Ifacahiervol5a Subject 1

CAHIERS DE DROIT FISCAL INTERNATIONAL
Studies on International Fiscal Law
by the International Fiscal Association
2020
Volume 105A
CAHIERS DE DROIT FISCAL
INTERNATIONAL
Studies on International Fiscal Law
by the International Fiscal Association
Volume 105A
Reconstructing the treaty network
General report
David G. Duff (Canada)
Daniel Gutmann (France)
EU report
Alfredo Garcia Prats
Werner Haslehner
Volker Heydt
Eric Kemmeren
Georg Kofler
João Félix Pinto Nogueira
Pasquale Pistone
Stella Raventós-Calvo
Emmanuel Raingeard de la Blétière
Isabelle Richelle
Alexander Rust
Rupert Shiers
Piergiorgio Valente
OECD report
Sophie Chatel
Jessica Di Maria
Summary and conclusions of all branch reports
List of Cahiers published since 1939

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A list of Cahiers is available in the back of this book
Table of contents
Subject 1
Reconstructing the treaty network 11
General report 15
EU report 51
Werner Haslehner
Volker Heydt
Eric Kemmeren
Georg Kofler
Pasquale Pistone
Stella Raventós-Calvo
Isabelle Richelle
Alexander Rust
Rupert Shiers
Piergiorgio Valente
OECD report 79
Sophie Chatel
Jessica Di Maria
List of branch reports Subject 1 103
Branch reports Subject 1:

Argentina 107
Australia 127
Austria 149
Belgium 167
Bosnia and Herzegovina 191
Brazil 203
Canada 219
Chile 239
China, People’s Republic of 263
Chinese Taipei 283
Colombia 301
Denmark 323
IFA © 2020 9

Finland 339
France 349
Germany 367
India 399
Israel 421
Italy 439
Japan 459
Korea, Republic of 477
Liechtenstein 485
Luxembourg 503
Mexico 521
Netherlands 539
New Zealand 563
Nigeria 585
Norway 601
Peru 619
Poland 637
Portugal 653
Russia 677
Serbia 691
Singapore 711
South Africa 735
Spain 759
Sweden 781
Switzerland 797
Turkey 819
United Kingdom 843
United States 873
Uruguay 891
The views expressed are those of the reporters and not necessarily those of the respective
IFA branches or the International Fiscal Association.
© 2020 IFA
10
General report Subject 1

General report

Table of contents
Summary and conclusions 15
Part One: Impact of the BEPS Actions and the MLI on the Tax Treaty Network 17
1.1. Background to the BEPS Actions and the MLI 17
1.1.1. BEPS Actions and the MLI 17
1.1.2. Pre-BEPS project responses to BEPS concerns 21
1.1.2.1. Preamble 22
1.1.2.2. Treaty shopping 22
1.1.2.3. Hybrid mismatches 24
1.1.2.4. Specific treaty abuses 25
1.1.2.5. Avoidance of permanent establishment status 26
1.1.2.6. Dispute resolution 27
1.2. Direct impact of the BEPS Actions and the MLI 28
1.2.1. Contracting jurisdictions 28
1.2.2. Covered Tax Agreements 29
1.2.3. Provisions adopted 30
1.2.3.1. Minimum standard on treaty abuse 31
1.2.3.2. Hybrid mismatches 32
1.2.3.3. Specific treaty abuses 33
1.2.3.4. Permanent establishment status 34
1.2.3.5. Dispute resolution 35
1.3. Indirect impact of the BEPS Actions and the MLI 36
Part Two: Practical Implementation of Provisions of the MLI 37

2. 1. Procedural aspects 37
2.1.1. Ratification process 37
IFA © 2020 13
GENERAL REPORT
2.1.2. Publication of synthetized texts of covered tax agreements 38

2.2. Interpretation issues relating to the MLI and the covered tax agreements 39
2.2.1. The object of interpretation: MLI, CTAs, domestic law implementing
the MLI? 40
2.2.2. The MLI as a hybrid instrument 41
2.2.3. The legal status of the Explanatory Statement 42
2.2.4. The legal status of BEPS reports 43
2.2.5. The “ex-post” interpretation of covered tax agreements 44
2.3. Interpretation issues relating to other tax treaties 46
2.4. Tax planning after the BEPS Action Plan 47
2.4.1. Impact of the new preamble to tax treaties 47
2.4.2. Impact of the general anti-avoidance rule (GAAR) 48
2.4.3. Impact of LOB provisions 49
Conclusion 49
14
General report
David G. Duff (Canada)1

Daniel Gutmann (France)2
Summary and conclusions

Among the many actions in the OECD/G20 Base Erosion and Profit-Shifting (BEPS) project,
one of the most ambitious involved a number of modifications to tax treaties. Intended to
help neutralize the effects of hybrid mismatches, to prevent the granting of treaty benefits in
inappropriate circumstances, to prevent the artificial avoidance of permanent establishment
status, and to improve the resolution of international tax disputes, these modifications were
proposed in BEPS Action Plans addressing each of these areas, and subsequently incorporated
into the 2017 OECD Model Tax Convention and Commentaries.
Significantly, these modifications were also included in the Multilateral Convention
to Implement Tax Treaty Measures to Prevent Base Erosion and Profit Shifting, which was
designed to facilitate the swift and efficient amendment of thousands of bilateral tax treaties.
Described as “an historical turning point in the area of international taxation” that introduces
a third layer of rules for the taxation of cross-border taxation in addition to domestic tax law
and bilateral tax treaties, this multilateral instrument (MLI) modifies specific provisions
of Covered Tax Agreements (CTAs) that are designated by contracting jurisdictions to the
Convention.
Although the MLI is intended to quickly re-shape or reconstruct the international tax
treaty network, the extent to which it accomplishes this objective depends on the number of
jurisdictions that enter into the Convention, the number of CTAs that each of these contracting
jurisdictions designates, the specific provisions of the MLI that each of these contracting
jurisdictions chooses to adopt, and the extent to which these choices match with those of
other contracting jurisdictions. At the same time, the impact of the BEPS project on the tax
treaty network may also be assessed by considering the extent to which the revised treaty
provisions in the MLI and the 2017 OECD Model Tax Convention have been incorporated into
bilateral and regional tax treaties that have been concluded in light of the BEPS project, even
if these treaties are not themselves subject to the MLI. In addition, the ultimate effectiveness
of these treaty revisions also depends on their practical implementation among contracting
states.
Subject 1 of IFA in 2020 reviews the impact of the BEPS Actions and the MLI on the
structure and operation of the international tax treaty network, assessing the direct impact
of the MLI on tax treaties, the broader impact of the BEPS project on bilateral and regional
tax treaties that are not subject to the MLI, and the practical implementation of these revised
treaty provisions. This general report draws on 41 branch reports from around the world, as
well as OECD and EU reports.
Part One of the general report examines the impact of the BEPS Actions and the MLI
1
Professor of Law and Director of the Tax LLM program at the Peter A. Allard School of Law at the University of
British Columbia.
2
Professor of tax law at the Sorbonne Law School (University Paris-1); Partner at CMS Francis Lefebvre Avocats and
member of the steering committee, CMS Global Tax.
IFA © 2020 15
General report
on the international tax treaty network, both directly through CTAs subject to the MLI and
indirectly through tax treaties concluded in light of the BEPS project that are not themselves
subject to the MLI. It starts with a description of the main features of the BEPS project and
provides a detailed survey which shows that many countries had taken measures in response
to BEPS concerns even before the BEPS project started and before the MLI was concluded.
The direct impact of the MLI is assessed by the number of contracting jurisdictions and
of covered tax agreements. We also examine all the provisions adopted by the contracting
jurisdictions and we try to account for the great diversity of choices made by them, to the
extent made possible by the MLI. A detailed approach shows that the impact of the MLI is
significantly different depending on the provision at stake and the tax policy choices made
by every country.
In addition to the direct impact of the BEPS project on the tax treaty network through
provisions of CTAs that are modified by the MLI, the BEPS project has also had an impact on
the tax treaty network though revisions to tax treaties that have been concluded in light of
the BEPS project, even though these treaties are not subject to the MLI. We also note that
bilateral tax treaties negotiated since the MLI was signed, often include provisions which
the jurisdiction opted not to apply in the context of the MLI. We try to explain these results,
drawing on the material provided by the branch reports.
Part Two of the general report focuses on the actual steps taken by states in order to
implement the MLI and attempts to assess and predict to what extent the MLI has indeed
changed, or will change, the “law in action”. It starts with a synthesis of the most interesting
findings relating to the implementation procedures followed in the countries which signed
the MLI. It also looks at the choices made by tax administrations in terms of publication of
synthetized and/or consolidated versions of tax treaties following the MLI and shows the
practical difficulties connected to these choices.
Some interpretation issues relating to the MLI and the covered tax agreements are then
described, as well as interpretation issues relating to other tax treaties. In particular, we show
that the structural diversity of legal systems entails significant differences as to whether the
interpretation process bears on the MLI itself, or on covered tax agreements, or on domestic
legislation implementing the MLI. The complexity of interpretation issues also relates to the
hybrid nature of the MLI, which modifies other treaties and contains provisions of substantive
tax law. We then turn to the way jurisdictions address questions which have already become
“classical” in international tax literature, in particular regarding the impact of the legal status
of the Explanatory Statement and of the BEPS report on tax treaty interpretation.
A third chapter is on the impact of the BEPS Action Plan on tax planning. While it is not
disputed that that the BEPS Action Plan has significantly changed practice in the sense that
much greater attention is paid by practitioners to the risk incurred by taxpayers when setting
up of borderline tax planning schemes, it is more disputed whether the changes brought by
the MLI to tax treaties are more apparent than real. We explain this by looking at the impact
of the new treaty preamble, the principle purpose test and the LOB mechanism.
We conclude that with 94 signatories as of March 2020, and over 1,600 CTAs subject to
modification by the MLI, the OECD can rightly claim a considerable measure of success –
success that is properly measured not only by treaty provisions that are directly modified
by the MLI but also by the inclusion of these modifications in bilateral tax treaties that have
been concluded in light of the BEPS project.
At the same time, it is important to note that the impact of the MLI and the 2017 revisions
to the OECD Model has, so far at least, been limited primarily to the minimum standards on
treaty abuse and dispute resolution, and that the adoption of other provisions through the
16
Duff & Gutmann
MLI and bilateral tax treaties concluded in light of the BEPS project has been much more
limited.
It is also worth noting that the treaty modifications in the MLI and the 2007 revisions
to the OECD Model were not entirely unknown within the tax treaty network but were
anticipated in a number of practices and treaty provisions that preceded the BEPS project
altogether. As a result, while the inclusion of these provisions through the MLI or bilateral
tax treaties may represent a significant change for some jurisdictions, this is much less for
other jurisdictions. While the limited adoption of provisions beyond the minimum standards
thus far suggests that this process still has some way to go, further progress can be expected
as contracting jurisdictions to the MLI withdraw reservations to particular provisions and
subsequent bilateral tax treaties include provisions based on the 2017 OECD Model.
A final question is whether the MLI can be expected to remain as a permanent “third
layer” of international tax law, or whether it will fade into historical insignificance over time
as jurisdictions renegotiate bilateral tax treaties. Although the answer to this question may
depend on whether contracting jurisdictions view the MLI as an instrument to implement
future treaty-related modifications such as those designed to address challenges of the
digitised economy, branch reports suggest that many jurisdictions regard the MLI as a
temporary instrument whose role is solely to facilitate the swift and efficient modification
of the current tax treaty network, not to supplant or permanently supplement the bilateral
tax treaty network that remains the core international law dimension of international tax law.
Part One: Impact of the BEPS Actions and the MLI on the Tax Treaty
Network
1.1. Background to the BEPS Actions and the MLI
In order to assess the impact of the BEPS Actions and the MLI on the international tax
treaty network, it is necessary first to summarize the treaty modifications proposed in
the BEPS Actions and incorporated into the MLI and the OECD Model Tax Convention and
Commentaries, and to consider pre-BEPS project responses to the concerns that these
modifications are intended to address. This chapter provides this background to the BEPS
Actions and the MLI.
1.1.1. BEPS Actions and the MLI
As the OECD report explains, the purpose of the BEPS project was “to design tools, at both
the domestic and international levels, for jurisdictions to ensure that profits are taxed where
economic activities take place and where value is created, while at the same time giving
businesses greater certainty by reducing disputes over the application of international tax
rules and standardising compliance requirements.” To this end, the BEPS Actions included
best practices, recommendations, and four minimum standards which members of the
OECD/G20 Inclusive Framework on BEPS have committed to implement.
Of these minimum standards, two involve modifications to tax treaties in order to counter
treaty abuse (BEPS Action 6) and to improve the resolution of international tax disputes (BEPS
Action 14). In addition to these minimum standards, the BEPS Actions also include other treaty
17
General report
modifications to neutralize the effects of hybrid mismatch arrangements (BEPS Action 2),
to prevent specific treaty abuses (BEPS Action 6), and to prevent the artificial avoidance of
permanent establishment status (BEPS Action 7). Each of these treaty modifications was
incorporated into the 2017 OECD Model Tax Convention and Commentaries and included in
the MLI in order to facilitate their swift and efficient implementation throughout the global
tax treaty network.
Beginning with the minimum standard on treaty abuse, BEPS Action 6 concluded that
“countries should agree to include in their tax treaties an express statement that their
common intention is to eliminate double taxation without creating opportunities for non-
taxation through tax evasion or avoidance, including through treaty shopping arrangements”
and “should also implement that common intention” in one of three ways:
–– through a general anti-abuse provision based on the principal purpose of transactions or
arrangements (the principal purposes test or “PPT”),
–– through a PPT and a more specific anti-abuse rule based on the limitation-on-benefits
(“LOB”) provisions found in treaties concluded by the United States and a few other
countries, or
–– through LOB provisions, supplemented by domestic or treaty provisions to address
conduit arrangements not already dealt with in tax treaties.3
The statement of common intention is included in the preamble to the 2017 OECD Model
Tax Convention and may be implemented through article 6(1) of the MLI. Article 6(3) of the
MLI also allows contracting jurisdictions to choose additional preamble language expressing
a desire “to further develop their economic relationship and to enhance their co-operation
in tax matters.”
The LOB and PPT provisions are incorporated into the 2017 OECD Model Tax Convention as
new articles 29(1) to (7) and 29(9) and may be implemented through articles 7(8)-(13) and 7(1)
of the MLI. Article 7(4) of the MLI also allows contracting jurisdictions to select a “discretionary
benefits rule” authorizing competent authorities of contracting jurisdictions that have denied
treaty benefits under the PPT to allow the same or different treaty benefits if they determine
that such benefits would have been granted in the absence of a transaction or arrangement
subject to the PPT, while article 7(17)(a) permits contracting jurisdictions to indicate that
they accept the PPT alone as an interim measure and intend where possible to adopt a LOB
provision, in addition to or in replacement of the PPT, through bilateral negotiation.
The minimum standard on the resolution of treaty disputes requires countries to include
in their tax treaties a mutual agreement procedure (MAP) based on article 25(1) to (3) of the
OECD Model Tax Convention, according to which:
–– countries should either permit a request for MAP assistance to be made to the competent
authority of either contracting state, or implement a bilateral notification or consultation
process for cases in which the competent authority to which the MAP case was presented
does not consider the taxpayer’s objection to be justified;
–– taxpayers are allowed to present a MAP case within at least three years from the first
notification of action resulting in taxation not in accordance with the provisions of the
treaty;
–– the competent authority to which the case is presented shall endeavour, if the objection
to it appears to be justified and is not in itself able to arrive at a satisfactory solution,
to resolve the case by mutual agreement with the competent authority of the other
3
OECD/G20 Base Erosion and Profit Shifting Project, Preventing the Granting of Treaty Benefits in Inappropriate
Circumstances, Action 6: 2015 Final Report, para. 22 [hereafter BEPS Action 6 Final Report].
18
Duff & Gutmann
contracting state, with a view to the avoidance of taxation which is not in accordance
with the treaty;
–– countries should either permit any mutual agreement to be implemented
notwithstanding any time limits in the domestic law of the contracting states, or accept
alternative treaty provisions limiting the time during which a contracting state may
make adjustments to the profits of an enterprise under article 9(1) or to the profits of a
permanent establishment under article 7(2) in order to avoid late adjustments for which
MAP relief will not be available; and
–– the competent authorities of the contracting states shall endeavour to resolve by mutual
agreement any difficulties or doubts arising as to the interpretation or application of
the treaty, and may consult together for the elimination of double taxation in cases not
provided for in the treaty.4
Provisions consistent with this minimum standard are included in articles25(1) to (3) of the
2017 OECD Model Tax Convention, and may be implemented through article 16 of the MLI –
which allows contracting jurisdictions to satisfy the minimum standard in one of two ways:
(1) through treaty provisions that are fully consistent with those in the 2017 OECD Model Tax
Convention, or (2) by indicating that it intends to meet the minimum standard by ensuring
that its CTAs include a bilateral notification or consultation process for cases in which the
competent authority to which the MAP case was presented does not consider the taxpayer’s
objection to be justified and provisions limiting the time during which a contracting state
may make adjustments to the profits of an enterprise or the profits that are attributable
to a permanent establishment of an enterprise. In addition to these provisions, article 17
of the MLI permits contracting jurisdictions to add a provision based on article 9(2) of the
OECD Model requiring a corresponding adjustment to the profits of an enterprise subject to
a transfer pricing adjustment, while articles 18 to 26 of the MLI allow contracting jurisdictions
to select mandatory binding arbitration as a mechanism to address unresolved MAP issues. A
framework for mandatory binding arbitration is also authorised by article 25(5) of the OECD
Model Tax Convention and the Commentary on this provision.
In addition to the minimum standards on treaty abuse and dispute resolution, the BEPS
Actions also include other proposed modifications to tax treaties. In order to address BEPS
concerns attributable to hybrid mismatch arrangements, BEPS Action 2 recommended that
tax treaties should include:
–– a new treaty provision for transparent entities, providing that “income derived by or
through an entity that is treated as wholly or partly fiscally transparent under the tax law
of either Contracting State shall be considered to be income of a resident of a Contracting
State but only to the extent that the income is treated, for purposes of taxation by that
State, as the income or a resident of that State”;5
–– a revised tie-breaker rule for dual-resident entities, requiring mutual agreement by the
competent authorities;6 and
–– modifications to the elimination of double taxation provisions of tax treaties, either
through: (A) a provision precluding the exemption method where the other contracting
state applies provisions of a treaty to exempt or limit the rate of tax on income or capital;
4
OECD/G20 Base Erosion and Profit Shifting Project, Making Dispute Resolution Mechanisms More Effective,
Action 14: 2015 Final Report, paras. 9-17 and 34-41 [hereafter BEPS Action 14 Final Report].
5
OECD/G20 Base Erosion and Profit Shifting Project, Neutralizing the Effects of Hybrid Mismatch Arrangements, BEPS
Action 2: 2015 Final Report, paras. 434-435 [hereafter BEPS Action 2 Final Report].
6
Ibid., paras. 430-431. This recommendation is also found in the BEPS Action 6 Final Report at paras. 45-48.
19
General report
(B) a switch-over rule allowing contracting states to apply the credit method, as opposed
to the exemption method, for dividends that are deductible in the payer state; or (C) the
complete replacement of the exemption method with the credit method.7
These recommendations are incorporated into the 2017 OECD Model Tax Convention and
Commentary as new article 1(2), revised article 4(3), and articles 23A and B, and may be
implemented through articles 3, 4, and 5 of the MLI. Article 5 of the MLI permits contracting
jurisdictions to select either of the three alternative options for the elimination of double
taxation in the BEPS Action 2 Final Report, which are identified as Options A, B and C.
In order to address specific treaty abuses, BEPS Action 6 also proposed the following
treaty modifications to tax treaties:
–– a minimum shareholding period to qualify for the reduced rate of withholding tax on
dividends paid to a company with a substantial ownership interest;8
–– language that extends the rule for gains from the alienation of shares more than 50 per
cent of the value of which is derived from immovable property situated in a jurisdiction
to gains from the alienation of “comparable interests, such as interests in a partnership
or trust” and prevents avoidance of this rule by providing that the 50 per cent threshold
applies “at any time during the 365 days preceding the alienation”;9
–– an anti-abuse rule for a permanent establishment in a third jurisdiction that is exempt
from tax in the jurisdiction in which it is a resident and subject to a relatively low rate in
the third jurisdiction;10 and
–– a “saving clause” confirming the right of a contracting jurisdiction to tax its own residents.11
These modifications are incorporated into the 2017 OECD Model Tax Convention as articles
10(2), 13(4), 29(8) and 1(3), and may be implemented through articles 8, 9, 10 and 11 of the MLI.
Finally, in order to prevent the artificial avoidance of permanent establishment status,
BEPS Action 7 recommended the following modifications to the treaty definition of a
permanent establishment:
–– changes to the concept of a dependent agent permanent establishment to address
commissionaire arrangements and similar strategies to avoid permanent establishment
status;12
–– changes to the specific activity exemptions to restrict each of the exceptions to activities
that are of a preparatory or auxiliary character;13
–– an anti-fragmentation rule to prevent the artificial avoidance of permanent establishment
status by fragmenting a cohesive business operation into smaller operations carried on
by the same enterprise or closely related enterprises that would otherwise be eligible for
one or more of the specific activity exemptions;14
–– optional language to prevent the artificial avoidance of permanent establishment
status by splitting-up contracts in order to qualify for the exemption for a building site
or construction or installation project lasting less than a specified period of time;15 and
7
BEPS Action 2 Final Report, paras. 442-444.
8
BEPS Action 6 Final Report, paras. 34-40.
9
Ibid., paras. 41-44.
10
11
12
OECD/G20 Base Erosion and Profit Shifting Project, Preventing the Artificial Avoidance of Permanent Establishment
Status, BEPS Action 7: 2015 Final Report, paras. 5-9 [hereafter BEPS Action 7 Final Report].
13
14
15
20
Duff & Gutmann
–– a definition of closely-related enterprises for the purposes of these provisions.16

These modifications are incorporated into the 2017 OECD Model Tax Convention as revisions
to articles 5(5) and (6), revisions to article 5(4), new article 5(4.1), new Commentary to article
5(3), and new article 5(8), and may be implemented through articles 12, 13, 14 and 15 of
the MLI. Consistent with the BEPS Action 7 Final Report, which observes that some states
consider that BEPS concerns related to the specific activity exemptions arise only where there
is fragmentation of activities among the same enterprise or closely-related enterprises,17
the MLI gives Contracting jurisdictions the option in article 13(2) to restrict all specific
activity exemptions to activities of a preparatory or auxiliary character (Option A) or to limit
the application of a preparatory or auxiliary element to the maintenance of a fixed place
of business solely for the purpose of carrying on, for the enterprise, any activity that is not
specifically listed in a CTA or solely for any combination of such activities (Option B), and the
option in article 13(4) to add an anti-fragmentation rule to prevent the artificial avoidance of
permanent establishment status by fragmenting a cohesive business operation into smaller
operations.
Although all members of the Inclusive Framework have committed to implement the
minimum standards on treaty abuse and dispute resolution, jurisdictions are not required
to sign the MLI and those who choose to do so, are not required to list all their tax treaties
as CTAs. In addition, the BEPS Action Plans and the MLI provide different options on the
ways in which jurisdictions may satisfy the minimum standards on treaty abuse and dispute
resolution, and allow jurisdictions to decide whether or not to adopt other modifications
to their tax treaties. As a general rule, moreover, the MLI modifies provisions of tax treaties
only when all contracting jurisdictions list the treaty as a CTA and choose to apply the same
option or provision. As the OECD report explains, although this optionality and flexibility
contributed to the complexity of the MLI, this was necessary to achieve a broad consensus
on the BEPS Actions and the MLI.
As a result, although the MLI is intended to facilitate the swift and efficient amendment
of thousands of bilateral tax treaties, the extent to which it does so depends on the number of
jurisdictions that enter into the Convention, the number of CTAs that contracting jurisdictions
designate, the specific options and provisions that contracting jurisdictions choose to apply,
and the extent to which these choices match with those of other contracting jurisdictions. At
the same time, the broader impact of the BEPS project on the tax treaty network also depends
on the extent to which the treaty modifications contained in the relevant BEPS Actions and
included in the 2017 OECD Model Tax Convention and Commentaries, are incorporated into
tax treaties concluded in light of the BEPS project that are not themselves subject to the MLI.
1.1.2. Pre-BEPS project responses to BEPS concerns
In order to understand the decisions that jurisdictions have taken regarding these treaty
modifications, it is helpful to consider measures that they have taken prior to the BEPS project
in response to BEPS concerns that these treaty modifications are intended to address.
16
Ibid. paras. 9, 15 and 17.
17
Ibid., para. 13.
21
General report
1.1.2.1. Preamble
Beginning with the preamble to these treaties, branch reports indicate that the stated
purpose of most pre-BEPS treaties is to avoid double taxation and prevent fiscal evasion,
or simply to avoid double taxation. In addition to these purposes, the preambles of several
pre-BEPS treaties also declare a further purpose to enhance economic cooperation. A few
pre-BEPS treaties also express an intention to prevent tax avoidance,18 though these treaties
do not expressly refer to an intention to prevent tax avoidance through treaty shopping
arrangements. In contrast, Switzerland explicitly rejected the view of the pre-2017 OECD
Commentary that a purpose of tax treaties is to prevent tax avoidance, but has withdrawn
this observation following 2017 revisions to the OECD Model that include this purpose in
the preamble.
Although several branch reports emphasize the limited role that preambles have played
in the interpretation of tax treaties, the India branch report cites a notable case in which
the Indian Supreme Court referred to a stated intention in the India-Mauritius Tax Treaty
to encourage “mutual trade and investment” to conclude that “many developed countries
tolerate or encourage treaty shopping, even if it is unintended, improper of unjustified, for
other non-tax reasons, unless it leads to a significant loss of tax revenues.”19
1.1.2.2. Treaty shopping
With respect to tax treaty shopping, branch reports indicate a considerable diversity of
approaches prior to the BEPS project. Although most branch reports note the availability
of domestic anti-avoidance doctrines, such as sham and substance over form, as well as
statutory general anti-avoidance rules (GAARs), there is considerable uncertainty in some
jurisdictions as to whether statutory GAARs can apply to tax treaties absent agreement to
this effect in treaties themselves.20 In addition, while courts in some jurisdictions such as
France have applied domestic anti-avoidance doctrines and statutory GAARs to challenge
tax treaty-shopping arrangements,21 courts in other jurisdictions such as Canada have been
reluctant to apply these measures to tax treaty shopping arrangements on the grounds that
the abusive nature of these arrangements is not clear.22 In addition, branch reports from
Argentina, Chile, Colombia, India ,Mexico, Poland and the United Kingdom note that their
domestic GAARs are relatively new and not yet tested in the context of tax treaty shopping.
Irrespective of domestic anti-avoidance doctrines and statutory GAARs, some jurisdictions
have taken the position that tax treaties include an inherent anti-abuse principle, based on
the pacta sunt servanda principle that treaties should be interpreted and applied in good faith.
In Switzerland, for example, the Federal Court relied upon this principle to reject a tax treaty-
18
In Germany, for example, the 2013 basis for negotiation expressed an intention to allocate taxing rights “in a way
that avoids both double taxation and non-taxation.”
19
Union of India v. Azadi Bachao Andolan (2003) 132 Taxman 373 (SC).
20
In France, on the other hand, the Conseil d’Etat has held that the domestic GAAR applies to tax treaties even if
this is not explicit in the treaty. Conseil d’Etat, 25 October 2017, Verdannet, n°396954. In other jurisdictions (e.g.,
Australia and Canada), domestic legislation makes tax treaties explicitly subject to domestic GAARs.
21
Decisions 2012-47, 2013-25, 2018-24 and 2013-26, and Administrative Court of Appeal (Versailles), 24 July 2018,
Holding Yaka, n°15VE04006.
22
MIL Investments (SA) v. The Queen, 2006 TCC 460, aff’d 2007 FCA 236 (Canada); and Alta Energy Luxembourg S.A.R.L.
v. The Queen, 2018 TCC 152, aff’d 2020 FCA 43.
22
Duff & Gutmann
shopping arrangement in A Holdings ApS v. Federal Tax Administration, (2005), 8 ITLR 536 (Swiss
FC). The District Court of Tel Aviv relied on a similar principle to reject a tax treaty-shopping
transaction in Yanko-Weiss v. Holon Assessing Office, (2007), 10 ITLR 524 (Tel Aviv – Yafo DC).
In Japan, however, courts appear to have rejected this interpretation.23 As a result, although
paragraph. 9.5 of the 2003 Commentary to article 1 of the OECD Model Convention affirmed
a “guiding principle” that “the benefits of a double tax convention should not be available
where a main purpose for entering into certain transactions or arrangements was to secure
a more favourable tax position and obtaining that more favourable tax treatment in these
circumstances would be contrary to the object and purpose of the relevant provisions,” it is
not clear that all jurisdictions have agreed on this guiding principle. As well, branch reports
from Canada and Norway suggest that it is unclear whether this principle, even if accepted,
applies to tax treaties negotiated before the 2003 revisions to the OECD Commentary.
Another way that many jurisdictions have challenged tax treaty-shopping arrangements
is through the requirement that the recipient of certain kinds of income must be the
“beneficial owner” of the income in order to qualify for treaty benefits. Added to the OECD
Model Tax Convention in 1977, this requirement appears in the articles for dividends,
interest and royalties in most treaties concluded over the past 40 years, and is regarded as a
requirement for treaty benefits under these provisions in France and Italy even in the absence
of specific treaty language.24 Although originally intended primarily to ensure that treaty
benefits are granted to the real owners of these payments, not agents or nominees on whose
behalf these payments might be received,25 the beneficial owner requirement has also been
interpreted more broadly to deny treaty benefits in the context of conduit arrangements
entered into in order to obtain treaty benefits that would otherwise be unavailable to the
ultimate recipient of the income.
According to branch reports from Brazil, the People’s Republic of China, Denmark,
Israel, the Republic of Korea, Poland, Russia and Switzerland, courts in these jurisdictions
have adopted a broad interpretation of the beneficial owner requirement, employing an
economic substance approach to the meaning of this term in order to prevent tax avoidance
through treaty shopping. In contrast, courts in Belgium, Canada and the Netherlands
have favoured a narrower interpretation of this concept based on traditional aspects of
legal ownership such as possession, use, control and risk, thereby limiting the scope of the
beneficial owner requirement as an instrument to prevent tax treaty-shopping. In Australia,
Colombia, Germany, New Zealand and Singapore, courts have yet to address the meaning of
the beneficial owner requirement, resulting in considerable uncertainty. In the meantime,
revisions to the 2014 OECD Commentary on articles 10, 11 and 12 appear to favour a narrower
interpretation of the term, stating that a recipient of income will not be regarded as its
beneficial owner only where the recipient’s right to use and enjoy the income is “constrained
by a contractual or legal obligation to pass on the payment received to another person” and
only where this contractual or legal obligation depends on the receipt of the payment by the
intermediary. More generally, although the Commentary to these provisions states that the
beneficial owner requirement “deals with some forms of tax avoidance,” it also emphasizes
23
Guidant Japan Case (Tokyo High Court, 28 June 2007; and Japan-Ireland Tax Treaty Case (Tokyo High Court, 29 October
2014).
24
Conseil d’Etat, Eurotrade Juice, n°383838 (23 November 2016); and Italian Supreme Court, 16 December 2015, no.
25281; and 25 May 2016, no. 10792.
25
Richard Vann, “Beneficial Ownership: What Does History (and Maybe Policy) Tell Us, in M. Lang, et. al., Beneficial
Ownership: Recent Trends, (Amsterdam: IBFD, 2013) 267-331 at 273-279.
23
General report
that “it does not deal with other cases of abuse, such as certain forms of treaty shopping”
which may be addressed by other approaches.
In addition to the beneficial ownership requirement, many tax treaties entered into
before the BEPS project also include specific anti-avoidance provisions to prevent tax treaty
shopping. For example, branch reports from Belgium Chile, Colombia, Japan, Singapore,
Spain, Switzerland and Uruguay refer to treaties with “look-through” provisions that deny
treaty benefits to entities resident in the other contracting state to the extent that they
are not owned directly or indirectly by residents of that state, “exclusion” provisions that
deny treaty benefits to entities enjoying special tax privileges in the other contracting
state, “subject-to-tax” provisions that limit treaty benefits to income that is subject to tax
in the other contracting state, and “channel” provisions that deny treaty benefits for income
received by entities in the other contracting state that is used primarily to satisfy claims of
one or more non-arm’s length persons resident in other states. More significantly, branch
reports from Argentina, Australia, Austria, Canada, People’s Republic of China, France, Japan,
the Netherlands, New Zealand, Singapore and the United Kingdom mention treaties with
provisions that deny treaty benefits where “the main purpose or one of the main purposes” of
a transaction or arrangement was to obtain the benefit.26 In addition, detailed LOB provisions
have been included in US tax treaties since the late 1980s and were added to the US Model
Tax Convention in 2006, and are also increasingly found in tax treaties entered into by other
jurisdictions such as Argentina, Chile, India, Japan, Mexico, the Netherlands, Poland and
Russia.
Finally, some branch reports identify specific anti-treaty-shopping provisions in domestic
law. The United States, for example, introduced anti-conduit rules in the mid-1990s, which
allow the revenue authority to disregard an intermediate entity’s participation in a financing
arrangement where the entity is acting as a “conduit entity” engaged in a tax avoidance plan
to reduce non-resident withholding tax. Germany also introduced a domestic anti-treaty-
shopping rule in the mid-1990s, denying treaty benefits to a foreign company to the extent
that the company’s shareholders would not be entitled to these benefits if they had received
the income directly, unless the income is derived from the company’s own economic activity
or there are sound economic or other non-tax reasons for interposing the company and the
company participates in general commerce through an appropriately equipped business
establishment. Similarly, Switzerland adopted a domestic anti-treaty-shopping provision in
1962, that protects treaty partners by denying treaty benefits where a Swiss resident receives
a payment that qualifies for a reduced rate of withholding tax and this relief directly or
indirectly benefits residents of third countries to whom the income is forwarded.
1.1.2.3. Hybrid mismatches
In contrast to the pre-BEPS Project responses that many jurisdictions adopted to prevent
tax treaty shopping, branch reports suggest much less attention to hybrid mismatches.
Although the 2006 U.S. Model Tax Convention included a provision for transparent entities
that is similar to Article 1(2) of the 2017 OECD Model Tax Convention and Article 3(1) of the
MLI, only the branch reports from Chile, Germany, Japan and New Zealand refer to similar
26
These provisions generally apply either to the interest and royalty articles or to these articles and the article for
dividends, but sometimes also apply to capital gains or more broadly to all treaty benefits.
24
Duff & Gutmann
provisions in treaties concluded before the BEPS Project.27 Instead, some countries such as
Austria approach transparent entities in accordance with principles contained in the OECD
Partnership Report, while others like India reject this approach and regard partnerships as
fiscally opaque but not themselves liable to tax and therefore not entitled to treaty benefits.
Other countries such as Australia, Mexico, New Zealand, Sweden, and the United Kingdom
have introduced domestic rules to address BEPS challenges posed by hybrid mismatches.
Branch reports from Serbia and Singapore, on the other hand, indicate that their jurisdictions
either have little experience with or little concern about hybrid mismatches.
Pre-BEPS Project provisions for dual resident entities are similarly varied, with relatively
few branch reports expressing concerns about BEPS issues attributable to dual residence.
Although branch reports from Korea, Portugal, India, the United States and the United
Kingdom mention pre-BEPS treaties with tie-breaker provisions that require mutual
agreement by the competent authorities having regard to relevant factors and otherwise
limit treaty benefits to those agreed upon by the competent authorities, branch reports
from Argentina and Chile explain that their treaties generally rely on the entity’s place of
incorporation to address cases of dual resident entities, while branch reports from Austria,
Belgium, China, France, Germany, Italy Luxembourg and Spain observe that their treaties
generally refer to the place of effective management to resolve these cases.
Finally, although branch reports indicate that several jurisdictions use the exemption
method to eliminate double taxation, many jurisdictions use the credit method. For this
reason, many pre-BEPS treaties already include provisions like Option C in Article 5(1) of the
MLI. In general, therefore, branch reports do not identify significant BEPS concerns relating
to the exemption method for eliminating double taxation.
1.1.2.4. Specific treaty abuses
With respect to specific treaty abuses addressed by the MLI and revisions to the 2017
OECD Model Tax Convention, branch reports from Australia, Belgium, Germany, Japan,
Liechtenstein, Poland, Portugal, Spain, Switzerland and the United States indicate that many
treaties concluded by their jurisdictions before the BEPS project already included minimum
holding periods for a reduced withholding tax rate on dividends paid to a parent company,
while branch reports from Canada, Chile, India and Japan note that many treaties concluded
by their jurisdictions before the BEPS project commenced included a substituted property
rule for gains from the alienation of shares or other interests in entities deriving their value
primarily from immovable property. Not surprisingly, however, minimum holding periods for
dividends are not included in treaties like the France-US Tax Treaty that exempt all dividends
from withholding tax, or in treaties concluded by countries that do not impose withholding
tax on dividends like India, or do so at a single rate like Peru. Nor do substituted property rules
appear in treaties with countries like Brazil and Chile that apply source taxation to gains from
the alienation of shares of resident companies irrespective of whether their value is derived
primarily from immovable property.
Among branch reports identifying treaties with minimum holding periods for a reduced
withholding tax rate on dividends paid to a parent company, these periods range from six
months to two years, but are generally one year. Among branch reports identifying treaties
27
In addition, the Canadian branch report mentions unique provisions in the Canada-US Treaty that address hybrid
mismatches.
25
General report
with a substituted property rule for gains from the alienation of shares or other interests
deriving their value primarily from immovable property, none mention “look back” rules like
the rule in article 9(4) of the MLI that applies the proportionate value test at any time during
the 365 days preceding the alienation. In other jurisdictions, such as Belgium, Luxembourg
and the Netherlands, treaties with substituted property rules often include carve-outs for
insubstantial interests, publicly-traded shares and/or property in which the taxpayer’s
business is carried on.
Relatively few branch reports mention pre-BEPS project treaties with provisions
addressing triangular permanent establishments that are subject to little or no tax in a third
jurisdiction and exempt from tax in the jurisdiction in which they are resident. Although a
triangular permanent establishment provision was added to the US-Netherlands Tax Treaty
in 1993 and has been included in subsequent US tax treaties where relevant, branch reports
from Brazil, Chile, India, Japan and the Netherlands observe that their jurisdictions do not
regard these arrangements as a significant source of BEPS concerns, and the Swiss branch
report states that Switzerland does not consider low taxation as a sufficient justification for
withholding treaty benefits.
Finally, branch reports suggest that only US tax treaties appear to have consistently
included a saving clause confirming the right of a contracting jurisdiction to tax its own
residents. As the US branch report explains, because the US levies worldwide tax on its
citizens regardless of their residence, this provision is intended to ensure that treaty benefits
do not accrue to US citizens who are residents of other countries under the treaty. Although
saving clauses may have other purposes, such as ensuring the treaty compatibility of CFC
rules, the fact that almost no other country in the world taxes non-resident nationals on
their worldwide income makes it unsurprising that these provisions are generally absent
from treaties concluded before the BEPS Project other than those concluded with the US
1.1.2.5. Avoidance of permanent establishment status
Branch reports suggest a wide diversity of pre-BEPS project responses to the avoidance
of permanent establishment status through commissionaire arrangements and similar
strategies, use of the specific activity exemptions, and the splitting up of contracts for a
building site or construction or installation project. While some jurisdictions appear to have
taken no measures to counteract the avoidance of permanent establishment status in these
ways, others have relied on various approaches both to expand the concept of a permanent
establishment and to prevent the avoidance of this status.
Beginning with commissionaire arrangements and similar strategies, courts in some
countries appear to have adopted a broader interpretation of the dependent agent
permanent establishment concept than might otherwise be suggested by the pre-2017 OECD
Model Tax Convention. In Italy, for example, the Philip Morris case gave the tax authorities
the ability to apply a broad substance-over-form approach to the interpretation of a
permanent establishment.28 In France and Norway, however, judicial decisions have held
that commissionaire arrangements and similar strategies have not resulted in a permanent
establishment. While France and the United Kingdom have also challenged these structures
on transfer pricing grounds, the branch report from France suggests that this response has
28
See the judgements of the Italian Supreme Court of 7 March 2002, nos. 3367 and 3368; 25 May 2002, no. 7682;
and 6 December 2002, no. 17373. See also the Belgian branch report.
26
Duff & Gutmann
had limited success. Alternatively, several branch reports note that their treaties often include
a broader definition of a permanent establishment than the definition in the OECD Model Tax
Convention, including assembly and supervisory permanent establishments (India), services
permanent establishments (Chile), resource exploration and development (Denmark and
Norway), and insurance businesses (Australia).
Regarding the specific activity exemptions, branch reports indicate that Germany,
Japan, and the United Kingdom have taken the position that all listed activities must be
of a preparatory or auxiliary character. Indeed, this approach has been judicially approved
in Japan,29 and appears to have been confirmed by judicial decisions in India holding that
liaison offices of non-resident entities were not permanent establishments where they
carried on support functions that were regarded as preparatory or auxiliary,30 but not where
they performed core business activities like marketing and sales.31 Other jurisdictions such
as Belgium and Chile take the position that the specific activity exceptions are inherently
preparatory or auxiliary and therefore do not need to satisfy these additional criteria. In either
case, branch reports make no mention of pre-BEPS project treaties with anti-fragmentation
rules like the rule in article 13(4) of the MLI and article 5(4.1) of the 2017 OECD Model Tax
Convention.
Finally, branch reports from Chile, Japan and the Netherlands identify treaties with
provisions designed to prevent the avoidance of permanent establishment status by splitting
up of contracts for a building site or construction or installation project. In contrast, the revenue
authorities in India have successfully challenged these arrangements under domestic anti-
avoidance doctrines,32 while Belgium has opted to counteract these arrangements through
domestic anti-avoidance rules.
1.1.2.6. Dispute resolution
Regarding dispute resolution, branch reports indicate that most tax treaties concluded before
the BEPS project commenced included a mutual agreement procedure similar to the MAP
in the OECD Model Tax Convention. In most of these treaties, however, the request for MAP
assistance could only be made to the competent authority of the residence state, except
in cases involving non-discrimination in which the request had to be made to the state of
which the taxpayer is a national. In addition, several treaties included limitation periods
less than three years (Belgium and France), many did not allow implementation of a MAP
agreement irrespective of time limits in domestic law (France, Italy and Japan), and some did
not include provisions allowing the competent authorities to consult in order to eliminate
double taxation in cases not provided for in the treaty (Brazil and Italy).
While branch reports also state that most treaties concluded before the BEPS project
commenced, also included provisions for corresponding adjustments, the reports from
Belgium, Japan and New Zealand note that these provisions were often absent from older
treaties. Notwithstanding the absence of these provisions from certain treaties, however, the
branch reports from Belgium and India note that corresponding adjustments are routinely
applied in order to prevent economic double taxation contrary to the treaty. In Argentina,
29
Tokyo High Court, 28 January 2016.
30
Sumitomo Corp. v. DCIT (2008) 114 ITD 61 (Del).
31
ADIT v. GE Energy Parts Inc. [2019] 101 taxman.com 142 (Delhi H.C.).
32
J. Ray Mcdermott Eastern Hemisphere Ltd. v. JCIT [2010] 39 SOT 240 (Mum).
27
General report
Brazil, and Russia, however, domestic law has only recently allowed for corresponding
transfer pricing adjustments.
In contrast to the MAP and corresponding adjustments, branch reports suggest that
relatively few treaties concluded before the BEPS project commenced, included provisions
for mandatory arbitration. Nonetheless, these provisions were included in several treaties
concluded by many European countries (e.g., Austria, France, Italy, Liechtenstein, Netherlands,
Norway, Sweden and Switzerland), some of which also have experience with mandatory
arbitration under the EU Arbitration Convention which came into force in the mid-1990s
and applies to transfer pricing adjustments involving associated enterprises or the profits
of a permanent establishment. In contrast, developing countries have much less experience
with mandatory arbitration and are often reluctant to include these provisions in tax treaties
since, as the branch report from Serbia explains, “enabling foreign bodies to decide on tax
matters would put restraints on the exercise of [their] fiscal sovereignty.
1.2. Direct impact of the BEPS Actions and the MLI
Since the MLI applies to a treaty only where all parties to the treaty designate it as a CTA, and
generally modifies only those provisions which all parties to the CTA have chosen to adopt,
its impact on the tax treaty network depends not only on the number of jurisdictions that
have signed the MLI, but also on the extent to which the choices made by each contracting
jurisdiction match the choices made by other contracting jurisdictions. This chapter considers
the direct impact of the MLI on the tax treaty network, reviewing the number of signatories,
CTAs and provisions that will be subject to the MLI, and the reasons why jurisdictions have
signed or not signed the MLI, designated or not designated treaties as CTAs, and chosen to
apply or not apply specific provisions of the MLI.
1.2.1. Contracting jurisdictions
As of 11 March 2020, 94 jurisdictions had signed the MLI, 44 of which had deposited their
instrument of ratification, acceptance or approval with the OECD, as a result of which the
MLI has already come into effect for many of the tax treaties designated as CTAs. Of the 41
jurisdictions that submitted branch reports, 38 have signed the MLI and 3 have not.
Among jurisdictions that have signed the MLI, the reasons for doing so are numerous.
According to many branch reports, the decision to sign the MLI is consistent with a
policy priority to combat international tax avoidance and to preserve the integrity of the
international tax system. Several branch reports add that the decision to sign the MLI also
reflects a commitment to a multinational rules-based framework, while others emphasize
the advantages of increased consistency and certainty that multinational coordination can
bring to the international tax regime. Branch reports also note that the MLI facilitates the
standardization of their tax treaties in a swift and efficient manner, which is particularly
appreciated by jurisdictions with limited capacity for negotiating a large number of bilateral
tax treaties. As well, some branch reports state that their jurisdictions anticipate additional
revenues from the measures contained in the MLI, though these revenue gains are generally
considered relatively small or difficult to quantify precisely. Finally, some branch reports
mention the appeal of some MLI provisions to source jurisdictions, while others emphasize
the enhancements to dispute resolution contained in other provisions of the MLI.
28
Duff & Gutmann
Among jurisdictions that have not signed the MLI, the reasons for doing so also vary.
Although Brazil has provided no official justification for not signing the MLI, the branch report
suggests that this decision was made in order to preserve autonomy in the field of tax treaty
policy and because bilateral negotiations are considered less complicated than the MLI. The
US, on the other hand, an official statement for why the US did not sign the MLI explained
that many of its provisions are consistent with long-standing US tax treaty policy, and that
US tax treaties already have robust LOB provisions to prevent tax treaty shopping and other
rules to limit exposure to base erosion and profit shifting. The other jurisdiction submitting
a branch report that has not signed the MLI is Chinese Taipei, which is neither a member of
the OECD nor the Inclusive Framework on BEPS, but has committed to satisfying the BEPS
minimum standards in each of its 32 tax treaties.
Although some branches report that their jurisdictions have examined the impact of the
MLI on tax compliance and administration as well as revenue,33 several branch reports note
that there has been little or no detailed impact analysis of the MLI and little or no public
disclosure of any analysis that has been conducted.34 Instead, jurisdictions appear to have
relied on assessments by the OECD about the harmful effects of base erosion and profit
shifting on tax revenues and the international tax regime more generally.35
1.2.2. Covered Tax Agreements
Although 94 jurisdictions have signed the MLI, many of these jurisdictions have not listed
all of their tax treaties as CTAs and many jurisdictions that have signed the MLI have listed
as CTAs, treaties with jurisdictions that have not signed the MLI. As a result, the number of
tax treaties that will be modified by the MLI is much fewer than the number that would be
modified if these jurisdictions had listed all their treaties as CTAs and if these CTAs were also
listed by other jurisdictions that had signed the MLI. In practice, branch reports from Finland,
Poland, Portugal, Sweden, and the United Kingdom suggest that roughly 55% to 75% of CTAs
will be modified by the MLI. As of 1 March 2020, the OECD reports that 1,630 bilateral tax
treaties will be modified by the MLI, comprising approximately half of the pre-BEPS project
tax treaty network.
Among jurisdictions that have signed the MLI, it is possible to discern two distinct groups.
The first group, comprising most jurisdictions that have submitted branch reports, have listed
all or most of their tax treaties as CTAs: Argentina (17 of 20), Australia (42 of 44), Belgium (96 of
101), Bosnia and Herzegovina (37 of 40), Canada (84 of 93), Chile (34 of 34), People’s Republic
of China (102 of 107), Colombia (10 of 14), Denmark (65 of 70), Finland (70 of 78), France (91 of
128), India (93 of 95), Israel (53 of 58), Italy (80 of 99), Republic of Korea (63 of 93), Liechtenstein
(14 of 18), Luxembourg (81 of 82), Mexico (61 of 61), Netherlands (81 of 94), New Zealand (37
of 40), Nigeria (19 of 19), Peru (7 of 7), Poland (78 of 88), Portugal (79 of 79), Russia (71 of 100),
Serbia (64 of 64), Singapore (86 of 91), South Africa (76 of 79), Spain (86 of 94), Sweden (64 of
86), Turkey (90 of 90), United Kingdom (121 of 130) and Uruguay (20 of 20). The second group,
comprising Austria, Germany, Japan, Norway and Switzerland, have listed only a fraction of
33
See, e.g., the branch report from the UK, which states that this analysis indicated a limited impact on businesses
and the revenue authority; and the branch report from Sweden, which states that the MLI is expected to increase
use of the mutual agreement procedure and the workload for the tax authority and the courts.
34
See, e.g., the branch reports from Argentina, France, Japan, Serbia and Uruguay.
35
See, e.g., the branch report from Bosnia and Herzegovina.
29
General report
their treaties as CTAs: Austria (38 of 88), Germany (35 of 96), Japan (39 of 71), Norway (28 of
84) and Switzerland (12 of 105).
For the first group of jurisdictions, the main reasons to exclude some treaties from their
CTAs are threefold: (1) that treaties under negotiation or recently concluded after the BEPS
project had commenced could incorporate minimum standards and other provisions without
relying on the MLI, (2) that older treaties, multilateral treaties and treaties with a different
legal status are not readily amenable to modification by the MLI, and (3) that there is no point
listing treaties with jurisdictions that have not signed the MLI. In addition to these reasons,
the second group of jurisdictions also takes the position that it is best to amend treaties
bilaterally than to rely on parallel instruments that increase complexity.
1.2.3. Provisions adopted
In contrast to the two distinct groups of jurisdictions that can be identified regarding the
number of treaties listed as CTAs, it is more difficult to categorize jurisdictions by the number
of MLI provisions that they have chosen to adopt. Although branch reports indicate that
Austria, Finland, Republic of Korea, Liechtenstein, Luxembourg, Singapore, Sweden and
Switzerland have taken a minimalist approach by adopting only provisions implementing the
minimum standards on treaty abuse and dispute resolution, while Australia, Denmark, Israel,
New Zealand and Norway have taken a maximal approach by adopting as many provisions
as possible, branch reports indicate that most jurisdictions have adopted some, but not all,
provisions beyond those implementing the minimum standards.
Among jurisdictions taking a minimal approach, the reasons for this approach are
threefold. First, these jurisdictions generally share the view of jurisdictions that have listed
few treaties as CTAs that tax treaties are best negotiated bilaterally in order to minimize
complexity and address the particular circumstances of the contracting states. Second,
some jurisdictions take the position that they have already adopted adequate measures to
counteract aggressive tax planning, so do not need to include additional provisions in the
MLI. Finally, several branch reports note that a minimalist approach allows reservations to
be withdrawn at a later date.36 Indeed, at least three jurisdictions have already withdrawn
reservations between the date that they signed the MLI and the date when they deposited
their instrument of ratification, acceptance or approval with the OECD.
Among jurisdictions taking a maximal approach, branch reports suggest that the main
reasons for this approach are to increase the number of treaty measures to prevent base
erosion and profit shifting while also providing improved access to dispute resolution.
Another reason is the desire to standardize all tax treaties with the 2017 OECD Model Tax
Convention because it is now used as a point of departure for negotiating the jurisdiction’s
tax treaties.
Among jurisdictions that have adopted some but not all MLI provisions beyond those
implementing the minimum standards on treaty abuse and dispute resolution, branch
reports suggest that the main reasons that these jurisdictions have chosen not to apply
specific provisions of the MLI is because they consider existing domestic rules or treaty
provisions sufficient to counteract the specific abuse addressed by the provision of the MLI,
because the MLI provision targets a type of abuse that is not relevant to their jurisdiction, or
36
See, e.g., the branch reports from Finland and Sweden.
30
Duff & Gutmann
because their jurisdiction disagrees with the approach adopted in the MLI. These reasons are
best explained by reference to the specific provisions of the MLI.
1.2.3.1. Minimum standard on treaty abuse
Beginning with the minimum standard on treaty abuse, all jurisdictions signing the MLI are
required to adopt the preamble language in article 6(1), except for CTAs that already include
preamble language expressing an intent of the contracting jurisdictions to eliminate double
taxation “without creating opportunities for non-taxation or reduced taxation through tax
evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining
reliefs provided in this agreement for the indirect benefit of residents in third jurisdictions).”
As a result, since 1,630 bilateral tax treaties will be modified by the MLI, it follows that at least
this number of treaties will include this modified preamble language.
In addition to this provision, branch reports suggest that a number of jurisdictions have
also adopted the additional preamble language in article 6(3) of the MLI expressing a desire
on the part of the contracting jurisdictions “to further develop their economic relationship
and to enhance their co-operation in tax matters.” Although the OECD report provides no
figures on the number of CTAs that will be modified by this additional preamble language,
branch reports from Belgium and Chile suggest that the percentage of CTAs modified by this
provision is approximately 35% of CTAs, which would affect around 570 tax treaties. Whether
this additional preamble language will have much effect on the interpretation of these CTAs
is uncertain, though India’s experience with the Union of India v. Azadi Bachao Andolan case
presumably informed its decision not to adopt this additional preamble language.
With respect to article 7 of the MLI, all signatories have adopted the PPT in article 7(1),
14 have adopted the simplified LOB provisions in article 7(8) to (13), 27 have adopted the
discretionary benefits rule in article 7(4), and 11 have indicated that they accept the PPT
alone as an interim measure and intend where possible to adopt a LOB provision, in addition
to or in replacement of the PPT, through bilateral negotiation. Since the MLI will modify
1,630 bilateral tax treaties, at least this number of treaties will include the PPT. According
to the OECD report, only about 50 tax treaties will be modified to include the simplified
LOB. Although this report provides no figures on the number of CTAs that will include the
discretionary benefits rule in article 7(4) of the MLI, branch reports from Australia and
Belgium suggest that the percentage of CTAs modified by this provision is less than 25%,
which would affect roughly 400 tax treaties.
Regarding these choices, branch reports suggest that jurisdictions have adopted the PPT
because it is the easiest way to satisfy the minimum standard on treaty abuse, because it is a
familiar approach that is broadly consistent with the domestic GAARs in many jurisdictions
and the OECD’s guiding principle on the improper use of tax treaties, and because it is
more effective to counteract unforeseen abuses than more mechanical provisions like LOB
provisions. In contrast, branch reports regarded LOB provisions as more complex to administer,
potentially incompatible with EU fundamental freedoms, and requiring substantial bilateral
customization. The last of these considerations is presumably why several jurisdictions did
not adopt the simplified LOB provision in the MLI but indicated that they intend where
possible to adopt a LOB provision, in addition to or in replacement of the PPT, through
bilateral negotiation. Finally, while branch reports from the Netherlands, Switzerland and the
United Kingdom explain that their jurisdictions have adopted the discretionary benefits rule
in order to prevent a potentially punitive application of the PPT, branch reports from Norway,
31
General report
Sweden and Germany state that their jurisdictions consider this provision unnecessary or
undesirable on the grounds that adverse tax consequences may be mitigated in other ways,
such as by invoking the mutual agreement procedure, or should not be mitigated in order
to discourage aggressive tax planning.
1.2.3.2. Hybrid mismatches
Provisions addressing hybrid mismatches have been adopted by about a third of the
signatories to the MLI, though the percentage varies for each specific provision. While 28
jurisdictions (30% of signatories) have opted to include the look-through provision for
hybrid entities in article 3, 34 jurisdictions (36% of signatories) have adopted the rule for
dual resident entities in article 4, and 21 jurisdictions (22% of signatories) have selected
either Option A or C in article 5. Another 37 jurisdictions have allowed these options to apply
to residents of the other contracting jurisdiction by not reserving the right for article 5 not
to apply to its CTAs. As a result, according to the OECD report, article 3 will modify 207 tax
treaties, article 4 will modify 246 treaties, and article 5 will modify 123 treaties.
For jurisdictions that did not adopt the rule for hybrid entities in article 3, branch reports
suggest that the main reasons are that these entities may be regarded as treaty residents,
or that domestic rules and general principles on income attribution are adequate to address
abusive arrangements. Other jurisdictions have little experience with hybrid entities, so
considered the provision complex and unnecessary. In contrast, branch reports submitted by
jurisdictions that adopted this provision indicate that it was consistent with many of their tax
treaties and provided a more secure legal foundation for the application of treaty provisions
to hybrid entities.
Among jurisdictions that did not adopt the rule for dual resident entities in article 4,
branch reports indicate that the main reason is that these jurisdictions do not regard the
fact of dual residence as necessarily abusive. In addition, these jurisdictions were concerned
about the additional administrative burden and uncertainty that resolution through a mutual
agreement procedure would impose on dual resident entities. Indeed, although Australia
and New Zealand both chose to include this provision of the MLI, branch reports from these
jurisdictions note that the prevalence of entities that are resident in both jurisdictions
led to an administrative agreement between the revenue authorities in these countries
to allow dual resident entities to self-determine their place of effective management for
treaty purposes, provided that various criteria are satisfied (relating to legal form, income,
the value of intangible assets and compliance history). As with article 3, branch reports from
jurisdictions that have adopted article 4 indicate that this approach is consistent with many
of their tax treaties, and more likely than established tie-breaker rules based on place of
effective management or incorporation to prevent manipulation.
Although branch reports had less to say about choices regarding article 5 of the MLI,
jurisdictions selecting Option A and exercising the right under article 5(9) of the MLI not to
permit the other contracting jurisdiction to apply Option C, take the position that replacement
of the exemption method of eliminating double taxation by the credit method was a major
change that should be subject to bilateral negotiation, not modification through the MLI.
Among jurisdictions that reserved the right under article 5(8) for the entirety of article 5
not to apply to their CTAs, the main reason appears to be that opportunities for abuse are
limited since most treaties entered into by the jurisdiction already apply the credit method
of eliminating double taxation. In contrast, Denmark and Portugal have chosen Option C
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in order to align all their tax treaties with the most recent version of the OECD Model Tax
Convention,37 or chosen not to adopt any option but to allow other contracting jurisdictions
to apply their chosen option to their own residents by not reserving the right for the entirety
of article 5 not to apply to their CTAs.
1.2.3.3. Specific treaty abuses
Turning to the specific treaty abuses addressed by articles 8 to 11 of the MLI, 42 jurisdictions
(45% of signatories) have opted to apply the rules for dividend transfer transactions in article
8, 54 jurisdictions (57% of signatories) have chosen to adopt either the substituted property
rule or the look-back rule in article 9, 25 jurisdictions (27% of signatories) have opted to apply
the rule for triangular permanent establishments in article 10, and 25 jurisdictions (27% of
signatories) have chosen to adopt the saving clause in article 11. On this basis, according to
the OECD report, article 8 will modify 180 tax treaties, article 9 will modify 350 treaties, article
10 will modify 138 treaties, and article 11 will modify 137 treaties.
For jurisdictions such as Austria and the United Kingdom which chose not to adopt the
365-day holding period for the reduced withholding tax rate for dividends in article 8 of the
MLI, branch reports suggest that the main reasons are that the rule could deny treaty benefits
in circumstances that are not abusive, that domestic anti-avoidance rules or the PPT should
be adequate to address abusive transactions, and that the addition of this holding period so
some treaties and not others could lead to unintended tax planning strategies. Other reasons
identified in other branch reports include the rejection of any limitation on the source taxation
of dividends (Chile), or the fact that dividends are either subject to withholding tax at a single
rate (Argentina) or exempt from source taxation altogether (United Kingdom).38 Among
jurisdictions adopting this provision, the main reasons are to prevent abusive transactions
and to standardize the rules adopted in different tax treaties. Notably, Canada and Denmark
have opted to apply article 8 notwithstanding the absence of domestic legislation providing
for a minimum holding period, which will presumably have to be enacted for the provision
to have any practical effect.
Among jurisdictions not opting to apply the substituted property and look-back rules in
article 9 of the MLI, branch reports indicate that one reason is the view that arrangements that
may be caught by this rule are not necessarily abusive and that abusive arrangements can be
addressed by domestic anti-avoidance rules and the PPT. Another reason is that the provision
has no relevance to the jurisdiction because gains from the alienation by non-residents of
shares or other interests in entities deriving their value primarily from immovable property
are not subject to domestic tax. In contrast, several jurisdictions have chosen to adopt the
substituted property rule and/or the look-back rule notwithstanding the absence of domestic
legislation, which will have to be adopted before article 9 can have any practical effect.
As with articles 8 and 9 of the MLI, jurisdictions like Belgium, France and Switzerland that
have chosen not to adopt the anti-avoidance rule for triangular permanent establishments
in article 10, take the position that these arrangements are not necessarily abusive and can
be addressed by domestic anti-avoidance rules and the PPT. In contrast, branch reports from
Australia and Norway indicate that their jurisdictions consider this provision unnecessary
37
See, e.g., the branch reports from Denmark and Portugal.
38
Interestingly, however, India and Peru both chose to adopt art. 8 notwithstanding that the former does not levy
withholding tax on dividends and the latter levies withholding tax at a single 5% rate.
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because their treaties generally adopt the credit method for eliminating double taxation. In
contrast, even if their treaties generally use the credit method, the branch report from the
Netherlands states that this jurisdictions has opted to apply article 10 on the basis that it is
fair to countries that give up their taxing rights on the assumption that income will be taxed
in the other contracting state.
As noted earlier, saving clauses appear to have originated in US tax treaties in order to
ensure that treaty benefits do not accrue to US citizens who are treaty residents in other
countries. As a result, although Belgium has opted to apply the saving clause in article 11 in
order to ensure that their CFC rules are compatible with treaty obligations, branch reports
from France, Germany and the Netherlands report that their jurisdictions consider this
provision unnecessary. The Japanese branch report adds that Japan reserved its right for
this provision not to apply on the grounds that the complexity of coordinating with other
jurisdictions to determine which provisions should be excluded from a saving clause, made
this provision more suitable for bilateral negotiation.
1.2.3.4. Permanent establishment status
Provisions addressing the avoidance of permanent establishment status have been adopted
by roughly half of signatories to the MLI, with 46 jurisdictions (49% of signatories) opting to
apply the revised rules in article 12 to counteract commissionaire arrangements and similar
strategies, 56 jurisdictions (60% of signatories) choosing to adopt one of the options in article
13 relating to the specific activity exceptions, and 30 jurisdictions (32% of signatories) opting
to apply the anti-avoidance rule in article 14 to address the splitting up of contracts for a
building site or construction or installation project. According to the OECD report, 309 tax
treaties will include the revised rules in article 12, 350 treaties will include Option A or B in
article 13, 516 treaties will include the anti-fragmentation rule in article 13(4) and 153 treaties
will include the anti-avoidance rule in article 14.
Among jurisdictions not adopting the rules for commissionaire arrangements and similar
strategies in article 12, branch reports suggest that the main reason is that the provision
does not specifically addresses abusive arrangements but instead shifts taxing rights from
residence jurisdictions to source jurisdictions. Other jurisdictions take the position that
domestic anti-avoidance doctrines or rules are sufficient to address abusive arrangements.
In contrast, France regards these arrangements as abusive and not readily amenable to
domestic anti-avoidance provisions and many developing countries undoubtedly regard a
shift toward greater source taxing rights as a welcome improvement.
Branch reports have less to say about the choices that jurisdictions have made regarding
the specific activity exemptions in article 13, except to note that the choices between Option A
or B confirm long-standing approaches to the interpretation of article 5(4) of the OECD Model
Tax Convention. While Japan and the Netherlands regard Option A to be a useful revision
to address problematic cases or the challenges of the digital economy, jurisdictions such as
France and Luxembourg which have chosen Option B do not consider it abusive for an activity
to qualify for an exemption without also being of a preparatory or auxiliary character and add
that the addition of this qualification for each activity would create unnecessary uncertainty.
Finally, branch reports from Austria, Belgium, Germany, Japan, Liechtenstein and Sweden
indicate that these jurisdictions decided not to adopt the anti-avoidance rule in article 14 on
the grounds that this provision could apply to legitimate business arrangements, and that
abusive transactions could be addressed by domestic anti avoidance doctrines or rules or by
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the PPT. In contrast, as with article 12 of the MLI, this provision has been adopted by many
developing countries, presumably because it may not only address abusive arrangements
but may also expand source taxing rights.
Although virtually all tax treaties concluded before the BEPS project commenced, already
included provisions for a mutual agreement procedure, all jurisdictions signing the MLI are
required to adopt the minimum standards in article 16. As a result, it follows that all 1,640
CTAs will either already include these minimum standards or be modified to do so. According
to the OECD report, two-thirds of signatories have chosen to adopt the first sentence of article
16(1) allowing a taxpayer to present a case to the competent authority of either jurisdiction, as
a result of which approximately 600 treaties will include this modification. Other jurisdictions
such as Chile, Germany, Italy and Singapore, have reserved their right for this sentence not
to apply to their CTAs and will satisfy the minimum standard through a bilateral notification
or consultation process.
Most tax treaties concluded before the BEPS project commenced, also included
provisions for corresponding adjustments consistent with article 17 of the MLI. As a result,
although more than half of all signatories have opted to apply this provision in article 17 in
order to modify older treaties that do not include this provision, the OECD reports that only
470 treaties will be modified by this provision.
In contrast to provisions for a MAP and corresponding adjustments, relatively few tax
treaties concluded before the BEPS project commenced, included provisions for mandatory
arbitration. Nonetheless, the OECD reports that only 30 jurisdictions have opted to apply
the arbitration provisions in Part VI of the MLI and that these provisions will modify only
211 treaties. Most of the MLI signatories have chosen the “final offer” approach, while eight
jurisdictions have chosen the “independent opinion approach”.
Motivations for choosing (or not) arbitration are quite diverse, as evidenced by the branch
reports. Countries which have opted in to the arbitration provisions may have done so because
they had committed to arbitration in an EU-context anyway and felt that they had to be
consistent at a broader level (with the notable exception of Poland which followed an exactly
opposite reasoning and considered that since most of its treaty partners are EU members,
there is no reason to go for arbitration beyond the EU). They may also have done so because
their treaty policy had changed already, even before the MLI was signed. Other jurisdictions
like Denmark and New Zealand note that arbitration can encourage speedy resolution of
mutual agreement procedures by the competent authorities, which may be particularly
important given the PPT and other anti-avoidance rules in the MLI.
Among countries that have opted out of arbitration, there is a great variety of motivations
ranging from the reluctance towards giving up a bit of national sovereignty to the lack of
financial and human resources to handle arbitration procedures. The US report also contains
an interesting statement in this respect, namely that the US Treasury Department was
concerned that the MLI’s arbitration provision gave signatory countries excessive discretion
to narrow the scope of arbitration in contravention of US treaty policy. This shows that opting
out (or not signing, in the case of the US) does not necessarily mean that arbitration is rejected
in principle. The Norwegian report also provides an example of a country that has recently
renegotiated a few treaties in order to include arbitration but takes the view that the design
of arbitration in the MLI does not suit its policy and prefers to include arbitration provisions
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through bilateral negotiations. The South African report also explains that arbitration has not
been chosen in the MLI because South Africa first wishes to test arbitration at the regional
level “before moving to the global stage”. These indications tend to show that a statistical
approach to the number of countries that have opted for arbitration should be used with
caution and that arbitration may become more widespread in the next years.
1.3. Indirect impact of the BEPS Actions and the MLI
In addition to the direct impact of the BEPS project on the tax treaty network through
provisions of CTAs that are modified by the MLI, the BEPS project has also had an impact
on the tax treaty network though revisions to tax treaties that have been concluded in light
of the BEPS project, even though these treaties are not subject to the MLI. Indeed, many
branch reports observe that treaties concluded after the BEPS project commenced, include
provisions implementing the minimum standards on treaty abuse and dispute resolution,
as well as several other provisions included in the MLI and incorporated into the 2017 OECD
Model Tax Convention. This impact is confirmed by a review by the OECD of 465 bilateral
instruments among 154 jurisdictions concluded since the BEPS project commenced, which
reports that most treaties concluded after 2018 include the minimum standards, but that
relatively few include other provisions addressing hybrid mismatches, specific treaty abuses,
the avoidance of permanent establishment status and arbitration.39
Notwithstanding these statistics, several branch reports also note that bilateral tax
treaties negotiated since the MLI was signed, often include provisions which the jurisdiction
opted not to apply in the context of the MLI. In addition, branch reports from jurisdictions
that did not sign the MLI indicate that treaties concluded after the MLI was signed, are likely
to include the minimum standards as well as other provisions included in the MLI. Indeed,
the US branch report notes that the 2016 US Model Tax Convention includes several MLI
provisions, including the revised preamble language in article 6(1) of the MLI, a 365-day
ownership requirement for the reduced withholding tax rate on dividends paid to a parent
company, a rule to prevent the avoidance of permanent establishment status by splitting
up contracts for a building site or construction or installation projects, and rules to improve
dispute resolution through mandatory binding arbitration. In addition, it is notable that
several jurisdictions that reserved the right for provisions of the MLI not to apply to their
CTAs, have not entered reservations regarding corresponding provisions in the 2017 OECD
Model Tax Convention, suggesting that these provisions may be included in bilateral treaties
negotiated subsequent to the MLI.
39
See the OECD report, reporting that only 58 tax treaties included the rule for hybrid entities in art. 3 of the MLI,
only 91 included the rule for dual resident entities in art. 4 of the MLI, only 54 included the minimum shareholding
period in art. 8 of the MLI, only 50 included the substituted property rule in art. 9 of the MLI, only 19 included the
anti-avoidance rule for triangular permanent establishments in art. 10 of the MLI, only 45 included the revised
language for dependent agent permanent establishments in art. 12 of the MLI, only 52 included revised rules for
the specific activity exemptions consistent with art. 13 of the MLI, and only 83 included arbitration provisions.
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Part Two: Practical Implementation of Provisions of the MLI
The second part of the guidelines sent to branch reporters focused on the actual steps taken
by states in order to implement the MLI and asked them to examine to what extent the MLI
has indeed changed, or will change, the “law in action”. It also requested reporters from
countries which are not signatories of the MLI, to provide some input on the way the BEPS
Action Plan impacts tax treaty interpretation and tax planning.
In this part of our general report, we therefore start with a synthesis of the most interesting
findings relating to the implementation procedures followed in the countries which signed
the MLI. We then describe some interpretation issues relating to the MLI and the covered tax
agreements, as well as interpretation issues relating to other tax treaties. A third chapter is
about the impact of the BEPS Action Plan on tax planning.
2. 1. Procedural aspects
2.1.1. Ratification process
A vast majority of signatory states has implemented (or in the process of implementing)
the MLI through a ratification procedure in parliament. Depending on the constitutional
structure of the state and on the monist or dualist approach to the relationship between
treaties and domestic law, the ratification process may entail submitting the text of the MLI
to the constitutional court, to a special finance committee in parliament, to the Council of
State, or even to the Chamber of Commerce (Portugal). Only in rare cases has parliament not
been required to vote (e.g. New Zealand, where a parliamentary committee has nevertheless
been consulted) or has it delegated its authority to the government (e.g. Singapore). In
federal states, complexity may reach its climax: the Belgian report notes that because the
MLI affects the taxing powers of the federal government and also touches upon the regions
and communities’ competences, it had to be ratified by six parliaments.
It is worth mentioning that most countries seem to have focused their attention on the
MLI itself, without requiring parliament to vote on the covered tax agreements impacted
by the MLI. A notable exception is in Germany, where the ratification of the MLI through
a parliamentary procedure was not considered sufficient. There will also be separate legal
instruments to ratify the implementation of changes brought to covered tax agreements.
Although the degree of scrutiny exercised by the domestic legislator on the MLI is high
from a formal perspective, it is striking to observe that in most countries, it has proved to be
very low in substance. Sometimes it is clearly stated by branch reporters that no budgetary
and economic assessment of the impact of the MLI has been conducted (e.g. Mexico). In
some countries, the impact assessment (if any) relies on very general views regarding the
overall structure of the economy. For instance, a cabinet paper in New Zealand has stated
that “data limitations prevent officials from accurately estimating the actual impact on net
tax revenue. However, as New Zealand is a capital importer and the MLI covers the majority
of New Zealand’s double taxation agreements network, it is expected that overall impact on
tax revenue will be positive”. In most countries, there seems to have been no genuine effort to
inquire about the actual effect of the MLI. Branch reporters repeatedly state that parliament
has simply been convinced by the need to fight base erosion and profit shifting, aggressive tax
planning, tax evasion, etc. This explains why in most countries, little or no change has been
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suggested to the MLI clauses chosen by the department of Finance at the time of signature.
Debates in national parliaments have generally been quite short.
Little criticism has been voiced about this. The South African report has however clearly
pointed out that most of the questions raised by the MLI in terms of financial impact and
administrative practicability have received no answer during the parliamentary process.
Along the same line, it is worth mentioning that a statement issued by the French Court of
Accounts on 31 May 2019 (Référé S 2019-1421) has observed that the discrepancy between
the scarcity of the quantitative analysis and of the human resources invested by the tax
authorities during the ratification process are in sharp contrast with the financial amounts
at stake, in particular for a country such as France which is a residence state for many
multinational companies. This official report goes as far as concluding: “without neglecting
the difficulties of such an analysis, the Court thinks that moving forward without a robust
assessment of the economic impact of negotiations, hence almost blindly, is likely to harm
the defence of our interests”. This strong statement may be completed by the South African
report’s conclusion regarding these issues: “The experience with the MLI in South Africa’s
parliament illustrates some weaknesses in the work of the OECD and the Inclusive Framework
about implementation of the BEPS project. It can be questioned if enough attention was
given, during the design of the MLI, to the difficulty that national parliaments may face in
domesticating an extremely complex legal instrument. The need to ensure legitimacy of the
BEPS Package in the eyes of lawmakers beyond OECD member countries has been an Achilles
heel of the implementation project, since national lawmakers are beyond the reach of the
peer review mechanism and it can’t be expected that they only nominally consider proposals
for hard-law implementation”.
2.1.2. Publication of synthetized texts of covered tax agreements
Many countries have considered or started publishing synthetized texts of covered tax
agreements as modified by the MLI, following the guidelines provided by the OECD in the
Guidance for the development of synthetized texts (November 2018) where the original
text of the MLI is reproduced in boxes which are inserted after the relevant provisions of
the covered tax agreement. Branch reporters from such countries all insist on the idea that
the publication of synthetized texts is not a legal obligation stemming from the MLI, which
is in line with the Guidance (§ 2.1, at 4) and with the Explanatory Statement on the MLI; the
development of synthetized texts therefore takes place for “educational purposes” (Australian
report) or as a “matter of courtesy” (Austrian report).
Consistent with the idea that synthetized texts are optional, they do not have a legal value
of their own. This unanimous statement by branch reporters is in line with the Guidance (§
2.1.4, at 19). Accordingly, the prevailing view is that whenever a conflict appears between the
content of the synthetized text and the content of the tax treaty as modified by the MLI, the
latter prevails and the taxpayer cannot argue that he could legitimately rely on the content of
the synthetized text. Branch reports generally do not bother about this finding but in some
countries, the question of the legal protection granted to the taxpayer in this situation has
explicitly been raised. This is the case in France, where published administrative guidelines
may, under certain conditions, be opposed to the tax authorities even where they contradict
the content of the law or of the treaty (but one may wonder whether a synthetized text is a
form of administrative guideline). The Norwegian and Argentinian reports also raise the
question to what extent a taxpayer who has in good faith complied with the synthetized
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version, or who committed an excusable mistake, should not deserve legal protection.
It should be observed, though, that synthetized versions generally provide in an explicit
manner that the original text of the covered tax agreement prevails, in which case there is
no possibility for a taxpayer to develop such an argument based on good faith.
The practice described in branch reports shows that the development of synthetized
versions of covered tax agreements by signatories of the MLI does not always take place in a
fully coordinated way. In many cases, synthetized versions are prepared in cooperation with
treaty partners in order to make sure that both states share a common understanding of how
the MLI interacts with the covered tax agreement. This is in line with the advice provided by
the OECD. However, there are also examples of countries which prepare synthetized versions
without consulting with the treaty partner (or even countries which consult with some treaty
partners but not with others). The outcome is inevitable: the versions published in parallel do
not necessarily coincide. The Indian report provides for several interesting examples of such
differences in the synthetized versions published by India on the one hand, and by Japan,
Singapore and the United Kingdom on the other.
Few countries seem to have considered going further than just publishing a synthetized
version of covered tax agreements and develop a truly consolidated version of these
agreements, where the results of the MLI modifications are directly inserted in the text of the
treaty. Austria had favoured this approach but abandoned it because the MLI ad hoc group
selected the technique of synthetized texts and because it might have caused constitutional
problems with respect to the principle of legality. A legal issue relating to consolidation
has also been raised in Liechtenstein where the legal provisions published in the official
gazette must be shown in a consolidated fashion. This obligation has however not been
found to be applicable because, “after intense internal debates” (in the branch reporter’s
words), the tax authorities took the view that the provisions of the MLI do not have a similar
effect on a CTA as a revision protocol, which entails that the MLI and the bilateral covered
tax agreements will have to be read in parallel to each other and that no consolidation can
take place. Interestingly, an opposite result has been reached in Switzerland, where it is also
compulsory to publish consolidated texts of tax treaties. As Switzerland is of the opinion that
the MLI changes the content of the covered tax agreements and does not simply coexist with
them, the Swiss authorities consider that there is an obligation to publish a consolidated
version of the treaty and has included in its list of covered tax agreements only those which
were concluded with a contracting state which shares the “amending view” rather than the
“coexisting view” promoted by the OECD.
Lastly, one may observe that some countries seem to have developed an intermediate
practice (somewhere between “synthesis” and “consolidation”). This is the case in France,
where the tax authorities have published new versions of some covered tax agreements
which do not exactly follow the practice recommended by the OECD (in the sense that there
is an effort to present the articles of the treaties as they appear after their modification
by the MLI) although they do not consist in truly consolidated versions of the covered tax
agreements.
2.2. Interpretation issues relating to the MLI and the covered tax agreements
An obvious problem raised by the MLI is its idiom, which does not necessarily correspond to
the language of covered tax agreements. According to the final clause of the MLI, its authentic
languages are English and French. Accordingly, the Explanatory Statement (§ 317) states that
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where questions of interpretation arise in relation to Covered Tax Agreements concluded in

