Executive summary

The 2025 Update to the OECD Model Tax Convention (the 2025 Update), published on 19 November 2025, amends the Commentary on Article 5 (Permanent establishment) of the 2017 OECD Model Tax Convention on Income and on Capital (2017 OECD Model Tax Convention) with significant impact, both directly and indirectly, on the Italian permanent establishment concept. Other amendments, affecting the concept of project permanent establishment, are not addressed in this Tax Alert. (For more on the 2025 Update, see EY Global Tax Alert, OECD releases update to Model Tax Convention, dated 25 November 2025.)

The above-mentioned amendments primarily deal with (i) the degree of temporal permanence (i.e., work time spent at a particular location) and (ii) the need to assess, on a case-by-case basis, taking all relevant facts and circumstances into consideration, the circumstances of use of an individual's home or other relevant place (Work Location) beyond which a fixed place of business could be deemed to exist for the enterprise.

In this context, the 2025 Update reiterates that a case-by-case analysis, taking all relevant facts and circumstances into consideration, still needs to be performed.

The 2025 Update confirms that a place of business may have a certain degree of permanence even if the location is used for only short periods of time but regularly over long periods of time, indicating that a specific set of rules applies to measure the temporal permanence of recurring activities.

If the individual works at the Work Location for less than 50% of the individual's time working for the enterprise over a 12-month period commencing or ending in the fiscal year concerned, that Work Location should generally not constitute a fixed place of business for the enterprise (50% Time Threshold), according to the 2025 Update.

To measure the individual's working time relevant for the 50% Time Threshold, the 2025 Update deploys a substance-over-form approach (i.e., it focuses on the individual's actual conduct and the contractual arrangements to the sole extent they are consistent with the individual's actual conduct).

If the 50% Time Threshold is exceeded, it shall be investigated whether there is a commercial reason for the performance of the individual's activities in the jurisdiction of the Work Location (e.g., the individual directly engages with customers, suppliers, associated enterprises or other persons on behalf of the enterprise and that engagement is facilitated by the individual's being located in that particular place — Commercial Reason Test).

If the Commercial Reason Test is not passed, the Work Location should not constitute a fixed place of business for the enterprise, unless other facts and circumstances indicate otherwise; however, if the individual is the only person or the primary person conducting the enterprise's business, there would be an increased risk that the individual's location will trigger a fixed place of business for the enterprise.

The 2025 Update provides five examples, derived from typical cross-border work scenarios, that illustrate the permanence test, the functioning of the 50% Time Threshold and the Commercial Reason Test.

Last, the Observation made by Italy, which asserted that the interpretation of the concept of dependent-agent permanent establishment had to align with the principles affirmed over time by Italian jurisprudence, should no longer apply due to the elimination of Paragraph 181 of the 2017 OECD Model Tax Convention.

Detailed discussion

On 19 November 2025, the OECD published the 2025 Update, introducing important revisions to the Commentary on Article 5 (Permanent establishment) of the 2017 OECD Model Tax Convention, through (i) the deletion of Paragraphs 18 and 19, (ii) the replacement of Paragraphs 32, 35, 116, 117 and 124, and (iii) the insertion of Paragraphs 44.1 to 44.21.

The 2025 Update aims to introduce a new and comprehensive framework for assessing whether cross-border remote working may give rise to a fixed permanent establishment. This development is of immediate relevance for multinational groups, for which cross-border working arrangements have steadily become an established component of workforce organization. The OECD expressly acknowledges that the rapid normalization of remote working requires a refined analytical approach to determine whether the place of remote working may constitute a fixed place of business through which the business of an enterprise is carried on in whole or in part.

The 2025 Update adds new paragraphs 44.1 to 44.21 to the 2017 OECD Model Tax Convention, addressing the cases of individuals who perform all or part of their duties for an enterprise of one Contracting State from a place situated in another Contracting State that is neither premises of the enterprise nor premises of entities connected to it.

Such a place, which is defined as "home or other relevant place" of the individual (hereafter, simply, Work Location), includes private residences, second homes, temporary accommodations or the premises of relatives or acquaintances.

Within this new framework, the 2025 Update introduces a two-step analysis, after having determined that the Work Location can be considered permanent, for determining whether the Work Location may constitute a fixed place of business for the enterprise.

Note that a specific set of rules applies to recurring activities. The 2025 Update confirms that a place of business may have a certain degree of temporal permanence even if the location is used for only short periods of time, but regularly over long periods of time.

The first step is the temporal criterion set out in Paragraph 44.8, which clarifies that in the specific context of activities carried out from a Work Location, that location would generally not be regarded as a fixed place of business of the enterprise when the individual performs less than 50% of his or her total time working for the enterprise at that Work Location over any 12-month period commencing or ending in the fiscal year at issue (50% Time Threshold).

As stated in new Paragraph 44.9 of the 2017 OECD Model Tax Convention, the determination of the working time performed from the Work Location must rely on the individual's factual conduct rather than exclusively on the applicable contractual arrangements or corporate policies. Formal elements retain a supportive role only to the extent that they correspond to the individual's actual behavior. This illustrates a substance-over-form approach: the mere existence of contractual provisions describing the work as occasional, incidental or limited will suffice if the individual's actual pattern of activity reveals a consistent and substantial presence in the other State.

If the 50% Time Threshold is not exceeded, the Working Location should not constitute a fixed place of business for the enterprise. However, if the 50% Time Threshold is exceeded, the second step is to investigate the facts and circumstances underlying the individual's presence in the other contracting State (e.g., Italy).

The Commentary on Article 5 places particular emphasis on whether there is commercial reason that justifies the individual's presence in the State where the person's home or other relevant place is located. New Paragraphs 44.11 to 44.19 of the 2017 OECD Model Tax Convention articulate this concept by affirming that a link must exist between the individual's physical presence in that State and the carrying on of the enterprise's business. This link exists if the individual's presence in the other State facilitates the conduct of the enterprise's activities (e.g., through interactions with customers, suppliers, affiliated entities or other relevant parties).

Conversely, a commercial reason should not be deemed to occur if the enterprise merely allows the individual to work from home for reasons connected to personal preferences, retention policies or cost-saving considerations unrelated to the conduct of the business in that particular jurisdiction.

An incremental risk of triggering a fixed place of business for the foreign enterprise could exist, however, if the individual is the only person or the primary person conducting the enterprise's business.

Last, because the 2025 Update repealed paragraph 181 from the Commentary on Article 5 of the 2017 OECD Model Tax Convention, Italy's Observation for interpreting the concept of dependent-agent permanent establishment based on Italian jurisprudence should no longer apply. It is not clear whether changes in the Commentary should be applied to new treaties only or should already be applied to existing treaties.

Implications

For purposes of the Italian tax environment, the 2025 Update's amendments to the Commentary on Article 5 of the 2017 OECD Model Tax Convention highlight the importance of analyzing all relevant facts and circumstances on a case-by-case basis. This includes making a detailed assessment of the individual's movements, the effective working days spent in Italy and the concrete nature of the activities performed in the Italian territory to determine whether these activities may trigger the existence of an Italian permanent establishment of the foreign enterprise or enterprises concerned.