The OECD’s long-awaited 2025 update to the Model Tax Convention on Income and on Capital and the Commentary released on 19 November 2025 introduce significant changes to the tax treatment of income from natural resource extraction. Most notably, the guidance reshapes how a permanent establishment (PE) arises in connection with natural resource activities. A new alternative tax treaty provision may be adopted by bilateral agreement to ensure that income from extraction-related activities is taxed where it occurs, strengthening source-country rights. These changes broaden the rules and, in some cases, lower the threshold for creating a PE, directly impacting enterprises engaged in cross-border oil, gas and mineral exploration or extraction.
Article (5)(f) of the model treaty provides that a PE includes a mine, oil or gas well, quarry or any other place of extraction of natural resources. The term “any other place of extraction of natural resources” is sufficiently broad to encompass all places of extraction of hydrocarbons, whether onshore and offshore. Offshore activities for these purposes include operations within a contracting state’s internal or archipelagic waters, its territorial sea and areas beyond where it holds sovereign rights with respect to the seabed and subsoil and their natural resources. Onshore activities encompass specialised services related to exploration or exploitation (e.g., installing mining infrastructure, engineering, consultancy or seismic surveys). Generic services (such as catering, utilities and standard deliveries) are excluded, even if performed on-site.
Paragraph 48 of the Commentary to article 5 clarifies that subparagraph (f) does not explicitly cover exploration activities. Whether exploration income creates a PE is generally governed by paragraph 1, but contracting states may agree bilaterally on specific rules: exploration may not create a PE, may create a PE or may create a PE if it lasts longer than a specified period, regardless of whether the activities are carried out offshore or onshore.
Historically, income from the extraction of natural resources considered as business profits rarely created a PE under paragraph 1, particularly for offshore activities as these are typically short-term and may not take place at a geographically fixed place of business. However, the alternative provision changes this position by introducing a time-based test.
The OECD 2025 update introduces a free-standing optional provision (Commentary paragraphs 170–203) that lowers the PE threshold for nonresident enterprises carrying out relevant activities for more than a bilaterally agreed period (typically 30 to 180 days within any 12-month period). The key features of the alternate provision are as follows:
The revised commentary on article 5 offers contracting states an optional mechanism to ensure that income derived from natural resource activities is taxed in the jurisdiction where those activities occur. By broadening the circumstances in which a PE can arise, the alternate provision represents a meaningful shift in treaty practice. Entities engaged in natural resource activities should carefully review tax treaty thresholds and adapt to any changes. Proactive monitoring of bilateral tax treaties will be essential to managing exposures and obligations.
Linda Peter
BDO in South Africa
Article (5)(f) of the model treaty provides that a PE includes a mine, oil or gas well, quarry or any other place of extraction of natural resources. The term “any other place of extraction of natural resources” is sufficiently broad to encompass all places of extraction of hydrocarbons, whether onshore and offshore. Offshore activities for these purposes include operations within a contracting state’s internal or archipelagic waters, its territorial sea and areas beyond where it holds sovereign rights with respect to the seabed and subsoil and their natural resources. Onshore activities encompass specialised services related to exploration or exploitation (e.g., installing mining infrastructure, engineering, consultancy or seismic surveys). Generic services (such as catering, utilities and standard deliveries) are excluded, even if performed on-site.
Paragraph 48 of the Commentary to article 5 clarifies that subparagraph (f) does not explicitly cover exploration activities. Whether exploration income creates a PE is generally governed by paragraph 1, but contracting states may agree bilaterally on specific rules: exploration may not create a PE, may create a PE or may create a PE if it lasts longer than a specified period, regardless of whether the activities are carried out offshore or onshore.
Historically, income from the extraction of natural resources considered as business profits rarely created a PE under paragraph 1, particularly for offshore activities as these are typically short-term and may not take place at a geographically fixed place of business. However, the alternative provision changes this position by introducing a time-based test.
The Alternative Provision
The OECD 2025 update introduces a free-standing optional provision (Commentary paragraphs 170–203) that lowers the PE threshold for nonresident enterprises carrying out relevant activities for more than a bilaterally agreed period (typically 30 to 180 days within any 12-month period). The key features of the alternate provision are as follows:
- The provision applies to both onshore and offshore activities, and includes related services performed “in connection with” these activities, but specifically excludes auxiliary functions such as transportation, towing, anchor handling and vessel operations.
- The duration threshold for creating a PE must be agreed upon bilaterally, with the effect that relevant activities will be deemed to be carried on through a PE once they exceed the agreed period within any 12-month period.
- There is no anti-contract splitting rule. However, periods of substantially similar activities carried out by closely related enterprises are aggregated, even if performed at different locations or under separate contracts.
BDO Perspective
The revised commentary on article 5 offers contracting states an optional mechanism to ensure that income derived from natural resource activities is taxed in the jurisdiction where those activities occur. By broadening the circumstances in which a PE can arise, the alternate provision represents a meaningful shift in treaty practice. Entities engaged in natural resource activities should carefully review tax treaty thresholds and adapt to any changes. Proactive monitoring of bilateral tax treaties will be essential to managing exposures and obligations. Linda Peter
BDO in South Africa