Revisiting Permanent Establishment under the OECD’s 2025 Update: Sectoral Impact and Implications for India

[P Jaishree and Soham are students at Hidayatullah National Law University.]

The recent update to the OECD Model Tax Convention in 2025 brings timely and important refinements in the concept of permanent establishment (PE), in two critical areas. Firstly, it addresses the modern reality of remote working, which its predecessor was not equipped to deal with, and secondly, it deals with taxing the extractive industries. Although this brings much-needed clarity, but is still mired with potential to create divergence among various jurisdictions.

Thus, by way of this article, the authors aim to analyze the recent amendments to the commentary and their impact on the economy. Firstly, it analyses the recent amendments brought forth in the context of permanent establishment and extractive industries. Secondly, it delves into the sectoral impact of these amendments, which is followed by the assessment of such impacts on India. Lastly, it highlights the opportunity for India to extractive industry, which is subsequently followed by the key considerations that the Indian businesses would have to focus upon.

Permanent Establishment Revisited: A Walk Through the OECD Commentary’s Recent Revisions

The first aspect that the recent amendment to the commentary addresses is the determination of a PE, and two tests are introduced to facilitate the same.

First is the “fixed place” test, i.e., permanence. Commentary on Article 5 emphasizes that the place has to be “used with a sufficient degree of continuity.” And the use for very brief periods, as an incident or occasionally, does not constitute a fixed place, even for substantial work. For example, three months working in another country is usually too short to constitute a fixed place of business. Secondly, the "place of business" test is brought forth, which prescribes two conditions to be satisfied. The first condition is the 50% time threshold, which states that if an individual works from a location in another country for less than 50% of their working time over a period of 12 months, that place is generally not considered a place of business of the enterprise. If the stated threshold is met, it triggers a facts-cum-circumstances analysis, which is thus followed by the “commercial reason” test. The test examines whether the individual’s stay in their home country is coupled with a commercial reason, i.e., whether the employee’s stay in their home country enables the enterprise’s business, such as servicing local clients or liaising with local clients. However, merely convenience, cost saving, or time zone differences alone do not constitute a commercial reason. Several illustrations for more clarification are also provided to avoid any confusion. 

This approach moves beyond the traditional, narrower question of whether a home is simply “at the disposal” of the enterprise. Rather, it focuses on greater clarity and predictability by emphasizing continuous presence and a real local economic connection. As a result, businesses with cross-border remote workers would have to closely track the working patterns of the employees and carefully assess why they are based in a particular location, in order to effectively manage the PE risks. 

Extractive Industries - Optional Lower PE Ratio Threshold

The second aspect this amendment deals with is the extractive industries. Realizing that the activities involved in extractive operations have some degree of mobility that is rarely found elsewhere, the 2025 update introduces a new optional rule for tax treaty applications. Fundamentally, the new measure has what amounts to a time-trigger mechanism that generates a PE for “relevant activities” that involve exploration, exploitation, and auxiliary services.

The rule states that an enterprise will be said to have a PE in a source state if it carries out qualifying activities in that state for more than an agreed period in any 12 months. This is the total time aggregated for all contracts, customers, or projects in the enterprise. The provision, however, is expected to be negotiated. It enables member states to decide the time frame under which the provision shall apply, enabling them to choose whether the provision would apply to “only offshore” business or “onshore/offshore” business, as well as whether to apply the “anti-contract-splitting" rule for closely linked groups of companies.

Sectoral Impact

The software sector pioneered remote and hybrid work. It employs a high concentration of highly skilled, globally mobile knowledge workers, such as software engineers, developers, product managers, sales engineers, and support staff who can perform their duties completely digitally. For such industries, the "commercial reason" test becomes critical since the new framework directly attacks their operating model.

Professional and financial services are some of the most impacted, since consulting, advisory, and fintech jobs are now more dependent on cross-border and hybrid remote work arrangements, where high time utilization and definite commercial purpose easily mandate PE risk exposure.

As an illustration, where a foreign company’s employee relocates to another jurisdiction and performs most of his work from a home office, particularly where his physical presence enables real-time or near-real-time interaction with key clients in the same or a nearby time zone, the arrangement is likely to create a permanent establishment, as the location directly supports business delivery. By contrast, if the employee works remotely on a global product with no direct link to the local market and is present in that jurisdiction for personal or lifestyle reasons, the risk of a permanent establishment is significantly lower due to the absence of a commercial justification tied to that location, although proving this position to tax authorities may involve considerable compliance effort. More broadly, as companies increasingly offer “work-from-anywhere” arrangements to attract talent, they must balance workforce flexibility against potential tax and regulatory risks, which may necessitate changes in employment structures, greater reliance on local entities or employer-of-record models, or stricter controls over employee location and working time.

The extractive industries, on the other hand, could experience a prominent and different level of impact, since the optional treaty modification can drastically reduce PE thresholds in countries choosing to implement it, thus bringing short-term activities under tax liability and boosting compliance and oversight obligations. Along with that, all industries dependent on global remote workers now face a growing challenge, due to the increased PE risk, which rather correlates with their global, mobile, and technology-enabled nature.

