Analysis of Israel's Reservations in Light of the Publication of the Updated Commentary to the OECD Model Tax Convention for 2025 Regarding Remote Work and Permanent Establishment

By

Meori Ampeli, Adv. (CPA) • Anna Tsabari, Adv.

Introduction

The mobility of human capital, digital nomad culture, geopolitical events, and technological developments have led to a dramatic increase in remote work over the past decade. This phenomenon has presented legal and tax challenges in the proper interpretation of the definition of "permanent establishment" under Article 5 of the OECD Model Tax Convention (hereinafter: "the Model Convention").

In a previous article, we extensively examined this issue, addressing the question of when working from an employee's private home would constitute a permanent establishment in that country for a foreign enterprise, with emphasis on the aggressive interpretation by the Israeli Tax Authority. On November 18, 2025, the updated Commentary to the Model Convention was published (hereinafter: "the Updated Commentary"), providing, inter alia, comprehensive clarifications regarding the concept of "permanent establishment" in the context of remote work, with emphasis on working from a home office. As will be shown below, the Updated Commentary presents a measured and balanced interpretation that seeks a substantive examination of the circumstances of each case through quantitative and qualitative tests ("commercial reason").

Israel, in contrast, submitted five reservations to the Updated Commentary - the highest number among all OECD member countries. This reveals the deep gap between its ostensibly declared policy - encouraging return to the country and attracting talent through increased certainty and tax relief - and its actual policy in the international taxation arena, which creates uncertainty and deters that very target population.

Background to the Publication of the Updated Commentary

Prior to the publication of the Updated Commentary, paragraphs 18-19 of the Commentary on Article 5 of the 2017 Model Convention provided a limited framework for dealing with current reality. Therefore, following the COVID-19 crisis, the OECD was required to publish two interim guidance documents (April 2020 and January 2021), which addressed the tax implications of forced working from home. These documents emphasized that working from home under exceptional circumstances does not create a permanent establishment. Now the time has come for the publication of a permanent framework under the title: "Cross-border working from a home or other relevant place."

The Updated Commentary in paragraphs 44.1-44.21 of the Commentary on Article 5 of the Model Convention states as follows:

"Changes to the Commentary on Article 5 to clarify the circumstances in which an individual's home could constitute a 'place of business' of the enterprise for which the individual works. These Changes are an evolution of existing principles and ensure the Commentary reflects modern working arrangements, providing additional certainty as to when a fixed place of business permanent establishment will, and will not, be created by an individual working from a home or other relevant place."

That is, the purpose of the Updated Commentary is to ensure that the interpretation of Article 5 of the Model Convention reflects modern working arrangements, while providing additional certainty regarding the question of the creation of a permanent establishment of a fixed place of business, as a result of an individual working from their home or other relevant place.

Therefore, we will review below the basic principles when examining the existence of a "permanent establishment" in the context of a "home office" in accordance with the Updated Commentary:

The Foundational Principle

The Updated Commentary opens with a description of the following state of affairs: 

44.1. " Increasingly, some individuals are able to, and choose to for personal reasons, carry out all or part of their work for an enterprise of a Contracting State from a place in the other Contracting State that is not a premises of the enterprise nor the premises of another enterprise with contractual or other connections to the first-mentioned enterprise such as a customer, supplier or associated enterprise (e.g. the individual's home or another place such as a second home, a holiday rental, the home of a friend or relative etc.). Such cross-border working arrangements present particular issues when determining whether a home or other place described in the preceding sentence (hereafter 'other relevant place') is a fixed place of business through which the business of an enterprise is wholly or partly carried on in accordance with paragraph 1 of Article 5."

Against this background, the Updated Commentary establishes that the mere fact that a person works from their home for a foreign company does not automatically create a permanent establishment. This is a fundamental interpretive principle based on the recognition that the employee's private home is not necessarily at the disposal of the company:

44.6. "  To constitute a permanent establishment under paragraph 1 of Article 5, a home or other relevant place must be a place of business of the enterprise. The mere fact that a place is used by an individual (e.g. an employee) to carry out activities related to the business of an enterprise should not lead to the automatic conclusion that that place is a place of business of that enterprise. Whether or not such a place constitutes a place of business of the enterprise will depend on the facts and circumstances of each case."

The determination of whether a home office or other relevant place is a permanent establishment must be examined based on the facts and circumstances of each case individually.

