Partnerships and hybrid entities

1. What is the problem and how to address it?

Participants in international tax practice regularly encounter partnerships and hybrid entities that do not fit neatly within traditional treaty concepts of “person” and “resident.” Article 1 of the OECD Model Tax Convention provides the starting point for determining who is entitled to treaty benefits, yet its application becomes complex when entities are treated differently across jurisdictions.

In this course, we explore how tax treaties address these mismatches and how double taxation can be eliminated in cases involving fiscally transparent entities and hybrid structures. Participants will examine the interaction between domestic qualification rules and treaty provisions, including developments reflected in the OECD Commentary and BEPS outcomes.

By the end, participants will be equipped to analyse treaty entitlement in cross-border structures involving partnerships and hybrids, and to identify where interpretative challenges arise—forming a foundation for deeper discussion and practical application.

Partnerships and hybrid entities create problems because they may be treated as a person in one country and as transparent or ignored in another, so it becomes unclear who is the treaty claimant and who is the actual taxpayer. A related issue is that one state may attribute income to the entity while the other attributes it to the partners, which can produce either double taxation or double non-taxation.

These issues are generally resolved by looking through the entity to the partners or other owners and granting treaty benefits only to the extent the income is treated as the income of a resident in that state. The OECD’s approach in Article 1 and the Commentary, echoed in the MLI, is designed to align treaty entitlement with the person who is actually taxed on the item of income. In practice, this means the treaty analysis depends on how each state classifies the entity and whether the relevant income is allocated to a treaty resident.