OECD/G20 Inclusive Framework releases Subject to Tax Rule model treaty provision and commentary

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EY Global

25 Jul 2023
Subject Tax Alert
Categories BEPS 2.0
  • Among the key documents that the Organisation for Economic Co-operation and Development released on 17 July 2023 is a document under Pillar Two containing the model treaty provision of the Subject to Tax Rule (STTR) and an accompanying commentary.
  • The STTR is a core element of Pillar Two and, where applicable, would apply before the Global Anti-Base Erosion Rules.
  • Companies should evaluate the potential implications of the STTR for their businesses and monitor STTR developments in relevant jurisdictions.

Executive summary

Among the series of documents that the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework released on 17 July 2023 focusing on elements of the OECD/G20 project on addressing the tax challenges of the digitalization of the economy (the BEPS 2.0 project), is a document under Pillar Two containing the model treaty provision of the Subject to Tax Rule (STTR), together with an accompanying commentary explaining the purpose and operation of the STTR.

Like the Global Anti-Base Erosion (GloBE) Rules, the STTR is an integral part of Pillar Two. The STTR is a treaty-based rule that applies to intragroup payments from source jurisdictions (i.e., the jurisdiction in which the income arises) that are subject to tax rates below 9% in the payee's jurisdiction of residence. The STTR allocates to the source country a limited and conditional taxing right to ensure a minimum level of taxation. The relevant tax rate under the STTR generally is the statutory tax rate applicable in the jurisdiction where the related person deriving the income is a resident, subject to special rules that apply if the person benefits from a preferential adjustment in respect of the income.

The STTR applies to interest, royalties and a defined set of other payments made between connected companies, including all intra-group service payments. Application of the STTR is subject to a series of exclusions and the so-called mark-up and materiality thresholds. The STTR also includes an anti-avoidance rule that targets particular situations, including using back-to-back payments or interposing a connected person1 that is subject to a tax rate above 9%. Coordination rules provide that taxing rights under the STTR take precedence over tax treaty provisions on the elimination of double taxation.

The STTR document reiterates that the STTR takes priority over the GloBE Rules, so that the application of the STTR does not take into account a qualified Income Inclusion Rule (IIR), qualified Undertaxed Profits Rule (UTPR) or a Qualified Domestic Minimum Top-up Tax (QDMTT). It also reiterates that Inclusive Framework member jurisdictions with nominal corporate income tax rates below the 9% STTR rate have committed to implementing the STTR into their bilateral treaties with other members that are developing countries, if and when they are asked to do so. A multilateral instrument to facilitate implementation of the STTR in relevant bilateral tax treaties will be open for signature from 2 October 2023.

Detailed discussion


The Pillar Two Blueprint,2 released by the OECD in October 2020, included a description of the STTR framework for developing a treaty-based rule targeting the risks to source jurisdictions posed by BEPS structures involving intragroup payments that take advantage of low nominal tax rates in other contracting jurisdictions.

In October 2021, the OECD released a statement reflecting the high-level agreement of member jurisdictions of the OECD/G20 Inclusive Framework on core design elements of Pillars One and Two of the BEPS 2.0 project.3 The agreement included a commitment that Inclusive Framework members that apply nominal corporate income tax rates below 9% to interest, royalties and a defined set of other payments would incorporate the STTR into their bilateral treaties with developing Inclusive Framework members when requested to do so.

On 12 July 2023, the OECD released an outcome statement reflecting the agreement reached by 138 of the 143 Inclusive Framework-member jurisdictions on the remaining elements of the BEPS 2.0 project.4 The July 2023 statement referenced new Inclusive Framework deliverables in several areas, including the STTR under Pillar Two.

Subject to Tax Rule

The STTR document, which contains the model treaty provision for implementing the STTR along with explanatory commentary, reiterates the STTR's importance to developing countries that are Inclusive Framework members. Pillar Two provides jurisdictions with a right to "tax back" where other jurisdictions have not exercised their primary taxing rights or an amount is otherwise subject to low levels of taxation. The document describes the STTR as designed to help developing countries, particularly those with lower administrative capacities, protect their tax bases.