other languages or in relation to translations of the Convention into other languages, it may
be necessary to refer back to the English or French authentic texts of the Convention.
For some countries, such as Japan, this is not really an issue because most treaties
provide that the English text shall prevail in case of divergence of interpretation between
the authentic versions of the treaty. However, several reports point out the inevitable
character of semantic uncertainties which will stem from the fact that a multilateral treaty
with two authentic languages modifies bilateral treaties with other authentic languages.
An additional practical problem is likely to appear when the MLI is submitted to parliament
in a linguistic version which is that of the country at stake and published in that version (see
for instance the Mexican report). However, considering that 83.92% of treaties in the global
treaty network have English as the language of at least one of their texts, 7.68% have French,
the proportion of treaties with neither English or French as an authentic language is 8.40%.40
The language problem should not be overestimated.
The main questions relating to treaty interpretation after the MLI and the BEPS Action
Plan are mostly related to substantive issues. According to article 2.2. of the MLI, “as regards
the application of this Convention at any time by a Party, any term not defined herein shall,
unless the context otherwise requires, have the meaning that it has at that time under
the relevant Covered Tax Agreement”. This rule only deals with one dimension of the
interpretation issue raised by the MLI, i.e. its semantic dimension. However, interpretation
issues raised by the MLI and its interaction with covered tax agreements are far more complex
for numerous reasons which pertain to the hybrid nature of the MLI and to the indirect effect
which it may have on agreements other than covered tax agreements. The branch reporters
have therefore been requested to answer many questions in order to clarify how the MLI
impacts tax treaty interpretation in general.
2.2.1. The object of interpretation: MLI, CTAs, domestic law implementing the MLI?
It is particularly difficult to present the interpretative issues raised by the MLI in systematic
terms (i.e. in terms which are equally valid regardless of the jurisdiction which implements
the MLI). This is because the interaction between (i) tax treaties and domestic legislation
and (ii) the MLI and covered tax agreements varies according to the legal system of each
country and to the interpretation which each country adopts regarding the legal effect of
the MLI. Branch reports reveal an enormous diversity in this respect. Even the traditional
distinction between monist and dualist countries is blurred by the descriptions found in
national reports which reveal that there seems to be some kind of continuum between the
two theories, or, to say the least, that the concepts of “monism” and “dualism” are subject to
significant variations worldwide.
As to the question whether interpretation issues bear on the MLI itself or on the legal
instrument which implements the MLI, most branch reports simply do not address it. Some
reports however clarify that the interpretation process of the MLI is to be distinguished
from the interpretation process of the domestic legislation which implements it. The
German report points out, for instance, that “as an international convention, the MLI has
to be interpreted in line with the Vienna Convention on the Law of Treaties (…). However, it
40
Figures provided by R. X. Resch, The OECD BEPS Multilateral Instrument and the Issue of Language, Intertax,
vol. 47, Issue 6 & 7, 2019, p. 563 et seq., p. 565.
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should be noted that the two-step approach implies that for tax treaty cases, the MLI itself
will generally not be interpreted directly. Instead, it is the domestic law modifying the treaty
that needs to be interpreted. The MLI can then become relevant as the context for that law”.
This analysis goes together with the German approach described above, which considers that
every covered tax agreement modified by the MLI must be subject to parliamentary scrutiny.
Although every country has its own way of describing the object of interpretation, all
countries face the same problem at the end of the day: distinguishing between the “operative”
mechanism of the MLI and its “substantive” effect on covered tax agreements. This distinction
derives from the hybrid nature of the MLI itself.
2.2.2. The MLI as a hybrid instrument
As indicated in the Explanatory Statement to the MLI (§ 12), the MLI aims at implementing
the BEPS measures through a single instrument which modifies covered tax agreements.
The MLI is therefore a hybrid instrument: it modifies other treaties and contains provisions
of substantive tax law. The interpretation methods used to understand the MLI must reflect
this dual nature.
Insofar as the MLI is a tool which modifies existing bilateral treaties, it lays down a
complex mechanism through which it does not amend earlier treaties but rather applies
“alongside existing tax treaties, modifying their application in order to implement BEPS
measures” (Explanatory Statement, § 13). We have seen above that not all countries share this
analysis. However, a majority of countries seems to endorse this approach to the relationship
between the MLI and the covered tax agreements. Accordingly, these countries should
logically follow the interpretation guidelines provided by the explanatory statement which
makes a clear distinction between the mechanics of the MLI and its substantive provisions:
“while this Explanatory Statement is intended to clarify the operation of the Convention to
modify Covered Tax Agreements, it is not intended to address the interpretation of the underlying
BEPS measures (except with respect to the mandatory binding arbitration provision contained
in Articles 18 through 26)” (§ 12).
One might think that problems of interpretation relating to the operative nature of the
MLI will be rare in practice, but the drafting of synthetized versions has already revealed
ambiguities about the way in which the MLI actually modifies the covered tax agreements.
An example may be found in the Japanese report (footnote 32) which has identified an issue
relating to the synthetized version of the treaty between Japan and New Zealand in which a
paragraph of article 13 relating to capital gains on real estate companies has been improperly
(according to the branch reporter) replaced by paragraph 4 of article 9 of the MLI.
There are also cases in which the implementation of the operative mechanism of the
MLI may reveal issues regarding the interpretation of the underlying covered tax agreement.
The Indian reporter notes, for instance, that Norway has reserved the right for the entirety of
article 17 not to apply as it believes that its covered tax agreement with India already contains
the provision for the corresponding adjustment as described in that article. However, the
Indian reporter takes the view that a closer look at article 9(2) of the covered tax agreement
reveals that the other state “may make an appropriate adjustment” while article 17(1) requires
such adjustment to be mandatorily made. The Explanatory Statement states that such a
provision which gives discretion to a contracting state to make the adjustment cannot be
reserved, which drives the Indian reporter to consider that the reservation made by Norway
seems to rely on a wrong interpretation of the covered tax agreement with India.
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It is very likely that many other questions relating to the interpretation of the MLI will
arise as countries complete its implementation process and develop synthetized versions of
their covered tax agreements with their treaty partners. It is therefore important to assess
to what extent they may legally rely on the Explanatory Statement (regarding the operative
mechanism of the MLI) and on the BEPS reports themselves (regarding the substance of the
measures introduced in the covered tax agreements).
2.2.3. The legal status of the Explanatory Statement
All national reports state that the Explanatory Statement should be taken into account in
order to analyse the mechanism by which covered tax agreements are being modified by
the MLI. The Explanatory Statement states that it “reflects the agreed understanding of the
negotiators with respect to the Convention” (Explanatory Statement, § 11). It goes on by saying
that “accordingly, the provisions contained in Articles 3 through 17 should be interpreted in
accordance with the ordinary principle of treaty interpretation, which is that a treaty shall be
interpreted in good faith in accordance with the ordinary meaning to be given to the terms
of the treaty in their context and in light of its object and purpose” (id.). This is a transparent
reference to article 31(1) of the Vienna Convention on the Law of Treaties.
It is however difficult to ascertain whether the Explanatory Note should really be
considered as an element of “context” under article 31. Let us recall that article 31(2) defines
the concept of “context” for the purpose of interpretation of a treaty and states that it shall
comprise, in addition to the text, including its preamble and annexes: (a) any agreement
relating to the treaty which was made between all the parties in connection with the conclusion
of the treaty; (b) any instrument which was made by one or more parties in connection with
the conclusion of the treaty and accepted by the other parties as an instrument related to
the treaty. In our view, the Explanatory Note does not seem to fall within the scope of § 2 (a)
because a document prepared by the participants in the ad hoc Group, and in the Sub-Group
on Arbitration may not be considered as an “agreement relating to the treaty”, even though
it has been adopted at the same time as the text of the Convention. It does probably not fall
within the scope of § 2 (b) either because it is doubtful whether it has been “accepted by the
other parties as an instrument related to the treaty”.
However, even if the Explanatory Statement is not considered as an element of
“context” under article 31(2), it should certainly be considered as a “supplementary means
of interpretation” (under article 32(a)) which may be used to determine the meaning of the
MLI when the interpretation according to article 31 leaves the meaning ambiguous or obscure.
The idea that the Explanatory Statement falls within the scope of article 32 is expressed
in some national reports (e.g. Russia). The Swiss report takes a different view and states
that there are “good reasons to support the view that the Explanatory Statement is not just
a supplementary means of interpretation, but part of the context within the meaning of
article 31(1) Vienna Convention. The statement constitutes an essential part as it was written
alongside the specific treaty (and not just in relation to a treaty model), which makes the
link to the MLI closer than the one between the OECD Model convention and a double tax
convention”.
Whatever analysis prevails, it is clear that the Explanatory Statement is not a binding
instrument of its own but rather a source of inspiration in order to interpret the operative
provisions of the MLI. The same can be said about the note of the OECD Directorate on
Legal Affairs titled “Multilateral Convention to Implement Tax Treaty Related Measures to
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Prevent Base Erosion and Profit Shifting: Functioning under Public International Law” which
is, according to its first paragraph, to be read “in conjunction with the Explanatory Statement
to the MLI”.
An exception to this reasoning may however be made in the very specific case of a
country which has submitted the Explanatory Statement to a parliamentary vote during
the ratification process of the MLI. This has happened in Belgium, where the bill of consent
(i.e. the bill ratifying the MLI) specifically states that both the MLI and the Explanatory Note
shall come into full force and effect. The Explanatory Note has therefore acquired the status
of “hard law” in this country.
2.2.4. The legal status of BEPS reports
Since the Explanatory Statement is not intended to address the interpretation of the BEPS
measures enshrined in the MLI (except with respect to the mandatory binding arbitration
provision contained in articles 18 through 26), the question arises whether the BEPS reports
published by the OECD during the process which has led to the signature of the MLI, may be
taken into account for the purpose of interpreting the MLI.
The Explanatory Statement takes a position in this respect by making an implicit
reference to article 31(1) of the Vienna Convention on the Law of Treaties. Paragraph 12 of
the Explanatory Statement states that “the object and purpose of the Convention [i.e. the
MLI] is to implement the tax treaty-related BEPS measures. The commentary that was
developed during the course of the BEPS Project and reflected in the Final BEPS Package
has particular relevance in this regard. It should be noted that while in some cases (…), the
provisions of the Convention differ in form from the model provisions that were produced
through the BEPS Project, unless noted otherwise, these modifications are not intended to
make substantive changes to those provisions. Instead, they are intended to implement the
agreed BEPS measures in the context of a multilateral instrument that applies to a widely
varied network of existing treaties”.
The development of the BEPS Action Plan is certainly essential in order to understand
“the object and purpose” of the MLI according to article 31.1. of the Vienna Convention on
the Law of Treaties. This statement is not incompatible with the idea that the actual content
of the final BEPS reports is also to be taken into account as “supplementary means of
interpretation” to which recourse may be had, according to article 32, in order to confirm the
meaning resulting from the application of article 31, or to determine the meaning when the
interpretation according to article 31 leaves the meaning ambiguous or obscure.
Several branch reports endorse this analysis (e.g. India, Mexico, Japan, Portugal, South-
Africa). Even some non-OECD reporters share the view that some legal value should be
attributed to the OECD BEPS reports because their countries belong to the inclusive
framework or to the G20 and have, in that capacity, actively contributed to the development
of the BEPS Action Plan. The Chinese report, for example, presents the pros and cons of the
debate on this issue and stresses that it could seem “unreasonable” for China not to give value
to the outcomes of the BEPS Action Plan when interpreting the MLI. The Chinese reporter
however calls for further clarification from the tax authorities in this respect.
Although the BEPS reports can certainly not be ignored, they may not always be
considered relevant for the purpose of interpreting covered tax agreements. The Australian
report interestingly points out that while the BEPS final reports are likely article 32 material
under the Vienna Convention, they are “broad and not necessarily focused on the text of the
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General report
MLI and are not directly related at all to any specific Covered Tax Agreement (…). As such,
the usefulness of the BEPS Reports in determining the meaning of any particular article of
a Covered Tax Agreement is uncertain”. The Liechtenstein report also notes that “as these
reports were published earlier than the MLI negotiations took place, it remains to be seen
how much weight will be given by the courts to content which was not incorporated into the
MLI, its Explanatory Statement or into the OECD Model Convention 2017 and its commentary”.
Along the same line, one may note that even though BEPS reports may be considered as
“supplementary means of interpretation” within the meaning of article 32, their convincing
value is often considered lower than that of OECD Commentaries on the Model Convention
because they may be less accurate than the wording of the articles of tax treaties. Besides, as
the Japanese and Swedish report rightly point out, there is an important difference between
the OECD Commentary on the Model Convention and BEPS reports: the former is a consensus
document which may be subject to reservations and observations (in the absence of which
it may be assumed that a jurisdiction adheres to the content of the commentary), which is
not the case of the latter. It may however only be a question of time, as the Mexican reporter
notes, before case law recognises that final BEPS reports carry the same weight as OECD
Commentaries where they provide for a clear-cut explanation of the provisions of the covered
tax agreements, as modified by the MLI. Besides, some elements in the BEPS reports have
been incorporated into the 2017 Commentary: as far as they are concerned, the debate on the
status of BEPS reports as such for tax treaty interpretation may become partially irrelevant.
2.2.5. The “ex-post” interpretation of covered tax agreements
Branch reporters have been asked whether the modification (or the absence of modification)
of an existing tax treaty by the MLI could impact the interpretation of that treaty in its “pre-
MLI” version. A few reports answer that retroactivity of treaties (in this case, of the MLI) is
forbidden by article 28 of the Vienna Convention on the Law of Treaties. In dualist countries,
the same outcome may be reached by virtue of the non-retroactivity principle enshrined in
the constitution. A deeper analysis of the problem however reveals a more complex legal
reality, as the following examples will show.
The question first arises whether some provisions of the MLI could be regarded as having
a declaratory or clarifying nature, particularly in areas where the tax treaty interpretation
according to the Commentaries of the OECD offered already this interpretation. Along this
line, the Austrian report suggests that the wording of the preamble suggested by article 6(1)
of the MLI (which clarifies that treaties do not intend to create “opportunities for non-taxation
or reduced taxation through tax evasion or avoidance”) does not innovate with respect to
the aims of the Model Convention before the update of 2017.41 The Austrian tax authorities
take the view that this conclusion could be drawn from the Commentary on article 1 OECD
Model Convention 2014 which allows states to disregard abusive transactions such as those
entered into with the view to obtaining unintended benefits under the provisions of these
conventions. A similar reasoning may be found in the Indian and Singapore reports. It should
be noted, though, that this “retrospective” interpretation of tax treaties may only take place in
countries that follow the “guiding principle”, which is not always the case (see for instance the
41
The Austrian reporter also points out that a similar result could be achieved with regard to the application
of art. 12 MLI concerning artificial avoidance of permanent establishment status through commissionaire
arrangements and similar strategies.
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caselaw quoted in the Japanese report). It is also worth stressing that any kind of retrospective
interpretation is likely to harm the taxpayer’s legitimate expectations and should therefore
be subject to very strict conditions.
Another case in which the implementation of the MLI may help interpreting a treaty prior
to its modification arises where a state opts for a mechanism provided by the MLI which is
believed to confirm the existing content of the tax treaty or reserves a provision of the MLI,
based on the idea that the covered tax agreement already contained a similar one.
The Belgian report illustrates the first situation with respect to article 13 of the MLI
on “Artificial Avoidance of Permanent Establishment Status through the Specific Activity
Exemptions”, which offers a choice between two options regarding the conditions required
to enjoy the specific activity exemption. Belgium has opted in favour of Option B, which
preserves the exceptions for activities described in article 5(4)(a) through (d) of the Covered
Tax Agreement, irrespective of whether the activity is of a preparatory or auxiliary character.
The Belgian government stated that this confirms its current interpretation of article 5(4) of
the OECD Model Convention as it read until 2014. Beyond Belgium, § 169 of the Explanatory
Statement recalls that « some States consider that some of the activities referred to in Article
5(4) of the 2014 version of the OECD Model Tax Convention are intrinsically preparatory or
auxiliary and, in order to provide greater certainty for both tax administrations and taxpayers,
take the view that these activities should not be subject to the condition that they be of a
preparatory or auxiliary character, and that concern about inappropriate use of the specific
activity exemptions can be addressed through anti-fragmentation rules”.
Another similar example (albeit more complex) may be found in the Indian report
commenting on the choice made by India of Option C in article 5(6) of the MLI (implementation
of the credit method to eliminate double taxation in a contracting jurisdiction, except to
the extent that the provisions of the covered tax agreement allow taxation by that other
contracting jurisdiction solely because the income is also income derived by a resident of
that other contracting jurisdiction). The Indian reporter observes that “India opted for Option
C in article 5 but has not notified the CTA provisions where it follows the credit method for
relieving double taxation of its residents. Arguably, it could be the understanding of the Indian
tax authorities that the additional words inserted in that provision by article 5(6) (relieving
India of the obligation to give credit for taxes imposed by the other state solely to tax its
residents) are merely clarificatory and should apply to all treaties”. This case is particularly
interesting because it suggests that the content of non-notified covered tax agreements could
be interpreted by reference to the option chosen by the contracting jurisdiction.
As far as the second situation is concerned (i.e. a situation where a reservation made
by a contracting jurisdiction may reveal the interpretation of the covered tax agreement
prior to the MLI), complex issues are also likely to arise in practice because a reservation
may be explained in many ways: it may stem from the idea that the existing treaty needs
no modification (in which case the reservation actually reveals the interpretation of that
treaty); it may also rely on policy choices, such as a preference to implement BEPS measures
through bilateral agreements rather than through the MLI itself. Therefore, a reservation
on a provision cannot be systematically understood as an indirect means of interpretation.
In order to understand the proper meaning of a reservation, it is necessary to refer both
to the MLI and to the way reservations have been justified by the parties to the MLI. The
MLI itself provides some tools in this respect. For instance, article 6 (“Purpose of a Covered
Tax Agreement”) explicitly states that “A Party may reserve the right for paragraph 1 [new
wording of treaty preamble] not to apply to its Covered Tax Agreements that already contain
preamble language describing the intent of the Contracting Jurisdictions to eliminate double
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General report
taxation without creating opportunities for non-taxation or reduced taxation, whether that
language is limited to cases of tax evasion or avoidance (including through treaty-shopping
arrangements aimed at obtaining reliefs provided in the Covered Tax Agreement for the
indirect benefit of residents of third jurisdictions) or applies more broadly”.
One might wonder to what extent these interpretation techniques may be reconciled with
article 31.3 of the Vienna Convention which provides that “there shall be taken into account,
together with the context : (a) any subsequent agreement between the parties regarding the
interpretation of the treaty of the application of its provisions ; (b) any subsequent practice
in the application of the treaty which establishes the agreement of the parties regarding
its interpretation; (c) any relevant rules of international law applicable in the relations
between the parties”. In our view, this provision of the Vienna Convention does not apply in
the situation where the content of a covered tax agreement is interpreted in light of later in
time reservations or options because the latter are adopted in a unilateral way by the parties
to the MLI and cannot be regarded as revealing any kind of bilateral agreement between the
contracting jurisdictions of a covered tax agreement.
In conclusion, an “ex-post” interpretation of covered tax agreements is not always
excluded from a legal perspective but should be handled very carefully.
2.3. Interpretation issues relating to other tax treaties
May the MLI and the Explanatory Statement have an impact on the interpretation of tax
treaties which are not covered tax agreements? From a technical perspective, the answer is
of course negative because only covered tax agreements are modified by the MLI.
However, it is likely that in practice, many bilateral treaties concluded by signatories to the
MLI which are not covered tax agreements will undergo a “BEPS interpretative shift”, simply
because the BEPS Action Plan will serve as a general matrix for tax treaty interpretation.
Administrative practice in some countries shows that BEPS reports start being referred to in
tax audits involving the interpretation of tax treaties prior to their modifications by the MLI
(see the Mexican and Chilean reports). The German report also notes that even though the
MLI has no legal implications when a tax treaty is not a covered tax agreement, it may have
factual implications as the judiciary may pursue a uniform interpretation of double taxation
treaties even where the context is technically different.
One may equally predict that bilateral tax treaties concluded after the presentation of
the final BEPS reports, either by signatories of the MLI or by non-signatories, will necessarily
be interpreted by taking into account the BEPS material. The OECD report, established
for the purpose of these Cahiers shows that in many bilateral tax treaties concluded or
modified between 1 January 2014 and 18 June 2019, there has been a considerable uptake
of treaty-related BEPS measures. This cannot remain without effect in terms of tax treaty
interpretation, even though the legal basis for having recourse to the BEPS material will
differ from country to country:
–– In countries that are OECD members, the 2017 revised model and commentary will serve,
either as an element of context (article 31 of the Vienna Convention) or as a supplementary
means of interpretation (article 32 of the Vienna Convention) of treaties concluded later
in time, depending on the judicial approach prevailing in these countries. For treaties
concluded after the publication of the BEPS reports but before the revision of the OECD
Model and Commentaries, the question will arise whether the 2017 revision may be taken
into account for interpretation purposes – a question that will receive different answers
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depending whether the jurisdiction at stake accepts ambulatory interpretation or not.

–– In countries which are not OECD members, the 2017 revision of the model and
commentary should remain without impact as such although judicial practice shows
that even in non-member countries, OECD Commentaries may be taken into account by
tax judges because they have “persuasive value” (see the Indian report) or are considered
as “a valuable auxiliary tool” (see the Colombian report). In any case, several branch
reports point out that regardless of the actual legal value to be attributed to the OECD
Commentary as such, BEPS final reports may play a decisive role for future tax treaty
interpretation because they simply played an important role in the revision or conclusion
of bilateral tax treaties (see 2.2.4).
2.4. Tax planning after the BEPS Action Plan
Branch reporters generally agree that the BEPS Action Plan has significantly changed
practice in the sense that much greater attention is paid by practitioners to the risk incurred
by taxpayers when setting up borderline tax planning schemes. From a “sociological”
perspective, the international tax world has therefore entered a new era.
In legal terms, it is well-known that the MLI has implemented the Action 6 minimal
standard. Accordingly, all signatories are bound by this minimal standard.
It is more disputed whether the changes brought by the MLI to tax treaties are more
apparent than real. Let us explain this by looking at the impact of the new treaty preamble,
the principle purpose test and the LOB mechanism.
2.4.1. Impact of the new preamble to tax treaties
It is well-known that article 6 of the MLI modifies the preamble of covered tax agreements
by making clear that tax treaties tend “to eliminate double taxation with respect to the
taxes covered by this agreement without creating opportunities for non-taxation or reduced
taxation through tax evasion or avoidance (including through treaty-shopping arrangements
aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents
of third jurisdictions)”.
We have already noted that the extent to which this wording really alters tax treaty
interpretation is disputed (see 2.2.5 above). Several reports consider that this is not the case
when a jurisdiction already applied the OECD Commentaries on article 1 which allow tax
authorities to disregard abusive uses of tax treaties (e.g. Austria and Singapore). Other reports
take the same view but justify it differently: they rather stress that the existing tax treaties
generally expressed the objective to fight tax evasion (e.g. Chile, Colombia, Nigeria, Uruguay
and many more). The Italian report also mentions that a 2017 decision of the Supreme Court
had already considered that the object and purpose of a tax treaty would be defeated if the
treaty was used to achieve double non-taxation or to obtain undue tax benefits.
Only a few reports take a dissenting (and interesting) view by observing that the new
preamble goes much further than the previous wording of tax treaties because double non-
taxation may take place without tax evasion, or because the concept of “tax evasion” is in
itself very vague and does not necessarily coincide with analogous concepts that were used
in tax treaties. The Liechtenstein report provides an interesting example by noting that the
concept of “fiscal evasion”, which was frequently introduced in the preamble and in the title
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General report
of old treaties, is not identical to “tax evasion”, as the former was not meant to cover treaty
shopping, but related to the exchange of information agreed upon in the treaty.
At the end of the day, it seems that the actual change brought about by the MLI/BEPS
wording of the preamble to tax treaties is difficult to assess. The key issue rather seems to
be whether the general anti-avoidance rule which is to be found in article 7 of the MLI or in
other articles of bilateral tax treaties independently of the MLI, innovates with respect to
earlier practice.
2.4.2. Impact of the general anti-avoidance rule (GAAR)
In some countries, the impact of the treaty GAAR introduced through the MLI or bilateral
amendments to tax treaties is truly important because there was no legal tool available to
the tax authorities in order to disallow benefits under a tax treaty that had been abused.
The Luxembourg report states that “the adoption of the PPT is the most significant change
for Luxembourg’s double tax treaty network”. The Japanese report also underlines that the
absence of a treaty GAAR so far contrasts with the new policy. However, it observes that,
failing any experience of such a provision, it would be surprising to see a sudden change in
the tax authorities’ practice. This comment from the Japanese reporter goes together with a
more general line of comments from other reporters who note that even in countries where a
GAAR did exist, judges have often been reluctant to implement it broadly (see the Canadian,
Dutch and South African reports). One may therefore wonder whether the new rule will leave
things as they are, or whether judges will perceive it as a fundamental legal change which
must trigger genuine practical changes.
For countries in which the application of GAARS to tax treaty abuses was already a legal
reality, both in theoretical and in practical terms, the impact of the new GAAR is hardly
predictable for a number of different reasons pertaining to the pre-existing legal situation. A
first group of countries already considered that the domestic concept of abuse of law applied to
tax treaties (e.g. Argentina, France, Norway, Peru, Portugal). Another group of countries used
treaty GAARS that were, either considered as “implicit” in tax treaties (as in Switzerland), or
perfectly explicit (which does not mean that their wording was identical to the MLI one). For
both groups of countries, the question is therefore whether the new GAAR will be considered
as an innovation compared to the content of the prior domestic or treaty anti-abuse rule, or
whether judges will in practice continue to reason in the same way, albeit under the new
umbrella of the BEPS-GAAR. To a certain extent, this is a “sociological” question relating
to the judiciary’s will and ability to change its mindset and adopt a dual standard of abuse,
rather than a legal one. From a purely legal perspective, a dual standard of abuse may raise
constitutional problems. According to the Belgian Council of State, for instance, “it goes
without saying” that article 7 MLI must be applied under the same constitutional constraints
as the ordinary GAAR which applies in a purely domestic context; this example shows that
the content of article 7 MLI may well be distorted in order to be harmonised with prior law.
Such a harmonisation process between different GAARs will however not always be possible.
In some countries, abuse of law requires an exclusive tax goal, which is not the case of the
new GAAR which is based on the “principal purpose test”. Often too, the rule governing the
burden of proof of abuse in article 7 MLI does not coincide with the rule which applies in
several countries (e.g. France, Canada).
In other words, while concepts (especially vague ones) may be flexible enough to be
interpreted in a stable way notwithstanding the change in their wording, there is a limit to
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this flexibility and it is inevitable that a dual standard of abuse will take place. Taking also
account the interpretative constraints which derive from EU law (see the EU report), one can
predict that not only two but certainly three and maybe even more standards of abuse of
law will have to coexist in the future. Against this background, one may certainly welcome
initiatives directed towards more legal safety, such as the Finnish one on advanced rulings
regarding the implementation of the principal purpose test or the Dutch “international tax
certainty board”.
2.4.3. Impact of LOB provisions
The minimum standard established by Action 6 of the BEPS Action Plan includes the
possibility to agree on either complete or simplified LOB provisions (in which case they can
supplement the PPT rule). The OECD report released for the purpose of these Cahiers shows
that under paragraph 6 of article 7 of the MLI, thirteen jurisdictions have chosen to apply the
simplified LOB provision found in article 7 (paragraphs 8 to 13) of the MLI. Because the MLI
LOB is an optional provision that can only apply where contracting Jurisdictions both decided
to adopt the option, only around 50 covered tax treaties will include it.
The MLI has therefore not drive a significant increase in the recourse to LOB provisions in
the treaty network. A closer look at the branch reports however shows that, as always, things
are a bit more complex. Countries which had tax treaties without LOB provisions (or only
with treaty partners, such as the US, for whom LOB are a structural choice in treaty policy)
logically rejected the LOB in the MLI and most of them also refused to allow their treaty
partners to implement such a provision unilaterally. More strangely, some countries that
are very familiar with LOB provisions and often include them in their treaties have made the
same choice (see for instance, Japan, the Netherlands, Sweden). In some cases, this can be
justified by the potential issues raised by LOB provisions with respect to EU law (as clearly
shown by the EU report). In others, the rationale rather seems to leave more flexibility to
bilateral negotiations. However, even though the LOB mechanism is by far less widespread
than the PPT, it does not decline either, and it is interesting to note that some countries which
have not signed the MLI are ready to accept LOB provisions in their new bilateral treaties
(see the Brazilian treaty concluded with Singapore in 2018, which contains a detailed LOB
clause – albeit not identical to the Action 6 model). LOB provisions could even be on the rise
in the future, since some countries (e.g. Canada, India, Poland, Norway, Spain) which have
so far opted for the PPT mechanism, have presented this choice as an interim measure and
announced that they would attempt to negotiate the inclusion of a detailed LOB article in
their tax treaties in addition to, or in replacement of, the PPT.
Conclusion
Among the many BEPS Actions, one of the most ambitious involves modifications to the
international tax treaty network through the MLI and the 2017 revisions to the OECD Model
Tax Convention. As the Final Report on BEPS Action 15 explained, the MLI is intended to
facilitate the swift and efficient amendment of thousands of bilateral tax treaties, quickly re-
shaping or reconstructing the international tax treaty network to implement treaty-related
minimum standards and best practices formulated in the context of the BEPS Project.
With 94 signatories as of March 2020 and over 1,600 CTAs subject to modification by the
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MLI, the OECD can rightly claim a considerable measure of success – success that is properly
measured not only by treaty provisions that are directly modified by the MLI but also by the
inclusion of these modifications in bilateral tax treaties that have been concluded in light
of the BEPS project.
At the same time, it is important to note that the impact of the MLI and the 2017 revisions
to the OECD Model has, so far at least, been limited primarily to the minimum standards
on treaty abuse and dispute resolution, and that the adoption of other provisions through
the MLI and bilateral tax treaties concluded in light of the BEPS project has been much
more limited. Indeed, it is notable that the OECD report itself acknowledges that the future
multilateral efforts to modify the international tax treaty network, for example to address
challenges of the digitised economy, might “invest more time in reaching a strong prior
consensus on the underlying measures and standards to be implemented in tax treaties.”
It is also worth noting that the treaty modifications in the MLI and the 2007 revisions
to the OECD Model were not entirely unknown within the tax treaty network, but – as the
branch reports clearly demonstrate – were anticipated in a number of practices and treaty
provisions that preceded the BEPS project altogether. As a result, while the inclusion of
these provisions through the MLI or bilateral tax treaties may represent a significant change
for some jurisdictions, this is much less for other jurisdictions which had already adopted
many of these practices or treaty provisions and have used the MLI and subsequent treaty
negotiations to formalise and standardise these practices and provisions across all of their
tax treaties. While the limited adoption of provisions beyond the minimum standards thus
far suggests that this process still has some way to go, further progress can be expected
as contracting jurisdictions to the MLI withdraw reservations to particular provisions and
subsequent bilateral tax treaties include provisions based on the 2017 OECD Model.
A final question is whether the MLI can be expected to remain as a permanent “third
layer” of international tax law, or whether it will fade into historical insignificance over time
as jurisdictions renegotiate bilateral tax treaties. Although the answer to this question may
depend on whether contracting jurisdictions view the MLI as an instrument to implement
future treaty-related modifications such as those designed to address challenges of the
digitised economy, branch reports suggest that many jurisdictions regard the MLI as a
temporary instrument whose role solely is to facilitate the swift and efficient modification
of the current tax treaty network, not to supplant or permanently supplement the bilateral
tax treaty network that remains the core international law dimension of international tax law.
50
EU report Subject 1

Werner Haslehner
Volker Heydt
Eric Kemmeren
Georg Kofler
Pasquale Pistone
Stella Ravenóts-Calvo
Isabelle Richelle
Alexander Rust
Rupert Shiers
Piergiorgio Valente
EU report
Alfredo Garcia Prats, Werner Haslehner, Volker Heydt, Eric Kemmeren,

Georg Kofler, João Félix Pinto Nogueira, Pasquale Pistone, Stella Ravenóts-Calvo,
Emmanuel Raingeard de la Blétière, Isabelle Richelle, Alexander Rust,
Rupert Shiers and Piergiorgio Valente1

