This article explores the legal and policy challenges posed by the rise of remote work to traditional tax residency and permanent establishment (PE) rules. As corporate employees and decision-makers increasingly work from different jurisdictions, the physical presence-based standards of international tax law are proving inadequate. The article analyzes the conceptual foundations of tax residency and PE, examines the legal risks introduced by remote operations, and discusses how governments and multinational enterprises (MNEs) are adapting to this shift. It concludes with a call for tax law reform and proactive corporate strategies that align legal compliance with the realities of a decentralized global workforce.
Keywords: tax residency, permanent establishment, remote work, international tax law, OECD, nexus, corporate mobility, global workforce, cross-border compliance, substance.
В статье рассматриваются юридические и политические проблемы, возникающие в связи с ростом удалённой занятости и влияющие на традиционные правила налогового резидентства и постоянного представительства (PE). По мере того как сотрудники компаний и лица, принимающие решения, всё чаще работают из разных юрисдикций, стандарты международного налогового права, основанные на физическом присутствии, становятся неэффективными. В статье анализируются концептуальные основы налогового резидентства и PE, юридические риски, связанные с удалённой деятельностью, а также рассматриваются подходы правительств и транснациональных корпораций к адаптации к новой реальности. Завершается статья призывом к реформе налогового законодательства и разработке проактивных корпоративных стратегий, соответствующих требованиям правового соответствия и условиям децентрализованного глобального рынка труда.
Ключевые слова: налоговое резидентство, постоянное представительство, удалённая работа, международное налоговое право, ОЭСР, привязка, nexus, корпоративная мобильность, глобальный рынок труда, трансграничное соответствие, экономическая сущность.
Introduction
The rapid proliferation of remote work, accelerated by the COVID-19 pandemic and the digital transformation of the global economy, has introduced significant challenges to traditional tax systems. As employees and even executives increasingly perform their duties from various jurisdictions, long-standing principles of corporate tax residency and permanent establishment (PE) are being called into question.
Historically, corporate tax obligations were closely linked to physical presence, such as the location of management, office space, or personnel. However, the normalization of remote work has blurred the lines of what constitutes a “fixed place of business” and “central management and control.” These developments raise important legal and policy questions: Can remote employees create a taxable presence in a foreign country? Should the location of corporate decision-makers working from home influence a company’s tax residence?
This article addresses these pressing questions by examining the core concepts of tax residency and PE in international tax law and evaluating how remote work disrupts them. It further explores the need for tax authorities and multinational enterprises (MNEs) to adapt through legal reforms, risk mitigation strategies, and updated compliance frameworks. As remote work becomes a long-term reality, the reevaluation of nexus and establishment rules is no longer optional—it is a legal and economic imperative.
Corporate Tax Residency and Permanent Establishment: Core Legal Concepts
In international tax law, the concepts of corporate tax residency and permanent establishment (PE) are fundamental in determining where a company has the legal obligation to pay corporate income tax. These concepts are embedded in domestic laws, bilateral tax treaties, and international frameworks such as the OECD Model Tax Convention.
Traditionally, corporate tax residency has been defined based on either the place of incorporation (common in jurisdictions such as the United States) or the place of effective management (used in many OECD countries). The latter approach emphasizes where key strategic decisions are made, typically by the board of directors or executive leadership. As long as a company’s central management and control occurred within a particular jurisdiction, it would be considered a tax resident there.
The concept of permanent establishment, as outlined in Article 5 of the OECD Model Convention, refers to a fixed place of business through which the business of an enterprise is wholly or partly carried on. Common forms of PE include branch offices, factories, or places where contracts are habitually concluded. Additionally, the activities of dependent agents—individuals with authority to bind the company—can create a PE under certain conditions [1].
Both concepts rely heavily on physical presence and a relatively static understanding of business operations. The legal assumption has been that meaningful economic activity takes place in specific locations, with tangible infrastructure and face-to-face interactions. However, the shift toward digitalization and mobile workforces—now intensified by remote work—has exposed the limitations of these traditional criteria. Questions have emerged about whether a home office or a laptop used across borders can constitute a PE, or whether executives working from abroad might shift a company’s tax residence.
These uncertainties necessitate a reexamination of long-standing legal definitions to ensure they remain effective and equitable in the context of modern business practices.
Disruption Caused by Remote Work
The widespread adoption of remote work has fundamentally altered the geographic footprint of corporate activity, raising significant legal and compliance challenges for multinational enterprises (MNEs). As employees, including key decision-makers, increasingly perform their duties from jurisdictions different from those where their employers are legally established, the traditional nexus between physical presence and tax liability becomes strained.
One major concern is the unintentional creation of permanent establishments (PEs). An employee working remotely from a foreign country, particularly one with authority to negotiate or conclude contracts, may inadvertently trigger PE status for their employer under both domestic tax laws and international treaties. This could expose the employer to new tax liabilities, reporting obligations, and audits in jurisdictions where they did not intend to operate.
Similarly, the criteria for determining corporate tax residency become more ambiguous when central management functions—such as strategic planning, financial oversight, or board meetings—are carried out remotely from various locations. If executives or directors habitually exercise key decision-making authority from a jurisdiction different from the company’s registered office, tax authorities may assert that the place of effective management has shifted, thereby changing the company’s tax residence. This opens the door to double taxation risks and legal disputes over jurisdictional claims.