The Quantitative Criterion - Temporal Permanence

Paragraph 44.8 of the Updated Commentary establishes a clear quantitative threshold regarding the principle of "temporal permanence": if an employee performs work from their home for less than 50% of their total working time during a 12-month period in the relevant tax year, generally a permanent establishment will not be created, as follows:

44.8" …that home or other relevant place would generally not be considered a place of business of the enterprise if the individual worked from that home or relevant place for less than 50 per cent of their total working time for that enterprise over the course of any twelve-month period commencing or ending in the fiscal year concerned."

This criterion is based on the assumption that partial and limited use of a home office does not indicate that the place is at the "disposal" of the enterprise to a sufficient degree to create a permanent establishment.

Paragraph 44 of the Updated Commentary continues and establishes that even if the home is used for work continuously over an extended period, granting it a sufficient degree of permanence, it is still necessary to examine additional tests, such as the "circumstances test" and "commercial reason," as will be detailed below.

The Qualitative Criterion - "Commercial Reason"

To the extent that the scope of work from home exceeds the permanence threshold, the Updated Commentary instructs examination of whether there is a commercial reason for the employee's presence in that country, or whether it is a personal choice of the employee, as stated in paragraphs 44.10- 44.11 below:

44.10 " If an individual works from a home or other relevant place for at least 50 per cent of their total working time over the course of any twelve-month period commencing or ending in the fiscal year concerned, then whether the enterprise has a place of business at such a place will be determined by the facts and circumstances.

44.11. A prominent consideration is whether there is a commercial reason for the activities to be undertaken by that individual in the Contracting State where the home or other relevant place is located. A commercial reason for the performance of the individual's activities related to the business of the enterprise in a Contracting State will be considered to exist where the physical presence of the individual in that State will itself facilitate the carrying on of the business of the enterprise, such as where there are people or resources in that State to which the enterprise needs access for the performance of its business activities."

A commercial reason is therefore defined as a situation where the physical presence of the employee in that country itself advances the conduct of the enterprise's business, for example, when the enterprise needs access to people or resources in that country.

Paragraph 44.17 provides a non-exhaustive list of situations constituting a "commercial reason":

• Meetings between the employee and the enterprise's clients;

• Development of a new customer target or identification of business opportunities;

• Identification of new suppliers, management of relationships with suppliers, or performance, monitoring, or management of contractual relationships with suppliers;

• Real-time or near real-time interaction with clients or suppliers in different time zones (for example, providing call center services or virtual IT support or medical services);

• Access to business expertise used in performing the enterprise's activity, for example, regular meetings with university staff conducting research relevant to the enterprise's business;

• Collaboration with other enterprises;

• Providing services to clients located in the other country, when these services require physical presence of employees or other staff of the enterprise in that other country (for example, training or repair services performed at the client's location);

• Interaction with employees and other staff of the enterprise or related enterprises.

Concurrently, paragraphs 44.15-44.16 clarify that a commercial reason requires a connection between the person's presence at the home or relevant place in the country and the conduct of the enterprise's business. This connection does not exist in the following cases:

• The enterprise allows working from home solely to recruit or retain the employee;

• The enterprise allows working from home solely to reduce costs (such as reducing office space expenses);

Moreover, the Updated Commentary emphasizes that the mere presence of clients or suppliers of the enterprise in the country where the home office is located does not necessarily lead to the conclusion that there is a "commercial reason."

To the extent that no commercial reason is found for performing the activities, the residence will not be considered a fixed place of business of the enterprise, unless there are other facts and circumstances indicating otherwise.

Special Treatment for Self-Employed Individuals and Controlling Shareholders

According to paragraph 44.20 of the Updated Commentary, different considerations should be applied in cases where the individual is the sole or principal person managing the business or enterprise. A clear example of this is an independent consultant who is a non-resident, located for an extended period in a given country, where they perform most of their consulting enterprise's business activities from a home office in that country. In such a case, the home office constitutes a "fixed place of business of the enterprise."

Subject to the "Preparatory and Auxiliary" Test

Even if it is determined that there is a fixed place of business, Article 5(4) of the Convention may still establish that there is no permanent establishment if the activities performed there are of a preparatory or auxiliary character.

