The OECD's New 50% Rule: When a Remote Hire Creates Permanent Establishment (2026 Guide)

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In November 2025 the OECD updated the commentary to its Model Tax Convention, the document most countries lean on when they interpret tax treaties. Buried in that update is something the old rules never had: an actual number for when a remote employee's home office starts to count as a taxable presence for their employer. The threshold is 50% of the person's working time, and the fine print around it decides whether your hire in Portugal stays a payroll line or becomes a corporate tax registration you didn't know you owed.

This guide explains the new rule in plain English: what permanent establishment is, what changed in November 2025, where the traps sit for small remote companies, and what the sensible fix looks like.

What is permanent establishment, in plain English?

Permanent establishment (usually shortened to PE) is the point at which a foreign tax authority decides your company has enough presence in its country to owe corporate tax there. That means registering locally, filing local returns, and paying tax on the profits connected to that presence. The concept comes from Article 5 of the OECD Model Tax Convention, and most bilateral tax treaties copy it more or less word for word.

Nobody applies for PE status. A tax authority asserts it, usually after something routine tips them off, like your worker's own tax filing or a labour dispute. By then the assessment can reach back over the entire period the arrangement existed, with penalties and interest added on top of the back taxes.

Two versions of PE matter if you employ people abroad. A "fixed place of business" PE is a location your business operates through with some permanence, and a home office can qualify. A "dependent agent" PE is a person in the country who habitually concludes contracts on your behalf, or plays the main role in getting them agreed.

What the new 50% rule actually says

The OECD's November 2025 guidance draws a line that did not exist before. A home office is generally not treated as a place of business of the employer if the employee works there for less than 50% of their total working time in any twelve-month period.

Three details in that sentence deserve attention.

First, the window is any twelve months, not a calendar year. An employee who gradually shifts to working from home can cross the line mid-year without anyone making a decision.

Second, crossing 50% does not automatically create a PE. It moves you into a deeper set of questions about why the work happens in that country, covered below.

Third, and easiest to miss: staying under 50% does not always protect you. The guidance says that where the person is the only or main person delivering the company's services, the time-based exclusions may not apply at all. For a solo founder whose first overseas hire effectively is the delivery team, this carve-out matters more than the headline number.

Tax advisers are also warning against reading 50% as a bright line. KPMG's analysis concludes the threshold "is rarely expected to be treated as a binding safe harbour" and will mostly serve as a reference point inside a broader look at the facts.

The commercial-reason test, and why remote-first companies fail it

Once someone works from home abroad more than half the time, the deciding question becomes whether the company has a commercial reason for the work happening in that country.

The guidance lists reasons that count: the employee is near customers or suppliers there, covers a time zone your customers need, or does on-site work such as training or repairs. It also names a reason that does not count, and it happens to be the reason most remote arrangements exist. Letting someone work from home purely to keep them on staff is not a commercial reason. Neither is saving money on office space.

That distinction lands hard on small remote companies. "We hired her in Portugal because she is excellent and did not want to relocate" feels like a perk. Under the new rules it reads as the company choosing to operate through her home, with no business purpose tied to Portugal itself. The friendlier your remote policy, the weaker your defence.

Three worked examples from the guidance

The OECD included examples, summarised by KPMG here, and they map neatly onto hires small companies actually make.

In one, an employee works about 80% from home abroad and regularly visits local customers. That created a PE. It describes any first salesperson you place in a new market.

In another, an employee works 60% from home, over the threshold, but only has sporadic customer contact in that country. No PE. The lack of a local commercial anchor saved it.

In a third, an employee works almost entirely from home delivering services to clients in other time zones. PE created. That one should worry small agencies, because it describes the classic offshore developer or designer serving your client base.

None of these examples involve an office, a subsidiary or a big team. One person in the wrong structure is enough.

