We can work it out: OECD adopts 2025 Update to the Model Tax Convention

On November 18, 2025, the OECD adopted the “2025 Update to the OECD Model Tax Convention” (Update)¹, which includes broad-ranging updates to the OECD model treaty (Model Treaty).²

The most significant updates to the commentary concern Articles 5, 9, and 26—provisions that address permanent establishment, transfer pricing, and exchange of information, respectively. These revisions represent a fundamental recalibration of international tax principles in response to contemporary challenges posed by an increasingly mobile workforce and digitalized global economy.

The changes to the commentary provide critical guidance on remote work arrangements and permanent establishment risk, clarify the interaction between treaty-based profit allocation and domestic tax laws, and expand the scope and utility of information exchange for tax administration purposes. Taxpayers and tax authorities alike will need to carefully assess the implications of these updates for cross-border operations, transfer pricing policies, and tax controversy strategies.

Article 5, Home Office Permanent Establishment

The Update revises the Commentary on Article 5 and provides comprehensive guidance on when use of an individual’s, such as an employee’s, home (or other relevant place) may give rise to a permanent establishment (PE) of the enterprise. The revision comes as part of a larger effort by the OECD to respond to the effects of global mobility on tax, in recognition of the complexities caused by a workforce that is increasingly cross-border and remote.

Under the Model Treaty, for a place of business (including a home office) to constitute a PE, the enterprise must have a fixed place of business through which it carries on its business (in whole or part).³ In the context of an individual’s home office, the Model Treaty's prior commentary provided that the determination should be based on whether the home was at the enterprise’s disposal, weighing the facts and circumstances; however, the commentary contained little concrete guidance as to how the test should be applied. The Update continues to provide that whether a home office is a “place of business” for PE purposes depends on the facts and circumstances analysis, but clarifies application of the test in a few key areas.

Eversheds Sutherland Observation: No changes were made to Article 5 of the Model Treaty. Employers should continue to ensure that remote employees are not authorized to enter contracts on the enterprise’s behalf.

First, the Update introduces a general presumption, in the absence of other facts and circumstances showing otherwise, that a PE does not exist if an individual works remotely in a jurisdiction for an enterprise for less than 50% of his or her total working time over the course of a year. To the extent that an individual works remotely for an enterprise for at least 50% of his or her total working time over the course of a year, whether the enterprise has a PE is determined based on an analysis of the facts and circumstances; a “predominant consideration” in this analysis is whether there is a “commercial reason” for the individual’s remote work at that location. The presence of such a “commercial reason” generally indicates that the enterprise has a PE. 

Eversheds Sutherland Observation: Notably, the presumption contemplates that working days, rather than days present in a country, are used to determine whether the 50% threshold has been exceeded.

A commercial reason is considered to exist where the individual’s physical presence in the country itself facilitates the carrying on the enterprise’s business, such as where a home office facilitates an individual’s ability to directly engage with customers, suppliers, and others on behalf of the enterprise. The Update further details that a commercial reason exists if the individual working from a home office or other relevant place facilitates (1) meetings between the individual and the enterprise’s customers, (2) cultivation of a new customer base or identification of business opportunities, (3) identification of new suppliers and managing supplier relationships (and related contractual arrangements), (4) collaboration with other businesses, access to experts (such as regular meetings with personnel of a university carrying out research relevant to the enterprise’s business), performance of services for customers located in the same country as the home office that must be performed on-premises (such as training or repair services performed on the premises of the customer), and interaction with employees and other personnel of the enterprise or of associated enterprises.

The Update clarifies that where the home office facilitates real-time or near real-time interaction with customers or suppliers in different time zones (such as call center services or virtual IT or medical services), a commercial reason exists. However, the “mere presence” of customers and suppliers, or the “mere fact” of a difference in time zone, does not create a commercial reason. Likewise, a commercial reason does not exist where an enterprise allows remote work only to obtain or retain an individual’s services or only to reduce costs.

Eversheds Sutherland Observation: Generally, the Update’s cross-border work from home commentary is taxpayer-favorable. The Update contains many helpful examples of how the Model Treaty applies in common scenarios such as when employees work remotely to care for a sick relative or after renting a vacation property.

