Executive summary

On 19 November 2025, the Organisation for Economic Co-operation and Development (OECD) published the 2025 Update to the OECD Model Tax Convention and its Commentary, the first comprehensive revision since 2017. The Update adds a new paragraph to Article 25 (Mutual Agreement Procedure) and makes substantive revisions to the Commentary with respect to multiple articles. It also reflects changes to the observations and reservations of OECD member countries and the positions of non-member economies with respect to the OECD Model Tax Convention and its Commentary.

The most detailed changes relate to Article 5 (Permanent Establishment). The revised Commentary introduces an analytical framework that clarifies when use of a home or other relevant place, such as a second home, a holiday rental or the home of a friend or relative, in another country to carry out activities related to the business of an enterprise can amount to a fixed place of business permanent establishment of the enterprise. Under the framework, a "50 percent of total working time" reference point is used as a general benchmark. The framework focuses on whether the location is used regularly and substantially rather than intermittently, whether the individual's presence serves a business purpose such as servicing local customers or suppliers rather than personal convenience, and whether the enterprise in practice carries on business from the location even if it does not formally own or lease the premises. Five illustrative examples are included.

Other notable revisions in the 2025 Update include an optional time-based permanent establishment provision for extractive activities that contains model anti-contract-splitting language and a capital gains paragraph, as well as optional drafting approaches to extend source taxing rights over employment income tied to extractive activities. The OECD describes the revisions to the Commentary on Article 9 (Associated Enterprises) as clarifying the application of Article 9, especially as it relates to domestic laws on interest deductibility; these changes have potential implications that extend beyond interest deductions. In addition, revisions to the Commentary on Article 26 (Exchange of Information) to provide clarifications regarding permitted use and limited disclosure of exchanged information, including the treatment of material that is not taxpayer specific.

(This in-depth Alert follows a high-level look at the 2025 Update; see EY Global Tax Alert, OECD releases update to Model Tax Convention, dated 25 November 2025.)

Detailed discussion

2025 update to the OECD Model Tax Convention

On 19 November 2025, the OECD issued the 2025 Update to the Model Tax Convention and its Commentary, which the OECD Council had adopted the previous day. This is the first comprehensive revision to the OECD Model since 2017, when the Model was updated to incorporate treaty measures developed under the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, including changes addressing hybrid mismatches, treaty abuse and permanent establishment. The only amendment to the Model itself in the 2025 Update is the addition of paragraph 6 to Article 25 (Mutual Agreement Procedure), which addresses the role of the competent authorities in determining if a matter is within a tax treaty's scope for purposes of the dispute resolution mechanisms under the General Agreement on Trade in Services (GATS). The bulk of the revisions in the 2025 Update are to the Commentary, and they cover a range of topics across multiple articles.

Whether and how the revised Commentary affects existing bilateral treaties depends on jurisdictional doctrine and practice: some jurisdictions may use later Commentary when interpreting older treaties (a dynamic approach); some limit treaty interpretation to the text and guidance in force when the treaty was signed (a static approach); and some use both approaches, with the approach they apply determined by the particular circumstances.

These updates will be incorporated into the OECD Model to be published in 2026.

Commentary on Article 5 (Permanent Establishment): Working from home

Cross-border working from home or other places has become increasingly common, often through hybrid arrangements, as some individuals have the opportunity to perform all or part of their work from a location outside the country where their employer is located. The 2025 Update responds to this trend by introducing a detailed analytical framework that clarifies when the use of a home or other relevant place (such as a second home, a holiday rental, the home of a friend or relative, etc.) in another country can amount to a fixed place of business permanent establishment of the enterprise. Before this update, the Commentary focused primarily on the concept that working from home did not, by itself, mean that the home was at the disposal of the enterprise.

The Commentary reflects the general guidance that whether a permanent establishment exists must be determined on the basis of the facts and circumstances applicable during a given period, and notes that a place of business must be fixed with a degree of permanence. Thus, a place of business must exhibit a sufficient degree of continuity under paragraph 1 of Article 5. Use that is considered short-duration, incidental or irregular is not enough, even if substantive tasks are performed during that period of use.

