EOR in a three-country scenario: the risk of a permanent establishment in the state of employment
The Employer of Record (EOR) has become an integral part of the international labor market. Companies that want to deploy staff quickly and flexibly in another country engage an EOR as the legal employer. The EOR places the employee on its payroll and relieves the client of the burden of personnel and payroll administration. However, day-to-day management remains with the client: the actual employer. As long as the employee lives and works in the same country as the EOR, income tax and social security contributions are due in that single country, and the EOR, as the formal employer, can withhold and remit those amounts locally. That clarity disappears as soon as the work is performed in a country other than both the employee’s country of residence and the EOR’s country of establishment. This three-country situation harbors a tax risk that too often goes unnoticed in practice: the risk of a permanent establishment (PE) of the actual employer in the country where the work is performed, with far-reaching consequences for the withholding of income tax and social security contributions.
The three-country situation
The simple EOR scenario
An EOR places employees on its own payroll and acts as the legal employer, while day-to-day management remains with the client—the actual employer. In simple EOR situations, employees live and work in the same country as the EOR and the actual employer. Income tax and social security contributions are due in the employee’s country of residence and work, and the EOR, as the formal employer in that same country, can withhold and remit those obligations. This completely relieves the client of any burden.
When three countries are involved
The complexity increases significantly when the employee, the EOR, and the client are each based in a different country. The following case study, which closely mirrors the facts in the ruling of the Court of Appeal in 's-Hertogenbosch dated November 5, 2025, serves to illustrate this. (1)
An EOR is based in Portugal and employs workers who also reside in Portugal. The client—the actual employer—is a public limited company (NV) based in Belgium. The workers physically perform their duties in the Netherlands, on a project for the Belgian NV, and stay there for fewer than 183 days in a 12-month period.
Does the Netherlands have the right to tax the wages of these employees? The answer requires an understanding of Article 15 of the OECD Model Tax Convention (OECD MTC).
Article 15 of the OECD Model Tax Convention: the System
Paragraphs 1 and 2: general rule and exception
Article 15, paragraph 1, of the OECD Model Convention assigns the right of taxation to the State of residence, unless the work is actually performed in another State. In the example above, the Netherlands therefore has the right of taxation in principle.
Article 15(2) of the OECD Model Convention provides for an exception. The remuneration remains taxable exclusively in the employee’s country of residence only if all three conditions are met. (2)
‐ a. The employee does not stay in the state of employment for more than 183 days in any calendar year, tax year, or a 12-month period, depending on the relevant tax treaty;
‐ b. The remuneration is paid by or on behalf of an employer who is not a resident of the state of employment; and
‐ c. The remuneration is not borne by a permanent establishment that the employer has in the state of employment.
The burden of proof rests with the taxpayer. If even one condition is not met, the state of employment has the right to tax.
The rationale: the interplay between deduction and taxation
Subparagraphs (b) and (c) of paragraph 2 share the same objective. The OECD commentary on Article 15 states this as follows:
"The objectives and purpose of subparagraphs 2(b) and (c) are to prevent the taxation at source of income from short-term employment to the extent that such income is not allowed as a deductible expense in the source State because the employer is not subject to tax in that State, as he is neither a resident nor has a permanent establishment there."
The principle is clear: the state of employment may tax wages if the employer is subject to income tax in that state—either as a resident or through a permanent establishment—and can claim the wage costs as a deduction there. There is a direct correlation: the state of employment that accepts payroll costs as a deductible expense may include the employee’s wages in its tax base, and vice versa. (3)
The employer under the agreement: formal or substantive?
The practical interpretation of
In an EOR structure, the question immediately arises as to who qualifies as the employer within the meaning of Article 15(2): the EOR (the formal employer) or the client (who exercises the actual authority)?
In 2006, the Supreme Court ruled that the term “employer” in subparagraph (b) requires an economic-substantive interpretation for the purposes of Article 15(2)(b). (4) A user company qualifies as the substantive employer, the treaty employer, if:
‐ the employee is in a relationship of authority with the user; and
‐ the work is performed at the user’s expense and risk; and
‐ the costs for this work are billed in a specifically individualized manner.
In an EOR structure, the client is therefore the contractual employer, not the EOR.
The same explanation applies to both subparagraph (b) and subparagraph (c)
In November 2025, the Court of Appeal in 's-Hertogenbosch confirmed that the substantive definition of "employer" also applies to subparagraph (c). Both subparagraphs serve the same purpose, and the term "employer" in subparagraph (c) has the same meaning as in subparagraph (b).
