Will WFH give rise to a Permanent Establishment?
By: Atty. Euney Marie J. Mata-Perez on November 5, 2026
WILL an employee working from home (WFH) in another jurisdiction give rise to a permanent establishment (PE)?
The PE concept has long served as a fundamental basis in determining a State’s right to tax the business profits of a foreign enterprise. Generally, under existing income tax treaties, a State cannot tax the profits of a foreign enterprise unless such profits are attributable to a PE of the foreign enterprise situated in that State.
Traditionally, a PE has been premised on the presence of a fixed place of business through which the business of an enterprise is wholly or partly conducted or carried, creating a taxable presence in a foreign country. Classic examples would include a branch, an office or a factory. A PE shall also be deemed to arise in a building site, construction, assembly or installation project that exceeds a specific duration threshold (typically 12 months) or if a dependent agent is appointed.
However, with the rapid evolution with the way business is conducted globally, the increasing mobility of the workforce, the global trend of WFH arrangements and the expansion of commercial activities across national borders, determining when an enterprise may be considered to have a taxable presence in another jurisdiction has become increasingly complex.
Recognizing these emerging challenges, the Organization for Economic Co-operation and Development (OECD), through the 2025 Update to the OECD Model Tax Convention on Income and on Capital approved by the OECD Council on Nov. 18, 2025, introduced significant amendments and additional Commentary to provide guidance on the interpretation and application of the PE rules in light of the evolving business practices and modern working arrangements.
The OECD Commentary introduced basically two measures, namely, a quantitative measure and a commercial reason measure.
For the quantitative measure, the OECD Commentary introduced the 50-percent total working-time benchmark. It means that generally, a home or other relevant place where an individual conducts his work would not be considered a place of business of an enterprise if the individual works from that home or other relevant place for less than 50 percent of his total working time for that enterprise over the 12-month period.
For the commercial reason measure, the OECD Commentary clarifies that, for an individual’s home or other relevant place to constitute a PE, it must first qualify as a place of business of the enterprise, determined based on the facts and circumstances of each case.
In this regard, a prominent consideration is whether there is a commercial reason for the activities undertaken by the individual in the place where his home or other relevant place is located. Such commercial reasons will be considered to exist where the individual’s physical presence in the jurisdiction where his home is situated facilitates the conduct of the foreign enterprise’s business. An example of this is where an individual directly engages with customers, suppliers, associated enterprises or other persons on behalf of the foreign enterprise, and such engagement is facilitated by the individual in his home or other relevant place. Meetings between the individual and customers of the enterprise, cultivation of a new customer base, identification of business opportunities are also cited as examples of business activities that may give rise to a commercial reason.
Conversely, a commercial reason will generally not be considered to exist where the individual’s engagement with persons in the jurisdiction where his home or other relevant place is situated is merely intermittent or incidental. This may be the case, for example, where an individual only makes short occasional visits to the premises of a customer or where the individual’s engagement with a customer is minor in the context of the overall business of the foreign enterprise. In such circumstances, the individual’s physical presence in that jurisdiction would not, in itself, establish a commercial reason.
The OECD Commentary further clarifies that certain circumstances, taken in isolation, should not automatically give rise to a conclusion on the existence of a commercial reason. These include the fact that the individual’s home or other relevant place is located in a different time zone from that of the state in which the foreign enterprise is located, as well as the mere presence of the enterprise’s customers, suppliers or associated enterprises in the jurisdiction where the individual works. Accordingly, the determination of whether a commercial reason exists requires an evaluation of the business of the enterprise and how the specific activities of the individual relate to that business.
In any case, the above shows that the interpretation of the PE concept has also evolved. It has clearly departed from the traditional concept of a physical office through which business is conducted to consider commercial activities which may arise in WFH arrangements. Thus, enterprises can no longer rely on the traditional view and should, thus, examine if a PE is deemed to arise as a result of the WFH arrangements of its employees.
Euney Marie J. Mata-Perez is a CPA-Lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal and is the Vice Chair of the Tax Committee of the Management Association of the Philippines. She acknowledges the contribution Atty. Mary Grace S. Tejada in this article. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com.
The article was published at the More to Follow Column at The Manila Times on November 5, 2026. Please see this link.