Cross-border remote work and international taxation: the OECD updates its Model Tax Convention

On November 18, 2025, the OECD Council approved an update to its Model Tax Convention (MTC) and the Commentaries, aimed at adapting international tax rules to the remote work era and clarifying various technical issues. This is the first significant revision of the Model Convention since 2017 and was prompted by the rise of cross-border remote work and the need to bring greater certainty to tax authorities and taxpayers alike. The key components of this "update" and its practical impact are summarized below.

1. Remote work and the risk of "micro-permanent establishments"
           
   The cornerstone of the update is a clarification of the criteria to be considered for an employee's domicile in another country to be classed (or not) as a permanent establishment (PE) of the company. Although the wording of article 5 of the Model Convention has not been updated, its Commentary has been reorganized and expanded to include a new framework applicable to remote work. These amendments relate exclusively, in all cases, to the fixed place of business test in article 5, without changing the rules and commentaries on dependent agents.
             
   As a general principle, it is established that working from a domicile abroad does not automatically create a PE, although this conclusion will depend on a case-by-case analysis. However, the OECD now establishes two specific guidelines:

   1. Time threshold. If the employee works remotely for less than 50% of their total working time in any 12-month period, it is presumed that there is no fixed "place of business" for the employer at that domicile. The aim of this threshold is to provide legal certainty and prevent the proliferation of "micro-PEs" due to sporadic remote working.
   2. "Commercial reason" for presence. If the employee goes over the 50% threshold, their physical presence in the state where they are domiciled must be due to a real commercial reason in order for a PE to be considered to exist. Therefore, there will be no PE where remote work in another state is sporadic or incidental in terms of business activity.

   The OECD includes five illustrative examples covering typical scenarios (short stays, recurring work below 50%, cases involving frequent interaction with clients, among others), to help define when a PE exists and when it does not.

2. Other major changes

Enhancements have been made to several provisions to reflect recent technical consensus and strengthen consistency in application of the conventions:

• An alternative clause has been added in the Commentary to article 5 for states wishing to tax natural resource exploration and exploitation activities more easily.
• Article 9 ("associated enterprises") and its comments have been adjusted to clarify its scope and application. It is emphasized that the profits of associated enterprises should only be adjusted where their transactions are not under arm's length conditions, and that the deduction of expenses (interest, and so on) remains a matter for each country's domestic law, although subject to the non-discrimination clause in the event of diverging treatment.
• The commentaries to articles 7 ("business profits"), 9, and 24 ("non-discrimination") have been aligned with recent OECD guidance (e.g., on financial transactions or on the Amount B framework for simplifying transfer pricing), ensuring consistency with dispute resolution mechanisms.
• Lastly, article 25 ("mutual agreement procedure") incorporates a new paragraph 6 to avoid overlaps between tax treaties and other international agreements. Furthermore, the comments on article 26 ("exchange of information") have been updated to expand and clarify the use of exchanged tax information.

c. Reservations made by Spain

Several reservations have been added to this update. In particular, Spain reserves (i) the right not to include in its agreements paragraph 3 of article 1 of the Model Convention (a provision designed to ensure that the agreement does not restrict certain internal taxing powers over residents, except in relation to specific benefits of the convention itself) and (ii) the power to amend article 1(2) to specify in which cases it recognizes the tax transparency of entities incorporated in third countries. Lastly, (iii) it has also made a reservation to article 2(1), to ensure that agreements signed by Spain do not cover local or regional taxes.