The interested party argued that the Supreme Court’s ruling of November 23, 2007, did not apply to the present case. The Court of Appeal rejected that defense: although the 2007 precedent concerned a binational case—with a principal place of business and a permanent establishment in two states—whereas three jurisdictions are at issue here, that distinction does not affect the applicability of the substantive concept of employer. The sole determining factor is whether the remuneration is functionally attributable to the permanent establishment under Article 7 of the Convention.
Two regimes: before and after July 22, 2010
The current Dutch policy framework — effective as of January 1, 2024 — makes an explicit distinction based on the Supreme Court’s ruling of October 14, 2022 (5) and the Decision of the State Secretary for Finance of December 15, 2023 (6) . Which regime applies depends on the date on which the treaty was concluded (i.e., signed).
| Type of treaty | Assessment criterion | OECD Commentary 2010 |
|---|---|---|
| Concluded before July 22, 2010 | Hierarchical relationship and working at one’s own risk and expense: cumulative | Not relevant |
| Closed as of July 22, 2010 | Authority relationships and the passing on of labor costs: two factors within a broader context | A major source of interpretation |
The dynamic method and its limitations
n the Netherlands applies the dynamic method when interpreting tax treaties. This method holds that post-treaty commentary intended to provide clarification or precision also applies to treaties concluded before the amendment of that commentary. However, the Supreme Court ruled that the OECD commentary amended in 2010 cannot be regarded as a clarification or elaboration, but rather constitutes a substantive expansion of the interpretive framework. 8 Due to the limited dynamic application, this commentary therefore plays no role in the interpretation of treaties concluded prior to July 22, 2010.
The State Secretary adds a disclaimer: the OECD commentary on the definition of “employer” was also amended several times prior to July 22, 2010. Since the Supreme Court did not need to rule on intermediate versions, the State Secretary assumes that the commentary of July 22, 2010, goes beyond a mere clarification compared to all previous versions. That is a plausible position, but the Supreme Court may rule otherwise in a given case. (7)
Treaties concluded before July 22, 2010
For these treaties, the test set forth in the 2006 judgments remains the guiding principle. The treaty employer is the party that (i) exercises authority over the employee (power to give instructions) and (ii) on whose behalf and at whose risk the work is performed. The “account and risk” component means that the party bears the costs of the remuneration and enjoys the benefits, while also assuming the disadvantages and risks. An individualized allocation of wage costs can demonstrate this cost-bearing component; in this regard, a general allocation per unit of time—for example, per day—may suffice. It is therefore crucial that the OECD commentary of July 22, 2010, is not relevant to these treaties when interpreting the concept of employer.
Treaties concluded on or after July 22, 2010
For treaties concluded on or after July 22, 2010, the OECD Commentary in the version dated July 22, 2010, is indeed a significant source of interpretation. Under that regime, the authority relationship and cost allocation are no longer in a strict “and” relationship; they are two elements that are taken into account in a comprehensive assessment of all relevant facts and circumstances, in line with paragraphs 8.1–8.28 of that commentary.
This policy shift is not merely cosmetic: it changes the legal standard used to evaluate cases and, consequently, the outcome in borderline cases. It is therefore important, in every three-country arrangement, to determine which treaties apply and when they were concluded.
In the case that led to the judgment of the Court of Appeal in 's-Hertogenbosch, the Netherlands-Portugal treaty was concluded on September 20, 1999, i.e., before July 22, 2010. The pre-2010 standard therefore applied. The two pillars of the pre-2010 regime—de facto control and the obligation to bear economic risk—are decisive here.
The permanent establishment: the threshold
If the treaty employer, the client, regardless of where it is established, has a permanent establishment in the state of employment within the meaning of Article 5 of the OECD Model Tax Convention, and the labor costs of the seconded employees are functionally attributable to that permanent establishment pursuant to Article 7 of the OECD Model Tax Convention, then:
1. the remuneration is “borne by a permanent establishment of the employer in the State of employment”;
2. the exception in Article 15(2) no longer applies; and
3. the State of employment has the right to tax.
It is crucial that the permanent establishment need not belong to the EOR, but rather to the client. In the case that led to the judgment of the Court of Appeal in 's-Hertogenbosch, it was not in dispute that the costs of the temporary workers were functionally attributable to the Dutch permanent establishment of the Belgian NV. This established the Netherlands’ right to tax.
Furthermore, the permanent establishment has a transfer pricing dimension that must not be overlooked in practice. For tax purposes, a permanent establishment is treated as an independent entity to which profits must be allocated based on a functional analysis of activities, assets, and risks. If that analysis is missing or insufficiently developed, tax authorities may make adjustments or double taxation may occur. The permanent establishment thus triggers not only payroll tax for the employee but also profit allocation obligations for the client—with the associated compliance burden. (8)
Article 6(3)(c) of the 1964 Wage Tax Act (Wet LB 1964) is relevant to the withholding tax obligation in the Netherlands. Pursuant to that provision—introduced in 1997 to facilitate the taxation of income earned by foreign temporary workers—the EOR qualifies as a withholding agent as soon as its employees work for a third party in the Netherlands through its intermediary. This applies even if the EOR itself has no physical presence in the Netherlands and the third party is not established in the Netherlands.
