Hot topics in tax treaties

A report on a session at the IBA’s 26th Annual US and Europe Tax Practice Trends Conference held in Rome 16 on April 2026

Session Co-Chairs

Margriet Lukkien, Loyens & Loeff, Amsterdam
Loren Ponds, Skadden, Washington, DC

Speakers

Sandy Bhogal, Gibson Dunn, London
Francisco Cabral Matos, Vieira de Almeida (VdA), Lisbon
Paolo Ludovici, GPBL, Milan
Heather Ripley, Alston & Bird, New York
John Stokes, OECD, Paris
Christian Wimpissinger, Binder Grösswang, Vienna

Reporter

Jasper Bossuyt
Liedekerke, Brussels
j.bossuyt@liedekerke.com

Introduction

The panel discussed recent developments in tax treaty policy and practice, focusing on the growing divergence between the Organisation for Economic Co-operation and Development (OECD) and United Nations (UN) approaches, the 2025 update to the OECD Model Tax Convention, selected treaty cases and domestic developments, anti-abuse rules and recent trends in mutual agreement procedures (MAP). The discussion combined multilateral developments with practical examples from the UK, US, Portugal, Italy and Austria.

Panel discussion

Sandy Bhogal opened the discussion by highlighting the increasing divergence between the OECD and UN approaches to source-state taxation. While the OECD Model continues in principle to link source taxation of services to the existence of a permanent establishment, the March 2025 update to the UN Model gives source states significantly broader taxing rights. In particular, the new Article 12AA allows gross-basis withholding taxation of cross-border service payments without requiring physical presence in the source state. The UN Model also expands the royalty definition to include certain software payments, introduces a source taxing right for insurance premiums under Article 12C, and provides for a deemed permanent establishment for extractive activities under Article 5A. Francisco Cabral Matos noted that these developments are particularly relevant for capital-importing jurisdictions, and he especially referred to Portuguese-speaking countries such as Brazil. In practice, domestic laws in a number of such jurisdictions may follow source-oriented UN concepts while their treaty networks continue to be based largely on the OECD Model. The developments at the UN could now create some instability as they tend to intervene with established practice and case law based on what has been known from the OECD. This could create interpretation difficulties; he gave the example of the royalty and technical services discussion in the context of lawyers and engineers.

Bhogal also addressed the UK's continuous engagement with three key UN tax initiatives, considering the UK as a ‘polite country’. Unlike the US, which withdrew from the UN negotiations in February 2025, the UK has indeed remained involved in the framework convention and the protocols on cross-border services and dispute resolution. At the same time, the UK has maintained reservations on a broad market- or consumer-based allocation of taxing rights and continues to regard physical presence as the appropriate nexus for most situations. The panel considered this continued engagement useful, while observing that substantial work remains before the UN proposals could result in a broadly accepted multilateral framework.

John Stokes then presented the 2025 update to the OECD Model, adopted by the OECD Council in November 2025. He emphasised that the update reflects a broad governmental consensus and includes changes to the Commentary on Article 5 regarding home offices and extractive activities, changes to the Commentary on Article 9 concerning transfer pricing and financial transactions, and updates relating to Articles 25 and 26 and to country observations, reservations and positions.

Christian Wimpissinger used recent Swiss, Austrian and German cases to discuss a recurring interpretative question: whether later versions of the OECD Commentary may be used to interpret treaties concluded before those updates. The cases discussed generally favoured a static approach, under which the version of the Commentary in force when the treaty was concluded carries particular weight, although later Commentary may still have persuasive value. Wimpissinger noted that a number of Austrian treaty protocols expressly refer to the OECD Commentary as amended from time to time, adding a further layer to the analysis. Heather Ripley added that US case law tends to take a less formalistic approach, with different versions of the Commentary being relied upon depending on the arguments advanced in the particular case.

