Direct Tax Laws & International Taxation · Overview of Model Tax Conventions

Difference Between OECD and UN Models (CA Final International Taxation)

Updated 5 October 2026 · Fact-checked

The OECD Model favours residence-country taxation and sets higher thresholds for source taxation. The UN Model gives more taxing rights to the source country. The main differences are in Article 5 (PE, with service PE and a lower threshold in the UN Model), Article 7 (force of attraction), Article 12 (royalties), Article 12A (fees for technical services) and withholding rates. Answer by comparing article by article.

Understand Difference Between OECD and UN Models

A model tax convention is a template that countries use when negotiating a bilateral tax treaty (DTAA). It is not binding. Each treaty is the final text that two countries sign. The two models you must know are the OECD Model and the UN Model.

The core question in any treaty is who gets to tax: the country where the person lives (residence country) or the country where the income arises (source country). The OECD Model was drafted mainly for flows between developed countries, where investment runs both ways. So it leans to residence-country taxation and limits the source country's rights.

The UN Model was drafted for treaties between developed and developing countries, where the flow is mostly one way, into the developing country. So it keeps more taxing rights with the source country. Most of its text follows the OECD Model, and the differences are in a few articles.

The differences you need are in four places. Article 5 (permanent establishment): the UN Model has a wider PE definition, including a service PE and a lower time threshold for building sites. Article 7 (business profits): the UN Model allows a limited force of attraction. Articles 10, 11 and 12 (dividends, interest and royalties): the UN Model leaves withholding rates to bilateral negotiation. Article 12 covers royalties only. Fees for technical services fall under the separate Article 12A in the UN Model (2017 onward). Article 14 and Article 17 also differ in some points, but Articles 5, 7 and 12 are the safest to write about.

India's treaties generally follow a mix of both models. India usually takes the source-country stance, so many of its DTAAs include a service PE and taxation of fees for technical services at source. Always say that the actual treaty text decides the case.

Key rules to remember

Article 5: PE threshold for building site or construction project: OECD: more than 12 months | UN: more than 6 months; This is the usual comparison. A UN-style treaty creates a PE earlier.
Article 5: service PE: OECD: no separate service PE clause | UN: service PE if services are performed in the source state through employees or other personnel and continue for more than 183 days in any 12-month period for the same or a connected project; The services must be furnished in the source state. The PE exists only for that project, and the profits taxed are those attributable to it. The 183-day period is the UN Model threshold, but a bilateral treaty may set a different one.
Article 5: insurance agent: UN: an insurance enterprise is deemed to have a PE if it collects premiums or insures risks through a dependent person (excluding reinsurance) | OECD: no such specific rule; A useful extra point to add in a comparison answer.
Article 5: stock for delivery (dependent person): UN Article 5(5)(b): a PE is deemed where a person with no authority to conclude contracts maintains a stock of goods from which they regularly deliver goods on behalf of the enterprise | OECD: no such clause; This is a dependent-agent rule. It applies to a person who is not an independent agent acting in the ordinary course of business. Do not confuse it with the stock exclusion for a fixed place of business (Article 5(4)), which both models contain in similar form.
Article 7: attribution of profits: OECD: profits attributable to the PE only | UN: limited force of attraction (sales of same or similar goods or similar business activities also taxable in the source state); The OECD removed the old force-of-attraction idea. The UN Model keeps a limited form. Also, the UN Model does not allow deduction of notional payments such as royalties and interest paid by the PE to the head office.
Article 12: royalties: OECD: taxable only in the residence state | UN: taxable in both states, source tax limited to a rate negotiated bilaterally; The UN Model shares taxing rights and leaves the rate to the treaty partners. Article 12 covers royalties only.
Article 12A: fees for technical services: OECD: no separate article (generally business profits under Article 7 or independent services) | UN: Article 12A allows source taxation of technical service fees at a negotiated rate; The UN Model added Article 12A in later versions (2017 onward). Many Indian treaties already have a fees-for-technical-services clause.
Articles 10 and 11: withholding rates: OECD: the Model's own text limits source-state tax to 5% on dividends where a company holds at least 25% of the capital, 15% on other dividends, and 10% on interest | UN: rates left blank for bilateral negotiation; The OECD Model states a maximum rate for each, while the UN Model leaves the figures blank. Do not state UN rates as fixed numbers.
Article 14: independent personal services: OECD: deleted from the Model in 2000 (covered by Article 7) | UN: retained, source taxation if (i) a fixed base is regularly available, or (ii) the stay in the source state amounts to or exceeds 183 days in the fiscal year concerned, or (iii) the remuneration for services performed in the source state is paid by a resident of that state and exceeds an amount fixed in the treaty; Useful as a supporting point. The 183-day test is met at exactly 183 days, not only above it. The third UN trigger depends on the amount fixed in the treaty.

How to solve Difference Between OECD and UN Models questions

Use this method for any question that asks you to compare the OECD and UN models, or to apply one to a case.

1Read the question and identify which articles it touches: PE (Article 5), business profits (Article 7), or passive income and fees (Articles 10 to 12).
2State the basic stance: OECD favours residence-country taxation, UN favours source-country taxation.
3Compare article by article. For each, give the OECD rule first, then the UN rule, in one line each.
4If it is a case, extract the facts: duration of the project, days of services, who is the agent, what type of payment.
5Apply the threshold to the facts under each model and state whether a PE or source taxation arises.
6Say that the actual DTAA between the two countries decides the answer, and that the models are only a guide.
7Conclude with the result: which country can tax, and under which article.

