The 2025 Update to the OECD Model Tax Convention Commentaries provides guidance on when a home or remote location can give rise to a fixed place of business PE under Article 5(1).
The scope of the 2025 Update
The 2025 Update on Article 5(1) (2025 Update) addresses permanent establishment (PE) exposures from "Cross-border working from a home or other relevant place" in Article 5(1), while making it clear that other Article 5 provisions (including dependent agent PE under Article 5(5)) must still be analysed under existing principles.
This distinction is critical. In many remote working arrangements involving sales or business development, the dependent agent analysis may present greater risk than the fixed place of business analysis in Article 5(1).
The two-stage inquiry for fixed place of business
Where the 2025 Update provides clarity is in structuring the fixed place of business analysis for home offices.
The first stage introduces a time-based indicator. Where an individual works from a home or other relevant place for less than 50% of their total working time for the enterprise over a 12-month period, a place of business will generally not exist. This threshold is an indicator, not a statutory safe harbour.
Where the 50% threshold is met or exceeded, the inquiry moves to the second stage. Exceeding the time indicator does not, by itself, result in a PE. The conclusion depends on whether there is a commercial reason for the individual to carry on activities in that State.
A commercial reason exists where the individual’s physical presence facilitates the enterprise’s business. The 2025 Update gives a non-exhaustive list of examples, including direct engagement with customers or suppliers, cultivation of a local customer base, identification of new suppliers, services that require physical presence (such as training or repairs), and real-time interaction that benefits from proximity or time zone alignment. The operative concept is facilitation. The location must genuinely enable business activities that benefit from being carried out there.
Conversely, no commercial reason exists where an enterprise permits home working solely to obtain or retain the services of the individual, or solely to reduce costs such as office space. The mere presence of customers in a jurisdiction is insufficient. An employee working remotely while serving clients globally with only intermittent or incidental contact with local customers will generally lack the necessary commercial rationale, even if the individual works from home more than 50% of the time.
The "enterprise as person" distinction
The 2025 Update draws an important distinction between different factual situations. The precise analytical question is whether the individual is effectively carrying on the enterprise’s business in that State.
For individuals conducting work of an enterprise, a home office will constitute a fixed place of business PE only where both the time indicator and the commercial reason test are satisfied. An individual working from home in another State will not create a PE where the arrangement reflects personal preference and there is no commercial nexus between the enterprise’s business and that location.
Different considerations apply where the individual is the only person, or the primary person conducting the business of an enterprise in a particular State. An individual whose consulting enterprise is carried on predominantly from a home office in another jurisdiction would generally create a fixed place of business PE because the individual is, in substance, the enterprise itself.
This distinction has practical consequences. For example, an employee may not create a PE because there is no commercial reason for the employer’s presence (through the individual) in that State, while an individual carrying on their own enterprise from the same location may create a PE.
The South African context
South Africa is not an OECD member, although it participates in the OECD Inclusive Framework. South African courts have had regard to the Commentaries when interpreting double tax agreements, but the 2025 Update does not have the force of law. The application of the 2025 Update to treaties concluded before its publication may also be subject to debate.
South Africa has not taken any express position disagreeing with or reserving against the updates on the guidance contained in paragraphs 44.1 to 44.21 of the 2025 Update.
South Africa's silence on the update is notable. This suggests that, at least at this stage, South Africa appears to accept the 2025 Update for analysing when remote working from home offices creates PE exposure.
In AB LLC and BD Holdings LLC v CSARS [2015] ZATC 2 (15 May 2015), the Tax Court held that a foreign enterprise can have premises "at its disposal" without a lease agreement in place, even if those premises are within a client's offices and usage is restricted to the specific contract work. The court emphasised that exclusive access during necessary working hours is sufficient. Access outside business hours is not required if not functionally necessary. No formal lease or ownership is required, the key is functional control and regular access for business purposes.
This South African approach appears to take a practical, functional view of access that may be broader than the 2025 Update which introduces specific thresholds including 50% working time and commercial reason requirements.
Tax Court judgments are not binding. Yet the AB LLC judgment remains highly persuasive as there are not many South African cases on the issue of when a foreign enterprise has a PE in South Africa. It may be that courts will determine that the AB LLC case remains good law for client premises, and the 2025 Update applies for home offices as new and refined guidance for employees / consultants that work from their homes or related premises. This method (yet to be tested) maintains alignment with the 2025 Update by creating two different tests depending on the type of premises and location.
Under South African case law, South African courts interpret treaties in accordance with the Vienna Convention on the Law of Treaties (VCLT) with emphasis on the parties' shared contemporaneous understanding at the time of treaty conclusion. The VCLT binds South Africa as customary international law despite South Africa not being a signatory.
Subsequent changes to the Commentaries cannot alter pre-existing treaty meanings absent express agreement by both contracting states. This accords with paragraph 35 of the Commentaries' Introduction which provides that amendments to the Model Tax Convention and consequential changes to the Commentaries are not relevant to interpreting previously concluded conventions where those conventions differ in substance from the amended Articles.
For example, the AB LLC judgment relied heavily on the US Technical Explanation prepared at signature to interpret the South Africa–United States treaty, treating it as expressing the signatories' shared understanding and serving as an official interpretive guide. The US Technical Explanation is an official, treaty-specific explanatory memorandum issued by the US Treasury at the time a tax treaty is signed setting out how the United States understands and intends each provision of the treaty to be interpreted and applied.
Paragraphs 44.1 to 44.21 of the 2025 Update on home office PEs are therefore likely to be applied persuasively to South Africa's existing treaties where the guidance clarifies rather than innovates on Article 5(1) as it existed at treaty conclusion. South African courts retain discretion to determine whether the 2025 Update represents clarification of shared original intent or a significant innovation. This distinction will likely be tested in the courts, as it remains to be seen how SARS will apply the 2025 Update to a relevant treaty in tax audits and assessments.
We recommend that multinationals conduct a robust and defensible tax analysis of their remote working arrangements. This requires a holistic review of all PE provisions in Article 5 of the relevant treaty, informed by the 2025 Update and an assessment of how SARS is likely to test the facts in an audit.