European Union law overlaps and interacts with both the OECD’s Base Erosion and Profit Shifting
project (BEPS) and its implementation and the member states’ tax treaties between them and
with third countries, and there is also an area where all three fields meet. This intersection of
EU law, BEPS and member states’ (mostly) bilateral tax treaties is the subject of this report.
First, it should be noted that the Union’s competence under article 115 TFEU not only
covers purely internal situations, but the Union can also use its internal competence to specify
the treatment of non-EU investors or third-country investments, and it has done so, e.g., in the
Anti-Tax Avoidance Directive (ATAD). This has potential impact also on tax treaties between
the member states and with third countries: Given the supremacy of EU (secondary) law,
domestic law implementing Directives (e.g., the ATAD) might, under certain conditions,
arguably take precedence over (pre- and post-accession) tax treaties between the member
states, even if that implementation is detrimental to taxpayers and irrespective of whether
the specific tax treaty was concluded before or after a provision of a Directive entered into
force. As for tax treaties with third countries the TFEU contains a differentiating rule, as
article 351 TFEU (ex-article 307 EC) grandfathers (only) member states’ treaties with third
countries, including tax treaties, that a member state concluded before 1 January 1958 or, for
acceding states, before the date of their accession, so that EU law arguably takes precedence
over post-accession tax treaties with third countries and, therefore, may directly affect the
relevant member state’s (but of course not the third country’s) tax system.
Second, the European Commission has issued various Recommendations with regard
to post-BEPS tax treaties of the member states. A 2012 Recommendation “on aggressive tax
planning” addressed (also) tax treaty-based double non-taxation and encouraged member
states to include an appropriate subject-to-tax clause in their double taxation conventions.
The Commission’s 2016 Recommendation dealt with the inclusion of a subject-to-tax clause in
tax treaties, the definition of “permanent establishments” to prevent their artificial avoidance
(article 5 OECD MC) and the use of an EU-compatible Principal Purposes Test (PPT), which
refers to “a genuine economic activity” as a carve-out to align the clause with the case-law of
the Court of Justice of the European Union as regards the abuse of law.
Third, the OECD BEPS project has established a (political) minimum standard regarding
measures against treaty shopping (article 7 MLI and article 29 OECD MC), and the Limitation
on Benefits (LoB) clause in particular raises issues with regard to its compatibility with the
EU fundamental freedoms. In particular, LoB clauses are confronted with continuing doubts
regarding their compatibility with the freedom of establishment. These concerns have also
1
This report was prepared within and by the members of the ECJ Task Force of the CFE Tax Advisers Europe with
the support of CFE Tax Advisers Europe’s President, Piergiorgio Valente. Although this report has been drafted
jointly within the ECJ Task Force, its content does not necessarily reflect the position of all members of the group.
IFA © 2020 53
EU report
found expression not only in various documents of the European Commission but also in the
BEPS Action 6 Final Report, where the OECD noted that some countries may have “concerns
based on EU law that prevent them from adopting the exact wording of the model provisions
that are recommended in this report”, further specifying those concerns by recognizing “that
the LOB rule will need to be adapted to reflect certain constraints or policy choices concerning
other aspects of a bilateral tax treaty between two Contracting States” such as “concerns
based on EU law”. Indeed, the “ownership clauses” in LoB provisions face scrutiny because
the company’s residence state has agreed to give better conditions to companies held by
shareholders resident in its own territory as compared to the ones resident elsewhere in
the EU and the EEA. In such circumstances and in light of the Open Skies judgments, LoB
clauses could thus be regarded as the immediate source of the discriminatory treatment.
It is, however, unclear whether other – objective or subjective – tests in a typical LoB clause
make them “EU compatible”, and if the source state’s perspective might require a different
analysis in light of the ECJ’s decision in ACT Group Litigation.
Fourth, and while the OECD BEPS project has not established a minimum standard with
regard to mandatory binding arbitration, the 2017 Tax Dispute Resolution Directive (TDRD)
has established a mechanism for binding arbitration with regard to tax “disputes”. While
the TDRD does not address double taxation outside of a tax treaty context, it is a huge step
towards the removal of double taxation caused by diverging interpretation and application
of tax treaties between member states.
Fifth, the OECD BEPS project has addressed situations of treaty-based non-taxation,
which might also raise state aid questions under article 107 TFEU in cases where the
misapplication of a tax treaty leads to “white income”. While generally “the need to avoid
double taxation” would be a basis for a possible justification, it might indeed be asked if
a double taxation convention must be interpreted, in light of article 107 TFEU, to not give
rise to “white income” (e.g., through an unconditional exemption of untaxed income) or to
“overcompensation” (e.g., through a tax sparing credit). That rather extreme path, however,
was not (yet) taken by the Commission in the McDonald’s case: Indeed, to show selectivity,
the Commission attempted merely to prove that Luxembourg had misapplied the applicable
tax treaty. It did not rely on the alternative argument that double non-taxation resulting from
the application of a tax treaty ipso facto amounts to state aid.
1. Introduction
European Union law overlaps and interacts with both the OECD’s Base Erosion and Profit
Shifting project (BEPS) and its implementation2 and the member states’ tax treaties between
them and with third countries,3 and there is also an area where all three fields meet. This
2
See specifically S. Douma, “EU Report”, in: IFA (ed.), Subject 1: Assessing BEPS: origins, standards and responses, CDFI
Volume 102a (2017), p. 65-89.
3
For comprehensive analyses see, e.g., P. Pistone, The Impact of Community Law on Tax Treaties: Issues and Solutions
(Kluwer, Alphen aan den Rijn, 2002), G. Kofler, Doppelbesteuerungsabkommen und Europäisches Gemeinschaftsrecht
(Linde, Vienna, 2007), and E. Raingeard de la Blétière, Les relations entre le droit communautaire et le droit fiscal
international: nouvelles perspectives (2008); E.C.C.M. Kemmeren, “Double Tax Conventions on Income and Capital
and the EU: Past, Present and Future”, 21 EC Tax Review (2012), p. 157-177. For a recent overview of issues see Y.
Brauner and G. Kofler, “Interaction of Tax Treaties with International Economic Laws”, in: R. Vann et. al. (eds.),
Global Tax Treaty Commentaries (GTTC), IBFD Online Collection (2019).
54
PRATS, HASLEHNER, HEYDT, KEMMEREN, KOFLER, PINTO NOGUEIRA, PISTONE,
RAVENÓTS-CALVO, RAINGEARD DE LA BLÉTIÈRE, RICHELLE, RUST, SHIERS & VALENTE
intersection of EU law, BEPS and member states’ (mostly) bilateral tax treaties is the subject
of this report. It will deal with a variety of legal and policy issues:
–– First, the relationship between EU law that implements BEPS measures, especially the
Anti-Tax Avoidance Directive (ATAD),4 and tax treaties between the member states and
with third countries needs to be explored.
–– Second, the European Commission (EC) has issued various Recommendations with regard
to post-BEPS tax treaties of the member states. These deals, inter alia, with the inclusion
of a subject-to-tax clause in tax treaties,5 the definition of “permanent establishments”
to prevent their artificial avoidance (article 5 OECD MC) and the use of an EU-compatible
PPT approach.6
–– Third, the OECD BEPS project has established a (political) minimum standard regarding
measures against treaty shopping (article 7 of the Multilateral Instrument, MLI, and
article 29 OECD MC).7 However, both a Principal Purposes Test (PPT) and a Limitation
on Benefits (LoB) clause raise issues with regard to their compatibility with the EU
fundamental freedoms and EU tax policy. These issues need to be explored in light of the
Commission’s recommendation of an EU-compatible PPT approach8 and the continuing
doubts regarding the compatibility of LoB clauses with the freedom of establishment.9
–– Fourth, the OECD BEPS project has established a minimum standard with regard to
mutual agreement proceedings (e.g., articles 16 and 17 MLI),10 but no such standard has
been agreed with regard to mandatory binding arbitration.11 In the EU, however, such
binding arbitration is foreseen both in the multilateral 1990 Arbitration Convention for
4
Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly
affect the functioning of the internal market, [2016] OJ L 193, p. 1, as amended by Council Directive (EU) 2017/952
of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries, [2017] OJ
L 144, p. 1.
5
Commission Recommendation of 6 December 2012 on aggressive tax planning, [2012] OJ L 338, p. 41 (“2012
Recommendation”).
6
Commission Recommendation (EU) 2016/136 of 28 January 2016 on the implementation of measures against tax
treaty abuse, [2016] OJ L 25, p. 67 (“2016 Recommendation”).
7
See OECD, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 – 2015 Final Report
(2015) (“BEPS Action 6 Final Report”), and also OECD, BEPS Action 6 on Preventing the Granting of Treaty Benefits in
Inappropriate Circumstances – Peer Review Documents (2017); OECD, Prevention of Treaty Abuse – Peer Review Report
on Treaty Shopping: Inclusive Framework on BEPS: Action 6 (2019).
8
treaty abuse, [2016] OJ L 25, p. 67.
9
See for critical approaches, e.g., “Taxation: Commission asks the Netherlands to amend the Limitation on
Benefits clause in the Dutch-Japanese Tax Treaty for the Avoidance of Double Taxation”, Case No 2014-4233,
MEMO/15/6006 (19 November 2015), and the Commission Working Paper on “EC Law and Tax Treaties”, DOC(05)
2306 (9 June 2005), para. 19. For a detailed discussion of that issue, also in light of ECJ, 12 December 2006,
C-374/04, ACT Group Litigation, EU:C:2006:773, see CFE ECJ Task Force, “Opinion Statement ECJ-TF 1/2018 on the
Compatibility of Limitation-on-Benefits (LoB) Clauses with the EU Fundamental Freedoms”, 58 European Taxation
(2018), p. 419-425.
10
See OECD, BEPS Action 14 on More Effective Dispute Resolution Mechanisms – Peer Review Documents (2016), and the
MAP Peer Review Reports.
11
Rules on binding arbitration are foreseen in Part VI of the MLI, and a number of countries had already committed
to a mandatory binding arbitration process; see the list of countries in OECD, Making Dispute Resolution Mechanisms
More Effective – Action 14 2015 Final Report (2015), para. 62.
55
EU report
transfer pricing disputes12 and the 2017 Tax Dispute Resolution Directive (TDRD),13 which
covers all tax “disputes”.14
–– Fifth, and finally, may the (correct) application of a tax treaty that leads to double non-
taxation trigger state aid scrutiny under article 107 TFEU? While generally “the need to
avoid double taxation” would be a basis for a possible justification,15 it might indeed be
asked if a double taxation convention must be interpreted, in light of article 107 TFEU,
to not give rise to “white income” (e.g., through an unconditional exemption of untaxed
income) or to “overcompensation” (e.g., through a tax sparing credit).16 That rather
extreme path, however, was not (yet) taken by the Commission in the McDonald’s case.17
There are also potential areas of interest that are not dealt with in this report (e.g., the
developments with regard to the automatic exchange of information outside tax treaties).
Three of those more remote issues should, however, be mentioned:
–– First, tax treaty issues were raised with regard to the EU Commission’s (failed) proposal
for a “digital services tax” (DST), i.e., a 3% tax on the turnover from certain digital services
rendered within the EU by large enterprises.18 The focal point of the discussion related
to the question whether such a tax, which was politically conceived as an “equalization
levy” to collect tax revenues otherwise out of reach of the corporate tax systems, would
nevertheless qualify as tax on “income” under article 2 OECD MC and hence put it at
variance with the member states’ treaty obligations with third countries.19
–– Second, EU law addressing BEPS issues might also lay down rules that avoid double
taxation beyond what can be achieved under tax treaties. A concrete example is the
obligation of member states to implement the exit taxation regime of article 5 ATAD
and the avoidance of a potential (time-delayed) double taxation. While the OECD MC
12
Convention 90/436/EEC on the elimination of double taxation in connection with the adjustment of transfers of
profits between associated undertakings, [1990] OJ L 225, p. 10, as amended. See also the Revised Code of Conduct
for the effective implementation of the Convention on the elimination of double taxation in connection with the
adjustment of profits of associated enterprises, [2009] OJ C 322, p. 1.
13
Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union,
[2017] OJ L 265, p. 1.
14
See, e.g., I. Richelle, “Dans les arcanes de la nouvelle directive sur le règlement des différends fiscaux”, in: J.
Wildemeersch and P. Paschalidis (eds.), L’Europe au présent ! – Liber Amicorum Melchior Wathelet (Bruylant, Brussels,
2018), p. 883-927; G. Kofler, “EU Tax Dispute Resolution Directive: The Deathblow to Double Taxation in the
European Union”, 28 EC Tax Review (2019), p. 266-269.
15
See para. 139 of the Commission’s notice on the notion of State aid as referred to in art. 107(1) of the Treaty on the
Functioning of the European Union, [2016] OJ C 262, p. 1.
16
See, e.g., W. Haslehner, “Double Taxation Relief, Transfer Pricing Adjustments and State Aid Law”, in: I. Richelle,
W. Schön & E. Traversa (eds.), Allocating Taxing Powers within the European Union (Springer, New York, 2013), p. 133,
at p. 135-143.
17
See the Commission Decision of 19 September 2018 on tax rulings SA.38945 (2015/C) (ex 2015/NN) (ex 2014/CP)
granted by Luxembourg in favour of McDonald’s Europe, C(2018) 6076 final [19 September 2018]).
18
Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the
provision of certain digital services, COM/2018/0148. No agreement on the DST was reached in December 2019
(Doc. 14885/18 FISC 510 ECOFIN 1148 [29 November 2018] and Doc. 14886/18 FISC 511 ECOFIN 1149 [29 November
2018]) and the proposal was subsequently confined to digital advertising services in March 2019 (Doc. 6873/19
FISC 135 ECOFIN 242 [1 March 2019]) and effectively given up in March 2019 (Doc. 7368/19 PRESSE 12 [12 March
2019]).
19
For a detailed discussion and further references see D. Hohenwarter, G. Kofler, G. Mayr and J. Sinnig, “Qualification
of the Digital Services Tax under Tax Treaties”, 47 Intertax (2019), p. 140-147.
56
does not provide for an automatic solution,20 article 5(5) of the ATAD solves that issue
by requiring the “import” state to give a step-up to the market value, i.e., “that Member
State shall accept the value established by the Member State of the taxpayer or of the
permanent establishment as the starting value of the assets for tax purposes […]”.
–– Third, the long-drawn discussion whether a “static” or an “ambulatory” (“dynamic”)
approach to tax treaty interpretation should be taken with regard to the Commentaries
to the OECD Model Tax Convention (OECD MC Comm.) has become even more relevant
after the BEPS-induced amendments. Since the OECD MC Comm. is changed frequently
without corresponding changes to the Model itself, it becomes relevant which version of
the OECD MC Comm. should be used when interpreting an OECD MC-based tax treaty:
The one existing at the time the concrete OECD-based tax treaty is applied (“ambulatory
approach”)21 or the one at the time the respective tax treaty was concluded (“static
approach“, “frozen meaning”22)? Quite surprisingly, the ECJ might recently have endorsed
an ambulatory (dynamic) use of the OECD MC Comm. in the “Danish beneficial ownership
cases”,23 where it found that the tax treaty notion of “beneficial ownership” is relevant
with regard to the interpretation of that concept in the 2003 Interest-Royalties-Directive
(IRD).24 In considering which guidance might be derived from the OECD MC Comm.,
the Court implicitly referred to the 1977 and 2003 versions of the OECD MC, the latter
addressing certain conduit companies. The ECJ, however, did not (explicitly)25 refer to the
2014 Update of OECD MC Comm., which brought significant changes to the treaty notion
of “beneficial owner”. This might either imply that it did not want to go “fully dynamic”
or that it did not consider it necessary. Moreover, the ECJ’s seemingly dynamic approach
might not technically be “dynamic” at all: While the IRD was proposed in 1998, it was
adopted in Council on 3 June 2003, whereas the 2003 OECD Update was already adopted
by the OECD Council on 28 January 200326 and was based on an even earlier 2002 Report,27
i.e. both were introduced before the IRD was passed. A dynamic approach, however,
20
The OECD takes the position that a tax treaty does not prevent the application of that form of taxation, but also
notes that “[t]he application of such taxes, however, creates risks of double taxation where the relevant person
becomes a resident of another State which seeks to tax the same income at a different time, e.g. […] when assets
are sold to third parties”. See OECD, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action
6 – 2015 Final Report (2015), para. 66.
21
See, e.g., Intro no. 3 and nos 33-36.1 and art. 5 no. 3 OECD MC Comm.
22
See for that position, e.g., Austrian VwGH, 31 July 1996, 92/13/0172; German BFH, 8 December 2010, I R 92/09;
Tax Court of Canada, 18 August 2006, MIL (Investments) S A v. The Queen, 2006 TCC 460; UK First Tier Tribunal, 12
April 2016, Fowler v Revenue and Customs, [2016] UKFTT 234 (TC) (“limited value”).
23
Grand Chamber of the ECJ, 26 February 2019, C-115/16, C-118/16, C-119/16 and C-299/16, N Luxembourg I, X Denmark,
C Danmark I and Z Denmark, EU:C:2019:134, and 26 February 2019, C-116/16 and C-117/17, T Danmark and Y Denmark,
EU:C:2019:135.
24
For discussion see CFE ECJ Task Force, “Opinion Statement ECJ-TF 2/2019 on the CJEU decisions of 26 February
2019 in C-115/16, C-118/16, C-119/16 and C-299/16, N Luxembourg I et al, and C-116/16 and C-117/17, T Danmark et al,
concerning the “beneficial ownership” requirement and the anti-abuse principle in the company tax directives”,
59 European Taxation (2019), p. 487-502, at p. 498.
25
It did, however, implicitly refer to a notion that was introduced by the 2014 Update of the OECD Model (the “in
substance” criterion) in explaining the indicia for abuse. See ECJ, 26 February 2019, C-115/16, C-118/16, C-119/16
and C-299/16, N Luxembourg I, X Denmark, C Danmark I and Z Denmark, EU:C:2019:134, para. 132.
26
As “The 2002 Update to the Model Tax Convention”.
27
Entitled “Restricting the Entitlement to Treaty Benefits” (adopted by the OECD Committee on Fiscal Affairs on 7
Nov. 2002).
57
EU report
would not be surprising, as the ECJ in Berlioz28 had already used the 2012 Commentaries
on article 26 of the OECD Model29 to interpret the concept of “foreseeable relevance” in
the 2011 EU Mutual Assistance Directive.30 It is, however, hard to see how such a dynamic
understanding and attribution of “relevance” would fit into the EU legal order, since
– as AG Kokott, who certainly prefers a static approach,31 succinctly pointed out – “[o]
therwise the contracting countries to the OECD would have the power to decide on the
interpretation of an EU directive”.32
2. EU law, BEPS and “Treaty Overrides”
The European Union is a “player” in international tax policy also because it has legislative
competences for binding positive tax integration, i.e., for harmonizing member states’ tax
systems: It enjoys the competences conferred on it by the EU Treaties (“principle of conferral”;
article 5 TFEU), such that competences in direct taxation within the European Union (an
“internal market” matter) are shared between the European Union and the member states
(article 4(2)(a) TFEU). Indeed, the general internal market competence that allows the
issuance of “directives for the approximation of such laws, regulations or administrative
provisions of the Member States as directly affect the establishment or functioning of the
internal market” under (now) article 115 TFEU (ex-article 94 EC) has been used as the legal basis
for a number of directives in the area of direct taxation, especially with regard to corporate
taxation: It has been claimed by the Commission for its proposals for direct tax harmonization
as early as 1969,33 and these proposals as well all those made subsequently were and are based
on what is now article 115 TFEU. While the “traditional” company tax directives (such as the
Parent-Subsidiary Directive and the Interest-Royalty Directive) focus the internal market on
the rights of the four freedoms and aim at removing tax distortions of the internal market,
to allow enterprises to adapt to the requirements of the internal market and to improve their
competitive strength at the international level, some directives approach the internal market
through the lens of “practices of tax evasion and tax avoidance”.34 This is not only true, e.g., for
the directive on mutual assistance between tax administrations in the area of exchange of
28
ECJ, 16 May 2017, C-682/15, Berlioz Investment Fund SA, EU:C:2017:373, para. 66.
29
“Update to Article 26 of the OECD Model Tax Convention and its Commentary”, adopted by the OECD Council
on 17 July 2012, and later included in the 2014 Update of the OECD MC, adopted by the OECD Council on 16 July
2014.
30
Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and
repealing Directive 77/799/EEC, [2011] OJ L 64, p. 1.
31
Opinions of AG Kokott of 1 March 2018 in C-115/16 (N Luxembourg 1, EU:C:2018:143, para. 52), C-118/16 (X Denmark,
EU:C:2018:146, para. 52), and C-119/16 (C Danmark I, EU:C:2018:147, para. 52), noting that “[a]t most, should it
transpire from the wording and history of the directive that the EU legislature was guided by the wording of an
OECD Model Tax Convention and the commentaries (available at the time) on that OECD Model Tax Convention,
a similar interpretation might be appropriate”.
32
See, e.g., Opinion of AG Kokott of 1 March 2018, C299/16, Z Denmark, EU:C:2018:148, para. 53.
33
See the proposals for the Parent-Subsidiary-Directive in COM(69)6 and for the Merger Directive in COM(69)5.
34
It has been noted already in the 1970s that these practices extend across the frontiers of member states, they
“lead to budget losses and violations of the principle of fair taxation and are liable to bring about distortions of
capital movements and of conditions of competition”, and “therefore affect the operation of the common market”.
See, e.g., the Preamble to the original Council Directive of 19 December 1977 concerning mutual assistance by
the competent authorities of the Member States in the field of direct taxation (77/799/EEC), [1977] OJ L 336, p. 15.
58
information (and its expansion in scope),35 but also for the more recent developments with
regard to substantive anti-tax avoidance measures (ATAD I and II).36
However, the Union’s competence under article 115 TFEU not only covers purely internal
situations, but the Union can also use its internal competence to specify the treatment of
non-EU investors or third-country investments.37 While some doubt that legally relevant
distortions on the internal market can arise from third-country relations at all,38 others
argue that the Union’s competence under article 115 TFEU may indeed be triggered because
differences among the member states in their treatment of third-country investments may
lead to distortions in the flow of investments and of competition in the internal market.39
The latter notion also seems to be held by the Commission.40 However, regulating the
treatment of non-EU nationals in internal legislation may create conflicts with existing
bilateral tax treaties (e.g., where a directive would ask for taxation where a treaty would
foresee exemption).41 This potential conflict becomes evident, e.g., with regard to the scope
of application and a number of substantive provisions of the ATAD I42 and II43 (and in the
35
Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and
repealing Directive 77/799/EEC, [2011] OJ L 64, p. 1 (“DAC1”), as amended.
36
For doubts as to the Union’s competence with regard to the ATAD see, e.g., I. Lazarov and S. Govind, “Carpet-
Bombing Tax Avoidance in Europe: Examining the Validity of the ATAD Under EU Law”, 47 Intertax (2019), p.
852-868.
37
G. Kofler, Doppelbesteuerungsabkommen und Europäisches Gemeinschaftsrecht (Linde, Vienna, 2007), pp. 322-323; D.
S. Smit, “The Influence of EU Tax Law on the EU Member States’ External Relations”, in: W. Haslehner, G. Kofler
and A. Rust (eds.), EU Tax Law and Policy in the 21st Century (Kluwer, Alphen aan den Rijn, 2017), p. 215, at p. 221
and pp. 223-224.
38
See, with regard to external competence, in this direction A. P. Dourado and P. Wattel in: P. Wattel, O. Marres and
H. Vermeulen (eds.), European Tax Law, Volume 1, 7th edn (Kluwer, Alphen aan den Rijn, 2018), p. 209.
39
See D. S. Smit, “The Influence of EU Tax Law on the EU Member States’ External Relations”, in: W. Haslehner, G.
Kofler and A. Rust (eds.), EU Tax Law and Policy in the 21st Century (Kluwer, Alphen aan den Rijn, 2017), p. 215 (at
p. 224).
40
See, e.g., the Proposal for a Council Directive amending Directive 2011/16/EU as regards mandatory automatic
exchange of information in the field of taxation in relation to reportable cross-border arrangements,
COM(2017)335 (noting that “the actual level of protection of the internal market is overall defined by reference to
the weakest Member State” and that, therefore, “a cross-border potentially aggressive tax planning arrangement
that engages one Member State in reality impacts on all States”).
41
It does moreover call for an examination of whether it might lead to an (exclusive) external, treaty-making
Union competence in the spheres covered by those acts. See for a detailed discussion, e.g., G. Kofler, “EU Power
to Tax: Competences in the Area of Direct Taxation”, in: C. HJI Panayi, W. Haslehner and E. Traversa (eds.), Research
Handbook on European Union Taxation Law (Edward Elgar Publishing 2020) [in print]. This issue might also come
on the political agenda in the future. See, e.g., the European Parliament resolution of 16 December 2015 with
recommendations to the Commission on bringing transparency, coordination and convergence to corporate tax
policies in the Union, P8_TA(2015)0457 (16 December 2015), point AT(i) (noting that the “the Commission should
be mandated to negotiate tax agreements with third countries on behalf of the Union instead of the current
practice under which bilateral negotiations are conducted, which produce sub-optimal results”).
42
According to its art. 1, the ATAD (Council Directive (EU) 2016/1164, [2016] OJ L 193, p. 1) “applies to all taxpayers that
are subject to corporate tax in one or more Member States, including permanent establishments in one or more
Member States of entities resident for tax purposes in a third country”, i.e., also to third-country corporations
with EU permanent establishments.
43
See Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid
mismatches with third countries, [2017] OJ L 144, p. 1, which explicitly covers third-country situations.
59
EU report
proposals for the C(C)CTB)44. And while the Union is generally careful not to interfere with
tax treaties, one example for such potential conflict are the income inclusion rules under
the controlled foreign company (CFC) regime of articles 7 and 8 ATAD. These also apply to
a “permanent establishment of which the profits are not subject to tax or are exempt from
tax in that member state”, i.e., to a low-taxed permanent establishment either located in
another member state or a third country. By referring to profits that “are not subject to tax
or are exempt from tax” in taxpayer’s member state, the ATAD might be viewed as obliging
member states to effectuate a “treaty override” where a specific tax treaty would otherwise
foresee an exemption (e.g., based on article 23A OECD MC).45
In any event, EU law has supremacy and thus prevails over domestic law and tax treaties.46
This is also true for directives under article 288(3) TFEU, which are addressed to the member
states and must be implemented by them.47 Domestic law implementing directives (e.g., the
ATAD) might therefore arguably take precedence over (pre- and post-accession) tax treaties
between the member states,48 even if that implementation is detrimental to taxpayers and
irrespective of whether the specific tax treaty was concluded before or after a provision of
a directive entered into force;49 however, it is not fully clear if states whose constitutional
framework prohibits “treaty overrides” would rather be obligated to additionally amend or
terminate their tax treaties to give full effect to the directive’s implementation into domestic
law.50 As for tax treaties with third countries, however, the TFEU contains a differentiating
rule: Article 351 TFEU (ex-article 307 EC) grandfathers (only) member states’ treaties with
third countries, including tax treaties,51 that a member state concluded before 1 January 1958
or, for acceding states, before the date of their accession. Under article 351 TFEU, the “rights
and obligations” arising from such agreements “shall not be affected by the provisions of
the Treaties”. This, a fortiori, means that EU law takes precedence over post-accession tax
treaties with third countries and, therefore, may directly affect the relevant member state’s
44
That concerns the scope of application as well as substantive provisions. Under art. 2(2) of the Commission’s
proposal for a CCTB (COM(2016)685), that Directive would, under certain conditions, also “apply to a company
that is established under the laws of a third country in respect of its permanent establishments situated in one or
more Member State”. Likewise, third-country situations are, e.g., addressed in the area of anti-abuse provisions
under arts. 59 and 61 of the Commission’s proposal with regard to CFC rules and hybrid mismatches.
45
For the substantive, third-state relevant provisions of the ATAD see the overview by W. Haslehner, “EU-US
Relations in the Field of Direct Taxes from the EU Perspective: A BEPS-Induced Transformation?”, in: P. Pistone
and D. Weber (eds.), Implementation of Anti-BEPS Rules in the EU: A Comprehensive Study (IBFD, Amsterdam, 2018),
Ch. 3.3.
46
ECJ, 5 February 1963, 26/62, van Gend & Loos, EU:C:1963:1.
47
ECJ, 17 December 1970, 11/70, Internationale Handelsgesellschaft, EU:C:1970:114.
48
See, e.g., ECJ, 14 February 1984, 278/82, Rewe, EU:C:1984:59, para. 29; ECJ, 27 September 1988, 235/87, Matteuccci,
EU:C:1988:412, para. 14 and 20-21. It should be noted, however, that an intensive discussion exists whether
taxpayers can rely on tax treaty (e.g., with regard to a reduced withholding tax rate) notwithstanding the fact
that the more beneficial reduction under domestic implementing law (e.g., implementing the withholding
tax exemption of the Parent-Subsidiary-Directive) is not granted because of abuse; the Dutch Supreme Court
recently held so and granted the reduced treaty withholding rate despite denying the withholding tax exemption
under the Dutch implementation of the Parent-Subsidiary-Directive (see Hoge Raad, 10 January 2020, 18/00219,
NL:HR:2020:21).
49
See, e.g., ECJ, 10 November 1992, C-3/91, Exportur, EU:C:1992:420, para. 8, and, with further references, G. Kofler,
Doppelbesteuerungsabkommen und Europäisches Gemeinschaftsrecht (Linde, Vienna, 2007), p. 272.
50
See for that perspective E.C.C.M. Kemmeren, Principle of Origin in Tax Conventions – A Rethinking of Models (2001),
p. 233-234.
51
See, e.g., the Commission’s Working Paper on “EC Law and Tax Treaties”, DOC(05) 2306 (9 June 2005), para. 15-19.
60
(but of course not the third country’s) tax system (again perhaps conditional on the domestic
approach “treaty overrides”). Indeed, article 351 TFEU merely aims at protecting the rights of
third states (and, vice versa, the obligations of member states) in compliance with international
public law.52 However, it also calls on member states to “take all appropriate steps to eliminate
the incompatibilities established”, including, where necessary, by denouncing the bilateral
agreement. With regard to the Union’s internal competence, the ECJ applies article 351 TFEU
not only in situations where provisions of a pre-accession tax treaty are incompatible with
the “provisions of the Treaties”, i.e., primary law,53 but also when provisions of a pre-accession
tax treaty become substantively incompatible with a subsequent directive.54 It is, however,
unclear if a member state’s post-accession tax treaties with third countries are also covered
through an analogous application of article 351 TFEU if those bilateral tax treaties have been
compliant with Union law, but subsequently became substantively incompatible with a
directive.55 Given those uncertainties and also the unclear scope of potential consequences,56
it is quite welcome that the Commission makes attempts to take tax treaties into account
in its proposals.57
52
See, e.g., ECJ, 11 March 1986, 121/85, Conegate, EU:C:1986:114, paras 24-25; ECJ, 10 March 1998, C-364/95 and
C-365/95, T. Port GmbH & Co., EU:C:1998:95, para. 60; ECJ, 16 May 2017, Opinion 2/15 (“Singapore”), EU:C:2017:376,
para. 254.
53
See, e.g., ECJ, 14 January 1997, C-124/95, Centro-Com, EU:C:1997:8, paras. 56-61.
54
ECJ, 2 August 1993, C-158/91, Jean-Claude Levy, EU:C:1993:332.
55
That issue was, e.g., explicitly left open in the Opinion of AG J. Kokott, 13 March 2008, C-188/07, Total France,
EU:C:2008:174, paras 94-98.
56
See W. Haslehner, “EU-US Relations in the Field of Direct Taxes from the EU Perspective: A BEPS-Induced
Transformation?”, in: P. Pistone and D. Weber (eds.), Implementation of Anti-BEPS Rules in the EU: A Comprehensive
Study (IBFD, Amsterdam, 2018), Chapter 3.5.2.
57
See, e.g., art. 53 of the Commission’s proposal for a CCTB, COM(2016)685, under which the switch-over clause
will “not apply where a convention for the avoidance of double taxation between the Member State in which
the taxpayer is resident for tax purposes and the third country where that entity is resident for tax purposes
does not allow switching over from a tax exemption to taxing the designated categories of foreign income”.
Another example is, e.g., the Commission’s proposal for a significant digital presence (COM(2018)147), where
art. 2 specifies that the directive would, “in the case of entities that are resident for corporate tax purposes in a
third country with which the particular Member State in question has a convention for the avoidance of double
taxation”, only apply “if that convention includes provisions similar to Articles 4 and 5 of this Directive in relation
to the third country and those provisions are in force“. Complementing this delimitation of the directive’s scope,
the Commission has simultaneously issued a recommendation to member states to (bilaterally) amend their
tax treaties with third countries and to include provisions on significant digital presences (see the Commission’s
Recommendation of 21.3.2018 relating to the corporate taxation of a significant digital presence, C(2018)1650).
Another example is art. 9(5) ATAD 2 (Council Directive (EU) 2017/952, [2017] OJ L 144, p. 1), which generally
provides that, “[t]o the extent that a hybrid mismatch involves disregarded permanent establishment income
which is not subject to tax in the Member State in which the taxpayer is resident for tax purposes, that Member
State shall require the taxpayer to include the income that would otherwise be attributed to the disregarded
permanent establishment’, but also postulates that this does not apply if “the Member State is required to
exempt the income under a double taxation treaty entered into by the Member State with a third country”.
61
EU report
3. BEPS and EU Recommendations on Post-BEPS tax treaties
3.A. Introduction
The European Commission 2016 Recommendation “on the implementation of measures

against tax treaty abuse”58 appears as the “tax treaty prong” of the 2016 EC’s comprehensive
plan against corporate tax abuse, the EU’s 2016 Anti-Tax Avoidance Package (ATAP).59 Even
though the ATAP was adopted shortly after the final BEPS reports had been issued in October
2015,60 its scope is more limited. This explains why this tax treaty prong of the ATAP does
not refer to all BEPS actions dealing with treaties (Actions 2, 6, 7 and 14) but only to those
dealing with substantive corporate tax issues: Action 6 (“Preventing the Granting of Treaty
Benefits in Inappropriate Circumstances”)61 and Action 7 (“Preventing the Artificial Avoidance
of Permanent Establishment Status”)62. The ATAP required or recommended action at all
levels: domestic, EU and international (tax treaties). For the latter, directives would not be
appropriate (namely because most of the tax treaty network of member states refers to
treaties with third countries). In this context, the 2016 Recommendation, a non-binding
(“soft”), secondary law instrument under article 288(5) TFEU, appeared to be a viable option.
The 2016 Recommendation is addressed to the EU member states. However, this one has a
vis expansiva as it aims to be applied in all treaties signed by member states (including those
signed with third countries).
It should be noted in passing that even before the BEPS project the European Commission
had issued a Recommendation “on aggressive tax planning” in 2012, in which it addressed
(also) tax treaty-based double non-taxation: It recommended that “[w]here Member States,
in double taxation conventions which they have concluded among themselves or with third
countries, have committed not to tax a given item of income, Member States should ensure
that such commitment only applies where the item is subject to tax in the other party to
that convention”. To that end the Commission encouraged member states to include an
appropriate clause in their double taxation conventions.63
58
treaty abuse, [2016] OJ L 25, p. 67 (“2016 Recommendation”).
59
See https://ec.europa.eu/taxation_customs/business/company-tax/anti-tax-avoidance-package_en (last access 31
January 2020)
60
A direct reference can be found in para 6 of the 2016 Recommendation’s preamble.
61
OECD, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 – 2015 Final Report (2015)
(“BEPS Action 6 Final Report”).
62
OECD, Preventing the Artificial Avoidance of Permanent Establishment Status, Action 7 – 2015 Final Report (2015), p. 42-
43 (“BEPS Action 7 Final Report”).
63
The wording suggested in point. 3.2 of the 2012 Recommendation reads: “Where this Convention provides that
an item of income shall be taxable only in one of the contracting States or that it may be taxed in one of the
contracting States, the other contracting State shall be precluded from taxing such item only if this item is subject
to tax in the first contracting State”. For a critical analysis see, e.g., M. Lang, “Aggressive Steuerplanung“ – eine
Analyse der Empfehlung der Europäischen Kommission”, 23 Steuer und Wirtschaft International (2013), p. 62 et seq.
62
3.B. Recommendation on an EU-compliant Principal Purposes Test
The first part of the 2016 Recommendation concerns the proposed changes regarding abuse
of treaties in the BEPS Action 6 Final Report. The Preamble of the Recommendation makes
an explicit reference to both an amendment of treaties’ preambles and an introduction of a
general anti-abuse rule based on an EU-compliant “principal purpose test” (PPT).64
Nonetheless, the “operative” part of the Recommendation ignores the preamble part and
is limited to the introduction of a general anti-avoidance rule based on a principal purpose
test (PPT). It is difficult to understand the reasons behind such a restriction. Particularly
considering that in the framework of the BEPS Action 6 Final Report, the amendment of the
treaty preamble is considered a minimum standard.65 Moreover, the operative part of the
Recommendation refers to only one of the modalities for meeting the minimum standard.
One should recall that BEPS Action 6 allowed three options to meet the minimum standard,66
i.e., (i) the inclusion of a PPT rule,67 (ii) the inclusion of a simplified Limitation-on-Benefits
(LOB) rule68 together with a PPT rule, or (iii) the inclusion of a detailed LOB rule69 together
with a provision dealing with conduit arrangements that are not dealt with in tax treaties.70
The operative part of the 2016 Recommendation proposes a deviation in what concerns
the PPT rule as proposed by the OECD. In the version recommended by the European
Commission, benefits of the convention could be granted not only where it is considered to be
“in accordance with the object and purpose” of the respective tax treaty but also71 to situations
where the claimed benefit “reflects a genuine economic activity”. The recommended wording
(with the proposed deviation in italics) is:
Notwithstanding the other provisions of this Convention, a benefit under this Convention
shall not be granted in respect of an item of income or capital if it is reasonable to conclude,
having regard to all relevant facts and circumstances, that obtaining that benefit was
one of the principal purposes of any arrangement or transaction that resulted directly or
indirectly in that benefit, unless it is established that it reflects a genuine economic activity
or that granting that benefit in these circumstances would be in accordance with the
object and purpose of the relevant provisions of this Convention.
The Commission explains that this deviation was introduced to ensure “compliance with EU
Law” and is based on the assumption that the OECD’s PPT clause “needs to be aligned with
the case-law of the Court of Justice of the European Union as regards the abuse of law”72. This
deviation raises some issues. This deviation introduces a fundamental concern that may not
have been taken into account by the European Commission: An entity or transaction may be
absolutely genuine but, nevertheless, be used to obtain a benefit that falls outside the treaty’s
object and purpose. In these cases, the OECD is clear and considers that the mere infringement
of the treaty object and purpose is enough to disqualify the entity or transaction. Understood
64
Para 3 of the 2016 Recommendation.
65
See paras 22 and 23 of the BEPS Action 6 Final Report.
66
Paras 19 and 22 of the BEPS Action 6 Final Report.
67
As mentioned in para. 26 BEPS of the BEPS Action 6 Final Report.
68
Para. 25 of the BEPS Action 6 Final Report.
69
Para. 25 of the BEPS Action 6 Final Report.
70
Paras 19 and 22 of the BEPS Action 6 Final Report.
71
The conjunction “or” indicates that this is a second prong in the application of the test.
72
Para. 7 of the Preamble of the 2016 Recommendation.
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EU report
in this sense, the deviation proposed by the European Commission would decrease the level
of protection against treaty abuse required by the OECD. Considering that all EU member
states (out of the three available options for meeting the minimum standard) opted for the
PPT, this situation leads to a conundrum. States opting for being compliant with the 2016
Recommendation would not be OECD compliant; States opting for implementing the OECD
PPT rule without deviation would not be compliant with the 2016 Recommendation. This
may be the reason why all EU member states decided to ignore the deviation proposed by
the Commission. A careful examination of the full treaty network73 reveals that no member
state includes (or plans to include) such deviation in its tax treaties.74
3.C. Recommendation on the definition of “permanent establishment”
The second part of the 2016 Recommendation concerns the BEPS proposed changes
regarding the PE definition. The preamble of the 2016 Recommendation75 expresses the need
to amend tax treaties to prevent (i) the avoidance of a permanent establishment through
commissionaire arrangements and similar structures and (ii) the “abuse” of the exceptions
concerning preparatory or auxiliary activities. Nonetheless, and unlike the previous one, this
second Recommendation makes a full and unrestricted remission to the conclusions of the
BEPS Action 7 Final Report, “encouraging” Member States to adopt them in their full treaty
network:
Member States are encouraged, in tax treaties which they conclude among themselves
or with third countries, to implement and make use of the proposed new provisions to
Article 5 of the OECD Model Tax Convention in order to address artificial avoidance of
permanent establishment status as drawn up in the final report on Action 7 of the Action
Plan to address Base Erosion and Profit Shifting (BEPS).
3.D. Follow-up by the European Commission
The Commission has not established or suggested a time frame for the implementation
of the 2016 Recommendation.76 The same occurred at the OECD level, where BEPS Actions
were generally silent in this regard, even those that included minimum standards.77 For the
Commission and at the moment of the Recommendation, it was enough to require member
states to inform it of any measures related with the implementation, stating that a report
would be published “within three years after its adoption”. As the Recommendation was
73
Using IBFD’s tax treaty research platform, available at https://research.ibfd.org/#/ (last accessed 1 January 2020)
74
The Austria-France Tax Treaty (1993) makes reference to “genuine economic reasons”. However, this cannot be
seen as an implementation of the EC recommendation since (i) the expression is used in the framework of the
provision regarding taxation of capital gains and (ii) the treaty provision dates from 1993, more than two decades
before the adoption of the recommendation.
75
Para.4. of the 2016 Recommendation.
76
Which is in line with prior recommendations in direct tax matters.
77
For instance, para. 23 of the BEPS Action 6 Final Report stated: “Since the conclusion of a new treaty and the
modification of an existing treaty depend on the overall balance of the provisions of a treaty, however, this
commitment should not be interpreted as a commitment to conclude new treaties or amend existing treaties
within a specified period of time”.
64
adopted in January 2016, this report should have been published in January 2019. However,
one year later, nothing has yet been published. The Commission requested the member
states to inform not only of the implementing measures but also of “any changes made to
such measures”. In our view, this would cover not only the measures adopted in the strict
implementation of the Recommendation but all treaty measures falling down the objective
scope of the Recommendation, i.e. any changes on the PE definition and on a treaty GAAR.
However, in the absence of further clarification and of the publication of the follow-up report,
it is difficult to understand what the Commission wanted and what it is effectively monitoring
in this regard.
4. Treaty shopping and EU law
4.A. Introduction
Countering abusive and fraudulent practices is a well-established principle of European

Union law.78 Therefore, insofar as EU law is applicable (e.g., within the scope of a company
tax directive), all member states must counter such practices, including so-called “directive
shopping”. Anti-avoidance issues also arise with regard to tax treaties, especially with regard
to treaty shopping. Treaty shopping generally involves the establishment of an intermediate
holding company in a state with tax treaties with both the state of residence of the investor,
and with that of a source of profit, in order to get a more favourable regime than if the investor
had received the profit directly. Countering such treaty shopping must, however, conform to
all other EU law principles and rules, since otherwise the primacy of European over domestic
and treaty law79 would be undermined.
These EU law obligations might, however, lead to tensions with the OECD BEPS Action
6 political “minimum standard”, which is now reflected in article 7 MLI and article 29 OECD
MC 2017.80 Indeed, both a Principal Purposes Test (PPT) and a Limitation on Benefits (LoB)
clause raise issues with regard to their compatibility with the EU fundamental freedoms and
EU tax policy that need to be explored in light of the Commission’s 2016 Recommendation of
an EU-compatible PPT approach81 and the continuing doubts regarding the compatibility of
78
See ECJ, 26 February 2019, C-115/16, C-118/16, C-119/16 and C-299/16, N Luxembourg I et al, EU:C:134, para. 101; ECJ,
26 February 2019, C-116/16 and C-117/16, T Danmark et al, EU:C:2019:135, para. 75.
79
See supra ch. 2. It should be remembered that, from the perspective of European Union law, also tax treaties are
part of national legislation. Therefore, EU member states may not invoke the application of a treaty to overcome
the primacy of supranational legislation of the European Union, except for those treaties that were signed before
its establishment, or, for the non-founding member states, their date of accession (see art. 351 (1) TFEU). In some
situations, also involving treaties concludes with non-EU member states, this has generated conflicts. In some
circumstances, the Court of Justice has obliged member states to ensure an equivalent treatment by means of
their domestic legislation (see ECJ, 21 September 1999, C-307/97, Saint-Gobain ZN, EU:C:1999:438); in others, by
de facto obliging them to either terminate the treaties, or find alternative solutions, including at EU level, in
order to remove the problem (see ECJ, 5 November 2002, C-466/98 et al., Commission v. United Kingdom et al.,
EU:C:2002:624).
80
See for that “minimum standard” already supra ch. 3.
81
treaty abuse, [2016] OJ L 25, p. 67.
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LoB clauses with the freedom of establishment.82 These concerns have also found expression
in the BEPS Action 6 Final Report, where the OECD noted that some countries may have
“concerns based on EU law that prevent them from adopting the exact wording of the model
provisions that are recommended in this report”,83 further specifying those concerns by
recognizing “that the LOB rule will need to be adapted to reflect certain constraints or policy
choices concerning other aspects of a bilateral tax treaty between two Contracting States”
such as “concerns based on EU law”.84
4.B. Limitation on Benefits clauses (LoB)
A simplified Limitation on Benefits (LoB) clause under article 7(6)-(13) MLI and article 29(1)-(7)
OECD MC has undoubted merits insofar as it outlines the qualified persons entitled to treaty
benefits alongside criteria that reflect their low exposure to treaty shopping85 and applies
objective tests and sub-tests that allow for excluding potential cases (e.g., “active conduct of
a business”, derivative benefits, companies traded on a stock exchange). However, the main
EU law compatibility issue of a simplified LoB clause is that its “ownership clause” generally
requires that resident entities only qualify for treaty benefits if at least 50% of their shares
are held by other qualified persons (e.g., individuals resident in one of the contracting states
or companies traded on a recognized stock exchange), so that other entities are excluded
unless they meet one of the other objective tests (e.g., the “active conduct of a business”
test) or receive discretionary relief. Such “ownership clause” may, however, lead to different
treatment as between EU companies controlled by residents of a contracting member state
and those controlled by residents of a non-contracting member state,86 i.e., it can deprive a
company resident in a member state, which is controlled by residents of another member
state, of entitlement to the benefits of tax treaties that it would otherwise enjoy along with
other residents of the former member state. Since the reason for that disadvantageous
treatment typically coincides with the exercise of a fundamental freedom, i.e., the right
of an EU national or EU company to establish a subsidiary in another member state, such
problems may be regarded as the source of a substantive obstacle when the application of
LoB clauses completely excludes the exercise of such right in the case of a genuine practice, or
82
See for critical approaches, e.g., “Taxation: Commission asks the Netherlands to amend the Limitation on
Benefits clause in the Dutch-Japanese Tax Treaty for the Avoidance of Double Taxation”, Case No 2014-4233,
MEMO/15/6006 (19 November 2015), and the Commission Working Paper on “EC Law and Tax Treaties”, DOC(05)
2306 (9 June 2005), para. 19. For a detailed discussion of that issue, also in light of ECJ, 12 December 2006, Case
C-374/04, ACT Group Litigation, EU:C:2006:773, see CFE ECJ Task Force, “Opinion Statement ECJ-TF 1/2018 on the
(2018), p. 419-425.
83
BEPS Action 6 Final Report, p. 14.
84
BEPS Action 6 Final Report, p. 19 (para. 21).
85
Such as in the case of individuals, contracting states, their political subdivisions, agencies and instrumentalities,
publicly traded companies and entities (including the related affiliates), non-profit organisations and recognized
pension funds, and in some cases of collective investment vehicles.
86
See already the critical approach in the Commission Working Paper on “EC Law and Tax Treaties”, DOC(05) 2306
(9 June 2005), para. 19.
66
of a procedural one, when their application makes it more burdensome.87 The compatibility
issue therefore does not affect the goal of LoB clauses, which also matters for EU law, but
rather how this type of instrument achieves such goal and, more specifically, the impact
that the instrument may have on the exercise of genuine rights protected by EU primary law.
Despite the extremely diversified range of LoB clauses, all of them share one structural
problem, which has prompted the European Commission to a critical position already in
200588 and to initiate an investigation on the compatibility of an LoB clause with EU law
in a case concerning the tax treaty between Japan and the Netherlands in 2015.89 Indeed,
the Reasoned Opinion of the EU Commission finds this specific problem in the fact that the
Netherlands has agreed to give better conditions to companies held by shareholders resident
in its own territory and to companies traded on its stock exchanges as compared to the ones
resident or traded elsewhere in the EU and EEA. In such circumstances, LoB clauses are thus
to be regarded as the immediate source of the discriminatory treatment. The Commission
argues:
The European Commission asked the Netherlands today to amend the Limitation on
Benefits (LOB) clause in the Dutch-Japanese Tax Treaty for the Avoidance of Double
Taxation, which entered into force on 1 January 2012. The Commission believes that,
on the basis of previous cases such as C-55/00 Gottardo and C-466/98 Open Skies, a
Member State concluding a treaty with a third country cannot agree better treatment
for companies held by shareholders resident in its own territory, than for comparable
companies held by shareholders who are resident elsewhere in the EU/EEA. Similarly,
it cannot agree better conditions for companies traded on its own stock exchange than
for companies traded on stock exchanges elsewhere in the EU/EEA. However, under the
current terms of the LOB clause, some entities are excluded from the benefits of the tax
treaty. This means that they suffer higher withholding taxes on dividends, interest and
royalties received from Japan than similar companies with Dutch shareholders or whose
shares are listed and traded on ‘recognised stock exchanges’, which include certain EU
and even third-country stock exchanges.
The specific consequence of the application of the LoB clause is therefore that the exclusion
of such entities from the application of the double tax treaty makes the interest and royalties
received from Japan by foreign-owned Dutch companies more heavily taxed than they
would otherwise be, thus producing potential dissuasive effect on the exercise of the right
of establishment of EU nationals into the Netherlands, or of the free movement of capital
even in relations with third countries.90 Indeed, and as the Commission has pointed out,
87
For a detailed analysis and further references see CFE ECJ Task Force, “Opinion Statement ECJ-TF 1/2018 on the
(2018), p. 419-425.
88
Commission Working Paper on “EC Law and Tax Treaties”, DOC(05) 2306 (9 June 2005), para. 19.
89
See “Taxation: Commission asks the Netherlands to amend the Limitation on Benefits clause in the Dutch-
Japanese Tax Treaty for the Avoidance of Double Taxation” in the Commission’s Fact Sheet “November
infringements package: key decisions”, MEMO/15/6006 (19 November 2015). Until present, there has been no
development in this investigation, but the Commission has not closed this file.
90
While the entitlement to the right of establishment only operates in favor of EU nationals and within the
EU internal market, EU law protects free movement of capital under art. 63 ff. TFEU regardless of nationality
within the EU internal market and, on a unilateral basis, also in relations with third countries regardless of the
nationality.
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there is a structural similarity between LoB clauses and the nationality clauses contained in
air traffic agreements concluded by several EU member states with the US in the pre-Open
Skies era, i.e., before the EU liberalization of air traffic routes and the conclusion of an EU-
US agreement,91 which the Court of Justice has regarded as incompatible with the EU right
of establishment.92 If one were to follow that line of reasoning, the issue is that a member
state may not agree in its treaties with third countries a better treatment for companies held
by shareholders resident in its own territory, than for comparable companies held by non-
resident ones, and that such a situation would still prevail if certain “equivalent beneficiaries”
under a so-called “derivative benefits” clause were included. Notwithstanding this, however,
it is also under discussion whether other – objective or subjective – tests in a typical LoB clause
make them “EU compatible”.
A similar yet different compatibility issue may arise if the state of source is an EU member
state that effectively deprives residents of the other contracting state of the entitlement to
the benefits of the tax treaty based on an “ownership clause”, i.e., based on whether they are
controlled by qualifying shareholders of either contracting state. This issue was addressed
by the ECJ in the rather complex ACT Group Litigation case,93 with regard to the operation of
the “ownership test” of the LoB in the Netherlands-United Kingdom tax treaty, according to
which certain benefits granted by the source state (i.e., the UK) were denied to the recipient
of a dividend in the residence state (i.e. a Netherlands entity) because its sole shareholder
was resident in a third member state (i.e. Germany). The ECJ dealt with this issue in light of a
horizontal discrimination analysis and held that the LoB clause at issue did not infringe upon
the freedom of establishment:
Thus, the grant of a tax credit to a non-resident company receiving dividends from a
resident company, as provided for under a number of DTCs concluded by the United
Kingdom, cannot be regarded as a benefit separable from the remainder of those
DTCs, but is an integral part of them and contributes to their overall balance (see, to
that effect, [ECJ, 5 July 2005, C-376/03, D, EU:C:2005:424], paragraph 62). […] The same
applies to the provisions of the DTCs which make the grant of such a tax credit subject
to the condition that the non-resident company is not owned, directly or indirectly, by a
company resident in a Member State or a non-member country with which the United
Kingdom has concluded a DTC which does not provide for such a tax credit. […] Even
where such provisions extend to the situation of a company which is not resident in one
of the contracting Member States, they apply only to persons resident in one of those
Member States and, by contributing to the overall balance of the DTCs in question, are
an integral part of them.94
While it is still not entirely clear that the ECJ in ACT Group Litigation wanted to give carte blanche
to source member states to apply “ownership clauses”,95 other precedents addressing the
91
The EU-US Open Skies Agreement was signed in Washington DC on 30 April 2007.
92
See the (non-tax) judgments ECJ, 5 November 2002, C-466/98 et al., Commission v. United Kingdom et al.,
EU:C:2002:624 ff. Furthermore, the EU Commission has also invoked another non-tax law precedent, namely
ECJ, 15 January 2002, C-55/00, Gottardo, EU:C:2002:16.
93
ECJ, 12 December 2006, C-374/04, ACT Group Litigation, EU:C:2006:773.
94
ECJ, 12 December 2006, C-374/04, ACT Group Litigation, EU:C:2006:773, paras 88-90.
95
For critical discussion see, e.g., CFE ECJ Task Force, “Opinion Statement ECJ-TF 1/2018 on the Compatibility of
Limitation-on-Benefits (LoB) Clauses with the EU Fundamental Freedoms”, 58 European Taxation (2018), p. 423-425.
68
residence member state that has agreed to them, such as Gottardo96 and Open Skies,97 rather
clearly imply that those clauses might indeed be considered a relevant discrimination and
potential infringement of the freedom of establishment that would require a justification,
e.g., based on the attempt to counter abusive practices, and must be proportionate. As for
the latter, the principle of proportionality requires a case-by-case analysis, which gives the
taxpayers a right to prove the genuine nature of their transactions and accordingly protects
the exercise of their rights, as granted by EU law. This prevents EU law from using irrefutable
(so-called iuris et de iure) presumptions, for their overkill effects on genuine practices,98 and
limits the rebuttable (so-called iuris tantum) ones to the cases in which the rule of experience
indicates the likelihood of an abusive practice.99 Moreover, the exercise of genuine rights
may not become more burdensome as an indirect consequence of their proximity to abusive
practices, since this would be tantamount to not protecting such rights at all.
Another issue is not just whether the standard of article 7 MLI and article 29 OECD MC is
compatible with EU law, but also and especially how tax authorities will act in such a context.
This also applies for the “discretionary relief clause” contained in the text of the LoB clause
(article 29(6) OECD MC), which may not be interpreted as giving tax authorities absolute
powers, including that to subordinate the entitlement to treaty benefits to conditions that
are in fact impossible to meet. By contrast, this clause is an instrument for them to also grant
the treaty benefits when the tests of the LoB would otherwise fail to do so. Insofar as we
interpret the clause in line with the requirements of the rule of law, which play a particularly
important role under EU law, tax authorities not only have the power to grant relief under
the treaty, but also the obligation to do so.
4.C. Principal Purposes Test (PPT)
The Principal Purposes Test (PPT) under article 7(1) MLI and article 29(9) OECD MC allows
tax authorities to reject the entitlement to treaty benefits in the presence of grounds that
indicate the existence of an abusive practice, i.e., “if it is reasonable to conclude, having
regard to all relevant facts and circumstances, that obtaining that benefit was one of the
principal purposes of any arrangement or transaction that resulted directly or indirectly in
that benefit, unless it is established that granting that benefit in these circumstances would
be in accordance with the object and purpose of the relevant provisions of this Convention”.
If the application of this measure is based on an effective rule of experience that indicates
the abusive nature of a given practice and allows the taxpayer to prove the contrary, it may
in principle fit within the justification admitted by the Court of Justice for admitting the
restrictions on the exercise of fundamental freedoms. It has, however, been addressed by
the Commission’s 2016 Recommendation100 and might indeed raise a number of concerns
because it arguably deviates from the standard of abuse established under EU law. On the
one hand, the application of this measure allows for a certain degree of flexibility, which is
compatible with a proportionate reaction to abusive practices and thus may help reducing
the overkill effects on the genuine exercise of rights. On the other hand, the PPT takes an
96
ECJ, 15 January 2002, C-55/00, Gottardo, EU:C:2002:16.
97
ECJ, 5 November 2002, C-466/98 et al., Commission v. United Kingdom et al., EU:C:2002:624.
98
See ECJ, 18 December 1997, C-286/94, C-340/95, C-401/95 and C-47/96, Garage Molenheide, EU:C:1997:623.
99
See ECJ, 28 October 1999, C-55/98, Bent Vestergaard, EU:C:1999:533.
100
See supra ch. 3.
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approach that deviates from established EU anti-abuse doctrine: First, the “reasonableness
test” is not per se a problem if it is understood that it requires the tax authorities to give
proper evidence and effectively allows taxpayers to give evidence to the contrary without
making the burden of proof too difficult or using unlimited discretionary powers. Second,
the standards of tolerance for treaty shopping under the PPT (“one of the principal purposes”)
may be in fact lower than the ones established by settled case law of the ECJ (“essential
purpose”) to justify restrictions on the exercise of fundamental freedoms for countering
abusive practices.
It is, however, not yet clear if those concerns merely relate to policy or if they may amount
to a question of EU compatibility with regard to the fundamental freedoms. On the one
hand, one might argue the latter for cases where the application of the PPT amounts to a
non-discriminatory restriction such as at issue in Deutsche Shell101 or where differences in the
application of countering abuse in the domestic and cross-border scenarios lead to a de facto
discrimination.102 On the other hand, one might argue that the PPT per se can never lead to
a relevant restriction: It merely denies a treaty benefit so that taxation is (again) exclusively
governed by domestic law, and if such domestic law is non-discriminatory the cross-border
situation is not treated worse than a comparable domestic transaction; likewise, even if the
denial of treaty benefits would lead to double taxation, this would not infringe upon the
freedoms.103 It will, however, eventually be for the Court to decide that matter if so asked.
5. Beyond the MLI: binding dispute resolution
Juridical double taxation “is the most serious obstacle there can be to people and their
capital crossing internal borders”.104 However, outside the limited scope of the company tax
directives,105 EU law neither provides for explicit substantive mechanisms to avoid juridical
double taxation of income or capital between member states106 nor has the ECJ so far found
101
ECJ, 28 February 2008, C-293/06, Deutsche Shell, EU:C:2008:129.
102
In those situations, proportionality would require a case-by-case analysis that gives the taxpayers a right to prove
the genuine nature of their transactions and accordingly protects the exercise of their rights, as granted by EU
law.
103
ECJ, 14 November 2006, C-513/04, Kerckhaert-Morres, EU:C:2006:713; see also, e.g.,ECJ, 12 February 2009, C-67/08,
Block, EU:C:2009:92, ECJ, 19 September 2012, C-540/11, Levy and Sebbag, EU:C:2012:581, and also EFTA Court, 7 May
2008, E-7/07, Seabrokers, para. 49 et seq.
104
Opinion of Advocate General Colomer, 26 October 2004, C-376/03, D, EU:C:2004:663, para. 85.
105
Such as the avoidance of juridical double taxation of inter-company dividends under the Parent-Subsidiary
Directive (Council Directive 2011/96/EU) and of inter-company interest and royalty payments under the Interest-
Royalties-Directive (Council Directive 2003/49/EC). Also, the step-up provided in art 5(5) of the ATAD (Council
Directive (EU) 2016/1164) is a measure to avoid – time delayed – double taxation of the same capital gain.
106
The only provision directly dealing with double taxation was former art. 293(2) of the EC Treaty, which urged the
member states, “so far as is necessary, [to] enter into negotiations with each other with a view to securing for
the benefit of their nationals ... the abolition of double taxation within the Community”. That provision was not
directly applicable to the benefit of taxpayers (ECJ, 12 May 1998, C-336/96, Gilly, EU:C:1998:221, para. 15) and was
also subject to intense debate with regard to its interpretation. Art. 293 of the EC Treaty was, however, repealed
by the Treaty of Lisbon (Point 280, [2007] OJ C 306/1) and speculation as to the reasons for its repeal and its effect
are ongoing.
70
that the fundamental freedoms offer relief.107 It is nevertheless common ground that the
abolition of double taxation is, still,108 an objective of the TFEU and even a “priority objective”
of the Union,109 as the overlap of taxing jurisdictions may result in distortions of the internal
market.110 In light of the un-harmonized international tax systems of the member states
and their competence to conclude bi- and multilateral tax treaties, the Commission’s focus
has always been on procedural mechanisms to avoid those distortions: As early as 1976, the
Commission had tabled a proposal for a directive regarding an arbitration procedure for
the elimination of double taxation resulting from transfer pricing adjustments,111 but this
proposed directive was not adopted by the Council due to member states’ resistance, largely
on sovereignty concerns.112 The member states have, instead, concluded the multilateral 1990
Arbitration Convention,113 which is based on former article 293 of the EC Treaty (ex-article 220
EEC Treaty). This multilateral convention deals exclusively with the – narrow, but extremely
important – issues of transfer pricing and profit attribution and has also been made workable
in practice through the guidance developed by the EU’s Joint Transfer Pricing Forum (JTPF).114
Despite the OECD’s work in that area, especially in the framework of Action 14 of the BEPS
project and Part V of the Multilateral Instrument (MLI), there are still many situations where
double taxation can persist, even within the European Union.
Accordingly, from an EU perspective, the Commission has long viewed the lack of an overall
binding dispute resolution procedure for intra-EU situations as an issue to be addressed for
both internal market reasons and global competitiveness.115 Having announced further work
107
The Grand Chamber of the ECJ, in its 2006 decision in Kerckhaert-Morres, i.e., at a time when (old) art. 293(2)
EC Treaty was still part of primary law, declined to hold juridical double taxation to be incompatible with the
fundamental freedoms (ECJ, 14 November 2006, C-513/04, Kerckhaert-Morres, EU:C:2006:713), and the Court
has since confirmed that conclusion at a number of occasions (see, e.g.,ECJ, 12 February 2009, C-67/08, Block,
EU:C:2009:92, ECJ, 19 September 2012, C-540/11, Levy and Sebbag, EU:C:2012:581, and also EFTA Court, 7 May 2008,
E-7/07, Seabrokers, para. 49 et seq.).
108
See ECJ, 12 September 2017, C-648/15, Austria v. Germany, EU:C:2017:664, para. 26, noting “the beneficial effect
of the mitigation of double taxation on the functioning of the internal market that the European Union seeks
to establish in accordance with Article 3(3) TEU and Article 26 TFEU”. In the past, the ECJ specifically referred
to – now repealed – art. 293(2) of the EC Treaty to establish that “the abolition of double taxation is one of the
objectives of the Community to be attained by the Member States” (see, e.g., ECJ, 12 May 1998, C-336/96, Gilly,
EU:C:1998:221, para. 16, and ECJ, 19 January 2006, C-265/04, Bouanich, EU:C:2006:51, para. 49).
109
See, e.g., “Taxation in the Single Market”, Periodical 6/1990, 25.
110
Discussion paper for the Informal Meeting of Economic and Financial Affairs Council (ECOFIN) Ministers,
Taxation in the European Union, SEC(96)487 final, 7 (20 March 1996).
111
Proposal for a Council Directive on the elimination of double taxation in connection with the adjustment of
transfers of profits between associated enterprises (arbitration procedure), COM (76) 611 final (25 November
1976) = [1976] OJ C 301/4.
112
The proposal was eventually withdrawn two decades later; see [1997] OJ C 2/6.
113
Convention 90/463/EEC on the elimination of double taxation in connection with the adjustment of profits of
associated enterprises, [1990] OJ L 225/10, as amended.
114
For a detailed overview on the Convention and the JTPF’s work see, e.g., G. Kofler, “Tax Disputes and the EU
Arbitration Convention”, in: E. Baistrocchi (ed.), Resolving Tax Treaty Disputes: A Global Analysis, Cambridge
University Press 2017, 205-236.
115
The following brief analysis is largely based on G. Kofler, “EU Tax Dispute Resolution Directive: The Deathblow
to Double Taxation in the European Union”, 28 EC Tax Review (2019), p. 266-269.
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in this area in the early 2010s,116 the Commission made a proposal for a directive on dispute
resolution in 2016,117 which was swiftly adopted by the Council.118 This directive provides a
binding procedural mechanism for resolving disputes between member states regarding
EU resident taxpayers (article 2(1)(d)) when those disputes arise from the interpretation
and application of agreements and conventions (i.e., tax treaties between member states
and the EU Arbitration Convention) that provide for the elimination of double taxation of
income and, where applicable, capital;119 it hence does not apply to double taxation created
by the interaction of domestic laws (e.g., the implementation of the ATAD), if the dispute
is not based on the “interpretation and application” of a tax treaty. The directive had to
be implemented by member states by 30 June 2019 and it “shall apply to any complaint
submitted from 1 July 2019 onwards relating to questions of dispute relating to income or
capital earned in a tax year commencing on or after 1 January 2018”.
The directive contains strict timelines and detailed rules for initiating the procedure
(article 3), for the MAP and for arbitration (articles 4 to 14), the composition of the arbitration
panels (articles 8, 9 and 10), details on the rules of functioning, the costs and the procedure
regarding evidence etc (article 11, 12 and 13),120 the opinion of the arbitration panel (article
15), a number of taxpayer safeguards to keep the process moving,121 exclusions (e.g., for cases
of penalties regarding tax fraud under article 16(6)), rules regarding the interaction with
national proceedings and dispute resolution under tax treaties (article 16) and simplifications
for individuals and small undertakings (article 17); the final decision rests with the competent
authorities (which can deviate from the arbitration panel’s opinion), but “if they fail to reach
an agreement as to how to resolve the question in dispute, they shall be bound by that
opinion” (article 15). Moreover, a resolution requires that the taxpayer agrees and renounces
the right to any other remedy or terminates any action, and in that case the decision must
be implemented “irrespective of any time limits prescribed by the national law“(articles 4(2),
15(4)).
116
See, e.g., the Commission’s Communication on “Double Taxation in the Single Market”, COM(2011) 712 final (11
November 2011), at p. 11, where it is stated that the “Commission sees a need to analyse the improvements that
can be made to the procedures for the resolution of double taxation disputes within the EU. In particular, the
possibility of a mechanism to effectively and swiftly resolve these disputes in all areas of direct taxation should
be explored”.
117
Proposal for a Council Directive on Double Taxation Dispute Resolution Mechanisms in the European Union,
COM(2016)686 (25 October 2016).
118
Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union,
[2017] OJ L 265/1.
119
See, e.g., the comprehensive analysis by H. M. Pit, Dispute Resolution in the EU (IBFD 2018). For a comparison
between the OECD and the EU approaches see S. Govind, “The New Face of International Tax Dispute Resolution:
Comparing the OECD Multilateral Instrument with the EU Dispute Resolution Directive”, 27 EC Tax Review (2018),
309-324.
120
The Commission has issued standard rules of functioning for the Advisory Commission and the Alternative
Dispute Resolution Commission in case the competent authorities either have not agreed upon such rules or
only done so incompletely. See Commission Implementing Regulation (EU) 2019/652 of 24 April 2019 laying down
standard Rules of Functioning for the Advisory Commission or Alternative Dispute Resolution Commission and
a standard form for the communication of information concerning publicity of the final decision in accordance
with Council Directive (EU) 2017/1852, [2019] OJ L 110/26. For an overview see also, e.g., K. Perrou, “Taxpayer Rights
and Taxpayer Participation in Procedures Under the Dispute Resolution Directive”, 47 Intertax (2019), p. 715–724.
121
The directive contains taxpayer safeguards throughout the procedure, e.g., recourse to the Advisory Commission
where not all member states involved accept a complaint (art. 6) or appointment by competent courts or a
national appointing body should the competent authorities not set up an arbitration panel in time (art. 7).
72
The directive’s substance scope covers “disputes between member states when those
disputes arise from the interpretation and application of agreements and conventions that
provide for the elimination of double taxation of income and, where applicable, capital”.122
It hence requires the existence of a tax treaty (or the Arbitration Convention) between the
member states. This is, however, not a high hurdle: Out of the 378 possible bilateral tax treaty
relationships between the (current) 28 member states, only five are not covered by a tax
treaty.123 Moreover, and unlike the Commission proposal,124 the directive applies to all kinds
of income tax disputes, whether business or individual. However, the directive only addresses
income and capital taxation, but neither extends to inheritance and gift taxation or double
taxation with other taxes (e.g., car registration taxes, consumption taxes etc),125 i.e., areas
where few tax treaties exist. However, it is a significant progress as compared with bilateral
mechanisms given the fact that the directive clearly covers disputes in situations involving
three or more member states, a typical “risk area” for unrelieved double taxation.126
The directive covers “disputes” between member states that arise “from the interpretation
and application” of tax treaties or of the Arbitration Convention. Those disputes certainly cover
cases of “double taxation” within the meaning of article 2(1)(c) of the TDRD but are not limited
to those. Rather, the directive extends to disputes beyond issues of double taxation, e.g., with
regard to the application of non-discrimination provisions. However, the directive deviates
from article 25 OECD MA in that its article 2(1)(c) specifically defines “double taxation” as “the
imposition by two or more Member States of taxes covered by an agreement or convention
referred to in article 1 in respect of the same taxable income or capital when it gives rise to
either: (i) an additional tax charge; (ii) an increase in tax liabilities; or (iii) the cancellation or
reduction of losses that could be used to offset taxable profits”. What seems hence not to be
included in the directive’s notion of “double taxation” are situations of so-called “virtual double
taxation”, where a tax treaty would, in principle, require exemption even if the other state
does not tax the income (e.g., because of an exemption under domestic law or an unresolved
122
This is broader and at the same time narrower than the Commission’s proposal: The proposal would have applied
“to all taxpayers that are subject to one of the taxes on income from business listed in Annex I” – i.e., the Member
States’ income and corporate taxes –, “including permanent establishments situated in one or more Member
State whose head office is either in a Member State or in a jurisdiction outside the Union”, i.e., irrespective of the
existence of a double taxation convention between the member states (making, instead, “international practice
in matters of taxation such as the latest OECD Model Tax Convention” the yardstick for arbitration).
123
As of January 2020, those are the relations between Cyprus and Croatia (the 1985 treaty was terminated); Cyprus
and the Netherlands (with a treaty initialled in September 2019); Denmark and France (the 1957 treaty was
terminated effective January 1, 2009, and a new treaty is currently under negotiation); Denmark and Spain (the
1972 treaty was terminated effective 1 January 2009); and Finland and Portugal (the 1970 treaty was terminated
effective 1 January 2019, and the 2016 treaty is not yet in force).
124
The Commission’s proposal with its limitation to “income from business” raised criticism from the European
Parliament which (quite correctly) pointed out that the impact of “[d]isputes on the taxation of income, such
as pensions and salaries” on individuals “can be significant”. See Amendment 16 of the European Parliament
legislative resolution of 6 July 2017 on the proposal for a Council directive on Double Taxation Dispute Resolution
Mechanisms in the European Union (P8_TA(2017)0314), [2018] OJ C 334/266.
125
There is hence ample room for expansion as to the taxes covered by the EU dispute resolution mechanism.
See, e.g., the Commission’s Communication on “Tackling cross-border inheritance tax obstacles within the
EU”, COM(2011) 864 final (15 December 2011), and the Report of Commission’s expert group on “Ways to tackle
inheritance cross-border tax obstacles facing individuals within the EU” (December 2015).
126
See, e.g., art 2(1)(c), speaking of the imposition of taxes “by two or more Member States”, and similar language
throughout the Directive.
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negative conflict of qualification).127 Conversely, situations of conflicts of qualification, where,