Israel's Five Reservations

Israel, as an OECD member country, is entitled to submit reservations to the interpretation of the Model Convention, Positions on the Commentaries, which constitute an official declaration by the country that it reserves the right to act differently from the Updated Commentary. Israel, the Czech Republic, and Chile were the only three countries among the 38 OECD member countries that expressed reservations to the proposed text. Chile reserved in full, the Czech Republic reserved partially, while Israel registered five reservations, which effectively pull the rug out from under the purpose underlying the Updated Commentary. On this below:

First Reservation: Method of Calculating the 50% Quantitative Threshold

This reservation allows Israel to choose between two calculation methods and adopt the higher of the two. The first method compares days of presence (including partial days) in Israel to full working days abroad. The second method compares actual working days (including partial days) from Israel to full working days abroad, as stated in the Positions on the Commentaries:

"Israel reserves the right, when applying the approach described in paragraph 44.8, to determine whether the 50 per cent threshold is met by using the greater of: a comparison between the number of full or partial working days present in the Contracting State in which the home or other relevant place is located ('home jurisdiction') and the number of full working days present outside of the home jurisdiction (counting days of presence that are working days in either the home jurisdiction or in another relevant jurisdiction); or a comparison between the number of full or partial days actually worked from the home jurisdiction and the number of full days actually worked outside of the home jurisdiction."

The first alternative therefore focuses on the employee's physical presence in Israel (even if they did not actually work the entire time) compared to their stay outside Israel, while the second alternative focuses on work actually performed from home in Israel compared to their working days outside Israel. Israel, for its part, chooses the alternative that leads to the higher result - that is, the one that presents a higher percentage of work from home in Israel. Thus, if an employee is present in Israel for 60 days, but actually worked from home only 40 days, and the rest of the time was traveling or worked from other places - according to the first alternative all 60 days will be counted, according to the second alternative only 40 will be counted. Israel will choose the higher number.

This approach is significantly more stringent than the OECD's standard approach and increases the risk of creating a permanent establishment in Israel for foreign companies.

Second Reservation: Group of Employees as Commercial Reason

As we have seen, the Updated Commentary (in paragraph 44.18) establishes that the presence of the enterprise's clients or suppliers in that country should not lead to an automatic conclusion of the existence of a "commercial reason." Israel extends this also to a "meaningful group" of employees, as follows:

"Regarding paragraph 44.18, Israel reserves the right to consider a commercial reason to exist where a number of employees are located in the Contracting State in which the home or other relevant place is located creating a meaningful group relative to their business unit."

This reservation fundamentally changes the commercial reason test. Instead of examining a causal connection between the physical presence of a specific employee and the advancement of the enterprise's business, it appears that Israel is proposing a unique collective test, based on the number of employees. In effect, the presence of several employees can create a "commercial reason" for each of them, even if there is no direct business connection between the specific employee and Israel.

Third Reservation: Core Activity and Value Creation

Paragraph 44.19 of the Updated Commentary clarifies that in the absence of a "commercial reason," that place will not be considered a fixed place of business of the enterprise, unless there are other circumstances indicating otherwise. Israel fills this void with a specific criterion: core activity to the business or activity that significantly contributes to value creation, as follows:

"Regarding paragraph 44.19, Israel wishes to clarify that, where there is no commercial reason for undertaking the activities related to the business of the enterprise of a Contracting State from a home or other relevant place located in the other Contracting State, it will take account of circumstances whereby the individual is employed to perform activity that is 'core' to the business or activity that significantly contributes to value creation for the enterprise."

In effect, this reservation allows Israel to recognize a permanent establishment even in the absence of a commercial reason, based on a completely different criterion that does not exist in the Updated Commentary. The concepts of "core activity" and "significant contribution to value creation" are subject to broad interpretation, and in practice may apply to most skilled employees who stay in Israel.

Fourth Reservation: Key Persons

As mentioned, paragraph 44.20 addresses the special case of an independent entrepreneur who constitutes the enterprise itself. Israel dramatically expands this section to all "primary persons" of an enterprise, including founders, partners, or relatively significant senior executives, as follows:

"Regarding paragraph 44.20, Israel reserves the right to consider a home office used by one of the primary persons of an enterprise, such as a founder, partner or relatively significant senior executive, to constitute a permanent establishment of the enterprise."

Thereby, Israel effectively creates a presumption of permanent establishment for a broad category of individuals, without the need to examine the quantitative threshold criterion, commercial reason, or specific circumstances, such that any senior employee of a foreign enterprise who works from their home in Israel ostensibly creates a permanent establishment in Israel, even if in practice their entire contribution to the enterprise is not relevant to the Israeli market. This approach stands in direct contradiction to the foundational principles of the Updated Commentary.