However, the adoption of this provision in treaties will trigger a dramatic extension of source-state taxing authority in the mining industry. A lower barrier exists to establish the existence of a PE compared with the traditional "fixed place of business" formula. Exploration and services conducted through mobility will subject industry players to a PE under a pure duration of presence test, thus necessitating sectors to direct utmost attention to wording in operating treaties. 

This has overall created a new challenge for all sectors with global remote workers, and ultimately, it will affect any multinational corporation whose employees work across borders from home. However, the degree of impact correlates with the mobility and digitization of the role; the easier the job can be done remotely, the higher the risk. The relationship between the employee's location and the company's business activity in that location: The higher the local commercial nexus, the more significant the risk.  

Effect on India Across Key Areas

India has explicitly rejected the new 50% threshold and “commercial reason” test as prescribed by the OECD commentary. It sets the stage for divergence and potential double taxation disputes. India has clarified its position, stating that when business activities are conducted from a person's home, that residence can be “at the disposal of the enterprise” and, therefore, be a PE. This is a stricter, more source-tax-friendly position than the OECD's new framework.

The OECD Model Convention commentary does not attempt to provide guidance across all possible Forms of PE, because its main aim is to contribute some illumination regarding Article 5(1), that is, provide clarity regarding the concept of fixed place of business PE. Agency PE, service PE, construction PE, or economic presence PE, among other Forms of PE, are instead contingent upon other special rules set forth in treaties, bilateral treaty negotiations, or local jurisprudence. Moreover, due to its nature of providing a consensus-oriented solution, it would seem that attempting to provide some governmental or treaty interpretation in these forms of PE could jeopardize existing treaty outcomes, amongst other possible national tax policies.

A US or European technology company might employ an employee working out of Bangalore. Thus, in that case, under India's interpretation, there is a much quicker chance of a PE risk in India compared to the OECD's safe harbour. India can easily claim a PE even if the employee works less than 50% of the time from his house or the "commercial reason" is not clearly connected to the Indian market, for example, when they are working on global products. This would result in heightened uncertainty and greater tax exposure for multinationals.

In contrast, in the case of an Indian IT services company having a home-based employee in Germany to serve EU clients, Germany would apply the OECD scheme. This would then exempt the Indian company from a German PE if the time and commercial reason thresholds are not satisfied, except that the India-Germany treaty might be negotiated otherwise. India's rejection would mean that it will aggressively assert PE claims based on its own interpretation in audits and MAP cases, thereby increasing compliance costs and leading to more disputes faced by foreign businesses in India.

Moreover, the huge IT services sector and Global Capability Centres of India often have cross-border remote working arrangements. The inbound risk is that the foreign parent companies might create a PE in India inadvertently, in cases of employees or secondees employed for considerable periods when they work from Indian locations. The outbound consideration is that Indian IT companies deputing employees on short-term or hybrid assignments to client countries run the risk of inviting fresh PE scrutiny in those countries under the new global standards.

Furthermore, Indians startups with founders or key employees’ resident and working from abroad would fall under PE for the Indian company in the country where they reside, such as the U.S. or Singapore, thus creating complications for its expansion and its global tax footprint.

Extractive Industries Provision: A Strategic Opportunity

India is not a significant extractor offshore but is a major consumer with mining operations in its own territories. The optional provision on extractive industries creates a strategic negotiating tool in the treaties. India could seek the inclusion of this lower time-threshold PE rule in treaties with resource-rich countries where Indian companies are investing in exploration or mining. This would help secure India's right to tax foreign extractive enterprises operating in India for shorter durations. It also provides a model to assert greater taxing rights over mobile service providers in the oil and gas sector.

The Way Forward: Key Action Points for Businesses Operating in or from India

In this regard, companies must adopt a bifurcated strategy, i.e., for companies operating in India, tax administration will apply a more stringent PE threshold than what is recommended by the OECD. In place, introduce strict monitoring of remote work days across borders, provide documentation of the purpose of each remote work arrangement, and evaluate restructuring the employment models, such as through the use of Indian entities or employer-of-record services for long-term remote workers in India.

For Indian operations abroad, while sending employees overseas, it would be imperative to analyse the position of the host country with respect to the 2025 update. If the host country follows the OECD framework, then use the 50% and commercial reason tests as a shield. If the host country has reservations similar to India's, then the same may ring a bell for higher PE risk. 

Conclusion

The 2025 update of the OECD commentary represents an important step towards harmonizing the definition of PE in modern business practices in cross-border remote work and mobile extractive industries. The OECD uses a structured approach to fixed place PE in the 50% of working time rule and “commercial reason” test to improve certainty, and restricts itself to fixed place PE in the commentary and reserves other definitions of PE to treaty text and country case law, respectively. while being deliberate in circumscribing the ambit of the commentary to fixed-place PE and deferring the other forms of PE to the provisions of the treaties themselves.

The relatively narrow bandwidth of the above provisions also explains the stance of India. India has been and remains a strong critic of the OECD commentary, and it recommends that it is non-binding and can be generally relied upon only if it is consistent with domestic law and judicial precedents. Although India has made reservations against the OECD commentary of 2025 primarily with regard to the temporal limitation and commercial nexus tests, it is selective about reliance upon OECD guidance that is supportive of source country taxing rights and doctrines like 'at the disposal' test. The future is expected to see a close nexus between workforce mobility and tax risk, owing to a rising degree of incongruity about PE authorities.