The effect of rare earth oxides (Y2O3 and Dy2O3) on the microstructure and electrical properties of the X7R-type ceramics for base metal internal electrode multilayer ceramic capacitor (BME-MLCC) was investigated. As the amount of Y increased, the dielectric constants and the dielectric losses increased, while the temperature coefficient of capacitors (TCC) curve rotated in counterclockwise direction. On the contrary, the dielectric constants decreased with Dy, and the TCC curve remained the same. The grain growth can be inhibited by the Dy2O3, concluded from XRD analysis. The different influences on dielectric properties between Y2O3 and Dy2O3 were discussed by defect chemistry. Y3+ acted as acceptor, performing B-site substitution, while Dy3+ showed the amphoteric behavior. By optimizing appropriate qualities of Y2O3 and Dy2O3, the most-compatible composition for BME X7R ceramics can be obtained.