Further complicating the landscape is the lack of uniform global guidance. While some tax authorities have issued temporary COVID-era relief measures, these policies vary significantly and often lack legal clarity or permanence. The OECD, for example, released non-binding guidance in 2020 suggesting that remote work arrangements resulting from the pandemic should not, on their own, lead to changes in tax residence or the creation of PE. However, this guidance is discretionary and not enforceable, and its application depends on the individual interpretations of member states [2].
As remote work transitions from a temporary response to a permanent feature of the modern workplace, MNEs are left operating in a legal grey zone. They must balance employee flexibility and mobility with the growing complexity of cross-border tax compliance, often without clear or consistent regulatory direction.
Adapting Tax Policy and Corporate Strategies
In response to the legal uncertainties posed by remote work, both governments and multinational enterprises (MNEs) are beginning to adapt their tax policies and operational strategies. The aim is to strike a balance between maintaining fiscal sovereignty and enabling business flexibility in a globally mobile workforce.
On the regulatory side, some jurisdictions have taken initial steps to clarify the tax implications of remote work. Several countries issued guidance indicating that temporary work-from-home arrangements due to the COVID-19 pandemic would not, by themselves, trigger tax residency or create a permanent establishment (PE). However, few have implemented permanent legislative changes, and most existing rules still rely on physical presence and habitual activities—concepts that are increasingly difficult to apply in a digital environment.
At the international level, discussions within the OECD Inclusive Framework continue to explore how tax rules can evolve in line with modern work practices. Some proposals suggest redefining the threshold for PE to reflect digital presence or economic engagement rather than fixed locations. Others recommend increased reliance on substance-based tests, assessing whether remote operations involve meaningful decision-making or value creation in a given jurisdiction. These discussions, however, are ongoing and face political and practical barriers to implementation.
In the absence of uniform international standards, MNEs are developing their own internal risk mitigation strategies. One common approach is to restrict the authority of remote employees—for instance, preventing them from signing contracts or representing the company in ways that could establish nexus in a foreign jurisdiction. Others are implementing remote work policies that limit the duration or scope of international telecommuting or require prior approval for long-term remote arrangements abroad.
Technological tools are also playing an increasingly important role in compliance. Companies are using location tracking software, legal checklists, and real-time tax risk assessments to monitor where employees are working and whether those activities might trigger tax obligations. Integration between human resources, legal, and finance departments is crucial for managing cross-border employment in a compliant and efficient manner [3].
Ultimately, a proactive and coordinated approach—combining legal risk awareness, clear corporate policy, and close monitoring—is essential for businesses seeking to offer remote work options while avoiding unintended tax consequences. Until international tax standards catch up with the digital economy, companies must take the lead in defining safe operational boundaries.
Conclusion
The rise of remote work has fundamentally disrupted the legal foundations of international tax regulation, particularly the long-standing concepts of corporate tax residency and permanent establishment. As multinational enterprises (MNEs) increasingly embrace distributed workforces, the assumptions that tax liability follows physical presence and fixed geographic management are no longer sufficient. This transformation calls for a comprehensive reevaluation of the nexus rules that underpin cross-border taxation.
Current legal frameworks struggle to account for the fluid and decentralized nature of remote work, exposing companies to unintended tax risks, inconsistent enforcement, and legal uncertainty. While the OECD and certain national authorities have issued temporary guidance, the lack of harmonized and binding rules leaves MNEs with the burden of navigating fragmented regulatory landscapes on their own.
In this context, it is imperative for both policymakers and corporate stakeholders to act. Tax authorities should move toward clearer and more digitally oriented definitions of economic presence, considering the realities of virtual operations [4]. Meanwhile, companies must adopt structured policies, legal safeguards, and technology-driven compliance tools to mitigate risks and maintain control over their global tax footprint.
Ultimately, the post-pandemic era demands not just regulatory updates, but a paradigm shift in how tax law interprets business activity in a borderless digital economy. Proactively addressing these challenges will help foster a more equitable and predictable tax environment—one that supports innovation and flexibility while ensuring fairness and legal certainty in international taxation.
References:
- OECD. Model Tax Convention on Income and on Capital: Condensed Version 2017 [Electronic resource]. — Paris: OECD Publishing, 2017. — Access mode: https://www.oecd.org/ctp/model-tax-convention-2017-full-version-en.pdf — Date of access: 18.06.2025.
- OECD Secretariat Analysis. Updated guidance on tax treaties and the impact of the COVID-19 pandemic [Electronic resource]. — Paris: OECD, 2020. — Access mode: https://www.oecd.org/tax/beps/guidance-tax-treaties-covid-19.pdf — Date of access: 18.06.2025.
- OECD. Commentary on Article 5: Permanent Establishment. In: Model Tax Convention on Income and on Capital 2017 [Electronic resource]. — Paris: OECD Publishing, 2017. — Access mode: https://www.oecd.org/ctp/treaties/article-5-permanent-establishment.pdf — Date of access: 18.06.2025.
- PwC. Permanent Establishment and Remote Work: Managing Tax Risk in a Post-COVID World [Electronic resource]. — PricewaterhouseCoopers International Ltd., 2021. — Access mode: https://www.pwc.com/gx/en/services/tax/publications/permanent-establishment-and-remote-work.html — Date of access: 18.06.2025.