e.g., “one Member State interprets a source of income as salary while the other Member State
interprets the same source of income as profit”, would be covered by that definition,128 and
relevant “double taxation” arguably also exists where member states tax the same income but
in different taxable years. Likewise, classical economic double taxation in transfer pricing and
profit attribution cases (i.e., the object also of the EU Arbitration Convention) seems to fall
squarely within the directive’s notion of “double taxation”, as it does not require that double
taxation occurs in the hands of the same taxpayer. That said, the distinction of whether a
“dispute” involves “double taxation” is relevant: This is because, under article 16(7), a member
state may “deny access to the dispute resolution procedure under Article 6 on a case-by-case
basis where a question in dispute does not involve double taxation”.129 However, that case-
by-case exclusion is limited to the arbitration procedure, whereas access to the directive’s
mutual agreement procedure remains available for all relevant “disputes”.
In line with the concept of the Arbitration Convention, the primary tool for dispute
resolution after a failed Mutual Agreement Proceeding is arbitration by a so-called “Advisory
Commission”. As said above, the directive provides a detailed set of rules on procedure, timing,
appointments, information, evidence, hearings, costs etc (and the Commission has further
drafted standard rules of functioning130), and – in article 15 – also determines that the Advisory
Commission has to issue a – reasoned – independent “opinion” in writing (which may or may
not be accepted by the competent authorities)131. This opinion is to be based “on the provisions
of the applicable agreement or convention […] as well as on any applicable national rules”.
While an independent opinion might certainly have its benefits, a recent international trend
is to agree on the so-called “final offer”, “last best offer” or “baseball” arbitration,132 where the
arbitration panel (only) has to decide between competing proposals made by the competent
authorities (e.g., a specific monetary amount of income or expense). This implicitly forces the
competent authorities to take reasonable and well-considered positions in their submissions,
while also barring the arbitration panel from simply “splitting the difference”.133 That said,
127
For a detailed analysis of this definition of double taxation and further nuances see R. Ismer, “Was ist
internationale Doppelbesteuerung?”, in: R. Ismer, E. Reimer, A. Rust and Ch. Waldhoff (eds.), Territorialität und
Personalität, Festschrift für Moris Lehner, Otto Schmidt 2019, 27-46.
128
The European Parliament refers to that situation as “economic double taxation”. See Amendment 16 of the
European Parliament legislative resolution of 6 July 2017 on the proposal for a Council directive on Double
Taxation Dispute Resolution Mechanisms in the European Union (P8_TA(2017)0314), [2018] OJ C 334/266.
129
See for that compromise of keeping a (broader) scope of the directive and permitting member states to deny
access to the dispute resolution procedure on a case-by-case bases paras 8-10 in Doc. 9011/17 FISC 99 ECOFIN 345
(12 May 2017).
130
See Commission Implementing Regulation (EU) 2019/652, [2019] OJ L 110/26.
131
Under art. 15, it is for the competent authorities to agree on how to resolve the question in dispute within six
months after the opinion. The competent authorities may take a decision which deviates from the opinion of the
Advisory Commission or Alternative Dispute Resolution Commission. However, if they fail to reach an agreement
as to how to resolve the question in dispute, they shall be bound by that opinion.
132
It should be noted, e.g., that under Part V of the OECD’s Multilateral Instrument (MLI) as of December 2019, 22
out of the currently 30 States opting for mandatory binding arbitration have chosen “baseball arbitration” (these
are Australia, Austria, Barbados, Belgium, Canada, Curacao, Denmark, Fiji, Finland, France, Germany, Ireland,
Italy, Liechtenstein, Luxembourg, Mauritius, Netherlands, New Zealand, Singapore, Spain, Switzerland and the
UK, whereas Andorra, Greece, Japan, Malta, Papa New Guinea, Portugal, Slovenia, and Sweden have opted out
of baseball arbitration).
133
For a brief analysis see, e.g., N. Bravo, “Mandatory Binding Arbitration in the BEPS Multilateral Instrument›,
Nathalie Bravo”, 47 Intertax (2019), p. 693, at p. 698-699.
74
the directive gives member states a tool to opt for “baseball arbitration” in that it foresees, in
article 10, the setting up of an “Alternative Dispute Resolution Commission” (ADRC) to resolve
the dispute instead of an Advisory Commission. Indeed, the ADRC may apply “any dispute
resolution process or technique”, “including the ‘final offer’ arbitration process (otherwise
known as ‘last best offer’ arbitration)”, hence enabling the choice of a streamlined process.
Also, “baseball arbitration” does not necessarily mean that the arbitration panel must be
prevented from giving reasons for the decision, although article 23(1)(c) of the OECD’s MLI
takes the clear position that the arbitration panel’s decision “shall not include a rationale or
any other explanation of the decision”; in contrast, the directive would certainly allow for
“baseball arbitration with reasons”.134 Moreover, the ADRC is not limited to ad hoc arbitration,
but can also have a permanent nature (a so-called “Standing Committee”), which could be a
real chance for a permanent arbitration structure135 or even serve as a first step towards the
establishment of a European tax court.136
In summary, the TDRD certainly has a number of shortcomings and raises questions as to
taxpayer’s fundamental rights,137 but it nevertheless is a welcome and potentially huge step
to prevent persisting double taxation in the European Union and might even open further
avenues for the establishment of a permanent arbitration structure.138 Moreover, and even if
some technicalities might need to be worked out in practice, the mere existence of a legally
enforceable, tightly timed arbitration mechanism will certainly have a positive impact on the
member states’ willingness to speedily resolve double taxation issues in mutual agreement
proceedings before cases are taken out of their hands and into independent arbitration.
6. Treaties, non-taxation and state aid?
A further crucial question from an EU law perspective concerns whether double non-taxation
amounts to illegal state aid under article 107 TFEU.139 It is clear that any exemption from
taxation normally imposed by a taxpayer’s residence state amounts to a relevant “advantage”
134
See, however, J. F. Avery Jones, “Types of Arbitration Procedure”, 47 Intertax (2019), p. 674, at p. 675, who considers
“baseball arbitration with reasons” as “the best of both worlds”.
135
See, e.g., the discussion in para. 14-17 in Doc. 9011/17 FISC 99 ECOFIN 345 (12 May 2017), and the ideas on a
permanent structure developed by S. Piotrowski, R. Ismer, P. Baker, J. Monsenego, K. Perrou, R. Petruzzi, E. Reimer,
F. Serrano Antón, L. Stankiewicz, E. Traversa and J. Voje, “Towards a Standing Committee Pursuant to Article 10
of the EU Tax Dispute Resolution Directive: A Proposal for Implementation”, 47 Intertax (2019), p. 678-692.
136
See J. Voje, “EU Tax Dispute Resolution Directive (2017/1852): Paving the Path Toward a European Tax Court?”, 58
European Taxation (2018), p. 309-317.
137
See, e.g., K. Perrou, “Taxpayer Rights and Taxpayer Participation in Procedures Under the Dispute Resolution
Directive”, 47 Intertax (2019), p. 715-724.
138
It might be noted in passing, however, that the compatibility of the dispute resolution mechanism under the
TDRD with arts. 18, 267 and 344 TFEU in light of the ECJ’s judgment in Achmea (ECJ, 6 March 2018, C-284/16, Achmea,
EU:C:2018:158) has been questioned. See for that discussion, e.g., S. Piotrowski, R. Ismer, P. Baker, J. Monsenego,
K. Perrou, R. Petruzzi, E. Reimer, F. Serrano Antón, L. Stankiewicz, E. Traversa and J. Voje, “Towards a Standing
Committee Pursuant to Article 10 of the EU Tax Dispute Resolution Directive: A Proposal for Implementation”, 47
Intertax (2019), p. 678, at p. 682-684; J. Monsenego, “Does the Achmea Case Prevent the Resolution of Tax Treaty
Disputes through Arbitration?”, 47 Intertax (2019), p. 725, at p. 733-735; K. Perrou, “Taxpayer Rights and Taxpayer
Participation in Procedures Under the Dispute Resolution Directive”, 47 Intertax (2019), p. 715, at p. 719-723.
139
For extensive analysis see C. Marchgraber, Double (Non-)Taxation and EU Law (Kluwer, 2017).
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for the taxpayer who receives it, irrespective of whether it is granted unilaterally or by way
of a bilateral tax treaty. What is less clear, however, is under which circumstances such an
advantage will be considered “selective” and, thus, prima facie illegal.
The EU Commission has in the past considered “provisions to prevent double taxation”
to be of a “purely technical nature” and thus not constitute state aid where “they apply
without distinction to all firms and to the production of all goods”.140 In contrast to this
fairly broad exception, it noted in its 2016 explanatory notice merely that “the need to avoid
double taxation” would be “the basis for a possible justification”.141 While this still seems
to protect member states’ freedom to provide relief from double taxation142 and, indeed,
to choose different methods for doing so in different tax treaties,143 it is not clear that this
remains true in cases where a particular relief mechanism leads to “overcompensation”
that expresses itself as non-taxation, such as in the case of exemption granted for untaxed
foreign income.144
In the McDonald’s case,145 the EU Commission initially considered that the exemption
in Luxembourg of profits attributed – at least under domestic law146 – to a permanent
establishment in the US would amount to state aid if the US did not tax those profits. It
ultimately reversed course, however, and concluded that the applicable tax treaty –
interpreted in line with guidance from the OECD Commentaries – did not require taxation in
the source state as a precondition for the obligation on the residence state to exempt income
140
See para. 13 of the Commission’s notice on the application of the state aid rules to measures relating to direct
business taxation, [1998] OJ C 384, p. 3.
141
See para. 139 of the Commission’s notice on the notion of state aid as referred to in art. 107(1) of the Treaty on the
Functioning of the European Union, [2016] OJ C 262, p. 1.
142
See, e.g., W. Schön, “Taxation and State Aid Law in the European Union”, 36 Common Market Law Review (1999), p.
911, at p. 935; W. Schön, “State Aid in the Area of Taxation”, in: L. Hancher, T. Ottervanger & P. J. Slot (eds.), EU State
Aids, 3rd edition (Sweet & Maxwell, 2016), p. 393, at p. 426 (noting that “[t]ax provisions which are advantageous
to foreign or domestic investors engaged in cross-border activities are not at all ‘aids’ insofar as they only strive
to reduce or compensate for the disadvantageous effects of double taxation”).
143
See, e.g., R. Luja, “Tax Treaties and State Aid: Some Thoughts”, 44 European Taxation (2004), p. 234 et seq.
144
See on this discussion, e.g., C. HJI Panayi, “Limitation on Benefits and State Aid”, 44 European Taxation (2004),
p. 83 et seq.; R. Luja, “Tax Treaties and State Aid: Some Thoughts”, 44 European Taxation (2004), p. 234 et seq.; F.
Ph. Sutter, “Die DBA-Freistellungsmethode als unzulässige Beihilfe i. S. d. Art. 87 EG?”, 14 Steuer und Wirtschaft
International (2004), p. 4 et seq.; C. HJI Panayi, Double Taxation, Tax Treaties, Treaty-Shopping and the European
Community (Kluwer, 2007), p. 169 et seq.; S. Leitsch, “Stellt die fiktive Quellensteueranrechnung gemäß DBA
eine unzulässige Beihilfe dar?”, 28 Steuer und Wirtschaft International (2018), p. 217 et seq. For a broad perspective
based on the recent OECD BEPS discussion see P. Rossi-Maccanico, “Fiscal Aid, Tax Competition, and BEPS”, 75
Tax Notes International (Sept. 8, 2014), p. 857, at p. 865-866, and P. Rossi-Maccanico, “Fiscal State Aids, Tax Base
Erosion and Profit Shifting”, 24 EC Tax Review (2015), p. 63 et seq.
145
Case SA.38945 on possible aid granted by Luxembourg to McDonald’s Europe: [2016] OJ C 258, p. 11 (‘McDonald’s
Opening Decision’) and [2019] OJ L 195, p. 20 (“McDonald’s Final Decision”).
146
It was unclear from the Opening Decision whether the attribution to such permanent establishment was in
line with the proper reading of the terms of the applicable double tax convention, since it remained uncertain
whether there was such an establishment from the US perspective; ultimately, the Commission concluded that
the attribution under Luxembourg’s domestic law was decisive by virtue of art. 3(2) of the double tax convention
(see paras 112-113 of the McDonald’s Final Decision).
76
properly allocated to the former.147 Notably, to show selectivity, the Commission attempted
merely to prove that Luxembourg had misapplied the applicable tax treaty.148 It did not rely
on the alternative argument that double non-taxation resulting from the application of a tax
treaty ipso facto amounts to state aid.
So, at this point in time, the Commission seems to identify each individual tax treaty as
the appropriate reference framework to establish “normal taxation”, instead of either national
corporation tax system in its entirety. Consequently, only selective misapplication of a tax
treaty to give a taxpayer benefits that are not due under the proper interpretation, will be
recognized as state aid. Notably, the Commission is likely to consider any interpretation
that deviates from the treaty-related OECD Commentaries to be erroneous and thus aid.
However, if the Commission chose the reference framework differently – and it almost
certainly could do so as this choice is not pre-determined149 – the benefits granted by a tax
treaty could be directly scrutinized as prima facie aid with the consequence that “double
taxation relief” would have to be relegated to an issue of justification and thus – crucially – be
subject to a proportionality analysis.150 Under this alternative approach, one might even go
as far as questioning treaty benefits that result in “white income” because they are not made
dependent on the other contracting state domestically exercising the taxing right assigned to
it through a subject-to-tax clause:151 Exempting income that would not otherwise be at risk of
double taxation is not “necessary” to avoid double taxation, nor is it possible to characterize
a system that freely grants such benefit as implementing the least far-reaching measures
to achieve that goal. Such inquiry would, however, be at odds with the accepted principle of
capital import neutrality.152
As the Commission appears to be motivated partly by a desire neither to upset the
balanced allocation of taxing rights resulting from a tax treaty nor the perceived “international
standard” visible in the OECD Commentaries, the distinction between the approaches
outlined above is likely to become less pronounced following the implementation of the new
post-BEPS standard through the MLI. As the latter makes it clear that existing tax treaties do
147
Specifically, the Commission accepted that the non-taxation outcome was not the result of a conflict of
qualification and thus not subject to the corresponding solution suggested in the OECD Commentaries. See
for details on the proceedings and arguments, e.g., R. Szudoczky, “Double Taxation Relief, Transfer Pricing
Adjustments and State Aid Law: Comments”, in: I. Richelle, W. Schön & E. Traversa (eds.), State Aid Law and Business
Taxation (Springer, 2013), p. 163, at p. 171-173; O. R. Hoor & K. O’Donnell, “McDonald’s State Aid Investigation: What
the European Commission Got Wrong”, 83 Tax Notes International (Sept. 12, 2016), p. 975 et seq.; F. Shaheen, “Tax
Treaty Aspects of the McDonald’s State Aid Investigation”, 86 Tax Notes International (Apr. 24, 2017), p. 331 et seq.;
B. Larking, “How Did McDonald’s Get Off the EU State Aid Hook?”, 93 Tax Notes International (Feb. 4, 2019), p. 479
et seq.
148
See McDonald’s Final Decision, paras 107-109.
149
W. Haslehner, “Double Taxation Relief, Transfer Pricing Adjustments and State Aid Law”, in: I. Richelle, W. Schön
& E. Traversa (eds.), Allocating Taxing Powers within the European Union (Springer, 2013), p. 133, at p. 138-143.
150
See para. 140 of the Commission’s notice on the notion of state aid as referred to in art. 107(1) of the Treaty on
the Functioning of the European Union, [2016] OJ C 262, p. 1, referring to the ECJ, 8 September 2011, C-78/08 to
C-80/08, Paint Graphos and others, ECLI:EU:C:2011:550, para. 75.
151
See, with further references, W. Haslehner, “Double Taxation Relief, Transfer Pricing Adjustments and State Aid
Law”, in: I. Richelle, W. Schön & E. Traversa (eds.), Allocating Taxing Powers within the European Union (Springer,
2013), p. 133, at p. 135-143; R. Szudoczky, “Double Taxation Relief, Transfer Pricing Adjustments and State Aid Law:
Comments”, in: I. Richelle, W. Schön & E. Traversa (eds.), State Aid Law and Business Taxation (Springer, 2013), p.
163, at p. 169-179.
152
See in the area of the fundamental freedoms, e.g., ECJ, 12 December 2002, C-385/00, De Groot, EU:C:2002:750;
ECJ, 28 February 2013, C-168/11, Beker and Beker, EU:C:2013:117).
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not intend to create opportunities for non-taxation,153 the Commission would be somewhat154
strengthened in scrutinizing a double non-taxation outcome derived from a misapplication
of the relevant tax treaty.
EU state aid rules do not by themselves rule out member states concluding or maintaining
tax treaties that allow double non-taxation to occur; however, it is undoubtedly the case that
such outcomes will be scrutinized even more closely going forward.
153
Art. 6 MLI.
154
The argument must be limited by the fact that the preamble text included via art. 6 MLI is not the equivalent of
adding a subject-to-tax clause into the tax treaty; therefore, the limits of interpretation must be heeded.
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OECD report Subject 1
Sophie Chatel
Jessica Di Maria
OECD report
Sophie Chatel1
Jessica Di Maria2

This report presents the impact of the OECD/G20 Base erosion and profit shifting Project
(the BEPS Project) on the global bilateral tax treaty network. In particular, it discusses the
lessons to be learnt from that experience and how the BEPS treaty-related measures were
implemented in existing tax treaties through the Multilateral Convention to Implement Tax
Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI). It also discusses
how those BEPS treaty-related measures were implemented in existing and new tax treaties
via bilateral negotiations.
The MLI represents an unprecedented coordinated effort to comprehensively modify
existing tax treaties so that new international taxation norms can be implemented in
a coordinated and efficient way. With 94 covered jurisdictions and over 1,630 “matched
agreements” as of 1 March 2020, jurisdictions at all levels of development have demonstrated
strong support for a coordinated, multilateral approach to resolving BEPS issues and changing
tax treaties. It is important to look at the elements that have contributed to the success of the
MLI, as well as lessons that could be drawn from the MLI experience so that future changes
could be implemented.
Part I of this report discusses the lessons to be learnt from such experience and, in
particular, how the MLI experience could inspire future multilateral changes to international
tax standards. It concludes that while the complexity of the MLI was necessary to achieve
its purpose (namely to offer signatories wide flexibility in making policy choices), a future
multilateral instrument – namely in the context of the ongoing work to address the
digitalisation of the economy – could focus on core measures for broad and consistent
implementation.
Part II provides the statistical impact of the BEPS Project on bilateral tax treaties. It also
looks at the impact of the MLI on tax treaties as compared with bilateral amendments to
existing treaties in order to implement the BEPS tax treaty measures. Based on the analysis,
the number of tax treaties modified by the MLI is significantly greater than the number
of tax treaties modified through bilateral renegotiation. Indeed – subject to the MLI
signatories’ internal ratification process, about half of the existing global treaty network will
be modified by the MLI. This therefore demonstrates strong support from jurisdictions at all
levels of development, for a coordinated, multilateral approach to resolving BEPS issues and
changing tax treaties. The MLI experience thus shows us that coordinated effort is needed
to comprehensively and swiftly modify existing tax treaties and implement internationally
agreed tax norms.
Going forward, particularly in light of the ongoing work to address the tax challenges
posed by the digitalisation of the economy, it will be essential to draw on the MLI experience
to implement future internationally-agreed treaty-related measures. The MLI will pave the
1
Head of the Tax Treaty Unit of the Centre for Tax Policy and Administration at the OECD.
2
Adviser in the Tax Treaty Unit of the Centre for Tax Policy and Administration at the OECD.
IFA © 2020 81
OECD report
way for future changes to the international tax system and will inform how future changes
could be implemented even more effectively.
1. Introduction
1. This OECD IFA report presents the impact of the OECD/G20 Base Erosion and Profit
Shifting Project (the BEPS Project) on the global bilateral tax treaty network. In particular,
it discusses the lessons to be learnt from that experience and how the BEPS treaty-related
measures were implemented in existing tax treaties through the Multilateral Convention
to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI).
It also discusses how those BEPS treaty-related measures were implemented in existing
and new tax treaties via bilateral negotiations.
2. The MLI represents an unprecedented coordinated effort to comprehensively modify
existing tax treaties so that new international taxation norms can be implemented in a
coordinated and efficient way. The MLI experience has paved the way for future changes
to the international tax system. As a result, it is important to look at the elements that
have contributed to the success of the MLI, as well as lessons that could be drawn from
the MLI experience so that future changes could be implemented – including those that
go beyond changes to bilateral treaties – even more effectively. This is one of the tasks
of this report.
3. Therefore, Part I of this report discusses the lessons to be learnt from such experience
and, in particular, how the MLI experience could inspire future multilateral changes
to international tax standards. Then, Part II provides the statistical impact of the BEPS
Project on bilateral tax treaties. It also looks at the impact of the MLI on tax treaties and
compares it with bilateral amendment to existing treaties in order to implement the
BEPS tax treaty measures.
2. Background
4. Two years after the publication of the BEPS Action Plan, OECD countries together with
the G20 and partner jurisdictions launched the Final OECD/G20 Base Erosion and Profit
Shifting Package in October 2015 (the BEPS Package).3 The BEPS Package took the form
of 15 actions set out in separate reports. The aim of the BEPS Project was to design tools,
at both the domestic and international level, for jurisdictions to ensure that profits are
taxed where economic activities take place and where value is created, while at the same
time giving businesses greater certainty by reducing disputes over the application of
international tax rules and standardising compliance requirements. The BEPS Package
contained recommendations, best practices, and minimum standards. Jurisdictions have
committed to implement all four BEPS minimum standards to ensure a minimum level
of protection against BEPS.
3
This work began with the report Addressing Base Erosion and Profit Shifting released by the OECD in February 2013.
The BEPS Action Plan was then adopted by the OECD and G20 leaders in September 2013. This Action Plan formed
the basis of the Final BEPS Package.
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Chatel & Di Maria
5. Following the launch of the BEPS Package, the Inclusive Framework on BEPS (“IF”) was
established in 2016 to ensure that interested countries and jurisdictions, including
developing economies, could participate on an equal footing in the development
of standards on BEPS and related issues, while reviewing and monitoring the
implementation of the BEPS Project. On 15 December 2019, the IF had a membership of
135 jurisdictions from all over the world and at all levels of development.
6. In order to implement the BEPS treaty-related minimum standards and measures in
existing tax treaties, Action 15 of the BEPS Package4 recommended the development
of a multilateral instrument to allow all interested jurisdictions to modify the existing
network of bilateral tax treaties in a swift and coordinated way, without the need for
bilateral renegotiations.5
7. Negotiations of that multilateral instrument were quickly convened in 2016 with the
formation of an ad hoc group for the development of the MLI (the ad hoc Group), which
had been approved by the OECD Committee on Fiscal Affairs and endorsed by the G20
in February 2015. On 24 November 2016, the ad hoc Group formally adopted the text of
the MLI, the first legal instrument of its kind in tax matters able to modify all existing
bilateral tax treaties in force.
8. The MLI was then signed by the first group of jurisdictions on 7 June 2017. On 15 December
2019, the MLI had already been signed by 92 jurisdictions and formally ratified by 37
jurisdictions; it would thus modify over 1,600 bilateral tax treaties – half of the pre-BEPS
tax treaty network.6 Its impact on the global tax treaty network has already proven to
be significant because of the efficiency gains it offers jurisdictions: through a single
process of signature and ratification, jurisdictions may implement all treaty-related BEPS
measures in accordance with their policy choices.
9. Signing the MLI, however, is not a minimum standard. Members of the IF may freely
determine how they implement the treaty-related BEPS measures in their treaty network.
They could do so through the MLI or through bilateral renegotiations. To assist bilateral
renegotiations, all treaty-related BEPS measures are included in the 2017 version of the
OECD Model Convention on Income and Capital (OECD MTC)7 and its Commentary – a
model whose influence extends beyond the OECD member countries.
2.1. The BEPS treaty-related Minimum Standards
10. While jurisdictions may decide how to implement the BEPS treaty-related measures,
they have committed to introduce the treaty-related minimum standards in all their
tax treaties in force. The BEPS Package includes two treaty-related minimum standards:
the Action 6 minimum standard for the prevention of treaty abuse, and the Action 14
4
See OECD (2015), Developing a Multilateral Instrument to Modify Bilateral Tax Treaties, Action 15 -2015 Final Report, OECD/
G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264241688-
en.
5
Unless otherwise specified, we use the term “tax treaties” in this paper interchangeably with “double taxation
agreements”, referring specifically to comprehensive treaties for the elimination of double taxation.
6
As set out in arts. 1 and 2 of the MLI, the Convention “modifies” any tax treaty in force between parties to the MLI
which has been listed by both contracting jurisdictions as an agreement which they wish to be covered by the
MLI (defined as a “Covered Tax Agreement”).
7
OECD (2017), Model Tax Convention on Income and on Capital: Condensed Version 2017, OECD Publishing, Paris, https://
doi.org/10.1787/mtc_cond-2017-en.
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minimum standard for making dispute resolution mechanisms more effective. The
implementation of these minimum standards is currently being monitored through the
Action 6 Peer Review and Action 14 Peer Review processes.
2.1.1. Action 6 Minimum Standard – Preventing Treaty Abuse
11. The Action 6 Final Report8 introduced treaty anti-abuse rules to provide safeguards
against the abuse of treaty provisions and to prevent the granting of treaty benefits
in inappropriate circumstances. A key focus of the report was treaty shopping, which
involves the attempt by a person to indirectly access the benefits of a tax treaty between
two jurisdictions without being a resident of either one of those jurisdictions.9 The Action
6 Final Report set out one of the BEPS minimum standards that deal with treaty abuse.
12. The Action 6 minimum standard requires jurisdictions to include two elements in their tax
agreements: first, an express statement of common intention, generally in the preamble,
to eliminate double taxation without creating opportunities for non-taxation or reduced
taxation through tax evasion or avoidance, including through treaty-shopping;10 second,
one of three measures to implement that common intention:11
i. a principal purpose test (PPT)12 together with either a simplified or a detailed version
of the limitation on benefits (LOB) rule;13
ii. the PPT alone; or
iii. a detailed version of the LOB rule together with a mechanism (such as a treaty rule
that might take the form of a PPT rule restricted to conduit arrangements, or domestic
anti-abuse rules or judicial doctrines that would achieve a similar result) that would
deal with conduit arrangements not already dealt with in tax treaties.
2.1.2. Action 14 Minimum Standard – Making Dispute Resolution Mechanisms More Effective
13 The work carried out under Action 14 aimed to improve treaty dispute resolution
mechanisms for disputes arising between contracting jurisdictions. The Action 14 Final
Report14 contained a number of measures, recommendations and best practices. It also
set out a minimum standard which requires jurisdictions to include in their bilateral tax
8
OECD (2015), Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 – 2015 Final Report, OECD/
G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264241695-
en.
9
See para. 17 of the BEPS Action 6 Final Report (2015). As the report also notes, cases where a resident of the
contracting state in which income originates seeks to obtain treaty benefits (e.g. through a transfer of residence
to the other contracting state or through the use of an entity established in that other state) could also be
considered a form of treaty shopping.
10
This measure can be implemented through art. 6 of the MLI.
11
This measure can be implemented through art. 7 of the MLI.
12
Included at para. 9 of art. 29 of the 2017 OECD MTC.
13
Included at paras 1 to 7 of the 2017 OECD MTC.
14
OECD (2015), Making Dispute Resolution Mechanisms More Effective, Action 14 - 2015 Final Report, OECD/G20 Base
Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.org/10.1787/9789264241633-en.
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treaties paragraphs 1 to 3 of article 25 of the OECD MTC as modified by the BEPS Project.15
Paragraphs 1 to 3 provide that:
–– Choice of competent authority: where a person considers that the actions of one or both
of the contracting jurisdictions result or will result for that person in taxation not in
accordance with the provisions of a tax treaty, that person may, irrespective of the
remedies provided by the domestic law of those contracting jurisdictions, present
the case to the competent authority of either contracting jurisdiction;
–– Specific time limit: the case must be presented within three years from the first
notification of the action resulting in taxation not in accordance with the provisions
of the tax treaty;
–– Commitment to resolve objections: the competent authority shall endeavour, if the
objection to it appears to be justified and if it is not itself able to arrive at a satisfactory
solution, to resolve the case by mutual agreement with the competent authority of
the other contracting jurisdiction, with a view to the avoidance of taxation which is
not in accordance with the tax treaty;
–– Implementation notwithstanding domestic time limits: any agreement reached by the
competent authorities shall be implemented notwithstanding any time limits in the
domestic law of the contracting jurisdictions;
–– Commitment to resolve difficulties or doubts: the competent authorities of the contracting
jurisdictions shall endeavour to resolve by mutual agreement any difficulties or
doubts arising as to the interpretation or application of the tax treaty; and
–– Consultation: the competent authorities may also consult together for the elimination
of double taxation in cases not provided for in the tax treaty.
2.1.3. Other treaty-related BEPS measures
14. In addition to the Action 6 and Action 14 minimum standards, the BEPS package contained
several additional best practices and recommendations that address a variety of BEPS
issues. These measures, which were developed under BEPS Action 2 (Neutralising the
Effects of Hybrid Mismatch Arrangements), Action 6 (Preventing Treaty Abuse), Action
7 (Preventing the Artificial Avoidance of Permanent Establishment Status) and Action 14
(Making Dispute Resolution Mechanisms More Effective), are briefly described below.
2.1.4. Action 2 - Neutralising the Effects of Hybrid Mismatch Arrangements
15. The following treaty-related BEPS measures were developed under the Action 2 Final
Report and aim to neutralise the effect of hybrid instruments and entities:16
–– Transparent entities: provisions that prevent treaty benefits being granted where
neither contracting jurisdiction treats the income of an entity as income of one of its
residents under its domestic law;17 and
15
These measures can be implemented through art. 16 of the MLI.
16
OECD (2015), Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final Report, OECD/G20 Base
Erosion and Profit Shifting Project, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264241138-en
17
Included in para. 2 of art. 1 of the 2017 OECD MTC and applicable through art. 3 of the MLI.
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–– Application of methods for elimination of double taxation: provisions that address

problems arising from the inclusion of the exemption method in treaties with respect
to items of income that are not taxed in the jurisdiction of source.18
Action 6 – Non-minimum Standard Provisions
16. In addition to the minimum standard, the Action 6 Final Report proposed the following
treaty-related measures alongside the Action 6 minimum standard:
–– Dual resident entities: a provision that ensures that competent authorities may resolve
the residence of dual-resident entities on a case-by-case basis;19
–– Dividend transfer transactions: a provision that requires a person to hold shares for a
minimum period in order to benefit from a reduced rate on dividends received from
a foreign subsidiary;
–– Capital gains from alienation of shares or interests of entities deriving their value principally
from immovable property: a provision that strengthens the rules that address situations
in which the value of immovable property held by an entity is diluted ahead of a sale
of shares or interests in that entity, which can deprive the jurisdiction where that
immovable property is located of the taxing rights it might otherwise have had;20
–– Anti-abuse rule for permanent establishments situated in third jurisdictions: measures that
address the double non-taxation which may arise when the profits of an enterprise
are attributed to a permanent establishment situated in third jurisdictions;21 and
–– Application of tax agreements to restrict a jurisdiction’s right to tax its own residents: a
provision that confirms the right of a contracting jurisdiction to tax its own residents.22
2.1.5. Action 7 - Preventing the Artificial Avoidance of Permanent Establishment Status
17. The work carried out under Action 7 led to changes in the definition of permanent
establishment to address certain arrangements commonly used to artificially avoid
permanent establishment status. The specific treaty-related measures proposed in the
Action 7 Final Report23 are as follows:
–– Dependent and independent agents: rules that strengthen the permanent establishment
definition relating to activities undertaken in a jurisdiction by a dependent agent of
a foreign company (including through commissionaire arrangements);24
–– Specific activity exemptions: rules that restrict the application of certain specific activity
exceptions to the definition of permanent establishment to those activities that are
of a preparatory or auxiliary nature;25
18
Paras 442 through 444 of the Action 2 Report; art. 5 of the MLI and art. 23A of the 2017 OECD Model Tax Convention.
19
20
21
22
The so-called “saving clause” is included in para. 3 of art. 1 of the 2017 OECD MTC and applicable through art. 11
of the MLI.
23
OECD (2015), Preventing the Artificial Avoidance of Permanent Establishment Status, Action 7 - 2015 Final Report, OECD/
G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264241220-en
24
Included in paras 5 and 6 of art. 5 of the 2017 OECD MTC and applicable through art. 12 of the MLI.
25
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Chatel & Di Maria
–– Anti-fragmentation of activities: ensuring that an enterprise cannot circumvent

permanent establishment status through the fragmentation of activities of a cohesive
business operation;26
–– Splitting-up of contracts: a measure addressing the splitting-up of contracts related to
a specific project where this circumvents a provision stipulating a period of time after
which the project constitutes a permanent establishment;27
–– Definition of a person closely related to an enterprise: a definition of a person closely
related to an enterprise for the purposes of the above changes to the permanent
establishment definition.28
Action 14 – Non-minimum Standard Provisions
18. The Action 14 Final Report, alongside its minimum standard, encouraged jurisdictions
to make the appropriate corresponding adjustments in the context of taxing associated
enterprises, and to resort to resolving any case by mutual agreement where necessary.29
19. It also provided for the development of a mechanism for mandatory binding MAP
arbitration, which was subsequently developed by a sub-group of interested jurisdictions
and is now in Part VI of the MLI.30
3. Part I: Insights from the MLI experience and the effects on the
global tax treaty network
20. The MLI experience has shown that a multilateral approach for the implementation
of internationally agreed standards in existing tax treaties has been a success. As of 1
March 2020, 94 jurisdictions joined the MLI, which then applied to over 1,630 “matched
agreements” that would become covered tax agreements31 once the MLI enters into force
for both contracting jurisdictions.
21. Subject to the MLI signatories’ internal ratification process, about half of the existing
global treaty network will be modified by the MLI. This demonstrates strong support
from jurisdictions at all levels of development, for a coordinated, multilateral approach
to resolving BEPS issues and changing tax treaties. Based on our analysis contained in
Part II of this report, the number of tax treaties modified by the MLI is significantly greater
than the number of tax treaties modified through bilateral renegotiation.
22. This Part presents what went well with the MLI and what could be improved in the future,
drawing on feedback received from policy experts of the Ministries of Finance of MLI
26
Included in para. 5(4.1) of the 2017 OECD MTC and applicable through para. 4 of art. 13 of the MLI.
27
28
29
30
Included in para. 5 of art. 25 of the 2017 OECD MTC as well as the related Commentary. We note that several
measures included in Part VI of the MLI were transposed into the Commentary on para. 5 of art. 25 of the 2017
OECD MTC in the form of a sample mutual agreement on arbitration.
31
As set out in arts. 1 and 2 of the MLI, the MLI “modifies” any tax treaty in force between parties to the MLI which
has been listed by both contracting jurisdictions as an agreement which they wish to be covered by the MLI
(defined as a “Covered Tax Agreement”).
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signatories and parties. It also discusses what could enrich future multilateral efforts to
streamline the implementation of future measures or changes in existing tax treaties,
noting that part of the feedback received was made in light of possible changes to tax
treaties that may be required as a result of the work carried on to address the challenges
posed by the taxation of the digitalised economy.
3.1. Efficiency and consistency
23. The MLI experience demonstrates that it is possible to negotiate and implement changes
throughout the global tax treaty network in a coordinated and effective manner. A tax
treaty network consisting of thousands of bilateral tax treaties cannot be easily updated
through the renegotiation of each individual treaty: the traditional bilateral negotiation
process is costly, time consuming, and necessarily gives rise to uncoordinated approaches.
24. Changing more than half of the global treaty network over a few years would not have
been possible without the MLI. This experience has allowed jurisdictions to seize the
momentum and promptly tackle BEPS issues without delay. It has also demonstrated
that existing bilateral tax treaties are not frozen in time and that internationally agreed
norms and standards can be quickly implemented.
25. If the efficiency of the MLI in implementing the BEPS treaty-related measures is
undeniable, the MLI has also ensured that the texts of those agreed measures would
be implemented in the treaty network in a consistent manner throughout the global
treaty network. This has been particularly important for anti-abuse measures such as
the PPT. For instance, the analysis conducted on bilateral uptake has shown that, before
the implementation of the MLI, a wide variety of anti-abuse measures existed in the
global treaty network. If those rules all pursued the same objective, they presented
different scopes or terminology that may have led to uncertainty in their application.
The 26. variety observed was also sometimes present within specific jurisdictions’ treaty
networks.
26. The implementation of the BEPS treaty-related measures through the MLI ensures that
all anti-BEPS measures are implemented consistently in the global treaty network. This
will be key to further ensure those measures are given the same interpretation and
application in the future.
3.2. Flexibility and optionality: key elements in reaching a broad consensus
27. The purpose of the MLI is to swiftly implement the tax treaty-related BEPS measures.
Consistent with that purpose, the ad hoc Group of about 100 jurisdictions that negotiated
the MLI on an equal footing, considered that the MLI should enable all parties to meet the
treaty-related minimum standards that were agreed as part of the Final BEPS Package.
Given, however, that each of those minimum standards can be satisfied in multiple
different ways, and given the broad range of countries and jurisdictions involved in
negotiating the MLI, it was agreed that the instrument needed to be flexible enough
to accommodate the positions of different countries and jurisdictions while remaining
consistent with its purpose. The MLI also needed to provide flexibility in relation to
BEPS treaty-related measures that did not reflect minimum standards. It does so in the
following ways:
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Chatel & Di Maria
–– Specifying the tax treaties to which the MLI applies (the “Covered Tax Agreements”).
Although it was intended that the MLI would apply to the maximum possible number
of existing treaties, there may be circumstances in which a jurisdiction prefers
not to include a specific agreement in the scope of application of the MLI. This is
accomplished by ensuring that the MLI only applies to a treaty specifically listed by
the parties to that treaty in their MLI positions.
–– Flexibility with respect to provisions that relate to a minimum standard. Where a minimum
standard can be satisfied in multiple alternative ways, the MLI must not give
preference to a particular way of meeting the minimum standard. To ensure that the
minimum standard can be met in such circumstances, however, in cases where parties
to a given treaty each adopt a different approach to meeting a minimum standard,
those parties must endeavour to reach a mutually satisfactory solution consistent
with the minimum standard. It should be noted that, with respect to the Action 6
minimum standard, all MLI parties and signatories have agreed to implement the
MLI PPT.
–– Opting out of provisions or parts of provisions with respect to all Covered Tax Agreements.
Where a BEPS treaty-related measures does not reflect a minimum standard,
jurisdictions are free to opt out of the MLI provisions which reflect those measures
entirely through the mechanism of reservations. Where a reservation is made under
an MLI article, that article does not apply between the reserving party and all other
parties to the MLI.
–– Opting out of provisions or parts of provisions with respect to Covered Tax Agreements that
contain existing provisions with specific, objectively defined characteristics. The ad hoc
Group recognised that even when a party intends to apply a particular provision of
the MLI to its treaty network, it may have policy reasons for preserving the application
of specific types of existing provisions. To accommodate this, the MLI permits a
party in a number of cases to reserve the right to opt out of applying a provision to
a subset of Covered Tax Agreements in order to preserve existing provisions that
have specific, objectively defined characteristics. When a party makes one or more
such reservations, all such reservations will apply between the reserving party and
all contracting jurisdictions to the Covered Tax Agreements that are covered by such
reservations.
–– Choosing to apply optional provisions and alternative provisions. In some cases, the output
of the work on BEPS produced multiple alternative ways to address a particular BEPS
issue. In other cases, the work resulted in a main provision that could be supplemented
with an additional provision. The MLI incorporates a number of alternatives or
optional provisions that generally will apply only if all contracting jurisdictions to a
Covered Tax Agreement affirmatively choose to apply them.
28. The flexibility introduced through the MLI has ensured that jurisdictions would retain
control over their treaty policy choices. Given the alternatives proposed in the BEPS
Package and the non-minimum-standard BEPS treaty-related measures, the MLI
necessarily had to incorporate a certain degree of flexibility to fulfil the ad hoc Group’s
mandate. This was key in ensuring many jurisdictions would join the instrument and use
it as a tool for swift implementation.
29. If the optionality and flexibility offered by the MLI facilitated the achievement of a
consensus among different groups, it also created a level of complexity in the instrument
and gave rise to possible mismatches in the adoption of options and alternatives.
30. The MLI is a complex instrument, whose complexity is mainly explained by the necessity
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to “match” the MLI positions of the signatories and parties to each covered tax agreement
in order to determine the effects of the MLI on that agreement. This brings an additional
level of complexity to the exercise when compared with the application of traditional
bilateral tax treaties.
31. In the future, it may be worthwhile to invest more time in reaching a strong prior
consensus on the underlying measures and standards to be implemented in tax treaties.
This would reduce the need to integrate flexibility and optionality within the instrument,
and would therefore lead to less complexity.
3.3. Signature and ratification
32. In June 2017, 76 jurisdictions joined the MLI. That number has increased to 94 in February
2020. The key to this success has been to seek early political commitment. Throughout the
negotiations, jurisdictions’ delegates ensured that the agreement was aligned with their
domestic and international political objectives. In the case of the BEPS Package, there was
agreement at the political level and in particular at the G20 level on the objectives of the
BEPS Project at an early stage.
33. The need for a strong political commitment however remains essential beyond the
negotiation and signature phases to ensure effective implementation. Ratification of
the MLI has proceeded more slowly than many jurisdictions at first thought. This is for a
number of reasons specific to the internal processes that each jurisdiction has to carry out
related to domestic approval. One recurring cause of delay was the technical complexity
of the MLI and the fact that it is unprecedented. This may have slowed down discussions
among interested internal parties.
34. To improve the pace of ratification of future multilateral efforts, jurisdictions could be
encouraged to liaise at an early stage with all their internal interested parties, including
their ministry of foreign affairs and relevant legislative bodies. Ensuring coordination
within governments has shown to be important for the swift ratification of the MLI.
3.4. Interpretation and implementation of the MLI
35. The flexibility built into the MLI was key to the broad uptake of the instrument.
Nevertheless, these same features pose certain challenges relating to the application
and interpretation of the MLI.
36. Governments, businesses and tax advisors are becoming familiar with the application of
the MLI. Because of the instrument’s complexity, further implementation tools needed to
be developed (notably the matching databases and synthesised texts). The flexibility of
the MLI requires additional layers of analysis as compared to the interpretation of more
traditional instruments. As discussed above, to determine the effect of the MLI in relation
to a given tax treaty, a “matching” exercise must be conducted based on the review of both
treaty partners’ MLI positions, read alongside the relevant provisions of the MLI and the
underlying tax treaty. This method of interpretation is unprecedented, and differs from
traditional methods of interpreting tax treaties and related amendments or protocols.
Interested parties have therefore taken some time to grow comfortable applying and
interpreting the MLI and using the implementation tools that were developed.
37. One of the most used tools developed to support the implementation of the MLI, was the
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MLI matching database that shows all of the choices, options and reservations made by
MLI signatories and parties. The MLI matching database also allows users to extract a
snapshot of the application of the provisions of the MLI to a given tax treaty.
38. The Secretariat has published guidance for tax administrations to prepare such
synthesised texts in a consistent manner and encourages their publication, as they have
proven to be a useful tool for interpretation. Also, parties and signatories have prepared
synthesised texts of their covered tax agreements as modified by the MLI to detail the
application of each MLI provision to the relevant provisions of their tax treaties. These
synthesised texts significantly improve tax certainty and simplicity in the application and
interpretation of the MLI by taxpayers and tax administrations.
39. On the interpretation and application of the provisions of the MLI, applying measures
that do not change specific existing provisions (i.e. applying the PPT in a covered tax
agreement that did not contain any existing anti-abuse provisions that deny all or part
of the benefits that would otherwise be provided) will lead to less interpretation and
application challenges. This will be simpler than applying, for example, the measures
relating to BEPS Action 7 to address the avoidance of permanent establishment status.
These measures, contained in article 12 through article 15 of the MLI, mostly modify the
application of existing provisions in covered tax agreements and could lead to challenges
when these existing provisions are not based on the OECD or UN Model Tax Conventions.
40. In the future, it may be preferable to implement measures in the global treaty network
without changing specific existing provisions or by superseding entirely those existing
provisions with new measures.
3.5. Future multilateral efforts and tax-treaty changes
41. The MLI exercise will certainly enrich future multilateral efforts to streamline the
implementation of future measures or changes in existing tax treaties. This could be
particularly relevant when considering the possible changes to tax treaties that may
be required as a result of the work carried on addressing the challenges posed by the
taxation of the digitalised economy.
42. The work on the tax challenges of the digitalisation of the economy contemplates changes
to key concepts of the international tax system embedded in tax treaties that could
impact the allocation of taxing rights. If new measures are agreed upon by jurisdictions,
these would again require changes to the tax treaty network to ensure all treaty barriers
are duly removed for the exercise of new taxing rights.
43. The changes could be implemented through an instrument similar to the MLI (that would
modify existing tax treaties), or through a different instrument (that would supplement
and prevail over the global treaty network for in-scope taxpayers). The choice of the
instrument to implement those changes would depend on the exact nature of the
changes.
44. When compared to the work on the digitalisation of the economy, the BEPS project
generally sought to change and fix traditional concepts of the international tax system
(e.g. changes to the permanent establishment definition, changes to the mutual
agreement procedure provisions, etc). The changes brought by the BEPS Project generally
targeted existing treaty provisions or concepts already in place in bilateral tax treaties or
in model tax conventions. As a result, to change those existing provisions, the MLI had to
apply alongside bilateral tax treaties and modify their application.
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45 By contrast, the changes discussed under the work on the digitalisation of the economy
may involve the development of new concepts, such as the coordinated taxation of an
MNE group by multiple jurisdictions. An agreement on those new concepts may require
the implementation of new measures that would sit with difficulty on top of bilateral
tax treaties. Updating existing treaty provisions may not be the most effective way
of implementing such changes and, subject to further developments, it may become
desirable to design a multilateral convention that would operate independently from
(and concurrently with) the existing tax treaty network for in-scope taxpayers.
46. Regardless of the design options chosen to coordinate the implementation of future
changes to the tax treaty network, learning lessons from the MLI experience is an
invaluable exercise.
47. After observing the marked success of the MLI as a novel measure to implement new
measures across the global treaty network in a swift and coherent manner, we have
gained valuable insights to apply to future changes. While the complexity of the MLI
was necessary to achieve its purpose, a future multilateral instrument could focus on
core measures for broad and consistent implementation.
48. Going forward, particularly in light of the ongoing work to address the tax challenges
posed by the digitalisation of the economy, it will be essential to draw on the MLI
experience to design a robust multilateral implementation framework. The scope of the
multilateral instrument that may result from this work, will likely go beyond that of the
MLI – namely, to cover relationships between jurisdictions that do not have a tax treaty in
force. This will therefore require the development of new design features. Nevertheless,
the MLI experience will remain a central reference point in this work.
4. Part II: The impact and implementation of the treaty-related

BEPS measures in the global tax treaty network
49. This Part presents the comparative impact of the MLI and bilateral negotiations on the
global tax treaty network. It also discusses the overall implementation and uptake of the
BEPS treaty-related measures.
50. For the MLI, results are based on policy choices reflected in the provisional list of options,
notifications and reservations (the MLI position) deposited by each jurisdiction upon
signature, or, if available, in their definitive MLI position deposited upon ratification. As of
1 March 2020, 94 jurisdictions joined the MLI, which then applied to over 1,630 “matched
agreements” that would become covered tax agreements32 once the MLI enters into force
for both contracting jurisdictions.
51. For bilateral negotiations, bilateral instruments concluded between 1 January 2014 and
30 June 2019 were reviewed – recognising, however, that bilateral negotiations often span
several months, or even years, and that, for some of the BEPS measures, specific treaty
language was only introduced with the Final Reports published in October 2015.
32
As set out in arts. 1 and 2 of the MLI, the MLI “modifies” any tax treaty in force between parties to the MLI which
has been listed by both contracting jurisdictions as an agreement which they wish to be covered by the MLI
(defined as a “Covered Tax Agreement”).
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52. In total, 465 bilateral instruments concluded by 154 jurisdictions were reviewed.33 These
jurisdictions included both members and non-members of the IF, and signatories and
non-signatories of the MLI. The time period under review covers the creation of the
Inclusive Framework34 and the adoption of the MLI. Some of the parties to these bilateral
instruments that committed themselves to the BEPS measures did so at different times.
4.1. Implementation through the MLI
53. A jurisdiction that joins the MLI does not necessarily adopt all BEPS treaty-related
measures. To accommodate different policy preferences, the MLI allows for different
forms of flexibility through a system of reservations and notifications of choices between
alternative provisions and choices to apply optional provisions. A jurisdiction’s list of
Covered Tax Agreements, reservations and notifications is submitted in the form of a
completed template and constitutes the jurisdiction’s MLI position.
54. Irrespective of the MLI position taken by its treaty partners, the modifications to the
application of a jurisdiction’s bilateral tax treaties can never go beyond the boundaries of
the jurisdiction’s own consent as defined in its MLI position and with the consequences
set out in the relevant provisions of the MLI. For instance, the application of a bilateral
treaty concluded by the jurisdiction will not be modified unless it has been listed by
that jurisdiction as a Covered Tax Agreement and an MLI provision will not modify the
application of any of that jurisdiction’s bilateral treaties if the jurisdiction has made
a reservation opting out of an MLI provision. Accordingly, in ratifying the MLI, the
jurisdiction consents to a possible set of modifications to the application of bilateral tax
treaties and this consent is given independently of the MLI position which may be taken
by its treaty partners.
55. As a result, in interpreting the MLI findings, it is necessary to distinguish between the
rate of uptake of a given provision by MLI signatories and parties, and the proportion of
covered tax agreements that will be modified as a result.
4.1.1. Implementation of the Action 6 minimum standard
56. The Action 6 minimum standard to prevent treaty abuse requires jurisdictions to include
in their tax treaties an express statement of common intention and one of three methods
to address treaty shopping. The minimum standard does not, however, prescribe the
method through which these two components are to be implemented.
57. The first component of the Action 6 minimum standard, the express statement of
common intention, is set out in article 6(1) of the MLI. It has been included in all covered
tax agreements as MLI signatories can only opt out of article 6 for agreements that already
include the required statement. As a result, all covered tax agreement will include the
first component of the Action 6 minimum standard.
58. The second component of the Action 6 minimum standard offers more flexibility in its
33
Texts that were either not readily available, or that had not been translated into either English or French were
excluded from the analysis.
34
When it was first formed, the Inclusive Framework included 82 member jurisdictions. On 15 December 2019, the
Inclusive Framework counts 135 member jurisdictions.
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implementation and has three alternative anti-treaty-shopping provisions. The MLI

allows jurisdictions to adopt two of the three alternatives: the MLI does not include a
detailed version of an LOB provision.
59. Further, one of the three available options, the PPT rule included in article 7(1) of the
MLI, is presented as the default option. Although jurisdictions may opt out of the PPT for
agreements that already include the anti-treaty-shopping measures or when they wish
to adopt a detailed version of an LOB provision, all have in practice adopted it.
60. The MLI also contains a simplified version of an LOB provision to supplement the PPT rule.
Under paragraph 6 of article 7 of the MLI, thirteen jurisdictions have chosen to apply the
simplified LOB provision found in article 7 (paragraphs 8 to 13) of the MLI. Because the
MLI LOB is an optional provision that can only apply when contracting jurisdictions both
decided to adopt the option, only around 50 covered tax treaties will include it. Additional
treaties could be modified where a signatory, under article 7(7) of the MLI, allows for the
possibility to apply the simplified LOB if a treaty partner agrees to apply this rule, in either
a symmetrical or an asymmetrical manner.
61. The Action 14 minimum standard can be implemented through article 16 of the MLI. This
provision offers several alternatives to meet the Action 14 minimum standard, which
in some cases involves commitments by signatories to follow certain administrative
practices without necessarily updating the language of their tax treaties. This means
that a jurisdiction that does not choose to apply all of the treaty language proposed in
article 16 of the MLI, could still comply with the Action 14 minimum standard.
62. Two-thirds of the MLI signatories have chosen to modify their treaties to allow a taxpayer
to present a case to the competent authority of either contracting jurisdiction as provided
in the first sentence of article 16(1). This provision will affect around 600 covered tax
agreements. The remaining third of MLI signatories made a reservation on the basis
that they intend to meet this element of the Action 14 minimum standard through the
implementation of a bilateral notification or consultation process.
63. All MLI signatories have chosen to introduce the three-year time limit to present a case in
the second sentence of article 16(1). As for the first sentence of article 16(2), most covered
tax agreements already meet the requirement under the Action 14 minimum standard
whereby a competent authority must endeavour to resolve a case by mutual agreement
with the competent authority of the other contracting jurisdiction if the objection to it
appears to be justified and if it is not itself able to arrive at a satisfactory solution. The
impact of the MLI here is therefore less important and about 40 treaties will be updated
in this respect.
64. The vast majority of MLI signatories have chosen to introduce the second sentence
of article 16(2) that provides that any agreement reached in the context of a mutual
agreement will be implemented notwithstanding any time limits in the domestic law
of the contracting jurisdictions. This measure will modify around 380 tax agreements
that do not already contain that rule.
65. Article 16(3) of the MLI provides that the competent authorities shall endeavour to
resolve by mutual agreement any difficulties or doubts arising as to the interpretation or
application of a tax treaty, and that they may also consult together for the elimination of
double taxation in cases not provided for in a treaty. It applies to a covered tax agreement
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in the absence of similar measures and no reservation can be made to omit it. As a result,
all covered tax agreements that do not currently comply with this measure will be
brought into compliance under this article.
4.1.3. Implementation of the Action 6 non-minimum-standards provisions
66. The optional measures proposed in Action 6 have each been applied by a substantial
number of MLI signatories. The greatest number – more than 55% – have chosen to
strengthen their rules for determining the value threshold applicable to capital gains
from the alienation of shares or interests in entities deriving their value principally
from immovable property.35 This rule will consequently apply to around 350 covered tax
agreements. The new tie-breaker rule applicable to dual-resident entities will modify 246
covered tax agreements.36 More than a third of MLI signatories has also chosen to apply
the minimum shareholding period in dividend transfer transactions, which will modify
around 180 covered tax agreements.37 The anti-abuse rule38 applicable to permanent
establishments situated in third jurisdictions was taken up by 32% of MLI signatories
(modifying 138 covered tax agreements) and the so-called “saving clause”39 confirming
the right of a jurisdiction to tax its own residents was taken up by 27% of MLI signatories
(modifying 137 covered tax agreements).
67. The two principal treaty-related measures in Action 14 outside the minimum standard,
as discussed above, are those relating to corresponding adjustments and to mandatory
binding MAP arbitration. Just over half of the MLI signatories chose to include the
requirement to make corresponding adjustments in the transfer pricing context and
the measure will apply to over 470 covered tax agreements.40 (Many existing treaties
already contain this requirement to make corresponding adjustments.)
68. As for mandatory binding arbitration contained in Part VI of the MLI, 30 MLI signatories,
including those countries that had already committed to arbitration at the time of the
development of the Action 14 Final Report, adopted the optional part of the MLI. As a
result, 211 covered tax agreements will include the MLI mandatory binding arbitration
provisions.
69. The MLI provides for two types of arbitration processes. The “final offer” arbitration
process, whereby the arbitrators have to choose one of the positions advanced by the
competent authorities, is the default process under the MLI, except where the competent
authorities agree on different rules. Most of the MLI signatories that have chosen to apply
Part VI have chosen this approach. The alternative is the “independent opinion approach”,
under which the arbitration panel can reject both competent authorities’ positions and
35
Art. 9 of the MLI.
36
Art. 4 of the MLI.
37
Art. 8 of the MLI.
38
Art. 10 of the MLI.
39
Art. 11 of the MLI.
40
Art. 17 of the MLI.
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OECD report
come to one of its own. Eight jurisdictions have chosen this method (except to the extent
that the competent authorities agree on different rules).
4.1.5. Implementation of Action 2 - Neutralising the Effects of Hybrid Mismatch Arrangements
70. Around one-quarter of MLI signatories have taken up treaty-related measures from the
Report on Action 2. The measures applicable to income earned through transparent
entities41 was chosen by 32% of signatories (modifying 207 covered tax agreements),
and 24% of signatories chose to update their mechanisms to eliminate double taxation
to better align them with the domestic measures applicable to transparent entities42
(modifying 123 covered tax agreements).
4.1.6. Implementation of Action 7 - Preventing the Artificial Avoidance of Permanent Establishment