Quickest way: Three-lens comparison: PE, profits, payments

When to use it: Use when you have to write a comparison in a short time, or when a case MCQ asks which model gives a source-country right.

Remember the rule: UN gives the source country more power. If in doubt in an MCQ, the UN-leaning option is usually the one that allows source taxation.
Write three lines: PE (6 months vs 12 months, service PE), profits (force of attraction), payments (royalty and fees shared at source).
Add the line on withholding: UN leaves rates open, OECD states maximum rates.
Close with a line that the treaty text decides the actual result.

Common mistakes in Difference Between OECD and UN Models

Stating that the UN Model fixes higher withholding rates.
Students assume source taxation means set higher rates.
Fix: Say that the UN Model leaves the rates blank to be negotiated. It only allows more source taxation, not fixed rates.
Reversing the PE thresholds for building sites (saying 12 months for UN, 6 months for OECD).
Students mix up which model is more source-friendly.
Fix: Link the threshold to the stance. UN favours the source state, so the UN period is shorter (6 months). OECD is longer (12 months).
Saying the OECD Model has a service PE.
Students recall service PE from Indian treaties and attribute it to the OECD Model.
Fix: A service PE is a UN Model feature. It appears in some bilateral treaties, but not in the OECD Article 5 text.
Writing the comparison as a long general essay with no article numbers.
Students remember the idea but not the structure.
Fix: Use article-wise points: Article 5, 7, 10 to 12, 14. Mention the number each time.
Treating the model as binding law.
Students forget that models are only templates.
Fix: State that only the signed DTAA applies. Under Indian law, treaty relief is given under the treaty-relief provision of the Income-tax Act, 2025, as per the treaty text.
Applying the UN force of attraction rule to every sale in the source country.
The rule sounds broad.
Fix: State that it is limited: it covers sales of the same or similar goods or similar business activities as those carried on through the PE.

Worked examples

Example 1

Alpha Ltd, a company resident in Country X, builds a power plant in India. The project runs for 8 months. Alpha has no other presence in India. The India–X treaty follows the UN Model on PE. Another treaty, India–Y, follows the OECD Model. Does Alpha have a PE in India under each model, if the same facts applied to both?

Show the solution

Identify the article: Article 5, building site or construction project.
UN Model threshold: more than 6 months. The project lasts 8 months, so 8 > 6 and a PE exists.
OECD Model threshold: more than 12 months. The project lasts 8 months, so 8 < 12 and no PE exists.
Consequence: under the UN-style treaty, India can tax profits attributable to the PE under Article 7. Under the OECD-style treaty, India cannot tax the business profits.
Note that the actual treaty text applies in each case.

Answer: Under the UN-style treaty, Alpha has a PE in India because 8 months exceeds 6 months. Under the OECD-style treaty, there is no PE because 8 months is below 12 months.

Example 2

Beta Inc., resident in Country P, sends 5 engineers to India to provide technical consultancy to an Indian company. The engineers perform the services in India, and the services for the same project continue for 200 days within a 12-month period. Beta has no office in India. Discuss whether a PE arises under the UN Model and the OECD Model.

Show the solution

Identify the issue: Article 5, services furnished through employees or other personnel.
UN Model: a service PE arises if services are performed in the source state through employees or other personnel and continue for more than 183 days in any 12-month period for the same or a connected project.
Facts: the services are performed in India through Beta's employees on the same project, and they continue for 200 days. Since 200 > 183, a service PE arises under the UN Model. It exists only for that project, and the profits attributable to the service activities are taxable in India under Article 7.
OECD Model: there is no separate service PE clause. A PE needs a fixed place of business or a dependent agent. The engineers use no fixed place of Beta's own, so on these facts no PE arises under the OECD Model.
Conclusion: the answer differs because the UN Model is more source-friendly.

Answer: Under the UN Model, Beta has a service PE in India, for that project only, because the services performed in India through its employees continue for 200 days, which is more than 183 days in a 12-month period. Under the OECD Model, there is no PE on these facts because there is no fixed place of business and no dependent agent.

Exam tips

Write comparison answers in article-wise points: Article 5, Article 7, Articles 10 to 12. Examiners look for the article numbers.
In case MCQs, check the number of days or months first. The thresholds (6 and 12 months, 183 days) decide the answer.
Always add one line that the signed DTAA overrides the model and that India's treaties mix features of both.
Do not quote fixed UN withholding rates. Say they are left to negotiation.
If the question mentions services income, mention the service PE and the UN Article 12A on technical service fees.

Practice questions from Overview of Model Tax Conventions

Difference Between OECD and UN Models in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Difference Between OECD and UN Models: frequently asked questions

What is the main difference between the OECD and UN models?

The OECD Model favours the country of residence, while the UN Model gives more taxing rights to the source country. This shows up in the PE definition, the force of attraction rule and the taxation of royalties and fees.

Which model does India follow?

India does not follow one model strictly. Its treaties borrow from both and usually lean toward the source-country position, such as including a service PE and taxing fees for technical services at source. The actual treaty text always decides the result.

Is the PE threshold for a building site 6 months or 12 months?

Under the OECD Model it is more than 12 months. Under the UN Model it is more than 6 months. A particular treaty may set a different period, so check the treaty.

How should I answer a comparison question in the exam?

Start with the stance of each model in one line. Then compare article by article with short points on PE, business profits, and royalty and fees. Finish with a line that the signed DTAA governs.