oecd-model-treaty-defaults

Skill Metadata

Skill Metadata

Field	Value
Jurisdiction	International (OECD member and partner countries)
Primary Source	OECD Model Tax Convention on Income and on Capital (consolidated 2025 update)
Supporting Source	UN Model Double Taxation Convention (2021 update)
Scope	Default allocation of taxing rights between residence and source states; PE definition; income classification; double taxation elimination methods
Contributor	OpenAccountants
Validation Date	May 2026
Skill Version	1.0
Key update	2025 OECD update: new Commentary on Art 5 re home office PE; Art 9 transfer pricing clarifications; Art 25 Amount B signposting; Art 26 exchange of information

Model provision (Art 4(1))

• Resident of a Contracting State (Art 4(1)) — "For the purposes of this Convention, the term 'resident of a Contracting State' means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature." (Art 4(1) OECD Model Tax Convention)

Dual residence tie-breaker for individuals (Art 4(2))

Dual residence tie-breaker for individuals (Art 4(2)) (Art 4(2) OECD Model Tax Convention)

Priority	Test	Key factors	Resolution
1	Permanent home available	Does the person have a home continuously available in one state? Includes owned or rented accommodation. A home rented OUT to others is NOT "available."	If permanent home in only ONE state → resident there
2	Centre of vital interests	Where are personal and economic relations closer? Family, social connections, employment, business activities, political/cultural activities, property, bank accounts	If centre of vital interests in only ONE state → resident there
3	Habitual abode	Where does the person stay habitually? Assessed over a sufficient period (not just the current year). Compares frequency/duration of presence in each state	If habitual abode in only ONE state → resident there
4	Nationality	Citizenship	If national of only ONE state → resident there
5	Mutual Agreement Procedure	Competent authorities negotiate	If all above fail → MAP between governments (typically 24–36 months)

Dual residence tie-breaker for entities (Art 4(3))

• Entity dual residence tie-breaker — For entities (companies) resident in both states, the 2017 update replaced the "place of effective management" (POEM) automatic tie-breaker with a MAP requirement: the competent authorities shall determine by mutual agreement the state of residence, having regard to: Place of effective management; Place of incorporation/constitution; Any other relevant factors. If no agreement → entity NOT entitled to treaty benefits (except as agreed). (Art 4(3) OECD Model Tax Convention (2017 update))

Practical guidance

• The tie-breaker cascade ONLY applies when BOTH states claim the person as a full tax resident under their domestic law
• Many older treaties still use the pre-2017 formulation for entities (POEM as automatic tie-breaker)
• The 2025 update did not change Article 4 — the remote work Commentary additions are under Article 5

Model definition (Art 5(1))

• Permanent establishment (Art 5(1)) — "For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on." (Art 5(1) OECD Model Tax Convention)

Three-element test

Three-element test (Art 5 OECD Model Tax Convention)

Element	Requirement	Assessment
Place of business	A facility — office, room, factory, workshop, desk, even a pitch in a marketplace	Must be a tangible, identifiable location
Fixed	Established at a distinct spot with a degree of permanence (not merely temporary)	Generally requires more than 6 months; some treaties specify thresholds
Business carried on through it	The enterprise actually conducts its business activities at/through the place	Preparatory/auxiliary activities excluded (Art 5(4))

Specific inclusion list (Art 5(2))

• PE inclusion list — The following are expressly included as PE examples: Place of management; Branch; Office; Factory; Workshop; Mine, oil/gas well, quarry, or other extraction site (Art 5(2) OECD Model Tax Convention)

Construction PE (Art 5(3))

• Construction PE threshold — A building site or construction or installation project constitutes a PE only if it lasts more than twelve months. Many bilateral treaties reduce this to 6 months (check specific treaty). The 12-month clock starts when preparatory work begins at the site and stops when work is permanently discontinued. months (Art 5(3) OECD Model Tax Convention)

Exclusions — NOT a PE (Art 5(4))

Exclusions — NOT a PE (Art 5(4)) (Art 5(4) OECD Model Tax Convention)

