A German, Swiss or British company employs a sales director, an engineer or a finance manager who has chosen, for personal reasons, to live in Mallorca and work from home. The company has no office, branch or subsidiary in Spain. The question, which carries real financial consequences, is whether that home can amount to a permanent establishment of the foreign employer. If it does, the company becomes liable to Spanish non-resident income tax on the profits attributable to the work carried out here.
Until recently, the answer had to be pieced together from very little material. On 18 November 2025 the OECD Council approved the 2025 update to the Model Tax Convention which, for the first time, deals with this situation in detail.
Article 5 stays the same; the Commentary does not
The update leaves the wording of the Model untouched. Article 5 still defines a permanent establishment as a fixed place of business through which the business of an enterprise is wholly or partly carried on. What changes is the Commentary. Former paragraphs 18 and 19 are deleted and replaced by new paragraphs 44.1 to 44.21, which address work performed from an individual's home or from comparable locations such as a second home, a holiday rental or the home of a friend or relative.
The deletion matters. The old paragraphs turned on whether the home was "at the disposal" of the enterprise, and treated as a relevant indicator whether the enterprise had required the individual to use that location for its business (for example, by not providing an office where the nature of the employment clearly called for one). That analysis is replaced by two successive tests, which apply in addition to the general requirements of Article 5: that the place be fixed (paragraphs 44.4 and 44.7, and Example A in paragraph 44.21) and that the exception for preparatory or auxiliary activities in Article 5(4) does not apply (paragraph 44.5).
First test: the 50 per cent working time threshold
Where the individual works from their home in Spain for less than 50 per cent of their total working time for the enterprise over any twelve-month period beginning or ending in the fiscal year concerned, the home should generally not be regarded as a place of business of the enterprise (paragraph 44.8). The Commentary does not expect exceptions to this approach to arise in most situations.
The threshold needs to be read with care. Reaching it does not, on its own, create a permanent establishment; it simply means that the question is decided on the facts and circumstances of the case (paragraph 44.10). The calculation looks at what the employee actually does rather than only at what the employment contract or the company's policy says; those documents are of practical help only to the extent that they correspond to the individual's actual conduct (paragraph 44.9). The requirement that the place be fixed is a separate matter. On that point, Example A in paragraph 44.21 notes that where a place is used on a recurrent basis over several years, each period of use must be considered together with the number of times the place has been used over those years, which leaves some uncertainty for second homes used on a regular basis.
Second test: the commercial reason
Once the threshold is reached, the prominent consideration is whether there is a commercial reason for the activity to be carried on in Spain (paragraph 44.11). Such a reason exists where the physical presence of the individual in the country in itself facilitates the business of the enterprise: meeting clients, cultivating a new customer base or identifying business opportunities, managing suppliers, collaborating with other businesses, and interacting with personnel of the enterprise or of associated enterprises (paragraph 44.17). The Commentary also includes real-time or near real-time interaction with customers or suppliers in different time zones, even where they are not located in Spain (paragraph 44.17 and Example E), although a difference in time zone does not, by itself, establish a commercial reason (paragraph 44.18).
By contrast, there is no commercial reason where the enterprise allows home working solely to obtain or retain the services of the individual (paragraph 44.15), or solely to reduce costs, such as office space (paragraph 44.16). In our view, the employee's personal preference does not on its own establish a commercial reason either, although the Commentary makes clear that where one of several reasons for using the home is commercial, the indicator is met (paragraph 44.13). Nor is it enough that the enterprise has clients or suppliers in Spain, or that the individual makes brief and occasional visits or has only minor dealings in the context of the overall relationship with a client (paragraphs 44.14 and 44.18). Where there is no commercial reason, the home is not a place of business of the enterprise unless other facts and circumstances indicate otherwise (paragraph 44.19).
The examples in paragraph 44.21 show how fine the line can be. In Example C, an employee who works from home for 80 per cent of the working time and regularly visits clients of the enterprise in the same State to provide services gives rise to a permanent establishment, in the absence of other facts and circumstances showing otherwise. In Example D, an employee who works from home for 60 per cent of the time in an exclusively client-facing role, serving clients in several States remotely without meeting them, and who visits one local client for a day each quarter to review performance under the contract, does not, again in the absence of other facts and circumstances, because those visits are intermittent and incidental and there is no commercial reason. In both cases the 50 per cent threshold is exceeded: what makes the difference is the commercial reason, that is, the intensity of the employee's dealings with the Spanish market.
The sole or main individual
The Commentary calls for different considerations where the individual is the only person, or the primary person, conducting the business of the enterprise (paragraph 44.20). Its example is a non-resident consultant who is present for an extended period in a State and carries on most of the business of her own consulting enterprise from an office set up in her home: that home office is a place of business of the enterprise. In our view, although the paragraph does not say so expressly, the natural reading is that in these cases the absence of a commercial reason cannot be relied on as it can in ordinary cases. This is the position of many single-person foreign consultancy or professional services companies whose owner lives in Spain: for those structures the update brings no relief, but a heightened risk. Israel has reserved the right to apply the same approach to partners, founders and relatively senior executives.