The active duty to investigate
In a three-country situation, the EOR cannot hide behind a claim of ignorance regarding the client’s tax status in the country of employment. The Court of Appeal in ’s-Hertogenbosch put it as follows:
"In the court's view, it was incumbent upon the interested party to ascertain, prior to the work to be performed by its employees in the Netherlands, whether such work might give rise to tax obligations for the interested party in the Netherlands."
In this regard, the court pointed to two specific indications that should have alerted the EOR: the invoices sent to the Belgian corporation consistently listed a project location in the Netherlands, and Article 26 of the agreement stipulated that Dutch law applied. The EOR therefore has an active duty to investigate. Indications of a permanent establishment of the client in the country where the work is performed include:
‐ The project site is located in the state where the work is performed (as evidenced by invoices or contracts);
‐ The agreement specifies that the laws of the state where the work is performed apply;
‐ The project has a duration of more than twelve months;
‐ The client has a branch or office in the state where the work is performed.
If the EOR fails to withhold payroll tax based on an incorrect assumption, it risks receiving a back-tax assessment for payroll tax, plus a penalty and tax interest.
Practical Considerations
‐ Identify the treaty employer at an early stage. For each assignment, determine whether the client has activities in the host country that could constitute a permanent establishment.
‐ Assess the applicable treaty and the date of conclusion. The pre- or post-2010 regime determines which legal test applies and, consequently, the outcome in borderline cases.
‐ Include due diligence obligations in the contract: contractually oblige the client to inform the EOR in a timely and continuous manner about project locations and the presence of a permanent establishment in the host country.
‐ Ensure coordination between HR, Finance, and Tax. The documentation of cost allocation serves as the evidentiary basis for material employer status under pre-2010 treaties. Global Mobility requires individualized substantiation for each employee, whereas Transfer Pricing employs a broader group-wide allocation. A lack of coordination between these disciplines increases the risk of adjustments by tax authorities. (9)
’s Conclusion The three-country scenario highlights a tax issue that is too often overlooked in EOR practice. The crux of the matter is that, in EOR arrangements, the client can easily become a treaty employer. As soon as that client, regardless of where it is established, has a permanent establishment in the state of employment and the payroll costs are functionally attributable to that permanent establishment, the exception under Article 15(2) of the OECD Model Tax Convention no longer applies. The state of employment then has the right to tax, and the EOR runs the risk of becoming a withholding agent in a country where it is not itself established.
Subparagraphs (b) and (c) of Article 15(2) form a coherent system. They share the same objective, and the concept of “employer” in both subparagraphs must be interpreted consistently, with economic reality taking precedence over legal form. The three-country situation does not alter this principle. The applicable assessment framework depends on the date on which the treaty was concluded.
For EORs, the message is clear: due diligence beforehand is not a luxury, but an obligation. Anyone who fails to meet this obligation risks additional tax assessments, fines, tax interest, and reputational damage—even if the EOR itself did not lift a finger in the country of operation.
Author: Frank Mélotte, Nassau Tax & Global Mobility
Published in: Across the Border, Issue 2, April 10, 2026
Notes:
1. Court of Appeal of 's-Hertogenbosch, November 5, 2025, ECLI:NL:GHSHE:2025:3036, FutD 2025-2421.
2. Art. 15, para. 2, OECD Model Tax Convention 2017; see also Art. 15 of the Netherlands-Portugal Tax Treaty, concluded on September 20, 1999.
3. Supreme Court, November 23, 2007, ECLI:NL:HR:2007:AY8549, FutD 2007-2202.
4. Supreme Court, December 1, 2006, ECLI:NL:HR:2006:AZ3169, FutD 2006-2191.
5. Supreme Court, October 14, 2022, ECLI:NL:HR:2022:1436, FutD 2022-2798.
6. Decision of the State Secretary for Finance, December 15, 2023, Fida 20236026.
7. A. Lahaije, “Amendment to the OECD Commentary and the Interpretation of the Term ‘Employer’,” Over de Grens 2024-0020.
8. Source: “Global Mobility and Transfer Pricing: Two Sides of the Same Coin,” by authors at ForvisMazars, Over de Grens 2025-0095.
9. Source: “Global Mobility and Transfer Pricing: Two Sides of the Same Coin,” by authors at ForvisMazars, Over de Grens 2025-0095.