Stokes next explained the new OECD guidance on cross-border home working. The changes were made entirely through the Commentary to Article 5(1), rather than by amending the text of Article 5 itself. The objective was to provide greater certainty in an area where the pre-existing Commentary had become inadequate following the widespread increase in remote working. The analysis remains dependent on the facts and circumstances, but the new Commentary provides an important practical indication: where an individual works from a home or other relevant place for less than 50 per cent of his or her working time, a permanent establishment should generally not arise, with exceptions not expected in most circumstances. Above that threshold, the existence of a commercial reason for the individual to work from that location becomes particularly relevant. Cabral Matos observed that this commercial-reason test is important for countries such as Portugal, which attract significant numbers of remote workers who may choose to live there for personal reasons even though their employer has no business interest in Portugal.

Heather Ripley added a US perspective. Home-office arrangements may potentially engage fixed-place and agency permanent establishment concepts and, under some US treaties, a services permanent establishment. US courts and the Internal Revenue Service (IRS) have historically referred to OECD Commentary as interpretative guidance, although the weight given to later Commentary is not uniform. Ripley also pointed to analogous issues at US state level, where the presence of a remote employee may create nexus and affect the employer's state tax position.

The panel then turned to the Article 9 changes. Stokes explained that the updated Commentary aligns the treatment of intra-group loans with Chapter X of the OECD Transfer Pricing Guidelines: jurisdictions may use accurate delineation or domestic doctrines to determine the appropriate amount of debt, after which the arm's-length principle is applied to price the financing. The Commentary also clarifies that Article 9 does not determine whether an expense remains deductible under domestic law once profits have been allocated in accordance with the arm's-length principle. Following comments received during the 2021 public consultation, the OECD is also considering domestic rules that operate in a manner similar to transfer pricing adjustments and whether such rules should, in appropriate circumstances, give access to MAP.

Moving to selected country developments, Bhogal reviewed recent UK treaty activity. The UK has generally opted for the principal purpose test (PPT) under the Multilateral Instrument rather than a simplified limitation-on-benefits (LOB) provision. Recent and renegotiated treaties increasingly contain modern provisions on dual-resident entities, anti-fragmentation and exchange of information. The Finance Act 2026 also expands the domestic agency permanent establishment definition to align it with the 2017 OECD Model and narrows the independent-agent exception, although existing treaties may initially limit the practical effect of those domestic changes. Ripley contrasted this with the US, where treaty activity remains relatively limited because of the Senate ratification process and the resulting time lag between negotiation and entry into force.

Wimpissinger discussed an Austrian case concerning a crypto-mining company that rented servers in Lithuania. The Austrian court accepted that a server could in principle constitute a permanent establishment, but required the taxpayer to identify the specific server at its disposal. A virtual machine that could operate on different physical servers was insufficient. The case illustrates the increasing difficulty of applying traditional fixed-place concepts to artificial intelligence (AI), cloud and other digital activities where the taxpayer may not know where the relevant computing processes physically take place.

Paolo Ludovici then addressed a series of Italian royalty issues. He first discussed the Italian Revenue Agency's position that payments for rights to use, reproduce and distribute software may constitute royalties. The panel distinguished this from the mere distribution of software copies without a reproduction right, for which the OECD Commentary points towards business-profit treatment. Italy has entered an observation in relation to that Commentary and applies a case-by-case approach. Ludovici also described the increasing Italian audit focus on 'embedded royalties', where the tax authorities seek to identify a royalty component within the price paid for branded products or other bundled transactions. The limited case law does not support an automatic recharacterisation and places importance on the contractual arrangements, payment flows, ownership of the intangibles and supporting transfer pricing evidence.

