OECD Model Tax Convention on Income and on Capital
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The Organisation for Economic Cooperation and Development Model Tax Convention on Income and on Capital is a widely recognised framework that serves as a basis for the negotiation and drafting of bilateral tax treaties between countries. The model convention provides a set of standard provisions and guidelines for the allocation of taxing rights between countries and the prevention of double taxation.
Elimination of double taxation: The model convention aims to prevent situations where the same income or capital is subject to tax in more than one country. It achieves this by allocating taxing rights between the source country (the country where income arises) and the residence country (the country where the taxpayer is a resident).
Avoidance of tax evasion and abuse: The model convention includes provisions to prevent tax evasion and abuse of the treaty. These provisions are designed to ensure that the benefits of the treaty are only available to bona fide residents and that the treaty cannot be misused for improper tax planning purposes.
Facilitation of cross-border trade and investment: The model convention seeks to provide certainty and predictability to taxpayers engaged in cross-border activities. By establishing clear rules for the taxation of income and capital, it aims to promote international trade, investment, and economic cooperation.
The Model Tax Convention consists of a series of articles that collectively form a comprehensive framework for the taxation of income and the prevention of double taxation in international transactions. These articles address various aspects of taxation and set out the standard language and concepts that countries can use as a basis for negotiating and drafting their bilateral tax treaties.
Article 4 Residence
This article provides criteria for determining an individual's residence for tax purposes and resolves cases of dual residency. It helps determine which country has the right to tax an individual's worldwide income.
Scope: Article 4 addresses the determination of the tax residence of individuals and entities for the purposes of international taxation. It is a fundamental article because it defines which country has the primary right to tax the worldwide income of individuals and entities.
Residence for individuals: The article provides criteria for determining the tax residence of individuals. Commonly, an individual is considered a resident of the country where they have a permanent home available to them. If they have a permanent home in both countries, they are considered a resident of the country with which they have closer personal and economic ties. Factors such as the centre of vital interests, habitual abode, and nationality may be considered in determining residence.
Residence for entities: For entities such as companies and corporations, Article 4 typically defines residence based on either the place of incorporation (i.e., where the entity is registered) or the location of its central management and control. The exact criteria for determining residence can vary between tax treaties.
Tie-breaker rules: The article often includes tie-breaker rules to resolve situations where an individual or entity could be considered a resident of both countries under their domestic laws or under the tax treaty. These rules help determine the country of residence for tax purposes.
Changes in residence: Article 4 addresses how changes in residence are handled, particularly in cases where an individual or entity moves from one country to another. It often specifies that the change in residence should be communicated to the tax authorities.
Mutual agreement procedure: The article includes provisions related to the mutual agreement procedure, which allows the competent authorities of the countries involved to consult and resolve cases of dual residence or disputes regarding an individual or entity's residence.
Exchange of information: Like other articles in the Model Tax Convention, Article 4 includes provisions for the exchange of information between tax authorities to determine and verify an individual or entity's residence.
Article 5 Permanent Establishment
This article defines what constitutes a permanent establishment, which is a fixed place of business through which an enterprise carries out its business activities. It determines the taxing rights of the source country over business profits.
Scope: Article 5 addresses the concept of a Permanent Establishment (PE) for the purposes of international taxation. A Permanent Establishment represents a taxable presence that a foreign enterprise or individual has in another country, which may subject them to taxation in that country.
Definition of PE: The article defines what constitutes a PE. A PE is generally a fixed place of business through which an enterprise carries on its business activities. This can include places like an office, a branch, a factory, a workshop, a mine, or a construction site. The definition may also encompass other forms of taxable presence, such as a dependent agent.
Construction site exception: Some tax treaties include an exception for construction sites. They state that a building site or construction project is considered a PE only if it lasts for a certain period, often exceeding 12 months. Shorter-term construction activities may not trigger the creation of a PE.
Services PE: In some cases, Article 5 addresses the concept of a Services PE. This occurs when an enterprise provides services in a country through its employees or other personnel for a certain period, typically exceeding 183 days within a 12-month period.
Dependent vs Independent Agent: The article distinguishes between a dependent agent and an independent agent. If an enterprise operates through a dependent agent (one who acts exclusively or almost exclusively for that enterprise), it may create a PE. However, if it operates through an independent agent, it usually does not create a PE.
Preparatory or auxiliary activities: The article specifies that certain preparatory or auxiliary activities, such as storage of goods or the maintenance of a stock of goods for delivery, do not constitute a PE. These activities are considered secondary to the core business operations.