Activity	Status
Storage, display, or delivery of goods belonging to the enterprise	NOT a PE
Maintenance of stock for processing by another enterprise	NOT a PE
Maintenance of a fixed place solely to purchase goods or collect information	NOT a PE
Maintenance of a fixed place solely for any preparatory or auxiliary activity	NOT a PE
Maintenance of a fixed place solely for any combination of the above	NOT a PE

• Anti-fragmentation rule — These exclusions do NOT apply if: The activity is NOT of a preparatory or auxiliary character, OR the enterprise (or a closely related enterprise) carries on business at the same place or another place in the same state, and the combined activity is NOT preparatory/auxiliary. (Art 5(4.1) OECD Model Tax Convention (2017 Model))

Agent PE (Art 5(5)–(6))

Agent PE (Art 5(5)–(6)) (Art 5(5)–(6) OECD Model Tax Convention)

Type	Creates PE?	Conditions
Dependent agent	YES	Person habitually concludes contracts (or plays the principal role leading to conclusion without material modification) in the name of the enterprise
Independent agent	NO	Agent of independent status acting in ordinary course of business
Closely related agent	YES (per 2017 rules)	Agent acts exclusively or almost exclusively for closely related enterprises (>50% interest) — cannot be "independent"

2025 Commentary update — remote work and home offices

2025 Commentary update — remote work and home offices (2025 update to the Commentary on Article 5)

Factor	Guidance
Less than 50% rule	If an individual works from a home office less than 50% of total working time over any 12-month period, this generally will NOT constitute a PE of the employer
Commercial reasons test	Even if ≥ 50%, a PE may not arise if the home office use is for the employee's convenience (not required by employer), has no commercial reason for the employer, and the employer has a suitable office available
Employer-required	If the employer requires the employee to work from home (no alternative office provided), and this exceeds 50% of working time, a PE is more likely
Not a blanket rule	The 50% threshold is an indicative guidance point in the Commentary, not a binding treaty rule — it is a factor in the overall assessment

Important: The 2025 Commentary guidance only applies to treaties that are interpreted consistently with the current OECD Commentary. Older treaties may be interpreted under the Commentary in force when concluded.

Model rule

• Business profits taxation rule — "The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein." (Art 7 OECD Model Tax Convention)

Key principles

Key principles (Art 7 OECD Model Tax Convention)

Principle	Rule
Exclusive residence taxation	Business profits taxable ONLY in the residence state — unless there is a PE in the other state
PE attribution	If PE exists, the source state may tax ONLY the profits attributable to the PE
Arm's length attribution	Profits attributed to PE as if it were a separate, independent enterprise dealing at arm's length with the rest of the enterprise
Expense deduction	Expenses incurred for the PE are deductible, including executive and general administrative expenses (whether in the PE state or elsewhere)
No force of attraction	The source state cannot tax profits of the enterprise that are NOT attributable to the PE (even if the enterprise has other activities in that state)

Practical significance for freelancers

If a freelancer has NO PE in the client's country, business profits are taxable ONLY in the freelancer's residence country. The client's country has no right to tax under Article 7, even if the client is paying from that country.

This is the single most important treaty article for cross-border freelancers. Combined with the PE analysis under Article 5, it answers: "Do I owe tax in my client's country?"

Model rule (OECD position: exclusive residence-state taxation)

• Royalties taxation rule — "Royalties arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other State if such resident is the beneficial owner of the royalties." (Art 12 OECD Model Tax Convention)

OECD Model: 0% source-state WHT

• Royalties source-state WHT under OECD Model — 0% (Art 12 OECD Model Tax Convention — royalties taxable ONLY in the residence state of the beneficial owner)

However: Many actual bilateral treaties deviate from the OECD Model and allow source-state WHT on royalties at negotiated rates (commonly 5%, 10%, or 15%). Always check the specific treaty.