Fifth Reservation: Expansive Interpretation of Examples

Israel also reserved from the conclusion of Example D in paragraph 44.21 of the Updated Commentary, which describes an employee who performs most of their work from home in State S for a company in State R. The employee has a role that focuses exclusively on clients and provides services "remotely," without physically meeting with clients located in State R, State S, and other states.

That is, in the circumstances of the example, it is found that there is no substantial commercial reason for the activity to be performed specifically from the home in State S, and visits to clients in State S are only occasional on a quarterly basis. Therefore, in the example it is determined that despite the home being used for business activity, it will not be considered a permanent establishment of the company in State S, unless additional facts are found that show otherwise.

Israel reserves from this and establishes that it may reach a different conclusion on the same facts, relying on considerations such as "regional visits" or "different time zone":

"Israel reserves the right to consider that the facts and circumstances of example D in paragraph 44.21 could indicate that the physical presence of the employee in that State facilitates his quarterly visits to clients in the same region or enables him to provide services in a different time zone."

That is, Israel chose to reserve even from a specific example designed to illustrate a clear situation of the absence of a permanent establishment, in which the employee's activity is not connected by commercial reason to Israel.

Summary, Reflections, and Questions Going Forward

The Updated Commentary undoubtedly constitutes a comprehensive and balanced interpretive arrangement against the background of the human capital mobility phenomenon, which provides certainty regarding the question of the creation of a fixed place of business (permanent establishment) as a result of a person working from their home or other relevant place, when the employer is located in another country. The arrangement was adopted in full by the overwhelming majority of OECD member countries.

Unfortunately, it appears that Israel chose to remain behind. That is, examination of the five reservations reveals a consistent pattern: at every point of intersection between the OECD's balanced interpretation and the Israeli interpretation, Israel chooses the "Beit Shammai" approach, the most stringent one. The reservations create a structure of stringent alternatives that complement each other. When a taxpayer does not pass the fifty percent threshold according to the standard calculation, Israel is entitled to apply an alternative calculation method. When there is no commercial reason according to the standard definition, Israel can rely on the presence of a group of employees or on contribution to value creation. And if even that is not enough, the employee's status as a key person may suffice by itself to create a permanent establishment.

The central concepts in the reservations remain without clear definition, and the absence of case law or official guidelines alongside the Tax Authority's official position as expressed in Tax Ruling 253/12 and Mandatory Disclosure Position 13/2016 leave the taxpayer and advisor community in uncertainty regarding the Tax Authority's position and require obtaining an individual tax ruling. Accordingly, pre-planning a business structure that will definitively prevent the attribution of permanent establishment status in Israel is problematic, and there exists substantive exposure to permanent establishment characterization for any new immigrant or returning resident who relocates to Israel and continues providing services to a foreign company from Israeli territory.

The contradiction between the declared policy and the actual policy is particularly striking. The Government of Israel actively promotes a policy of attracting talent under the heading "bringing the brains home", while promising to create legal and tax certainty and strengthen Israel's status as a Startup Nation. However, concurrently, on the most fundamental and significant question in international taxation - permanent establishment - Israel has created absolute uncertainty.

The 2025 Commentary revision presented an exceptional opportunity to establish a balanced framework for the systematic handling of remote work scenarios, and the vast majority of OECD member states embraced this equilibrium—with many extending even greater relief measures prior to its formal release. Israel, conversely, pursued an alternative course and stands alone among OECD nations, apart from Chile, in lodging such an extensive array of restrictive reservations, which effectively negate, as noted, the underlying objectives of the revised guidance.

And we can only wonder, who is leading this line? Why, before publishing the reservations, did the state not bother to share with the public and particularly with the professional community, why is there no uniform line regarding encouraging immigration and return, and who is it that believes that adopting a stringent policy relative to the standard established in the Updated Commentary will contribute specifically at this current time to the country's economy?

Combined with the cancellation of the reporting exemption under Amendment 272 for first-time Israeli residents and veteran returning residents, the stringent reservations create a double trap and negative incentive to immigrate or return to Israel, and this is before we discussed the implications of Amendment 277 and the Trapped Profits Law on this population. On that in another article.

For further questions and clarifications, please contact: Meori Ampeli, Adv. (CPA), Anna Tsabari, Adv., Shlomi Shalev, Adv., Gershon Pink, Adv., Goni Zussman, Adv., and Itzik Irim, Adv.. You are invited to read additional articles and updates on our firm's website. 

Disclaimer: The information provided in this article does not constitute legal opinion or advice regarding the issues discussed. It is recommended to consult with a tax expert before taking any legal or other actions based on this article.