MNC Tax Risks for Cross-Border Work From Home – An Indian Perspective

The Covid-19 pandemic ushered in a new era in how we imagine the future of work. Studies increasingly show that employees across the world now prioritise flexibility and work–life balance over higher pay, and a core element of this shift is the ability to work remotely. For businesses in the services sector, attracting and retaining quality talent is critical for survival, and enabling work from home (WFH) arrangements has become a commercial necessity for enterprises globally.

However, multinational businesses must be mindful of the tax implications that can arise from cross-border WFH. In particular, such arrangements may expose enterprises to unforeseen tax liabilities in jurisdictions where their employees perform work remotely.

One significant risk is the possibility of creating a taxable presence—i.e., a ‘permanent establishment’ (PE)—for a non-resident enterprise (NR enterprise) in India. If an employee of the NR enterprise stays in India beyond the threshold prescribed under an applicable tax treaty and renders services to clients (as opposed to undertaking preparatory or auxiliary activities), that presence could constitute a service PE. In such cases, profits attributable to the NR enterprise’s operations in India become taxable in India.

Even if the treaty threshold for a service PE is not met (or if the treaty does not contain a service PE clause), the employee’s presence in India may still give rise to a fixed place PE. Tax authorities may argue that the employee’s home constitutes a fixed place of business at the disposal of the NR enterprise, especially when the employee routinely conducts core business activities from that location.

Recognising this emerging challenge, the Organisation for Economic Co-operation and Development (OECD) has offered guidance on when cross-border WFH may constitute a fixed place PE. Two key factors highlighted in the OECD Commentary are:

1. The 50% Criterion:
   If an employee spends 50% or more of their time working at the office in the NR enterprise’s jurisdiction, then the fact that the employee works from home for the remaining period should not, by itself, result in a fixed place PE in the source country. Importantly, the OECD does not suggest that crossing the 50% threshold automatically creates a fixed place PE. Instead, in such cases, an examination of the underlying commercial rationale for the employee working from home in that jurisdiction becomes necessary.
2. Commercial Rationale for WFH:
   If there is a clear commercial reason for the employee to work from home in a particular jurisdiction—for example, to service clients located there or to make regular client visits—the likelihood of triggering a fixed place PE increases. The OECD provides several illustrative examples showing how commercial justification may indicate that the employee’s home is at the disposal of the enterprise. Nonetheless, it cautions that the mere presence of customers in the source country does not automatically imply such a commercial rationale.

India, however, has expressed reservations about this OECD interpretation. It maintains its sovereign right to treat an employee’s home as a fixed place of business of the NR enterprise where circumstances suggest that the enterprise has disposal over that location. Indian courts have yet to address the tax implications arising specifically from cross-border WFH arrangements, leaving uncertainty regarding the approach Indian tax authorities may ultimately adopt.

As cross-border mobility continues to expand and remote work becomes entrenched in global business models, the demand for WFH arrangements across jurisdictions will only intensify. Accordingly, enterprises must proactively assess the tax implications arising from employees working in different jurisdictions. Employment contracts, job descriptions, and internal policies should be carefully drafted to reflect the nature of work performed and to mitigate PE risks. Businesses should also maintain detailed documentation—including timesheets, client-servicing records, and leave logs—as these will be critical in the event of a tax assessment.