Definition of royalties (Art 12(2))

• Royalties (Art 12(2)) — "Payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience." (Art 12(2) OECD Model Tax Convention)

Software payments — the contested classification

Software payments — the contested classification (Art 12 / Art 7 OECD Model Tax Convention)

Payment type	OECD position	Many countries' position
Payment for a copy of software for personal/business use	Business profits (Art 7) — NOT a royalty	Some countries (India, Brazil) treat as royalty
Payment for the right to reproduce/distribute software	Royalty (Art 12)	Consistent with OECD
Payment for a site license (limited copies)	Business profits (Art 7)	Contested in some jurisdictions
SaaS subscription (no transfer of software)	Business profits (Art 7)	India treats as royalty (Explanation 4 to § 9(1)(vi))

Allocation rules

Allocation rules (Art 13 OECD Model Tax Convention)

Asset type	Taxing right
Immovable property (Art 13(1))	May be taxed in the state where the property is situated
Movable property of a PE (Art 13(2))	May be taxed in the state where the PE is situated
Ships/aircraft in international traffic (Art 13(3))	Taxable only in the state of effective management of the enterprise
Shares deriving value principally from immovable property (Art 13(4))	May be taxed in the state where the property is situated
Other shares / securities (Art 13(5))	Taxable only in the residence state of the alienator

Key practical points

• Art 13(4) is an anti-avoidance rule preventing the use of interposed entities to avoid taxation on real estate gains
• "Principally" means >50% of the share value derives from immovable property (in many treaties; wording varies)
• Art 13(5) means that a freelancer selling shares in a foreign company (that is NOT a property company) owes capital gains tax ONLY in their residence country — not in the company's country

Historical note

Article 14 covered income from independent personal services (freelancers, professionals). It was deleted from the OECD Model in 2000 — such income is now covered by Article 7 (business profits).

Why this still matters

Many existing bilateral treaties were concluded before 2000 and still contain Article 14. Under those treaties:

Old Article 14 provisions and effects (Old Art 14 (pre-2000 OECD Model))

Old Article 14 provision	Effect
Income taxable only in residence state UNLESS individual has a "fixed base" regularly available in the other state	Lower threshold than PE — a "fixed base" is easier to establish than a "fixed place of business"
If fixed base exists → income attributable to the fixed base taxable in that state	Similar to PE attribution but under different terminology

Why this still matters

Check the specific treaty. If it has an Article 14, apply it. If it doesn't (post-2000 treaties), apply Article 7.

Model rule

• Employment income taxation rule — Employment income is taxable in the state where the employment is exercised — BUT a short-term exemption applies. (Art 15 OECD Model Tax Convention)

Short-term assignment exemption (Art 15(2))

Short-term assignment exemption (Art 15(2)) (Art 15(2) OECD Model Tax Convention)

Condition	Requirement
Days	Employee is present in State B for not more than 183 days in any 12-month period commencing or ending in the fiscal year concerned
Employer	Remuneration is paid by, or on behalf of, an employer who is NOT a resident of State B
PE not bearing cost	Remuneration is NOT borne by a PE which the employer has in State B

• All three conditions must be met — All three must be met. If any one fails, State B may tax the employment income. (Art 15(2) OECD Model Tax Convention)

183-day counting

• 183-day counting rules — The OECD Model uses a "12-month period" (rolling, not calendar year). Many actual treaties use "calendar year" or "fiscal year" instead — check the specific treaty. "Days of presence" includes days of arrival, departure, weekends, holidays, sick days, and any other day spent in the country (not just working days). A fraction of a day counts as a full day of presence. (Art 15 OECD Model Tax Convention)

Practical example

UK employee sent to Germany for a project:

• Present 150 days in a 12-month period ✓ (< 183)
• Paid by UK employer (not German resident) ✓
• UK employer has no German PE ✓ → Germany cannot tax. Only UK taxes.

If any condition fails (e.g., employee is present 190 days), Germany may tax the employment income earned there.

The problem

When both the residence state and source state have taxing rights (e.g., source state taxes under Art 13(1) for immovable property gains, and residence state taxes worldwide income), double taxation occurs.