Once permanence is established, the analytical framework in the Commentary turns to whether the home or other relevant place is a place of business of the enterprise. Under the Commentary, the mere fact that business activities are performed at home or other relevant place does not, on its own, mean the enterprise is carrying on business from that place. Activities may be so intermittent or incidental that the home or other relevant place does not become a place of business at all. However, if activities are carried out on a continuous basis over an extended period and other indicators are present, the home or other relevant place may be treated as a place of business.

In this context, the Commentary introduces a new test. If an individual works from a home or other relevant place for less than 50% of his or her total working time over any 12-month period, that place would generally not be considered a place of business of the enterprise. Conversely, if the individual works from home or other relevant place at least 50% of his working time over a 12-month period, the determination of whether the place is a place of business of the enterprise is based on the overall facts and circumstances.

Importantly, the calculation of working time is driven by actual conduct, not formal schedules or employment contracts. Contracts and internal policies may assist in the analysis only to the extent that they accurately reflect how work is performed in practice.

The second key reference point in the Commentary is whether there is a commercial reason for the individual to perform activities in the state where the home or other relevant place is located. A commercial reason exists when the individual's physical presence in that country facilitates the carrying on of the enterprise's business. This may arise, for example, when there are customers, suppliers or other resources in that country with whom the enterprise needs to engage, or when the individual's presence enables timely delivery of services. Intermittent or incidental engagement with a customer, or minor involvement in a broader commercial relationship, does not amount to a commercial reason. Moreover, enabling an individual to work from home or other relevant place solely for talent retention/employee convenience, or solely for cost-saving in relation to office space is not considered to be a commercial reason. Likewise, being in a different time zone from the enterprise's country is not by itself a commercial reason. However, a time-zone difference may support a commercial reason if it facilitates real-time or near real-time interaction with customers or suppliers.

Different considerations apply if the individual is the only, or the primary, person conducting the enterprise's business, such as a nonresident consultant who spends an extended period in a country and carries on most of the consulting business from an office set up in her home there. In that case, the home office constitutes a place of business of the enterprise.

The Commentary illustrates this analytical framework through five examples. Example A considers whether a place of business is fixed and Examples B to E consider more specifically whether a home or other relevant place is a place of business of an enterprise.

• Example A focuses solely on whether the place is fixed. An employee works from a location in another country for three months during a 12-month period. The period is too short to constitute permanence, so the place is not fixed. All other factors are irrelevant.
• Example B addresses a recurring pattern of home working, likely through a hybrid remote work model. The employee works from her home in the other country one or two days per week throughout the year, equivalent to 30% of her working time. Although the pattern is regular enough to satisfy permanence, the home is not a place of business of the enterprise in the absence of other facts and circumstances showing otherwise.
• In Example C the employee spends 80% of his working time from home in the other country and regularly engages with clients located in that market. The individual's presence in that country facilitates the business, and the home serves as the base for client service delivery. On these facts, and absent other facts and circumstances showing otherwise, the home is a place of business of the enterprise and a fixed place of business permanent establishment is present.
• Example D highlights that percentages alone are not enough. The employee fills a regional role, working from home 60% of the time and performing a client-facing role, but the clients are in multiple countries. Quarterly visits to a local client for a single day are incidental and do not create a commercial reason for being based in that country. The employee's home should be considered fixed because it has a sufficient degree of permanence. Although the individual spends more than 50% of his working time in a jurisdiction other than that of the employer, other facts and circumstances including the reason for the individual's presence in that jurisdiction must also be taken into account. In the absence of other facts and circumstances showing otherwise, the home is therefore not a place of business of the enterprise.
• Example E describes an employee of an enterprise resident in a country who works almost exclusively from her home in another country and provides virtual services to customers in the enterprise's country and in other jurisdictions in different time zones. The home is considered fixed because it is used to carry on the enterprise's activities throughout a 12-month period, which provides a sufficient degree of permanence. The employee spends at least 50% of her total working time at that home and there is a commercial reason for her presence in that country because the time zone difference enables real time or near real time service delivery to those customers. Absent facts and circumstances showing otherwise, the home would be a place of business of the enterprise and would constitute a fixed place of business permanent establishment.

