What are the key changes included in the OECD Model 2025

Cross-border remote work

The OECD Model (2025) includes new guidance addressing when cross-border remote work from an employee's home or another location may give rise to a permanent establishment (PE) of the employer (new paragraphs 44.1-44.21 of the Commentary on Article 5).

The new guidance confirms that the mere fact that an employee performs work from a home or other location abroad does not automatically create a PE. Whether a PE exists must be determined based on the specific facts and circumstances to establish whether the location constitutes a fixed place of business through which the business of an enterprise is wholly or partly carried on.

In such context, the guidance introduces a new indicator under which a home or other location will generally not be regarded as a place of business of the enterprise if the individual works there for less than 50% of their total working time during any relevant 12-month period. Where the individual works from that location for at least 50% of their working time, a further factual analysis is required. Additionally, the guidance places particular emphasis on whether there is a commercial reason for the employee's presence in the other jurisdiction, such as facilitating engagement with local customers or suppliers, developing of business opportunities or providing local services. By contrast, no commercial reason is generally considered to exist where remote work is undertaken solely for the employee's personal preferences or where the arrangement merely enables the enterprise to reduce office costs.

New alternative provision on natural resources

The OECD Model (2025) introduces a new optional provision on the taxation of activities connected with the exploration and exploitation of natural resources (paragraphs 170-203 of the Commentary on Article 5). The provision is intended to grant broader taxing rights to the source state through a lower PE threshold than under article 5.

Under this provision, a PE would be deemed to exist where a non-resident enterprise carries on qualifying activities in the source state for more than a bilaterally agreed period, irrespective of whether those activities are linked to a particular project or customer. The provision may be drafted to apply solely to offshore activities or to both offshore and onshore activities. The provision also includes model rules on the taxation of gains derived from the disposal of extractive assets and resource-related interests, and the Commentary further provides optional treaty provisions allowing source-state taxation of certain employment income connected with extractive activities.

Interaction between article 9 and domestic interest limitation rules

The OECD Model (2025) clarifies the interaction between article 9 on Associated Enterprises and domestic rules governing the classification and tax treatment of debt and equity funding within MNE groups. The new Commentary (paragraphs 3 and 3.1) provides that the characterization of a purported loan as debt, and the extent to which it should be treated as such for tax purposes, must be determined before the transaction is priced under the arm's length principle. Once a transaction is recognized as a loan, its pricing should be assessed under the arm's length principle in accordance with the OECD Transfer Pricing Guidelines. However, article 9 does not govern the deductibility of expenses, which remains a matter of domestic law. As a result, domestic limitations on interest deductibility, including fixed-ratio and group-ratio rules, may continue to apply.

Interaction between tax treaties and the General Agreement on Trade in Services (GATS)

The new paragraph 6 of article 25 on MAP clarifies that tax measures falling under the scope of article 24 (Non-Discrimination) fall within the scope of the treaty, ensuring that related disputes are generally addressed through the treaty's mutual agreement procedure rather than under WTO/GATS dispute-settlement mechanisms.

Report from our correspondent Francesco De Lillo, Principal Associate, IBFD. Follow our reporting on this via our daily Tax News Service (subscribers only).