Exclusions: Article 5 also outlines specific activities that are excluded from being considered a PE. For example, having a place of business solely for activities like storage, display, or delivery may not create a PE.
Attribution of profits: In cases where a PE is deemed to exist, the article often provides guidance on how the profits attributable to that PE should be calculated and taxed. The allocation is generally based on the arm's length principle.
Mutual agreement procedure: The article includes a provision related to the mutual agreement procedure. This allows the competent authorities of the countries involved to consult and resolve cases of PE-related disputes or dual taxation.
Article 7 Business Profits
This article outlines the rules for the taxation of business profits. It establishes the principles for attributing profits to a permanent establishment and provides guidance on the methods for determining taxable profits.
Scope: Article 7 addresses the taxation of business profits in the context of cross-border activities. It establishes rules for determining the allocation and taxation of profits earned by an enterprise that operates in more than one country.
General rule: This article establishes the principle that business profits should be taxed in the country where the enterprise's business activities generate those profits. Specifically, it outlines that business profits of an enterprise are taxable only in the country where that enterprise has a PE.
Definition of business profits: The article provides a definition of business profits, which typically includes income derived from the regular course of business operations. This encompasses income from the sale of goods, the provision of services, and any other activities related to the enterprise's core business.
Allocation of profits: Article 7 prescribes the method for allocating and attributing profits to a PE. It generally follows the arm's length principle, which means that the profits attributed to the PE should be determined as if the PE were a separate, independent entity engaged in similar activities under similar circumstances.
Exemptions for certain activities: Some versions of Article 7 include exceptions for certain activities that are considered auxiliary or preparatory to the enterprise's core business. Profits derived solely from such activities may not be subject to taxation in the country where the PE is located.
Related enterprises: The article addresses the treatment of business profits when the enterprise has related entities or associates. It emphasises that profits should be allocated based on arm's length transactions between related enterprises to prevent profit shifting.
Force of attraction rule: In some cases, Article 7 includes a force of attraction rule, which states that if an enterprise has a PE in a country, then all income derived from that country, even if not directly related to the PE, may be subject to taxation in that country.
Anti-avoidance measures: To prevent abuse of tax treaties, Article 7 contains provisions allowing countries to disregard certain arrangements or structures that have been set up to artificially reduce the tax liability on business profits.
Taxation at source country: If an enterprise does not have a PE in a particular country, that country generally does not have the right to tax the business profits of that enterprise unless specific exceptions or rules apply, as outlined in the treaty.
Interaction with double taxation agreements: The article acknowledges that the rules for taxing business profits may differ between countries based on their bilateral tax treaties. It often states that the tax treaty takes precedence in determining how business profits are taxed, provided that the treaty contains provisions on the taxation of business profits.
Article 10 Dividends
This article addresses the taxation of dividends. It determines the withholding tax rates on dividends and provides rules for the residence country to tax dividends received by its residents.
Scope: Article 10 addresses the taxation of dividends distributed by a company resident in one country to a resident of another country. It ensures that the taxation of dividends is carried out in a manner that prevents double taxation while allowing countries to tax dividends under specific circumstances.
Rate of withholding tax: The article often specifies the maximum rate of withholding tax that the source country (the country where the company paying the dividends is located) can impose on dividends paid to a non-resident of that country. The specified rate is usually lower than the regular corporate tax rate.
Exemptions or reduced withholding tax: Article 10 includes provisions for exempting or reducing withholding tax on dividends under certain conditions. For example, dividends paid to a company that owns a significant stake in the distributing company (e.g. a substantial shareholding) may be subject to a lower withholding tax rate or may even be exempt from withholding tax.
Ownership thresholds: The article often sets out specific ownership thresholds that a recipient company must meet to qualify for reduced withholding tax rates or exemptions. These thresholds vary between tax treaties but are commonly set at a certain percentage of ownership (e.g. 10%, 25%, or 50% of the distributing company's shares).
Publicly traded companies: Some treaties provide reduced withholding tax rates or exemptions for dividends paid by publicly traded companies, recognising that it may be challenging to determine the ownership of shares in such entities.
Treaty shopping provisions: To prevent treaty abuse, Article 10 includes anti-avoidance provisions that deny the benefits of the treaty to residents of third countries who route their investments through a treaty country solely to benefit from the lower withholding tax rates.