Status
71. Part IV of the MLI contains four measures resulting from work on BEPS Action 7 to counter
the artificial avoidance of permanent establishment status. Each of these measures has a
rate of uptake by MLI signatories of around 50%, with the exception of the rule on splitting
up of contracts relating to a specific project,43 taken up by only 36% of MLI signatories. The
number of covered tax agreements modified by these measures varies considerably. The
new anti-fragmentation rule44 will apply to more than 516 covered tax agreements, while
the splitting-up of contracts rule will only apply to 151 of them. The updates to the rules
relating to intermediaries and commissionaire arrangements45 will modify 309 covered
tax agreements and the restrictions on the specific activity exemptions46 will modify more
than 350 covered tax agreements.
4.1.7. Summary of the MLI’s effects
72. The MLI has had – or soon will have – a wide-ranging effect on more than half of the
world’s bilateral tax treaties. Its impact is greater in implementing of the Action 6 and
Action 14 minimum standards. Nevertheless, there has been a material use of the MLI
for the non-minimum-standard provisions, considering that the implementation of such
measures on a bilateral basis would have taken decades in comparison.
41
Art. 3 of the MLI.
42
Art. 5 of the MLI.
43
Art. 14 of the MLI.
44
Art. 13(4) of the MLI.
45
Art. 12 of the MLI
46
Art. 13(1 to 3) of the MLI. Art. 13 contains two options. To modify a covered tax agreement, both contracting
jurisdictions must decide to apply the same option.
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4.2. Bilateral uptake of treaty-related BEPS measures
73. A high-level analysis of 465 bilateral instruments on the IBFD tax treaty database was
conducted to study the extent to which jurisdictions implemented treaty-related BEPS
measures by way of bilateral negotiations, compared with implementation through the
MLI. These include new tax treaties or instruments that modified existing tax treaties
that were concluded between 1 January 2014 and 18 June 2019.
74. A comparison between the adoption of treaty-related BEPS measures in the bilateral
instruments compared with the MLI is necessarily imperfect. The MLI modifies existing
instruments and is aimed exclusively at implementing treaty-related BEPS measures.
By contrast, a new bilateral instrument will be concluded for reasons beyond BEPS
implementation.
75. As noted above, the Action 6 minimum standard is two-pronged. For the first component
of the minimum standard (the express statement) the texts of the bilateral instruments
that were reviewed did not always contain the full preamble text, though this could
be because until recently the IBFD did not reproduce the preamble to treaties in its
database.47
76. With that caveat, around a quarter of reviewed bilateral instruments contain preamble
text that is fully compliant with the first component of the Action 6 minimum standard.
Half of these were concluded after 2018. This suggests an acceleration of the pace at
which jurisdictions are bilaterally bringing their existing treaty networks into compliance
with the Action 6 minimum standard.
77. The express statement may take a number of forms, with many possible formulations
that could satisfy this first component of the Action 6 minimum standard. Many preamble
texts of the reviewed bilateral instruments, however, were only partially compliant. The
majority contained a statement of common intention to prevent fiscal evasion, but did
not mention an intention to prevent double non-taxation or reference to other forms
of treaty abuse. Nevertheless, 46% of the bilateral instruments containing partially
compliant statements were concluded between treaty partners that are both members
of the IF, and that have therefore committed to update their treaty network to reach full
compliance with the Action 6 minimum standard. Higher levels of full compliance are
therefore expected in future.
78. The second component of the Action 6 minimum standard can take the form of a PPT
alone, a combination of the PPT and an LOB (either simplified or detailed) or an LOB
rule accompanied by anti-conduit-arrangements rules. Around half of the reviewed
bilateral instruments include the PPT or a similar provision. More than three-quarters
of these covered the entire treaty, while the remainder only apply to specific types of
income. Similar provisions that did not have as broad a scope as the PPT, varied widely,
in particular with respect to which types of income were subject to their application.
79. A clear trend over the period under analysis was nevertheless observed, both towards the
wider adoption of provisions that resemble the PPT and the adoption of the PPT itself. For
47
96 out of the 465 reviewed bilateral instruments did not display preamble text.
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example, almost all instruments concluded in the first half of 2019 (20 out of 21) contained
the PPT or something that was a similar, fully compliant, broad-scope provision.
80. As for the LOB, although about 7% of the reviewed bilateral instruments included a
version of that provision, there was no increase in its adoption rate similar to that of the
PPT.
81. More than a quarter of the reviewed bilateral instruments included new MAP language
to meet the Action 14 minimum standard, in whole or in part. All of these involved at least
one treaty partner that is currently a member of the Inclusive Framework.
82. The most common treaty-related element of the Action 14 minimum standard adopted
on a bilateral basis, is language that offers taxpayers the choice to present a case to the
competent authority of either contracting jurisdiction (first sentence of paragraph 1 of
article 25 of the 2017 OECD MTC).
4.2.3. Implementation of the Action 6 non-minimum-standard provisions
83. Some bilateral implementation of Action 6 measures outside the minimum standard was
observed. The minimum shareholding period applicable to dividend transfer transactions
was implemented in 54 bilateral instruments; the stricter valuation threshold for capital
gains from the alienation of shares or interests of entities deriving their value principally
from immovable property was implemented in 50 bilateral instruments. Of the reviewed
bilateral instruments, 91 included the measure relating to dual-residency whereby the
competent authorities must resolve such cases on a case-by-case basis, failing which
the entity cannot be granted treaty benefits. Only 19 bilateral instruments included the
measure relating to permanent establishments in third jurisdictions.
84. Arbitration provisions included in the reviewed bilateral instruments (78 in total)
generally followed the latest version of the OECD MTC. An additional five with highly
customized arbitration provisions were identified. An additional 13 bilateral instruments
included a provision in which the treaty partners agreed to implement an arbitration
clause if one of them were to agree to such a clause in favour of a third-party jurisdiction
(a “most favoured nation”-type clause).
4.2.5. Implementation of Action 2 - Neutralising the Effects of Hybrid Mismatch Arrangements
85. Fifty-eight bilateral instruments introduced a provision addressing the concerns posed
by hybrid mismatches and income derived by entities or arrangements treated as wholly
or partly fiscally transparent, similar to that set out in article 3 of the MLI and paragraph
2 of article 1 of the 2017 OECD MTC.
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4.2.6. Implementation of Action 7 - Preventing the Artificial Avoidance of Permanent

Establishment Status
86. Most of the permanent establishment provisions contained in the reviewed bilateral
instruments were customised versions of the 2014 OECD MTC, and did not include
the Action 7 recommendations. Only 45 reviewed bilateral instruments contained
the stricter rules on dependent agent PEs similar to article 12 of the MLI. Fifty-two
included the restricted specific activity exemption similar to article 13 of the MLI. The
provision preventing the splitting-up of contracts to avoid the creation of a permanent
establishment was more popular, and is contained in more than half of the bilateral
instruments reviewed. Its inclusion has also been steady throughout the years under
review (52% in 2014, 63% in 2017, and 57% in the first half of 2019).
4.2.7. Summary of the bilateral uptake of BEPS treaty-related measures
87. The bilateral uptake of the BEPS treaty-related measures is by far less important than
their implementation through the MLI in existing treaties over the same period. Based
on our analysis, it seems that without the MLI, jurisdictions would not have been able to
swiftly implement the BEPS treaty-related measures in their existing treaties.
88. Recognising however that bilateral negotiations often span several months, or even
years, the negotiations of some of the instruments reviewed, started before the launch
of the BEPS Project in October 2015. As a result, comparing the implementation of the
BEPS treaty-related measures at this stage remains imperfect. It however seems that
jurisdictions are moving towards a wider adoption of the BEPS treaty-related measures:
instruments concluded in 2018 or 2019 included more BEPS treaty-related measures than
those concluded before 2018.
5. Conclusion
89. The MLI is an unprecedented coordinated effort to comprehensively modify existing tax
treaties and has allowed jurisdictions to implement new international taxation norms
in a coordinated and efficient way. It has shown that a multilateral approach for the
implementation of internationally agreed standards in existing tax treaties has been a
success.
90. With 94 covered jurisdictions and over 1,630 “matched agreements” on 1 March 2020,
the MLI demonstrates strong support from jurisdictions at all levels of development, for
a coordinated, multilateral approach to resolving BEPS issues and changing tax treaties.
91. Beyond the strong support from all jurisdictions, the analysis contained in this report
suggests that jurisdictions would not have been able to swiftly implement the BEPS
treaty-related measures in about half of the existing global treaty network without a
multilateral instrument that could modify all their existing treaties at once. The MLI
experience thus shows us that coordinated effort is needed to comprehensively and
swiftly modify existing tax treaties and implement internationally agreed tax norms.
92. Going forward, particularly in light of the ongoing work to address the tax challenges
posed by the digitalisation of the economy, it will be essential to draw on the MLI
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experience to implement future internationally agreed treaty-related measures. The

MLI will pave the way for future changes to the international tax system and will inform
how future changes could be implemented even more effectively.
100
List of branch reports Subject 1
LIST OF BRANCH REPORTS SUBJECT 1
Argentina Luxembourg
Australia Mexico
Austria Netherlands
Belgium New Zealand
Bosnia and Herzegovina Nigeria
Brazil Norway
Canada Peru
Chile Poland
China, People's Republic of Portugal
Chinese Taipei Russia
Colombia Serbia
Denmark Singapore
Finland South Africa
France Spain
Germany Sweden
India Switzerland
Israel Turkey
Italy United Kingdom
Japan United States
Korea, Republic of Uruguay
Liechtenstein
Vol. 105A
103
Branch reports Subject 1
Argentina
Branch reporters
Ariadna Laura Artopoulos1
Pablo Sergio Varela2

Argentina has adopted an active role with regard to the implementation of several measures
proposed by the Organization for Economic Cooperation and Development (OECD) as part
of its project on base erosion and profit shifting (BEPS).
In line with Actions 6 and 7 of the BEPS Action Plan, specific clauses have been included in
the bilateral tax treaties signed during 2015 and 2016, such as preamble language describing
the intent of contracting jurisdictions to eliminate double non-taxation; principal purpose
test clauses (PPT) combined with limitation on benefits provisions (LOB) and mutual
agreement procedures (MAP) on dual resident entities disputes.
Traditionally, the country has experienced on the application of GAARs included in the
domestic legislation to international transactions covered by a bilateral tax treaty which are
closed to the PPT clauses. Thus, it was an innovation to incorporate LOB provisions.
It is pending the final decision of the Argentine Supreme Court of Justice on the
application of the GAARs to a case covered by the first tax treaty signed with Chile -that
had already been denounced and renegotiated- which does not follow the OECD Model Tax
Convention on Income and on Capital (OECD Model Tax Convention) or the United Nations
Model Double Taxation Convention between Developed and Developing Countries (UN
Model Tax Convention) and does not have a clause rejecting double non-taxation.
Argentina has signed the Multilateral Convention to Implement Tax Treaty Measures to
Prevent Base Erosion and Profit Shifting (MLI) in June 2017 but the instrument is still pending
approval as of 30 September 2019.3 Despite a delay in the internal proceeding to be approved
by the National Congress, we deem the MLI will be passed into law.
The government provisionally informed that 85% of the existing bilateral tax treaties at
the time of signature were covered by the MLI. With respect to the treaties entered into by
Argentina and not included by the MLI, it concerns the tax treaties signed with Germany and
Brazil where a new treaty and a Protocol of Amendment –already approved-, respectively,
were being negotiated on the date of signing of the MLI. The exclusion of the treaty with
Bolivia is based on the fact that it was written according to the guidelines of the principle of
source or territoriality provided for in the Andean Pact Model.
The contracting jurisdictions of the Covered Tax Agreements (CTAs) have also signed it
and 76% of them have already ratified it definitively by 30 September 2019.
1
Partner of BOMCHIL in Buenos Aires, lawyer with a Master in Tax Law with more than twenty years of experience
advising local and international clients; Professor at different postgraduate courses in Argentina.
2
Founding member of Estudio PSV Consultores Impositivos in Buenos Aires; Lawyer and Certified Public
Accountant with a master’s degree in taxation and other of Criminal Law; Professor at several universities in
taxation matters.
3
The report has been made with the information available until 30 September 2019.
IFA © 2020 107

Argentina
After the signature of the MLI, substantial legislative changes have been made in
domestic legislation that incorporate provisions set forth, among others, in Actions 1, 3, 4, 7,
10, 13 and 14 of the BEPS Action Plan.
Several bilateral tax treaties were negotiated during the last two years that also include
clauses set forth in the BEPS Action Plan and specifically in the MLI.
Thus, the BEPS Action Plan and the MLI already have an indirect impact on the tax treaty
network due to the bilateral tax treaties negotiated since 2015 and will have a direct impact
-with different levels- on the CTAs once the provisions of the MLI take effect.
Argentina also communicated its desire that the treaties covered by the MLI contain the
SLOB clause. Based on the statements expressed to date, the SLOB clause could impact once
the provision takes effect in 36% of the CTAs.
The only reservations made by Argentina are intended to prevent application of the
modifications proposed by the MLI to the treaties that already provide similar provisions.
An important aspect is that Argentina has not opted for the binding arbitration included in
section VI of the MLI.
Taking into account the provisional reservations made by Argentina and the similar or
definitive ones made by the co-contracting countries, 137 clauses out of a total of 510 could
be modified; thus, 27% of the total number of provisions would be modified by the MLI.
Argentina reported to the OECD4 that for its agreement subject to a bilateral complying
instrument, Argentina is implementing the preamble statement and the PPT combined with
the LOB. Nevertheless, LOB provisions were included in only 17% of the bilateral tax treaties
entered into after the signature of the MLI.
There might be interpretation problems due to the fact that the official language in
Argentina is Spanish and 25% of the CTAs do not have an English or French version.
The government unofficially informed that consolidated texts would be agreed upon with
the co-contracting countries and will be available online for consultation, but they will not be
considered as official texts. Such a decision could help to avoid situations of legal uncertainty
or insecurity but will not eliminate the risk of disputes.
The relevant changes introduced in the OECD Model Tax Convention and the
Commentaries will be considered either by the tax officials, the taxpayers, the advisors and
the judges at the time of analyzing a particular transaction, particularly concerning PPT and
SLOB rules.
The complexity of the new framework will demand the enactment of clear and precise
domestic rules to provide legal certainty and transparency.
4
OECD Report on Prevention of Treaty Abuse - Peer Review Report on Treaty Shopping published in February
2019 (OECD (2019), Prevention of Treaty Abuse - Peer Review Report on Treaty Shopping: Inclusive Framework
on BEPS: Action 6, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.
org/10.1787/9789264312388-en).
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Part One: Impact of the MLI and the BEPS Action Plan on the Tax
Treaty Network
1.1. Introduction
The Argentine government signed the Multilateral Convention to Implement Tax Treaty
Measures to Prevent Base Erosion and Profit Shifting (MLI) at the ceremony held in Paris on
7 June 2017 and reported that 85% of the tax treaty network was covered by the instrument.
As of 30 September 2019, the MLI is pending approval by the National Congress.
The contracting jurisdictions of the Covered Tax Agreements (CTAs) provisionally
included at the time of signature of the MLI have also signed it and 76 of them have already
ratified it definitively by 30 September 2019.
During the development of the project on base erosion and profit shifting (BEPS Action
Plan) and of the MLI, Argentina negotiated and/or signed bilateral tax treaties or Protocols
of Amendment that contain guidelines set forth in Actions 6 and 7 of BEPS Action Plan and
in the MLI.
In addition, after the signature of the MLI, substantial legislative changes have been
made in domestic legislation that incorporate the provisions set forth, among others, in
Actions 1, 3, 4, 7, 10, 13 and 14 of the BEPS Action Plan.
Furthermore, several bilateral tax treaties were negotiated during the last two years that
also include clauses set forth in the BEPS Action Plan and specifically in the MLI.
1.2. Background to the MLI
1.2.1. Tax treaties entered into before the MLI
Prior to the signing of the MLI, 19 bilateral tax treaties were in force to avoid double
international taxation at the level of income tax entered into by the Argentine Republic
with Germany, Australia, Belgium, Bolivia, Brazil, Canada, Chile, Denmark, Spain, Finland,
France, Italy, Mexico, Norway, the Netherlands, the United Kingdom, Russia, Sweden and
Switzerland.
Argentina had also signed a treaty with the United Arab Emirates before the signing of
the MLI that entered into force in 2019.5
Most of the tax treaties were negotiated mainly on the basis of the OECD Model Tax
Convention on Income and on Capital (OECD Model Tax Convention) with express inclusion
of provisions contained in the United Nations Model Double Taxation Convention between
Developed and Developing Countries (UN Model Tax Convention), particularly in relation to
the configuration of permanent establishments of construction and services and shared tax
power in matters of royalties.
The tax treaty with Bolivia is the only exception since it is based on the principle of source
or territoriality reflected in the Andean Pact Model.6 The tax treaty in force with Brazil before
5
Agreement signed on 5 February 2016, approved by law No. 27,496, published in the Official Gazette on 4 January
2019. The tax treaty entered into force on 4 February 2019.
6
Until 2012 there was another exception: the previous treaty with Chile, denounced by Argentina and which had
also been negotiated based on the Andean Pact Model.
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the signing of the MLI showed particular characteristics as it combined recommendations

of both models, allowing both countries to apply their internal laws, without limitations.
Between 2008 and 2012 Argentina decided to denounce the existing treaties with Austria,
Chile, Switzerland and Spain considering that there were cases of double non-taxation or
treaty abuse. With the exception of the tax treaty with Switzerland, new texts were concluded
that contain clauses to prevent treaty abuse or treaty shopping.
Also prior to the MLI, tax treaties were signed with Chile, Mexico and the United Arab
Emirates and negotiations were initiated for the signing of a Protocol of Amendment of
the treaty with Brazil and a new treaty with Germany, all with clauses aligned to the new
international context that gave rise to the BEPS Action Plan and to the MLI.
1.2.2. Domestic and treaty-based doctrines, provisions and practices before the MLI
1. Preambles
All the tax treaties in force as of the signature of the MLI provide for preambles that indicate
that the main purposes proclaimed by the tax treaties consist of avoiding double taxation
and preventing tax evasion, with the exception of the tax treaties entered into with Bolivia
and Russia that only indicate that the purpose is to avoid double taxation.
Traditionally, the bilateral tax treaties signed by Argentina did not include any reference
to the intent not to create opportunities for non-taxation or reduced taxation as a central
objective.7
The tax treaties entered into with Chile and Mexico before the MLI include the minimum
standard provided for in article 6 (1) of the MLI and the reference suggested in article 6 (3).
The preamble language of the bilateral tax treaty with the United Arab Emirates includes
article 6 (1) and adds the intention to continue developing economic relations and cooperation
in tax matters and avoid both double taxation and non-taxation.
2. Tax treaty shopping
Domestic general anti-avoidance rules

The competent authority in matters of tax treaties and the fiscal authority resorted to the
application of domestic general anti-avoidance rules (GAARs) to challenge the appropriate
use of the benefits derived from the application of a tax treaty.8
7
García Cozzi, José María, “La doble no imposición internacional”, Convenios para Evitar la Doble Imposición
Internacional, capítulo V. Editorial La Ley, Buenos Aires 2010, p. 95.
8
Opinion (DAT) 57/1996 regarding the treatment of insurance premiums and linked to agreements entered into
with Spain and Italy; Memorandum (National Tax Office 64/2009) in which it was concluded that an abuse of
the treaty signed with Austria was configured and Memorandum (National Tax Office) 799/2010 regarding the
current tax treaty with Chile.
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The GAARs are set forth in articles 1 and 2 of the Tax Procedure Law9 and are known as the
economic reality principle and misuse of the legal forms (“substance over form”).10
The debate is not over yet. In recent years, the most important case that the country had
on the subject matter is discussed judicially and still pending the definition of the highest
court, the Supreme Court of Justice of the Nation.11
The “Molinos case” is based on the tax treaty signed with Chile in 1976 and denounced
by Argentina in 2012 which follows the Andean Pact Model. The GAARs were invoked or
applied despite the fact that the text of the relevant tax treaty did not follow the OECD or the
UN Models nor expressly authorized the use of domestic clauses and ignored the superior
regulatory hierarchy that the tax treaties have over the Tax Procedure Law.
The tax authority resorted to the principle of economic reality to justify that the taxpayer
would have resorted to treaty abuse. Specifically, it questioned the existence of a situation of
double non-taxation arising from the application of the tax treaty.
The facts of the case were that dividends distributed by a Chilean business platform
company incorporated pursuant to Law 19,840 -from related companies resident in third
countries- and received by the Argentine company, were subject exclusively to tax in Chile
by application of the tax treaty rules, without being taxed in Argentina.
On the other hand, the Chilean law 19,840 exempted from the Chilean income tax the
profits obtained by “business platform companies” for investments made or services rendered
outside Chile, so that, the dividends in question were included in the aforementioned
exemption.
The Tax Court and the Court of Appeals shared the criteria of the tax authority when
concluding that the sole purpose of the corporate structure was to take advantage of the
benefits of the tax treaty. Moreover, they considered the existence of a “conduit company”
9
Ley de Procedimiento Tributario, Law 11,683, consolidated text in 1998 adopted by Annex I of Decree 821/98,
published in the Official Gazette on 20 July 1998, and amended rules.
10
Title I, ch. I, General Provisions, Principle of Interpretation and Application of the Laws.
Law 11,683 – S. 1: “When interpreting the provisions of this law or of the tax laws subject to its régime, their purpose
and their economic impact are the aspects to be considered. The rules, concepts and terms of private law shall
be admitted only when it is not possible to determine the meaning or the scope of the rules, concepts or terms
of the aforementioned provisions through letter or spirit.
Analogy to broaden the scope of the taxable event, exemptions or tax offenses shall not be accepted.
In all the cases of application of this law, the right of the taxpayer to a treatment similar to that given to other
subjects who have the same tax status shall be safeguarded and guaranteed. This right entails the right to know
the opinions issued by the Argentine Tax Authority (“AFIP”), which shall be published in accordance with the
regulations issued by that body. These opinions will only be binding when said circumstance has been expressly
set forth in this law or in its regulations” (unofficial translation).
Law 11,683 – S. 2: “In order to determine the true nature of the taxable event, the economic acts, situations and
relations actually performed, pursued or established by the taxpayers shall be the aspects to be considered.
When the taxpayers submit those acts, situations or relations to legal forms or structures that are not those
expressly offered or authorized by private law to properly determine the actual and economic intention of the
taxpayers, the inadequate legal forms and structures shall be set aside when analyzing the real taxable event, and
the real economic situation shall be deemed as falling within the scope of the forms or structures that would be
applied by private law, regardless of those chosen by the tax payers, or that private law would allow the taxpayers
to apply as the forms or structures that would most closely correspond with their actual intentions” (unofficial
translation).
11
National Tax Court, chamber D, “Molinos Río de la Plata S.A.”, 14 August 2013; Federal Court of Appeals, chamber
I, 19 May 2016 and Attorney General for Tax Matters, legal opinion dated on 28 November 2017.
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and concluded that the lack of specific anti-abuse clauses in the tax treaty determined the
validity of resorting to the GAARs foreseen in the domestic law.
The Attorney General for Tax Matters filed a legal opinion to the Supreme Court in the
relevant case in favor of the taxpayer´s position arguing that the tax treaty did not contain
an anti-abuse clause that required transactions to have a commercial purpose or minimum
substance. Additionally, the Attorney General rejected the invocation of domestic anti-abuse
rules not expressly included in the tax treaty due to the hierarchy of rules which determines
that tax treaties are above Argentine law and thus, the GAARs contained in the domestic
law were not applicable.
As a conclusion before BEPS one of the anti-abuse tools were focused mainly on the
GAARs. The Supreme Court will decide in the near future if the GAARs are applicable in the
context of a tax treaty which does not include them.
General principles of treaty interpretation

Argentina follows the principles foreseen in the Vienna Convention of the Law of Treaties of
1969 (Vienna Convention), which was made part of the Argentine law.12
The Supreme Court of Justice has indicated that the necessary application of article 27 of
the Vienna Convention requires the organs of the state of Argentina to give precedence to
treaties whenever they are in conflict with domestic law.13
In general, local scholars are of the opinion that a local GAAR is applicable to the context
of tax treaties provided that its application is generally allowed under a broad interpretation
of article 3.2. of the OECD Model Tax Convention and similar rules of the tax treaties signed,
do not constitute a violation of the text and purpose of the treaty and/or the obligations of the
State to which tax jurisdiction is attributed under the treaty, based on the guiding principle
adopted in 2003 OECD Commentary.14
Even as a general rule there is no conflict between the GAARs and the treaty provisions,
the application of the GAARs should not imply the application of a tax that contradicts the
treaty clauses. In case of a dispute, the treaty provision will prevail as a logical outcome of the
Pacta Sunt Servanda principle contained in article 26 of the Vienna Convention.15
The Tax Court has considered that the OECD Commentaries constitute a source of
authority for the interpretation of a tax treaty16 or can be applied subsidiary as an auxiliary
element for the analysis of a tax treaty.17
12
Law 19,865 published in the Official Gazette on 11 January 1973.
13
Supreme Court of Justice, “Ekmekdjian, Miguel Angel vs. Sofovich, Gerardo y otros”, 7 July 1992, Fallos 315:1492;
“Hoechst A.G. vs. DGI”, 28 April 1998, Fallos 321:1031, among others.
14
Teijeiro, Guillermo: “Las normas anti-elusión en el derecho tributario”, Interpretación económica de las normas
tributarias, Editorial Abaco de Rodolfo Palma, Buenos Aires, 2004, page 603; Messineo, Alejandro: “El principio
de la realidad económica”, Interpretación económica de las normas tributarias, Editorial Abaco de Rodolfo Palma,
Buenos Aires, 2004, p. 658 and Tarsitano, Alberto: “Interpretación y prohibición de abuso de convenio para evitar
la doble tributación internacional”, Tratado de Derecho Internacional Tributario, La Ley 2013, Buenos Aires, page
365.
15
The Argentine Supreme Court has validated the criteria in the case “Autolatina Argentina S.A.”, 27 December
1996, Fallos 319:3208.
16
Tax Court, chamber C, “La Industrial Paraguaya”, 11 March 1980.
17
Tax Court, chamber B, “Volkswagen Argentina S.A.”, 11 December 2009, chamber D, “Aventis Pharma S.A.”, 26
February 2010; chamber C, “Líneas Aéreas Privadas Argentinas S.A.”, 14 April 2010, chamber C, “Union Pak S.A.”, 6
July 2010, chamber B, “Nobleza Piccardo SACIyF”, 15 July 2010 and chamber B, “Carraro Argentina SA s/apelación”,
16 October 2013, among others.
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During 2014, Argentina has accepted the invitation issued by the OECD to become an
associate member of the Committee on Fiscal Affairs which implied to adhere to all the
OECD instruments issued by the Committee with the right to make all the reserves, and
observations that correspond to the OECD members.
In the last years, the Tax Court has considered the examples given in the reports related
to BEPS actions in order to resolve a tax dispute.18
The beneficial ownership concept

This concept was the other anti-abuse tool managed by the tax authorities before the
enactment of BEPS guidelines.
The concept of beneficial ownership is the most used in the tax treaties signed by
Argentina, specifically in the clauses of dividends, interests and royalties, although as of
2012 its application was also foreseen regarding all the clauses of the tax treaties entered
into with Chile and Spain.19
There is no domestic rule that indicates its meaning and scope; there are no judicial
decisions on the subject matter either.
The Argentine government issued some opinions20 related to financial transactions in
which the legal relationship between the parties was analyzed, especially who assumed
the risks related to the transaction, concluding that the concept of “beneficial ownership”
would then require a legal analysis that points to define who has the attributes of income
property, such as possession, use, control and risk without limitations that restrict such
right. Therefore, the principle of economic reality should not be used to define the concept
“beneficial ownership” or the existence of a business purpose to validate its scope.
In order to apply a tax treaty, Argentina requires an affidavit signed by the state of
residence indicating that the relevant individual or entity is the beneficial owner of the
income21.
Treaty-based anti-avoidance provisions

The PPT was included by Argentina in the tax treaties entered into with Sweden and the
United Kingdom in relation to interests and royalties, respectively, and in the tax treaty
entered into with Spain in 2013 in relation to dividends, interests, royalties and capital gains.
Since 2015, the PPT was included in the tax treaties entered into with Chile, Mexico and
the United Arab Emirates.
Also, in the tax treaties entered into as of 2015, LOB clauses with the minimum standard
provided for in article 7 of the MLI (SLOB), were included in the treaties signed with Chile
and Mexico. In the case of the tax treaty with the United Arab Emirates, a SLOB has also been
established, although somewhat simpler.
18
Tax Court, chamber B, “Cisco System Argentina SA”, 14 April 2015.
19
Memorandum of Understanding regarding the application of agreements between the Argentine Republic and
the Republic of Chile or the Kingdom of Spain, points b).
20
Opinion of Treasury Attorney Carlos María Bidegain of the year 1960 and memorandum (National Tax Office
3/2006) dated 4 January 2006.
21
General Resolution (DGI) 3497 as amended by General Resolution (AFIP) 2228 published in the Official Gazette
on 21 March 2007.
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3. Treaty abuses
Before the MLI, there were no rules or practices related to the treaty abuses on the situations
described in articles 8, 9 and 10 of the MLI.
In relation to the abuses detected around the splitting-up of contracts between associated
companies, in the tax treaties with Chile and Mexico, a PPT was foreseen to avoid situations
of abuse.
With regard to independent agents, the treaty with Chile foresees that it will not be
considered to constitute an independent agent if the person acts exclusively on behalf of
several closely related or associated persons, in accordance with the guidelines arising from
action 7 of the BEPS Action Plan.
4. Hybrid mismatch arrangements. Transparent entities and dual resident entities
The Argentine income tax reform comprised in December 2017 made modifications to the
CFC rules, which are the purpose of treatment in action 3 of the BEPS Action Plan.
In line with international standards and comparative legislation, the current legal rule22
extends the application of the international fiscal transparency regime, for cases of trusts
and other similar figures or contracts abroad whose main purpose is the administration of
financial assets, as well as of entities to which the tax legislation of the country of its location,
establishment or domicile does not recognize tax personality. Likewise, the requirements
are modified, and the universe of situations covered with respect to the application of this
regime is extended to cases of participation by residents in the country in foreign entities
that obtain income considered as passive income.
Another measure consistently with the BEPS Action Plan was the creation of a Registry
of Foreign Passive Entities in 2016, which is pending further regulation and implementation
by the Federal Tax Authorities.23 The reporting is applicable to taxpayers who own more
than 50% (or act as directors, managers or similar positions) in foreign companies, trusts,
foundations and other entities that obtain more than 50% of their income from passive
sources within a given calendar year.
In line with action 6 and article 4 of the MLI, the treaties signed by Argentina as of 2015
no longer consider the “effective management headquarters” to resolve cases of double
residence but instead establish recourse to the MAP in order to resolve the issue.
In the case of the treaty with Chile and the United Arab Emirates, however, nationality has
been provided as the first criterion for resolving cases of double residence of legal persons,
while the MAP is contemplated in a subsidiary manner. If there is no agreement between the
competent authorities, the legal person in a double residence situation would not be entitled
to any of the tax benefits or exemptions provided in the treaty.
22
Art. 133 of the Income Tax Law (Ley de Impuesto a las Ganancias), text ordered by Annex I of Decree 649/97
published in the Official Gazette on 6 August 1997, as amended.
23
Law 27,260 published in the Official Gazette on 22 July 2016.
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5. Mutual agreement procedure (MAP) and transfer pricing adjustments
Most of the tax treaties signed by Argentina include the friendly procedure as a method of
resolving international tax disputes, with little experience in the subject. It is not mandatory,
although it would be positive, for unilateral or bilateral decisions that end the procedure, to
be published.
In compliance with the commitment to implement the minimum standard related to
action 14 of the BEPS Action Plan and in line with the provisions set forth in article 16 of the
MLI, Argentina introduced in 2017, in its domestic legislation, rules destined to establish the
terms and the procedure in general for the effective implementation of the MAP contained
in the tax treaty network.24
Argentina is one of the six countries selected by the OECD in the first stage to monitor
the progress of this issue.25
A system of anticipated price tax treaties called “Joint Determinations of International
Operation Prices” was also incorporated into domestic legislation.26 Through this mechanism,
the taxpayer and the tax authority may establish the criteria for transfer pricing according
to which the international operations carried out will be assessed. The incorporation of this
procedure in the Tax Procedure Law is another example of the gradual harmonization of fiscal
policies with the initiatives of the BEPS Action Plan, in this case with its Actions 8, 9 and 10
linked to transfer pricing.
6. Mandatory binding arbitration
The treaties signed by Argentina do not consider mandatory arbitration in any case.27
1.3. Direct impact of the BEPS Action Plan and the MLI
1.3.1. Signature, ratification, entry into force, and entry into effect
Argentina, as part of the G-20, has played an active role in the negotiations and development
of the MLI, forming part of the ad hoc group that began its work in August 2015,28 in accordance
with the mandate drafted by the Fiscal Affairs Committee of the OECD and the G-20 member
countries in February 2015.29
The government signed the MLI at the ceremony held in Paris on 6 June 2017 and delivered
24
The drafting of arts. 205 to 216 of the Tax Procedure Law, already quoted, is an almost literal transcription of the
“model” procedure suggested by the OECD Model Tax Convention for this purpose.
25
https://www.oecd.org/tax/beps/making-dispute-resolution-more-effective-map-peer-review-report-
argentina-stage-1-4fed4933-en.htm
26
Art. 244 of Law 27,430 includes Title IV of the Tax Procedure Law, already quoted, whose chapter II is titled “Joint
Price Determinations of International Operations”.
27
The bilateral tax treaties signed with Switzerland and Chile set forth that if Argentina changes its policy on
the application of the mandatory arbitration, the competent authorities will consider the negotiation of an
amendment of the relevant tax treaty.
28
http://www.oecd.org/tax/treaties/work-underway-for-the-development-of-the-beps-multilateral-instrument.htm
29
http://www.oecd.org/tax/beps/beps-action-15-mandate-for-development-of-multilateral-instrument.pdf
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the relevant list with the country`s position: options, reserves and notifications in respect of
each of the MLI`s provisions.30
The Argentine government has demonstrated a strong commitment to the initiatives
developed within the framework of the G-20, which it chaired during 2018. Since 2016,
Argentina has expanded its participation in OECD Committees and Working Groups, with
the objective to adopt a new status as a member country in the coming years.31
The analyses of the government that have evaluated the impact of the MLI on tax
compliance, on administration and economic activity or on the economic and budgetary
impact of the MLI in Argentina, were not publicly disclosed.
As of 30 September 2019, the legislative process that must be completed with the approval
of the MLI by the National Congress required by article 75, paragraph 22 of the National
Constitution has not been initiated.32Therefore, it has not been deposited definitively as the
instrument of ratification or approval that confirms or modifies the decisions communicated
by Argentina at the time of the signing of the MLI regarding the chosen reservations, notices
and options. The government’s expectation was that the MLI was approved during 2019 and
in a position to enter into force in 2020.
By application of internal regulations,33 (i) the text of the instrument of ratification of the
MLI with its reservations and interpretative statements; (ii) the text of the MLI, with legislative
approval, if applicable, plus the reservations and interpretative statements made by the
other signatory parties, and (iii) the date of deposit of the instrument of ratification, must
be published within fifteen (15) business days following each event or act.
1.3.2. Covered tax agreements
Argentina informed the OECD on a provisional basis that it considered that all the bilateral
tax treaties in force on the date of signing of the MLI were CTAs, with the exception of those
signed with Germany, Bolivia and Brazil. It also included among the CTAs, the tax treaty
entered into with the United Arab Emirates that had been signed but had not entered into
force.
The tax treaties included are seventeen out of the twenty tax treaties entered into and/or
in force. The signatory countries of the tax treaties included are Australia, Belgium, Canada,
Chile, Denmark, the United Arab Emirates, Spain, Finland, France, Italy, Mexico, Norway, the
Netherlands, the United Kingdom, Russia, Sweden and Switzerland.
The tax treaties included represent 85% of the total tax treaties entered into by Argentina
at the date of signature of the MLI.
The contracting jurisdictions of the CTAs have also signed it and have included the
bilateral tax treaty concluded with Argentina as CTAs.
Thirteen of the seventeen countries (76%) have deposited definitively, as of 30 September
2019, the instrument of ratification of the MLI and confirmed that the tax treaty entered
30
The MLI was executed by the Executive, in accordance with the powers provided for in art. 99, para. 11 of the
National Constitution.
31
http://www.oecd.org/latin-america/countries/argentina/argentina-y-la-ocde.htm; http://www.cancilleria.
gob.ar/argentina-mas-cerca-de-la-ocde; https://www.g20.org/, among others.
32
The Bill was nominated under EX-2019-63757636-APN-DGD # MRE and is under the analysis of the Legal and
Technical Secretary of the Presidency of the Nation.
33
Law 24,080 published in the Official Gazette on 18 June 1992.
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into with Argentina had the status of a CTA.34 The rest of the countries have indicated that
the list is provisional or should be confirmed at the time of the deposit of the instrument of
ratification, acceptance or approval.
With respect to the treaties entered into by Argentina and not included by the MLI, these
concern tax treaties signed with Germany and Brazil where a new treaty and a Protocol of
Amendment, respectively, were being negotiated on the date of signing of the MLI. This
was stated by Argentina in its response to the OECD Report on Prevention of Treaty Abuse –
Peer Review Report on Treaty Shopping published in February 2019 (OECD (2019), Prevention
of Treaty Abuse – Peer Review Report on Treaty Shopping: Inclusive Framework on BEPS: Action
6, OECD / G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.
org/10.1787/9789264312388-en).
As of 30 September 2019, the new treaty with Germany has not been signed. For its part,
the Protocol of Amendment to the treaty with Brazil was signed on 21 July 2017 and approved
by the National Congress on 9 May 2018.
The exclusion of the treaty with Bolivia is based on the fact that it was written according
to the guidelines of the principle of source or territoriality provided for in the Andean Pact
Model.
1.3.3. Applicable provisions of the MLI
1. Preamble language in article 6(3) of the MLI
Argentina opted to include the preamble language in article 6(3) of the MLI.
The tax authorities have not given any reason for this choice but before the signature of
the MLI the relevant provision was included in the treaties signed with Chile and Mexico in
2015.
According to the options included by the contracting countries at least 12 out of the 17
CTAs -71%- would be modified including the language foreseen in article 6(3) of the MLI.35
2. OECD’s minimum standard on treaty abuse
Of the total of 17 tax treaties included in the MLI, those entered into since 2015 with Chile and
Mexico provided for an express statement on the intention of the parties to prevent the abuse
of treaties, in line with article 6 (1) of the MLI, so Argentina has expressly made reservations
that these provisions will not be replaced. The preambles of the rest of the tax treaties would
be modified once the provision of the MLI takes effect.
The PPT set forth in article 7(1) was consistently included by Argentina since 2015 in the
treaties entered into with Chile, Mexico, the United Arab Emirates and in the Protocol of
Amendment of the treaty with Brazil.
34
The counterparties that have deposited definitively the instrument of ratification of the MLI as of 30 September
2019 are Australia, Belgium, Canada, Chile, Denmark, Finland, France, the Netherlands, Norway, Russia, Sweden,
Switzerland, the United Kingdom and the United Arab Emirates.
35
These treaties are those executed with Australia, Belgium, France, Norway, the Netherlands, the United Arab
Emirates, the United Kingdom, Russia, Spain and Switzerland. We add the agreements with Chile and México
that already include the provision.
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Argentina also communicated its desire that the CTAs (except the treaty with Chile and
Mexico that already complied with the guidelines) contain the SLOB clause pursuant to article
7 (6) of the MLI. The only countries that also exercised the same option to include the SLOB
clause are Denmark, Norway and Russia.
As we indicated, LOB provisions were included in the tax treaties signed with Chile,
Mexico, the United Arab Emirates and in the Protocol of Amendment of the tax treaty entered
into with Brazil.
Thus, the SLOB clause could impact once the provision takes effects in 36% of the CTAs.
Finally, it should be noted that Argentina has not opted for the application of article 7 (4)
of the MLI, which provides for the revision of the concession of the tax benefits provided for
in the treaty, at the request of the person and prior consultation with the other competent
authority, prior to its rejection.
3. Other provisions of the MLI addressing tax treaty abuse Argentina has chosen to apply
(1) Dividends
Argentina stated that all the CTAs contain a clause to which the standard provided in article 8
(1) of the MLI will apply, with the exception of the bilateral tax treaties with France and Italy.36
Based on the notices made, 47% of the CTAs will be modified for which the limited
withholding rate will apply only if the property conditions set by the rule are met for a period
of 365 days. They are the treaties executed with Australia, Belgium, Canada, Spain, Mexico,
Norway, the Netherlands and Russia.37
(2) Capital gains

Argentina notified its willingness that article 9 (4) of MLI be applied, so that the profits
obtained by a resident derived from the disposal of shares or similar rights may submit to
taxation in the other contracting jurisdiction if at any time during the period of 365 days
prior to disposal, the value of the shares or rights proceeds in more than 50 percent directly
or indirectly of real estate located in that other contracting jurisdiction.
This option was also exercised by Canada, Denmark, France, Italy, Russia and Spain so that
in these cases the respective clause of the treaties will be replaced. They represent 35,30%
of the CTAs.
Argentina also reported that the treaties executed with Australia, Chile, the United Arab
Emirates, Spain, Mexico, the Netherlands, Switzerland and the United Kingdom, already
contain a clause similar to that set forth in 9 (1) that would be completely replaced by article
9 (1) in the case of the treaties with Mexico and the Netherlands or, partially, either by article
9 (1) (a) in the case of the treaty with Australia or by article 9 (1) (b) in the case of the treaty
with Chile.
Only Australia, Chile, México and the Netherlands notified the application of any of the
provisions indicated in article 9(1), so the clause may be replaced in 23,50% of CTAs.
36
Those treaties do not contain a different tax treatment as a consequence of the ownership, holding or control
of a certain amount of capital.
37
Chile, Denmark, Finland, the United Arab Emirates, the United Kingdom, Switzerland and Sweden have made
a reservation pursuant to the provisions set forth in art. 8 (3) of the MLI.
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We emphasize that the domestic tax reform applicable since 2018 included in the income
tax law the taxability of the indirect disposal of shares and participations to the extent that
the parameters established by the rule are met.38
(3) Low taxes PE in third jurisdictions

Regarding the rule set forth in article 10 (1) to (3) of the MLI, Argentina only reserved the
right not to apply the rule regarding the tax treaty with Chile for containing a similar rule.39
Therefore, and in accordance with the notices disclosed, the rule will apply to 29,40% of the
CTAs. Those are the bilateral tax treaties in force with Denmark, Mexico, the Netherlands,
Russia and Spain.40 The provision will impact only if Argentina qualifies as the state of
source. Otherwise, income obtained by a PE located in any jurisdiction will be subject to tax
in Argentina (state of residence). It will be subject to the same treatment of a PE located in
the country.
(4) PE status through commissionaire

Argentina expressed its willingness that the clause set forth in article 12 of the MLI be applied
to all treaties covered by the MLI, with the exception of the treaty with Chile that already
contains a similar rule.
Regarding the notices made, the parameter provided for in article 12 of the MLI would
apply to treaties in force with Belgium, Denmark, France, Mexico, Norway, Russia and Spain.41
More than 47% of the CTAs will be impacted by this amendment.
The Argentine government opted for option A provided for in article 13 (2) of the MLI,
so that each of the activities included in the “negative list” is required to be preparatory or
auxiliary in order to rule out the existence of a PE, as it has also been reflected in its internal
regulations with the reform approved in December 2017.42
Among the treaties included, Australia, Denmark, Italy, Mexico, the Netherlands, Norway,
Russia and Spain would also have exercised option A, so that the relevant part of article 5 of
the treaties will be amended.43 For its part, given that the parameter is already foreseen in the
treaty with Chile,44 Argentina indicated that the rule will not be applied.45 As a result, more
than 53 of the CTAs will be amended after MLI’s approval.
Regarding section (4) of article 13, referring to the development of activities that constitute
complementary functions that are part of a cohesive economic operation, Argentina opted for
its application so that depending on the coincidence with the choice of Australia, Belgium,
Chile, Denmark, France, Italy, Mexico, the Netherlands, Norway, Russia, Spain, and the United
38
Art. 13.1 of the Income Tax Law already quoted. According to the rule, under certain circumstances, there is an
Argentinean source in the indirect transfer of assets. The transfers made within the same economic group are
excluded.
39
The Protocol of Amendment to the treaty with Brazil also includes this anti-abuse rule.
40
Australia, Belgium, Canada, Chile, Finland, France, Italy, Norway, Sweden, Switzerland, the United Arab Emirates
and the United Kingdom have made reservations not to apply this rule, in accordance with the provisions set
forth in clause 10 (5) (a).
41
Australia, Canada, Finland, the Netherlands, Italy, Sweden, Switzerland, the United Arab Emirates and the United
Kingdom have made reservations not to apply this rule, in accordance with the provisions set forth in clause 12 (4).
42
Art. 16.1, fourth para. of the Income Tax Law, already quoted.
43
For its part, Belgium, Canada, Finland, France, Sweden, Switzerland, the United Arab Emirates and the United
Kingdom reserved the right not to apply the rule.
44
Art. 5 (4).
45
This standard has also been incorporated in the Protocol of Amendment of the treaty with Brazil, art. 5.3.
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Kingdom, the rule will apply to the corresponding treaties. Thus, more than 70% of the CTAs
would be modified to include the proposed text.
Argentina also opted for the application of article 14 (1) to the included treaties, with the
exception of the treaties with Chile and Mexico which, as we indicated, they already contain
the rule.
Taking into account the notices made, the rule will apply to treaties in force with Australia,
Denmark, the Netherlands, Norway (except in the latter two cases regarding the exploration
and exploitation of natural resources since an express reservation was made) and Russia,46
for which they will be modified as from the corresponding entry into force. The change will
impact more than 40% of the CTAs.
This standard is also already incorporated into domestic legislation since the end of 2017,47
although a thirty (30) day time threshold (as in the MLI) is not foreseen, which will be added
to the accumulated term.
4. Hybrid mismatch arrangements
The only notification made by Argentina concerning article 3 was the existence of the bilateral
tax treaty with the United Kingdom which contains a provision described in article 3 (4). The
actual scope of the bilateral tax treaty limited to partnerships will be expanded according
to the language set forth in article 3 (1) as both countries have opted for the replacement.
According to the notifications made by the CTAs jurisdictions, the proposed amendment
will be adopted in 73% of the included tax treaties: Australia, Belgium, Chile, Denmark, the
Netherlands, Norway, Russia, Spain and the United Kingdom.
Argentina has opted to apply article 4 of the MLI to all the CTAs.
So far, most of the countries that correspond to CTAs (11 out of a total of 16) have reserved
the right not to apply any of the provisions set forth in article 4 of the MLI to their included
treaties. The bilateral tax treaties that will be amended are the ones signed with Australia,
Canada, Denmark, the Netherlands, Norway and the United Kingdom.
By virtue of this, it has ruled on the application of the MAP to resolve the disputes of
entities with double residence, as it was bilaterally negotiated in the tax treaties signed as
of 2015 (i.e., Chile, Mexico and the United Arab Emirates).
Thus, MAP will be applicable in more than 52% of the CTAs.
5. Mandatory binding arbitration of disagreements between contracting states
Argentina has not chosen to apply the arbitration with respect to its included treaties, so
none of them will have modifications in this regard.
We emphasize that domestic legislation does not contemplate the use of alternative
methods for resolving tax disputes. However, the submission of differences to arbitration
tribunals is not an obstacle in the provisions contained in the National Constitution, when
46
Belgium, Canada, Chile, Finland, France, Italy, Mexico, the United Arab Emirates, the United Kingdom, Spain,
Sweden and Switzerland reserved the right not to apply the rule.
47
Art. 16.1 of the Income Tax Law already quoted.
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such differences result from the application of international treaties.48

The inclusion of arbitration should await other instances of internal and international
discussion which are expected not to occur in the near future so that it can be adopted as a
means of resolving international disputes.
6. Reservations
The only reservations made by Argentina are intended not to apply the modifications
proposed by the MLI to the treaties that already provide similar provisions (generally, with a
broader standard than the one contained in the BEPS Action Plan and the MLI).
This happens with respect to treaties with Chile and/or Mexico, in line with the provisions
indicated in articles 6 (4), 7 (15) (b) and (c), 10 (5) (b), 13 (6) (b), 14 (4) of the MLI. This was
indicated by Argentina in the 2019 OECD Peer Review Report on Action 6.
An important aspect is that Argentina has not opted for the binding arbitration included
in section VI of the MLI.
7. Proportion of tax treaty provisions subject to modifications through the MLI
Given that some of the treaties were executed more than four decades ago, we envision that
effects may occur mainly with regard to Actions 6 and 7 of the BEPS Action Plan, with the
incorporation of PPT and SLOB clauses to the CTAs.
Taking into account the provisional reservations made by Argentina and the similar or
definitive ones made by the co-contracting countries, 137 clauses of a total of 510 could be
modified; thus, 27% of the total number of provisions would be modified by the MLI.
1.4. Indirect impact of the BEPS Action Plan and the MLI
1. New bilateral tax treaties entered into since the MLI was signed
After the signing of the MLI, Argentina signed the Protocol of Amendment to the tax treaty
in force with Brazil.
The government also signed tax treaties with Qatar, China, Luxembourg, Turkey and
Japan.
As of 30 September 2019, there are ongoing negotiations with Germany and France to
modify the existing treaties and with Austria, Israel and Colombia for the signing of tax
treaties.
The intention of the government is also to start negotiations in the near future with
Kuwait, New Zealand and India.
48
Art. 75, para. 24 of the National Constitution authorizes the Congress to approve integration treaties in which
jurisdiction is delegated in favor of supra-state organizations.
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2. MLI and associated revisions to the 2017 OECD Model Tax Convention impact on negotiations
of bilateral tax treaties since the MLI
The MLI and the revision of the 2017 OECD Model Tax Convention have an impact on the
negotiation of bilateral treaties.
Argentina reported in the OECD Report on Prevention of Treaty Abuse – Peer Review
Report on Treaty Shopping published in February 2019 (OECD (2019), Prevention of Treaty
Abuse – Peer Review Report on Treaty Shopping: Inclusive Framework on BEPS: Action 6,
OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris,
https://doi.org/10.1787/9789264312388-en) that for its agreement subject to a bilateral
complying instrument, it is implementing the preamble statement and the PPT combined
with the LOB.
Nevertheless, only PPT provisions were included in the tax treaties signed with Qatar,
China, Luxembourg, Turkey and Japan which are pending approval by the National Congress.
The PPT combined with LOB was included in the Protocol of Amendment to the treaty with
Brazil.
A preamble text similar to the one proposed by article 6 (1) of the MLI was included in the
Protocol of Amendment of the tax treaty with Brazil, and in the tax treaties signed with China,
Luxembourg, Turkey and Japan. The additional text described in article 6 (3) and chosen by
Argentina in the context of the MLI, was not included.
The aforementioned treaties also contained other provisions proposed by articles 3, 449,
850, 951, 1052, 12, 13, 14 and 16 of the MLI.
Argentina did not include in bilateral negotiations provisions of the MLI which were not
adopted either before or after the signature of the MLI.
It is expected that the country will continue the negotiation of new treaties and
amendments on current treaties based on MLI’s provisions.
As a non-OECD economy, Argentina had included its position on the Model Tax
Convention. The policy adopted regarding the MLI is the same as the policy adopted regarding
the 2017 version of the OECD Model Tax Convention.
Part Two: Practical Implementation of the Provisions of the MLI
2.1. Entry into force and legal value of the MLI
2.1.1. Procedure implemented in order to implement the MLI
A specific procedure to implement the MLI has not been disclosed.

