New OECD Model Tax Convention – examining the new definition of “employer” in Article 15

January 4, 2011

The revised version of the condensed OECD Model brings welcome clarity to the meaning of employer for Article 15 (short term assignment) purposes.

The OECD (Organisation for Economic Co-operation and Development) Council approved the 2010 Update to the Model Tax Convention in July 2010.


One of the most important parts of the 2010 update to the Model Tax Convention is the replacement of Article 7 (Business Profits) of the Model Tax Convention and its Commentary.  For international assignments the new Commentary on Article 15 (Employment) provides enhanced guidance regarding the allocation of taxing rights where an employee undertakes a short term assignment.

Background to New Article 15 Commentary

Historically there have been many conflicts over the interpretation of who is the employer of a short term assignee.  As each party to a treaty exercised its discretion to determine under their respective domestic law who is regarded as an “employer” for the purpose of employment income exemption, many cases of double taxation have arisen.

The newly published Commentary to the Model Tax Convention provides a new framework with which the state where the duties are performed (the source state) can determine whether there is a substantive “employment relationship” and therefore, whether they can tax the employees’ earnings derived in their state.

One of the key features of the new Commentary is that if, after applying the new framework set out in the Commentary, the source state determines there is a relevant employment relationship then the home state must give relief from double taxation whether or not they would apply a different test (paragraph 8.10).

Integration & Control Test

Rather than look at the “legal” or “economic” employer the commentary focuses on factors that indicate whether the individual is integrated into the business and under the control of a host state entity in order to test whether there is an employment relationship.  There is therefore a distinction between individuals who provide services to an entity in a employment relationship (contract of service) and those who provide services as part of a contract between two separate entities (contract for services).  The existence and features of any remuneration/management fee re-charging arrangements are likely to be one of the leading indicators of this distinction but is unlikely to be conclusive on its own.


As well as providing comprehensive guidance, there are six helpful examples in the new Commentary.  The last of the examples is of particular interest as it creates a potential barrier against possible source state taxation of services provided by centralised functions.  This should help reduce potential risks that can result in the double withholding or double taxation of short term assignments/business travellers.  The new Commentary also offers the opportunity to review and align HR and transfer pricing policies to minimise the compliance risks associated with short term assignments.

For further information or to discuss the issues raised, please contact Bina Gayadien or Guy Abbiss on +44 (0) 203 051 5711


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