge tax breaks of up to 90% of taxable earnings if relocating to specific regions within a country
- No tax in Dubai for foreigners and expats (though this is not entirely correct)
While offering the kind of work flexibility the previous generations of workers could only dream of, these arrangements (many of which have, if not formally, de facto transitioned to be on a permanent basis) raise complex tax issues for both individual employees and their employers.
We have already touched upon, at a high level, some of the main considerations for both employer and employees engaged in cross-border working arrangements in considerations for both employer and employees engaged in cross-border working arrangements in this previous article.
Today we are going to dive deeper into one particular aspect which is sometimes overlooked but that could have significant unintended repercussions particularly on the employer: permanent establishment (PEs) risks.
What is a Permanent Establishment (PE)?
There are various forms of PEs:
- Fixed Place of Business (FPB) PE: essentially whether there is: 1) a fixed base 2) at the disposal of the a foreign business and 3) the foreign company’s business is being carried on in that fixed base.
- Dependant Agent PE (including Commissionaires arrangements whereby a PE exist even though the agent does not conclude contracts in the name of the foreign enterprise)
- Construction PE: in general, applicable to construction projects abroad lasting more than 6 months at least.
- Service PE: where for instance a Company from Country X sells chemical products to customers in Country Y without creating a PE but then sends, for more than 6 months, its own employees to Country Y to advise customers on how to apply the chemicals to their products.
The common denominator being that the PE concept is crucial in determining a company’s tax liability in a particular country.
If a PE exists, the company may be subject to corporate income tax in that jurisdiction.
Cross Border Home Office PE Risks: a Case Study
Let us delve into a scenario which is becoming more and more commonplace for the reasons already mentioned in the introductory part of this article above.
An employee who agrees with his employer:
– to work indefinitely from a country in which the employer has no business presence;
– from a home office (which could be as basic as a desk in a bedroom at his/her parents home) that the employee has set up in that country;
Let us also assume that the employer has agreed to the arrangement as an incentive for the employee to remain with the company since he/she is a brilliant, creative professional who has invaluable marketing skills for the business but otherwise the company has no requirement whatsoever for the employee to be working from his chosen country.
Tax Treaties Interpretation for Cross-Border Working From Home Arrangements
In a scenario like the one described above, companies must consider both domestic laws and applicable tax treaties when assessing PE risks.
Tax treaties in particular, which more often than not prevail over domestic laws, provide tiebreaker rules and clarifications to address situations where an employee’s home office could create a FPB PE in another country.
These rules can be complex and may require case-by-case analysis, however for our example, let us also assume the two countries in question have a bilateral tax treaty in place which is based on the OECD Model Tax Convention (MTC) on Income and on Capital.
The Commentaries to the applicable OECD MTC Article 15 for the above scenario, covers various examples of home office arrangements.
Of particular relevance to our case study is paragraph 18 of the Commentary to Article 15 which reads:
Even though part of the business of an enterprise may be carried on at a location such as an individual’s home office, that should not lead to the automatic conclusion that that location is at the disposal of that enterprise simply because that location is used by an individual (e.g. an employee) who works for the enterprise.
Whether or not a home office constitutes a location at the disposal of the enterprise will depend on the facts and circumstances of each case.
In many cases, the carrying on of business activities at the home of an individual (e.g. an employee) will be so intermittent or incidental that the home will not be considered to be a location at the disposal of the enterprise (see paragraph 12 above).
Where, however, a 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 that location to carry on the enterprise’s business (e.g. by not providing an office to an employee in circumstances where the nature of the employment clearly requires an office), the home office may be considered to be at the disposal of the enterprise.
Paragraph 19 of the Commentary to Article 15 then goes on to say that:
the activities carried on at a home office will often be merely auxiliary and will therefore fall within the exception of paragraph 4 [of Article 5 which deals with defining what a PE is and the applicable exemptions].
In our example, the arrangement:
– is clearly continuous; but
– the Company has not required the employee to use that location (the home office the employee has set up in the other country) to carry on the enterprise’s business; although
– it might be argued that by not providing an office which clearly is required for the employee to do his job, the employee had no other choice but to set up his own home office and thus it might be considered at the disposal of the Company nonetheless; however
– the work is likely to be considered auxiliary in nature as marketing is usually not considered core business activity (unless of course the Company’s core business IS selling marketing services to clients).