The older trap: who closes your deals

The 2025 update focused on home offices. The dependent-agent rules, the ones that catch a hire who closes contracts, are unchanged and remain the fastest route to a PE. If your overseas hire negotiates pricing and deals are effectively agreed by them, the fact that your e-signature happens at head office will not help you, because tax authorities look at what actually happens rather than what the paperwork says. This sits under Article 5(5) of the model convention, the clause dealing with sales agents, and the OECD has said more guidance on agents is still to come.

A five-question self-check

1. Does anyone abroad spend more than half their working time, measured over any twelve months, working for you from home?
2. If yes, is there a genuine business reason for the work happening in that country, beyond keeping the person happy or saving money?
3. Is anyone abroad the only or main person delivering what you sell?
4. Does anyone abroad negotiate or effectively close your contracts?
5. Has the arrangement lasted six months or more, doing core work rather than support tasks like admin or research?

One yes on questions 2 to 5 means you are relying on treaty details you probably have not read. Two or more means the structure needs fixing before a tax authority looks at it for you. Bear in mind that countries are not obliged to adopt the new commentary uniformly, and local practice already varies between countries.

The fix: stop being the employer in that country

The structural answer to employment-based PE risk is simple to state. Your company does not employ the person in that country. A local legal employer does, on your behalf. That arrangement is called an Employer of Record, or EOR.

The EOR is the legal employer where your hire lives. It issues a compliant local contract, runs payroll, files the local taxes and carries the employment-law obligations, while the person works for you day to day exactly as before. Your company is no longer the one operating through that home office, which removes the employment leg of the PE question.

This is the core of what Deel does, and a few specifics are relevant to the PE problem. Deel's EOR covers 150+ countries, backed by roughly 250 legal entities that Deel itself owns and operates rather than a chain of subcontracted local partners. It also handles conversion from contractor to employee, which matters because the riskiest person under the new rules is usually the long-tenured "contractor" doing core delivery. Converting them fixes misclassification exposure and the employment side of PE in one step. On cost, Deel's published EOR price is $599 per employee per month, with contractor management at $49 per contractor per month. Compare that with what a PE assertion costs: local counsel, accountants, back-filed returns, penalties, interest, and months of your attention.

One honest caveat. An EOR resolves the employment side of PE risk, not every side. If your person abroad habitually closes your deals, the dependent-agent argument exists regardless of who legally employs them. The practical playbook for a small company: use an EOR for the employment structure, keep genuine contract acceptance with the home company, and pay for an hour of specialist advice for any hire whose job is closing deals in their country.

Frequently asked questions

Does one remote employee create a permanent establishment?
One employee can be enough, but usually is not by default. Risk rises when they work from home there more than half the time without a business reason tied to that country, when they are the main person delivering your services, or when they close contracts on your behalf.

Is the OECD's 50% threshold a safe harbour?
Not reliably. Advisers including KPMG expect it to work as a reference point inside a wider factual assessment, and individual countries can take stricter positions. Under 50% with a key-person situation can still create exposure.

Does using an EOR remove permanent establishment risk?
It removes the employment-based route to PE, because a local entity becomes the legal employer. It does not cover the dependent-agent route, so sales roles that conclude contracts in-country still need separate care.

Where this leaves you

There is now a number, a test and a written-down trap where before there was only vague risk. That cuts both ways. Structured properly, your first international hires are safer than they have ever been, because you can point at the rule you satisfy. Structured casually, the same rule is what a foreign tax office will quote back at you.

See how Deel's Employer of Record handles compliant hiring in 150+ countries: open a free account and price your specific country. If you are weighing contractor versus employee first, my Deel pricing guide breaks down the $49, $325 and $599 tiers line by line.

Related reading: The Philippines misclassification trap · Deel vs Rippling 2026 · The AI hiring stack in 2026

Sources: OECD Model Tax Convention, Article 5; OECD guidance on remote work and permanent establishment, November 2025, as analysed by KPMG and Vialto Partners. This article is general information, not tax advice. For a specific situation, speak to a cross-border tax adviser.