Exclusion of certain dividends: The article excludes certain types of dividends from the treaty's provisions, such as dividends paid by certain investment funds or real estate investment trusts.
Credit method: In some cases, the treaty allows the recipient country (the country of residence of the dividend recipient) to provide a tax credit for taxes withheld at the source country, thereby reducing or eliminating double taxation.
Exchange of information: Like other articles in the Model Tax Convention, Article 10 includes provisions for the exchange of information between tax authorities to ensure compliance and prevent tax evasion.
Article 11 Interest
This article deals with the taxation of interest income. It establishes the conditions under which the source country can tax interest payments and provides guidelines for the residence country to tax interest received by its residents.
Scope: Article 11 addresses the taxation of interest payments made by a resident of one country to a resident of another country. Its primary goal is to establish rules for the taxation of interest income that prevent double taxation while allowing countries to tax such income under specific circumstances.
Rate of withholding tax: The article often specifies the maximum rate of withholding tax that the source country (the country where the interest is paid) can impose on interest payments made to a non-resident of that country. This specified rate is typically lower than the regular corporate tax rate.
Exemptions or reduced withholding tax: Article 11 includes provisions for exempting or reducing withholding tax on interest payments under certain conditions. For example, interest paid on certain government bonds or loans between affiliated entities may be subject to lower withholding tax rates or may even be exempt from withholding tax.
Ownership thresholds: Similar to the provisions for dividends, the article sets out specific ownership thresholds that a recipient company must meet to qualify for reduced withholding tax rates or exemptions. These thresholds vary between tax treaties and are commonly set at a certain percentage of ownership.
Treaty shopping provisions: To prevent abuse of tax treaties, Article 11 includes anti-avoidance provisions that deny the benefits of the treaty to residents of third countries who route their investments through a treaty country solely to benefit from the lower withholding tax rates on interest payments.
Interest on certain loans: The article specifies that certain types of interest payments are excluded from its provisions, such as interest on loans made for specific purposes, like the purchase of ships or aircraft.
Credit method: In some cases, the treaty allows the recipient country (the country of residence of the interest recipient) to provide a tax credit for taxes withheld at the source country, reducing or eliminating double taxation.
Exchange of information: As with other articles in the Model Tax Convention, Article 11 includes provisions for the exchange of information between tax authorities to ensure compliance and prevent tax evasion.
Article 12 Royalties
This article covers the taxation of royalty income. It determines the conditions under which the source country can tax royalty payments and provides rules for the residence country to tax royalties received by its residents.
Scope: Article 12 deals with the taxation of royalties paid by a resident of one country to a resident of another country. Its primary purpose is to establish rules for the taxation of royalty income that prevent double taxation while allowing countries to tax such income under specific circumstances.
Definition of royalties: The article typically provides a definition of royalties, specifying the types of payments that are considered royalties for tax purposes. Royalties often include payments for the use of or the right to use intellectual property, such as patents, copyrights, trademarks, and technical know-how.
Rate of withholding tax: Similar to other articles, Article 12 often specifies the maximum rate of withholding tax that the source country (the country where the royalties are paid) can impose on royalty payments made to a non-resident of that country. This rate is usually lower than the regular corporate tax rate.
Exemptions or reduced withholding tax: The article includes provisions for exempting or reducing withholding tax on royalty payments under specific circumstances. For example, royalties paid between affiliated entities or for certain types of intellectual property use may be subject to lower withholding tax rates or may even be exempt from withholding tax.
Ownership thresholds: Just as with dividends and interest, the article sets specific ownership thresholds that a recipient company must meet to qualify for reduced withholding tax rates or exemptions. These thresholds can vary between tax treaties and are often set at a certain percentage of ownership.
Treaty shopping provisions: Article 12 includes anti-avoidance provisions to prevent the abuse of tax treaties by residents of third countries who attempt to route their royalty income through a treaty country solely to benefit from lower withholding tax rates.
Payments for services: Some tax treaties include provisions that treat certain payments for services as royalties if those services are closely related to the use of intellectual property or if they involve the transfer of technical knowledge.
Credit method: Similar to other income articles, the treaty allows the recipient country (the country of residence of the royalty recipient) to provide a tax credit for taxes withheld at the source country, reducing or eliminating double taxation.
Exchange of information: Article 12, like other articles in the Model Tax Convention, includes provisions for the exchange of information between tax authorities to ensure compliance and prevent tax evasion.
