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MARK RUHINDI
The 2025 OECD Model Convention Update on the International Taxation concept of Permanent Establishments(PE) has fundamentally redefined Human Capital and Workforce Management in the context of cross-border remote working.
These changes, which African nations like Uganda are expected to localise as domestic tax law, widen cross-border tax risk exposure for Multi-National Enterprises(MNEs) beyond commercial presence through physical offices. The news rules recognise the notion of commercial presence through human capital and remote workers working from a home or a similar place in another jurisdiction.
This commentary explains the PE concept and its application to cross-border remote working in the context of Uganda’s current PE law, and further discusses the likely implications of the 2025 OECD update to the concept from two perspectives:
First, the implications for global and regional firms and technology start-ups scaling across borders, with emphasis on emerging human capital management complications likely to arise once African countries, including Uganda, localise the update into domestic tax law.
Secondly, the opinion discusses the advantages it offers to tax administrations(OECD Member nations and nations that eventually localise the update into domestic law), particularly on combating tax avoidance by multinational enterprises (MNEs).
For the non-technical readers, I will be returning to explain the concept of a PE in simple terms but below are the new changes in brief:
- The New Test: A PE is now strongly indicated if an employee works from a home office in State A for 50% of their total working time for their Non-Resident employer in State B AND there is a commercial reason for their presence in state A (e.g, servicing local clients and time-zone alignment). The changes have explicitly rejected cost saving or employee convenience as sole justification for remote cross-border working.
- Impact on Tax Administration: The update is a powerful anti-avoidance tool for Tax Authorities, allowing them to assert taxing rights based on functional substance rather than just legal form(e.g work-from-anywhere contract clauses permitting cross-border remote working), materially expanding the tax base beyond the current 183-day Service PE rule.
- Headache for MNEs and Tech Start-ups: The new rules transform low-cost, agile market testing for tech start-ups into a high-cost compliance burden for start-ups and other regional businesses trying to enter new markets and to scale across-borders.
- The rules will likely result in immediate, non-negotiable Payroll, Social Security, and Immigration risk above Corporate Income Tax, aggressively eroding the limited cash runway of young scaling companies, and rope companies into a more complex compliance matrix.
What Is a Permanent Establishment in the General Context?
A permanent establishment (PE) is the threshold concept in international taxation that determines when a country is entitled to tax the business profits of a non-resident enterprise. In substance, it is the point at which a non-resident enterprise’s economic presence in another country becomes sufficiently real, continuous, and business-driven to justify local taxation.
Traditionally, a PE was associated with physical business infrastructure: Under Uganda’s Income Tax Act, this remains reflected in concepts such as a fixed place of business, a place of management among other brick and mortar locus-in-quo, and finally, a Services PE triggered by 183 days of activity by an employee or personnel present in Uganda.
In the modern remote-working context, a PE is no longer defined by office or warehouse leases, or other formal physical presence but rather where human capital is deployed, how it is deployed, and whether that deployment facilitates the carrying on of the enterprise’s business in that jurisdiction.
Once established, a PE is typically treated as a separate taxable taxpayer independent of its mothership, with local corporate tax, payroll, social security, transfer pricing, and immigration consequences, thereby placing permanent establishments squarely at the intersection of tax, HR, payroll, and broader workforce strategy of an Multi-National Enterprise(MNE) and other businesses involved in cross-border trade/international business.
The 2025 Update represents a significant and deliberate recalibration of the permanent establishment (PE) concept in response to the structural shift toward remote and cross-border working arrangements and the new tech-driven commercial realities of globalism. That is an interconnected global business world in which people, not premises, increasingly determine how value-creating activities are undertaken.
The 2025 changes are such that a PE may now therefore arise where the business of a non-resident enterprise is carried on through the sustained activities of its employees working remotely from a home or similar location in another country, even before the 183 day trigger, provided:
- The home is used on a continuous and sufficiently permanent basis, and
- There is a commercial reason for the enterprise to have that employee physically present in that country.
Implications for Cross-Border Human Capital Management
The update neither introduces a new category of PE nor does it invent a new permanent establishment concept, but rather re-anchors the “fixed place of business” test to today’s contemporary working patterns by focusing on remote work, distributed teams, time-zone driven services, and cost-efficient cross-border deployment of labour and the increasing substitution of physical offices with human capital.
The update articulates a rebuttable 50 per cent working time threshold and introduces a structured commercial reason test that goes beyond employee convenience, and emphasises a functional analysis of the activities actually performed from a home or other relevant place. Importantly, it expressly rejects cost reduction or talent retention alone as sufficient justification for such employees’ presence in the other country.
