Risk of establishing a permanent establishment due to working from home

The OECD has published an update to its Commentary on Article 5 of the Model Tax Convention on Double Taxation. Among other things, it addresses the principle of permanent establishment in cases where employees work from home, or another location within the country that is not directly connected to the employer's business.
However, the Czech Republic does not agree with the new interpretation and continues to strictly interpret the assessment of work from home in the Czech Republic for foreign employers exclusively in accordance with the relevant double taxation agreement. According to the OECD, it is necessary to consider and assess:

• Scope of work from home

If an employee works from home and located abroad for less than 50 percent of their working hours during a 12-month period, a permanent establishment does not arise.

• Commercial nature of the activity

If the scope of work exceeds 50 percent of working hours performed from home and located abroad, a permanent establishment does not automatically arise. It must be proven that the employee's activity in the country in question is of a commercial nature. There must therefore be a clear link between the employee's work in the country and the company's business activities - for example, the employee deals directly with customers or suppliers in the country. On the other hand, it is not considered a commercial reason if the employee works from home located abroad solely for personal reasons or to reduce costs.

The Czech Republic does not agree that the type of place used to perform work should be the only determining factor limiting the possibility of establishing a permanent establishment. The Czech tax administration continues to argue that, unless the activities are of a preparatory or auxiliary nature, a foreign company may establish a permanent establishment in the Czech Republic on the basis of its employees' remote work, without taking into account the other criteria set out in the OECD Commentary.