The Update provides several illustrative examples. For instance, where an employee works from home for 1–2 days per week, or 30% of total working time, the home is not a place of business for the enterprise because less than 50% of the employee’s working time was spent working from the home office and because no facts and circumstances existed to override the general presumption. Where an employee works from home 80% of total working time and regularly visits clients in the country where the home is located to provide services, the home is a place of business for PE purposes because (1) more than 50% of the employee’s working time is spent working from the home office and (2) there is a commercial reason for the employee’s presence because it facilitates the provision of the enterprise’s services in the country where the home office is located. And where an employee works almost exclusively from home to provide services virtually to customers in countries located in different time zones than the home office’s country, the home is a place of business for PE purposes because (1) more than 50% of the employee’s working time is spent working from the home and (2) there is a commercial reason for the employee’s presence because it enables the employee to be fully available (such as through offering real-time or near real-time services around the clock). By contrast, where an employee works from home 60% of total working time, in a client-facing role providing services remotely to clients in multiple countries (including the country in which the employee’s home is located) and making quarterly visits to the premises of a client located in the same country as the home, the home is not a place of business for PE purposes, despite exceeding the 50% working time threshold, because there is no commercial reason for the employee’s presence, due to the intermittent and incidental nature of the client visits (and due to the fact that the mere presence of clients in the country does not, alone, create a commercial reason).

Eversheds Sutherland Observation: The Update only addresses corporate income tax concerns; however, the Inclusive Framework is expected to propose a work plan to address the global mobility of individuals in early 2026. Individuals and employers must continue to consider individual tax or payroll withholding and/or other social contribution obligations. Multiple countries (Israel, Czech Republic, Chile and Colombia) have reserved with respect to certain aspects the Article 5 Update. Companies must continue to understand applicable local law, availability of treaties and to monitor activities of their cross-border employees including those that work from home.

Article 9, Arm’s Length Principle

The Update revises the Commentary on Article 9 representing a fundamental recalibration of the relationship between the arm’s length principle and domestic tax law, with significant implications for transfer pricing controversy management. The changes introduce a clear conceptual separation between profit allocation under international treaty standards and taxable income computation under domestic law. This separation is reinforced by the clarification that domestic law deductibility denials do not trigger corresponding adjustment obligations, effectively permitting economic double taxation in certain circumstances and narrowing the scope of treaty relief previously available to taxpayers.

The Update also acknowledges the divergent approaches jurisdictions take to debt-equity characterization, recognizing that some apply transfer pricing accurate delineation principles while others rely on domestic thin capitalization rules, and refines the corresponding adjustment mechanism to impose higher evidentiary burdens on taxpayers seeking relief from economic double taxation. Collectively, these changes signal a shift toward greater deference to domestic law in transfer pricing matters, requiring taxpayers to fundamentally rethink their controversy strategies by distinguishing between international profit allocation disputes (which remain subject to Article 9 and MAP) and domestic law deductibility issues (which may fall outside traditional treaty relief mechanisms and require alternative approaches such as Article 24 non-discrimination arguments).

1. Clear Separation Between Profit Allocation and Taxable Income Computation

The Update introduces a critical new paragraph 3.1 clarifying that once the profits of the associated enterprises 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 such profits should be taxed. If there is conformity with the requirements of other provisions of the Convention, Article 9 does not deal with the issue of whether expenses are deductible when computing the taxable income of either enterprise.

Eversheds Sutherland Observation: This fundamental clarification creates a two-stage analysis that taxpayers and tax authorities must navigate separately—first, the allocation of profits under the arm’s length principle, and second, the computation of taxable income under domestic law. This separation has profound implications for how transfer pricing disputes are framed and resolved. The practical implication is that taxpayers facing transfer pricing adjustments must separately analyze: (1) whether the profit allocation reflects arm’s length principles under Article 9, and (2) whether domestic law expense deductibility rules apply to the allocated profits. These are distinct issues requiring different legal arguments and evidence. Taxpayers can no longer argue that Article 9 prevents the application of domestic expense deductibility limitations once arm’s length profit allocation has been determined. This likely reduces the scope of treaty protection in transfer pricing controversies.