Historically, the National Congress has not had an active participation in the analysis
49
The Protocol of Amendment to the tax treaty with Brazil and the bilateral tax treaty signed with Luxembourg
do not contain the provision sets forth in art. 4 (1) of the MLI:
50
The bilateral tax treaty signed with Qatar does not contain the provision proposed in art. 8 (1) of the MLI and the
bilateral tax treaty entered into with Japan foresees a term of six months.
51
The Protocol of Amendment to the tax treaty with Brazil and the bilateral tax treaty signed with Qatar do not
contain the provision included in art. 9 (1) of the MLI.
52
This provision was only included in the tax treaty signed with Japan.
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Artopoulos & Varela
of international tax treaties, so it is estimated that it will be approved without thoroughly

analyzing the details of its content.
The Ministry of Finance has unofficially stated that consolidated texts would be agreed
with the co-contracting countries that will be available online for consultation, but they will
not be considered as official texts. This decision is not due to a legal requirement but to
political reasons and with the aim of avoiding situations of legal uncertainty or insecurity.
Due to the fact that there are seventeen tax treaties included, we consider it feasible for this
initiative to be carried out. There is no evidence that Argentina has been influenced by the
“Guide for the development of synthesized text” published by the OECD (November 2018).
So far, private publishers have not disclosed consolidated texts of tax treaties as a result of
their future modification by the MLI.
If the tax authorities publish consolidated or synthesized tax treaties that take into
account the MLI, they will not have their own legal value unless they have been approved
by the National Congress.
If there is a divergence between the final text and the actual impact of the MLI in a
tax treaty due to an error in the consolidation process or due to the ambiguity of the MLI
impact, the tax administration will not be bound by the consolidation. Hence, there is a risk
of potential disputes. If as a consequence the tax authorities imposed a fine, the taxpayers
may allege they incurred an excusable error to reject its imposition.53The OECD “MLI matching
Database” has no legal value in Argentina.
2.1.2. Legal value of the MLI
In Argentina the monist doctrine is applied. For more than a century, the position of the
Supreme Court of Justice of the Nation was basically dualist. In 1992 it made a fundamental
turn by judging in the case “Ekmekdjian, Miguel Angel c/Sofovich, Gerardo and others”,54
adopting a monist stance, a criterion that from that date remains uniform in its case law.
On that occasion, the Argentine Supreme Court indicated that the treaties, both bilateral
and multilateral, constitute “a complex federal act that culminates in its approval and
ratification”, as celebrated by the Executive, approved by the Legislative Branch and refined
again by the Executive through registration and deposit. The highest Court also concluded
that because of the validity of the Vienna Convention on the Law of Treaties, the primacy of
conventional international law over domestic law integrates the Argentine legal system and
that the necessary application of article 27 of the Vienna Convention imposes to the bodies
of the Argentine Government to assign primacy to the treaty before a possible dispute with
any internal contrary rule clarifying in another precedent that this should happen “once the
constitutional principles of public law were assured.”55
53
Law 11,683, already quoted, – S. 50.2:” It will be considered that there is an excusable error when the applicable
rule to the case – due to its complexity, darkness or novelty – admits different interpretations that prevent the
taxpayer or responsible, even acting with due diligence, to understand its true meaning. In order to evaluate
the existence of an excusable error exempt from sanction, the non-complied rule, the taxpayer’s condition and
the repetition of the conduct on previous occasions must be assessed, among other elements, of judgment”.
54
Precedent already quoted. Other rulings that refer to monist principles are: “Fibraca Constructora SCA vs.
Comisión Técnica Mixta de Salto Grande”, 7 July 1993, Fallos: 316:1699 and “Cafés La Virginia SA”, 13 October
1994, Fallos 317:1282.
55
Precedent “Fibraca Constructora” already quoted.
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As of 1994, the National Constitution was reformed, which establishes in article 75

paragraph 22 that international treaties or tax treaties, among which are the tax treaties
to avoid international double taxation and the MLI, have a superior hierarchy to the laws.
Until it is approved by Congress, the MLI has no legal value. Once ratified, its provisions are
superior to domestic legislation and cannot be modified by subsequent internal regulations.
The similar regulatory hierarchy of both rules – MLI and treaties- determines that in the
application phase, the respective clauses of the included treaties will be replaced or added
according to the text provided in the MLI, provided that it is the result of the statements made
by the contracting jurisdictions. That is, the provisions of the MLI will prevail over domestic
legislation and over the clauses of the treaties comprised by both signatory parties in the MLI
and which were modified in a coincident manner by both countries.
2.2. Interpretation Issues
2.2.1. Interpretation of the MLI
The MLI has so far not given rise to specific interpretations in Argentina either by the
government or by the courts. No legal weight has been granted to the explanatory
memorandum of the MLI. There was no pronouncement either regarding the interpretation
guidelines provided in the OECD memorandum called “Multilateral agreement to implement
measures related to the tax treaty to prevent the base erosion and profit shifting: functioning
according to public international law”.
There might be interpretation problems due to the fact that the official language in
Argentina is Spanish and 25% of the CTAs do not have an English or French version. The
government must submit a translation into Spanish to Congress for the MLI to be approved.
2.2.2. Interpretation of tax treaties generally
The connection between the MLI and the previous OECD reports published in the course of
the BEPS Action Plan has so far not given any indirect legal value to these reports for treaty
interpretation purposes.
As we already mentioned in this report, the courts have resorted to the definition set
forth in article 5 of the OECD Model Tax Convention, and to the comments of the OECD Model
Tax Convention on numerous occasions in order to determine whether or not a permanent
establishment exists.56
Given the impact that the OECD Model Tax Convention has had on the definition of the
concept of permanent establishment in domestic legislation and in the signing of bilateral tax
treaties, the comments to the OECD Model Tax Convention will without any doubt continue to
be a source of interpretation that will be used frequently to resolve disputes that may arise.
So far there is no evidence that the method of interpretation of an agreement is being
modified due to the MLI. There is no background after the signing of the MLI to determine if
there are changes in the interpretation of the clauses of the tax treaties.
56
Precedents already quoted in s. 2 of this report.
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2.2.3. Interpretation of earlier tax treaties (pre-MLI)
The MLI cannot have an impact on the interpretation of tax treaties entered into before its
signature since it will be violating the principle of non-retroactivity set forth in article 28 of the
Vienna Convention on the Law of Treaties of 1969, which was made part of the Argentine law.57
There are no signs that the preambles that are modified by the MLI are used retroactively
when interpreting the tax treaties by de facto situations existing before the MLI enters into
force.
The retroactive application would be objectionable because it is contrary to the principle
of law reserved for tax matters enshrined in articles 4 and 17 of the National Constitution.
There have been no debates about whether the decisions taken by Argentina after the
signing of the MLI can exert a retrospective influence on the interpretation of the tax treaty.
2.3. Tax planning and tax administration after the BEPS Action Plan and the MLI
Experts dedicated to the tax area will undoubtedly take into account the PPT in tax planning
issues. Once the minimum standard of the MLI takes effect, all international instruments
signed by Argentina will have PPT clauses.
But, also if by any circumstance the MLI`s provision does not take effect, the PPT will be
considered by tax professionals and the tax administration. First, because without considering
the MLI, almost 50% of the bilateral tax treaties signed by Argentina as of 30 September
2019 contain a PPT provision. Second, because of the existence of a GAARs provided in the
domestic law. The position of the tax authorities and the existing doctrine on the application
and interpretation of said GAARs are considered by the experts at the time of analyzing a
specific transaction.
The expanding of the parts of the Commentary of the OECD Model Tax Convention
by explaining that treaties do not inadvertently prevent the application of such domestic
anti-abuse rules will increase the consideration of the GAARs to analyze any international
transaction.
The subjective nature of the PPT test implies the carefully review of the transactions or
arrangements in order to determine if the taxpayer has the purpose to obtain the benefits
of the provision of the treaties in inappropriate circumstances.
The incorporation of LOB clauses entails a significant change in the analysis of investment
schemes that will require the evaluation of various circumstances to determine if the tax
treaty is applicable. Depending on the application and interpretation of these clauses, it
may imply ruling out the origin of the tax treaties in many cases generating double taxation,
which may discourage genuine investments that are intended to be made through foreign
investment vehicles.
The examples mentioned in Action 6 of the BEPS Action Plan and the relevant changes
introduced in the OECD Model Tax Convention will be considered either by the tax officials,
the taxpayers, the advisors or the judges at the time of analyzing a particular transaction,
particularly concerning PPT and SLOB rules.
57
Law 19,865 already quoted. The non-retroactivity principle is also accepted by art. 7 of the Civil and Commercial
Code of the Nation, approved by Law 26,994 published in the Official Gazette on 8 October 2014.
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Argentina
The complexity of the new framework will demand the enactment of clear and precise
domestic rules to provide legal certainty and transparency.
So far, there have been no substantial modifications in practical terms in the evaluation
of the budgets for misuse of the tax treaty. Although LOB provisions are already part of the
Argentine legislation because they are incorporated into existing international tax treaties
signed since 2015, no indications or decisions from the tax authority regarding the issue have
been made public.
Moreover, assuming that the MLI will enter into force and adding the bilateral tax treaties
signed after the MLI and pending of approvals, only seven out of 22 tax treaties will include
a LOB provision (30% of the treaty network).
The tax authority must carry out an inspection and subsequent fiscal adjustment if it
intends to ignore the tax treatment of a given transaction by applying a PPT clause. There are
no backgrounds, nor have they been found to suggest that a special committee can be created
to review potential determinations based on the application of the PPT clause.
Most of the tax treaties entered into by Argentina provide for the MAP and there are
internal rules that provide for deadlines and precautions for their implementation in line
with the standards provided by the OECD.
Finally, Argentina did not opt for arbitration so the MLI will not have an impact in this
sense. The criterium was also followed in the bilateral tax treaties negotiated after the
signature of the MLI.58
58
In the tax treaty signed with Japan a special clause was included indicating that if Argentina concluded an
agreement with a third jurisdiction containing provisions for arbitration, it shall enter into negotiations with
Japan, at its request, to incorporate them into the convention.
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Australia
Branch reporters
Sunita Jogarajan1
Gareth Redenbach2

While Australia has a modest treaty network (44 treaties), its treaties cover a large majority
of direct and indirect investment into and out of Australia. Its major trading partners include
the US, China and the UK. Australia’s treaty practice is based on the OECD Model with a
number of exceptions including importantly:
–– a broader definition of permanent establishment (reflecting Australia’s dependence on
mineral resources);
–– imposition of tax on dividend, interest and royalty at source and subject to higher than
usual rates of withholding;
–– a reservation relating to the ability to impose tax on permanent establishments without
necessarily having regard to the functionally separate enterprise principle;
–– modern treaties including a limitation on dividend, interest and royalty articles where
one of the main purposes was to access those benefits; and
–– explicitly providing in domestic law, which incorporates each treaty into domestic law,
that it was subject to being overridden by certain GAARs and SAARs.
Prior to the MLI, Australia had made some domestic and limited bilateral agreements relating
to what are now termed the BEPS initiatives. These included:
–– limited domestic foreign hybrid provisions applying transparent treatment to certain
limited partnerships and LLCs and other entities which would otherwise be taxed as
companies for Australian tax purposes;
–– only one of Australia’s signed (but then unenacted) treaties included pre-amble wording
that specifically addressed the desire to avoid “creating opportunities for non-taxation
or reduced taxation”;
–– comprehensive and complex statutory anti-hybrid rules that came into effect on 1 January
2019 which, in some actions, go beyond BEPS Action item 2.
Australia has, at the time of writing, 27 outstanding MAP matters relating to transfer pricing
and 17 relating to other aspects of treaty practice.
Australia signed the MLI listing 43 of its 44 comprehensives tax treaties (based on
counterparty positions, 32 of Australia’s treaties will be amended by the MLI). The only
treaty Australia excluded was the 2016 Australia-Germany DTA which was concluded after
the publication of the MLI and met the MLI minimum standards. Australia also subsequently
excluded the agreement with Chinese Taipei as it is of less than treaty status. Australia’s
stated position with regard to the MLI is to adopt the minimum standards and as many of
the optional articles as possible and make limited use of the MLI reservation system. The
1
Professor at Melbourne Law School, University of Melbourne.
2
Barrister and Senior Fellow of the University of Melbourne.
IFA © 2020 127

Australia
most important treaty not to be modified, from a bilateral trade perspective, is the treaty
with the US.
The MLI has entered into force, consistent with Australia’s treaty practice, as a schedule
to the International Tax Agreements Act 1953. But for particular GAAR and SAAR provisions,
treaties override Australia’s domestic law (including, in at least one case, to impose domestic
tax via a deemed source article where no tax would otherwise be imposed). There is nothing
in the manner in which the MLI has been incorporated into Australian law indicating that its
text will be construed differently to that of other bilateral treaties by reference to the Acts
Interpretation Act 1901 and to the Vienna Convention of the Law of Treaties 1969 (VCLT). While
Australian law favours the text as written, interpretation of treaty instruments generally gives
greater weight to context and purpose (e.g. by reference to article 31 of the VCLT).
Consistent with article 32 of the VCLT, when the meaning resulting from the application
of article 31 leaves the meaning ambiguous or obscure or leads to a result which is manifestly
absurd or unreasonable, recourse is frequently had to supplementary materials. It is likely a
question will arise on how far this recourse to supplementary materials extends in the context
of a Covered Tax Agreement. The Base Erosion and Profit Shifting Action Item Reports are
likely article 32 material under the Vienna Convention, but they are broad and not necessarily
focussed on the text of the MLI and are not directly related at all to any specific Covered Tax
Agreement. The formal separation of the MLI from existing bilateral treaties is not overly
convincing, and Australian statutory interpretation tends to read an instrument that depends
on another for its effect (such as the relationship of the MLI to a Covered Tax Agreement) as a
single instrument. As such, the usefulness of the BEPS Reports in determining the meaning
of any particular article of a Covered Tax Agreement is uncertain.
Informally, the reaction to the MLI within the Australian tax community has been
relatively calm (with the exception of the residency changes in article 4) as Australian tax
planning strategies are often not treaty dependent. Australian domestic law provides that
an entity incorporated outside Australia can be an Australian resident if (broadly) it has
central management and control in Australia. Accordingly, a large number of companies
may be prevented from benefiting from Covered Tax Agreements as dual residents (i.e.
foreign incorporated and Australian controlled). On the positive side, the confusion caused
by article 4 has led to a rapid increase in bilateralism at least between Australia and New
Zealand whose revenue authorities released a joint MLI Article 4(1) Administrative Approach
providing for self-assessment of a place of effective management where a taxpayer satisfies
certain eligibility criteria (e.g. for small to medium enterprises) as such entities may often
have elements of control in both countries.
The hybrid provisions in article 3 have been seen as reducing and increasing complexity
depending on a taxpayer’s particular position. Australia, somewhat uniquely, treats limited
partnerships as companies. Currently, the position is that a foreign limited partnership is
assessable separately from the partners and often without treaty benefits and required to pay
the tax assessed, although the Commissioner would be barred from enforcing a judgment
against a partner that was entitled to treaty benefits. Where the provisions of article 3(1) of
the MLI are available, this may provide greater certainty for inbound investors that they are
positively entitled to treaty benefits and protected from taxation in the hands of the deemed
company for Australian tax purposes.
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Jogarajan & Redenbach
1. Part One: Impact of the MLI and the BEPS Action Plan on the Tax
Treaty Network
1.1. Introduction
Australia is a net capital importer. At the end of 2018, foreign economies had a total of $3.5
trillion invested in Australia as compared to around $2.5 trillion of Australian money invested
overseas.3 The United States, the United Kingdom and Japan made up almost 50 percent
of direct and portfolio investment flows in and out of Australia in 2018. Almost 40 percent
of foreign direct investment in Australia flowed to mining and quarrying with another 30
percent flowing equally to manufacturing, financial services and real estate.
This part describes Australia’s tax treaties and doctrines, provisions and practices prior
to the MLI and then proceeds to discuss the direct and indirect impacts of the BEPS Action
Plan and the MLI in Australia.
Prior to the MLI, Australia had concluded 44 comprehensive tax treaties.4 Taking into account
any later amendments, Australia’s oldest tax treaty dates back to 1980 (with the Philippines)
and its most recent before the MLI was with Germany in 2016. Australia has ten tax treaties
which were concluded or updated within the last ten years, 13 between ten and twenty years
ago, another 13 between twenty and thirty years ago and eight more than thirty years ago.
Australia has been an active member of the OECD since 1971 and Australia’s tax treaties
generally follow the OECD Model in operation at the time the treaties were negotiated.
However, as a capital-importing country with a large natural resources industry, Australia’s tax
treaties depart from the OECD Model in certain aspects. In particular, Australia has historically
adopted a broader definition of ‘permanent establishment’ and imposed higher withholding
tax rate ceilings for dividends, interest and royalties derived from Australia by non-residents.5
In 2003, the government accepted a Board of Taxation recommendation that Australia should
move towards a more residence-based treaty policy.6 The recommendation was made on the
basis that Australia was moving towards a balance in investment inflows and outflows and also
that a move towards residence-based treaty policy would hasten the renegotiation of several
3
Australian Government Department of Foreign Affairs and Trade, Foreign Investment Statistics https://dfat.gov.
au/trade/resources/investment-statistics/Pages/foreign-investment-statistics.aspx.
4
These treaties are with Argentina, Austria, Belgium, Canada, Chile, China, Czech Republic, Denmark, Fiji,
Finland, France, Germany, Hungary, India, Indonesia, Ireland, Italy, Japan, Kiribati, Republic of Korea, Malaysia,
Malta, Mexico, Netherlands, New Zealand, Norway, Papua New Guinea, Philippines, Poland, Romania, Russia,
Singapore, Slovakia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Chinese Taipei, Thailand, Turkey, United
Kingdom, United States and Vietnam. In addition, Australia also has a number of airline profits agreements and
tax information exchange agreements.
5
Board of Taxation, International Taxation: A Report to the Treasurer (2003) 89.
6
Australian Treasury, Treasurer Peter Costello – Review of International Taxation Arrangements (Media Release
No.32, 13 May 2003).
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Australia
major tax treaties.7 Even with the shift to a residence-based treaty policy, Australia continues
to maintain a number of reservations with respect to the OECD Model.
1.2.1.1. Australia’s Reservations to the OECD Model
1.2.1.1.1. Article 2 (taxes covered)

Australia has a reservation to article 2(1) regarding the application of the OECD Model to taxes
on capital.8 This is because Australia does not impose a separate tax on capital.
1.2.1.1.2. Article 5 (permanent establishment)

Australia has three reservations in relation to article 5 (permanent establishment) which have
the effect of adopting a source-country taxation approach in this regard. First, Australia has
a current reservation to article 5(1) as follows:
Australia reserves the right to treat an enterprise as having a permanent establishment

in a State if it carries on activities relating to natural resources or operates substantial
equipment in that State with a certain degree of continuity, or a person – acting in that
State on behalf of the enterprise – manufactures or processes in that State goods or
merchandise belonging to the enterprise.
The reservation is intended to protect Australia’s right to tax income from natural resources
and is considered necessary as:
Australia’s experience is that the permanent establishment provision in the OECD Model
may be inadequate to deal with high value activities involved in the development of
natural resources, particularly in offshore regions. For example, mobile equipment
used in offshore exploration may not have the necessary geographical fixedness to be
considered as permanent establishments under Article 5(1) of the Convention. Also,
construction of offshore oil drilling platforms can be effected in a relatively short time.9
In keeping with this reservation, all but one of Australia’s tax treaties (with Austria) include
a provision treating the use or maintenance or operation of substantial equipment in
Australia (or some variation thereof) as a permanent establishment. Ten of Australia’s tax
treaties include an additional provision stipulating that the carrying on of activities relating
to the exploration or exploitation of natural resources constitutes a deemed permanent
establishment. Further, almost all of Australia’s tax treaties include as an additional example
of a permanent establishment “an agricultural, pastoral or forestry property” or some
variation thereof. This example reflects Australia’s policy of retaining taxing rights over the
exploitation of Australian land for the purpose of primary production.10
7
Above n. 5, 93-94.
8
OECD, Model Tax Convention on Income and on Capital (Full Version) (2019), C(2)-4 (hereafter referred to as
‘OECD Model’).
9
Explanatory Memorandum to the International Tax Agreements Amendment Bill (No. 2), 2002, para. 1.14.
10
Explanatory Memorandum to the International Tax Agreements Amendment Bill, 1995, p. 18; Explanatory
Memorandum to the International Tax Agreements Amendment Bill (No. 1), 2007, paras. 1.45 and 2.48;
Explanatory Memorandum to the International Tax Agreements Amendment Bill, 2009, para. 2.107.
130
Second, Australia also has a current reservation to article 5(3) to vary the 12-month
requirement in the OECD Model for a building site or construction or installation project to
constitute a permanent establishment.11 Australia uses a shorter period of six months. Third,
Australia has a similar reservation to treat supervisory or consultancy activities in connection
with a building site or construction or installation project of more than 183 days in any twelve-
month period as constituting a permanent establishment.12
1.2.1.1.3. Article 6 (immovable property)

Australia has a current reservation to article 6 (immovable property) to include rights relating
to all natural resources under this article.13 This is consistent with Australia’s position of
ensuring that all income arising from Australian natural resources is appropriately taxed
in Australia.
1.2.1.1.4. Article 7 (business profits)

Australia has four current reservations in relation to article 7. First, Australia continues to
maintain a reservation retaining its right to include a provision that will permit Australia’s
domestic law to apply in relation to the taxation of profits from any form of insurance.14 This
is thought to be due to concerns regarding the ability of the insurance industry to undertake
large scale operations in a country without giving rise to a permanent establishment in
that country and thus avoiding tax in that country on profits arising from business in that
country.15 Under domestic law, Australia taxes non-resident insurers and reinsurers on income
arising from insured property located in Australia or insured events which can only happen
in Australia.16
Second, Australia has a current reservation to article 7 retaining the right to include a
provision which clarifies that Australia has the right to tax a share of business profits derived
by a resident of another country as beneficiary of a trust estate which derives those profits
from the carrying on of a business in Australia through a permanent establishment (unless
the trust is treated as a company for tax purposes).17
Third, Australia also has a current reservation to include a provision stipulating that, if
the information available to the competent authority is insufficient to determine the profits
attributable to the permanent establishment, the competent authority may apply domestic
law to that enterprise in accordance with the available information.18 This reservation is
intended to preserve the applicability of Australia’s domestic transfer pricing provisions.
Fourth, Australia has reserved the right to use the previous version of article 7 immediately
before the 2010 update (i.e. prior to the introduction of the “functionally separate entity”
approach).19 The Australian approach currently is to allocate the taxpayer’s actual income
and expenses to a permanent establishment using functional analysis and by applying the
11
OECD Model, C(5)-70.
12
13
OECD Model, C(6)-3.
14
15
Board of Taxation, Review of Tax Arrangements Applying to Permanent Establishments: A Report to the Assistant
Treasurer (2013) 60.
16
Division 15 of Part III of the Income Tax Assessment Act 1936.
17
18
19
131
Australia
arm’s length principle (referred to as the “business activity approach”).20 The Board of Taxation
was asked by the then Assistant Treasurer to investigate the impact of Australia adopting the
“functionally separate entity” approach.21 The Board of Taxation provided its report to the then
Assistant Treasurer in April 2013 and the report was publicly released by the government on 4
June 2015. The government has yet to provide a formal response to the Board’s observations
and recommendations. In sum, the Board made 14 observations on the advantages and
disadvantages of Australia adopting the “functionally separate entity” approach, including
the more targeted option of only adopting the new approach for financial institutions.
1.2.1.1.5. Article 8 (ships and air transport)

Australia retains the right to tax profits from the carriage of passengers or cargo taken on
board at one place in Australia for discharge in Australia.22
1.2.1.1.6. Article 9 (associated enterprises)

Australia has a current reservation to article 9 (associated enterprises) identical to its
reservation in relation to article 7 regarding the application of domestic law when there is
inadequate information.23 As mentioned above, this reservation is intended to maintain the
applicability of Australia’s domestic transfer pricing provisions.
1.2.1.1.7. Article 10 (dividend)

Australia has two current reservations in relation to article 10 (dividends). The first reservation
retains Australia’s right not to include the requirement for the competent authorities to settle
by mutual agreement, the mode of application of paragraph 2 of article 10.24 The second
reservation retains Australia’s right to expand the definition of dividend to cover amounts
which are subject to the same taxation treatment as income from shares under its domestic
law.25 This reservation preserves the outcomes under Australia’s debt/equity rules which
classify an instrument as debt or equity based on its economic substance rather than on its
legal form.
1.2.1.1.8. Article 11 (interest)

Australia has a similar reservation to article 11 (interest) as it does for article 10 (dividends)
retaining the right to broaden the definition of interest to include amounts treated the same
as income from money lent under Australian domestic law.26
1.2.1.1.9. Article 12 (royalties)

Consistent with the abovementioned policy regarding taxation of natural resources, Australia
has three reservations to article 12 (royalties). First, Australia retains the right to tax royalties
at source.27 Second, Australia has a reservation retaining the right to amend the definition
20
Above n 15, 5.
21
Australian Treasury, Assistant Treasurer David Bradbury, ‘Board of Taxation to Review Permanent Establishment
Attribution Rules’ (Media Release No. 36, 24 May 2012).
22
OECD Model, C(8)-9.
23
OECD Model, C(9)-6.
24
25
26
27
132
of royalties to include payments or credits which are treated as royalties under its domestic
law.28 Third, Australia has a reservation retaining the right to include a source rule for royalties
similar to the interest source rule in article 11(5) of the OECD Model to address a perceived
gap in the OECD Model.29
1.2.1.1.10. Article 21 (other income)

Australia has a reservation to article 21 to maintain its right to tax income arising from sources
in Australia.
1.2.1.1.11. Article 24 (non-discrimination)

Australia has a reservation to article 24 to maintain its right to propose amendments to ensure
that Australia can continue to apply certain domestic law provisions relating to withholding
tax collection.
1.2.1.1.12. Article 25 (mutual agreement procedure)

Australia has a reservation to article 25 to maintain its right to exclude a case presented under
article 25 from the scope of paragraph 5 to the extent that any unresolved issue involves the
application of Australia’s general anti-avoidance rules.
1.2.2.1. Purpose of tax treaties as set out in preamble
All but one of Australia’s tax treaties concluded prior to the MLI define the purpose of the
treaty as the avoidance of double taxation and the prevention of fiscal evasion with respect to
taxes on income.30 The only exception is the German treaty which was signed on 12 November
2015, prior to the MLI but two months after the publication of the BEPS Final Reports. The
preamble to the German treaty defines the purpose of the treaty as “the elimination of double
taxation with respect to taxes on income and on capital without creating opportunities for
non-taxation or reduced taxation through tax evasion or avoidance (including through treaty
shopping arrangements …)”.31 The treaty entered into force on 7 December 2016.
1.2.2.2. Tax treaty shopping
1.2.2.2.1. Domestic anti-avoidance provisions

Prior to the MLI, Australia had limited specific anti-avoidance provisions in relation to treaty
shopping. Since 1 July 1990, Australia has had controlled foreign company (CFC) rules whereby
Australian companies with a controlling interest in a foreign company are liable to pay the
28
Id.
29
30
Australia: Status of List of Reservations and Notifications at the Time of Signature, available at http://www.oecd.
org/tax/treaties/beps-mli-position-australia.pdf (accessed 14 July 2019).
31
Agreement between Australia and the Federal Republic of Germany for the Elimination of Double Taxation with Respect
to Taxes on Income and on Capital and the Prevention of Fiscal Evasion and Avoidance, International Tax Agreements
Act 1953 (Commonwealth).
133
Australia
Australian corporate tax rate on income of the controlled foreign company. Since 2004,
Australia has applied (relatively limited) “foreign hybrid” provisions which apply transparent
treatment to certain outbound investments in limited partnerships and other entities which
are treated as companies for Australian domestic law purposes but flow-through entities
in foreign jurisdictions (including specific provisions relevant to US LLCs) to prevent some
foreign-domestic entity mismatches. However, Australia’s general anti-avoidance rule
contained in Part IVA of the Income Tax Assessment Act 1936 can address treaty shopping.
Section 4(2) of the International Tax Agreements Act 1953, the Act which gives Australia’s
tax treaties the force of law, stipulates that tax treaties override Australia’s domestic tax
law except in the case of the general anti-avoidance rule. The Australian Taxation Office
(ATO) adopts the view that the general anti-avoidance rule can apply to treaty shopping.32
However, as recognised by the ATO, the difficulty in applying Part IVA to treaty shopping is the
requirement in the legislation that a sole or dominant purpose of the scheme was to obtain
a tax benefit. More recently, Australia introduced the “Multinational Anti-Avoidance Law”
(MAAL) which targets schemes for the avoidance of an Australian permanent establishment.
The MAAL adopts a lower “principal purpose test”. The MAAL only applies to significant
global entities with annual global income in excess of $1 billion. It was introduced in 2015
and applied from 1 January 2016. Several companies, such as Google and Facebook, have
publicly stated that they would restructure their operations in response to the MAAL. The
ATO has estimated that as a result of the MAAL an additional $7 billion in sales revenue will
be reported in Australia in each year.33
1.2.2.2.2. Treaty interpretation and beneficial ownership concept

As Australia is an OECD member, it is generally accepted that the OECD Model Commentary
may be relevant in interpreting Australia’s tax treaties.34 The terms ‘beneficial owner’ or
‘beneficially entitled’ are used in Australia’s tax treaties but neither expression is defined in
any Australian tax treaty and the meaning of these terms for treaty purposes has not been
considered by the Australian courts. As such, it has been argued that the domestic law or
ordinary meanings of these terms do not prevent treaty shopping scenarios.35
1.2.2.2.3. Treaty based anti-avoidance provisions

Some of Australia’s more recently negotiated tax treaties (Finland, Japan, Mexico, New
Zealand, Norway, South Africa, United Kingdom) include a “main purpose” provision in
the dividend, interest and royalty articles to deny treaty relief where the main purpose or
one of the main purposes of the transaction was to obtain the treaty benefit. This type of
provision was contemplated in the OECD Model Commentary to article 1 between 2003 and
32
Australian Taxation Office, Taxation Determination, TD 2010/20, Income Tax: Tax Treaty Shopping — Can Part IVA
of the Income Tax Assessment Act 1936 Apply to Arrangements Designed to Alter the Intended Effect of Australia’s
International Tax Agreements Network? (1 December 2010).
33
Australian Taxation Office, ‘ATO Clarifies Impact of the MAAL’ (Media Release, 25 October 2017).
34
Australian Taxation Office, Taxation Ruling TR 2001/13 ‘Interpreting Australia’s Double Tax Agreements’, paras.
101-105. See also Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338, 349.
35
Tim Loh, ‘Treaty Shopping Defence Provisions: Part 1’, 14(2) Tax Specialist (2010) 90, 94. See also, JH Momsen,
‘Treaty Shopping and the Dividend, Interest and Royalty Articles in Australia’s Double Tax Agreements’ 27
Australian Tax Review (1998) 155, 168-171.
134
2017.36 Australia’s tax treaty with China includes a specific anti-abuse provision in article 4(5)
which states that “if a company has become a resident of a Contracting State for the principal
purpose of enjoying benefits under this Agreement, that company shall not be entitled to
any of the benefits of Articles 10, 11 and 12.” A specific anti-treaty shopping provision is also
contained in article 10(10) of Australia’s tax treaty with Japan. The provision was inserted at
Japan’s request to ensure that residents of third countries are not entitled to treaty benefits
through the use of preferred shares or similar interests in a back-to-back arrangement.37
Specific limitation on benefits provisions are also included in some of Australia’s tax treaties
such as Chile (article 27), Germany (article 23), Russia (article 23), Japan (article 23) and the
United States (article 16).
1.2.2.3. Responses to other tax treaty abuses
Many of Australia’s tax treaties address other tax treaty abuses through measures such as the
inclusion of minimum holding periods in relation to non-portfolio intercompany dividends.
These measures are discussed further in section 1.3.3.Hybrid mismatch arrangements
Australia passed legislation to introduce rules to target hybrid arrangements on 16 August
2018.38 The rules came into effect on 1 January 2019. Broadly, the rules target payments made
by an entity which result in duplicate deductions for the same expense or a deduction in one
jurisdiction, but no corresponding income included in any jurisdiction. The rules also apply to
imported hybrid mismatches whereby income is not subject to tax either directly or indirectly
due to hybrid outcomes elsewhere in a group of entities or a chain of transactions. The new
provisions also include a targeted integrity rule which prevents offshore multinational
companies from replicating a hybrid mismatch outcome by routing financing into Australia
through an interposed entity in a low or no-tax jurisdiction (≤ 10% tax rate).39
1.2.2.4. Mutual Agreement Procedure (MAP)
Many of Australia’s tax treaties include a provision regarding MAP. A review of the ATO’s
management of transfer pricing matters has found that, in general, stakeholders are satisfied
with the MAP and Advance Pricing Arrangement (APA) processes in Australia.40 The review
highlighted concerns as to the lengthy nature of the process and the onerous documentation
requirements. Historically, Australia has had a successful MAP program with only a handful
of cases not being resolved.41 The average resolution time for MAP cases has been two years.
The ATO released its revised guidance on MAP in October 2018 and has committed to the
36
37
Explanatory Memorandum to International Tax Agreements Amendment Act (No. 1) 2008, para. 1.157.
38
Division 832 of Income Tax Assessment Act 1997.
39
The operation of this rule is discussed in Draft Law Companion Ruling LCR 2019/D1 ‘OECD Hybrid Mismatch
Rules – Targeted Integrity Rule’.
40
Inspector-General of Taxation, ‘Review into the Australian Taxation Office’s Management of Transfer Pricing
Matters’ (2014) Ch. 4.
41
Deloitte, ‘ATO Releases Revised Guidance on MAP – What Does It Mean for You?’ (2018) 2.
135
Australia
OECD’s two-year time limit to finalise the MAP.42 The following table summarises Australia’s
MAP caseload at the end of 2017:43
Started Started in Started in Closed in Outstanding

pre 1/1/16 2016 2017 2017 at 31/12/17
Transfer pricing cases 21 12 8 14* 27
Other cases 10 8 10 11# 17
*
9 of the closed cases were cases started before 1/1/16
#
3 of the closed cases were cases started before 1/1/16
Australia was one of the original 68 signatories to the MLI on 7 June 2017. In its consultation
prior to signing the MLI, the Australian Treasury declared that “signing and adopting the
MLI to the widest extent possible would be consistent with Australia’s strong track record
on tackling multinational tax avoidance”.44 In its analysis of Australia’s national interest
of signing the MLI, the Australian Treasury noted that “the proposed treaty action would
reinforce Australia’s commitment to addressing tax avoidance and would help ensure
international consistency in the implementation of the relevant BEPS recommendations.
The proposed treaty action would also help protect Australia’s corporate tax revenue base
from BEPS practices.”45 The MLI is expected to result in a net revenue gain for Australia but
the estimated benefit was considered unquantifiable as the ultimate outcomes would
depend on the adoption choices made by other jurisdictions and the behavioural responses
by taxpayers.46
The MLI was passed into domestic law on 24 August 2018.47 Australia deposited the
instrument of ratification with the OECD Depository on 26 September 2018, in time to clear
the three months required for the MLI to enter into force from 1 January 2019 (article 34).
As such, the entry into effect for each particular CTA will be 1 January 2019 at the earliest in
respect of withholding taxes and 1 July 2019 in respect of all other taxes (article 35), depending
on the counter-party ratification.
42
Australian Taxation Office, ‘Mutual Agreement Procedure’ available at:
https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Mutual-agreement-procedure/.
43
OECD, ‘Mutual Agreement Procedure Statistics per Jurisdiction for 2017’ available at:
http://www.oecd.org/tax/dispute/mutual-agreement-procedure-statistics-2017-per-jurisdiction-all.htm.
44
Australian Government Treasury, Australia’s adoption of the BEPS Convention (Multilateral Instrument), Consultation
Paper, December 2016 available at https://treasury.gov.au/consultation/australias-adoption-of-the-oecd-
multilateral-instrument (TCP) para. 8.
45
Treasury, National Interest Analysis: Category 1 Treaty [2017] ATNIA 20 available at: https://www.austlii.edu.au/
au/other/dfat/nia/2017/20.html (NIA) para. 15.
46
Id. para. 45.
47
Treasury Laws Amendment (OECD Multilateral Instrument) Act 2018.
136
1.3.2. Covered tax agreements (CTA)
At the time of signing the MLI, Australia listed 43 of its 44 comprehensive tax treaties as
CTAs for the purpose of article 2 (i.e. 98%).48 The only treaty which was not included at that
time was the recently renegotiated tax treaty with Germany which was concluded after the
publication of the final BEPS Reports and includes the MLI minimum standards.49 However,
in its instrument of ratification with the OECD Secretary-General on 26 September 2018,
Australia only listed 42 of its 44 tax treaties which were in force at that time.50 The tax treaty
with Chinese Taipei was excluded as it is an agreement between the Australian Commerce
and Industry Office and the Taipei Economic and Cultural Office and therefore a document
of less than treaty status.51
Of Australia’s 42 CTAs, 32 will be amended by the MLI as the other contracting jurisdiction
has signed the MLI and listed the agreement as a CTA (i.e. 76% of Australia’s CTAs will be
amended by the MLI).52 The counterparties for 11 of the 32 CTAs have already deposited the
instrument of ratification and the date of effect of the MLI’s amendments is known.
Australia recently signed a new tax treaty with Israel on 28 March 2019.53 This treaty is not
yet in force but will not be listed as a CTA as it incorporates the MLI minimum standards. It
is expected that future Australian tax treaties will incorporate the MLI minimum standards
and will not be listed as a CTA.
Australia’s stated position with regard to the MLI is to adopt the minimum standards and
as many of the optional articles as possible and make limited use of the MLI reservation
system.
56
54
The responses to the specific questions are summarised in the following table.55
MLI Provision Australian Position

1. Preamble –– Yes, adopted.
language in –– Reasoning: Australia’s adoption of article 6 to the fullest extent
article 6(3) possible will ensure that the intention to address BEPS concerns
will be considered when interpreting a CTA.56
–– 21 of Australia’s 32 CTAs will be amended.
48
Australia: Status of List of Reservations and Notifications at the Time of Signature, available at http://www.oecd.
org/tax/treaties/beps-mli-position-australia.pdf (accessed 14 July 2019).
49
OECD, ‘Prevention of Treaty Abuse Peer Review Report on Treaty Shopping’ (2019) 256 fn. 4.
50
Id. 43.
51
Australian Government Treasury, ‘Income Tax Treaties’ available at:
https://treasury.gov.au/tax-treaties/income-tax-treaties.
52
Australian Taxation Office, ‘Multilateral Instrument’ available at:
https://www.ato.gov.au/General/International-tax-agreements/In-detail/Multilateral-Instrument/.
53
Australian Treasurer Josh Frydenberg, ‘New Tax Treaty Signed with Israel’ (Media Release No. 53, 28 March 2019).
54
TCP, above n 44, para. 22.
55
The affected CTAs have been determined using the OECD’s MLI Matching Database.
56
Explanatory Memorandum, International Tax Agreements Amendment (Multilateral Convention) Bill 2018 (EM MLI),
para 3.53..
137
Australia

2. Treaty abuse –– Adopted PPT in article 7(1) – PPT is consistent with Australia’s
(article 7) preferred tax practice.
–– Adopted the discretionary benefits rule in article 7(4). This will
amend 10 CTAs.
–– Not chosen to apply SLOB and has not indicated that it would
agree to allow the SLOB to be applied by another jurisdiction.
–– Pursuant to article 7(17)(a), Australia identified provisions
described in article 7(2) in 10 of 32 CTAs that were not subject to
a reservation under article 7(15)(b).
3. Other treaty –– Article 8 adopted without reservation. Australia hopes
abuse to standardise the holding period rules for non-portfolio
provisions intercorporate dividends and noted that many of its tax treaties
(arts. 8-10, already include minimum holding periods.57 Almost 50%
12-14) (20 of 43) of Australia’s treaties contain provisions described
in article 8(1), along with the newly signed German treaty.
However, only eight CTAs will be updated.58 Eight will not be
updated due to a reservation under article 8(3)(a)59 (four did not
sign the MLI).
–– Article 9 adopted but Australia will preserve existing bilateral
rules that apply to the disposal of comparable interests
(non-share interests) in land-rich entities. Australia notified
that all CTAs contained a provision described in article 9(1)
pursuant to article 9(7). No notifications were made pursuant
to article 9(8) so article 9(4) does not apply to any CTAs. As a
large number of CTAs already contain a general or detailed
reference to comparable interests,60 Australia reserved the right
for article 9(1)(b) not to apply to 19 CTAs. Overall, article 9(1) will
update 17 CTAs.61
–– Article 10 not adopted because such a rule is not included in any
of Australia’s tax treaties and further analysis of the potential
impacts in an Australian context is required.
–– Article 12 not adopted but Australia will consider adopting
these rules bilaterally to enable clarification regarding their
application in practice.
57 58 59 60 61
57
TCP, above n 44, 15
58
Argentina, France, Mexico, New Zealand, Norway, Romania, Russia and South Africa.
59
Canada, Chile, Czech Republic, Finland, Japan, Malaysia, Turkey and the United Kingdom.
60
TCP, above n 44, 16.
61
Argentina, Belgium, Chile, China, Fiji, France, India, Indonesia, Ireland, Japan, Mexico, Netherlands, New
Zealand, Poland, Russian Federation, Slovak Republic, Spain. art. 9(1)(a) will apply in all but two of those treaties
(Belgium and China have made a reservation under article 9(6)(b)). art. 9(1)(b) will not apply to nine of those
treaties because of the reservation made by Australia or both (Argentina, Chile, France, Ireland, Japan, Mexico,
New Zealand, Russian Federation and Slovak Republic).
138

–– Article 13 adopted but Australia is preserving existing applicable
bilateral rules.
–– Article 14 adopted but Australia is preserving existing bilateral
rules that deem a PE to exist in relation to offshore natural
resource activities.
4. Hybrid –– Article 3 adopted but Australia is preserving existing
mismatch corresponding bilateral detailed rules where appropriate.
arrangements Adoption is consistent with preferred treaty practice.
(arts. 3 & 4) –– Article 4 adopted but not the rule that would allow the two
tax administrations to grant treaty benefits in the absence of
such an agreement. Adoption is consistent with existing treaty
practice.
5. Arbitration Australia has adopted independent and binding arbitration subject
(arts. 18-26) to the following conditions:
–– Disputes which have been the subject of a decision by a court or
administrative tribunal will not be eligible for arbitration, or will
cause an existing arbitration process to terminate;
–– Breaches of confidentiality by taxpayers or their advisors will
terminate the arbitration process; and
–– Disputes involving the application of general anti-avoidance
rules will be excluded from the scope of arbitration.
Adoption is consistent with Australia’s general commitment to
implement binding MAP arbitration as evidenced by recently
concluded treaties.
15 of 32 CTAs will be amended.
6. Provisions not Although not quite adopting maximum standards, Australia
adopted has adopted far more than the minimum standards. This is not
surprising given that Australia was such a key negotiator in the
development of the MLI. Provisions not adopted:
–– Article 5 was not adopted on the basis that Australian treaties
already provide for the “credit method” to deal with double
taxation. It seems unlikely that this choice will be reversed.
–– Article 10 was not adopted on the basis that Australia should
await further analysis to see how the provision would apply in
an Australian context. It appears that there is currently no public
analysis on the issue.
–– Australia did not adopt article 12 on the basis of responses to
the public consultation, which took the view that the MAAL
sufficiently expanded the PEs concept for incoming investment.
The provisions have been included in the recently negotiated
German and Israel treaties and so it is reasonable to conclude
that Australia will continue to apply the content of article 12
going forward.
139
Australia

7. Significance of Australia’s reservations on the content of the MLI are not significant.
reservations The key reservations are to article 5, article 10 and article 12.
–– As discussed above, the reservation to article 5 was made as
Australia’s treaties provided for the credit system.
–– The reservation to article 10 was made on the basis that none of
Australia’s existing treaties dealt with the issue and so further
analysis was required.
–– The reservation to article 12 appears to have been made in
response to industry consultation but does not appear to
have made a durable impression on Australia’s general policy
position.
Policy choices underlying the reservations are not included in the
2019 Peer Review Report but have been included in the Treasury
Consultation Paper cited at footnote 44.
8. Proportion of To date, it appears that the MLI will update approximately 230
provisions in provisions in 32 treaties.
CTAs modified Assuming about 30 articles per treaty, that is approximately 25%
of all provisions subject to the MLI or 17% of all provisions to which
Australia is a party.
Australia signed bilateral tax treaties with Germany on 12 November 2015 and Israel on
28 March 2019. Although signed before the MLI on 7 June 2017, the German treaty was not
covered by the MLI on the basis that it already included the G20/OECD updates.62 There is no
public indication of any other treaties that are currently being negotiated.
Australia has generally embraced the MLI updates in its subsequent negotiations, having
included some provisions which were reserved from its instrument of deposit (specifically
article 12). It continues to embrace binding arbitration except in respect of matters to the
extent that they are subject to its GAAR (including the newly enacted MAAL and DPT).63
Although it is generally embracing the new approach to PEs, it retains a reservation to ensure
that multinational mining enterprises will have a taxable presence in Australia (where they
are carrying on activities relating to natural resources or operating substantial equipment
with a certain degree of continuity).64
It is expected that the MLI will remain a third layer of international tax law. The ATO is
62
Australian parliament (Joint Standing Committee on Treaties), ‘Chapter 4: Agreement between Australia and
the Federal Republic of Germany for the Elimination of Double Taxation with Respect to Taxes on Income and
on Capital and the Prevention of Fiscal Evasion and Avoidance’, Report 161: Treaties tabled on 1 December 2015,
3 December 2015 and 2 February 2016 available at:
https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Treaties/3_December_2015/Report_
161 (German DTA Report) para 4.5.
63
Refer to the new OECD Model Tax Convention Commentaries on art. 25, para 103.
64
Refer to the new OECD Model Tax Convention Commentaries on art. 5, para 188.
140
working to produce consolidated tax treaties but there has not been any indication that
affected treaties will be renegotiated outside the usual treaty negotiation process.
Australia’s policy with regard to the MLI appears to be broadly consistent with its policy
regarding the 2017 version of the OECD Model. The only inconsistency may be in the non-
adoption of article 12 of the MLI but even then, the non-adoption was only because Australia
wished to clarify the practical application of the provision bilaterally.
2. Part Two: Practical Implementation of Provisions of the MLI
Australia actively participated in the development of the MLI.65 After its release on
24 November 2016, Treasury held a public consultation from 19 December 2016 to
6 February 2017 in which it released a consultation paper setting out Australia’s proposed
approach and its initial adoption choices, and it invited all interested parties to make
submissions on the potential impacts of Australia becoming a party to the agreement.66 The
consultation received eight submissions. As discussed above, Australia adopted the MLI to
the widest possible extent. The main impact of the consultation appears to be a change in
Australia’s position on article 12 (to not adopt it).
Tax treaties are incorporated into, and given primacy over, domestic laws by section 4(1)
of the International Tax Agreements Act 1953 (ITAA53). Pursuant to section 4(2) ITAA53, they
are subject to the operation of Australia’s general anti-avoidance rule (GAAR). On and after
the date of entry into force, a provision of an agreement mentioned in section 5(1) ITAA53 has
the force of law according to its tenor.
The MLI was incorporated into Australian domestic law by the Treasury Laws Amendment
(OECD Multilateral Instrument) Act 2018 (passed 24 August 2018), which had the effect of
adding the MLI to the list of agreements mentioned in section 5(1) ITAA53. The instrument of
ratification was deposited with the OECD Depositary on 26 September 2018, in time to clear
the three-month window to come into force on 1 January 2019.
According to the TCP, consistent with the current practice, the Australian government
would not produce consolidated versions of each modified treaty.67 However, this approach
was deeply criticised in the consultation process.68 Consequently, the tax authority (ATO)
is preparing synthesised texts for the majority of Australia’s tax treaties which have been
65
Kelly O’Dwyer, OECD finalizes new multilateral convention on tax avoidance, Media Release 26 November 2016,
available at http://kmo.ministers.treasury.gov.au/media-release/104-2016/.
66
Treasury, Australia’s adoption of the OECD Multilateral Instrument available at:
https://treasury.gov.au/consultation/australias-adoption-of-the-oecd-multilateral-instrument
(last accessed 4 July 2019).
67
TCP, above n 44, para 26.
68
TCP, above n 44, see submissions from Chartered Accountants of Australia and New Zealand, Corporate Tax
Association and KPMG.
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Australia
modified by the MLI.69 A synthesised text is for educational purposes only and does not
constitute a source of law. However, when a taxpayer makes a mistake as a result of following
information from the ATO that turns out to be incorrect or misleading, the ATO will take
that into account when determining what action it should take. Six synthesised texts have
been published to date. It appears that Australia will, where possible, prepare the text in
consultation with the competent authority of the other jurisdiction in order to produce a
text that represents their shared understanding of the modifications made by the MLI.70 The
synthesised text for the Singapore agreement appears to have been made unilaterally.
The OECD’s “MLI Matching Database” does not have any legal value in Australia.
As discussed above, the MLI is given the force of law by enacting domestic legislation. The
MLI is given primacy over existing domestic legislation through the operation of section 4(1)
ITAA53. However, it is subject to Australia’s general anti-avoidance rule (GAAR) including,
the multinational anti-avoidance law (MAAL). As it is part of domestic law, the MLI can be
overridden by subsequent domestic legislation. Australia is a dualist country.
There is nothing that has been publicly identified in the manner in which the MLI was
implemented into domestic law that indicates that the meaning of the text it incorporates
alongside (or, arguably, into) existing treaties should be interpreted, from a methodological
perspective, differently to any other treaty instruments entered into by Australia.
As noted above, the MLI has been incorporated into Australian domestic law as a schedule to
the International Tax Agreements Act 1953. Australia’s approach to statutory interpretation
tends to favour the ordinary meaning of the statutory text71 within the specific framework
given for interpreting the relevant instrument. The context (including the relevant legislative
history) is considered at the first stage72 of interpreting the ordinary meaning of the text, as
well when ensuring that in considering the context and purpose of the provisions external
69
ATO, Multilateral Instrument, available at: https://www.ato.gov.au/General/International-tax-agreements/
In-detail/Multilateral-Instrument/ (last accessed 4 July 2019).
70
Refer to the general disclaimers of the synthesised texts for Japan, New Zealand, Poland, the Slovak Republic
and the United Kingdom.
71
Commissioner of Taxation v Consolidated Media Holdings (2012) 250 CLR 503; Alcan (NT) Alumina Pty Ltd v Commissioner
of Territory Revenue (2009) 239 CLR 27 at 47.
72
SZTAL v Minister for Immigration and Border Protection [2017] HCA 34 [14].
142
words (other than in cases of manifest error) have not impermissibly73 replaced the actual
statutory text.
In respect of treaties, it is generally accepted that interpretation starts from the text74 of
the relevant treaty instrument read in light of the rules prescribed by the Acts Interpretation
Act 1901, the Vienna Convention of the Law of Treaties 1969 (VCLT)75 and the rule in section 4(2)
of the International Tax Agreements Act 1953 that to the extent domestic law is inconsistent
with the terms of a treaty, the rule in the treaty shall prevail (unless the General Anti-
Avoidance Rules in Part IVA of the Income Tax Assessment Act 1936 have been applied).
Australian case law gives great weight to the rules of interpretation in article 31 of the
VCLT. While Australian law does favour the text as written, it is commonly acknowledged
that the nature of treaty instruments requires greater weight to be given to context and
purpose when applying the words of a treaty. Consistent with article 32 of the VCLT, when
the meaning resulting from the application of article 31 leaves the meaning ambiguous or
obscure or leads to a result which is manifestly absurd or unreasonable, recourse is frequently
had to supplementary materials.76 It is likely a question will arise on how far this recourse to
supplementary materials extends in the context of a CTA. For example, the Base Erosion and
Profit Shifting Action Item Reports are likely article 32 material under the Vienna Convention
but are broad and not necessarily focussed on the text of the MLI and are not directly related
at all to any specific CTA.77 As such, their usefulness in determining the meaning of any
particular article of a CTA is uncertain.
From a methodological perspective, the application of Australia’s usual rules as to the
interpretation of treaties gives rise to a specific (and relatively localised) concern. There
has been a recent decision of the Full Federal Court in Satyam Computer Services Limited v
Commissioner of Taxation [2018] FCAFC 172 (Satyam), and from which Australia’s High Court
(the ultimate appellate Court) refused to hear an appeal as there was “no reason to doubt
the correctness of the Full Court’s decision”,78 that Australia’s treaties can operate to modify
the domestic law to impose primary tax as well as to protect a resident of a contracting state
from taxation. The converse proposition, that treaties act as a shield and not as a sword,
was rejected as not being compatible with the wording of a particular treaty provision
(which deemed items of income to have an Australian source notwithstanding they are not
so sourced under domestic law) and the manner in which the treaty was incorporated into
domestic law as a schedule to the International Tax Agreements Act 1953. The extent to which
this affects treaty provisions more broadly than deemed source provisions, including the
MLI, is uncertain.
A narrow interpretation of the principles in Satyam would be that it only applies to specific
rules providing for a deemed source of a particular income type (usually, relevantly, royalties)
which does not arise under the text of the MLI. One broad interpretation of the principles in
Satyam would be that where a deemed PE arises (including under an aggregation of time
73
Taylor v Owens Strata Plan – Strata Plan No 11564 (2014) 253 CLR 531, 548 – 549.
74
Commissioner of Taxation v Resource Capital Fund IV LP [2019] FCAFC 51 [68] – [70].
75
Australian Treaty Series [1974 No 2].
76
Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338, 344, 349-350, 356-7; Federal Commissioner of Taxation v
SNF (Australia) Pty Ltd (2011) 193 FCR 149, [113]-[120].
77
Given some are explicitly referred to in the Explanatory Statement and the preamble to the MLI states that the
parties to the Convention, “Welcoming the package of measures developed under the OECD/G20 BEPS project…
have agreed as follows”.
78
[2019] HCASL 87.
143
Australia
periods resulting from article 14(1) of the MLI in a Covered Tax Agreement), Australian
domestic taxation can be imposed even though the usual domestic laws, which require gains
of a non-resident to have an Australian source at domestic law before tax can be imposed, is
satisfied. Against such a construction, Australia has historically interpreted deeming rules
narrowly79 and applies each deeming provision only for the specific purpose intended and
has interpreted article 7 generally as only providing a permissive80 power to tax.
Regarding the interpretation of treaties entered into before and after the MLI, it is likely
there will be a difference between the relevance of the MLI to interpreting pre-existing
treaties and subsequent treaties. In respect of treaties arising before the MLI was signed,
where both contracting states party to a pre-existing treaty are signatories to the MLI that
the MLI, including its preamble text, would be an article 31(3) material as a subsequent
agreement between the parties regarding the interpretation of the treaty or the application
of its provisions. Given Australia’s approach to statutory interpretation, this is significant as
article 31(3) mandates that such subsequent agreements be taken into account (as opposed
to article 32 materials to which recourse may be had).
2.2.4. Interpretation of later tax treaties (post-MLI)
By contrast, there is no binding rule in Australian domestic law or under the VCLT that
seemingly requires a decision maker to consider the terms of the MLI when interpreting a
treaty entered into after it has been signed. Quite probably, at its highest, it could be said
that the MLI forms part of the statutory context81 within which subsequent treaties should
be interpreted. Australia has excluded recently negotiated treaties (e.g. Germany and Israel)
from the application of the MLI on the basis that they contain provisions equivalent to those
that may be incorporated into MLI-affected treaties. This would, potentially, support a
contextual inference that the MLI was only intended to affect treaties existing prior to the
conclusion of the MLI absent a specific statement between the contracting states that the
MLI was an agreement made between the parties in connection with the conclusion of the
treaty.82 For the same reasons, it is doubtful that the MLI should be taken as a supplementary
means of interpretation under article 32 unless it could be said its existence was relevant to
the circumstances of the latter treaty’s conclusion.
One potential manner in which the provisions of article 6 of the MLI (Purpose of a Covered
Tax Agreement) may be effectively included in subsequent treaties – if not done so explicitly
by the contracting states – would be by reference to historical context. Recent scholarship
indicates that the League of Nations model tax treaties, the forerunner of the OECD Model
treaties which are most commonly implemented by Australia, arose as a response to and in
79
Federal Commissioner of Taxation v Comber (1986) FCR 88; [1986] FCA 92; also see GE Capital Finance Pty Ltd v
Commissioner of Taxation [2007] FCA 558.
80
GE Capital Finance Pty Ltd v Commissioner of Taxation [2007] FCA 558.
81
Commissioner of Taxation v Resource Capital Fund IV LP [2019] FCAFC 51.
82
Art. 31(2)(a) of the VCLT.
144
order to prevent both double non-taxation and double taxation.83 Accordingly, it is possible
that the combination of the historical context of the purpose of double tax treaties broadly,
coupled with the recent context of article 6 of the MLI, may be relevant to the interpretation
of any tax treaties entered into after the MLI was signed. However, any particular case would
turn on the terms of the relevant future treaty.
Informally, the reaction to the MLI within the Australian tax community has been relatively
calm (with the exception of the residency changes in article 4). Australia has a relatively
small (44 pre-MLI comprehensive tax treaties) network of income tax treaties. Australian tax
planning strategies are usually less reliant on entitlement to treaty benefits than comparable
European tax planning strategies and focus on domestic law (e.g. has the non-resident
derived income with an Australian source?) including historically generous safe harbours
for thin capitalisation (i.e. 3:1 debt to equity, subsequent reduced to 1.5:1) and debt-equity
classifications84 which are more likely to be adversely impacted by the recently enacted anti-
hybrid rules in Division 832 of the ITAA 1997.
The most obvious change to Australian tax planning as a result of the MLI would be, for
Covered Tax Agreements, the PPT which is likely to be the final nail in the coffin of simply
interposing a treaty jurisdiction entity with little economic substance between Australia and
a non-treaty country to benefit from reduced dividend and royalty withholding tax rates (i.e.
a dog-leg structure). For taxpayers with tax risk governance procedures, such structures are
relatively uncommon due to the risk of the domestic GAAR or transfer pricing disputes and
the fact that most Australian tax deduction generating tax planning utilised interest (whose
treaty rate is generally equally to the domestic rate of 10% and may often be deferred until
paid), entity mismatches, preferential taxation of capital gains and returns of capital and
other domestic measures.
The most significant non-signatory, from Australia’s perspective, is the United States
which is one of Australia’s largest trading partners. However, the absence of MLI compliant
articles in the Australia-United States DTC is likely an insignificant contributor to tax planning
changes between US-Australian enterprises when compared to the US domestic Tax Cuts and
Jobs Act 2017.
Quite high levels of optimism have been expressed by taxpayers in respect of fiscally
transparent entities (article 3) and the potential for mandatory binding arbitration under
Part VI. The areas of most concern are the dual resident provisions in article 4 and the PPT.
Taxpayer perspectives
In the context of Australia’s approach to both legislative drafting and statutory interpretation,
the Principal Purposes Test is often viewed reflexively as creating legal uncertainty. The
most common substantive legal uncertainty arises from the need to interpret the phrase
“a principal purpose”. That uncertainty is in part in contradistinction to the domestic GAAR
with has been judicially interpreted and accepted as requiring a “sole or dominant” purpose
83
Jogarajan, S Double Taxation and the League of Nations (2018), Cambridge University Press; SZTAL v Minister for
Immigration and Border Protection [2017] HCA 34 [14].
84
Division 974 of the ITAA 1997.
145
Australia
of obtaining a tax benefit. However, as the PPT has a more limited scope than the domestic
GAAR in terms of tax benefits it targets, and the domestic GAAR overrides treaty benefits
in any event, the PPT is probably no less uncertain in practice than the relevant tests in the
Australian GAAR.
More substantively, concerns have been raised by the new treaty dual residence rules
in article 4 of the MLI. This is partly in the context of how a recent Australian case (Bywater
Investments Limited v Commissioner of Taxation [2016] HCA 45) related to abusive offshore
arrangements controlled by a natural person from Australia which the Australian Taxation
Office has taken85 as providing broad principles of general application to all companies
(including substrative trading businesses). Broadly, this interpretation sees Australia’s
residency tests – which requires that an entity carries on business in Australia and is centrally
managed and controlled from Australia – more easily satisfied as an entity will carry on
business where it is centrally managed and controlled.86 As where an entity is centrally
managed and controlled can only be answered based on the facts of a particular case by
reference to “high level decisions that set the company’s general policies” ,87 this increases the
scope of dual resident foreign companies with Australian central management and control
to arise. As under article 4 dual residents will not be entitled to any treaty benefits absent an
agreement between the competent authorities, this could have very significant impact on
Australian outbound and inbound investment.
Further, there is a concept of a prescribed dual resident in Australian domestic law.88
This definition includes a resident of Australia and another country that is allocated to the
treaty partner under a tiebreaker provision and a company that is resident of Australia and
another country and has its central management and control in another country. In particular,
if an entity is a prescribed dual resident, it cannot89 broadly be a member of an Australian
tax consolidated group. Trying to determine, absent a determination by the competent
authorities, whether a dual resident of Australia and a state with a Covered Tax Agreement is
a prescribed dual resident, is an interpretative challenge (albeit one that could be addressed
through amending the relevant domestic law definition). On the positive side, the confusion
caused by article 4 has led to a rapid increase in bilateralism at least between Australia and
New Zealand whose revenue authorities released a joint MLI Article 4(1) Administrative
Approach providing for self-assessment of a place of effective management where a taxpayer
satisfies certain eligibility criteria (e.g. for small to medium enterprises) as such entities may
often have elements of control in both countries.
The hybrid provisions in article 3 have been seen as reducing and increasing complexity
depending on a taxpayer’s particular position. Australia, somewhat uniquely, treats limited
partnerships as companies.90 A series of (still ongoing) cases and administrative rulings have
debated whether taxing that deemed company is permissible in the context of particular
treaties where the income is beneficially owned by residents of a treaty jurisdiction.91
85
Taxation Ruling TR 2018/5.
86
Taxation Ruling TR 2018/5, [7].
87
Taxation Ruling TR 2018/5, [11].
88
S. 6(1) of the ITAA 1936.
89
S. 703-15 of the ITAA 1997.
90
Division 5A of the ITAA 1997.
91
Commissioner of Taxation v Resource Capital Fund IV LP [2019] FCAFC 51; Resource Capital Fund IV LP v Commissioner
of Taxation [2018] FCA 41; Federal Commissioner of Taxation v Resource Capital Fund III LP (2014) 225 FCR 290; Tax
Determination TD 2011/25.
146
Currently, in a matter subject to an appeal to the High Court, the analysis is that the limited
partnership is assessable separately from the partners and often without treaty benefits
and required to pay the tax assessed,92 although the Commissioner would be barred from
enforcing a judgment against a partner that was entitled to treaty benefits. Where the
provisions of article 3(1) of the MLI are available, this may provide greater certainty for
inbound investors that they are positively entitled to treaty benefits and protected from
taxation in the hands of the deemed company for Australian tax purposes.
Article 3 of the MLI also must be considered alongside Australia’s implementation of
BEPS Action Item 2 compliant (and beyond) anti-hybrid rules in Division 832 of the ITAA 1997
effective from 1 January 2019. Division 832 is mechanically complex, and the extent to which
article 3 deems income derived through an entity an MLI treaty partner considers transparent
to be income of another entity, may potentially alter the Division 832 anti-hybrid analysis for
a taxpayer’s structure and may require detailed consideration.
The most optimism expressed by taxpayers in respect of the MLI is the potential for
mandatory binding arbitration for Mutual Agreement Procedure matters which cannot
be resolved by agreement between the competent authorities. A number of inbound and
outbound investors have expressed interest in such arbitration as a path to resolving instances
of double tax which are currently unavoidable costs of doing business. It is also hoped that
the existence of the referral mechanism itself will encourage competent authorities to
proactively resolve such disputes before the time period for referral expires. Where Covered
Tax Agreements are shown to provide a realistic path to resolution of double tax imposed
between two contracting states via arbitration, it is not unlikely that Australian inbound
and outbound investors in some spaces may actively seek to structure into a Covered Tax
Agreement for access to the arbitration procedure.
Administrative perspectives
The Australian Taxation Office has an internal treaties consultation unit who has taken the
lead in issues relating to the MLI (i.e. the bilateral approach to article 4 issues with New
Zealand). The unit was asked to provide input for this report but did not participate.
Textual uncertainty
As previously noted, some initial legal uncertainty stems in part from the matching process
required to be undertaken to determine if a treaty has been affected by the MLI. The Australian
Treasury has historically maintained a detailed and publicly accessible online compendiums
of treaties. However, given the scope of the task involved, the actual process of providing
consolidated texts of Australia’s affected treaties initially fell entirely to private publishers.
As at the date of this draft, it has not resulted in any published consolidated treaty texts. The
Australian Taxation Office has since begun publishing consolidated texts as described above.
92
Commissioner of Taxation v Resource Capital Fund IV LP [2019] FCAFC 51 (an application for special leave to the High
Court was refused).
147
Austria
Branch reporter
Heinz Jirousek1

