STEP 1: applicability of Article 15 OECD
First, assess which DTC applies in the given case (ie Arts. 1+2)
In order to apply, the following conditions must be met:
1) There is ‘income’
2) There is a ‘cross-border situation’
3) There is a ‘resident of a contracting state’ (Art.4)
4) There is ‘NO lex specialis applicable’ (ie Arts. 16, 17, 18, 19)
5) Article 15 applies 1
STEP 3: application of Article 15, para 1 (‘exercising’ the employment)
First, as outlined in STEP 1, it will have to be assessed whether an item of income falls under Article 15
and constitutes ‘salaries, wages and other similar remuneration’.
o If not, Article 21 will apply
I. Place of ‘exercise’ of employment
Second, para 1 will determine whether:
(i) The residence state has taxing rights (first sentence)
(ii) The state of work/activity/source has taxing rights due to the fact that the activity is exercised
there (second sentence)
o Active work: it will be easy to determine where the work is exercised.
o Inactivity2: the focus is on whether the inactivity, as such, can be regarded as the exercise of an
employment in the work state or whether an employment exercised in the work state forms, or
is deemed to form, the basis of that income.
Accordingly, if the inactivity:
(i) Does NOT constitute and activity as such -> it will have to be determined
where the activity forming the basis of the income was exercised
(ii) Constitutes an employment activity as such -> it will be crucial to determine
the place where the inactivity (deemed to be employment activity) is exercised
This analysis will determine whether employment (active or inactive) is exercised as the consideration
for the payment received.
o If so, the place of exercise and the allocation will have to be established
o If not, it will have to be established what the consideration for such payment was and
determine the location of exercise
1
The source state will determine whether, under its domestic laws, the income falls under the notion of ‘salaries,
wages and other similar remuneration’. If so, it will apply Art. 15. If not, Art. 21 will apply (provided that NO lex
specialis applies).
2
Defined as: all situations in which no immediate or direct action of the employee is required as consideration for the
income received from the current or former employer within a certain period of time.
- In other words, the employee is not providing regular services for various reasons, including, for example,
sickness, disability, being on call, a non-competition situation with regard to his former employer,
cancellation of an employment, redundancy, etc.
, II. Allocation of income
Once it is determined whether employment is exercised, it can be established:
(i) Whether the income is paid (ie allocated) for such activity/employment
(ii) Whether the income has to be allocated to other activities
3 methods of allocation exist:
1) Direct allocation -> the income may be allocated directly to the exercise of an employment
(deemed to occur where the individual in question is physically present)
2) Replacement of income approach -> the income replaces the regular salary that would have been
received if the employee had been active 3 (the income is allocated in these situations to the place
where the employment would have been exercised had the employment continued)
3) Accrual approach -> the entitlement to the income relating to inactivity accrued during the period
that the individual in question provided his services
III. (Fictional) place of exercise
Once the allocation of the income is determined, the (fictional) place of exercise can be established:
1) The place where the (former) employee is physically present (whilst being inactive)
2) the employment would have been exercised if the employment had continued, when the contract
was breached or when the employee was called on to provide his services; and
3) the employment was exercised in the past.
According to the analysis above, you will have determined: (i) whether the income falls under the scope
of Article 15; (ii) if so, what activities were exercised as compensation for the remuneration; (iii) how
the remuneration is to be allocated; (iv) where such activities were exercised.
Consequently, Article 15(2) will have to be examined to determine whether the source state is
prevented from applying its domestic tax law (this is done below)
STEP 4: application of Article 15, para. 2 (183-days rule)
Article 15(2) provides an exception to Art. 15(1), second sentence -> granting taxing rights to the
residence state if its conditions are met.
A. The person is NOT present in the source state for more than 183 days
- Calculation of the threshold4:
(i) Reference to ‘any fiscal year concerned in any 12 month period’
§4.1 Commentary on Art. 15
3
for example, a severance payment that is intended to compensate for the loss of future employment income, certain
sickness benefits replacing regular salary income during the period of sickness, income derived from a non-
competition agreement intending to replace all or part of the employment income that the former employee could
have gained had he not been restricted in the usage of his knowledge and skills
4
Assess (i), (ii), (iii)!
