On 18 November 2025, the OECD Council adopted significant updates to the OECD Model Tax Convention (Model Convention and 2025 Update respectively), reflecting evolving international tax practices and addressing new challenges in cross-border business.
As the first update since 2017, the 2025 Update is significant. It focuses on the following three areas:
- Remote working;
- Natural resource exploration and exploitation; and
- Technical amendments regarding tax dispute resolution.
These changes are designed to modernise the Model Convention and provide greater certainty for multinational enterprises and tax authorities.
This article focuses on remote work and whether the updates could help to address the permanent establishment (PE) risk for foreign employers.
Remote work and home offices: PE risk
Since the 2020 lockdown, there has been a significant increase in cross-border remote work. Many employees realised they could perform their services from a foreign jurisdiction, often from home, without being physically present in an office.
Many employers accommodate these requests to retain valuable employees. However, even when these arrangements are employee-driven, a risk remains that the employee could create a PE for the employer. While the OECD issued guidance on the PE concept in 2020, it specifically addressed the unique context of lockdown rules and was not intended for long-term application.
Nivaani Moodley 19 Aug 2024 Since then, remote working has become widespread. With the 2020 guidance no longer applicable, there has been substantial uncertainty about whether a cross-border remote working arrangement from a home office could create a PE for an employer.
When the legislature introduced the ‘digital nomad’ visa in South Africa in 2024, it did not address the primary tax concern for foreign employers: the risk that a remote worker could create a PE. This risk is substantial, as a PE requires the foreign employer to register with the South African Revenue Service (Sars) and withhold employees’ tax, and it could trigger a corporate tax liability.
What constitutes a fixed place of business
We thus welcome the fact that one of the major areas of revision in the 2025 Update is the treatment of PEs, particularly in the context of remote work. The updated Commentary on Article 5 provides detailed guidance on when an individual’s home or another ‘relevant place’ may constitute a fixed place of business for the enterprise.
Notably, if an employee works from a home or other relevant place for at least 50% of their total working time during a 12-month period, and there is a commercial reason for their presence in that jurisdiction, the location may be considered a PE. The guidance emphasises that the existence of a PE depends on the specific facts and circumstances, including the nature of the activities and the enterprise’s business needs.
This clarification is particularly relevant for businesses with cross-border remote workers, as it provides a more predictable framework for assessing PE risk in the era of flexible and hybrid work arrangements.
Commercial reason
In South Africa, many remote workers spend more than 50% of their working time in the country, making the new ‘commercial reason’ concept particularly significant when assessing PE risk for a foreign employer.
The Commentary explains that a "commercial reason for the performance of the individual’s activities related to the business of the enterprise in a Contracting State will be considered to exist where the physical presence of the individual in that State will itself facilitate the carrying on of the business of the enterprise, such as where there are people or resources in that State to which the enterprise needs access for the performance of its business activities."
The Commentary further states a "commercial reason requires a link between the individual’s presence at a home or other relevant place in that State and the carrying on of the business of the enterprise. This would not be the case where an enterprise enables an individual to work from home or another relevant place solely to obtain or retain the services of that individual."
In other words, in those instances where a remote working arrangement is wholly employee-driven, and there is no commercial reason for the employee to work in South Africa, there should not be a significant PE risk.
However, it is imperative that the facts of each case are analysed to take into account all relevant facts or circumstances. For example, should the employee be required to have meetings with clients, suppliers or other businesses in South Africa, this could constitute a commercial reason, which would increase the PE risk.
Conclusion
In conclusion, the 2025 Update is a significant step in aligning international tax standards with modern business practices. While the amended Commentary regarding PE risk in remote working scenarios is welcome, foreign employers should not simply assume that a home office could not trigger a PE. The critical question is not whether the employee works from a home office, but whether there is a commercial reason for their presence in South Africa.
Foreign employers should also still obtain advice regarding possible employment law implications and whether the foreign company may be required to register as an external company with the South African Companies and Intellectual Property Commission.
