OECD Model Tax Convention

What it means

The OECD Model Tax Convention is the template for double tax treaties on which most of Slovakia's treaties are based. It determines which country has the right to tax different types of income, such as business profits, dividends, interest, royalties or employment income.

It comes with an extensive commentary explaining each article and concepts such as residence, permanent establishment, beneficial ownership and associated enterprises. The commentary is updated regularly, and tax authorities and courts use it when interpreting treaties.

Alongside the OECD model there is the UN model, which gives more taxing rights to the source country and is used mainly in treaties with developing countries. A specific treaty may depart from the model, so the text of the actual treaty must always be read, not just the model.

How it works in practice

For payments abroad, the treaty determines whether tax is withheld and at what rate. The OECD model, for example, limits source-country taxation of interest and royalties, so Slovak withholding tax may be reduced or eliminated if the recipient proves residence and entitlement.

For business abroad, the article on permanent establishment is key. It determines when an office, construction project or agent in another country creates a tax liability there. The OECD commentary helps assess borderline cases, such as working from home or service activities.

The article on associated enterprises is the basis of transfer pricing rules and rests on the arm's length principle. The OECD Transfer Pricing Guidelines elaborate on it in detail, and Slovakia refers to them in its own rules.

What to watch out for

Treaties concluded years ago may not reflect the current version of the model and commentary. Many treaties have also been modified by the MLI. When interpreting a treaty, consider which version of the commentary applies and whether the MLI has changed it.

A treaty does not create a tax liability; it only allocates taxing rights between countries. If income is not taxable under domestic law, the treaty does not change that. Planning must always consider the domestic law of both countries as well as the treaty between them.