Virtual PE Risk: The OECD’s 2025 Guidance and India’s Position

The growing normalization of remote working arrangements is testing conventional Permanent Establishment (PE) principles that rely on physical presence. For businesses considering potential virtual PE exposure in India, it is critical to understand the associated risks by evaluating the OECD’s 2025 guidance, India’s evolving virtual PE discourse, relevant judicial decisions, and the compliance implications for foreign enterprises with India-connected workforce.

The concept of Permanent Establishment (PE) has traditionally underpinned the international corporate tax framework. Under established principles, a jurisdiction may tax the business profits of a foreign enterprise only where the enterprise maintains a tangible presence, such as an office, branch, or personnel, within that jurisdiction.

The expansion of remote working models, digital service delivery, and cross-border workforce mobility has, however, placed pressure on this physical-presence-based approach. Presently, multinational enterprises can create substantial economic value in a market without establishing a conventional on-the-ground presence, leading tax authorities globally to reassess how PE thresholds should be applied.

In this evolving context, the concept of a “virtual Permanent Establishment” (virtual PE) has emerged as a key area of debate. This discussion is particularly relevant in India, where tax authorities increasingly emphasize economic substance and value creation when evaluating nexus and profit attribution for cross-border activities.

OECD 2025 update: Rethinking PE in the age of remote work

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On November 18, 2025, the Organisation for Economic Co-operation and Development (OECD) released a major update to its Model Tax Convention (MTC), marking the first substantial revision in eight years.

The revised Commentary to Article 5 of the OECD MTC provides updated guidance on when an employee’s home or another location not owned or controlled by the employer but situated in a different country may constitute a fixed place of business PE. These clarifications respond to the substantial increase in cross-border remote working since the previous MTC revisions in 2017.

Although the text of Article 5 itself remains unchanged, the updated Commentary is intended to inform the interpretation of existing bilateral tax treaties that follow the OECD model language. In practice, however, the extent to which courts and tax authorities rely on the Commentary will continue to vary by jurisdiction.

The OECD’s new home-office PE framework

The revised guidance confirms that an employee working from home or another remote location abroad does not, in itself, give rise to a fixed place PE. Whether a PE exists depends on a detailed assessment of the specific facts and circumstances, rather than the mere existence of remote work arrangements.

Under the revised Commentary to Article 5, two key tests apply when assessing whether remote work creates a PE:

1. The 50 percent working time test

The revised Commentary provides that a home or other remote location will generally not constitute a PE where an employee performs less than 50 percent of their total working time from that location over any rolling 12-month period. The analysis focuses on regular and sustained use of the location, as opposed to short-term, incidental, or occasional remote working arrangements.

Where the 50 percent threshold is met or exceeded, a further assessment is required to determine whether the location qualifies as a “fixed” place of business. In this regard, the permanence criterion remains central. As a general principle, a presence of up to six months is typically not regarded as sufficiently permanent; however, repeated or recurring use of the same location over multiple years may be aggregated and could satisfy the permanence requirement.

The Commentary also establishes a practical presumption for remote working arrangements undertaken primarily for personal reasons. In such cases, where the employee works from the home location for less than half of their working time, the location should ordinarily not be regarded as being at the disposal of the employer. Any departure from this presumption would be expected to arise only in limited and fact-specific circumstances.

2. The commercial reason test

Where an employee works remotely from a particular location for more than half of their working time, the analysis shifts to whether there is a genuine business-driven reason for that arrangement. A commercial reasoning is likely to exist where the location:

• Enables closer management of customer relationships, including in-person interactions
• Supports the development of new customers or business opportunities
• Facilitates sourcing or managing supplier relationships or contractual obligations
• Allows real-time or near real-time engagement across time zones, such as through support or service functions
• Provides access to specialized expertise relevant to the enterprise’s activities
• Encourages collaboration with other businesses or institutions
• Is critical for delivering services that require physical presence at customer premises
• Enhances coordination with the enterprise’s own employees or those of associated entities

What does not qualify as a commercial reason:

• Employee convenience or lifestyle choice
• Talent retention strategies
• Cost savings on office space
• Employer-provided home-office benefits

If remote work is driven primarily by personal reasons, the OECD suggests that a PE should not arise.