How to Determine if Employees Working from a Home Office in a Foreign Country may trigger a Permanent Establishment (PE)
The Netherlands and Belgium at the end of 2023 went as far as issuing official guidance to assist in determining whether employees working from a home office in their home country might trigger a permanent establishment (PE) for their employer in that home country.
Their guidance is in line with the OECD MTC Commentaries and in essence provides that:
- working from home, but the employee can also choose to work in employer’s location = No permanent establishment (PE)
- working from home, and employer factually requires the employee to work from home = possible permanent establishment (PE)
- contractually obligated to work from home and absence of office location in employer’s country = possible permanent establishment (PE)
- working from home during 50% or less of the work time in a 12-month period = No permanent establishment (PE)
- work is of a preparatory or auxiliary nature = No permanent establishment (PE)
PE Risk Mitigation Strategies When Home-Working from Abroad
To mitigate PE risks, companies should implement robust policies and tracking mechanisms for cross-border remote workers. This may include:
1. Limiting the number of days employees work from other countries.
2. Restricting revenue-generating activities from home offices abroad.
3. Maintaining detailed records of employee locations and activities.
4. Seeking expert advice on domestic laws and tax treaty provisions.
5. Considering alternative employment structures or legal entities in high-risk jurisdictions.
The tax implications of cross-border remote work are nuanced and evolving.
Similar PE risk considerations also apply to short-term international assignments, even when the employee is abroad for a limited period.
By proactively managing PE risks, companies can ensure compliance and avoid potential penalties or double taxation issues.
How may a global mobility tax services specialist help with your remote working across borders issues
A specialist in global mobility and international tax services is well positioned to assist with:
- Reviewing your current remote-work arrangements and provide advice on whether employers and their working from home from overseas locations employees should take any actions.
- Evaluating new cross-border working arrangements requests and advise on best-practices when working remotely in other countries including advice on compliance obligations and what to do next.
- Helping employers monitor closely what their employees should / should not be doing vs what they are actually doing and assist with global mobility and relocation compliance matters such as applying for A1 certificates / Certificates of Coverage or shadow payroll administration.
- Supporting clients in reducing risks and avoiding misunderstandings between employers and their cross-border remote working employees acting as a reliable, trusted third party for both in reconciling any misalignments on their mutual expectations in dealing with unexpected tax compliance consequences.
Frequently Asked Questions: Remote Work & Tax
What tax breaks and tax relief are available for working from home?
Tax breaks for working from home vary significantly by country.
In the UK, HMRC offers working from home tax relief — employees can claim a flat £6/week (or actual additional costs) against their income tax.
In the US, the home office deduction was eliminated for employees under the 2017 Tax Cuts and Jobs Act, though self-employed workers can still claim it.
Many EU countries (e.g., Germany, Netherlands) offer their own flat-rate home office allowances.
Beyond deductions, some countries actively compete for remote workers by offering significant tax incentive schemes such as the Irish SARP Relief, Portugal Non-Habitual Resident (NHR), Beckham Ruling in Spain, 30% Ruling in the Netherlands and France impats tax regime.
The Tax Foundation’s overview of digital nomad visa tax incentives is a useful starting point for comparing what’s available globally.
What tax deductions can remote workers claim for working from home?
Common tax deductions for remote workers (especially the self-employed) include:
- A home office deduction — based on the proportion of your home used exclusively for work
- Broadband and phone costs — the business-use portion
- Office equipment — desks, chairs, monitors, etc.
- Software and subscriptions used for work
Employees in many countries are more restricted than the self-employed and can typically only claim deductions if their employer does not reimburse these costs.
See the IRS guidance on home office deductions (US) or HMRC’s employment expenses page (UK).
How does tax work generally for remote and work-from-home jobs?
As a rule, you pay income tax where you are a tax resident, which is generally the country (or state) where you live and work — not where your employer is based.
Your employer is typically required (though not always) to operate a payroll (or a shadow payroll) and withhold taxes in the jurisdiction where you are physically working.
Working from home does not create a tax-free situation; it simply shifts where the tax obligation arises.
This principle applies whether you are an employee or a contractor.
If you work remotely, where do you file taxes?
You file taxes where you are tax resident, which is almost always determined by where you physically live and work — not where your employer or company is located.
If you are a US citizen or Green Card holder, you must also file a US federal return regardless of where you live (IRS Foreign Earned Income Exclusion may apply).
If you split the year between countries, you may have filing obligations in more than one jurisdiction.
Always seek local advice if you’ve moved mid-year.
