Employees working from a home office in a foreign country? Have you considered the potential permanent establishment (PE) implications for the company in that country?
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:
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.
There are various forms of PEs:
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.
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.
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).
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:
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.
A specialist in global mobility and international tax services is well positioned to assist with:
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.
Common tax deductions for remote workers (especially the self-employed) include:
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).
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.
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.
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.
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.
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.
This is where complexity escalates significantly.
Working remotely from another country can trigger:
Tax treaties between countries can mitigate — but not eliminate — these risks.
Always seek advice before committing to a long-term cross-border arrangement.
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.
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.
Remote work creates a matrix of potential tax issues:
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.
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:
When in doubt, take advice before — not after — relocating or agreeing to a remote arrangement abroad.
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