In substance, treating labour as the nexus for taxing rights, a threshold much lower than the brick and mortar presence test.
Uganda’s PE Law
Ugandan law already adopts a broad OECD-style permanent establishment framework, including: place of management concepts, and definitions encompassing offices, mines, oil and wells, factories, workshops, building and construction sites, warehouses and sales outlets, as well as furnishing of services(Services PEs) through employees present in Uganda for an aggregate period of 183 days during a 12 Months period.
The new update therefore differs materially from Uganda’s existing Service PE in the domestic law list, adding the ‘home office of an employee’ to that list but subject to the 50% working time threshold as well as the commercial reasons test.
Once Uganda and other African nations align domestic law with the update, the new home-office PE would be triggered if an employee spent 50 % of their working time in Uganda for a commercial reason even if the 183-day threshold is not met, representing a material expansion of Uganda’s taxing reach beyond the current Service PE criteria.
The “Commercial Reason” test
The most impactful element of the update is that it elevates the commercial reason test to a gatekeeping function.
Commercial reasons now include customer interaction, supplier management, market development, time-zone alignment driven service delivery, collaboration with local institutions, and access to specialised expertise. As already mentioned, employee convenience, cost reduction, and talent retention alone are explicitly excluded.
This sharply limits the ability of MNEs to argue that an employee “just happens to live here”.
For African markets, where proximity, relationships, and contextual understanding are often integral to service delivery, commercial reasons will generally be easier to establish than to rebut.
Implications for Global Companies and Start-ups Scaling Across Borders
Human capital and workforce management is now a critical tax risk area. Historically, tax risk followed assets, contracts, and offices. Going forward, tax risk follows where people sit, how often they work from there, who they interact with, and why they are there.
These are core HR and Workforce management decisions but they now come with a taxation twist and other related legal and regulatory compliance headaches.
As a result, tax, legal, and human resources functions can no longer operate in isolation, but must operate a central unit when dealing with cross-border movement of labor.
In Uganda, and other non-OECD member African jurisdictions that have localised the PE concept, a PE is taxed as a separate taxpayer, with attendant registration, filing, and transfer pricing implications and exposure.
Additionally, the changes are likely to expose MNEs to other non-tax compliance costs. A single remote employee triggers mandatory, immediate requirements for PAYE, local social security contributions (NSSF), and adherence to local labour laws.
A single remote employee might also trigger mandatory TP documentation to justify the profit split. For a startup, these are high-costs, and the non-scalable professional services fees to be incurred significantly add to operational expenses and erodes a Start-ups’ cash runway.
Redesign of remote working business models might be necessary.
The update effectively signals the end of unrestricted “work from anywhere” arrangements. It might therefore become necessary to undertake business model redesigns alongside tax strategy planning to take into account the change of circumstances.
Enterprises might also need to embark upon a redesign of expansion and market-entry strategies including, centralising remote work into recognised BPO hubs, adopting formal Employer-of-Record (EOR) structures and outsourcing functions to local independent service providers.
Positives for Tax Administration: Combating Tax Avoidance by MNEs
Multinational enterprises have increasingly avoided physical offices while deploying employees into cross-border markets and booking profits in other jurisdictions through digital and remote work tools, while avoiding paying their fair share. The update directly addresses this behaviour by decoupling the permanent establishment concept from leased premises and re-linking it to economic presence through people.
For African tax administrations, including the Uganda Revenue Authority, this might represent a potent anti-avoidance tool, particularly in consulting, IT services, fintech, professional services, and digital services taxation generally.
The update aligns squarely with the OECD’s BEPS actions points relating to value creation principles and taxation rights: That is, Where value is created, where customer relationships are cultivated, where contracts are managed or supported, and where services are delivered in real time, taxing rights should follow.
Conclusion
From a tax policy perspective, the 2025 OECD update represents a necessary and overdue modernisation of the PE concept, aligned with value creation and effectively addressing artificial permanent establishment avoidance.
This is bearing in mind that the digital economy has by and large replaced brick and mortar locus-in-quo commercial presence in many sectors and services are delivered digitally, with offices only being optional.
The update quietly but fundamentally redefines international taxation as far as cross-border scaling is concerned, transforming human capital into the new permanent establishment.
From a governance perspective, it increases cross-border trade complexity, by elevating human resource decisions into tax risk decisions, and from a commercial perspective, it penalises informal and yet agile expansion models that are used by young businesses to scale. This might lead to unintended consequences which are beyond the scope of this opinion.
This evolution places permanent establishments squarely at the intersection of tax policy, human capital deployment, payroll systems, and cross-border workforce management, a nexus that multinational enterprises operating in or into Uganda and the East Africa market can no longer afford to ignore.
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