Two methods

Two methods (Art 23A/23B OECD Model Tax Convention)

Method	Article	How it works	Effect
Exemption method	23A	Residence state exempts the income that the source state may tax (often with progression — the exempt income affects the rate applied to other income)	Income taxed only once, at the source-state rate
Credit method	23B	Residence state taxes worldwide income but grants a credit for the tax paid in the source state	Income taxed at the higher of the two rates

Credit method — practical mechanics

• Credit method mechanics — 1. Residence state computes tax on worldwide income (including the foreign-source income) 2. Residence state allows a credit equal to the tax paid in the source state 3. Credit is limited to the amount of residence-state tax attributable to the foreign income (no excess credit refund) 4. Excess foreign tax (where source-state rate > residence-state rate) is a real cost — not recoverable (Art 23B OECD Model Tax Convention)

Which method do countries use?

Which method do countries use?

Method	Countries typically using
Exemption (for business profits/employment)	Germany, France, Netherlands, Belgium, Austria, Luxembourg
Credit (general)	US, UK, Japan, Canada, Australia, India, Singapore
Mixed (exemption for some, credit for others)	Most EU countries (exemption for active income, credit for passive income)

Practical significance

• Exemption countries (e.g., Germany): If you pay 10% WHT in India on consulting fees, and Germany exempts the Indian income → your effective rate on that income is 10% (only India taxes)
• Credit countries (e.g., UK): If you pay 10% WHT in India, and UK rate on the income would be 40% → UK taxes at 40% but gives a 10% credit → effective rate is 40% (you pay 10% to India + 30% to UK)

When MAP applies

• When MAP applies — - Taxation not in accordance with the treaty - Difficulties in interpretation or application - Elimination of double taxation not otherwise provided for (Art 25 OECD Model Tax Convention)

Process

• MAP process steps — 1. Taxpayer initiates: Present case to competent authority of residence state within 3 years of first notification of the taxation 2. Competent authority attempts resolution: If it cannot resolve unilaterally, it shall endeavour to resolve by mutual agreement with the other state 3. No obligation to reach agreement: Under the standard OECD Model, there is no mandatory binding arbitration 4. Mandatory binding arbitration (Art 25(5)): Added in 2008 update — if competent authorities cannot resolve within 2 years, either state may submit to arbitration. NOT all treaties include this. (Art 25 OECD Model Tax Convention)

Timeline expectations

Timeline expectations (Art 25 OECD Model Tax Convention)

Phase	Typical duration
Filing MAP request	Within 3 years of adverse tax action
Competent authority initial review	3–6 months
Inter-state negotiation	12–36 months
Arbitration (if applicable)	Additional 6–12 months
Total MAP resolution	18–48 months typical

OECD Model default rates (what the Model Convention says)

OECD Model default rates (OECD Model Tax Convention Articles 7, 10, 11, 12, 13, 15, 18, 19)

Income type	Source state right	Residence state right
Business profits (Art 7)	0% (unless PE)	Full taxation
Dividends — portfolio (Art 10(2)(b))	Max 15% WHT	Full (with credit/exemption)
Dividends — substantial holding ≥25% (Art 10(2)(a))	Max 5% WHT	Full (with credit/exemption)
Interest (Art 11)	Max 10% WHT	Full (with credit/exemption)
Royalties (Art 12)	0% (exclusive residence)	Full taxation
Capital gains — immovable (Art 13(1))	Full taxation	Credit/exemption
Capital gains — shares (Art 13(5))	0%	Full taxation
Employment income (Art 15)	Full if >183 days or local employer/PE	Full (with credit/exemption)
Pensions (Art 18)	0%	Full taxation
Government service (Art 19)	Full (paying state)	Exempt (unless national of residence state)

What countries typically negotiate (deviations from OECD Model)

What countries typically negotiate (deviations from OECD Model)

Provision	OECD default	Common treaty deviation
Royalties	0% source	5–15% source WHT (especially with developing countries)
Interest	10% source	0–15% (many developed-country treaties achieve 0%)
Dividends (portfolio)	15% source	10–15% (some achieve 0% for pension funds)
Dividends (substantial)	5% source	0–5% (EU PSD achieves 0% without treaty)
Construction PE	12 months	6–9 months in many treaties
Service PE	Not in OECD Model	90–183 days (in UN-model influenced treaties)
Art 14 (independent services)	Deleted (2000)	Still present in pre-2000 treaties
Arbitration (Art 25(5))	Optional	Increasingly included in newer treaties

Section 11 — UN Model differences

The UN Model Tax Convention deviates from the OECD Model to preserve source-state taxing rights for developing countries.