While many countries base their bilateral tax treaties on the Model Tax Convention, individual treaties can have variations and specific provisions that deviate from the model. Therefore, it is crucial to refer to the specific provisions of a particular tax treaty to understand its applicability and implications.
Elimination of double taxation: The model convention aims to prevent situations where the same income or capital is subject to tax in more than one country. It achieves this by allocating taxing rights between the source country (the country where income arises) and the residence country (the country where the taxpayer is a resident).
Avoidance of tax evasion and abuse: The model convention includes provisions to prevent tax evasion and abuse of the treaty. These provisions are designed to ensure that the benefits of the treaty are only available to bona fide residents and that the treaty cannot be misused for improper tax planning purposes.
Facilitation of cross-border trade and investment: The model convention seeks to provide certainty and predictability to taxpayers engaged in cross-border activities. By establishing clear rules for the taxation of income and capital, it aims to promote international trade, investment, and economic cooperation.
The Model Tax Convention consists of a series of articles that collectively form a comprehensive framework for the taxation of income and the prevention of double taxation in international transactions. These articles address various aspects of taxation and set out the standard language and concepts that countries can use as a basis for negotiating and drafting their bilateral tax treaties.
Article 4 Residence
This article provides criteria for determining an individual's residence for tax purposes and resolves cases of dual residency. It helps determine which country has the right to tax an individual's worldwide income.
Scope: Article 4 addresses the determination of the tax residence of individuals and entities for the purposes of international taxation. It is a fundamental article because it defines which country has the primary right to tax the worldwide income of individuals and entities.
Residence for individuals: The article provides criteria for determining the tax residence of individuals. Commonly, an individual is considered a resident of the country where they have a permanent home available to them. If they have a permanent home in both countries, they are considered a resident of the country with which they have closer personal and economic ties. Factors such as the centre of vital interests, habitual abode, and nationality may be considered in determining residence.
Residence for entities: For entities such as companies and corporations, Article 4 typically defines residence based on either the place of incorporation (i.e., where the entity is registered) or the location of its central management and control. The exact criteria for determining residence can vary between tax treaties.
Tie-breaker rules: The article often includes tie-breaker rules to resolve situations where an individual or entity could be considered a resident of both countries under their domestic laws or under the tax treaty. These rules help determine the country of residence for tax purposes.
Changes in residence: Article 4 addresses how changes in residence are handled, particularly in cases where an individual or entity moves from one country to another. It often specifies that the change in residence should be communicated to the tax authorities.
Mutual agreement procedure: The article includes provisions related to the mutual agreement procedure, which allows the competent authorities of the countries involved to consult and resolve cases of dual residence or disputes regarding an individual or entity's residence.
Exchange of information: Like other articles in the Model Tax Convention, Article 4 includes provisions for the exchange of information between tax authorities to determine and verify an individual or entity's residence.
Article 5 Permanent Establishment
This article defines what constitutes a permanent establishment, which is a fixed place of business through which an enterprise carries out its business activities. It determines the taxing rights of the source country over business profits.
Scope: Article 5 addresses the concept of a Permanent Establishment (PE) for the purposes of international taxation. A Permanent Establishment represents a taxable presence that a foreign enterprise or individual has in another country, which may subject them to taxation in that country.
Definition of PE: The article defines what constitutes a PE. A PE is generally a fixed place of business through which an enterprise carries on its business activities. This can include places like an office, a branch, a factory, a workshop, a mine, or a construction site. The definition may also encompass other forms of taxable presence, such as a dependent agent.
Construction site exception: Some tax treaties include an exception for construction sites. They state that a building site or construction project is considered a PE only if it lasts for a certain period, often exceeding 12 months. Shorter-term construction activities may not trigger the creation of a PE.
Services PE: In some cases, Article 5 addresses the concept of a Services PE. This occurs when an enterprise provides services in a country through its employees or other personnel for a certain period, typically exceeding 183 days within a 12-month period.
Dependent vs Independent Agent: The article distinguishes between a dependent agent and an independent agent. If an enterprise operates through a dependent agent (one who acts exclusively or almost exclusively for that enterprise), it may create a PE. However, if it operates through an independent agent, it usually does not create a PE.
Preparatory or auxiliary activities: The article specifies that certain preparatory or auxiliary activities, such as storage of goods or the maintenance of a stock of goods for delivery, do not constitute a PE. These activities are considered secondary to the core business operations.
Exclusions: Article 5 also outlines specific activities that are excluded from being considered a PE. For example, having a place of business solely for activities like storage, display, or delivery may not create a PE.