What has not changed: the dependent agent
The new paragraphs deal only with fixed place of business permanent establishments. The dependent agent rule in Article 5(5) of the Model is unaffected. An employee working from Spain who habitually concludes contracts on behalf of the enterprise, or who habitually plays the principal role leading to contracts that the enterprise concludes without material modification, may create a permanent establishment regardless of the 50 per cent threshold and the commercial reason test. For sales staff with negotiating authority, this is probably the most significant exposure. Note that this is the wording of the Model since 2017 and that not all of Spain's tax treaties follow it: some retain the earlier formulation, which requires an authority to conclude contracts that is habitually exercised, unless the Multilateral Instrument has modified them, so the text of the applicable treaty must be checked.
How this fits with the Spanish tax authorities' position
The Spanish administrative reference on this point, to the best of our knowledge, has been binding ruling V0066-22 of 18 January 2022, in which the Dirección General de Tributos (the Directorate General for Taxation, which issues binding interpretations of Spanish tax law) found no permanent establishment, for the months in which health measures were in force, in the case of an employee of a UK company who stayed in Spain during the pandemic. The ruling relied on three facts: the employee decided on his own to remain in Spain once the restrictions had been lifted, the employer kept a workplace available to him in the United Kingdom, and it paid nothing for the use of his home. It applied the 2017 Commentary and the OECD's COVID-19 guidance, and warned that if the stay continued, the existence of a fixed place of business would have to be examined case by case. The first two facts rested on the "at the disposal" and employer-requirement analysis in the paragraphs of the Commentary that have now been deleted; the third, payment of costs, did not appear in those paragraphs, but nor does the new Commentary adopt it as a criterion.
There is a further point specific to Spanish law. Where the employment relationship is governed by Spanish law and the remote work is regular (at least 30 per cent of working time over a three-month reference period, under Article 1 of Law 10/2021), Article 12 of Law 10/2021 on remote work provides that remote working must be paid for or compensated by the employer, without the employee bearing costs relating to the equipment, tools and means linked to the work. That circumstance, which the Dirección General de Tributos weighed in ruling V0066-22, is in many cases a legal obligation.
In the text of the update approved in November 2025, Spain has entered no reservations or observations on the new paragraphs; Israel, the Czech Republic and Chile have. Because the change concerns the Commentary rather than the Convention, it cannot be ruled out that the tax authorities will invoke the new framework in audits of earlier years as well, although the version of the Commentary applicable to each treaty and year has to be analysed separately: in ruling V0066-22 the Directorate applied the 2017 version for the fixed place of business and the 2014 version for the dependent agent. According to published summaries of binding ruling V0899-26 of 23 April 2026 (a Swiss-resident consultant who moved to Spain and works from his home), the Directorate found that the home was a fixed place of business, and therefore a permanent establishment, from the outset, with no need for six months to elapse, relying in particular on the new 2025 Commentary on Article 5. It remains to be seen which paragraphs it cites and how it applies the 50 per cent threshold and the commercial reason test.
Two separate questions
Whether the employer has a permanent establishment is a different question from how the employee is taxed. An employee who is tax resident in Spain pays Spanish income tax on their salary whether or not the employer has a permanent establishment here; recent arrivals may want to consider, at that level, the Spanish inbound expatriate regime. And where the employee holds a senior management role, the risk may shift to the tax residence of the company itself, if its place of effective management ends up in Spain, a question the 2025 update does not address.
Practical implications
In light of the new framework, managing this risk depends less on interpretation than on evidence. A written international remote work policy, reliable records of where and when the employee works, a documented description of the employee's duties and of their dealings with Spanish clients and suppliers, and a review of any powers of attorney they hold are all particularly advisable.
If a permanent establishment does exist, the question becomes how much profit is attributable to it, an area on which paragraphs 44.1 to 44.21 contain no specific guidance. And workarounds such as engaging the employee through an employer of record or turning them into a self-employed contractor do not change the tax analysis if the individual continues, in substance, to carry on the foreign company's business.
In cross-border remote work, the permanent establishment question is no longer settled by the employment contract. It is settled by the employee's diary.
From our offices in Palma de Mallorca and Manacor, Lexon's international tax practice advises both foreign employers and professionals working remotely from the Balearic Islands on assessing this risk and on building the documentation needed to support their position before the Spanish tax authorities.
If the employee already lives in Mallorca, or is considering moving there, Tramuntana Tax, the international desk run by the same partners, explains what to settle before moving to Mallorca.
Source: Article 5 of the OECD Model Tax Convention on Income and on Capital and paragraphs 44.1 to 44.21 of its Commentary, as approved by the OECD Council on 18 November 2025; article 13(1)(a) of the consolidated text of the Spanish Non-Resident Income Tax Law, approved by Real Decreto Legislativo 5/2004 of 5 March; articles 1 and 12 of Ley 10/2021, of 9 July, on remote work; and binding ruling of the Dirección General de Tributos V0066-22, of 18 January 2022.
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This article is provided for general information purposes only and reflects the law, administrative doctrine and case law in force at the date of publication. It does not constitute legal or tax advice, nor does it replace the individual analysis of each case.