2. No Corresponding Adjustment Obligation for Domestic Law Deductibility Denials

The Commentary adds a new paragraph 6.1 clarifying that the denial of a deduction in the computation of taxable income under the domestic law of a Contracting State (as discussed in paragraph 3.1) does not in itself result in economic double taxation for the purposes of paragraph 2 and there is thus no obligation on the other Contracting State to make a corresponding adjustment.

Eversheds Sutherland Observation: The clarification eliminates corresponding adjustment obligations when one jurisdiction denies a deduction under domestic law even though this may effectively create economic double taxation. The traditional corresponding adjustment mechanism under Article 9(2) does not apply to domestic law deductibility denials. The practical effect is that when one jurisdiction applies domestic interest limitation rules or other expense deductibility restrictions, the other jurisdiction has no treaty obligation to provide relief through a corresponding adjustment. Taxpayers must accept this economic double taxation or seek relief through other mechanisms. However, traditional MAP processes under Article 25 are designed to resolve disputes about arm’s length profit allocation, not disputes about domestic law expense deductibility. The denial of a deduction in the computation of taxable income under the domestic law of a Contracting State does not in itself result in economic double taxation for the purposes of paragraph 2, so MAP competent authorities may decline to address these issues. While Article 9 does not provide relief, taxpayers may need to shift their controversy strategy to Article 24 non-discrimination arguments if domestic law expense deductibility rules are applied in a discriminatory manner.

3. Debt-Equity Characterization Approaches Remain Jurisdictionally Divergent

The Commentary expressly recognizes that 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. While some Contracting States 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 Contracting States, such as the United States, address the issue of the balance of debt and equity funding of an entity under their domestic laws (including judicial doctrines).

Eversheds Sutherland Observation: The Update explicitly acknowledges that jurisdictions use fundamentally different approaches to debt-equity characterization—some use transfer pricing accurate delineation principles, while others use domestic law thin capitalization rules. This creates inherent uncertainty and potential for disputes about which approach applies. The practical implication is that taxpayers should consider these approaches to determine whether each relevant jurisdiction applies transfer pricing accurate delineation principles or domestic law thin capitalization rules to debt-equity characterization. The applicable approach will fundamentally affect legal arguments and evidence.

4. Refined Corresponding Adjustment Standards Create Higher Burden

The Commentary refines paragraph 6 to clarify that State B is committed to make an adjustment of the profits of the affiliated company if it considers that the adjustment made in State A is justified both in principle, but only in an amount that State B considers reflects profits computed on an arm’s length basis. Hence, the corresponding adjustment obligation is now explicitly conditional on both jurisdictions agreeing that the adjustment is justified in principle AND that the amount reflects arm’s length profits. Moreover, as provided in the last sentence of paragraph 2, the Contracting States shall, if necessary, consult each other in determining an appropriate adjustment, with a view to eliminating the economic double taxation that may otherwise result where there is a difference of views between the Contracting States on the amount of the adjustment required to reflect profits computed on an arm’s length basis, having due regard to the other provisions of the Convention, including Article 25. 

Eversheds Sutherland Observation: The Update imposes a higher burden for taxpayers seeking corresponding adjustments and provides tax authorities with greater discretion to deny or limit such adjustments. Taxpayers must affirmatively demonstrate that both the principle and amount are justified under arm’s length standards. Even when one jurisdiction makes a primary adjustment, the other jurisdiction can refuse a corresponding adjustment if it disagrees either with the principle of the adjustment or with the amount. Taxpayers are well advised to provide detailed transfer pricing documentation to both jurisdictions showing that the primary adjustment is justified in principle and that the amount reflects arm’s-length profits. Taxpayers will need to assess whether it makes sense to file MAP requests promptly when corresponding adjustment disputes arise, and if so, provide both competent authorities with comprehensive analysis of both the principle and quantum issues.

