Tax Treaty Entitlement and Fiscally Transparent Entities: Improvements or Unnecessary Complications?

In J. Wheeler (ed), The Aftermath of BEPS, IBFD, Amsterdam (2020)

Posted: 20 Feb 2020

See all articles by Leopoldo Parada

Leopoldo Parada

University of Leeds School of Law

Date Written: January 1, 2020


Bilateral tax treaties are instruments designed to allocate taxing rights between two contracting states in order to prevent double taxation and fiscal evasion. That is, they are agreements between two sovereign states under which they agree to limit their fiscal sovereignty when identical or similar taxes are imposed in two states on the same taxpayer with respect to the same income, capital or event.

Generally speaking, tax treaties comprise two types of rules. The first type refers to the rules that determine whether a person is entitled to the benefits of a tax treaty or not – that is, whether a treaty is applicable to that person or not. These rules are part of articles 1 and 4 of the OECD Model. The second type of rules refers to those rules that distribute the taxing rights between the two contracting states in order to avoid double taxation. The latter kind, known as distributive rules, is a second step in the application of a tax treaty and necessarily depends on the results achieved after the application of the first type of rules. This chapter focuses on the first type of rules, especially in light of the recent modifications to the 2017 OECD Model as regards fiscally transparent entities. The ultimate aim of this chapter is to determine how these modifications have altered the dynamic of granting or denying tax treaty benefits and whether these changes represent an improvement or just an unnecessary complication. The time to revisit these issues could not be more appropriate.

Section 1.2. provides a brief review of the rules on tax treaty entitlement as regards tax transparent entities. Section 1.3. turns the analysis to the specific modifications introduced into the OECD Model as regards tax transparent entities. In particular, this section analyses the new article 1(2) of the OECD Model and the role of the “saving clause” in article 1(3) of the OECD Model. This section stresses that although the recently introduced provisions in the OECD Model represent a pragmatic and perhaps elegant solution to issues surrounding tax transparent entities and tax treaties, they still raise questions both regarding their coordination with other distributive rules within the treaties (especially in reference to the beneficial ownership requirement in articles 10, 11 and 12 of the OECD Model) and regarding the balance between residence and source states. Section 1.4. briefly explores some alternatives, both from tax treaty practice and from international tax law literature, that have attempted to provide an answer to the issues raised as regards the new provisions on tax treaty entitlement and tax transparent entities. Section 1.5. provides some final remarks.

Keywords: tax transparency; hybrid entities; tax treaties; tax treaty entitlement

JEL Classification: K34

Suggested Citation

Parada, Leopoldo, Tax Treaty Entitlement and Fiscally Transparent Entities: Improvements or Unnecessary Complications? (January 1, 2020). In J. Wheeler (ed), The Aftermath of BEPS, IBFD, Amsterdam (2020), Available at SSRN:

Leopoldo Parada (Contact Author)

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