A further Italian case concerned the withholding tax treatment of royalties exceeding the arm's-length amount agreed through a bilateral advance pricing agreement with Switzerland. The Italian Revenue Agency sought to apply the 30 per cent domestic withholding tax rate to the excess amount. A first-instance court rejected that approach, reasoning that the excess could not retain its royalty character under Article 12 and that, in the absence of a domestic statutory basis for a secondary adjustment, it should fall under Article 7 as business profits. Ludovici stressed that the decision is not final and remains subject to appeal. Ripley contrasted the Italian approach to mixed transactions with the 2025 US regulations on digital content and cloud transactions, which generally seek to identify the predominant character of a transaction and apply more standardised characterisation and sourcing rules.

The discussion then shifted to anti-abuse regimes. Ludovici described an Italian dispute concerning the former Swiss principal-company regime and the Italian anti-hybrid rules. The Italian authorities treated the Swiss regime and its transitional goodwill amortisation as giving rise to an imported hybrid mismatch and denied deductions in Italy. The panel noted the difficulty created where one jurisdiction seeks to counteract an alleged mismatch even though the other jurisdictions involved do not share the same characterisation, potentially leaving limited scope for treaty-based dispute resolution.

Cabral Matos discussed recent Portuguese cases in which the tax authorities have increasingly relied on the domestic general anti-abuse rule in situations involving personal service companies, acquisition vehicles, intra-group financing and holding structures. He cautioned against treating beneficial ownership, economic substance and abuse as interchangeable concepts. In his view, the PPT asks whether obtaining a treaty benefit was one of the principal purposes of an arrangement, while lack of substance and abuse require distinct analyses. He noted that Portuguese practice increasingly tests commercial substance and the coherence of the non-tax rationale, including in cases where a taxpayer can demonstrate a wider business purpose for maintaining a European treasury centre or investment platform.

Bhogal briefly reviewed the developing UK case law on treaty abuse and interpretation. The cases discussed show a tendency towards purposive and commercial interpretation, while at the same time resisting an unduly expansive reading by HM Revenue & Customs. The panel referred, among others, to Burlington Loan Management, concerning an assignment of a debt claim from Cayman to Ireland and the application of treaty withholding tax relief, and Haworth on the place-of-effective-management tiebreaker. The discussion illustrated that straightforward treaty-shopping arrangements remain vulnerable, but that the courts continue to examine carefully the wording and purpose of the particular treaty provision rather than applying a free-standing anti-abuse concept.

Wimpissinger then discussed an Austrian rule denying deductions for intra-group interest and royalties where the recipient is exempt or subject to taxation below ten per cent. An Austrian first-instance tax court held that the rule was incompatible with EU law to the extent that it went beyond what was necessary to combat abuse. Rather than disapplying the provision entirely, the Court limited its application to abusive cases or situations involving non-arm's-length remuneration. The case is pending before the Austrian Supreme Administrative Court (and the panel noted that a reference to the Court of Justice may still follow). Ludovici concluded the anti-abuse discussion with an Italian holding-company example illustrating that, although beneficial ownership is expressly relevant to dividends, interest and royalties and not to Article 13 capital gains, Italian tax authorities may rely on similar substance indicators and the PPT when examining capital-gains structures.

Finally, the panel considered recent MAP developments. Stokes noted that the global MAP inventory continues to increase, but only gradually: just over 2,700 cases were started in 2024 while approximately 2,500 were closed. The longer-term trend since BEPS Action 14 remains upward. This can be read positively as evidence of increased taxpayer confidence in MAP, although it may equally reflect a growing number of cross-border tax disputes. Ripley noted that US outcomes differ significantly between transfer pricing and non-transfer-pricing cases and that the identity of the counterparty jurisdiction can materially affect the outcome and duration of a case.

Cabral Matos closed with the Portuguese developments. Portugal has an extensive treaty network containing MAP clauses, but historically lacked a comprehensive domestic procedural framework governing how MAP cases should be initiated and conducted. New domestic rules in 2026 are intended to address procedural matters, including the taxpayer's position where the procedure is initiated in the other contracting state. He regarded this as an important practical development: a treaty clause alone may not be sufficient to make MAP an accessible and effective dispute-resolution mechanism without clear domestic procedures on timing and process.