The 25% trap or missed opportunity: where the new OECD tax rules meet Europe’s remote work divide

For countries within Europe's telework agreement, tax and social security rules are finally harmonising leading to opportunities to incentivise existing and access new talent. But for countries left out like the United Kingdom, employers are stumbling into a dangerous and expensive compliance trap.

The OECD tax update: A pragmatic 50% threshold

The OECD's updated Commentary on the Model Tax Convention, providing long-awaited clarity on when remote work creates a Permanent Establishment (PE) for corporate tax purposes.

The new framework relies on a "50% + Commercial Reason" test:

• Under 50%: Working from a foreign location for less than 50% of the time in a 12-month period generally does not create a PE.

• Over 50%: If an employee exceeds 50%, a PE only arises if there is a commercial reason for their presence (e.g., meeting local clients or expanding a market). Crucially, if the setup is purely for "employee convenience" (e.g., lifestyle or family), no PE is triggered.

This gives employers with an internationally mobile workforce a comfortable, globally recognised safety net to approve remote work arrangements across borders.

The social security divide

While the tax rules are standardising globally, social security in Europe is splitting into two tiers.

The signatory "sweet spot" (49.9%)

Since July 2023, the EU Multilateral Framework Agreement (MFA) on cross-border telework allows employees to work from their home country for up to 49.9% of their working time without shifting their social security liabilities.

For the 23+ signatory countries (including Germany, France, and Spain), this aligns beautifully with the new OECD tax rules. An employee can work 40% of their time remotely from another signatory state while staying comfortably under both the OECD's 50% tax threshold and the EU's 49.9% social security limit.

The non-signatory trap (25%)

For nations like the United Kingdom and Denmark, who are not signatories to the MFA, the generous 49.9% threshold does not exist. Instead, employers default to the standard multi-state worker rules.

Under these rules, if an employee works 25% or more of their time in their country of residence, their social security liability automatically shifts to that country.

The compliance collision

This is where the trap snaps shut for non-signatory states.

A UK company might review a request from an employee who wants to spend 35% of their year working from a second home in France.

• The tax view: The employer applies the new OECD guidance, sees it is well under 50% and purely for the employee's convenience, and approves the request with zero PE risk.

• The social security reality: Because the UK is not an MFA signatory, crossing the 25% line triggers an immediate legal obligation for the UK employer to register with the French authorities, set up a local shadow payroll, and pay French employer social security contributions.

By looking only at the relaxed OECD tax rules, the employer has accidentally walked into a costly payroll compliance nightmare.

Summary comparison of thresholds

Framework	"Safe" Remote Work Limit	Trigger Consequence
OECD Corporate Tax	< 50% (or > 50% for pure convenience)	Corporate Permanent Establishment (PE) risk
Social Security (MFA Signatories)	Up to 49.9%	Shift of social security to host country
Social Security (Non-Signatories)	Strictly < 25%	Shift of social security to host country

The talent drain and two-tier policies

This misalignment restricts the talent pool for companies in non-signatory nations. Multinationals based in signatory states can easily offer cross-border commuters a flexible hybrid schedule (e.g., 2 days in the office, 3 days at home). Companies in the UK cannot offer that same flexibility without triggering a social security shift.

Furthermore, it creates a two-tier policy within global organisations. A multinational with offices in Munich (signatory) and London (non-signatory) is forced to enforce completely different remote-work thresholds depending on the employee's location.

The bottom line

The new OECD guidelines successfully modernised corporate tax for the remote work era, and the EU MFA did the same for social security but only for those who signed on.

For Global Mobility and HR leaders managing workforces involving signatory and non-signatory countries, you have to navigate the limitations of the OECD's 50% safety net. Tax, Payroll, and HR cannot operate in silos. A robust process to identify, track and flag when the 25% limit applies, is essential to avoid accidental non-compliance.