The 2025 update to the United Nations Model Tax Convention marks a pivotal evolution in international tax treaty policy, especially for developing countries. Reflecting four years of deliberations by the UN Tax Committee, the revisions aim to rebalance taxing rights between source and residence jurisdictions in a global economy increasingly dominated by digital services, mobile capital, and cross-border corporate structures. Unlike previous updates, this version introduces substantive new articles and structural shifts that empower source countries to better protect their tax base, close long-standing loopholes, and assert fiscal sovereignty. The following analysis highlights key changes introduced in the 2025 update, offering and their practical effects and policy implications.

1. New Article on Extractive Industries (Article 5A)

One of the most transformative changes in the 2025 update is the introduction of Article 5A, which targets income from the exploration or exploitation of natural resources. Previously, taxation in such scenarios relied on general service PE rules under Article 5(3), which required a 183-day threshold for establishing a taxable presence. The new article drastically reduces this threshold to 30 days, allowing source countries to tax profits even when services are provided for relatively short durations. This provision is especially beneficial for developing countries with extractive potential but limited tax enforcement capacity.

• Establishes a deemed permanent establishment (PE) after 30 days of activity in extractives.
• Covers a broader range of activities including support services like surveying and offshore rig maintenance.
• Expands the definition of natural resources to include renewables and fisheries.
• Strengthens source taxation in favor of countries rich in natural resources but prone to tax base erosion.
• Offers a proactive safeguard, even for countries discovering new resource potential post-treaty.

2. Revised Article 8 on International Shipping and Air Transport

The treatment of international shipping and air transport under the UN Model Convention has long followed a residence-based taxation principle. However, the 2025 update flips the emphasis, making source-based taxation the new standard for both shipping and, for the first time, air transport. The former “Alternative B” becomes “Alternative A,” now allowing source countries to tax cross-border shipping and airline profits either on a gross or net basis. This change reflects the policy shift towards empowering developing and coastal states with more taxing rights over foreign shipping companies operating in their jurisdictions.

• Removes the vague “more than casual” threshold for taxing foreign carriers.
• Allows gross basis taxation (agreed % of freight charges) or net basis taxation (domestic tax rate, reduced by 50%).
• For the first time, applies to international air transport, previously exempt from source taxation.
• Empowers coastal and transit countries to reclaim taxing rights in maritime and aviation sectors.
• Challenges decades-long dominance of exclusive residence taxation, especially by major airline states.

3. Broadened Definition of Royalties (Revised Article 12)

The 2025 update addresses the growing digital economy by expanding the scope of royalties under Article 12. Previously, royalties were restricted to payments for the use of copyrights, patents, and similar rights. The revision now includes payments for the use of software, even if no copyright is involved—closing a major loophole used for base erosion through licensing arrangements. This change aligns with global efforts to curb tax avoidance in digital transactions and strengthens the taxing capacity of technology-importing countries.

• Includes software payments in the royalty definition, even if no copyright is transferred.
• Supports withholding tax mechanisms in source countries for outbound software licensing payments.
• Closes a gap widely exploited in tax planning structures involving intangibles.
• Benefits developing countries vulnerable to profit shifting by global tech firms.
• Shifts the conversation on digital taxation in favor of equitable cross-border rules.

4. Consolidated Article 12AA on Fees for Services

Article 12AA replaces and merges former Articles 12A (technical services) and 14 (independent personal services), creating a single, broad rule for all service-related payments. The former rules led to confusion due to overlapping thresholds, ambiguous definitions, and inconsistent enforcement. The new article removes such complexities by granting source countries the right to impose withholding tax on all service fees, regardless of the provider’s physical presence. This is a significant evolution, reflecting how cross-border services increasingly occur digitally, with little or no local footprint.

• Covers all types of services—technical, consultancy, automated, human, or digital.
• Allows withholding tax on gross payments, triggered by the payer’s residency in the source country.
• Removes outdated physical presence thresholds (e.g., 183-day PE rule remains optional).
• Abolishes Article 14, placing individuals and corporations under the same service taxation framework.
• Creates a powerful tool for developing countries to tax the growing digital services sector.

5. New Article 12C on Insurance Premiums

The insurance sector is another area where the UN Model (2025) strengthens source taxation. Under the new Article 12C, countries can impose a withholding tax on gross premiums paid to non-resident insurers—even including reinsurance contracts. This is a response to the fact that insurance companies often escape taxation through offshore arrangements, especially in developing countries where insurance markets are expanding. By targeting premiums at the payment point, the rule ensures that domestic markets contribute fairly to national revenues.

• Enables gross withholding tax on insurance and reinsurance premiums.
• Applies if the payer of the premium is a resident of the source country.
• Addresses revenue leakage through reinsurance loopholes.
• Complements development goals by ensuring the insurance sector contributes to domestic resource mobilization.
• Limits abuse of old ‘deemed PE’ rules, which were ineffective against indirect premium flows.

6. Introduction of a Subject to Tax Rule (STTR – Article 1(3))

The inclusion of a Subject to Tax Rule (STTR) in Article 1 is one of the most progressive aspects of the update. It provides that source countries are not bound by tax treaty limits if the income is not adequately taxed in the residence country. This rule helps tackle the problem of income shifting to low-tax jurisdictions and reflects an important departure from the OECD’s minimalistic approach. The flexibility to set bilateral minimum tax thresholds gives countries autonomy in protecting their tax base.

• Overrides treaty limits if income is taxed below an agreed rate in the residence country.
• Applies regardless of related-party status, making it broader than OECD’s Pillar Two STTR.
• Grants source countries the right to restore full taxation under domestic law.
• Enhances fairness and equity, especially in treaties with low-tax jurisdictions.
• Opens pathways for bulk renegotiation using the UN’s upcoming Fast-track Instrument (FTI).

7. Revised Dispute Resolution – Article 25 (GATS & Extended Provisions)

Article 25 now contains two important additions that redefine how tax treaty disputes are resolved, especially in relation to trade and investment agreements. The GATS provision confirms that tax disputes cannot be taken to WTO/GATS forums without mutual consent. The extended provision blocks the use of Investor-State Dispute Settlement (ISDS) to challenge tax measures under investment treaties. These updates are designed to protect tax sovereignty and shield developing countries from aggressive treaty-shopping by multinationals.

• GATS provision requires mutual consent before invoking trade dispute mechanisms on tax issues.
• Extended provision bars ISDS claims against tax measures deemed in line with tax treaties.
• Shields domestic tax reforms from investment treaty arbitration.
• Promotes a whole-of-government approach to dispute resolution across tax and trade policy.
• Aligns with global trends to reform or terminate abusive first-generation investment treaties.