Whenever dividends, interest, or royalties cross borders, questions arise over which country has the right to tax the income and at what rate. The answer is determined not only by domestic tax laws, but also by tax treaties. Most tax treaties, including those entered into by Indonesia, are based on the OECD Tax Treaty Model and the UN Tax Treaty Model.
On November 18, 2025, the OECD Council approved the latest update to the OECD Tax Treaty Model. The complete version was subsequently published on September 30, 2026, in two volumes. This article examines the structure, principles, and direction of the changes introduced in the model.
A Model That Continues to Evolve
The OECD defines international juridical double taxation as the imposition of comparable taxes by two or more countries on the same taxpayer, on the same income or property, and for the same period. Double taxation can affect trade as well as the movement of capital, technology, and people.
The development of tax treaty models dates back to the League of Nations' work in 1921, which produced the first bilateral model in 1928. This was followed by the Mexico Model in 1943 and the London Model in 1946.
The OECD Fiscal Committee subsequently prepared a draft convention that was approved by the OECD Council on July 30, 1963. The model was revised and published as the Model Convention in 1977.
Since 1991, the OECD has developed an approach that allows the model to be updated periodically without waiting for a comprehensive revision. Since 1992, the model has been updated 11 times, in 1994, 1995, 1997, 2000, 2002, 2005, 2008, 2010, 2014, 2017, and 2025.
The 2017 update was among the most significant because it incorporated the outcomes of the OECD/G20 BEPS project, particularly Actions 2, 6, 7, and 14.
The OECD Tax Treaty Model serves not only as a reference for OECD member countries in negotiating tax treaties. It has also influenced the development of the UN Tax Treaty Model, which is used by developing and non-OECD countries, including Indonesia. In addition, the OECD Commentary on the model tax convention is widely used as guidance in interpreting tax treaties.
For Indonesia, which is not an OECD member and is currently undergoing the accession process, the model is an important reference in international tax negotiations.
Structure of the OECD Tax Treaty Model
Broadly speaking, the OECD Tax Treaty Model is structured as a series of provisions that establish the allocation of taxing rights.
Articles 1 and 2 determine the persons and taxes covered by the treaty. Articles 3 through 5 set out definitions, including provisions concerning residents and permanent establishments (PEs). Articles 6 through 21 govern the allocation of taxing rights over various types of income, while Article 22 addresses taxes on capital.
Articles 23A and 23B provide methods for eliminating double taxation. Articles 24 through 29 cover nondiscrimination, the mutual agreement procedure, exchange of information, assistance in tax collection, and entitlement to treaty benefits. Articles 30 through 32 address territorial extension, entry into force, and termination of the treaty.
Article 14 was deleted in 2000.
Residents and Permanent Establishments
Two key concepts in the OECD Tax Treaty Model are residents and permanent establishments (PEs).
Article 4 sets out the concept of residence, which determines who may qualify for treaty benefits. Article 5, meanwhile, defines a PE as a fixed place of business through which an enterprise carries out all or part of its business activities.
Examples of PEs include a place of management, branch, office, factory, workshop, and a place where natural resources are extracted. A construction project constitutes a PE if it lasts for more than 12 months.
Activities of a preparatory or auxiliary nature, such as storing or purchasing goods, are generally excluded from the definition of a PE. However, such activities may not be artificially fragmented among associated enterprises to avoid creating a PE.
The concept of a PE is directly linked to Article 7 on business profits. In principle, the profits of an enterprise may be taxed only in the country where the enterprise is a resident, unless it carries on business in another country through a PE.
Where a PE exists, the country in which the PE is located may tax the profits attributable to that PE. Profits are determined based on the assumption that the PE is a separate and independent enterprise, taking into account its functions, assets, and risks. This principle is closely linked to the arm's-length principle, which is also recognized in transfer pricing practice.
Dividends, Interest, and Royalties
For cross-border passive income, the OECD Tax Treaty Model allocates taxing rights between the source country and the recipient's country of residence.