The STTR allows source jurisdictions to tax back where defined categories of intra-group payments are subject to nominal corporate income tax rates below 9% and domestic taxing rights over that income have been ceded under a treaty. The STTR takes priority over the GloBE Rules and therefore application of the STTR does not take into account a qualified IIR, qualified UTPR or QDMTT.

The STTR document includes a model treaty provision and commentary on the STTR, together with related amendments and commentary to model treaty provisions on eliminating double taxation and an annex with examples illustrating the STTR's targeted anti-avoidance rule.


The STTR covers payments between "connected persons." Two entities will be connected if both entities are under the control of the same person (or persons) either legally (direct or indirect ownership of more than 50% of the interests in the parties) or as a matter of fact and circumstance.

However, the STTR is subject to exceptions, providing that the STTR does not apply if the payment recipient is:

  • An individual
  • A recognized pension fund
  • A specified nonprofit organization
  • A State (or a political subdivision or local authority), a central bank, or an agency or entity established by, or any other person wholly or almost wholly owned by a State (or a political subdivision or local authority), provided its principal purpose is to fulfill a government function and it does not carry on a trade or business
  • An international organization
  • An investment fund that meets specified conditions
  • An entity that is subject to a single level of taxation and meets specified conditions
  • An entity that is wholly or almost wholly owned by an excluded recipient that meets specified conditions

The STTR includes a "targeted anti-avoidance rule" intended to prevent the use of intermediaries to avoid the STTR, such as interposing an unconnected person between two connected persons or routing a payment through a high-tax connected person. The STTR provision lays out a series of cumulative conditions that must be met for an arrangement to be subject to the rule:

  • The payment of the covered income (the original payment) must be made to a person (an intermediary) that is a resident of either of the contracting states.
  • The intermediary, during a period of 365 days, directly or indirectly makes payments equal to most or all of the original payment (related payments), meeting three requirements:
    1. Connected payee: The related payment is made to a person (a connected payee) that is connected to the person making the original payment and is not a person excluded from the STTR.
    2. Tax rate of connected payee and intermediary: The connected payee is subject to a tax rate below 9% in the jurisdiction where it is a resident and the statutory tax rate in the intermediary's country of residence is also below 9% (taking into account any reduction under a tax treaty).
    3. Deductibility of related payments: If the intermediary includes the original payment in its taxable income in its residence country, the related payments it makes to the connected payee are deductible in computing its taxable income in that country.
  • It is reasonable to conclude that the related payments would not have been made in the absence of the original payment.

The STTR document provides examples illustrating the operation of the targeted anti-avoidance rule.

Interaction with other articles of the tax treaty

The STTR would not apply if other provisions of the relevant tax treaty already allow the source country to tax the item of covered income at a rate that is equal to or above 9%. However, where an item of income is taxed below 9% under another provision of the relevant tax treaty, the STTR allows a supplementary taxing right to bring the combined rate under the two provisions up to 9%.

Covered income

The STTR applies with respect to the following categories of "covered income":

  • Interest
  • Royalties
  • Payments for distribution rights for a product or service
  • Insurance or reinsurance premiums
  • Fees to provide a financial guarantee or financing fees
  • Rental payments for industrial, commercial or scientific equipment
  • Income received for the provision of services

However, the STTR only applies to covered income (other than interest and royalties) if the amount of covered income exceeds the costs (both direct and indirect) incurred in earning that income plus a mark-up of 8.5% on those costs (the mark-up threshold). To calculate the costs associated with a specific item of covered income, the recipient of that income can refer to reliable business records, such as financial statements or internal accounting records. Further, payments of the same category of covered income are aggregated to determine the mark-up on costs if the payments are made under the terms of a single contractual arrangement or are so interrelated that an aggregate analysis is more reliable. Special rules apply for applying the mark-up threshold to income received for the provision of services.

The STTR also includes a "materiality threshold." This means that the STTR applies only if the gross amount of the payee's covered income during a fiscal year exceeds EUR 1 million. However, in situations where the smaller of the two jurisdictions incorporating the STTR into their bilateral tax treaty has a Gross Domestic Product (GDP) below EUR 40 billion, the materiality threshold is EUR 250,000.

Tax rate

Unlike the GloBE Rules that rely on effective tax rate, the starting point for the STTR is the statutory tax rate applicable to an item of covered income. The statutory rate generally means the corporate income tax rate applicable to companies that are resident in the relevant jurisdiction.

