Cross-border remote work and the creation of a permanent establishment
The Hungarian Tax Authority (NAV) recently published guidance on the latest amendments to the OECD Model Tax Convention and Commentary and their application in Hungary. One aspect of the amendment introduces a new approach to assessing the relationship between cross-border remote work (e.g. "foreign home office" arrangements) and the creation of a permanent establishment (PE).
According to the updated Commentary, the existence of a permanent establishment in such cases should be assessed through a two-step analysis:
First, it must be examined whether the individual performs work from a particular location (home, second residence, holiday property, etc.) for at least 50% of their total working time during any twelve-month period. If this threshold is not met, the location will generally not be regarded as a place of business of the enterprise, and therefore no permanent establishment will arise.
If the 50% threshold is met, the second step is to determine whether there is a business or commercial reason for the individual's presence in the other state.
When assessing the 50% threshold, all relevant facts and circumstances of the case, as well as the individual's actual working practices, must be taken into account. Contractual provisions and internal company policies are relevant only to the extent that they reflect the actual situation. If the individual works from the location for at least 50% of their total working time, a detailed examination of the facts is required to determine whether the location constitutes a fixed place of business of the enterprise. It is important to note that a different conclusion may apply where the individual carries out the enterprise's business activities as the sole or primary person performing those functions; in such circumstances, a home office may be considered a place of business of the enterprise.
A key consideration is whether there is any business or commercial justification for the individual's presence in the other state, meaning whether that presence genuinely facilitates the conduct of the enterprise's business activities. A business or commercial justification does not exist where the primary purpose of working in that state is merely to provide greater flexibility for the employee, improve employee retention, or reduce office rental costs. Likewise, the mere fact that customers or suppliers are located in the same state, or that there is a different time zone, does not in itself constitute a business or commercial justification. If a valid business or commercial reason exists and the remaining conditions are also met, the location may be considered a place of business of the enterprise, resulting in the creation of a permanent establishment. Examples of such business reasons may include regular in-person interaction with customers, suppliers, or other business partners; providing real-time services aligned with the time zone of that state; or access to specialised local expertise.
Based on the above, the current OECD approach may provide greater flexibility for employers in certain situations when assessing foreign home office arrangements, particularly where remote work abroad is primarily driven by the employee's personal preferences or convenience. As a result, companies may adopt a more permissive approach to cross-border remote working under certain circumstances. Nevertheless, a case-by-case assessment of all relevant facts and circumstances remains essential.
It is also important to emphasise that a reduction or absence of permanent establishment risk does not automatically mean that no other tax or social security obligations may arise. Personal income tax and social security obligations can still arise even in the absence of a permanent establishment, and their assessment is subject to different presence thresholds and other relevant considerations. Furthermore, compliance with any resulting tax obligations may involve significantly different administrative burdens from one jurisdiction to another, potentially affecting the company as well. Depending on local rules, registration and payroll withholding obligations may arise. Therefore, when deciding whether to permit foreign home office arrangements, companies should conduct a comprehensive assessment not only of permanent establishment risks, but also of personal income tax, social security, and immigration-related requirements and obligations.
