OECD Releases Update to the Model Tax Convention – New General Approach on Employees Working from Home and the Israeli Perspective

The OECD published on 19 November, 2025 an update to the articles and Commentaries of the Model Tax Convention on Income and on Capital (the “MTC“). In this client alert we will focus on a relatively significant overhaul of the Commentaries addressing remote workers (i.e., “work from home” jobs). As remote work became increasingly prevalent in recent years, also the potential tax complications increased. Taxpayers often face the question of whether engaging an employee or a contractor in another country may result in a taxable presence (a so-called permanent establishment) sufficient to be charged with income tax in that country.

The new update to the MTC provides much needed clarity regarding the circumstances in which such arrangements could result in a permanent establishment for the employer.

Home Offices and Permanent Establishments – What’s the Issue and What Changed with the new Update to the MTC?

When two countries sign a bilateral tax treaty, an enterprise resident in one country will generally be protected from tax liability on a net-income basis in the other country, unless it has a permanent establishment in such other country.

Under the MTC, an enterprise may have a permanent establishment in another country if it carries out a part or all of its business through a fixed place of business that is at its disposal and is located in such other country.[1]

A key issue that has become increasingly relevant in recent years is how to consider home offices in this respect. On the face of it, a home office of an employee or contractor of the enterprise could be viewed as a fixed place through which the business of an enterprise is carried out. As working remotely became a common employment model in recent years, the issue of home offices became a contentious point in tax proceedings.

The recent update to the MTC provides some clarifications and simplifies the rules relating to home offices. While the existence of a permanent establishment still depends on an analysis of all facts and circumstances, the new MTC update provides quantitative and qualitative tests to assist in this analysis.

The quantitative test focuses on total working time spent in the jurisdiction of the employee’s home office (the “home jurisdiction“). The MTC’s Commentaries now provide that if an individual works from home (or other relevant place, like a vacation home) for less than 50% of his or her total working time (over the course of any 12-month period commencing or ending in the relevant fiscal year), then that place “would generally not be considered a place of business of the enterprise.”

If the enterprise fails the quantitative test (i.e., an employee or contractor of the enterprise spends at least 50% of his or her working time in the home jurisdiction), all facts and circumstances should be considered.

According to the recent MTC update, a prominent consideration in this regard is whether there is a “commercial reason for the activities taken by the individual” in that the home jurisdiction. A commercial reason for this purpose exists where the physical presence in the home jurisdiction itself facilitates the carrying out of the business of the enterprise. The Commentaries are explicit that a commercial reason does not exist where the remote work arrangement is in place “solely to obtain or retain the services” of the relevant individual, or to “reduce costs”.

Where there is no commercial reason for undertaking activities related to the enterprise from the home (or other relevant place) located in the home jurisdiction, that place would not be considered a place of business, unless other facts and circumstances indicated otherwise (for example, where an individual is the only person or the primary person conducting the business of the enterprise).

The 2025 update to the MTC provides greater clarity and flexibility for taxpayers in hiring employees or engaging contractors that work remotely. The issue of permanent establishment would generally come up only if such individuals working remotely spend the majority of their work time outside of the enterprise’s country of residence, and even then a permanent establishment will generally be considered to exist only if the remote work arrangement was intended to fulfill the commercial interests of the enterprise that require physical presence in the other country.

The Israeli Perspective of the MTC Update

Israel generally follows the OECD’s guidance in international tax matters, including the interpretation of bilateral tax treaties in accordance with the OECD’s Commentaries to the MTC. However, it should be noted that Israel included five reservations and clarifications to the rules described above with respect to remote work arrangements, suggesting that the Israel Tax Authority may adopt in practice a stricter approach to work-from-home arrangements.

These reservations and clarifications relate to both the quantitative and qualitative tests, and should be considered carefully by taxpayers operating in Israel:

Regarding the 50% threshold, Israel reserves the right to determine whether the threshold is satisfied by using the greater of (a) the number of working days in which the individual was present in the home jurisdiction compared to the number of working days the individual was present outside the home jurisdiction, and (b) the number of the working days in which the individual actually worked in the home jurisdiction compared to the number of working days the individual actually worked outside the home jurisdiction.

With respect to the qualitative test, Israel may consider a commercial reason to exist if the number of employees located in a country create a “meaningful group” relative to their business unit.

In circumstances where there is no commercial reason of the enterprise for the use of a home office in the home jurisdiction, Israel would take into account circumstances whereby the individual is employed to perform an activity that is “core” to the business or significantly contributes to the value creation for the enterprise.

Israel also reserves the right to consider a home office used by a “primary person” of an enterprise, such as a “founder, partner or relatively significant senior executive” to constitute a permanent establishment.

Finally, Israel also recorded a reservation with respect to an example included in the new update to the MTC. According to this example, a permanent establishment should not exist where an individual that is working from a home office and provides client-facing services mostly online, makes quarterly visits to clients in his home jurisdiction. In this respect, Israel reserves the right to consider all facts and circumstances that could indicate that the physical presence facilitates the quarterly visits or provisions of services in a different time zone, suggesting that Israel will take a more aggressive approach regarding the existence of a permanent establishment where individuals working from Israel are in contact with Israeli customers.

The new update to the MTC is a welcomed addition, which will allow multinational groups to better plan their steps in respect of engaging remote workers, mitigating the threat of unexpected tax liabilities in foreign countries.

However, taxpayers should be aware that the recent update may provide clarity but does not resolve the potential issue entirely. This is especially the case for multinationals operating in Israel, as the reservations of the Israel Tax Authority may suggest an intent to take a more aggressive approach regarding permanent establishments in Israel. We highly recommend our clients to reach out for specific legal advice that will be based on all relevant facts and circumstances, in order to ensure that exposure to Israeli taxes is properly managed.

Our tax group is available to answer any questions you may have regarding the new update to the MTC and its potential implications on non-Israeli taxpayers operating in Israel or Israeli taxpayers operating abroad.

[1] We note that the MTC also provides that an enterprise will have a permanent establishment in a jurisdiction, if a person – other than an agent of an independent status – is acting on behalf of the enterprise and has, and habitually exercises, in such jurisdiction, an authority to conclude contracts in the name of the enterprise. This alternative for a permanent establishment is less relevant for the purpose of this client update.