Special Features of the UN Model Convention

1. S. 74Introduction

Service activities play an important role in the worldwide economy. Not only developed countries, but also developing countries have a large part of their GDP coming from service activities, e.g. United States of America 80,0% (2017) and Botswana 70,6% (2017). Simultaneously, cross-border services have a high relevance in international trading and investment activities. Therefore, the tax treatment of cross-border services is of international attention.

In the case that an enterprise operates its business in a state other than its state of residence, it may decide whether to set up a subsidiary enterprise or a permanent establishment (hereinafter PE). Art. 5 UN Model (2017) contains the framework for the constitution of PEs. In particular, Art. 5 (3) (b) UN Model (2017) encompasses a specific concept for service activities which may constitute a PE in the source state – the so-called service PE clause, which was first introduced in the UN Model 1980. Service PE clauses have been included in around 40% of all the concluded tax treaties.

The OECD Model (2017) does not contain a special provision governing the allocation of income and profits resulting from services. Tec...