Prior to the MLI Austria had entered into tax treaties with 88 jurisdictions. Tax treaties
concluded with OECD member states generally follow the OECD Model. Tax treaties
concluded with non-OECD member states or developing countries normally follow the UN
Model, unless those countries were prepared to follow the OECD Model at least partially.
Austrian domestic law provides for a number of provisions which are similar to those covered
by the BEPS Action plans. The tax procedural law provides for a general anti-avoidance
rule (“GAAR”) which adheres to the general principle that the duty to pay tax cannot be
circumvented or reduced by abusing constructions under civil law. In such situations, taxes
shall be collected as they would have been if the economic events, facts and circumstances
had been legally structured in a reasonable way. This rule is rather similar to the PPT clause
of the MLI respectively article 29(9) of the OECD Model Convention 2017. On a more general
level the Austrian procedural law provides for the substance over form principle. According
to this rule the true economic substance shall prevail over the form of a transaction. Austrian
jurisprudence also supports the view that the mere fact that a treaty does not contain
specific anti-avoidance rules (“SAAR“) must not lead to the conclusion that trustee structures
aiming at claiming undue treaty benefits or abusive civil law constructions, are permitted
according to treaty law. In the absence of specific anti avoidance provisions in the treaty,
contracting states are not prevented from protecting themselves against abusive claims
for treaty benefits. Concerning hybrid entities Austria follows the guidelines of the OECD
partnership report when applying tax treaties in hybrid situations which may lead to conflicts
of qualification or of allocation of income. This was the reason why Austria opted out of article
3 (transparent entities) of the MLI.
Austria signed the MLI on 7 June 2017. The instruments of ratification have been deposited
at the Secretary-General of the OECD on 22 September 2017. The MLI entered into force for
Austria on 1 July 2018. The main reasons for signing the MLI were the intention of the Austrian
government to follow the BEPS Action Plan of the OECD/G20 in order to avoid artificial shifting
of profits to low or no tax jurisdictions by allocating profits to those jurisdictions where the
value was created and by the improvement of mechanisms for dispute resolution. The list
of covered tax agreements (CTAs) contains 38 tax treaties. Compared to the current number
of tax treaties in force, i.e. 89 treaties, 43% of the Austrian treaty network is covered by the
MLI. Originally, Austria had listed about 60 treaties as CTAs. Due to the positions of the other
treaty partners as of 7 June 2017 only 38 jurisdictions remained as matching treaty partners.
All CTAs fulfil the minimum standard. According to the list of reservations and notifications
attached to the MLI Austria opted in for article 5 (application of methods for elimination of
1
Senior scientist at the Institute of Austrian and International Tax Law at the University of Economics and Business
Administration (WU) in Vienna, formerly Head of the International Tax Law Division at the Austrian Ministry of
Finance.
IFA © 2020 149

Austria
double taxation - option A), article 6 (preamble), article 7(1) (PPT clause alone), article 10
(third jurisdiction PE), article 13(2) (artificial avoidance of permanent establishment status
through the specific activity exemptions - option A), article 16 (mutual agreement procedure,
except for the first sentence of paragraph 1), article 17 (corresponding adjustments), article
18 (application of Part VI), article 19 (mandatory binding arbitration according to paragraph
1, replacing the two-year period by a three-year period and application of paragraph 12),
article 24 (different resolution), article 26 (reservation for existing mandatory arbitration
procedure with Germany and Switzerland). For the rest of the MLI provisions Austria entered
reservations for the entirety of the articles. Austria already entered into new bilateral tax
treaty negotiations or finished such negotiations since the MLI was signed. These treaties (UK
and Kosovo) meet the BEPS minimum standard by using the new text of the preamble (article
6 of the MLI) and the PPT clause (article 7(1) of the MLI). The treaties provide for access to MAP
according to the BEPS standard, thereby respecting the Austrian position to article 16(1) of the
MLI concerning the state of residence as the one where the MAP has to be presented. They
also provide for the mandatory binding arbitration procedure according to article 25(5) of the
OECD Model Convention. The BEPS Action Plan has also indirectly influenced the Austrian
tax treaty policy before the MLI was signed in June 2017. The new tax treaty with Japan, which
was signed on 30 January 2017, went even far beyond the minimum standard. The recent
tax treaty between Austria and Japan clearly shows that the restrictive approach chosen by
Austria in its MLI policy does not hamper the degree of flexibility at the bilateral level.
The procedure for implementation of the MLI was the same as Austria has to follow in
bilateral treaty situations. As a “monist” country the MLI is self-executing for Austria. Despite
the lack of any legal obligation for consolidating international law agreements it was seen
as a matter of courtesy to follow the recommendation of the OECD to prepare “synthesised”
versions of the covered bilateral tax treaties which do not have any legal force per se. Following
the considerations laid down in the Explanatory Statement to the MLI, the Austrian tax
administration is prepared to attribute to the BEPS reports the same legal weight as to the
OECD Commentaries for the purposes of interpretation of the MLI provisions. Generally,
the Austrian tax administration is committed to the ambulatory tax treaty interpretation
following the OECD Recommendation of 23 October 1997 concerning the OECD Model Tax
Convention. Retrospective effects of the MLI on the treaty interpretation of existing tax
treaties could arise in particular in those areas where the existing commentaries of the OECD
already offered this interpretation on the basis of pre-MLI treaties.
Currently it cannot be expected that the number of CTAs will be increased. Further BEPS
amendments will more likely be achieved through bilateral protocols or treaties.
Treaty Network
1.1. Introduction
Austria signed the MLI on 7 June 2017. The instruments of ratification have been deposited
at the Secretary-General of the OECD on 22 September 2017. The MLI entered into force for
Austria on 1 July 2018. Austria was one of the five Signatories which triggered the entry into
force of the Convention according to article 34 (1) MLI.
150
Jirousek
Prior to the MLI Austria had entered into tax treaties with 88 jurisdictions.2 These jurisdictions
are as follows: Egypt, Albania, Algeria, Armenia, Azerbaijan, Australia, Bahrain, Barbados,
Belarus, Belgium, Belize, Bosnia-Hercegovina, Brazil, Bulgaria, Chile, People’s Republic of
China (PRC), Croatia, Cuba, Cyprus, Czech Republic, Denmark, Estonia, Finland, France,
Germany, Georgia, Greece, Hungary, Hong Kong, India, Indonesia, Iran, Ireland, Iceland,
Israel, Italy, Japan, Canada, Kazakhstan, Kyrgyzstan, Korea, Kuwait, Latvia, Liechtenstein,
Lithuania, Luxembourg, Malaysia, Malta, Morocco, Macedonia3, Mexico, Moldavia,
Mongolia, Montenegro, Nepal, New Zealand, Netherlands, Norway, Pakistan, Philippines,
Poland, Portugal, Qatar, Romania, Russian Federation, San Marino, Saudi Arabia, Sweden,
Switzerland, Serbia, Singapore, Slovak Republic, Slovenia, Spain, South Africa, Tajikistan,
Chinese Taipei, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, United Arab Emirates,
United Kingdom, United States, Uzbekistan, Venezuela, Vietnam.
Tax treaties concluded with OECD Member States generally follow the OECD Model.
Tax treaties concluded with non-OECD Member States or developing countries normally
follow the UN Model, unless those countries were prepared to follow the OECD Model at least
partially. According to the rather flexible Austrian tax treaty policy deviations from the Model
Conventions are acceptable for Austria provided that they are generally in line with the tax
treaty network of the respective treaty partner. Since Austria entered a reservation on article
7 OECD Model Convention thereby reserving the right to apply the version of article 7 as was
included before the 2010 update of the OECD Model Convention, the total treaty network of
Austria follows in that regard this old version.4
1. Preambles
The preambles of the Austrian tax treaties normally just referred to the intention to
avoid double taxation and – depending on the title of the treaty – the prevention of fiscal
evasion. From this very general commitment the BEPS-related aims could not directly be
deducted.
2
This list comprises only those tax treaties which were already in force on 1 July 2018. The tax treaty with Kosovo is
therefore not listed here, since it entered into force on 28 December 2018. With that treaty the current number
should read 89. The number of treaties mentioned for Austria in the OECD Report on Prevention of Treaty Abuse –
Peer Review Report on Treaty Shopping published on February 2019 (OECD 2019) which lists 90 treaties, deviates
from this list insofar as the OECD referred to all signed tax treaties and therefore mentioned also the tax treaty
with Libya which did not enter into ratification up to now.
3
Now „North Macedonia“.
4
See para. 96 Commentary on art. 7 OECD Model 2017.
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Austria
2. Treaty shopping
(1) Austrian domestic procedural law provides for a general anti-avoidance rule
(GAAR)5 which adheres to the general principle that the duty to pay tax cannot be
circumvented or reduced by abusing constructions under civil law. In such situations,
taxes shall be collected as they would have been if the economic events, facts and
circumstances had been legally structured in a reasonable way. On a more general
level the Austrian procedural law provides for the substance over form principle.6
According to this rule the true economic substance shall prevail over the form of a
transaction. The tax procedural law also provides for a special rule concerning sham
transactions.7 According to this provision such transactions shall be deemed of no
consequence with respect to collection of taxes. Where a sham transaction conceals
another transaction, the concealed transaction shall be deemed determinative for
purposes of tax collection. The Austrian administrative practice also follows the view
that tax treaty law would not prevent the application of domestic anti-avoidance
rules. According to the jurisprudence of the supreme administrative court the mere
fact that a treaty does not contain specific anti-avoidance rules („SAAR“) must
not lead to the conclusion that trustee structures aiming at claiming undue treaty
benefits or abusive civil law constructions are permitted according to treaty law. In
the absence of specific anti-avoidance provisions in the treaty, contracting states are
not prevented from protecting themselves against abusive claims for treaty benefits.8
(2) The interpretation and application of the beneficial ownership concept strictly
follows the commentaries of the OECD.9 Austria’s commitment to the relevance of
the OECD commentary follows from the general recommendation of the OECD10 as
such, as well as from the interpretation rules of the Vienna Convention on the Law
of Treaties (VCLT).11 In many Austrian tax treaties this commitment is also explicitly
stated in protocols to those treaties.12 In respect of non-OECD countries reference is
normally also made to the UN Model. Such provisions of the protocol are, however,
only of a clarifying nature which means that this commitment is not strictly restricted
only to those jurisdictions where the tax treaty specifically mentions this.
(3) Before the MLI, tax treaty based anti-avoidance provisions were partially based
on LOB-clauses13 or on specific clauses, e.g. in articles 11 and 12 of the tax treaties14
although this approach was followed only on an exceptional basis. This can be
explained by the fact that domestic anti-abuse provisions can also be applied for
the purposes of tax treaty application as was already mentioned earlier. In some tax
5
S. 22 Bundesabgabenordnung (BAO). This rule has been adapted in 2018 to conform with the PPT clause (Federal
Law Gazette BGBl I 2018/62 as of 2 January 2019).
6
S. 21 BAO.
7
S. 23 BAO.
8
VwGH 26 July 2000, 97/14/0070.
9
See in particular para. 12.4 OECD Commentary on art. 10, para. 10.3 OECD Commentary on art. 11 and para. 4.3
OECD Commentary on art. 12 OECD Model.
10
See Model Tax Convention OECD 2017, Annex; Recommendation of the OECD Council concerning the Model Tax
Convention on Income and on Capital (adopted by the Council on 23 October 1997), Part I, sub para. 3.
11
VCLT S. 3: Interpretation of Treaties (including art. 31 – 33).
12
See e.g. the treaties with Germany, USA, UK, Azerbaijan, Croatia, Cuba, Finland, Georgia, Kazakhstan, Qatar;
Kosovo, Mexico, Montenegro, New Zealand, Poland, Tajikistan, Ukraine and United Arab Emirates.
13
See tax treaties with USA and Japan (2017).
14
See e.g. the tax treaties with Chile, Greece, Mexico and Poland (here only with respect to art. 11).
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treaties the right to apply domestic anti-avoidance rules is explicitly mentioned in

the treaty.15 Subject-to-tax clauses are rarely used in the Austrian treaty practice.
This is sometimes the case e.g. in the area of employment income, where the state
of residence gains the taxation right if the state of source does not exercise it.16 In
another tax treaty the state of employment (state of source) obtains the taxation
right if the state of residence does not tax income which would generally be taxable
in the state of residence according to article 15(2) of the tax treaty.17
3. Other forms of tax treaty abuse

The rather far reaching approach of domestic anti-avoidance rules together with the
broad acceptance of these opportunities in jurisprudence did not really increase the
pressure on Austria’s tax treaty policy to cope with the specific forms of tax avoidance
which were addressed in particular in articles 8, 9, 10, 12, 13 and 14 of the MLI. This was
the reason why Austria opted out of those provisions except for articles 10 and 13(2) of
the MLI. Concerning the PE status through commissionaire arrangements (article 12(1)
of the MLI) Austria followed and still follows the administrative practice as suggested in
the commentary on article 5(5) OECD Model Convention 2014, in particular its paragraph
32.1, which led to the decision not to follow the new wording as suggested in the MLI.18
4. Hybrid mismatch arrangements and dual resident companies

Austria’s administrative practice follows the guidelines of the partnership report when
applying tax treaties in hybrid situations which may lead to conflicts of qualification or
of allocation of income. This was the main reason why Austria opted out of article 3 of the
MLI.19Abusive transactions involving hybrid entities could be solved in particular cases
also by applying the domestic doctrine on income attribution and the specific rules as
laid down in the OECD report on the attribution of profits to permanent establishments.20
As far as dual resident companies are concerned, Austria still prefers the classical tie
breaker rule of article 4(3) OECD Model Convention before the update of 2017 providing
for the place of effective management as the decisive criterion for the determination of
the residence status of dual resident companies. This was the reason why Austria opted
out of article 4 MLI. The leading opinion in Austria is that the impact of article 4 MLI
(respectively the new wording of article 4(3) OECD Model Convention 2017) would be
excessive and could lead to considerable legal uncertainty and even create constitutional
problems with regard to the principle of legality.21
15
See e.g. tax treaties with Chile and Mexico.
16
See art. 15 (4) tax treaty Austria-Germany.
17
See art. 15 (2d) tax treaty Austria-Australia.
18
Turcan, DBA-Anpassung durch das MLI, in Bendlinger/Kofler/Lang/Schmidjell-Dommes (eds.), SWI-Spezial (2018),
Die österreichischen DBA nach BEPS, p. 12 et seq. (p. 35 et seq.).
19
Kofler, Transparente Rechtsgebilde und doppelt ansässige Gesellschaften, in Bendlinger/Kofler/Lang/Schmidjell-
Dommes (eds.), SWI-Spezial (2018), Die österreichischen DBA nach BEPS, p. 37 et seq.
20
See in that context several legal opinions issued by the Federal Ministry of Finance, in particular EAS 3010, EAS
3018, EAS 3125.
21
Kofler, SWI-Spezial (2018), p. 40 et seq.; Jirousek, Wohin entwickelt sich das internationale Steuerrecht? SWI 2017,
p. 331 et seq. (p. 335).
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5. Provisions for MAPs and corresponding adjustments

All Austrian tax treaties contain provisions on MAP. Even if not all of them conform to
the latest legal standard of the OECD the application of these provisions does not lead
to major problems at least from a practical point of view. Even if a MAP provision would
not provide for the second sentence of article 25(2) OECD Model Convention, Austria
would be prepared to implement the agreement reached in the MAP on the basis of
reciprocity. The same goes for corresponding adjustments where the lack of the second
paragraph of article 9 OECD Model Convention would not be seen as an impediment to
grant corresponding adjustments.22 Nevertheless, Austria opted in for both articles 16
and 17 of the MLI in order to remedy existing deficiencies in the current treaty network.
6. Mandatory binding arbitration

Austria is committed to mandatory binding arbitration and is prepared to accept
article 25(5) OECD Model Convention in its bilateral tax treaties.23 Due to the current
administrative practice, Austria has little experience with mandatory arbitration
procedures up to now. In that context it should also be mentioned that a special rule on
arbitration has been agreed in the tax treaty with Germany. Article 25(5) of the Austrian/
German tax treaty (2000) contains a mandatory binding arbitration clause appointing
the Court of Justice of the European Union (CJEU) as the arbitrator based upon article 273
TFEU. Up to now only one case dealing with a conflict of interpretation was brought up
to and decided by the CJEU.24
Austria signed the MLI on 7 June 2017. The reason for signing the MLI was the intention
of the Austrian government to follow the BEPS Action Plan of the OECD/G20 in order to
avoid artificial shifting of profits to low or no tax jurisdictions by allocating profits to those
jurisdictions where the value was created. Another important goal which was also addressed
in the explanatory report to the parliament, was the improvement of mechanisms for dispute
resolution. From a more general point of view it was desirable to modernize the Austrian
tax treaty network according to the latest standard of international tax treaty law which
should also positively influence the promotion of the Austrian business location. Preliminary
assessments of the economic and budgetary impact of the MLI had been prepared by the
Federal Ministry of Finance in the course of the ordinary ratification procedure. These
assessments were based on estimations by the OECD on the annual worldwide losses due to
profit shifting in 2015. This led to the assumption that due to the BEPS measures provided for
in the MLI, a reduction of revenue losses for CIT could be expected in an amount of less than
10% of the annual CIT revenue..25 Since Austria did generally not go beyond the minimum
22
Loukota/Jirousek/Schmidjell-Dommes, Internationales Steuerrecht (Manz40) I/1 Z 9, mn. 104.
23
See in that context e.g. the tax treaties between Austria and Armenia, Azerbaijan, Bahrain, Bosnia-Herzegovina,
North Macedonia, Mongolia, San Marino and Switzerland.
24
Fuksová in Majdanska/Turcan (Eds.), OECD Arbitration in Tax Treaty Law, Chapter 29 – The CJEU as a Court of Arbitration
(I) – The role of the CJEU under the Austria – Germany double tax convention, p. 663 et seq.
25
See BGBl III 2018/93, Beilagen 1670 XXV.GP., Vorblatt und WFA, p. 8.
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standard in the relevant areas and most parts of the minimum standard were achieved
already in Austria due to domestic anti-avoidance rules and jurisprudence or due to already
existing treaty interpretation, the expectations on budgetary effects of the MLI should not
be too high.
The draft bill together with the Annex of reservations and notifications has been
approved by parliament on 5 July 2017. The instruments of ratification have been deposited
at the Secretary-General of the OECD as the Depositary according to article 39 of the MLI on
22 September 2017. The MLI entered into force for Austria on 1 July 2018.
The list of covered tax agreements (CTAs) contains 38 tax treaties, covering the following
jurisdictions: Belgium, Bulgaria, Canada, Chile, China (PRC), Croatia, Cyprus, Czech Republic,
Estonia, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Ireland, Israel, Italy,
Latvia, Lithuania, Luxembourg, Malta, Mexico, Netherlands, Pakistan, Poland, Portugal,
Romania, Russian Federation, Switzerland, Serbia, Slovenia, Slovak Republic, Singapore,
Spain, South Africa and Turkey.
Compared to the current list of tax treaties which have already entered into force, i.e. 89
treaties, 43% of the Austrian treaty network is covered by the MLI. Originally, Austria had
listed about 60 treaties as CTAs. Due to the positions of the other treaty partners as of 7 June
2017 only 38 jurisdictions remained as matching treaty partners. This reduced list has been
submitted to parliament for ratification.
Austria selected as covered treaties only those where the BEPS standard had not already
been fulfilled prior to the MLI at the bilateral level, as was the case in relation to Japan and
Liechtenstein, or where bilateral negotiations were already pending, e.g. UK. Another
criterion was the status of the existing tax treaty. In cases where a revision of the treaty
was envisaged also for other reasons than for BEPS purposes, e.g. with New Zealand and
Australia, it was decided to better leave this to bilateral negotiations instead of achieving
the modification in a two-step approach. Another criterion was the shape of treaty provisions
other than those covered by the MLI. Where these treaty provisions were rather outdated
already (e.g. in relation to Egypt) or where source tax rates did no longer conform with
the expectations of Austria in the light of the recent treaty practice of the treaty partner, a
bilateral revision in the form of a protocol or negotiations for a completely new tax treaty
seemed more appropriate. Finally, Austria has only chosen those jurisdictions which already
declared their interest in signing the MLI in June 2017. Currently it is not reasonable to expect
that additional tax treaties will be listed as CTAs in the near future.
All CTAs fulfil the minimum standard. According to the list of reservations and notifications
attached to the MLI, Austria opted in for article 5 (application of methods for elimination
of double taxation -option A), article 6 (preamble), article 7(1) (PPT clause alone), article 10
(third jurisdiction PE), article 13(2) (artificial avoidance of permanent establishment status
through the specific activity exemptions – option A), article 16 (mutual agreement procedure,
except for the first sentence of paragraph 1), article 17 (corresponding adjustments), article
18 (application of Part VI), article 19 (mandatory binding arbitration according to paragraph
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1, replacing the two-year period by a three-year period and application of paragraph 12),
article 24 (different resolution), article 26 (reservation for existing mandatory arbitration
procedures with Germany and Switzerland). For the rest of the MLI provisions Austria entered
reservations for the entirety of the articles.
1. Austria has chosen to apply article 6 of the MLI only to the extent of paragraph 1 of article
6 MLI. This choice was based upon the assurance that including the second portion of the
preamble of the OECD Model Convention 2017 as provided for in paragraph 3 of article 6
of the MLI is not required in order to meet a minimum standard.26 This decision is in line
with the fact that most tax treaties of the Austrian treaty network only contain the intent
to eliminate double taxation in its preamble. If only the CTAs would have been affected
by the widening of purposes as suggested in paragraph 3 of article 6 of the MLI, the wrong
conclusion could have been drawn for the rest of the existing treaties that this more or
less obvious desire would not be relevant for those treaties.
2. Austria decided to satisfy the OECD`s minimum standard on treaty abuse by applying the
principal purposes test (PPT) in article 7(1) MLI alone. Austria did not choose to apply the
discretionary benefits rule in article 7(4) of the MLI. Austria has also not chosen to apply
the SLOB provisions and has not indicated that it would agree to allow the SLOB to be
applied by another contracting jurisdiction pursuant to article 7(7)(b) of the MLI. Austria
did not issue a notification under article 7(17)(a) of the MLI that it accepts the PPT alone
as an interim measure while intending, where possible, to adopt a limitation on benefits
provision, in addition to or in replacement of the PPT, through bilateral negotiations.
Austria’s decision to opt for the PPT alone was primarily influenced by the fact that the
PPT comprises to a large extent the principles of tax treaty interpretation in cases of
improper use of tax treaties which were already mentioned in paragraphs 9.5, 22, 22.1 and
22.2 of the OECD Commentary on article 1 OECD Model Convention 2014 and also guided
the Austrian administrative practice before the MLI. Also the 2015 final report on BEPS
Action 627 upholds the view that the application of domestic general anti-abuse rules will
not cause any conflict with the provisions of a tax treaty as long they are in conformity
with the principles laid down in the PPT clause.28 As already mentioned earlier Austria
modified its domestic anti-avoidance rules (GAAR)29 in a way which conforms both to
the PPT clause of the MLI (respectively article 29(9) OECD Model Convention 2017) and
the general anti-avoidance clause provided for at the level of European law in article 6
ATAD.30
3. Other provisions of the MLI addressing tax treaty abuse
(1) The minimum holding period for transactions or arrangements undertaken to access
the reduced treaty rate on dividends paid to a parent company in article 8 of the
MLI has not been chosen by Austria. Abuses in that regard could presumably also be
solved by applying the general anti-abuse rule of domestic law31 or the PPT. Provisions
26
See Explanatory Statement, para. 84.
27
OECD (2015), Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 – 2015 Final Report, OECD/
G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris; http://dx.doi.org/10.1787/9789264241695-en
28
See s. A para. 58 and 59 2015 Report on Action 6 and OECD Commentary on art. 1 OECD model convention 2017,
para. 77; see also BGBl III 2018/93, Beilage 1670 XXV.GP. Erläuterungen, p. 4.
29
See BGBl I 2018/62.
30
Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly
affect the functioning of the internal market, Official Journal of the European Union L 193/1.
31
S. 22 BAO.
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of this kind – unless they affect all tax treaties – could also lead to unintended tax
planning strategies.32 As long as there are still tax treaties in force which do not follow
that approach, this could lead to avoidance schemes by interposing companies in
those jurisdictions where such special limitations are not applicable. Another aspect
for this decision was the fact that the new rule applies only to direct investments and
not to portfolio investments. This second category, which gave rise in some states,
including Austria, for abusive claims for refund of dividends tax by more than one
person,33 would not have been covered by article 8 MLI.34
(2) The substituted property rule for gains from the alienation of shares or comparable
interests deriving their value primarily from immovable property at any time during
the 365-day period preceding the alienation of the property in article 9 of the MLI has
also not been chosen by Austria for reasons similar like the ones mentioned for article
8 of the MLI.35
(3) The provision denying treaty benefits for income paid to low-taxed permanent
establishments in third jurisdictions that are subject to little or no tax and exempt
from tax in the residence jurisdiction in article 10 of the MLI has been adopted by
Austria. Although structures of that kind did not cause serious problems in the past,
the adoption of this provision was primarily demanded for political reasons.
(4) The provision preventing the avoidance of permanent establishment status through
commissionaire and similar arrangements in article 12 of the MLI has not been adopted
primarily due to the current administrative practice in Austria which provides for the
application of those rules also on the basis of the old version of article 5 OECD Model
Convention by referring to the interpretation principles laid down in the commentary
of the OECD Model Convention.36 The provisions on the specific activity exemptions
(article 13 of the MLI) have been adopted according to the wording of article 13(2) of
the MLI (option A). This interpretation will not change the Austrian tax treaty practice
since Austria followed that interpretation also on the basis of the old text of that
provision based upon paragraph 21, second sentence, of the commentary on article
5(4) OECD Model Convention 2014.37 The anti-fragmentation rule in article 13(4) of the
MLI was not adopted by Austria, primarily with regard to the application of the PPT
clause. The provision on the splitting-up of contracts (article 14 of the MLI) has not
been adopted by Austria, since this provision is specifically addressing the splitting-
up of contracts for use in treaties that would not include the PPT.38
4. Austria did not adopt provisions of the MLI addressing hybrid mismatch arrangements,
including in particular mismatches resulting from the use of transparent entities in article
3 of the MLI and mismatches attributable to dual resident entities (addressed by article 4
of the MLI). This is due to the Austrian position on the interpretation of tax treaties which
uses the partnership report as the guiding instrument for dealing with the phenomenon
32
Turcan, SWI-Spezial (2018), p. 35 et seq.; Schmidjell-Dommes, Wie BEPS’t Österreich, TPI 2017, p. 36 et seq. (p. 38).
33
„cum-ex“-transactions.
34
Schmidjell-Dommes, TPI 2017, p. 38.
35
Turcan, SWI-Spezial (2018), p. 35 et seq.
36
See in particular para. 32.1 of the Commentary on art. 5 OECD Model Convention 2014. See also Turcan, SWI-
Spezial (2018), p. 36; see also BGBl III 2018/93, Beilage 1670 XXV.GP. Erläuterungen, p. 6.
37
See also Jirousek/Zöhrer/Dziwinski, Die Auswirkungen des MLI auf das österreichische DBA-Netzwerk, ÖStZ 2017/592,
p. 393 et seq. (p. 396).
38
See para. 182 Explanatory Statement. See also Turcan, SWI-Spezial (2018), p. 36.
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of hybrid entities and on the tax treatment of dual resident companies in the light of
general policy considerations. These reasons are described in more detail in section 1.2.2,
subparagraph 4.
5. Austria has chosen to apply articles 18-26 of the MLI providing for mandatory binding
arbitration of disagreements between contracting states and in this regard has chosen
the type of arbitration provided for in article 23(1) of the MLI (final offer arbitration). This
was primarily caused by the fact that this rule was drafted as a default rule so that it could
be expected that it will find the broadest possible acceptance by treaty partners. Since
Austria did not reserve the right not to apply article 23 with respect to CTAs with parties
that made a reservation according to article 23(2) of the MLI, Austria will accept to apply
the independent opinion arbitration in relation to parties which reserved the right to
apply article 23(2) instead of paragraph 1.39
6. For most of the articles of the MLI which were not chosen by Austria, it can be expected
that they could be used on a bilateral basis in relation to treaty partners which prefer to
adopt such provisions, in particular also with a view that Austria did not enter reservations
to these provisions in the OECD Model Convention 2017. There are currently no indications
that Austria will reverse the choices made in the MLI in the near future.
7. Austria entered reservations for articles 3, 4, 8, 9(1), 11, 12, 13(4), 14, 15, 16(1), first sentence
of the MLI, as well as reservations pursuant to article 28(2)(a) and to article 36(2) of the
MLI. Those reservations were introduced primarily due to a general policy decision
to limit the application of the MLI to the minimum standard in most areas without
precluding, however, the possibility to apply all or some of the MLI provisions on the
basis of bilateral tax treaties. Further explanations towards that end can be found in the
Explanations (“Erläuterungen”) which are part of the MLI-bill40 as Annex (“Beilage”) 1670
of the 25th legislation period (XXV. GP”), which is cited in this report as “BGBl III 2018/93,
Beilage 1670 XXV.GP. Erläuterungen, p. XX”. 41
8. Subject to possible changes caused by changes in the positions of CTA parties which
have not yet ratified the MLI, Austria expects the following results: The total number
of existing provisions (including the preambles) of all 38 CTAs is 1.162. The number of
existing provisions which will be changed according to the matching results with the
parties of the Austrian CTAs is 96. The number of new provisions (stemming from article
7(1) and Part VI of the MLI) is 117.
1. Austria entered already into new bilateral tax treaty negotiations or finished such
negotiations since the MLI was signed. A tax treaty with Kosovo was signed on 8 June
2018 and entered into force on 28 December 2018.42 On 23 October 2018 a new tax treaty
with the United Kingdom was signed which entered into force on 1 March 2019.43 On 6
December 2019 a tax treaty with Argentina was signed. Tax treaty negotiations with
39
BGBl III 2018/93, Beilage 1670 XXV.GP. Erläuterungen, p. 9.
40
BGBl III 2018/93.
41
Available in German language only.
42
BGBl III 2019/2.
43
BGBl III 2019/32.
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Brazil (amending protocol) are pending. A considerable number of other BEPS-related

protocols are in preparation.
2. The aforementioned tax treaties with Kosovo and the UK meet the BEPS minimum
standard by using the new text of the Preamble (article 6 of the MLI) and the PPT clause
(article 7(1) of the MLI). Both tax treaties provide for access to MAP according to the BEPS
standard, thereby respecting the Austrian position to article 16(1) of the MLI concerning
the state of residence as the one where the MAP has to be presented. Both treaties
provide for the mandatory arbitration procedure according to article 25(5) of the OECD
Model Convention 2017. Article 4(3) of the new tax treaty with the UK concerning dual
resident companies is drafted along the lines of article 4(1) of the MLI.
The BEPS Action Plan has also indirectly influenced the Austrian tax treaty policy before
the MLI was signed in June 2017. The Protocol with Liechtenstein signed on 15 September
201644 amending the tax treaty signed on 5 November 1969, added a new title and the
new preamble following article 6(1 and 3) of the MLI as well as the PPT clause following
article 7(1) of the MLI to the existing tax treaty. Also article 25 of the tax treaty referring to
the MAP has been completely adapted along the lines of article 16(1-3) of the MLI, thereby
also enabling the taxpayer to present the case in either contracting state. This tax treaty
therefore fully complies with the minimum standard.
The new tax treaty with Japan which was signed on 30 January 201745 went even further.
The tax treaty in principle adopts the following BEPS-related issues: Transparent entities
(article 3 of the MLI combined with a simplified saving clause in article 1(3) DTC), dual
resident entities (article 4(1) of the MLI), preamble (article 6(1) of the MLI), prevention
of treaty abuse in the form of the simplified LOB plus PPT (article 7 of the MLI), dividend
transfer transactions (article 8 of the MLI), capital gains from alienation of shares or
interests of entities deriving their value principally from immovable property (article 9 of
the MLI), artificial avoidance of permanent establishment status through commissionaire
arrangements and similar strategies (article 12 (1) of the MLI), artificial avoidance of
permanent establishment status through the specific activity exemptions (article 13(4)
of the MLI; anti-fragmentation rule), MAP (article 16 (1-3) of the MLI enabling the taxpayer
to present the case in either contracting state). The tax treaty also provides mandatory
arbitration following article 25(5) OECD Model.
3. The recent tax treaty between Austria and Japan clearly shows that the restrictive
approach in the MLI policy does not automatically influence the bilateral tax treaty policy
in the same manner. So it seems that the MLI will remain as a third layer of international
tax law.
4. The policy adopted by Austria regarding the MLI is not the same policy adopted regarding
the 2017 version of the OECD Model. Austria did not enter any reservations to the BEPS-
related provisions of the 2017 version of the OECD Model which means that Austria
reserved a certain flexibility to decide which approach should be chosen in relation to
its treaty partners on a bilateral basis.
44
BGBl III 2017/8.
45
BGBl III 2018/167.
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Austria
The procedure for implementation of the MLI was the same as Austria has to follow in all
other tax treaty procedures. After signature parliament had to approve the draft bill which
was submitted to parliament like in the case of bilateral tax treaties by the Federal Minister
of Europe, Integration and Foreign Affairs in the form of a government bill.46 The draft
had been prepared by the Federal Minister of Finance subject to prior consultations with
other authorities and stakeholders as is also customary in the case of bilateral tax treaty
procedures. The contents of the “template” addressing reservations, options and notifications
was finally the result of political discussions within the government. As in all other legislative
procedures parliament did check the contents of the bill although the technical details had
been prepared and evaluated by the Federal Ministry of Finance. Due to the preparatory
consultations parliament could be convinced on the necessity and usefulness of this approach
which was seen as an important part of Austria’s engagement to avoid base erosion and profit
shifting.47 The bill has been approved unanimously by all political parties.
After the MLI has entered into force, the Federal Ministry of Finance published
“synthesised” texts of the revised tax treaties. This process is still ongoing. Although there is
no legal obligation for consolidating international law agreements this has been seen as a
matter of courtesy which should help taxpayers and tax practitioners to better understand
the outcome of the MLI modifications of the existing tax treaties. Austria had favoured real
“consolidated” versions where the results of the MLI modifications would have directly been
inserted in the text of the treaty. Since this approach did not find the necessary support
in the ad hoc group and might also have caused constitutional problems with regard to
the principle of legality, Austria finally accepted the approach suggested by the OECD to
prepare “synthesised” texts where the original text of the MLI is reproduced in boxes which
are inserted after the relevant provisions of the CTA.48 The synthesised versions of the CTA
will be published on the website of the Federal Ministry of Finance49 and on the electronic
part of the federal law gazette.50 The Austrian competent authority prepares those texts
in close co-operation with the competent authorities of the other contracting states. In all
cases agreement could be reached at least on the substantial parts of the document, it being
understood that each state might have reasons to deviate from the guidelines of the OECD
in some areas. This agreement will normally also be stated in a separate paragraph of the
disclaimer which is attached as introductory part of the synthesised text.
Up till now, private publishers in Austria strictly followed the technical approach chosen
by the Federal Ministry of Finance for the publication of amended CTA and therefore also
printed those amendments in the way suggested in the “Guidance to the development of
synthetized text” by using the system of boxes reproducing the original wording of the MLI. It
46
„Regierungsvorlage“.
47
See also BGBl III 2018/93, Beilage 1670 XXV.GP. Erläuterungen, p. 1.
48
Jirousek, Das MLI – eine Erfolgsgeschichte?, SWI 2018, p. 523 et seq. (p. 526).
49
https://english.bmf.gv.at/taxation/The-Austrian-Tax-Treaty-Network.html
50
https://ris.bka.gv.at/Bundesrecht/
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can be expected that this approach will also be followed in the future since private publishers
will be well aware of the risks which might emerge from publication of legal texts which do
not follow the wording and structure of publication chosen in the official gazette. On the
other hand, it can also be expected that authors will not be prepared to take over those risks
on their own behalf.
From a constitutional point of view the only mandatory legal basis for the application
of a CTA as amended by the MLI is the original text of the tax treaty and the text of the MLI
which is applicable “alongside” the existing tax treaty.51 This means that only the MLI and the
affected tax treaty can be treated as legal sources. This is also indicated in the “disclaimer”
attached to the synthesized text of the CTA. This means in practice, that taxpayers can only
claim rights from the MLI and the existing tax treaty as such. Following from that any possible
errors in transposing the modifications caused by the application of the MLI into the existing
text of the treaty in the form of a synthesized text would have no legal consequences for the
taxpayer’s rights and obligations. It is also beyond any doubt that synthesized texts could
have no binding effect for the tax administrations or for courts. These synthesized versions
would therefore have no legal value of its own.
Austria is a so called “monist” country which means that tax treaties are “self-executing”
and do not need any domestic act of legislation for bringing them into force. This principle
is also relevant for the MLI irrespective of its multilateral character. Following from that the
MLI has primacy over existing international law but – where appropriate – also over existing
domestic legislation. This latter case could e.g. be met if a tax treaty which does not contain a
provision following article 25(2) OECD last sentence of the OECD Model52 is a CTA and article
16(2) of the MLI is applicable. Then the same effect would apply as in the case of a bilateral
tax treaty which follows the OECD Model, i.e. the overriding effect of international law over
domestic procedural law which would normally preclude reopening a case which is already
locked due to the expiration of the period of limitation.
From the Austrian point of view the transposition of the MLI into a CTA did not give rise to
specific interpretation issues. Due to the fact that only a few treaties were already in force at
the time when this report was finished, and the earliest year for first application of the MLI
in Austria is the year 2019 for assessed taxes, there could hardly be any court case pending
on interpretation issues. The Explanatory Statement of the MLI provides valuable guidance
on the functioning of the MLI. According to the view of the Austrian tax administration it
is characterised in the same manner as the commentaries of the OECD and has therefore
51
Explanatory Statement, para. 13.
52
This sentence provides for the implementation of a mutual agreement notwithstanding any time limits in the
domestic law of the contracting states.
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significant relevance on the interpretation of the MLI. The note of the OECD Directorate on
Legal Affairs titled “Multilateral Convention to Implement Tax Treaty Related Measures to
Prevent Base Erosion and Profit Shifting: Functioning under Public International Law” is also
a valuable tool for better understanding of the interaction between the MLI and the relevant
bilateral tax treaties. It strictly refers to the general interpretation principles laid down in
the Vienna Convention on the Law of Treaties (VCLT). Since it is of more general nature it
will have less importance for the interpretation of the contents of specific clauses of the MLI.
Generally tax treaties have to be interpreted according to the rules of the VCLT. These rules
are relevant even in the case that one of the parties should not have ratified the treaty.
This is due to the fact that the rules of interpretation as laid down in the VCLT form part of
international customary law.53 According to article 31(1) VCLT a treaty shall be interpreted “in
good faith in accordance with the ordinary meaning to be given to the terms of the treaty
in their context and in the light of its object and purpose.” Also historical aspects have to be
respected. According to article 32 VCLT “[r]ecourse may be had to supplementary means of
interpretation, including the preparatory work of the treaty and the circumstances of its
conclusion, in order to confirm the meaning resulting from the application of article 31, or to
determine the meaning when the interpretation according to article 31: (a) leaves the meaning
ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable.”
According to article 31(4) VCLT “[a] special meaning shall be given to a term if it is established
that the parties so intended.” Thus, it cannot be concluded that the development of law is only
of subordinate importance. Seen from this perspective the interpretation of international
treaties, including the MLI, is not different from the general principles of interpretation of
other legal provisions, where besides the wording of a provision, also systematic, teleological
and historical arguments might have to be considered. According to article 31(3) VCLT “[t]
here shall be taken into account, together with the context: (a) any subsequent agreement
between the parties regarding the interpretation of the treaty or the application of its
provisions; (b) any subsequent practice in the application of the treaty which establishes
the agreement of the parties regarding its interpretation; (c) […].“ It should be noted, however,
that such agreements or such subsequent practice which has been developed on a bilateral
basis between two parties, cannot have any relevance for the interpretation of the multilateral
treaty. 54 Based on these general considerations earlier OECD reports published in the course
of the BEPS project also have legal value for the interpretation of the MLI, in particular as
supplementary means of interpretation in the sense of article 32 VCLT. This result is also
reflected in the findings of the authors of the MLI. According to the Explanatory Statement
of the MLI “the provisions contained in article 3 through 17 [of the MLI] should be interpreted
in accordance with the ordinary principle of treaty interpretation, which is that a treaty shall
be interpreted in good faith in accordance with the ordinary meaning to be given to the terms
of the treaty in their context and in light of its object and purpose. In this regard, the object
and purpose of the convention is to implement the tax treaty-related BEPS measures. The
53
M. Lang, Die Auslegung des multilateralen Instruments (The Interpretation of the Multilateral Instrument), SWI 2017,
p. 11 et seq.
54
M. Lang, SWI 2017, p. 12.
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Jirousek
commentary that was developed in the course of the BEPS Project and reflected in the final
BEPS Package has particular relevance in this regard.”55
Following the above-mentioned considerations laid down in the Explanatory Statement
it seems logical to attribute the same legal weight to the BEPS reports as to the OECD
Commentaries. This follows already from the fact that most parts of the tax treaty related
BEPS reports have been incorporated into the OECD Commentary of the 2017 version of the
OECD Model Convention.
As stated already in the first paragraph of section 2.2.2 the MLI has to be interpreted
according to the rules of the VCLT.56 Starting from this assumption the method of tax
treaty interpretation could hardly be changed only because of the application of the MLI.
Although the technique of “alongside existing tax treaties application”57 used by the MLI
leaves the existing DTA as such untouched, it cannot be denied that a tax treaty being a CTA
changes its contents to the extent that provisions of this treaty are incompatible with the
provisions of the MLI. This means that tax treaties modified by the MLI are still applicable
but only in accordance with the contents which they are given through the application of
the MLI.58 Therefore the question whether the application of the MLI could lead to a move
from the method of static tax treaty interpretation to the method of ambulatory tax treaty
interpretation could hardly arise, since it was not the commentary which was changed but the
contents of the tax treaty as such. Even a state which applies the static tax treaty interpretation
as a general rule could hardly be expected to apply this interpretation if the contents of the
treaty has changed. For Austria this discussion would not be of specific relevance since the
Austrian tax administration – despite some opposite views expressed in literature59 – feels
committed to the ambulatory tax treaty interpretation with respect to the explicit wording
of the OECD Recommendation of 23 October 1997 concerning the Model Tax Convention on
Income and on Capital.60
Retrospective effects of the MLI on the treaty interpretation of existing tax treaties could arise
in particular in those areas where the tax treaty interpretation according to the commentaries
of the OECD already offered this interpretation. In such situations the wording imported by
the MLI would be more or less of a clarifying nature. As far as the preamble as suggested by
55
Explanatory Statement, para. 12.
56
See again M. Lang, SWI 2017, p. 11.
57
See Explanatory Statement, para. 13.
58
See in this direction also M. Lang, Die Anwendung des Multilateralen Instruments (MLI) “Alongside Existing Tax Treaties”
(Application of the Multilateral Instrument (MLI) “Alongside Existing Tax Treaties”), SWI 2017, p. 624 et seq. (p. 625).
59
M. Lang, Die Bedeutung des Musterabkommens und des Kommentars des OECD-Steuerausschusses für die Auslegung
von Doppelbesteuerungsabkommen in Gassner/Lang/Lechner, Aktuelle Entwicklungen im Internationalen Steuerrecht
(Linde, 1994), p. 11 et seq.; M. Lang, Seminar B, Teil 2: Das OECD Musterabkommen – 2001 und darüber hinaus:
Welche Bedeutung haben die nach Abschluss eines Doppelbesteuerungsabkommens erfolgten Änderungen des OECD-
Kommentars?, IStR 2001, p. 536 et seq.
60
Part I para. 3 of this Recommendation reads as follows:
“I. RECOMMENDS the Governments of member countries: […] 3. that their tax administrations follow the
Commentaries on the Articles of the Model Tax Convention, as modified from time to time, when applying and
interpreting the provisions of their bilateral tax conventions that are based on these Articles.” See in this direction
also Loukota/Jirousek/Schmidjell-Dommes, Internationales Steuerrecht (Manz24) I/1 Z 0, mn. 46-53.
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Austria
article 6(1) of the MLI is concerned, it could very well be argued that “creating opportunities
for non-taxation or reduced taxation through tax evasion or avoidance” was already contrary
to the aims of the Model Convention before the update 2017 (which imported the text of the
preamble in the new Model). This conclusion could be drawn from the commentary on article
1 OECD Model Convention 2014 which considers that a proper construction of tax conventions
allows states “to disregard abusive transactions such as those entered into with the view to
obtaining unintended benefits under the provisions of these conventions. This interpretation
results from the object and purpose of tax conventions as well as the obligation to interpret
them in good faith (see article 31 of the Vienna Convention on the Law of Treaties)”.61 Such
interpretation is also shared by the Austrian tax administration.62
A likewise result could be achieved with regard to the application of article 12 MLI
concerning artificial avoidance of permanent establishment status through commissionaire
arrangements and similar strategies. The commentary on article 5(5) OECD Model Convention
2014 allowed e.g. to accept the existence of a dependent agent PE even in cases where the
commissionaire entered into contracts in his own name. The phrase “authority to conclude
contracts in the name of the enterprise” in paragraph 5 should not be interpreted literally
and also comprise an agent who concludes contracts which are binding on the enterprise
even if those contracts are not actually in the name of the enterprise.63 This interpretation
has always been shared by the Austrian tax administration and it is likely that this will also
be the case in the future.64
In principle, tax professionals had to take into account a GAAR similar to the PPT provided for
in the Austrian Federal Tax Procedural Act (BAO) already before the MLI. It can be taken for
granted that future tax planning will carefully take the new legal situation into consideration.
A special challenge might be the overlap between “OECD” provisions and European Law.65 Tax
planning will largely depend on future court rulings (both at the national level thereby also
considering differences between the existing GAAR and the revised GAAR,66 and at the level
of the CJEU). Over the short term at least, the PPT can be expected to increase uncertainty in
international tax planning and lead to an increased number of tax treaty disputes.67
At the time when the report was drafted practical experience on the actual assessment
practices of the tax administration was not available since assessment on the basis of the MLI
will not take place earlier than for the taxable year 2019 due to rules on the entry into effect
of the MLI. Assessment for this year will start in 2020. Most Austrian CTAs will have effect
61
See para. 9.3 of the commentary on art. 1 OECD Model 2014. para. 9.4 generally concludes that “[…] States do not
have to grant the benefits of a double taxation convention where arrangements that constitute an abuse of the
provisions of the convention have been entered into.”
62
Jirousek/Zöhrer/Dziwinski, ÖStZ 2017/592, p. 395. See also Final Report on BEPS Action Item 6, OECD (2015), para.
73.
63
See commentary on art 5(5) OECD Model 2014, para. 32.1.
64
Jirousek/Zöhrer/Dziwinski, ÖStZ 2017/592, p. 397.
65
See in that latter context ATAD, art 6.
66
S. 22 BAO as amended by BGBl. I 2018/62.
67
See D.G. Duff, Tax Treaty Abuse and the Principal Purpose Test – Part 2, Canadian Tax Journal (2018), 66:4, p. 947 et seq.
(p. 1006). This statement made from the Canadian point of view can in principle also be anticipated for Austria.
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Jirousek
for taxable years 2020 and later. However, it can already be assumed now that in respect of
treaty shopping and other treaty abuses no dramatic changes will take place in the future
since abuse of tax treaties is already prohibited under domestic anti-avoidance rules. A still
open question is whether the changes of those provisions which have been initiated in the
course of recent EU law obligations,68 will lead to changes in jurisprudence. Although it was
the intention of the Austrian legislator to enable courts to uphold its interpretation practice
on abuse of law as far as possible, the possibility that such changes will take place cannot
be ruled out, in particular also based on possible changes of the jurisprudence of the CJEU.69
Concerning the future application of the PPT clause, the Austrian tax administration did
not decide on the installation of a special PPT committee for reviewing potential assessments
on this basis. Considering the already existing tools of advance rulings and measures of
“horizontal monitoring”70 which emerged from previous efforts for enhanced relationship
between tax administration and taxpayers, such a special approach did not seem appropriate.
The impact of the MLI on the resolution of tax disputes through mandatory binding
arbitration will be of higher relevance. Cases of arbitration will certainly increase due to the
number of treaty partners where this procedure will be available in the future. However, it
should also be taken into consideration that the mere existence of rules on arbitration will
normally have a deterrent effect on tax administrations, which could also lead to a quicker
solution of MAP cases.
68
BGBl. I 2018/62; see also sub para. 2 of s. 1.2.2.above.
69
See in this direction critical comments by M. Lang, Die Neuregelung des Missbrauchs in § 22 BAO, in ÖStZ Spezial,
Jahressteuergesetz 2018, p. 47 et seq.
70
https://www.bmf.gv.at/services/publikationen/BMF_Evaluationsbericht_Horizontal_Monitoring.
pdf?63xfqc (available in German language only).
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Belgium
Branch reporters
Piet De Vos1
Caroline Docclo2

Belgium’s international tax policy mirrors its willingness to encourage cross-border economic
exchanges, as it is expressed in the preambles of many of its pre-MLI treaties. Belgium has
treaties in force with 95 countries. It signed new treaties with six other countries. New treaties
are currently under negotiation with five other countries. Since 2007, Belgium has its own
model (“Standard”) that is based on the OECD-MC as almost all its treaties were before.
Belgium remedies double taxation by exempting foreign source income.
The Belgian pre-MLI environment can be described as follows. Domestic anti-abuse rules
are not specifically geared towards treaty-shopping. Because treaties supersede domestic
legislation, the compatibility of domestic anti-abuse rules is a sensitive issue, but it may be
tested through MAPs. However, Belgium has included in its treaties rules that specifically
target treaty-shopping.
When acting as the residence country, Belgium subjects the exemption of foreign income
(cf article 23A OECD-MC) to taxation by its partners while the “recapture rule” copes with
the deduction of foreign establishments’ losses in two countries. Anti-channelling rules
prevent the allowance of a credit for foreign tax on interest and royalties in inappropriate
circumstances.
In a number of treaties, some tax relieves are subject to a purpose test but Belgium seldom
denies treaty protection to taxpayers for the reason that they are mainly owned by residents
of other countries (LOB). Belgium is also reluctant to deny dual-residents treaty protection (cf
article 4(3) OECD-MC) and to look through real estate companies when determining where
the gains realized on their shares should be taxed (cf article 13(4) OECD-MC).
Although Belgium broadly defines a Belgian establishment of a foreign enterprise for
domestic purposes, the narrower definition of a permanent establishment based on the
OECD-MC supersedes for treaty purposes. When acting as the source country, Belgium
generally grants a reduced rate of tax on dividends depending on a minimum holding of
the recipient in the distributing company. In some 20 treaties, such relief is subject to a
minimum holding period. Besides, 14 pre-MLI treaties concluded by Belgium already
included a binding-arbitration clause in their MAP provisions.
The 2003 OECD’s guiding principle has had a limited impact on treaty interpretation
because Belgium sticks to the treaty language if it is clear.
Belgium signed the MLI as soon as it was open to signature on 7 June 2017. When ratifying
the MLI on 26 June 2019, it modified some of its notifications and reservations made two
years before. Belgium selected among the “optional” provisions those that it considered to
be balanced remedies to treaty abuses and in line with its traditional policy.
1
Head of Section - FPS Finance – Negotiation of international agreements.
2
Avocat (Brussels Bar) and professor (Université libre de Bruxelles and ULiège).
IFA © 2020 167

Belgium
Belgium listed as CTAs almost all its existing treaties (even if not yet in force). Its treaty
with Japan meets the OECD’s minimum standard. Norway and Switzerland prefer negotiating
bilateral protocols and a new bilateral treaty with Germany is currently under negotiation.
The treaties with those countries are not covered.
Depending on the date of its partners’ ratification, the MLI substantive rules will have
effect as from 1 January 2020 at the earliest. The Branch report forecasts the impact of the
MLI on Belgium’s treaty-network from the information made available on the OECD’s website
as of 17 July 2019.
Belgium opted out of article 4 MLI because it is not in favour of a discretionary approach
when dealing with dual-resident companies.
As mentioned before, Belgium signs treaties to enhance economic and tax cooperation.
Consequently, it opted for article 6(3) MLI and is now joined by 32 of its partners, while treaties
already saying the same will remain unchanged.
Belgium remains with the PPT provision (article 7 MLI). All of its partners agreed on the
same and 65 treaties will be affected. However, Belgium opted for the “discretionary relief”
under article 7(4) MLI softening a rough application of the PPT while only 22 of its partners
share this option.
Belgium opted for article 8 MLI, including a minimum holding period requirement for
a reduced taxation at source on dividends, in order to align its treaties with its Standard.
Although it notified 74 CTAs, only 18 partners agreed on the same.
Thirteen treaties already applying a “look-through” assessment of real estate companies
will extend their rules to interest in other investment entities when determining where the
gain realized on shares in such entities must be taxed (cf article 9(1)(b) MLI).
Belgium opted-out of the third-country permanent establishment rule (article 10 MLI).
Belgium is willing to generally apply article 11 MLI in order to secure the efficiency of CFC
or CFC-like rules provided by domestic legislation but only 18 treaties will include it.
Despite the reservation made in June 2017 to article 12 MLI relating to commissionaire-
arrangements, Belgium opted for this provision upon ratification. Only 29 treaties should
be affected.
Belgium restated its interpretation of the specific activity exemption under article 5(4)
of the pre-MLI OECD-MC and refused the anti-splitting-up of contracts rule proposed by the
MLI, although a like-kind of rule is included in its domestic legislation. Belgium found that
the MLI anti-splitting up of contract was too harsh because, by its automatic application, it
may catch good faith situations.
Belgium definitely wants to enhance dispute resolution and, therefore, it opted for
baseball binding arbitration as the default rule (articles 18-26 MLI). Arbitration will be
introduced in 17 treaties.
The implementation of the MLI raises a number of institutional problems: the mixed
nature of the MLI (within responsibilities of the federal government and Belgium’s
subdivisions); language issues; constitutional approval and gazetting obligations within the
ongoing process of signature and notification by other countries making different choices.
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De Vos & Docclo
Treaty Network
1.1. Introduction
1. Belgium’s international tax policy mirrors its willingness to encourage cross-border

economic exchanges. Belgium remedies double taxation by using the exemption
method. Nevertheless, Belgium prevents the inappropriate use of treaty benefits, as a
number of pre-MLI treaty provisions show.
2. Belgium signed the MLI as soon as it was open for signature, on 7 June 2017 and listed
as “covered tax agreements” (“CTAs”) all (but five) of its existing treaties, regardless of
whether its partners would also sign the MLI or were part of the Inclusive Framework
(“IF”) or not.3
Belgium selected among the “optional” provisions those that it considered to be balanced
remedies to treaty abuses and in line with its traditional policy.
3. Since then, Belgium amended its notifications and reservations when ratifying the MLI
on 26 June 2019.
4. To date treaties in force bind Belgium to 95 countries.