Article 10 gives the source country the right to tax dividends, subject to specified rate limits. If the beneficial owner is a company that directly holds at least 25 percent of the capital of the company paying the dividends for a period of 365 days, the tax rate in the source country is capped at 5 percent of the gross amount of the dividends. In other cases, the rate is capped at 15 percent.
Article 11 limits source-country taxation of interest to 10 percent of the gross amount of the interest.
Unlike dividends and interest, Article 12 provides that royalties may be taxed only in the country where the beneficial owner is a resident.
The provisions on dividends, interest, and royalties are linked to the concept of beneficial ownership. These provisions also do not apply where the income is effectively connected with a PE maintained by the income recipient in the source country.
Capital Gains
Article 13 governs gains from the alienation of property, including shares in companies whose value is derived principally from immovable property.
Article 15 addresses income from employment and contains the 183-day rule. The application of this rule is not determined solely by the number of days an individual is present in a country.
In principle, an exemption from taxation by the country where the employment is exercised applies when three conditions are met. First, the individual is present in that country for no more than 183 days in the relevant 12-month period. Second, the remuneration is paid by, or on behalf of, an employer who is not a resident of that country.
Third, the remuneration is not borne by a PE of the employer located in that country. Articles 17 through 21 cover income earned by entertainers and sportspersons, pensions, government service, students, and other income.
Eliminating Double Taxation
The allocation of taxing rights under a tax treaty does not always eliminate the possibility that two countries will tax the same income. Articles 23A and 23B therefore provide methods for eliminating double taxation.
The country where the taxpayer is a resident may use either the exemption method or the credit method. The choice of method is an important issue in tax treaty negotiations because it has a direct impact on a country's tax revenues.
Exchange of Information
Another part of the OECD Tax Treaty Model sets out mechanisms to ensure the effective implementation of tax treaties and the resolution of disputes.
Article 24 establishes the principle of nondiscrimination, including based on nationality, the treatment of PEs, and the deductibility of expenses.
Article 25 provides for the Mutual Agreement Procedure (MAP). A taxpayer who considers that the actions of one or both countries have resulted in taxation that is not in accordance with the tax treaty may present the case to the competent authority.
If the two competent authorities fail to reach an agreement within two years after all information necessary to resolve the case has been received, any unresolved issues may be submitted to arbitration at the taxpayer's written request. The arbitration decision is binding on both countries. However, the arbitration provision is optional because some countries face legal or administrative constraints under their domestic laws.
Article 26 provides the basis for the exchange of information that is foreseeably relevant to the implementation of the tax treaty or the enforcement of domestic tax laws. Information received must be kept confidential.
Countries are also not required to provide information that cannot be obtained under their laws or administrative practices, or information that would disclose a trade secret.
Article 27 complements these provisions by providing for assistance in the collection of taxes. For tax authorities, provisions on the exchange of information and assistance in tax collection are important instruments for implementing tax treaties.
Preventing Treaty Shopping
Article 29 on entitlement to treaty benefits forms part of the outcomes of the BEPS project. The OECD Tax Treaty Model does not prescribe a single approach that all countries must adopt, but instead provides several options.
Countries may use the principal purposes test (PPT) under paragraph 9 or combine it with more detailed provisions on qualified persons and anti-conduit mechanisms. In principle, treaty benefits are denied where it can reasonably be concluded that obtaining those benefits was one of the principal purposes of an arrangement or transaction.
The provision is intended to prevent treaty shopping. Tax treaties are designed to eliminate double taxation, not to create opportunities for taxpayers to obtain lower or even no taxation by exploiting treaty provisions.
Changes in the 2025 Model
Unlike the 2017 update, which introduced significant structural changes, the 2025 update is largely focused on refinements. The changes can be grouped into three categories.
First, changes to the text of the model. Paragraph 6 was added to Article 25 in relation to Article XXII, paragraph 3 of the General Agreement on Trade in Services (GATS). The parties agreed that a measure falls within the scope of that provision if it is covered by Article 24 on nondiscrimination.
