When Does a Tax Treaty Apply?

The effect of the distributive articles of a tax treaty, which allocate taxing rights between the contracting states, depends on the specific factual situation under consideration. The impact of these articles may change over time if the material facts change and it is therefore imperative to know at which time the effect of a specific distributive article should be determined. A change in the substance of these articles also makes it necessary to know at which time the treaty should be applied to a specific set of facts. Yet the answer to this question is still far from clear, even though this is a fundamental, systemic issue. This article aims to fill this gap. It draws on the basic principles of tax treaty interpretation expressed in the Commentaries to the Model treaties, OECD reports, case law and academic writing to develop a timing framework for the distributive articles. In doing so, it concludes that the traditional classification of the distributive articles as covering “active” or “passive” income is not useful. It proposes an alternative classification, based on the nexus requirements in the model treaties for source-state taxation, that is relevant well beyond the question discussed here.