On 19 November 2025, the OECD published a new edition of its Model Commentary (OECD-MK), which contains a far-reaching revision of its position on the question of the establishment of a permanent establishment for income tax purposes in an employee’s home office abroad. For its part, the Federal Ministry of Finance (BMF) responded in a letter dated 24 December 2025 to the Federal Fiscal Court (BFH) ruling of 5 December 2023, I R 42/20, and the stipulation therein regarding the so-called static interpretation of double taxation agreements, as well as the draft letter of 13 February 2026 on the administration’s principles regarding the concept of a permanent establishment, which also contains a section specifically dedicated to home offices.
The OECD Model Commentary, 2025 version
In November 2025, the OECD replaced its commentary on the creation of a permanent establishment for income tax purposes of a company of one Contracting State as a result of an employee’s activities in their home located in the other Contracting State – previously contained in two sections (paragraphs 18 and 19) of Article 5 of the Model Convention – with a total of 21 sections (paragraphs 44.1 to 44.21).
The definition of the term ‘permanent establishment’ set out in Article 5 of the Model Convention has, however, remained unchanged. This therefore constitutes an update and reinterpretation of the term ‘permanent establishment’ in the form of the home office permanent establishment, which was appropriate in view of the phenomenon of remote working, which has become commonplace since the Covid pandemic.
In future, the OECD will determine the existence of an employer’s permanent establishment at an employee’s foreign residence primarily on the basis of three criteria:
- The activity is not merely ancillary or preparatory.
- The employee carries out at least 50% of their work at their place of residence or another suitable location (this also includes holiday homes, accommodation with friends or relatives) over a period of 12 months.
- The work carried out from home must be based on an economic reason for the company.
The majority of the commentary is devoted to the criterion of the business reason. According to Section 44.11, such a reason exists if the employee’s presence in the other country facilitates the company’s business activities as such.
Examples include the company’s customers and suppliers in the country of residence – subject, however, to the restriction that the employee is in direct contact with them and that this contact is facilitated by the employee’s presence in the country in question. For example, an employee who, solely at their own request but without a business reason, carries out 80% of their work from home does not, on the basis of the time criterion alone, establish a permanent establishment for their employer in their country of residence.
Using the examples provided in section 44.21, the model commentary ultimately offers a nuanced solution framework that is guided by the employee’s role and the business-related nature of their work, particularly when carried out from a home office abroad.
As might be expected, the question of the employer’s power of disposal over the employee’s living quarters plays no role in this context.
Draft BMF letter on the concept of a permanent establishment dated 13 February 2026
In its draft, which is, of course, subject to further amendments, the Federal Ministry of Finance (BMF) maintains the position it had already set out in its letter of 5 February 2024, namely that the existence of a home office permanent establishment requires the employer to have control over the relevant residential premises of the employee (see para. 140 et seq. of the draft). As the latter is regularly lacking, the German tax authorities take the view that a permanent establishment at the employee’s place of residence virtually never arises.
In the same breath (paragraphs 145 and 146 of the draft), however, the BMF states that, on the one hand, “in connection with home office activities, paragraphs 44.1 to 44.21 of the OECD Model Commentary on Article 5 of the OECD Model Tax Convention are decisive and must be observed” and, on the other hand, “in outbound cases, German taxing rights may be restricted if, in the other contracting state, a permanent establishment under the treaty attributable to an employee’s employer is established on the basis of the employee’s home office activities there”.
Does this mean that, from the perspective of the German tax authorities, the outcome depends on whether and how the tax authorities of the country of residence interpret the relevant treaty in the light of the amended OECD Model Commentary?
BMF letter dated 24 December 2025
In the wake of the commentary on the OECD Model Tax Convention, which changes from time to time and adapts to new realities, and the OECD’s increasingly pioneering role in the drafting and interpretation of double taxation agreements, case law in Germany and abroad has recently had to address the question of whether an agreement concluded, for example, in 1975, should be interpreted in the light of the state of the OECD commentary at the time (so-called static interpretation) or on the basis of the commentary at the time the treaty is applied to the individual case (so-called dynamic interpretation).
The Federal Fiscal Court (judgment of 5 December 2023, I R 42/20) opted for the static interpretation, which the German tax authorities, having initially leaned towards the dynamic approach, ultimately followed in the aforementioned letter dated Christmas Eve 2025. From the German administration’s perspective, this would preclude the application of the 2025 Model Commentary to treaties concluded prior to 2025.
Were it not for a sentence in paragraph 3 of the BMF letter, which, in view of the quality of the Model Commentary as an aid to interpretation of Article 5 of the OECD Model Tax Convention – the wording of which remains unchanged – gives pause for thought: “Within the limits of the wording of the treaty provision to be interpreted, the version of the OECD Model Commentary in force at the time of application must therefore also be taken into account for the purposes of interpretation, insofar as it contains clarifications and precisions compared with earlier versions of the OECD Model Commentary.”
However, paragraph 5 of the letter immediately restricts the scope of application of the Model Commentary thus opened up, since, insofar as other administrative instructions (see those of 5 February 2024) result in a different interpretation of the Convention, this interpretation is to take precedence over that of the OECD Model Commentary.
In view of this back-and-forth, it would be desirable for the Federal Ministry of Finance to use the draft of its letter of 13 February on the concept of a permanent establishment to clarify its position.
Conclusion
- With the update to the Model Commentary, the OECD is taking a clear stance towards a functionally based definition of the term ‘permanent establishment’. This is evident from the commentary on the home office as a permanent establishment.
- By contrast, no clear direction can be discerned from the letters issued by the German tax authorities.
- Although German case law most recently ruled clearly against a dynamic interpretation of treaties based on the Model Commentary current at the time of application in 2023, its overall trend is increasingly to relax the requirements for the existence of a permanent establishment for income tax purposes (see the so-called ‘locker ruling’).
- Foreign courts and tax authorities (e.g. France) consistently adopt a dynamic interpretation.
- Double taxation is inevitable.