Disputes over such matters are to be resolved through the procedure under Article 25, paragraph 3, rather than through the GATS dispute settlement mechanism. The provision clarifies the boundary between the services trade regime and the tax treaty regime.
Second, changes to the Commentary. In the Commentary on Article 5, paragraphs 18 and 19 were deleted, while paragraph 32 was amended. In the Commentary on Article 4, the United States added a clarification concerning the concept of comprehensive taxation. Where a country provides more limited tax treatment to a particular group of individuals, for example under a territorial tax system or based on a specified amount that is not linked to income, individuals within that group are not considered subject to comprehensive taxation. They are therefore not considered residents under paragraph 1.
Chile's observation in the same section was also amended. Individuals who are exempt from tax under domestic law are not considered residents unless otherwise provided by the tax treaty.
Third, changes to reservations and country positions. The list of reservations and observations has been updated to reflect changes in OECD membership and the positions currently taken by individual countries.
In the Commentary on Article 1, Chile, Mexico, Costa Rica, Latvia, and Spain were added as countries expressing positions on a number of paragraphs. Germany reserved the right to regulate the application of withholding tax rate limitations. The Netherlands reserved the right to provide for additional exceptions in relation to Article 9, paragraph 1. Spain reserved the right to determine when the fiscal transparency of an entity in a third country is recognized.
Under Article 2, Costa Rica, Colombia, France, Hungary, and Spain added positions concerning local taxes, taxes on wages, and taxes on capital. Under Article 3, several countries expressed positions on the definition of a recognised pension fund, including Belgium, Germany, Colombia, Chile, and the United States.
Under Article 4, Colombia, Costa Rica, Estonia, Latvia, Lithuania, and the United States reserved the right to use place of incorporation or similar criteria in determining residence. The growing number of reservations shows that as more countries become involved in the development of the model, a wider range of national positions must also be accommodated.
A Broader Framework
The full 2025 OECD Tax Treaty Model contains more than the articles and their Commentary. It also includes a Recommendation of the OECD Council encouraging member countries to align their tax treaties with the model as explained in the Commentary.
The document also sets out the positions of non-member countries on almost every article.
Volume II contains earlier reports that underpin the development of the model, including reports on transfer pricing and the mutual agreement procedure, thin capitalization, conduit companies, the 183-day rule, software, the attribution of income to permanent establishments, partnerships, electronic commerce, real estate investment trusts (REITs), collective investment vehicles, and emissions credits.
The OECD Tax Treaty Model is therefore the product of decades of accumulated research and experience in applying tax treaties, rather than simply a model treaty text.
Implications for Indonesia
For Indonesia's tax authorities, at least three issues warrant attention.
First, the status of the OECD Commentary. The OECD Commentary plays an important role in the interpretation of tax treaties. However, for non-OECD countries such as Indonesia, treaty interpretation must ultimately be based on the text of the treaty agreed by the parties. The Commentary may serve as guidance where it is relevant to the context of the treaty concerned.
Second, the scope for determining positions in tax treaties. The 2025 list of reservations shows that countries have room to determine their policy positions in tax treaties. Countries may, among other things, express positions concerning place of incorporation, local taxes, or the definition of pension funds. Indonesia likewise has room to determine such positions when negotiating or renegotiating tax treaties with treaty partners.
Third, the balance between legal certainty and the integrity of tax treaties. Provisions such as Article 25, paragraph 5 on arbitration and Article 29 on entitlement to treaty benefits highlight the importance of providing certainty for taxpayers while safeguarding the objectives of tax treaties.
The 2025 update does not introduce changes on the same scale as the 2017 update. Most of the changes involve refinements to the text, Commentary, and country reservations and positions. Nevertheless, the changes remain important because they affect how countries apply and interpret tax treaties.
For practitioners, governments, and academics, the 2025 OECD Tax Treaty Model is an important reference for understanding developments in international tax treaty standards and the positions countries may adopt in tax treaty negotiations.
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