Several jurisdictions have signaled that their positions depart from the Commentary on Article 5 in the 2025 Update. For example, India indicates that it does not accept the new time threshold and commercial-reason tests. Rather, India considers that when business activities are carried on from an individual's home, that home can be at the disposal of the enterprise and thus a place of business.

Israel has included several reservations, including on how to measure the 50% working-time threshold using a greater-of comparison based on presence or days actually worked. It also indicates that it may find a commercial reason where a meaningful group of employees is located in the home-jurisdiction country. In addition, Israel indicates that, if there is no commercial reason for undertaking the activities from a home or other relevant place located in the other country, it will take account of circumstances indicating the individual is employed to perform activity that is "core" to the business or activity that significantly contributes to value creation for the enterprise. Israel further reserves the right to treat as a permanent establishment a home office used by one of the primary persons of an enterprise, such as a founder, partner or relatively significant senior executive. Finally, Israel does not agree with Example D of the new Commentary on Article 5.

The Czech Republic reserves its position on the additional specific criteria in the new guidance as it does not agree that the category of premises should be so determinative and thus limit the possibility of the existence of a permanent establishment when working from home. Chile does not adhere to all of the interpretations set out in paragraphs 44.6 to 44.21.

Nigeria takes the position that intermittent client visits over longer than six months and enterprise cost reduction are valid commercial reasons and it disagrees with Example D, concluding that the home would be a place of business under those facts.

Malaysia reserves the right to agree bilaterally the percentage below which home working would not make the home a place of business.

Commentary on Article 5 (Permanent Establishment): Extractive Industries

Historically, the OECD Model did not include a dedicated rule on permanent establishments for activities connected with the exploration and exploitation of extractible natural resources. The 2025 Update adds to the Commentary on Article 5 an optional provision that jurisdictions may consider applying a lower permanent establishment threshold to extractive activities. The clause is drafted for bilateral negotiation and when included in a tax treaty would have the effect of expanding source-state taxing rights.

At the core of the optional provision is a time-based permanent establishment trigger tailored to extractive activities. An enterprise of a country is deemed to have a permanent establishment in the other country once it carries on "relevant activities" in the other country for more than a bilaterally agreed period within a 12-month period. The Commentary provides drafting language using a placeholder for the period and explains how the provision operates. The optional provision is designed to be flexible and can be tailored by jurisdictions to cover offshore activities only or both offshore and onshore activities.

The new Commentary defines the term "relevant activities" for purposes of the scope of the optional provision. "Relevant activities" include exploration and exploitation activities, as well as certain related services.

The operative test is time-based. Exceeding a bilaterally agreed period in any 12-month period would constitute a permanent establishment for the relevant activities in the source country. The rule aggregates all relevant activities carried on by the enterprise, regardless of the number of contracts, customers or projects.

The optional provision does not contain a mandatory anti-contract-splitting rule, but the Commentary includes model language that jurisdictions may choose to add. That optional clause aggregates time spent by closely related enterprises performing "substantially the same" relevant activities. For this purpose, "substantially the same" is tested by resource type and method. The Commentary also notes that jurisdictions may tailor the period of the anti-contract-splitting rule.

The optional provision includes a paragraph related to capital gains. This paragraph assigns to the source country the primary right to tax gains from the disposal of specified assets (immovable property, certain movable property, and shares and other comparable interests).

In addition, the new Commentary addresses cases in which consecutive short-term employment arrangements might fall outside of the 183-day rule of Article 15 (Employment Income) of the OECD Model even when connected to extractive work. It provides two optional drafting approaches to expand source taxing rights over employment income tied to "relevant activities": (i) a special rule taxing employment exercised for more than the bilaterally agreed period within a 12-month period commencing or ending in the fiscal year concerned; or (ii) an amendment to Article 15(2)(a) that substitutes a shorter presence threshold for such cases.

