2025 update to the OECD Model Tax Convention

The Organization for Economic Co-operation and Development (“OECD”) Model Tax Convention on Income and on Capital (the OECD MTC) serves as a key reference for the negotiation and interpretation of bilateral tax treaties worldwide, providing a standardised framework for the prevention of tax evasion and avoidance as well as for the allocation of taxing rights between jurisdictions with the aim to prevent international juridical double taxation.

On 18 November 2025, the OECD Council approved the 2025 update to the OECD MTC, hereby introducing changes to several articles and commentaries in response to the evolving international tax challenges and global economic environment. This update was published the day after and comprises the first comprehensive revision of the OECD MTC since 2017. Key changes relate to:

• Commentary to Article 5 (Home office permanent establishment);
• Commentary to Article 5 (Natural resources);
• Commentary to Article 9 (Associated enterprises);
• Article 25 and related commentary (Mutual agreement procedure); and
• Commentary to Article 26 (Exchange of information).

Furthermore, the 2025 update includes details regarding the positions and reservations of certain jurisdictions with respect to some of the updated articles and commentaries.

This alert provides an overview of the most notable changes, while also briefly addressing the potential implications of these changes from a transfer pricing point of view. 

The updated commentary to Article 5 provides extensive additional guidance with further clarifications to the definition of a fixed place of business permanent establishment (“PE”), particularly in light of the increasing prevalence of cross-border remote work.

Under the OECD MTC, a fixed place of business PE is defined as a “fixed place of business through which the business of an enterprise is wholly or partly carried on”. The updated commentary now provides more detailed guidance on when a home office or “other relevant place” (including but not limited to for instance a holiday rental, second home etc.) may qualify as a PE.

In order to meet the notion of “fixed” within the definition of a PE, a 50% working time threshold is introduced to reflect a certain degree of permanence. A location (home or other relevant place) will not be considered to be a PE, if an individual works from home or other relevant place in another jurisdiction (which is not a premises of the enterprise) for less than 50% of their total working time over a twelve-month period. When this threshold is met or exceeded (based on actual conduct), additional facts and circumstances will be considered to determine whether the location will be a PE. The main additional consideration is whether there is a commercial reason for the enterprise to have the individual performing activities in the jurisdiction. In this respect, the commentary stipulates that a PE is more likely to arise where remote work is driven by business needs, rather than personal preference or cost-savings.

These changes aim to provide greater certainty for businesses navigating modern working arrangements and to ensure that the PE concept remains relevant in today’s global environment. 

The updated commentary to Article 5 also introduces an optional provision regarding the exploration and exploitation of natural resources. In this respect, tax treaty partners can make use of a bilaterally agreed lowered threshold for establishing a permanent establishment, so that a non-resident enterprise will be deemed to have a permanent establishment if it conducts natural resource activities in a jurisdiction for a period exceeding the mutually agreed threshold.

Even thought it might appear that a home office (or other relevant place) would less rapidly form a PE under the revised guidance, it will remain crucial to perform an in-depth analysis of the profit to be allocated to such a PE, where identified. In this context, Article 7 of the OECD MTC serves as the basis for determining the arm’s length result that should be attributed to the PE.

Irrespective of the updated commentary, sales related activities or C-Level type of activities remain attention points and carry a higher level of risk. Concentration of different individuals performing non-routine functions in a jurisdiction also requires the necessary attention. It is therefore key that the tax department within your organization is well informed of all people changes in order to assess the potential related risks.

Furthermore, on 26 November 2025, the OECD initiated a public consultation aimed at gathering data and insights on tax and regulatory challenges related to the global mobility of individuals. The consultation document outlines some of the initial tax concerns linked to global mobility that have been identified by the Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”) as possible areas for further consideration, including permanent establishments, corporate residence and issues around transfer pricing and the allocation of profits between countries, all of which can be affected by the international movement of employees. The Belgian tax authorities are however not awaiting additional guidance to initiate PE identification audits. We have for instance recently observed that the Belgian tax authorities are raising detailed questions on non-Belgian employees which are active in Belgium for a specific project, and more specifically, focussing on the activities of individuals included in the so-called “Limosa” declarations (i.e. declarations required for social security purposes).

Article 9 of the OECD MTC incorporates the arm’s length principle and provides a framework for the allocation of taxing rights regarding transactions between associated enterprises. The updated commentary to Article 9 introduces two key clarifications.

