Ministry of Finance responds to update of OECD Model Tax Convention
In November of last year, the OECD released an update to the Model Tax Convention on the avoidance of double taxation, including revisions to the accompanying Commentary. Among the changes is a substantially revised interpretation concerning the creation of a permanent establishment arising from cross border remote work performed from a home office. In its response, the Ministry of Finance has issued a Communication outlining selected consequential changes and clarifying their implications for domestic practice.
Creation of a permanent establishment arising from remote work (home office)
We wrote in more detail about the update to the Commentary on the Model Tax Convention in relation to the formation of a permanent establishment here.
The OECD Commentary on Article 5 (Permanent Establishment) of the Model Tax Convention stipulates that a permanent establishment arising from working from home for an employer abroad does not usually arise if:
- the employee works from home abroad for less than 50 per cent of their working hours during a 12-month period,
- the employee works from home for more than 50 per cent of their working hours during a 12-month period but the employee's activities are not of a "business nature".
Already in the course of amending the Commentary, the Czech Republic applied a reservation to the above criteria, which the Ministry of Finance further elaborates and justifies in its Communication of February 2026.
According to the Ministry of Finance, the proposed criteria are not upheld by Article 5 of the Model Tax Convention itself. At the same time, the ministry objects to the mere category of premises having a decisive influence on the creation of a permanent establishment: an example is given of a situation where working from an office abroad would generally lead to the creation of a permanent establishment even if the proportion of working time spent there was less than 50 percent (in accordance with Article 5), whereas performing the same work from home would not lead to the creation of a permanent establishment if the approach set out in the Commentary were applied.
The Ministry of Finance's main objection is that the Commentary is not legally binding and its content may not correspond to the actual wording of the double taxation treaty. According to the ministry, the Commentary therefore does not provide sufficient legal certainty when assessing the creation and existence of a permanent establishment.
Further changes resulting from the update to the OECD Model Tax Convention
The updated Commentary on Article 9 (Associated Enterprises) of the OECD Model Tax Convention addresses the issue of the classification of financial transactions between associated enterprises, in particular whether a purported loan should be treated as debt for tax purposes or reclassified, for example, as an equity contribution. The Communication emphasises that this assessment must always precede the actual determination of the transfer price. Only once the nature of the transaction has been determined can the arm's length principle be applied in accordance with the relevant chapters of the OECD Transfer Pricing Guidelines. The Communication also draws attention to the connection between Article 9 and domestic rules limiting the tax deductibility of interest.
In this context, the updated Commentary emphasises that a corporation’s profits must first be determined using the arm's length principle and then adjusted in accordance with national rules, such as those limiting the tax deductibility of interest.
As for Article 25 (Mutual Agreement Procedure), the only amendment to the Model Convention was the insertion of a new paragraph in connection with the implementation of the Amount B under Pillar 1 of the OECD/G20 project. The newly added paragraph 6 of Article 25 addresses the relationship between double taxation treaties and the General Agreement on Trade in Services (GATS). Any dispute between the contracting states is to be resolved primarily by mutual agreement procedure under Article 25 of the double taxation treaty, and only if no agreement is reached under this procedure, under GATS.
The commentary on Article 26 (Exchange of Information) has also been significantly expanded. Among other things, the Communication points out that information received by the competent authority in the context of international exchange may also be used for tax matters concerning a person other than the one for whom the exchange of information was originally made, provided that such use is in accordance with the relevant legislation.
An updated full wording of the Model Tax Convention with the accompanying Commentary can be expected to be published during 2026.