If you work from home, what is tax deductible?
What is deductible depends heavily on your country and employment status.
For self-employed/freelancers, you can generally deduct the business-use proportion of: rent or mortgage interest, utilities, internet, phone, equipment, and office supplies.
For employees, deductibility is more limited — most countries only allow claims for costs not reimbursed by the employer, and the home must be used exclusively and regularly for work.
Commuting costs are generally never deductible, but a dedicated home office space may be.
Are there work-from-home tax credits (as opposed to deductions)?
Tax credits (which reduce your tax bill pound-for-pound) specifically for working from home are relatively rare.
The UK’s working from home relief is technically a deduction rather than a credit.
Some countries offer credits for dependent care or childcare costs that become relevant when working from home, and certain jurisdictions have offered temporary pandemic-era credits.
If you’re looking for country-specific credits, check with your national tax authority — for example, Canada’s CRA home office expenses page.
If you work remotely in another state, how do taxes work — do you pay taxes in two states?
Yes, potentially. In the US, state income tax is generally owed where you physically perform your work.
If you live in State A but work remotely for a company in State B, you typically owe income tax in State A (your residence).
However, some states apply a “convenience of the employer” rule (notably New York) — meaning if you work from home for your own convenience rather than employer necessity, the state where your employer is based may also tax you, creating a risk of double state taxation.
You may be able to offset this via a credit for taxes paid to another state, but it is not always a perfect offset.
The Tax Foundation’s State Reforms for Mobility and Modernization project tracks how individual states are responding to exactly these issues.
What are the tax implications of working remotely from another country?
This is where complexity escalates significantly.
Working remotely from another country can trigger:
- Personal income tax obligations in the country where you are physically working (once you exceed a certain presence threshold — often 183 days, but sometimes less)
- Social security obligations — you may become liable for contributions in the host country (unless A1 Certificates or Certificates of Coverage are issued to you)
- Permanent Establishment (PE) risk for your employer — your home office abroad could inadvertently create a taxable presence for your company in that country (see the main article above for a detailed analysis)
Tax treaties between countries can mitigate — but not eliminate — these risks.
Always seek advice before committing to a long-term cross-border arrangement.
What are the tax implications for the employer when an employee works remotely from abroad?
Beyond the employee’s personal tax position, employers face their own risks.
The most significant is Permanent Establishment (PE) exposure: if an employee’s home office in a foreign country is deemed to be “at the disposal” of the employer, the company may become liable for corporate income tax in that country.
This depends on factors such as whether the employer required the employee to work from that location, whether the work is core or auxiliary, and the terms of any applicable tax treaty.
PE risk is often underestimated — read the full analysis in our article on PE risks for cross-border remote workers.
Where do remote workers pay taxes — in the employer’s country or the employee’s country?
Employees are taxed where they physically perform their work, not where their employer is headquartered.
So a UK-based employee whose employer is in the US will generally pay income tax in the UK, not the US.
However, your nationality can add another layer — US citizens owe US taxes on worldwide income regardless of where they live.
The employer’s country also matters for payroll withholding obligations, and there may be a disconnect between where payroll is run and where taxes are legally due — a situation often managed via shadow payroll.
The Tax Foundation’s research on how remote work affects personal income tax revenue flows between countries illustrates why this question is increasingly important for tax authorities globally.
What are the broader tax implications of remote working arrangements — for both employer and employee?
Remote work creates a matrix of potential tax issues:
- For employees: income tax residency, double taxation risk, loss of home-country social security entitlements, and reduced access to certain deductions
- For employers: payroll compliance in new jurisdictions, PE risk, corporate tax exposure, and HR/legal obligations (employment law, benefits)
These issues compound when the arrangement is cross-border.
The OECD’s report on implications of remote working adoption on place-based policies provides a useful policy framework, though domestic rules vary widely.
How do taxes work for remote jobs overall — what’s the bottom line?
The fundamental rule is: you owe tax where you are, not where your employer is.
The complexity arises when “where you are” changes — across state lines, across borders, or across tax years.
Key principles to keep in mind:
- Domestic remote work (same country as employer): generally straightforward; standard payroll applies
- Interstate remote work (different US state): state tax rules differ; risk of double taxation in “convenience” states
- International remote work: triggers personal income tax, potential social security obligations, and employer PE risk in the host country
When in doubt, take advice before — not after — relocating or agreeing to a remote arrangement abroad.
