Direct Tax Alert

OECD updates Model Tax Convention to reflect rise of cross-border remote work, clarify taxation of natural resources and address other key aspects 

BACKGROUND

The Organisation for Economic Co-operation and Development (OECD) has issued the “2025 Update to the Model Tax Convention”1 (2025 Update) that introduces significant new guidance on the circumstances under which cross-border remote working and home-office arrangements may create a “fixed place of business” permanent establishment (PE) under Article 5 of the OECD Convention which is an area of growing practical relevance following the acceleration of flexible work models post-COVID-19.

The 2025 update also emphasises the importance of multilateral co-operation to address emerging cross-border tax challenges and ensuring that international tax systems keep pace with economic changes and modern business practices. Further, India has modified its positions on various other articles, including those relating to dividends, interest, capital gains, entertainers and sportspersons, etc.

We, at BDO India, have summarised the key aspects of the 2025 Update and provided our comments on its impact hereunder:

A. Key Changes:

1. Commentary to Article 5 (PE)

i. Cross-border working from home or other relevant place

  • The new guidance emphasises on evaluating the facts and circumstances during a given period and outlines factors to be considered in assessing whether a home or other relevant place constitutes a place of business. The existing principles relating to permanence, business disposal, and preparatory or auxiliary activities continue to apply.

  • A time-based indicator is introduced- where an individual works from home or other location for less than fifty percent of their total working time, a fixed place PE would generally not be considered to exist. Whereas if an individual works fifty percent or more of their time from such location, the existence of a PE will depend on the facts and circumstances, with a key consideration being whether there is a commercial reason for the activities being conducted in the jurisdiction. A commercial reason will generally be considered to exist where the physical presence of the individual in the jurisdiction which itself facilitates carrying on the business of the enterprise.

ii. Exploration and exploitation of extractible natural resources:

  • On the taxation of income from natural resource extraction, the 2025 Update introduces an alternative (optional) treaty provision whereby a lower PE threshold is prescribed and the same would be crossed once a non-resident enterprise operates in a State beyond a bilaterally agreed period.

  • The optional provision applies to offshore activities carried out in connection with the exploration or exploitation of the seabed, subsoil, and their natural resources, including related services. This provision is designed to capture activities that may otherwise fall outside the traditional definition of fixed place PE, such as short-duration or temporary offshore activities or operations that are not geographically fixed. Jurisdictions may also agree to apply the rule to onshore natural resource activities and specialised associated services.

2. Commentary on Article 9 (Associated Enterprises)

  • The 2025 Update substantially revises the Commentary on Article 9 to address the transfer pricing aspects of financial transactions, drawing on the guidance in Chapter X of the OECD Transfer Pricing Guidelines. The amendments clarify the scope and application of Article 9, including its interaction with domestic interest-deductibility rules inspired by BEPS Action 4. Related changes to the commentaries on Article 7 (Business Profits) and Article 24 (Non-discrimination) accompany these changes.

3. Article 25 and Commentary to Article 25 (Mutual Agreement Procedure)

  • New paragraph 6 is introduced in Article 25 of OECD Convention that confirms the role of competent authorities in determining whether a matter falls within the scope of a tax treaty for purposes of the dispute resolution mechanisms provided under the General Agreement on Trade in Services (GATS).

  • To ensure optionality is preserved in all dispute resolution mechanisms for non-adopting jurisdictions, the 2025 Update references specific paragraphs contained in the OECD’s Consolidated Report on Amount B [Base Erosion and Profit Shifting (BEPS) Pillar 1].

4. Commentary on Article 26 (Exchange of Information) –

  • The commentary to Article 26 has been updated to clarify permissible uses of exchanged information, expressly confirming that information obtained through exchange of information can be used for tax matters relating to persons other than those in respect of which the information was initially received.
     

B. India’s Positions on the Articles of OECD Convention:

  1. Article 5 (Permanent Establishment) - India has rejected the new conditions introduced for determining when a home-office creates a PE, such as time-based thresholds and commercial-reason tests. India has maintained that in case an individual carries out business activities from his home, the home can be considered at the enterprise’s disposal and may constitute a place of business for Article 5 purposes.

  2. Article 7 (Business Profits) - India has added a new position on Article 7, reserving the right to attribute to a PE the business profits arising from the sale of goods or merchandise which are the same as or of a similar kind to the ones sold through a PE situated in Source State or from other business activities carried on in that Source State of the same or similar kind as those effected through that PE.

  3. Article 9 (Associated Enterprises) - India has now clarified that it does not agree to the OECD Transfer Pricing Guidelines and reserves the right to deviate from them in accordance with the provisions in its domestic laws.

  4. Article 10 (Dividends) - India now reserves the right to settle the minimum percentage of holding in bilateral negotiations for taxation of dividend income.

  5. Article 11 (Interest) - India now reserves the right to treat income derived from financial leasing and factoring contracts as “interest” for treaty purposes.

  6. Article 13 (Capital Gains) - India now reserves the right to tax gains arising from the direct or indirect alienation of shares or rights in a company as well as comparable interests such as interests in a partnership or trust that is resident of India.

  7. Article 17 (Entertainers and Sportspersons) - India expands its position on Article 17 by clarifying that payments received on cancellation of an event are also covered within that Article.

  8. Article 25 (MAP) - In relation to the new paragraph 6 to Article 25 of the OECD Convention, India reserves the right to modify the same so as to exclude the reference to “any other procedure agreed to by both Contracting States.

BDO INDIA COMMENTS

The 2025 Update reflects a significant step in modernising the OECD Convention to address the rapid evolution of global business models, driven in part by remote work flexibility and increased cross-border mobility.

The introduction of an optional lower PE threshold for extractible natural resource activities may lead resource-rich and developing economies to renegotiate existing treaties to safeguard taxing rights in respect of offshore and mobile operations. The updates to commentaries on exchange of information further strengthen tax administration tools and align treaty interpretation with recent developments related to BEPS.

India’s reservations on key Articles, including its stance on home-office PEs under Article 5, its reservation on transfer pricing guidelines under Article 9, etc. highlight India’s position amid evolving global tax norms and may influence bilateral treaty negotiations and dispute resolution processes.