Permanent Establishment and a Remote Employee Abroad: When an Israeli Company Is Taxable in the Employee's Country, and What About Payroll and Social Security

Remote work has become routine: a developer who moved to Lisbon and continues to work for an Israeli company, a sales manager living in Athens handling European customers, or a project manager supervising a building site in Romania. From the company's perspective this looks like ordinary continued employment. From the perspective of the tax authorities in the employee's country, it may be business activity of the Israeli company on their territory.

This guide explains when such activity may create a "permanent establishment", what changed in the OECD interpretation in 2025, and what payroll and social security obligations arise separately. It does not deal with immigration or the relocation of the employee themselves. The tax consequences in Israel and in the employee's country are checked with an Israeli accountant and a local adviser.

1What is a permanent establishment and why does it matter?

A permanent establishment is a business presence in a country that gives it the right to tax the profit attributable to that presence. Tax treaties are built on the principle that a company is taxed on business profits only in its country of residence, unless it has a permanent establishment in the other country. The definition appears in Article 5 of the treaties, usually based on the OECD Model Tax Convention.

The meaning of a permanent establishment: the Israeli company must register in the country, file returns there and pay tax on the attributable profit. In Israel, foreign tax paid on income that is also taxable here is usually credited under the rules, but the credit does not eliminate the compliance costs and the risk of penalties and interest in the foreign country if the matter is discovered late.

2What creates a permanent establishment under the OECD Model?

Article 5 of the Model defines several routes. The wording may differ in each treaty, so the table describes the Model and not a specific treaty.

3Does an employee working from home abroad create a permanent establishment?

Not automatically, but it is possible. On November 19, 2025 the OECD published an update to the commentary on Article 5 (the text of the Article itself was not changed), which expressly addresses a home office and similar places. According to the summaries by EY and DLA Piper, the update sets two tests:

1. The time test: when a person works from home or a similar place in another country for less than 50% of their total working time for the company over a 12-month period, the place is generally not considered a place of business of the company, except in exceptional circumstances.
2. The commercial reason test: when it is 50% or more, the answer depends on the circumstances, including whether the company has a commercial reason for the work being carried out in that country. A commercial reason exists, for example, when the presence enables face-to-face meetings or real-time work with customers, suppliers or group companies, or access to local resources, or when it replaces an office the company would otherwise rent.

According to the same summaries, there is no commercial reason when working from home is permitted only to recruit or retain employees or to save office costs. The update includes examples, and it is interpretation, not law: countries are not obliged to adopt it, and some have entered reservations.

4What is Israel's position on the 2025 update?

Israel entered reservations to the new interpretation. According to a professional review published in December 2025 (see the sources), Israel entered five reservations and clarifications, including:

• Reserving the right to treat the home office of a "key person" in the company, such as a founder, partner or senior manager, as a permanent establishment.
• When the company has no commercial reason for the home office, Israel will examine whether the person plays a key role in the company's business or contributes significantly to value creation.
• A reservation regarding an example in the commentary, under which an employee who serves customers mainly online and visits them once a quarter does not create a permanent establishment.

Israel's reservations mainly concern the reverse situation: a foreign company with an employee working from home in Israel. But they show that tax authorities interpret the matter differently. For an Israeli company with an employee abroad, the important question is how the employee's country interprets the treaty and its domestic law, and what its position on the 2025 update is.

5Which situations increase the risk?

When a founder or CEO moves abroad, the reverse question also arises: whether the foreign company they set up, or the Israeli company they left behind, is managed from another country. See the guide to controlled foreign companies and the control and management test and the guide to relocating with an Israeli company.

6What happens when there is no tax treaty with the employee's country?

Then there is no Article 5 protection, and the domestic law of that country applies, which may be broader. PwC notes regarding Israel, for example, that in the absence of a treaty, a non-resident is taxable on income produced in Israel, which is a lower threshold than the permanent establishment test. The list of Israel's treaties and the matters they govern appears in the guide to Israel's tax treaties.

7What are the payroll and social security obligations in the employee's country?

These questions stand separately from permanent establishment: even when there is no permanent establishment, the employee's country may require tax to be withheld from their salary and social security to be paid. In some countries a foreign employer can register as an employer without a local entity, and in others you operate through a local company or through a provider that employs the employee on the company's behalf (Employer of Record). The protective employment laws of the employee's country may also apply to them, alongside the Israeli contract.

• The employee's income tax: an employee who has become a resident of the other country is usually taxed there on their salary. In Israel, check whether to continue withholding tax, and whether approval from the assessing officer is required.
• Social security: in the European Union, the A1 form determines to which country the employee pays social security. This is a coordination arrangement between the EU, EEA countries and Switzerland, and Israel is not part of it.
• Israel's bilateral agreements: Israel has social security agreements with some countries. When an employee is posted by an Israeli employer to an agreement country, the employer applies to the Foreign Relations Department of the National Insurance Institute before departure, and requests approval for exemption from double contributions. The period of the arrangement is set in each agreement.
• Without an agreement: liability may arise in both countries. According to Kol Zchut, when there is no agreement, National Insurance contributions must continue to be paid in Israel as well.

8What to check before approving work from abroad?

1. In which country the employee will work, for how long, and what share of working time.
2. What their role is: whether they meet customers, negotiate or sign contracts.
3. Whether there is a tax treaty with that country, and the wording of its Article 5.
4. What the country's position on the 2025 OECD update is and what its domestic law provides.
5. What the payroll and employer registration obligations in the country are, and whether a local entity or an employment provider is needed.
6. Whether there is a social security agreement, and if so, request approval from National Insurance before departure.
7. Document the arrangement in writing: the place of work, the authority (with no authority to sign on the company's behalf, if that is the intention), and the length of the period.

Companies planning broader activity in a particular country will find details in the guides to an Israeli company doing business there, for example in Romania, in Portugal and in the US. On charging VAT to clients abroad see the guide to invoicing a client abroad.

9What we review and how we accompany it together with the accountant

Before an employee starts working from another country, or before a project abroad, it is worth mapping the role, the authority and the duration of the activity, and checking the relevant treaty. We work on the legal side: the wording of the employment or engagement agreement, defining the employee's authority towards customers, project agreements, and where necessary a subsidiary or branch structure, in coordination with local lawyers. Whether a permanent establishment has been created, the tax calculation and the reporting in Israel are reviewed by your Israeli accountant together with an adviser in the employee's country, and we work with them.

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