Attribution of profits: In cases where a PE is deemed to exist, the article often provides guidance on how the profits attributable to that PE should be calculated and taxed. The allocation is generally based on the arm's length principle.
Mutual agreement procedure: The article includes a provision related to the mutual agreement procedure. This allows the competent authorities of the countries involved to consult and resolve cases of PE-related disputes or dual taxation.
Article 7 Business Profits
This article outlines the rules for the taxation of business profits. It establishes the principles for attributing profits to a permanent establishment and provides guidance on the methods for determining taxable profits.
Scope: Article 7 addresses the taxation of business profits in the context of cross-border activities. It establishes rules for determining the allocation and taxation of profits earned by an enterprise that operates in more than one country.
General rule: This article establishes the principle that business profits should be taxed in the country where the enterprise's business activities generate those profits. Specifically, it outlines that business profits of an enterprise are taxable only in the country where that enterprise has a PE.
Definition of business profits: The article provides a definition of business profits, which typically includes income derived from the regular course of business operations. This encompasses income from the sale of goods, the provision of services, and any other activities related to the enterprise's core business.
Allocation of profits: Article 7 prescribes the method for allocating and attributing profits to a PE. It generally follows the arm's length principle, which means that the profits attributed to the PE should be determined as if the PE were a separate, independent entity engaged in similar activities under similar circumstances.
Exemptions for certain activities: Some versions of Article 7 include exceptions for certain activities that are considered auxiliary or preparatory to the enterprise's core business. Profits derived solely from such activities may not be subject to taxation in the country where the PE is located.
Related enterprises: The article addresses the treatment of business profits when the enterprise has related entities or associates. It emphasises that profits should be allocated based on arm's length transactions between related enterprises to prevent profit shifting.
Force of attraction rule: In some cases, Article 7 includes a force of attraction rule, which states that if an enterprise has a PE in a country, then all income derived from that country, even if not directly related to the PE, may be subject to taxation in that country.
Anti-avoidance measures: To prevent abuse of tax treaties, Article 7 contains provisions allowing countries to disregard certain arrangements or structures that have been set up to artificially reduce the tax liability on business profits.
Taxation at source country: If an enterprise does not have a PE in a particular country, that country generally does not have the right to tax the business profits of that enterprise unless specific exceptions or rules apply, as outlined in the treaty.
Interaction with double taxation agreements: The article acknowledges that the rules for taxing business profits may differ between countries based on their bilateral tax treaties. It often states that the tax treaty takes precedence in determining how business profits are taxed, provided that the treaty contains provisions on the taxation of business profits.
Article 10 Dividends
This article addresses the taxation of dividends. It determines the withholding tax rates on dividends and provides rules for the residence country to tax dividends received by its residents.
Scope: Article 10 addresses the taxation of dividends distributed by a company resident in one country to a resident of another country. It ensures that the taxation of dividends is carried out in a manner that prevents double taxation while allowing countries to tax dividends under specific circumstances.
Rate of withholding tax: The article often specifies the maximum rate of withholding tax that the source country (the country where the company paying the dividends is located) can impose on dividends paid to a non-resident of that country. The specified rate is usually lower than the regular corporate tax rate.
Exemptions or reduced withholding tax: Article 10 includes provisions for exempting or reducing withholding tax on dividends under certain conditions. For example, dividends paid to a company that owns a significant stake in the distributing company (e.g. a substantial shareholding) may be subject to a lower withholding tax rate or may even be exempt from withholding tax.
Ownership thresholds: The article often sets out specific ownership thresholds that a recipient company must meet to qualify for reduced withholding tax rates or exemptions. These thresholds vary between tax treaties but are commonly set at a certain percentage of ownership (e.g. 10%, 25%, or 50% of the distributing company's shares).
Publicly traded companies: Some treaties provide reduced withholding tax rates or exemptions for dividends paid by publicly traded companies, recognising that it may be challenging to determine the ownership of shares in such entities.
Treaty shopping provisions: To prevent treaty abuse, Article 10 includes anti-avoidance provisions that deny the benefits of the treaty to residents of third countries who route their investments through a treaty country solely to benefit from the lower withholding tax rates.
Exclusion of certain dividends: The article excludes certain types of dividends from the treaty's provisions, such as dividends paid by certain investment funds or real estate investment trusts.