Commentary on Article 9 (Associated Enterprises)

Article 9 (Associated Enterprises) of the OECD Model deals with adjustments to profits that may be made for tax purposes if transactions between associated enterprises have been entered into on other than arm's-length terms.

The 2025 Update revises the Commentary on Article 9 to address financial transactions and debt-versus-equity questions raised in connection with recent OECD work on the transfer pricing aspects of financial transactions. Countries may take different views on the application of Article 9 to determine the balance of debt and equity funding of an entity within a multinational enterprise group. Some countries use the accurate delineation of the transaction described in the OECD Transfer Pricing Guidelines to determine whether and the extent to which a purported loan between associated enterprises should be regarded as a loan for tax purposes (or as another kind of transaction, in particular a contribution to equity capital); other countries address the issue of the balance of debt and equity funding of an entity under their domestic laws (including judicial doctrines). Under both approaches, the determination whether and the extent to which a purported loan should be respected as a loan will precede any attempt to price the transaction so determined. If a loan is respected, pricing should follow the arm's-length principle using Chapters I, II, III and X of the OECD Transfer Pricing Guidelines.

The 2025 Update also reinforces the distinction between allocating profits under Article 9 and determining taxable income under domestic law. Once profits have been allocated in accordance with the arm's-length principle, it is for the domestic law of each Contracting State to determine whether and how those profits should be taxed, as long as there is conformity with the requirements of other provisions of the Convention. Article 9 itself does not address the deductibility of expenses when computing taxable income as the conditions for deductibility remain a matter of domestic law. Examples of domestic rules that can deny deductions for expense include certain rules on entertainment expenses and interest limitation rules, including the fixed ratio and group ratio rules recommended in the final report on Action 4 of the OECD/G20 BEPS project. Comparable guidance appears in the Commentary on Article 7 (Business Profits) of the OECD Model, which similarly draws a boundary between the attribution of profits to a permanent establishment and the domestic tax rules governing the deductibility of expenses.

The 2025 Update includes a change to the Commentary in relation to corresponding adjustments to be provided by a country when another country adjusts the profits of an enterprise. The prior Commentary provided that a corresponding adjustment by the other country is required only to the extent that country considers the adjustment justified both in principle and with regard to the amount. The updated Commentary amends this to provide that the other country should provide a corresponding adjustment if it considers the adjustment justified in principle, but only in an amount that the other country considers reflects arm's-length profits. If the competent authorities disagree on the amount, they shall, if necessary, consult each other with a view to eliminating economic double taxation, taking into account the Convention, including the Mutual Agreement Procedure under Article 25.

The denial of a deduction in the computation of taxable income is not dealt with by Article 9, does not lead to economic double taxation for the purposes of Article 9(2) and therefore there is no obligation for another country to make a corresponding adjustment.

The 2025 Update includes a number of observations and reservations in relation to the optional simplified and streamlined approach in the Annex to Chapter IV of the OECD Transfer Pricing Guidelines (i.e., Amount B of Pillar One). Australia and New Zealand observe that they do not elect for Amount B to be used as a proxy for the arm's-length principle but may recognize this approach as part of their political commitment to Amount B, until 31 December 2029, with respect to jurisdictions that qualify as covered jurisdictions.

Australia, Colombia and New Zealand reserve the right not to apply a correlative adjustment if Amount B was used as the basis for the adjustment. Türkiye made the same reservation, except where its political commitment to accept Amount B would require it to do so.

Addition of Article 25(6) and related Commentary

Article 25 establishes the Mutual Agreement Procedure, under which the competent authorities of the countries endeavor to resolve cases of taxation not in accordance with the Convention, with the aim of relieving double taxation and preventing disputes.

The 2025 Update introduces new paragraph 6 into Article 25 and deletes the alternative provision that previously appeared in the Commentary. New paragraph 6 explicitly addresses the relationship between tax treaties and Article XXII(3) of the GATS, which governs consultation and arbitration in disputes between World Trade Organization (WTO) Members over national treatment for services.