Article 26, Exchange of Information 

The Update revises the Commentary on Article 26 and expressly clarifies that information received by a Contracting State may be used not only for tax matters concerning the person or persons for which the information was initially received, but also for such purposes in respect of any other person, and that the receiving Contracting State is not required to inform or request authorization from the sending Contracting State regarding such use. The Update establishes a framework for determining when exchanged information may be disclosed, distinguishing between taxpayer-specific information, reflective non-taxpayer specific information, and information that must remain strictly confidential. With respect to taxpayer access, the Update confirms that information exchanged (whether obtained with respect to one or multiple taxpayers) may be communicated to the taxpayer (or their authorized representative) to the extent that such information has a bearing on the outcome of a tax matter concerning that particular taxpayer. Information can also be disclosed to governmental or judicial authorities charged with deciding whether such information should be released to the taxpayer, their proxy, or to witnesses.

The Update introduces the concept of “reflective non-taxpayer specific information,” defined as information about or generated on the basis of information received through exchange of information, such as statistical data, as well as non-taxpayer specific notes, summaries, and memoranda incorporating exchanged information. Such reflective information may be disclosed to third parties only if the information does not, directly or indirectly, reveal the identity of one or more taxpayers and the sending and receiving States have consulted with each other and concluded that the disclosure and use of such information would not impair tax administration in either State. The Update requires that there be a written record of the consultation and its outcome, and confirms that this consultation and conclusion can be achieved in the multilateral context, where the disclosure and use are foreseen in a multilateral process, such as a peer review methodology.

The confidentiality rules apply to all types of information received under paragraph 1, including both information provided in a request and information transmitted in response to a request, covering competent authority letters, including the letter requesting information. At the same time, it is understood that the requested State can disclose the minimum information contained in a competent authority letter (but not the letter itself) necessary for the requested State to be able to obtain or provide the requested information to the requesting State, without frustrating the efforts of the requesting State. If court proceedings or similar processes under the domestic laws of the requested State necessitate the disclosure of the competent authority letter itself, the competent authority of the requested State may disclose such a letter unless the requesting State otherwise specifies.

The Update expressly provides that information covered by paragraph 1, whether taxpayer-specific or not, should not be disclosed to persons or authorities not mentioned in paragraph 2, regardless of domestic information disclosure laws such as freedom of information or other legislation that allows greater access to governmental documents. Furthermore, the Update reinforces that in situations where the requested State determines that the requesting State does not comply with its duties regarding the confidentiality of information exchanged under Article 26, the requested State may suspend assistance until such time as proper assurance is given by the requesting State that those duties will indeed be respected. Moreover, the Update does not change the existing provision that if necessary, the competent authorities may enter into specific arrangements or memoranda of understanding regarding the confidentiality of the information exchanged under Article 26, providing flexibility for jurisdictions with particular confidentiality concerns or requirements to establish additional safeguards.

Eversheds Sutherland Observation: The Update’s express authorization for cross-person use of exchanged information transforms the strategic landscape of tax controversy, as tax authorities can leverage information obtained about one taxpayer to pursue investigations and assessments against related parties, group entities, or even unrelated taxpayers engaged in similar transactions, significantly impacting the reach of an exchange of information request. This development necessitates a paradigm shift in controversy management, requiring taxpayers to coordinate controversy positions across group entities and related parties given that information disclosed about one entity may be used against others, create comprehensive group-wide privilege strategies to protect sensitive information, carefully consider the ripple effects of any information provided in response to information requests or during audits, and recognize that settling a dispute with one tax authority may provide information that triggers inquiries in other jurisdictions. The practical implication is that tax controversy demands a holistic, group-wide coordination that anticipates how information disclosed in one context may be deployed by tax authorities across multiple taxpayers and jurisdictions, fundamentally altering the risk calculus of information disclosure, settlement negotiations, and dispute resolution strategies.

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If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.

_{1 OECD (2025), The 2025 Update to the OECD Model Tax Convention, OECD Publishing, Paris.
2 OECD (2017), Model Tax Convention on Income and on Capital: Condensed Version 2017, OECD Publishing.
3 The Model Treaty, Art. 5(1): The Update. Art. 5, para. 35.}