Diverging national positions: No uniform global application

While the OECD provides interpretative guidance, countries are not bound to apply it uniformly. Several jurisdictions have expressed reservations or adopted alternative approaches.

Notably:

• India has rejected the 50 percent working time benchmark and the commercial reason test.
• Israel applies additional criteria in measuring working time.
• Nigeria and Malaysia apply country-specific conditions.

As a result, multinational employers cannot rely solely on OECD guidance and must assess local PE rules and enforcement practices.

Service PE and the emergence of the “virtual Service PE” debate in India

What is Service PE?

Many of India’s tax treaties, such as those with the US, UK, Singapore, Australia, and the UAE, contain a service PE clause. Typically, a service PE arises when:

• Employees or personnel of a foreign enterprise physically perform services in India; and
• Such services continue beyond a specified duration.

In such cases, India may tax profits attributable to those services.

Tax authority’s virtual PE argument

In recent years, Indian tax authorities have advanced the view that the continuous provision of high-value services to Indian customers, even when delivered remotely from outside India, can give rise to a functional or economic presence comparable to physical presence in India.

This line of reasoning, commonly described as a virtual service PE approach, seeks to anchor taxability in the location of value creation and sustained digital interaction with the Indian market, rather than in the physical presence of personnel or infrastructure.

Judicial position in India: Physical presence remains central

The Indian judiciary has consistently declined to expand the concept of PE through judicial interpretation, particularly by introducing notions of “virtual” or digital presence in the absence of explicit treaty language. The prevailing judicial view remains that PE provisions must be applied strictly as drafted.

This position was reaffirmed by the Delhi High Court in its December 4, 2025 judgement in CIT v. Clifford Chance Pte Ltd (ITA Nos. 353–354/2025). The Delhi HC categorically held that tax treaties must be interpreted according to their express terms and that where a treaty requires services to be performed “in India,” virtual or offshore service delivery cannot satisfy that condition. Digital nexus concepts, the Court observed, cannot be read into tax treaties by way of interpretation.

In effect: No physical presence = No Service PE

This judgment provides strong judicial support for offshore service delivery models, provided personnel do not enter India.

India’s broader nexus framework

Although courts have rejected virtual PE under treaties, India has independently expanded its taxing reach through domestic law.

Significant economic presence (SEP)

SEP provisions seek to tax non-residents based on:

• Revenue thresholds; or
• User-based interaction with India.

While SEP is not yet fully operational under tax treaties, it signals India’s policy direction toward economic nexus.

Equalization levy

India’s equalization levy further reflects its willingness to tax digital transactions outside traditional PE concepts.

Together, these measures indicate that while treaty-based PE rules remain intact, India’s broader tax policy is moving beyond physical presence.

Practical implications for foreign employers with India exposure

Foreign enterprises with personnel working from India, including senior executives, global capability center (GCC) staff, technical specialists, and long-term digital nomads, face heightened tax and compliance scrutiny. Where such arrangements are not carefully structured or monitored, they may trigger exposure to fixed place or service PE risks, along with associated payroll withholding obligations, social security (provident fund) liabilities, and increased likelihood of corporate tax audits and disputes.

Since OECD “safe harbor” concepts do not carry binding effect in India, even home-based or remote work arrangements may attract PE scrutiny, depending on the nature, seniority, and commercial significance of the functions performed in the country.

How can businesses manage virtual PE risk in India?

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While the OECD’s 2025 update seeks to bring global clarity on remote-work-related PE risks, India does not accept OECD home-office thresholds and continues to apply a substance-heavy, revenue-focused interpretation of PE.

For now, Indian courts uphold the requirement of physical presence under treaties. However, India’s domestic nexus rules and enforcement posture suggest that virtual PE debates are far from settled. Proactive planning, local analysis, and careful workforce structuring remain essential for managing PE risk in India’s evolving tax landscape.

Companies with India-facing remote or mobile workforce should:

• Conduct India-specific PE risk assessments
• Map functions, authority, and decision-making performed in India
• Review payroll, social security, and compliance exposure
• Strengthen role definitions and inter-company agreements
• Align global mobility policies with India’s tax position, not just OECD guidance

Early assessment is critical, as the creation of a PE for one employee can pull additional personnel into India’s compliance framework.

For more information and advice for foreign firms on doing business in India, please feel free to email us at india@dezshira.com.

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