Under the new paragraph, the countries agree that a measure "falls within the scope of this Convention" for GATS purposes only if it is a measure to which Article 24 (Non-discrimination) of the OECD Model applies. They further agree that any dispute between them as to whether a measure falls within the scope of the Convention will be resolved under the Mutual Agreement Procedure in Article 25(3) or, failing agreement, any other procedure agreed by both countries, rather than under the WTO's dispute settlement system.

The Commentary on Article 25 is updated to explain the rationale for this new provision and to remove the earlier alternative language.

A number of jurisdictions have expressed positions on Article 25. Among them, India and Nigeria have indicated that they may not agree with the proposed new paragraph 6 in full.

Commentary on Article 26 (Exchange of Information)

Article 26 of the OECD Model covers how tax administrations exchange and use information to administer and enforce domestic tax laws. It defines what can be shared, how it can be used and the safeguards that apply.

The 2025 Update clarifies the permitted use and communication of exchanged information. Information received under Article 26, including information that relates to multiple taxpayers, may be communicated to a taxpayer or that taxpayer's proxy to the extent that it has a bearing on the outcome of that taxpayer's matter. The use of exchanged information is not limited to the person for whom it was originally received and may extend to any other person, provided the use remains within the purposes listed in paragraph 2 of Article 26 of the OECD Model. The receiving country is not required to inform, or obtain authorization from, the sending country regarding such use.

The 2025 Update includes rules on taxpayer access and on "reflective" non-taxpayer-specific material. "Reflective" is defined as information about, or generated on the basis of, exchanged information — for example, statistical data and non-taxpayer-specific notes, summaries and memoranda that incorporate exchanged information. Such material may be disclosed to third parties only if it cannot directly or indirectly reveal a taxpayer's identity and after the sending and receiving states consult, keep a written record and conclude that disclosure will not impair tax administration.

No new reservations or observations were recorded on Article 26 in the 2025 Update. Hong Kong recorded the position that it reserves the right to replace "domestic law' with "internal laws" in paragraphs 1 and 2 (reflecting its non-sovereign status) and clarifies that, under its internal law, information will be exchanged only for taxable periods after the agreement enters into force.

Public consultation on global mobility of individuals

On 26 November 2025, the OECD released a public consultation document on the global mobility of individuals. The document provides an initial discussion of the issues that arise from cross-border movement of people and seeks input from stakeholders on their insights and experiences. Although it primarily focuses on personal income tax and employment income, it also invites views on corporate tax challenges, including issues relating to the existence of a permanent establishment, the attribution of profits to such a permanent establishment, residence and transfer pricing.

Stakeholders are invited to submit written comments by 22 December 2025, and a public meeting will be held in January 2026.

Implications

The 2025 Update reflects the aim that the OECD Model be a living instrument that adapts to changing economic and business conditions. Its most immediately relevant implications for multinational groups are likely in two areas: (i) remote working and permanent establishment risk, and (ii) transfer pricing, both financial transactions and the fact that non-deductibility is not considered covered by Article 9. These are areas in which tax authorities are already active and the Update is likely to be tested in audits and controversy.

The 2025 Update clarifies when a home or other relevant place may constitute a fixed place of business permanent establishment under Article 5, but it does not address the interaction between cross-border remote work and agency and service permanent establishment clauses in bilateral treaties. Therefore, businesses should remain conscious of the existing mechanisms in bilateral treaties that may create a permanent establishment, namely by virtue of a dependent agency or service permanent establishment provision. Businesses may also want to consider participating in the OECD's public consultation on global mobility of individuals.

Businesses should stay abreast of how this update to the OECD Model is implemented or applied. It is important to recognize that its practical implications will not be uniform across jurisdictions, as is foreshadowed in the observations, reservations and positions reflected in the Commentary. Moreover, in some jurisdictions changes to the OECD Commentary may be taken into account in interpreting existing treaties, whereas in other jurisdictions they may not be taken into account until treaties are renegotiated or amended. Thus, businesses should review their existing structures, remote working arrangements and financing policies and assess the implications of the 2025 Update on a case-by-case basis.