Tax treaty interpretation governs how bilateral double taxation agreements and their provisions are construed and applied to resolve conflicts of taxing jurisdiction between contracting states. The legal foundation lies in Articles 31–33 of the Vienna Convention on the Law of Treaties, which require treaties to be interpreted in good faith in accordance with the ordinary meaning of their terms in context, and in light of the treaty’s object and purpose. In the transfer pricing and international tax context, disputes most commonly arise over provisions drawn from the OECD Model Tax Convention — particularly Articles 10, 11, 12, and 26 — as applied through specific bilateral agreements that may depart materially from the Model in wording or scope.

Disputes arise in practice across a recurring set of factual patterns visible in this category. Tax authorities challenge whether a recipient of dividends, interest, or royalties qualifies as the beneficial owner entitled to reduced withholding rates under a treaty — as illustrated by the Danish Heavy Transport and Spanish Colgate Palmolive cases involving interposed Luxembourg and Swiss entities. Authorities also contest whether particular payments constitute royalties or service fees for treaty purposes, which determines whether withholding tax applies at all, as seen in the Brazilian AES SUL and Polish Cosmetics cases. Administrative assistance clauses — such as Article 28 of the Switzerland-France agreement litigated in the Swiss Supreme Court proceeding — generate separate disputes about the scope of information exchange obligations. Hybrid entity classification issues arise where domestic and foreign systems treat the same entity differently, as in the German S-corporation case.

The primary OECD reference points are the Commentary on the OECD Model Tax Convention, which provides interpretive guidance on each Model article and is regularly updated. The concept of beneficial ownership, addressed in the Commentary on Articles 10, 11, and 12, has been substantially elaborated following the 2014 revisions. The OECD’s work on BEPS — particularly Action 6 on treaty abuse and Action 2 on hybrid mismatches — informs how anti-avoidance provisions in modern treaties are interpreted. The EU Parent-Subsidiary Directive and Interest and Royalties Directive supply parallel frameworks within the EU, as the Danish dividend case demonstrates.

Courts examine the treaty text, the official commentaries as persuasive but non-binding aids, domestic implementing legislation, and the factual substance of the arrangements. The most contested questions include whether conduit or holding structures satisfy beneficial ownership requirements, the proper classification of payments as royalties versus services, and the permissible reach of administrative assistance requests. Evidence of commercial substance, control over funds, and assumption of risk is central to beneficial ownership analysis.

Practitioners researching this category will find cases that directly test the boundary between treaty entitlement and treaty abuse, making them essential reading for any matter involving cross-border payments or intercompany financing structures touching bilateral tax agreements.