Section 11 — UN Model differences

UN Model differences table (UN Model Double Taxation Convention (2021 update))

Article	OECD Model	UN Model Difference
Art 5 (PE)	No service PE	Service PE at 183 days in 12 months (Art 5(3)(b)) — service PE triggered by furnishing services through employees or other personnel
Art 12 (Royalties)	0% source (exclusive residence)	Source state MAY tax royalties — rate negotiated bilaterally
Art 12A (Fees for Technical Services)	Does not exist	NEW article — source state may tax fees for technical services (added 2017 UN update). Rate negotiated.
Art 13 (Capital Gains)	Only immovable + PE assets in source	Broader source-state rights on share sales
Art 14 (Independent Services)	Deleted	Retained — allows source taxation if individual has a "fixed base" OR is present >183 days

Practical impact

When a freelancer in a developed country (e.g., UK) works for a client in a developing country (e.g., India), the treaty between them is likely UN-model influenced — meaning:

• Service PE thresholds are lower (90 days in India's treaties)
• Source-state WHT on services may apply (India: 10% on technical/professional services)
• Article 12A (fees for technical services) may give India taxing rights even without PE

Always check the specific bilateral treaty to determine which model it follows.

Interaction with withholding-tax-matrix.md

The WHT matrix provides specific rates for specific country pairs. This skill provides the default OECD framework. When they interact:

• Treaty rates in the WHT matrix override the OECD Model defaults (because they are the actual negotiated rates)
• For country pairs NOT in the WHT matrix, use the OECD Model default as the starting assumption, then verify against the actual treaty text

Interaction with permanent-establishment-risk.md

The PE risk skill provides practical assessment guidance. This skill provides the treaty-law framework (Art 5 definition). When they interact:

• Use Article 5 from this skill for the legal test
• Use the PE risk skill for practical risk assessment and country-specific thresholds

Interaction with tax-residency-planning.md

The residency planning skill provides country-specific domestic rules. This skill provides the treaty tie-breaker (Art 4(2)). When they interact:

• Country skill determines whether domestic law claims the person as resident
• If two countries BOTH claim → this skill's Art 4(2) cascade applies

Interaction with cross-border-workflow-base.md

The orchestrator calls this skill in Steps 4, 5, and 7 of the cross-border workflow:

• Step 4 (residency): Art 4 tie-breaker
• Step 5 (PE assessment): Art 5 definition
• Step 7 (WHT): Art 10–12 default rates

PROHIBITIONS

• Prohibitions list — 1. NEVER assume a specific bilateral treaty matches the OECD Model exactly. All treaties are negotiated and many deviate significantly. 2. NEVER apply Article 14 (independent services) unless the specific treaty still contains it. It was deleted from the OECD Model in 2000. 3. NEVER assume the 183-day rule uses a "12-month period" — many treaties use "calendar year" or "fiscal year." 4. NEVER ignore the 2017/2025 updates when interpreting PE risk — the anti-fragmentation rule and remote-work Commentary are critical for modern work arrangements. 5. NEVER assume royalties are 0% in the source state without checking the specific treaty. The OECD Model says 0%, but most actual treaties allow some source WHT. 6. NEVER advise that MAP resolves quickly. Typical timeframes are 18–48 months. 7. NEVER treat the OECD Model as binding law. It is a template that countries use to negotiate bilateral treaties. The treaty itself is the law.

Disclaimer

This skill and its outputs are provided for informational and computational purposes only and do not constitute tax, legal, or financial advice. Open Accountants and its contributors accept no liability for any errors, omissions, or outcomes arising from the use of this skill. Treaty interpretation is complex and fact-specific; the actual bilateral treaty text governs, not the OECD Model. All outputs must be reviewed and signed off by a qualified international tax professional before acting upon.

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