Credit method: In some cases, the treaty allows the recipient country (the country of residence of the dividend recipient) to provide a tax credit for taxes withheld at the source country, thereby reducing or eliminating double taxation.
Exchange of information: Like other articles in the Model Tax Convention, Article 10 includes provisions for the exchange of information between tax authorities to ensure compliance and prevent tax evasion.
Article 11 Interest
This article deals with the taxation of interest income. It establishes the conditions under which the source country can tax interest payments and provides guidelines for the residence country to tax interest received by its residents.
Scope: Article 11 addresses the taxation of interest payments made by a resident of one country to a resident of another country. Its primary goal is to establish rules for the taxation of interest income that prevent double taxation while allowing countries to tax such income under specific circumstances.
Rate of withholding tax: The article often specifies the maximum rate of withholding tax that the source country (the country where the interest is paid) can impose on interest payments made to a non-resident of that country. This specified rate is typically lower than the regular corporate tax rate.
Exemptions or reduced withholding tax: Article 11 includes provisions for exempting or reducing withholding tax on interest payments under certain conditions. For example, interest paid on certain government bonds or loans between affiliated entities may be subject to lower withholding tax rates or may even be exempt from withholding tax.
Ownership thresholds: Similar to the provisions for dividends, the article sets out specific ownership thresholds that a recipient company must meet to qualify for reduced withholding tax rates or exemptions. These thresholds vary between tax treaties and are commonly set at a certain percentage of ownership.
Treaty shopping provisions: To prevent abuse of tax treaties, Article 11 includes anti-avoidance provisions that deny the benefits of the treaty to residents of third countries who route their investments through a treaty country solely to benefit from the lower withholding tax rates on interest payments.
Interest on certain loans: The article specifies that certain types of interest payments are excluded from its provisions, such as interest on loans made for specific purposes, like the purchase of ships or aircraft.
Credit method: In some cases, the treaty allows the recipient country (the country of residence of the interest recipient) to provide a tax credit for taxes withheld at the source country, reducing or eliminating double taxation.
Exchange of information: As with other articles in the Model Tax Convention, Article 11 includes provisions for the exchange of information between tax authorities to ensure compliance and prevent tax evasion.
Article 12 Royalties
This article covers the taxation of royalty income. It determines the conditions under which the source country can tax royalty payments and provides rules for the residence country to tax royalties received by its residents.
Scope: Article 12 deals with the taxation of royalties paid by a resident of one country to a resident of another country. Its primary purpose is to establish rules for the taxation of royalty income that prevent double taxation while allowing countries to tax such income under specific circumstances.
Definition of royalties: The article typically provides a definition of royalties, specifying the types of payments that are considered royalties for tax purposes. Royalties often include payments for the use of or the right to use intellectual property, such as patents, copyrights, trademarks, and technical know-how.
Rate of withholding tax: Similar to other articles, Article 12 often specifies the maximum rate of withholding tax that the source country (the country where the royalties are paid) can impose on royalty payments made to a non-resident of that country. This rate is usually lower than the regular corporate tax rate.
Exemptions or reduced withholding tax: The article includes provisions for exempting or reducing withholding tax on royalty payments under specific circumstances. For example, royalties paid between affiliated entities or for certain types of intellectual property use may be subject to lower withholding tax rates or may even be exempt from withholding tax.
Ownership thresholds: Just as with dividends and interest, the article sets specific ownership thresholds that a recipient company must meet to qualify for reduced withholding tax rates or exemptions. These thresholds can vary between tax treaties and are often set at a certain percentage of ownership.
Treaty shopping provisions: Article 12 includes anti-avoidance provisions to prevent the abuse of tax treaties by residents of third countries who attempt to route their royalty income through a treaty country solely to benefit from lower withholding tax rates.
Payments for services: Some tax treaties include provisions that treat certain payments for services as royalties if those services are closely related to the use of intellectual property or if they involve the transfer of technical knowledge.
Credit method: Similar to other income articles, the treaty allows the recipient country (the country of residence of the royalty recipient) to provide a tax credit for taxes withheld at the source country, reducing or eliminating double taxation.
Exchange of information: Article 12, like other articles in the Model Tax Convention, includes provisions for the exchange of information between tax authorities to ensure compliance and prevent tax evasion.
While many countries base their bilateral tax treaties on the Model Tax Convention, individual treaties can have variations and specific provisions that deviate from the model. Therefore, it is crucial to refer to the specific provisions of a particular tax treaty to understand its applicability and implications.