The definition of tax rate is based on the assumption that the person deriving the covered income will be subject to tax on net income in the jurisdiction where it is resident. However, there may be cases where relevant taxes are imposed on a different basis. In that case, the Commentary indicates that the two jurisdictions need to agree on the tax rate or a methodology for determining the rate for purposes of the STTR.

The Commentary also indicates that there may be scenarios in which special statutory rates that differ from the general corporate income tax rate in the relevant jurisdiction apply to certain categories of income or to taxpayers with certain characteristics or meeting certain conditions. In these instances, the special rate is used for purposes of the STTR.

Where a person benefits from a "preferential adjustment" to an item of a covered income, the tax rate for purposes of the STTR is calculated after taking into account the effect of the preferential adjustment. A preferential adjustment is a permanent reduction in the amount of the covered income subject to tax or the tax payable on that income in the form of (i) a full or partial exemption or exclusion from income, or (ii) a deduction from the tax base or a tax credit (excluding a credit for foreign taxes paid) that is directly linked to the item of covered income or that arises under a regime that provides a tax preference for income from geographically mobile activities.

The competent authorities of the two jurisdictions must notify one another in writing of the statutory rates and provisions that may result in a preferential adjustment that apply to items of covered income of residents and that are relevant to the STTR


Taxes imposed under the STTR are determined and levied after the end of the fiscal year in which they arise (i.e., an ex-post annualized charge). The Commentary indicates that this is intended to ensure that all information needed to determine whether the STTR applies to a payment is known before any tax is determined under the STTR.

The Commentary further states that the ex-post annualized charge operates by way of self-assessment, indicating that residents of one jurisdiction only need to submit a tax return in the other jurisdiction if they have a tax liability under the STTR at the end of a fiscal year.

The competent authorities of the jurisdictions may by mutual agreement settle the mode of application of the provisions contained in the STTR. The Commentary indicates that they also may consider complementing the ex-post annualized charge approach with a certification system that would allow a nonresident to obtain a certificate confirming that is not liable to tax under the STTR and thus relieve the nonresident from the obligation of submitting a tax return.

Other aspects of the STTR

The STTR contains specific provisions regarding Permanent Establishments (PEs). In situations where the head office conducts business in the source jurisdiction and the covered income arises through a PE situated there, the STTR would not apply if the covered income is effectively connected or attributable to that PE. Instead, the provisions of Article 7 (business profits) of the OECD Model Tax Convention would apply.

The STTR also addresses the situation in which covered income is attributable to a PE in a third country. If the tax rate applicable to an item of covered income arising in one of the jurisdictions, derived by an enterprise of the other jurisdiction, is lower than 9%, and both the residence jurisdiction of the enterprise and the third jurisdiction treat the income as attributable to the PE, the applicable tax rate for STTR purposes would be the rate in the third jurisdiction if it is higher than the tax rate in the residence jurisdiction.

The STTR grants a limited taxing right to the source jurisdiction and, in some cases, supplements an existing limited taxing right already held by the source jurisdiction. Thus, the STTR operates as an exception to the other tax-treaty rules that typically would otherwise restrict the source jurisdiction's ability to levy taxes. Consequently, this creates an interaction between the STTR and the provisions related to eliminating double taxation in tax treaties. The STTR document includes model provisions that preserve the position under the elimination-of-double-taxation articles that would have applied before application of the STTR. The residence jurisdiction is not required to exempt the covered income because of tax payable under the STTR nor to provide a tax credit for tax payable under the STTR.


The STTR is a core element of Pillar Two and, where applicable, the STTR would apply before the GloBE Rules.

Inclusive Framework jurisdictions that have nominal corporate tax rates below 9% have committed to implementing the STTR through tax-treaty amendments when asked to do so by a developing country that is an Inclusive Framework jurisdiction. However, the actual timeline for treaty changes to come into force remains uncertain.

Companies should evaluate the potential implications of the STTR for their businesses and monitor STTR developments in relevant jurisdictions.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP (Netherlands)
  • Maikel Evers
  • Roberto Aviles Gutierrez
Ernst & Young LLP (United States)
  • Barbara M. Angus
  • Jose A. (Jano) Bustos

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.