Do treaties always reduce tax?

They usually reduce or allocate taxing rights, but they cannot create a tax liability that does not exist under domestic law - a treaty is a relieving instrument, not a charging one.

What is the Principal Purpose Test?

A general anti-abuse clause that denies treaty benefits where one of the principal purposes of an arrangement was to obtain those benefits, unless granting them would be in line with the treaty's object and purpose.

Glossary/Tax Concepts/Bilateral Tax Treaty

Tax Concepts

Bilateral Tax Treaty

Bilateral Tax Treaty is an international agreement between two states that allocates taxing rights over cross-border income and provides relief from double taxation.

What Bilateral Tax Treaty is

A bilateral tax treaty (also called a Double Taxation Convention or DTAA) is a binding agreement between two countries that overrides domestic law to the extent it is more favourable. Most modern treaties are based on the OECD Model Tax Convention or, for treaties involving developing countries, the UN Model.

They cover business profits, dividends, interest, royalties, capital gains, employment income, and several special categories.

Core articles

Residency (Article 4) and tie-breaker rules
Permanent establishment (Article 5)
Business profits (Article 7)
Dividends, interest, royalties (Articles 10, 11, 12) with reduced WHT rates
Capital gains (Article 13)
Employment income (Article 15) with the 183-day rule
Methods to eliminate double taxation (Article 23): credit or exemption
Mutual Agreement Procedure (Article 25)
Exchange of information (Article 26)

Anti-abuse and the MLI

Since BEPS Action 6, treaties typically include a Principal Purpose Test (PPT) and/or a Limitation on Benefits (LOB) clause. The OECD Multilateral Instrument modifies thousands of treaties simultaneously. Treaty access requires residency, beneficial ownership, and increasingly substance.

When you will meet Bilateral Tax Treaty

You will use a bilateral tax treaty whenever you reduce withholding tax on cross-border dividends, interest, royalties, or services, when assessing whether activities abroad create a permanent establishment, when relocating executives, when claiming foreign tax credits, and when invoking a Mutual Agreement Procedure during double-taxation disputes.

Where this comes up in our guides