The Offshore Provision: Offshore Permanent Establishments in Tax Treaty Practice and the OECD Model Commentary

The allocation of taxing rights over income derived from offshore extractive activities has proved challenging in tax treaty practice. The issue became evident in the 1960s with the emergence of the mobile offshore petroleum industry, where the OECD Model Tax Convention’s traditional permanent establishment test proved inadequate. In response, the so-called “offshore provision” emerged in bilateral tax treaty practice.This article examines such offshore provisions across historical, current and emerging tax treaty practice, alongside the alternative offshore clause introduced in the OECD’s 2025 update to the Commentary on Article 5 of the OECD Model Tax Convention. A comparative analysis demonstrates that the OECD’s reliance on the state’s bilateral practice has produced a fragmented landscape of offshore clauses. While the OECD’s alternative provision captures core elements of prevailing treaty practice and provides a valuable reference for future treaty negotiations, it does not fully reflect existing treaty practice, particularly recent developments. The article provides interpretative guidance for both existing offshore provisions and the OECD’s alternative provision.