A permanent establishment in jandals and shorts? the 2025 OECD Model in full

By Bart de Gouw & Hamish Butterworth-Snell

The Organisation for Economic Co-operation and Development (OECD) has recently published the full version of the 2025 Model Tax Convention on Income and on Capital (MTC). At over 2,500 pages, it should more than meet your weekend reading needs. If 2,500 feels like a bit much, the condensed version will be updated shortly. The MTC is used by countries as a framework when negotiating, applying and interpreting bilateral tax treaties, including New Zealand’s double tax agreements (DTAs).

The MTC is important for two key reasons. First, it provides guidance on how countries may interpret provisions contained in their DTAs. Second, updates to the MTC can provide an indication of how countries may seek to amend their DTAs going forward. With these two purposes in mind, what does the 2025 MTC offer?

Overall, the updated commentary provides greater detail on several areas. Of particular interest is the expanded commentary on when an employee working from home in another country may create a permanent establishment for their employer (a home office PE). Although there is no change to existing treaties, the updated MTC applies to the interpretation of current and future arrangements.

Home office PE: a practical reminder

The global adoption of remote and flexible work arrangements has enabled employees to work from virtually anywhere, including countries outside their employer’s home jurisdiction. While this flexibility offers significant benefits, it also raises important tax considerations for businesses, particularly the risk that an employee’s home office could be deemed a “permanent establishment” (PE) under international tax treaties. We discussed this in depth in the December 2025 Tax Alert following the OECD’s release of the approved 2025 update. Those changes have now been incorporated into the full version of the 2025 MTC.

As a refresher, a home office PE may arise in Country A where an employee of an overseas employer (in Country B) works from their home or another fixed location in Country A. Depending on the facts and circumstances, that location may be treated as a fixed place of business of the overseas employer, potentially giving rise to corporate tax and compliance obligations in Country A.

The updated guidance focuses on two key considerations: how much time the employee works from the location and whether there is a commercial reason for their activities being undertaken in Country A. Generally, a home office will not be treated as an employer’s fixed place of business where the employee works from it for less than 50% of their total working time over any 12-month period. However, if the employee works from that home office for 50% or more of their working time, it is then necessary to consider whether the employer has a business reason (a “commercial reason test”) for its employee being present in Country A.

Relevant considerations may include whether the employee regularly meets customers or develops customer relationships in Country A, identifies or manages local suppliers, or uses their location to provide real-time services across time zones. But the mere presence of customers or suppliers, or a time zone difference by itself, will not establish a commercial reason. Similarly, accommodating an employee’s preference, retaining or obtaining their services, or reducing office costs will not, by itself, establish whether there is a commercial reason for the employee’s activities to be undertaken in Country A. The analysis remains fact-specific and should reflect actual working arrangements rather than contractual terms alone.

Businesses that have employees in overseas jurisdictions (i.e. both inbound and outbound to New Zealand) should accordingly:

• review company policies on remote working arrangements
• maintain reliable records of where employees work and for how long
• document why an overseas working arrangement was approved including whether there were any commercial reasons for the remote working arrangement
• review longer-term arrangements, especially where employees interact with customers and suppliers, and consider what authority to contract the employee has
• consider other potential PE exposures (e.g. services PEs, dependent agent PEs)
• consider payroll taxes, non-resident contractor tax, and other withholding taxes.

New Zealand has also recently introduced new non-resident visitor rules. These rules provide specific relief to qualifying non-resident visitors by disregarding their New Zealand activities when determining whether an overseas entity has a permanent establishment. These rules make it easier for employees of overseas companies to temporarily live in New Zealand without creating a PE for the employer, as discussed in our September 2025 Tax Alert.

What else has changed?

The updated MTC contains several other developments that may affect cross-border arrangements:

• an optional treaty provision introducing a lower PE threshold for certain activities connected with the exploration and exploitation of extractable natural resources, which would need to be adopted through the relevant bilateral treaty before applying
• urther Article 9 Commentary on associated enterprises, including the interaction between the arm’s-length principle and domestic interest-deductibility rules
• related guidance under Articles 7 and 24 concerning corresponding adjustments to PE profits and information requirements for non-residents
• changes to Article 25 and its Commentary concerning the mutual agreement procedure, dispute resolution under the General Agreement on Trade in Services (GATS), and tax certainty in connection with Amount B of Pillar One.

We do not anticipate these changes affecting many of our clients.

Deloitte thoughts

Publication of the full 2025 MTC provides businesses and tax authorities with a consolidated reference point for the latest OECD treaty guidance. For many businesses, the immediate practical issue will remain cross-border remote working. Policies introduced in response to temporary or occasional overseas work may not adequately address arrangements that have become longer term or increasingly connected with customers, suppliers or business operations in another country.

Businesses should make sure that they have a process for identifying these arrangements early. They should also review the specific DTA and the positions of the relevant countries, as not every New Zealand DTA follows the current OECD Model, and some changes will require treaty amendments before they can apply.

If you have any questions about how the 2025 MTC may affect your arrangements, please contact your usual Deloitte adviser.