On the one hand, it reinforces the OECD Transfer Pricing Guidelines (including the new Chapter X on financial transactions) as the internationally agreed interpretation of the arm’s length principle, whereas Article 9 is considered to be the authoritative treaty statement of this principle.

On the other hand, the update clarifies how Article 9 interacts with domestic interest deductibility rules, such as those recommended under BEPS Action 4. More specifically, the updated commentary to Article 9 recognizes that jurisdictions are allowed to take different approaches when applying Article 9 to evaluate the balance between debt and equity funding within multinational enterprises. It clarifies that, in all instances, determining whether and to what extent a purported loan should be effectively treated as a loan for tax purposes must occur before pricing the transaction according to the arm’s length principle.

The updated commentary to Article 9 further explains that, after the profits of the related entities have been allocated based on the arm’s length principle, each jurisdiction’s domestic law will determine if and how those profits are taxed, including the deductibility of expenses. The 2025 update hereby emphasizes that Article 9 does not address the question of whether, or under what conditions, expenses are deductible. This remains a matter of domestic law.

These clarifications provide greater certainty for taxpayers on the boundaries between transfer pricing rules and local deductibility regimes but may also lead to greater challenges (such as the risk of double taxation and increased pressure to align transfer pricing policies with domestic interest deductibility rules). 

Dispute resolution procedures have also evolved, with the introduction of a new paragraph 6 to Article 25, clarifying the interaction between tax treaties and the World Trade Organization’s (WTO) General Agreement on Trade in Services (GATS). The 2025 update of Article 25 confirms that only measures related to non-discrimination (Article 24) fall within the scope of the tax treaty for GATS purposes, and any disputes on whether a measure falls within the scope must be resolved through a mutual agreement procedure (MAP) instead of via GATS dispute settlement.

The updated commentary to Article 25 also clarifies and broadens the circumstances under which taxpayers can initiate a MAP, confirming that taxpayers may do so as soon as it is likely that taxation which is not in accordance with the treaty will arise.

Additionally, specific references to the OECD’s Amount B guidance have been added, directing competent authorities to consider these rules in MAP and arbitration cases involving baseline marketing and distribution activities. This aims to promote consistent dispute resolution and preserve flexibility for jurisdictions that do not adopt Amount B.

Lastly, amendments to the commentary on Article 26 address the exchange of information between tax authorities. It is expressly stated that information received through exchange of information is allowed to be used for tax matters concerning persons other than those for whom the information was originally obtained. The receiving jurisdiction does not need to inform or seek authorisation from the sending jurisdiction before using the information.

The update also details the agreed guidance on taxpayer access to exchanged information and the handling of “reflective non-taxpayer specific information”. With respect to the latter, it is stipulated that confidentiality rules remain to apply. However, such type of information may only be disclosed to third parties if anonymised and both states agree in writing that such disclosure will not impair tax administration.

By clarifying the permitted uses of exchanged information and reinforcing the importance of confidentiality, tax authorities are offered increased flexibility in managing and sharing information. For multinational enterprises, these changes highlight the need for consistent (transfer pricing) documentation and coordinated approaches across all jurisdictions. 

The 2025 update does not entail changes to the wording of existing treaties. Rather, the updated OECD MTC and its commentaries may serve as a guidance for jurisdictions when negotiating new treaties or amending existing ones.

Nevertheless, the 2025 update may influence how tax authorities and courts interpret the provisions of existing treaties. For multinational enterprises this means that, while the 2025 update does not directly alter current treaty provisions, it might shape the way tax authorities assess and manage tax risks going forward. It is therefore of utmost importance for taxpayers to remain informed about these developments and to consider their potential impact on both current and future cross-border activities.

The 2025 update to the OECD MTC marks a significant modernization of the OECD treaty framework. The revisions foster greater alignment between transfer pricing principles and treaty provisions / interpretations, clarify the concept of permanent establishments (particularly in remote work situations), enhance dispute resolution mechanisms and strengthen the framework for information exchange between tax authorities.

The 2025 update emphasizes the importance for taxpayers to maintain solid transfer pricing policies that are correctly and consistently implemented, along with robust transfer pricing documentation and analyses. This is crucial for managing potential risks and ensuring compliance with the evolving international standards.