3.2.3 Legal framework of tax treaties

Tax treaties are international agreements to which the interpretation rules of the Vienna Convention on the Law of Treaties of 23 May 1969 (VC) apply.1 The VC contains general agreements on the application and interpretation of treaties. In addition, OECD compliant tax treaties include a specific provision on the interpretation of tax treaties (art. 3, par. 2, OECD MTC).

There are two levels of treaty interpretation. If a tax treaty contains a definition of a concept, the interpretation of the concept should in principle not cause any problems. The second level of treaty interpretation is the situation where the treaty and the protocol do not include a definition of a concept. In that case, art. 3, par. 2, OECD MTC provides a general interpretation rule. This rule establishes that the undefined concept is interpreted according to the tax laws of the state applying the treaty at the time of that application.2 Where the term is not included in the national tax legislation, its meaning in another national legislation must be considered.3

The reference to national legislation is limited by the context of the treaty term. If that context requires otherwise, the meaning in the national legislation is not followed. The context is determined by the intentions of the Contracting States as well as the meaning of the term in the legislation of the other state.4 A second limitation to the reference to national legislation applies if the Contracting States have arrived at a different meaning by applying the Mutual Agreement Procedure (MAP).

The VC is relevant in situations where art. 3, par. 2, OECD MTC fails to provide a clear solution.5 In that case, art. 26 VC contains the basic rule and generally provides that treaties should be interpreted in good faith by treaty partners. Art. 31 VC subsequently prescribes that a treaty must be interpreted in good faith in accordance with the ordinary meaning of the treaty terms in their context and in the light of the object and purpose of the treaty. The starting point is therefore a grammatical interpretation of treaty terms, overriding national legislation. In that regard, the context and the object and purpose of the treaty must be borne in mind. The context of the treaty includes the text of the treaty, the preamble, and any protocols as well as additional agreements and instruments of the contracting parties.6 Subsequent agreements made between contracting parties must also be considered in interpreting the convention.7

Art. 32 VC attaches significance to circumstances and statements made at the time the tax treaty was concluded. This provision thus provides an interpretation based on legal history. The provision only comes into play if application of art. 31 VC leads to an ambiguous or obscure interpretation, or to an interpretation that is manifestly absurd or unreasonable.

Finally, art. 33 VC is relevant for the interpretation of treaties. This provision deals with differences in the application of the treaty that arise from translation differences. After all, tax treaties usually have two official language versions (those of both Contracting States). The main rule of art. 33 VC is that both language versions have full legal force, unless explicitly agreed otherwise.