Redefining the Relation Between Articles 6, 7 and 21 of the OECD Model

Abstract

The relation between the Articles 6, 7 and 21 of the OECD Model Tax Convention (OECD Model), and in particular the scope of the exception for immovable property in Article 21(2), has been widely debated in academic literature. The approach proposed in this article gives the immovable property exception a proper role, thus defining the relation between the Articles 6, 7 and 21 of the OECD Model in e.g. triangular cases involving immovable property of an enterprise. In the case of immovable property of an enterprise that is situated in the residence state (State R) or in a third state (State T) and that is attributable to a permanent establishment (PE) in the other contracting state (State S), the author takes the view that the ‘context’ within the meaning of Article 3(2) of the R-S tax treaty prevents State S from categorizing the income under Article 7, regardless of its domestic law classification of the income as business profits. This context consists, inter alia, of Article 21(2) of the R-S tax treaty. Consequently, Article 21(1) of the R-S tax treaty must be applied in respect of the income from the immovable property located in State R or in State T, assigning the exclusive taxation right under this treaty to State R. To reinforce the proposed approach, the author recommends adding language to the OECD Commentary on Article 21 which confirms the inapplicability of Article 7 to income from immovable property situated in State R or State T. Regardless of the proposed changes to the OECD Commentary, the author believes that the effectiveness of the exclusion of immovable property from the scope of Article 21(2) could be further improved by amending Article 21 as suggested.