When people work from home or a vacation home, the tax result is often a mess. A recent OECD solution leaves doubts.
People in many sectors can work online wherever they want – at the office, at home, or in a vacation home in another country, by the beach, or in the hills. All they need is an Internet connection. Sounds fun?
Unfortunately, things are not so simple, and the OECD has tried to address the issue. Will it help Israelis, tourists, and olim (immigrants) working for an overseas company? Not always.
Quadruple taxation
In general, tax treaties say a visitor is taxable in Israel if he or she works as an employee for a foreign company at least 183 days in a year, or less time if the foreign company has a permanent establishment (PE) in Israel, i.e., a fixed place of business. That can include a home or a vacation home.
In such a case, not only is (1) the individual taxable in Israel on their pay, but also (2) the foreign employing company is taxable in Israel on its profit stemming from the individual’s efforts. That’s on top of possible (3) personal tax and (4) corporate tax in the foreign country concerned.
Quadruple taxation is every CFO’s worst nightmare. It means additional bureaucracy and high taxes if no action is taken.
Unfortunately, this is a frequent issue in the modern global village, especially in Israel.
Enter the OECD
The “work away from the office” issue is potentially relevant to anyone whose work contributes to the company’s profits – advice, trading, contacting customers and/or suppliers, investors, etc.
The issue cannot be shrugged aside, as governments want more tax revenues without raising tax rates.
The OECD has issued a 2025 update to its Model Tax Convention commentary, which is potentially applicable to all OECD member countries. Israel is an OECD member.
What the OECD says: In many cases, carrying on of activities related to the business of an enterprise at the home of an individual, e.g., an employee, or at another relevant place will be so intermittent or incidental that the place will not be considered to be a place of business, the new OECD commentary says.
So, the OECD lays down criteria for a fixed place of business (PE) as follows:
(1) 50% of working time: If the individual worked from that home or relevant place for at least 50% of their total working time for that enterprise over the course of any 12-month period commencing or ending in the tax year concerned; and
(2) Commercial reason: If there is a commercial reason for the activities to be undertaken by that individual in the country where the home or other relevant place is located, e.g., where the individual directly engages with customers, suppliers, associated enterprises, or other persons on behalf of the enterprise; and
(3) Location facilitates: the engagement is facilitated by the individual being located in that country, e.g., because they require physical interaction in that state or in the same geographic region, such as: (a) meetings with customers, (b) cultivation of a new customer base, or identification of business opportunities; (c) identification of new suppliers, managing relationships with suppliers, or undertaking, (d) monitoring or managing contractual arrangements with suppliers.
Different time zone: The OECD sends out mixed messages regarding time zones. That an employee’s home or “other relevant place” is located in a different time zone is not a commercial reason… unless other facts and circumstances indicate otherwise.
But the OECD gives an example of other facts and circumstances that may well cause confusion. In Example E, “an employee of RCo, an enterprise of State R, works almost exclusively from her home located in State S. The employee provides services virtually to customers in State R and/or in other jurisdictions located in time zones which differ from that in State S. The performance of those activities in State S enables the employee to be fully available around the clock… The home would be a place of business and a fixed place of business PE of RCo in State S.”
Comments: Hard-working people everywhere are often available around the clock. We anticipate disputes between taxpayers and tax authorities, e.g., the Israel Tax Authority, regarding whether the employee’s time zone matters to the employer.
Consider employing the employee via a local Israeli company instead of a foreign company. The new OECD commentary doesn’t fully resolve corporate tax risks for employees working away from the office in a different country.
As always, consult experienced advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.