Belgium has treaties with all EU and EFTA countries (except Liechtenstein), Albania,
Bosnia-Herzegovina, Kosovo, Macedonia, Montenegro, San Marino and Serbia.
Belgium’s treaty network also covers Canada, the United States and Mexico in North
America; Argentina, Brazil, Chile, Ecuador, Uruguay and Venezuela in Latin America;
Armenia, Azerbaijan, Bahrain, Bangladesh, Belarus, People’s Republic of China (PRC),
Republic of Korea, United Arab Emirates, Georgia, Hong Kong, India, Indonesia, Israel,
Japan, Kazakhstan, Kyrgyzstan, Kuwait, Malaysia, Mauritius, Moldova, Mongolia,
Uzbekistan, Pakistan, Philippines, Russia, Singapore, Sri Lanka, Tajikistan, Chinese Taipei,
Thailand, Turkmenistan, Turkey, Ukraine and Vietnam, in Asia; Algeria, Côte d’Ivoire,
Democratic Republic of Congo, Egypt, Gabon, Ghana, Morocco, Nigeria, Rwanda, Senegal,
Seychelles, South Africa and Tunisia, in Africa; Australia and New Zealand in Oceania.
In addition, nine new treaties have been signed but are not yet in force. Of these, three
will replace existing ones (Moldova, Russia and Tajikistan). The other six will expand our
network to Botswana, the Isle of Man, Macao, Oman, Qatar and Uganda.
5. All these treaties, except the 1964 one with France, were based on the OECD Model Tax
Convention (hereinafter “OECD-MC”) that existed at the time of their negotiations. Some
treaty provisions are based on the UN model.
The treaty of 27 November2006 with the United States is very similar to the US model of
1 November 2006.
3
Hereinafter, a “treaty” is a bilateral treaty signed by Belgium; a “partner” is a country bound to Belgium by a
“treaty”; a “signatory” is a country that signed the MLI.
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Belgium
Since 2007, Belgium has its own “Standard” largely based on the OECD-MC (last update
in 2010).
6. Variances between Belgium’s treaties and the OECD-MC that are relevant to enterprises
are the following:
–– Subject-to-tax rule: In recent treaties, Belgium only exempts foreign income if it is
“taxed” by the source country (comp. article 23A(1) OECD-MC). An item of income
is “taxed” abroad if it is subjected to the tax regime normally applicable under the
partner’s laws, even if that regime results in an exemption.
When Belgium makes the exemption of foreign income subject to “effective taxation”
by its partner, then a taxpayer claiming such an exemption must prove that the
income is taxed by the partner, without benefitting from any exemption.
Belgium may also subject exemption to a minimum taxation in the other country but
grant a reduced tax rate if the threshold is not met (see the treaties with the Isle of
Man, Mauritius, Rwanda, San Marino, Seychelles, Uganda and Tunisia).
–– Dealing with foreign dividends received by Belgian companies, Belgium does not apply
the credit method recommended by the OECD-MC but it exempts dividends within
the limits and conditions under domestic law (RDT/DBI). Under most recent treaties,
dividends disqualified for RDT/DBI are exempted if they originate from the active
conduct of a business.
–– Belgium does not include article 23(4) OECD-MC because the above-mentioned
subject-to-tax clause prevents non-taxation situations.
–– Belgium includes in its treaties a recapture rule under which the exemption of profits
derived from a foreign permanent establishment is denied to a Belgian enterprise
to the extent that losses earlier suffered in that establishment, were used to offset
Belgian profits according to Belgian law and were also used abroad to offset the
permanent establishment’s taxable basis. However, articles 185(3) and 206(1)(2)
CIR1992 introduced in 2008, render this provision inoperative insofar as they disallow
the deduction by Belgian companies of losses suffered by their foreign establishments
from their taxable base in Belgium.
–– Belgium was used to not include the second phrase of article 25(3) OECD-MC (see
§§17 and 37).
–– A few treaties also vary from the OECD-MC in that they provide some treaty protection
to hybrid entities (Finland, France, Isle of Man, Luxembourg, Moldova (ex-USSR),
Netherlands, New Zealand, Switzerland, Sweden, Tunisia, the United States).
1.2.2.1. Purposes of the treaties defined in their preambles
7. The enhancement of economic exchanges is obviously Belgium’s main goal when

negotiating a treaty. A number of treaties confirm in their preambles that they aim to
promote economic exchanges (Albania, Armenia, Bulgaria, Gabon, Georgia, Hungary,
Kuwait, Qatar, Romania, San Marino, Tajikistan (new), Uganda, Ukraine).
8. Belgium’s aim to prevent tax evasion or fraud is also confirmed in the title or preamble
of its treaties. Only the treaties with Algeria, Germany, Austria, Bosnia and Herzegovina,
Brazil, Bulgaria, Denmark, France, Israel, Kyrgyzstan, Kosovo, Luxembourg, Moldova,
Montenegro, Portugal, Serbia, Switzerland, Tajikistan, Turkey, Turkmenistan do not
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De Vos & Docclo
mention this purpose. The treaties with Gabon, Georgia and Italy mention in their
titles that they strive against tax evasion or fraud, although they do not mention it in a
preamble.
9. Under Belgian law, a clear distinction is made between tax evasion/fraud on the one hand,
and (lawful) tax avoidance on the other hand. With the exception of the 2016 treaty with
Japan, none of Belgium’s conventions allude to tax avoidance in their titles or preambles.4
1.2.2.2. Domestic anti-abuse rules
10. Under Belgian tax law, there is still no general anti-abuse or “fraus legis” theory, although
the European Court of Justice introduced the concept of abuse of EU law in tax matters.5
11. Nevertheless, under Belgian law, disguised transactions are disregarded by the tax
authorities that must assess the tax on reality. A sham is a fraud. However, there is
no sham when taxpayers intend to benefit from a favourable treatment, use the
freedom to contract without violating any obligation and accept all consequences of
their transactions, even if the form they give thereto is not the most usual one or those
transactions are driven by tax saving only.6
If the tax authorities determine that a taxpayer committed a sham to unduly benefit from
a tax treaty, they may deny the purported application of the treaty.
12. Article 344(1) CIR1992 targets so-called “tax abuse” (fiscaal misbruik/abus fiscal). However,
it only applies in the limited circumstances that it describes. It applies when a taxpayer
performs a legal act or a series of legal acts with the essential goal either to avoid tax by
escaping a provision of the CIR1992 or the royal decrees implementing it, or to claim a
tax advantage by putting itself within the scope of a favourable provision of the same
texts, and does so contrary to the purpose of such provision. The tax authorities can only
determine that a transaction is contrary to the purpose of a tax provision if this purpose
follows clearly from the text or the legislative history. In this respect, they must have
regard to the general context of the relevant legislation, the common practices at the
time of the introduction of the provision and the existence of specific provisions which
already aim to combat abuses of the same provision.7 Article 344(1) CIR1992 allows the
application of the tentatively abused provision in accordance with its objective but it
leaves no room for a change in the taxable matter.8
The government considers that article 344(1) CIR1992 complies with the GAAR of EU
Directive 2016/1164 (“ATAD”).9
Article 344(1) CIR1992 only targets the abuse of provisions of the CIR1992 and the royal
decrees implementing it. From its language, it cannot be used to prevent the abuse of a
treaty provision (see §18).10
13. Belgian legislation contains very few specific anti-treaty shopping provisions. This has to
do with the priority of treaties over domestic legislation (see §§23 and 76).
4
Doc. Parl., Chambre (2018-2019), DOC54-3510/001 (“DOC54K3510/001”), 37.
5
See §19 (ECJ, 26 February 2019, C‑115-119 and 299/16).
6
Cass., 6 June 1961, Pas., 1961, I, 1082; Cass., 22 March 1990, JDF, 1990, 110.
7
C.C., 141/2013, 30 October 2013.
8
D. Garabedian, in Alabaster (2013), 452.
9
DOC54K2864/003, 160; see however DOC54K2961/001.
10
W. Panis, Belgian IFA report (2018), 21.
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Belgium
14. Since the law of 13 December 2012, for the purposes of determining whether a building site
or the provision of services exceed the period after which a foreign enterprise maintains
a Belgian establishment, the aggregate period of time of similar activities conducted in
Belgium by related enterprises is taken into account. The same anti-splitting-up of contracts
rule would apply when determining whether a foreign enterprise maintains a permanent
establishment for treaty purposes (article 229(2/2) CIR1992). The compatibility of this text
with the treaties is questioned.11
15. The foreign tax (QFIE/FBB) on income from receivables is not credited against the Belgian
creditor’s tax liability on the same income if the creditor, although having carried out
the transaction in its own name, has actually acted on behalf of third parties who have
provided the funds necessary to finance the transaction and who wholly or partly bear
the risks. A company established abroad which has a Belgian establishment acting as a
creditor, is also considered a third party (article 289 CIR1992). In most treaties, Belgium
makes the foreign tax credit subject to this domestic anti-channelling rule.
16. Belgian legislation contains two look-through rules geared towards the use of low-tax
jurisdictions, but not specifically towards treaty-shopping.
Individuals and non-for-profit organizations are subject to the “Cayman Tax” if they have
created or if they participate in foreign “legal arrangements” subject to a favourable tax
regime. These taxpayers are taxed on the income obtained by these “legal arrangements”
as if they received it directly.
Besides, when a taxpayer transfers shares, debentures, intangible property or money to
a non-resident, and the income from such property is subject in the transferee’s country
to a significantly more favourable regime than in Belgium, the same income is taxed
at the transferor’s level as if the transfer never took place. The taxpayer may escape
this rule by demonstrating either that the transfer matches with economic or financial
purposes or that it received a compensation for the transfer and that income derived from
such compensation causes a tax burden comparable to the tax that the taxpayer would
have borne in the absence of the criticized transfer (article 344(2) CIR1992). Treaties may
prevent the application of this rule.
In addition, when implementing the CFC rule of ATAD, in order to circumvent possible
conflicts with treaties, Belgium opted for the “transactional approach”.12 Under Belgian
law, profits of a CFC are allocated to a Belgian company in accordance with the arm’s
length principle but the rule does not “look through” the CFC.
1.2.2.3. Treaty Interpretation
17. The Vienna Convention on the Law of Treaties (“VCLT”) applies to treaties signed by Belgium
since 1 October 1992. However, since VCLT rules codify customary laws, Belgian courts
apply them to all treaties regardless of their date or whether the treaty partner is a party
to the VCLT.
According to VCLT, treaties must be interpreted literally because they amount to
relinquishments of sovereignty by their partners.13 In addition, under the Constitution,
11
DOC53K2458/001, 45.
12
DOC54K3147/001, 17.
13
See B. Peeters, Cahiers (1993), 229.
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De Vos & Docclo
treaties are signed by the government and approved by parliament and, as a consequence,
other bodies must apply them without altering their content (see §§6 and 37). As a
consequence, interpretation tools cannot be used as devices to modify treaty rules.
18. On another note, according to the OECD’s “guiding principle” issued in 2003, “the benefits
of a convention should not be available where a main purpose for entering into certain
transactions or arrangements was to secure a more favourable tax position and obtaining
that more favourable treatment in these circumstances would be contrary to the object
and purpose of the relevant provisions”.14
Literature has provided arguments to support opposite views.15 Most tax avoidance
arrangements seek advantage of the distributive rules of the treaties (articles 6 to 22
OECD-MC), often combined with the relief provision (article 23 OECD-MC) and provisions
of domestic laws. The OECD’s guiding principle should therefore remain of little influence
if treaty and domestic provisions do not request interpretation.
Belgium made no observation to the OECD Commentary on the interaction between
domestic anti-avoidance rules and treaty-shopping. The tax authorities further relied on
it to support their views that domestic anti-abuse rules may be used in a treaty context.16
Access to MAP is granted for issues relating to the question whether the application of a
domestic anti-abuse provision is in conflict with a treaty provision.17
19. As to the “beneficial ownership” concept, under Belgian law the “beneficial owner” of an
item of income is the person legally entitled to it. A taxpayer may be taxed on an item of
income that it dedicates to another person.
The term “bénéficiaire effectif/uiteindelijk gerechtigde” has seldom been used in
domestic tax legislation, as in the implementation of the Savings Directive18 where a
“beneficial owner” has been defined as an individual who receives an interest payment,
unless he/she demonstrates that the payment has not been made for his/her own
account.19
The European Court of Justice gave some content to the concept of “beneficial owner”
used in the Interest-Royalty Directive20 and extended it to the term “beneficiary” used
in the Parent-Subsidiary Directive21, leaving much insecurity.22 Belgian legislation
implementing those directives never used the terms “beneficial owner”.23 The tax
authorities have not yet commented on this.
The term “beneficial owner” used in treaties has not caused significant disputes. The
taxpayer legally entitled to an item of income is the beneficiary of it, unless a specific anti-
channelling provision applies. However, if the transaction is a sham, it is re-characterized
according to the transaction truly carried out by the taxpayer.
14
OECD Commentary, para 1/61.
15
L. De Broe, International Tax Planning and Prevention of Abuse, IBFD (2008), 344; L. De Broe, in Alabaster (2013), 125;
F. Dierckx, in Mélanges Minne (2017), 173; C. Docclo, Cahiers (2001), 414, W. Panis, o.c., 21.
16
SPF Finances, Introduction au commentaire général des conventions…, 11.
17
MAP Peer Review, Stage 1, Belgium (OECD-2017), 25.
18
Directive 2003/48/CE; art. 338bis CIR1992.
19
RD, 27 September 2009, art. 2(1).
20
Directive 2003/49/EC of 3 June 2003.
21
Directive 90/435/EEC of 23 July1990.
22
ECJ, 26 February 2019, C‑116, 117/16 and C-115, 118, 119, 299/16.
23
Although the Dutch version of the Interest-Royalty Directive uses the terms “uiteindelijk gerechtigde”, those terms
are not used in its Belgian implementation.
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Belgium
1.2.2.4. Treaty-based anti-avoidance provisions
20. Prior to the MLI, Belgium already included anti-abuse provisions in its treaties.
21. Source-state treaty benefit subject to tax in residence state.- A number of treaties deny the
relief ordinarily granted by the source country when the beneficiary is not taxed on its
income under the domestic laws of its residence country.
The treaty with Australia gives this rule a general scope. Other treaties specifically target
Belgian source income paid to taxpayers subject to a remitted-basis tax regime in their
residence country (Cyprus, Ireland, Japan, United Kingdom, Singapore, Venezuela; see
also Switzerland).
Some treaties specifically target income from movable property paid to taxpayers who
benefit from tax privileges in their residence country (Cyprus).
In some treaties, the “catch-all provision” allows the source country to tax income that
is not taxed by the beneficiary’s residence country (Netherlands, Rwanda, Uruguay) or
allows both partners to tax regardless of the treatment of the beneficiary in its residence
country (Chile).
22. Residence-state treaty benefit subject to tax in source state.- See §6.
23. Anti-channelling provisions.- In most treaties, a credit for foreign tax on interest and
royalties is granted to Belgian residents subject to the anti-channelling provision of article
289 CIR1992 (see §15).
The base erosion test included in the LOB provision of the treaties with Switzerland and
the United States may work as anti-channelling provisions.
24. Reservation for domestic anti-evasion rules.- A few treaties explicitly state that they do not
limit the application of domestic anti-evasion rules (for example: Austria, Germany and
Luxembourg). Others specify that the application of such rules cannot result in a taxation
conflicting with treaty rules (People’s Republic of China and Singapore).
25. Purpose test (cf article 7 MLI).- Many treaties provide that when the taxpayer conducts a
transaction with the main objective to benefit from a treaty relief, such relief is denied.
Some give a general scope to this measure (Estonia, Isle of Man, Latvia, Lithuania, Macao,
Moldova, Qatar, San Marino, Seychelles, Tajikistan, Chinese Taipei, Japan). Other treaties
specifically target income from movable property (Azerbaijan, Bahrain, Botswana, Chile,
China (PRC), Greece, Kazakhstan, Mexico, Nigeria, Oman, Ukraine, United Kingdom) or
income covered by the “catch-all provision” (Azerbaijan, United Kingdom). The purpose
test may also be used to deny the remedy for double taxation (United Kingdom).
Some treaties deny treaty benefits in the presence of artificial arrangements (Poland,
Uruguay).
In some treaties, Belgium grants specific advantages to its residents who invest in
companies or permanent establishments that benefit from investment incentive schemes
under the partner’s laws. These advantages may be denied if the taxpayers’ investments
are not justified by legitimate financial or economic reasons (Democratic Rep. of Congo,
Macedonia, Rwanda, Tunisia) or are mainly driven by treaty benefits (Oman, Ukraine).
26. Limitation on benefits (cf article 7 MLI).- The treaty with the United States contains intricate
provisions that deny treaty benefits to a company resident in a country if it is not mainly
owned by residents of that country (LOB).
The treaty with Japan also provides a complex definition of the “qualified person” entitled
to exemption at source of dividends, interest and royalties.
The ordinary source-tax relieves provided by the treaty with Canada with respect
to interest and royalties do not apply if such income is paid to non-resident-owned
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De Vos & Docclo
companies that are not taxed on such income (unless purpose and fat-cap tests are
satisfied).
27. Arrangements to access the reduced rate on dividends (cf article 8 MLI).- Article 10(2) of the
Belgian Standard provides for an exemption from withholding tax on dividends provided
that the recipient is a company that holds a 10% participation in the distributing company
for at least 12 months.24
Most of the treaties concluded by Belgium provide for a maximum withholding tax
rate on dividends paid from Belgium,25 which is further reduced when the dividend is
paid to a company that holds a minimum participation in the distributing company.
The thresholds are either a direct 25% participation (Bosnia and Herzegovina, People’s
Rep. of China, Democratic Rep. of Congo, Denmark, Egypt, Estonia, Finland, Indonesia,
Kosovo, Latvia, Lithuania, Montenegro, Morocco, Rwanda, Serbia, Spain, Sweden,
Thailand); a direct or indirect 25% participation (Albania, Argentina, Belarus, Botswana,
Cyprus, Czechia, Georgia, Greece, Luxembourg, Romania, Slovakia, Slovenia, South
Africa, United Arab Emirates, Venezuela); a direct 20% participation (Ukraine), a direct
10% participation (Armenia, Bahrain, Brazil, Canada, Chile, France, Ghana, Iceland,
Isle of Man, Mexico, Netherlands, Norway, Oman, Philippines, Poland, Qatar, Russia,
Tajikistan, Tunisia, Uganda, United Kingdom, USA, Uruguay, Uzbekistan); or a direct
or indirect 10% participation (Croatia, Japan, Kazakhstan, Mauritius, Mongolia, Nigeria,
Switzerland). Some conventions provide for a degressive tax rate depending on the size
of the participation (Azerbaijan, Hong Kong, Kazakhstan, Macao, Macedonia, Malaysia,
Moldova, San Marino, Seychelles, Singapore, Vietnam).
Most of these treaties do not require that the minimum participation is held for a
minimum period of time. The treaty with Japan requires a six-month holding. Other
treaties take into account the minimum participation if it is continuously held for at least
12 months (Bahrein, Chile, China, Isle of Man, Mexico, Moldova, Norway, Poland, Russia,
Rwanda, San Marino, Switzerland, Tajikistan, United Kingdom). The treaty with France
requires a minimum holding during the entire subsidiary’s financial year closed before
the distribution. The agreement with Luxembourg refers to a minimum direct holding
since the beginning of the beneficiary’s financial year.
Among the treaties that provide for a degressive rate of tax at source depending on the
size of the participation, some grant a first reduction regardless of the holding period but
impose a minimum uninterrupted one-year holding period when considering a further
relief (Hong Kong, Macao, Macedonia, Malaysia, USA, Seychelles, Singapore).
28. Arrangements to avoid taxation of immovable property where it is situated (cf article 9 MLI).-
Belgium is not in favour of clauses providing that gains derived by a resident of one
partner from the alienation of shares or other interests in an entity, may be taxed by the
other partner if these interests derive a significant part of their value from immovable
property situated on the territory of that partner. If Belgium agrees to include such a
clause, it is subject to a number of carve-outs.
In a number of treaties, the clause refers to interests whose value is mainly derived,
directly or indirectly, from the value of such immovable property (Albania, India, Morocco,
San Marino, Spain, Venezuela); in others, at least 50% of the value of the interests must
24
Besides, Directive 2011/96/EU of 30 November 2011 and the agreement of 26 October 2004 between the EU
and Switzerland restrict Belgium’s right to tax dividends paid to a company resident in another EU State or
Switzerland, subject to a minimum two-year holding of 10% or 25%, respectively.
25
We are dealing here with Belgian taxation only.
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Belgium
come, directly or indirectly, from that of immovable property (Botswana, Chile, People’s
Rep. of China, Democratic Rep. of Congo, Hong Kong, Mexico, Moldova, Russia (new),
Rwanda, Uruguay); in others, it must come directly from that of immovable property
(Armenia, Australia). A number of treaties explicitly include the value of shares in real
estate companies when determining the value of the underlying property (Australia,
Canada, Kazakhstan, Ukraine); others explicitly exclude it (Estonia, Latvia, Lithuania,
Poland).
Belgium prefers to ignore the value of the premises in which the entity operates
(Botswana, Canada, Democratic Rep. of Congo, Hong Kong, Mexico, Moldova, Poland,
Russia (new), Rwanda, Uruguay).
Belgium also prefers to exclude from the clause publicly traded shares (Azerbaijan,
Botswana, Canada, Democratic Rep. of Congo, Hong Kong, Kazakhstan, Mexico, Moldova,
Russia (new), Rwanda, Uruguay, Japan); shares transferred upon a group reorganization
(Azerbaijan, Botswana, Democratic Rep. of Congo, Hong Kong, Mexico, Moldova, Russia
(new), Rwanda, Uruguay); small shareholdings (Botswana, Canada, Democratic Rep. of
Congo, Japan, Rwanda, see also Chile).
The treaty with Japan provides a timeframe: the clause applies if, at any time during the
365 days before the transfer, the shares disposed of derived more than 50% of their value
directly or indirectly from immovable property.
29. Third-country permanent establishment (cf article 10 MLI).- Under the treaty with Canada,
royalties for the use of certain intangible property must be exempted by the source
country. However, such an exemption is denied if the royalties are attributable to a
permanent establishment maintained by the beneficiary in a third country where these
royalties are taxed at a rate that is less than 60% of the tax that would be imposed in
the beneficiary’s residence country (unless the royalties are connected with the active
conduct of a business in the third country or in other specific circumstances).
The provisions of the treaty with the United States covering interest and royalties do
not apply to such income from US source paid to a Belgian resident if it is exempted by
Belgium because it is allocated to a permanent establishment in a third country where
the income is subject to a tax which is less than 60% of the tax that would be imposed in
Belgium. In such a case, the United States may impose a 15% tax. The rule does not apply if
the interest is related to the active conduct of a business by the permanent establishment
or if the royalties are paid for the use of intangible property developed by it.
30. Safeguard clause (cf article 11 MLI).- When acceding to the MLI, Belgium notified 24 existing
treaties that contain a safeguard clause according to which the partners’ right to tax their
own residents is not affected by the treaty in certain circumstances. However, 21 of those
have a very limited scope and seem to be of historical interest only.
The treaty with Australia provides that an enterprise may be taxed by its residence
country as if article 9 did not exist, so far as it is practicable to do so, in accordance with
the principles of article 9(1).
The treaty with Canada does not prevent Canada from taxing its residents on income of
trusts or controlled foreign affiliates.
The treaty with the United States contains a safeguard clause similar to that of article 11
MLI (see §54).
31. Avoidance of permanent establishment (cf articles 12 to 14 MLI).- Traditionally, when defining
a permanent establishment, Belgium has followed the wording of article 5 OECD-MC as
it read until 2014.
Regarding the definition of the dependent agent, in their old commentary the tax
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De Vos & Docclo
authorities gave a wide interpretation of article 5(5) and (6) by considering that a broker,
a general commission agent and any other agent, even with no authority to bind the
enterprise, could be a permanent establishment if they were acting outside the ordinary
course of their business.26 The authorities later turned to a narrower interpretation in
which a permanent establishment exists if a dependent agent has the power to act in
the enterprise’s name.
The 2016 treaty with Japan includes the new (broader) definition of dependent and
independent agents by adopting the wording of article 5(5) and (6) OECD-MC as it reads
since 2017.
The list of auxiliary or ancillary activities that do not trigger the existence of a permanent
establishment may vary from the list proposed by the OECD-MC. The treaty with
France gives a short list of situations where a fixed place of business is not a permanent
establishment. It further provides that the competent authorities consult each other to
determine whether a permanent establishment exists when those situations are mixed.
Under the treaty with Cyprus, a fixed place of business used in Cyprus by a Belgian
company for the sole purpose of carrying on “offshore” activities cannot be a permanent
establishment. Belgium thereby declines the exemption of profits derived through such
a place of business.
32. Hybrid entities (cf article 3 MLI).- The treaties with the Isle of Man, Moldova and the United
States contain a clause similar to article 3 MLI.
33. Dual residents (cf article 4 MLI).- The treaties with Canada and Japan deny treaty protection
to dual-resident entities if the competent authorities cannot agree on a single residence
for treaty purposes. Contrary to article 4 MLI, they do not allow these authorities to
determine the extent to which treaty relieves could nevertheless apply.
34. MAP (cf articles 16 and 17 MLI).- In 1999,27 the tax authorities commented on the then recent
inclusion in treaties of clauses dealing with a downward adjustment of an enterprise’s
profits subsequent to the upward adjustment of a related enterprise’s profits by the
partner (cf article 9(2) OECD-MC). This inclusion was subsequent to the entry into force of
the European Arbitration Convention28 and the observation that our main treaty partners
were more active than in the past in the area of transfer pricing.
43 treaties amongst those listed by Belgium when signing the MLI as potential CTAs, still
did not contain a language equivalent to that of article 9(2) OECD-MC. 38 of them simply
did not provide for downward adjustments.29 The 43 treaties deviating from article 9(2)
OECD-MC are those with:
–– Austria, Bulgaria, Cyprus, Czechia, Denmark, Greece, Hungary, Ireland, Italy,
Luxembourg, Malta, Portugal, Slovakia, Slovenia and Sweden (those countries are
bound by the Arbitration Convention and the Dispute Resolution Directive);30
26
Com.Conv. 5/501.
27
Circular AAF/98-0003 of 28 June 1999.
28
Convention 90/436/CEE of 23 July 1990.
29
See MAP Peer review, stage 2 – Belgium (OECD-2019), 19.
30
Directive 2017/1852 of 10 October 2017.
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Belgium
–– Bangladesh, Bosnia and Herzegovina, Brazil, Côte d’Ivoire, Ecuador, Egypt, Gabon,
India, Indonesia, Israel, Kazakhstan, Kyrgyzstan, Rep. of Korea, Kosovo, Mauritius,
Mexico, Moldova, Mongolia, Montenegro, Pakistan, Russia (old), Senegal, Serbia,
Tajikistan, Thailand, Turkmenistan, United Arab Emirates, Venezuela.31
Nowadays, the government considers that a “correlative adjustment” must be made, even
in the absence of such a provision, on the grounds that the economic double taxation
resulting from the adjustment by the partner could otherwise be conflicting with the
treaties.32
35. Since the bill of 21 June2004, article 185(2) CIR1992 contains a provision inspired by
article 9(2) OECD-MC. Originally, it also applied in the absence of a treaty but only at the
taxpayer’s request for an “advance ruling”. Since the bill of 17 December 2017 it applies
regardless of the procedure followed but only in a treaty situation.
The authorities automatically rescind taxes related to assessment years 2017 and
following that are found excessive after a MAP or a dispute solved under the Arbitration
Convention (article 376(3) CIR1992).
36. The Belgian Standard proposes that a taxpayer may submit a MAP request to either
partner within three years from the notification of a taxation not in accordance with the
treaties.
The treaties with Japan, Macedonia and the United States also allow taxpayers to send
their request to either partner. Nevertheless, almost all treaties provide that a MAP
request must be filed in the taxpayer’s residence country.
Belgium does not deny access to MAP on the grounds that national or treaty anti-abuse
provisions would apply.33 However, some treaties limit the possibility of MAP to events of
double taxation only (Denmark, France, Germany, Ireland, Israel, Luxembourg, Malaysia,
Portugal), as opposed to events of taxation conflicting with treaty rules.
Many treaties set deadlines shorter than three years for submitting MAP applications
(two years: Austria, Brazil, Canada, Denmark, Germany, Greece, India, Ireland, Israel,
Italy, Luxembourg, Malaysia, Philippines, Portugal, San Marino, Venezuela; six months:
France).
Although the Belgian Standard proposes that MAP agreements be implemented despite
domestic deadlines, less than half of the treaties include such a rule (Albania, Armenia,
Azerbaijan, Bahrein, Bangladesh, Botswana, People’s Rep. of China, Chinese Taipei,
Democratic Rep. of Congo, Croatia, Estonia, Georgia, Ghana, Hong Kong, Iceland, India,
Isle of Man, Japan, Kazakhstan, Latvia, Lithuania, Luxembourg, Macau, Macedonia,
Moldova, Morocco, Netherlands, New Zealand, Norway, Oman, Poland, Qatar, Russia,
Rwanda, San Marino, Seychelles, Singapore, Tajikistan, Tunisia, Uganda, Ukraine, United
Kingdom, United States, Uzbekistan, Uruguay).
37. The Belgian Standard proposes that MAP may solve treaty interpretation issues. Even
though a number of treaties do not explicitly provide so (Australia, Austria, Bosnia and
Herzegovina, Brazil, Denmark, Finland, France, Ireland, Israel, Côte d’Ivoire, Rep. Of
Korea, Kosovo, Luxembourg, Malaysia, Malta, Montenegro, Philippines, Portugal, Serbia,
Thailand), it is common practice.
Traditionally, the Belgian competent authorities were denied the ability to solve double
31
Art. 9(2) of the treaty with Uruguay does not apply if the transaction under review is fraudulent.
32
Circular 2018/C/27 of 7 March 2018.
33
MAP Peer review, Stage 1, Belgium (2017), 25.
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De Vos & Docclo
taxation in cases not provided by the treaty. However, since 2017, para 25/55.1 of the OECD
Commentary clarifies that countries are not expected to ignore their domestic laws when
dealing with non-provided cases. Therefore, Belgium does no longer see any impediment
to agree on the second sentence of article 25(3) OECD-MC, and already included it in the
2016 treaty with Japan.
38. Mandatory tax arbitration (cf articles 18 to 24 MLI).- The Belgian Standard includes a clause
similar to article 25(5) OECD-MC (as it reads since 2008) as a mechanism to secure that
treaty-related disputes be solved within a reasonable period of time. Arbitration is
envisaged in the treaties with Botswana, Isle of Man, Japan, Malaysia, Mexico, Moldova,
Norway, Poland, Russia, Switzerland, Tajikistan, United Kingdom, United States, Uruguay.
Beyond its treaties, Belgium is bound by the European Arbitration Convention and has
implemented Directive 2017/1852.34
1.3.1. Signature, ratification, entry into force and entry into effect
39. Belgium signed the MLI on 7 June 2017 and ratified it on 26 June 2019. As said before, its
final notifications and reservations are somewhat different from those made in June
2017.
The MLI entered into force vis-à-vis Belgium on 1 October 2019. Subject to its partners’
decisions, its procedural rules will apply at the earliest from that date, regardless of the
period to which the income relates; its substantive provisions will modify Belgium’s CTAs
at the earliest from 1 January 2020 with respect to taxation at source and as from 1 April
2020 otherwise.
40. As the government reminded when presenting the MLI to parliament, the effect of the
MLI on existing treaties will depend not only on the choices made by Belgium but also
on those made by its partners. In addition, choices expressed at the time of signature
are subject to change until signatories ratify the MLI. The impact of the MLI is therefore
difficult to assess.35
41. In order to forecast the impact of the MLI on the Belgian treaty network, this report relies
on the notifications of the signatories and the “matching-data-base” as published on the
OECD’s website as of 17 July 2019.
42. Following the recommendations of the Special Commission on International Tax Fraud
installed by parliament (“SCITF”), Belgium chose to cover 99 of its tax treaties in force or
signed with 96 countries.36 37
34
Bill of 2 May 2019.
35
DOC54K2749/001; DOC54K3510/001, 21.
36
DOC54K3510/001, 20, 24, 101.
37
Since 2017, the agreement with Chinese Taipei was delisted because it is not a treaty (see Circular AAF 6/2008
of 12 March 2008) and the treaty with Botswana was signed.
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Belgium
In June 2017, Belgium did not list its treaty with the Netherlands because of ongoing
negotiations. Since then, the prospects of speedily completing them became less clear
and Belgium finally preferred to list this treaty.
Belgium did not list its treaties with four other countries: the treaty with Japan already
meets OECD’s minimum standards; a new treaty with Germany is under negotiation;
Norway and Switzerland prefer negotiating bilateral protocols.
43. Of the 96 countries with which Belgium is now willing to apply the MLI, 65 signed it and 22
ratified it. However, among those, the Netherlands has not listed its treaty with Belgium
as a CTA.
As many other countries did, Belgium listed its treaty with the United States as a CTA,
although this country is not ready to sign the MLI.
44. Because Belgium expects that its future treaties will meet OECD’s minimum standards,
it should expectedly not extend its list of CTAs. However, Belgium might sign new treaties
that do not contain recommended provisions for which Belgium opted. Belgium could list
those treaties as CTAs and expect a swift amendment of those treaties when its partners
decide to opt for the same and also list the same treaties as CTAs.
45. This part of the report deals with Belgium’s position towards the MLI optional provisions.
The government provided a reasoned statement of Belgium’s choices in its explanatory
memorandum that was tabled together with the Council of State’s opinion on the draft
bills of consent before the parliamentarians called to approve the MLI.38
1.3.3.1. Article 6: Preamble
46. By signing the MLI, Belgium necessarily adopted article 6(1) MLI and expressed its
willingness to include in its treaties preambles stating that they do not intend to favour
non-taxation or reduced taxation through tax evasion or avoidance.
47. However, Belgium considers that it is also important to confirm that the main objectives
of tax treaties include the promotion of economic relations and the strengthening of
administrative cooperation.39 Therefore, Belgium opted for article 6(3) MLI.
32 countries are willing to modify their treaties with Belgium by adopting article 6(3) MLI
(Argentina, Australia, Chile, People’s Rep. of China, Croatia, Cyprus, Egypt, France, Greece,
Hong Kong, Ireland, Luxembourg, Malta, Mauritius, Mexico, Nigeria, Pakistan, Romania,
Russia, Senegal, Serbia, Seychelles, Singapore, Slovakia, Slovenia, South Africa, Spain,
Tunisia, Turkey, United Arab Emirates, United Kingdom, Uruguay).
A number of treaties already referred to the promotion of economic relations in their
preambles (see §7).
38
DOC54K3510/001.
39
DOC54K3510/001, 38.
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1.3.3.2. Article 7: LOB/PPT
48. The recommendation of the SCITF was that Belgium should always include a GAAR in
its treaties. Like the vast majority of signatories, Belgium chose to apply the principal
purpose test (PPT) only.40
All Belgium’s partners that signed the MLI so far, agreed to apply the PPT only. The
existing PPT rules included in a number of CTAs (see §26) will be replaced by the MLI
PPT clause.
Canada, Chile, India, Kuwait, Mauritius, Poland, Senegal, Seychelles have accepted the
PPT as an interim measure. The Simplified LOB will not apply.
49. Belgium opted for article 7(4) MLI, which allows the competent authorities to grant
the taxpayer the advantage to which it would have been entitled in the absence of
the transaction that failed the PPT. This clause will apply to 22 treaties (Australia, Cote
d’Ivoire, Cyprus, Czechia, Gabon, Hungary, Ireland, Isle of Man, Lithuania, Luxembourg,
Malta, Mauritius, New Zealand, Pakistan, San Marino, Senegal, Seychelles, Singapore,
Ukraine, United Arab Emirates, United Kingdom, Uruguay).
1.3.3.3. Article 8: Minimum holding period
50. According to the Belgian Standard (article 10(2)) dividends from subsidiaries should
be exempt from source taxation provided that a minimum participation is held for a
minimum 12 month-period. By opting for article 8 MLI, Belgium supplements treaties
providing for a source relief by adding a holding-period requirement, provided that its
partners agree on the same.41
Belgium notified 74 modifiable treaties. Only 18 of them will be affected (Albania,
Argentina, Armenia, Canada, People’s Rep. of China, Egypt, France, Indonesia Kazakhstan,
Mexico, Romania, Serbia, Slovakia, Slovenia, South Africa, Spain, Tunisia, Uruguay).
1.3.3.4. Article 9: Disposal of shares or interests deriving their value primarily from immovable
property
51. In 2005, Belgium made a reservation to article 13(4) OECD-MC. In a few treaties Belgium
agreed to include a similar provision but with a number of carve-outs (see §28).
In line with its policy, Belgium made a reservation to article 9(1)(a) MLI that introduces
a 365-day reference period to determine whether the value threshold that triggers the
application of provisions similar to article 13(4) OECD-MC is reached. The government
stressed that paragraph 28.9 of the OECD Commentary identifies problems related to
this reference period and proposes an alternative solution that is not included in the MLI.
52. Besides, Belgium made no reservation to 9(1)(b) MLI that extends the scope of the existing
provisions to interests in entities such as partnerships and trusts because there is no
reason to make a distinction between shares in companies and interests in such entities.42
40
DOC54K3510/001, 43.
41
DOC54K3510/001, 45.
42
DOC54K3510/001, 49.
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Belgium
Belgium notified 27 treaties to which it wishes to apply article 9(1)(b). 13 of them will
be modified (Albania, Armenia, Australia, Chile, People’s Rep. of China, Estonia, India,
Kazakhstan, Poland, Mexico, Spain, Ukraine, Uruguay).
1.3.3.5. Article 10: Third-country permanent establishment
53. Belgium reserved the right not to apply article 10. This provision makes treaty benefits
contingent on a comparison between the tax borne in a third country in which an
enterprise maintains a permanent establishment, and the tax that would have been
borne in the residence country of the enterprise if it were not exempted there. The
government explained that such a provision could harm enterprises resident in countries
which, like Belgium, have a high corporate tax rate. In addition, more than two thirds of
the signatories have made reservations to this article.43
1.3.3.6. Article 11: Safeguard clause
54. Belgium made no reservation to the safeguard clause in article 11(1). The government
explained that it merely clarifies, as the OECD Commentary does, that most treaty
provisions inspired by the OECD-MC do not preclude a country from taxing its own
residents, for example by applying CFC or CFC-like rules such as the “Cayman Tax”.44 45
In 2013, Belgium made reservations to the OECD Commentary indicating a disagreement
with this interpretation. It withdrew these observations following BEPS Action 6.
Belgium is among the few countries that have not opted out of article 11. Therefore, the
safeguard clause will be added to only 18 treaties (Argentina, Armenia, Australia, Chile,
People’s Rep. of China, Gabon, India, Indonesia, Mexico, New Zealand, Poland, Portugal,
Romania, Russia, Senegal, Slovakia, South Africa, United Kingdom).
1.3.3.7. Article 12: Commissionaire and similar arrangements
55. In June 2017, Belgium made a provisional reservation to article 12. It considered that the
new broad definition of the dependent agent combined with the existing transfer pricing
rules would not result in a fundamental change.
However, the bill of 20 December 2017 has broadened the domestic definition of a Belgian
establishment. The government then explained that this amendment was necessary
to ensure that domestic law does not prevent the application of article 12 MLI.46 This
amounted to an announcement of the change in Belgium’s position.
56. The government considered that a broader definition of the dependent agent is able to
combat commissionaire arrangements and withdrew the reservation of June 2017 upon
ratification.47
43
DOC54K3510/001, 52.
44
See §16.
45
DOC54K3510/001, 54.
46
DOC54 2864/001, 104.
47
DOC54K3510/001, 58.
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De Vos & Docclo
29 treaties will be affected by article 12 MLI (Albania, Argentina, Armenia, Chile, Cote
d’Ivoire, Croatia, Egypt, France, Gabon, India, Indonesia, Israel, Kazakhstan, Lithuania,
Malaysia, Mexico, New Zealand, Nigeria, Romania, Russia, Senegal, Serbia, Slovakia,
Slovenia, Spain, Tunisia, Turkey, Ukraine, Uruguay).
1.3.3.8. Article 13: Specific activity exemptions
57. Option B chosen by Belgium corresponds to paragraph 78 of the Commentary on article 5

OECD-MC as it reads from 2017. In substance, it does not vary from article 5(4) OECD-MC
until its amendment by the report on Action 7 but it clarifies that the activities specifically
mentioned in subparagraphs (a) to (d) of article 5(4) are automatically considered not
to constitute a permanent establishment, without having to determine whether they
actually are preparatory or auxiliary. The government stated that this confirms its current
interpretation of article 5(4) OECD-MC as it read until 2014.
58. Belgium considers that an anti-fragmentation rule, such as that contained in the new
article 5(4.1) OECD-MC, is the most appropriate to combat abuses that seek to unduly
benefit from the exceptions to permanent establishment status. If such a rule applies, it
is not necessary to verify, as it is provided in option A that each of the specific activities
mentioned in article 5(4) OECD-MC actually is preparatory or auxiliary when such an
activity is the only one conducted in a fixed place of business.48
59. Only France, Ireland, Lithuania, Luxembourg, San Marino, Singapore share option B with
Belgium.
However, the anti-fragmentation rule will apply with 36 countries (Argentina, Armenia,
Australia, Chile, Cote d’Ivoire, Croatia, Egypt, France, Gabon, India, Indonesia, Ireland,
Israel, Italy, Kazakhstan, Kuwait, Lithuania, Malaysia, Mexico, New Zealand, Nigeria,
Portugal, Romania, Russia, San Marino, Senegal, Serbia, Slovakia, Slovenia, South Africa,
Spain, Tunisia, Turkey, Ukraine, United Kingdom, Uruguay).
1.3.3.9. Article 14: Splitting-up of contracts
60. Belgium reserved the right not to apply article 14 to its CTAs. A provision targeting
contract-splitting is unnecessary when a treaty contains the PPT rule.
Also, article 229(2/2) CIR1992 specifically targets the same type of abuse but it allows
taxpayers to demonstrate that the conduct of similar activities by related enterprises
in the same place is not intended to avoid the existence of a permanent establishment.
When reviewing draft article 229(2/2) CIR1992, the Council of State considered that
the provision should target abuses only and, therefore, be worded as a rebuttable
presumption.49 Unlike article 229(2/2) CIR1992, article 14 MLI automatically applies to
all situations, abusive or not.50
48
DOC54K3510/001, 62.
49
DOC53 2458/001, 112.
50
DOC54K3510/001, 65.
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Belgium
1.3.3.10. Articles 3. and 4: Hybrid mismatches and dual residence
61. Belgium made no reservations to article 3. The provision on transparent entities resulting
from BEPS Action 2 (i.e., new article 1(2) OECD-MC) should therefore be included in
Belgium’s CTAs, insofar as Belgium’s partners also agree on this provision. To the same
extent, it should replace the few clauses on transparent entities already included in
Belgium’s treaties (see §6).51
In view of the reservations expressed by Belgium’s partners, the provision on transparent
entities would only be included in 19 treaties (Argentina, Armenia, Australia, Chile, Israel,
New Zealand, Nigeria, Poland, Romania, Russia, Slovakia, South Africa, Spain, Turkey,
Uruguay; article 3(1) will apply with Ireland, Luxembourg, Malaysia, United Kingdom).
62. Belgium reserved the right not to apply article 4 to its CTAs because the new suggested
tie-breaker rule would apply beyond abusive cases of dual-residence.
Article 4(1) OECD-MC defines residence by referring to the laws of the partners. As some
countries very broadly define residence, an entity may, in good faith, have a dual residence.
The new rule provides that the competent authorities must only endeavour to determine
the single residence country for treaty purposes. However, absent an agreement, treaty
relieves are denied unless the competent authorities agree to nevertheless grant such
benefits. In other terms, treaty protection is left to the authorities’ discretion. This could
prove problematic for Belgian companies operating abroad, since domestic law does not
unilaterally remedy double taxation.
Belgium may however consider negotiating a similar clause (subject to adjustments)
bilaterally, depending on the respective domestic rules on residence and the functioning
of MAP between the two countries.52
1.3.3.11. Articles 18-26: Mandatory binding arbitration
63. Belgium considers binding arbitration to be an integral part of MAP. Belgium chose to
apply the “final offer” (“baseball”)53 as a means to encourage the partners to reach an
agreement before arbitration. In order to secure the broadest application of arbitration,
Belgium made no reservation to the “independent opinion” (or “reasoned opinion”)
method.
Belgium chose to be able to find an “agreement on a different solution” in the event that
both partners agree that a reasoned decision is inadequate, while this is unlikely to occur
when the “baseball” method is used.
Only 17 CTAs will be modified (Australia, Austria, Canada, Finland, France, Greece, Ireland,
Italy, Luxembourg, Malta, Mauritius, New Zealand, Portugal, Singapore, Slovenia, Spain,
Sweden). The “independent opinion” method and the possible “different solution” will
apply with Greece, Malta, Portugal, Slovenia, Sweden. The two-year procedure will be
extended to three years with Austria, France, Greece, Portugal, Slovenia, Sweden.
Most of Belgium’s partners made reservations to limit the scope of arbitration. For
example, Austria excluded cases involving certain domestic anti-abuse provisions. Others
51
DOC54K3510/001, 29.
52
DOC54K3510/001, 31.
53
The arbitrators choose one of the partners’ position without having to reason their decision.
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De Vos & Docclo
excluded cases where there is no effective double taxation or limited arbitration to certain
CTA provisions. Belgium does not intend to raise objections to such reservations because
this would prevent the application of arbitration. In addition, Belgium reserved the right
to keep most of the existing clauses unchanged, to prevent its partners from unilaterally
narrowing the scope of arbitration by means of reservations under the MLI.
1.3.3.12. Expected changes in Belgium’s options
64. There are no indications that Belgium will lift some of its reservations or change its
options.
1.3.3.13. Reservations to MLI provisions
65. Belgium’s reservations are stated above (see §§51, 53, 60, 62).
1.3.3.14. Statistics
66. Belgium notified its treaties with 96 countries. Having regard to the notifications and
reservations of its partners that had signed the MLI as of 17 July 2019, the treaties will be
affected in the following proportions:
Belgium’s choices /96 countries

Hybrid entities – article3 19
Preamble – article 6(3) 32
PPT – article 7 65
Discretionary relief – article 7(4) 22
Holding period – article 8 18
Real estate – article 9(1)(b) 13
Safeguard – article 11 18
Commissionaire – article 12 29
Anti-fragmentation – article 13 36
Arbitration – articles 18-26 17
– reasoned opinion 5
– different solution 5
– baseball 12
185
Belgium
67. Belgium is currently negotiating bilateral protocols with Norway and Switzerland instead
of going through the MLI and will start negotiations with Chinese Taipei. It also requested
a number of countries which are not members of the IF or not signatories to amend the
treaties in line with the BEPS minimum standards (“BEPS protocols”) (Algeria, Botswana,
Bosnia and Herzegovina, Bahrein, Democratic Rep. of Congo, Oman, Sri Lanka, Vietnam).
In principle BEPS protocols are limited to the inclusion of the BEPS minimum standards
(preamble, PPT and MAP). However Belgium proposes to its partners to discuss the
possible inclusion of additional provisions in line with its MLI position.
68. Belgium is also currently negotiating new treaties with Andorra, Colombia, Ethiopia,
France, Germany, Kenya, Kosovo, Kuwait, Lebanon, the Netherlands and Ukraine. Until
now Belgium has not encountered any resistance against the inclusion of the BEPS
minimum standards, but a disagreement on this could seriously jeopardize the success
of (re)negotiations.
69. When negotiating general protocols with partners that signed the MLI, Belgium prefers to
rely on the effect of the MLI on CTAs and not to include MLI provisions in such protocols.
When renegotiating treaties, Belgium will analyse case by case if it will propose to
incorporate MLI provisions in the treaties or to maintain the MLI as third layer of
international tax law. This will depend on the respective positions of Belgium and the
partner towards the MLI provisions and on the need to tailor specific provisions for
reasons of enhanced clarity.
70. The policy adopted in the MLI is in line with the policy adopted regarding the 2017 version
of the OECD–MC.
71. Belgium is a monist country. When approving an international treaty as required by the
Constitution, the legislator does not exercise a normative function.54 The legislator may
however take additional measures to ease the implementation of a treaty. For this reason,
when reviewing the draft bill of consent, the Council of State suggested some deviations
from standard practices.
72. The MLI affects the taxing powers of the federal government but it may also touch upon
the regions and communities’ competences. Therefore it qualifies as a mixed treaty.
Belgium’s choices have been the subject of consultation with the governments of the
regions and communities. The MLI has been approved by Belgium’s six parliaments.55
73. As the government reiterated when presenting the MLI to the Belgian parliaments, the
54
Cass., 27 May 1971.
55
The consent was voted by the federal parliament (bill of 7 April 2019), Wallonia (bill of 4 April 2019), Flanders
(bill of 5 April 2019); Brussels (bill of 25 April 2019); the French community (bill of 25 April 2019) and the German
community (bill of 6 May 2019).
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De Vos & Docclo
effect of the MLI on existing treaties will depend not only on the choices made by Belgium
but also on those made by its partners. In addition, choices expressed at the time of
signature are subject to change until signatories ratify the MLI.56 The Council of State
emphasized that, at the time of the adoption of the bill, the legislator would not be aware
of (final) options of the signatories. The MLI’s approval procedure differs in this respect from
the approval procedure of another tax treaty where the legislator knowingly gives its
consent to the treaty.57
74 Notifications and reservations at the time of ratification of the MLI are the government’s
prerogative. However, since they determine the obligations under the MLI for Belgium
and its citizens, upon request of the Council of State, they had to be approved by the
parliaments.58
A specific provision has been inserted in the operative part of the consent bills stating that
Belgium’s (future) notifications and reservations will be fully and completely effective.
75. The bill of consent must ordinarily be gazetted in the Moniteur belge/Belgische Staatsblad
before the treaty enters into force. The Council of State emphasized that making
“summaries” available to the public does not affect the obligation of gazetting the bill of
consent and the related documents. The fact that the other relevant information relating
to the MLI (ratification, entry into force, choices of other signatories, etc.), which are
essential, are not published in the Moniteur does not raise any objection if and only if
the Belgian legislator allows another form in which these elements must be published.
The MLI provides that the “depositary” will maintain “publicly accessible lists” of the
CTAs and the signatories’ choices. The bill of consent provides that the publication in the
Moniteur is replaced with the depositary’s publications for domestic purposes. The Council
of State insisted that such a publication must meet the requirements of accessibility and
identification of an official gazette.59
The tax authorities have been entrusted with the release of relevant information on the
MLI on its webpage (Fisconetplus). If a treaty is impacted by the MLI, the tax authorities
will publish a “synthetic” text of the CTA as impacted, if possible in consultation with the
partner. Such a text will not be official but purely informative. An existing treaty will always
be applied in combination with the relevant provisions of the MLI, taking into account
the reservations and notifications of both partners. In view of this, the government
considered that it was not necessary to meet the Council of State’s recommendation
to impose the drafting and updating of “synthetic” texts.60 Belgium has not yet taken a
final position on the production of coordinated texts but is willing to discuss it if a partner
requests to do so.
76. Where a conflict exists between a norm of domestic law and a norm of international
treaty law having direct effects in the domestic legal order, the rule established by the
56
DOC54K3510/001, 21.
57
DOC54K3510/001, 101.
58
DOC54K3510/001, 105.
59
DOC54K3510/001, 106.
60
DOC54K3510/001, 106.
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Belgium
treaty must prevail. As a consequence a treaty always takes precedence over domestic
legislation, even if the latter is later in time.61
77. Belgian supreme courts dissent on the priority of treaties over the Constitution. The
Cour de cassation found that a treaty with direct effect supersedes the Constitution.62
However, the Constitutional Court considers that it is entrusted with the control of the
constitutionality of the bill of consent to a treaty and, as a consequence, the compatibility
of the content of international treaties with the Constitution. If it considered that the bill
of consent should be annulled or set aside, this would prevent the treaty to have effect in
the Belgian order.63
78. As a later in time rule, the MLI will modify the CTAs, subject to the notifications and
reservations of Belgium and its partners.
2.2. Interpretation issues
2.2.1.1. Value of the Explanatory Note
79. Given the special status of the Explanatory Note agreed by the signatories, the Council
of State considered that it was necessary to submit it for parliaments’ approval.64 As a
consequence, the bill of consent specifically states that both the MLI and the Explanatory
Note shall come into full force and effect.65
2.2.1.2. Value of translations
80. Belgium has three official languages (French, Dutch and German). The MLI and the
Explanatory Note had to be translated into Dutch and German for approval purposes.
However, in case of divergences, according to VCLT, the authentic versions in French and
English prevail.
2.2.2.1. Connection between the MLI and BEPS reports
81. The government restated that the BEPS measures were implemented by the MLI and
that the provisions of articles 3 to 17 MLI (excluding the provisions relating to arbitration)
must be interpreted in their context, keeping in mind that the purpose of the MLI is
to implement BEPS measures as they were commented. The Explanatory Note is not
intended for the interpretation of the underlying BEPS measures.
61
Cass., 27 May 1971.
62
Cass., 16 November 2004.
63
See the report of the Constitutional Court, A.C.C.P.U.F. (2015).
64
DOC54K3510/001, 105.
65
Art. 2 of the bill of consent.
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De Vos & Docclo
If the provisions of the MLI differ in the wording from the model provisions developed
during the BEPS project, these differences are not intended to change the content of the
provisions, unless otherwise stated; rather, they aim to implement BEPS measures in the
context of a multilateral instrument applicable to a wide range of existing treaties.66
2.2.2.2. Legal weight of OECD commentaries / BEPS reports
82. OECD member states are not bound by decisions of the organization if they have not
actually voted on them; an abstention does not engage them.67 OECD reports are
ordinarily not binding.
However, by referring to BEPS reports in the explanatory memorandum, as it already did
when implementing ATAD, and by explicitly approving the Explanatory Note to the MLI,
the legislator gave them a substantial legal value.
2.2.2.3. Change in the method of interpretation
83. With respect to terms that are not explicitly defined in the MLI or a CTA, the Explanatory
Note refers to the meaning given to them by the signatories’ domestic laws, according
to the ambulatory method of interpretation, unless the context requires a different
interpretation. For this purpose, the context would include the purpose of the MLI, as
well as the purpose of the CTA, as reflected in the preamble amended by article 6 MLI.68
Nevertheless, the preamble cannot lead to an interpretation that would be conflicting
with the text. Where a treaty provides for a tax relief in one country while the other
country does not make use of its taxing rights, the preamble cannot be used to deny the
treaty relief in the first country. A denial of treaty benefits must be supported by the terms
of the treaty read in their context. A teleological interpretation of the treaty cannot take
precedence over the text of the treaty.69
84. The government’s explanatory memorandum and the Council of State’s opinion will also
provide guidance in the interpretation of Belgium’s choices. In addition, if a provision
leaves room for interpretation, this provision must be given a meaning that is not
conflicting with basic principles of taxation.
For example, dealing with the PPT, the Council of State reminded that the Constitutional
Court held that domestic GAARs were compatible with the Constitution under several
strict conditions to which the application of these rules is subject (see §12). The Council
of State concluded that “it goes without saying” that article 7 MLI must be applied under
the same conditions.70
66
DOC54K3510/001, 9.
67
Art. 6 of the OECD Convention.
68
DOC54K3510/001, 22, 25.
69
L. De Broe, o.c.., IBFD (2008), 374,-.
70
DOC54K3510/001, 107.
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Belgium
2.2.3. Interpretation of pre-MLI treaties
85. By restating the choices made by Belgium in their historical context, the explanatory
memorandum clarified the government’s position on certain pre-MLI issues, such as the
interpretation of article 5(4) OECD-MC (see §57).
86. It is difficult to predict if and how enterprises and tax professionals will take account of
the PPT when planning their transactions, although the PPT is expected to make them
more cautious when setting up structures. However the PPT clause may start having a
noticeable impact only after a substantial number of partners have ratified the MLI.
87. As the MLI will only apply in Belgium from 1 January 2020 at the earliest, it has not yet
influenced assessment practices. The tax authorities will gradually organize assessments
focusing on the application of the PPT. Such targeted assessments are initiated on the basis
of prior risk assessments and managed by a specific central organ. Such risk assessments
may rely on information obtained under “DAC 6”.71
88. Currently there is no indication that the government will adopt any specific procedures or set
up a special committee for the purposes of PPT assessments. Under current legislation,
taxpayers may apply for advance rulings in order to have legal certainty as to whether
their transactions pass the purpose test.
89. It is expected that a larger application of mandatory binding arbitration, through the
MLI or through the EU Tax Dispute Resolution Directive, will smooth the resolution of
tax disputes. The domestic procedures do not need to be adapted.
71
Directive (EU) 2018/822 of 25 May 2018.
190
Bosnia and Herzegovina
Branch reporters
Azra Bećirović1
Ana Dujmović2

On 30 October 2019 Bosnia and Herzegovina (B&H) signed the MLI becoming the 90th
jurisdiction to join this agreement. Even though this step shows B&H’s commitment towards
fighting tax treaty abuses, especially treaty shopping, the report will show that maybe the
signing was the first but also easiest step to take in the long road ahead of us. The report will
emphasize many unknowns and challenges that will arise when it comes to implementation
and interpretation of MLI provisions, questioning the ability of B&H, as developing country
to deal with it. The reasons for this attitude and expectation are many, national but also
international ones.
Following its distinct constitutional structure, the tax system(s) and accompanying
policies, including one concerning DTC, are very complex and challenging in B&H. A first
and general remark is that international taxation is still not an issue of great importance in
B&H. Currently, Bosnia and Herzegovina has 37 bilateral tax treaties in force, mostly with
European, neighboring countries. The peculiarity of the tax treaty network is the fact that
ten treaties are implemented, based on succession from ex-Yugoslavia, including ones with
major European countries, like France and Germany. The time framework and complete list
of signed treaties actually show that the DTC policy in B&H is not coherent and does not
have a well-defined goal. All of the DTCs, implemented on the basis of succession, do not
refer to prevention of tax evasion within its title and purpose. When it comes to new treaties,
some of them refer to prevention of fiscal evasion, while others within its title contain only
purpose of preventing tax evasion. None of the treaties concluded before the MLI, contained
any provision aimed at curbing treaty shopping and since there are no ongoing tax treaty
negotiations at the moment, it is difficult to assess if the choices made in the MLI position,
will be included in future treaties.
In line with the practice of the majority of Inclusive Framework members, Bosnia and
Herzegovina listed all tax treaties that are currently in force, which are 37 tax treaties in
total. Out of 37 countries, to date 27 countries have also covered the treaty with Bosnia and
Herzegovina in their MLI position. On the other side, 32 tax treaty partners of B&H have
submitted their MLI position to the OECD Secretariat (whether provisional or final). It is
important to note that a number of treaties with important economic partners are left out of
CTAs by the other contracting jurisdictions, mostly where the treaty was concluded by former
Yugoslavia and later assumed by Bosnia and Herzegovina as one of the successor states.
No prior impact assessment of the MLI on tax compliance and administration, nor on the
economic activity has been made. The authorities seem to have relied on the assessments
1
Lecturer at the Sarajevo School of Science and Technology; Senior Advisor at Fiscal Affairs Department, Bosnia
and Herzegovina Ministry of Finance and Treasury.
2
Assistant Professor, Tax and Financial Law, University of Mostar Faculty of Law, Bosnia and Herzegovina.
IFA © 2020 191

presented by the international organizations about the harmful effects of treaty shopping
in terms of global losses of tax revenue and the vast acceptance of the MLI as an instrument
to curb those losses.
Assessing the overall budgetary impact of the MLI in Bosnia and Herzegovina would
be particularly difficult. As part of the standard procedure prior to the signature of the
Convention, the impact on the budget of Institutions of B&H was assessed as none. This is
due to the constitutional setting, where income taxation is solely within the competences
of the subnational governments, two entities and the Brcko District. The impact of the MLI is
therefore to be expected in the budgets of these three jurisdictions. To the best of the authors’
knowledge, these effects were not assessed so far.
Among other provision presented in the report, Bosnia and Herzegovina decided to meet
the OECD’s BEPS minimum standard on treaty abuse by applying the Principal Purpose Test
(PPT) in article 7(1). Further, not many other provisions of the MLI addressing tax treaty
abuse were chosen. This reasoning is in the line with everything else presented in the report,
especially the fact that international taxation and the problem of treaty shopping is not
the issue in Bosnia and Herzegovina and that even prior to the MLI, these issues were not
recognized by the judiciary practice or the general public and stakeholders.
While it is admirable that B&H supports global effort for curbing the base erosion and
profit shifting, not only by signing MLI but taking over other obligations, it is very questionable
and hard to predict how the MLI will become functional in the complex and challenging
setting of Bosnia and Herzegovina.
Treaty Network
1.1. Introduction
Taking in consideration its specific constitutional and territorial organization, Bosnia and
Herzegovina (B&H) is, in the political and fiscal sense, a multilevel and complex state. The
political structure of the state is based on the Framework Agreement for Peace (the so-called
Dayton Peace Agreement) and its Annex IV, which stands as the Constitution of Bosnia and
Herzegovina. The particularities of its political system are reflected in the fact that it consists
of two entities (Federation of B&H and Republic of Srpska), together with the Brcko District as
administrative unit with special status. The Constitution has given a wide range of authorities
to the entities, while leaving those authorities that are vitally important to the functioning of
an internationally recognized state, to the institutions of Bosnia and Herzegovina.
Following its distinct constitutional structure, the tax system(s) and accompanying
polices are very complex and challenging. There are four separate but relatively coordinated
tax systems in B&H. Division is done according to territorial and constitutional set-up (state
level, entities’ level and Brcko – as special tax system), but also according to tax forms,
having indirect taxes (VAT) in the hand of the central state,3 and direct taxes in the hands
3
Indirect taxes have initial also been within the competence of the entities. Based on art.3 (5(a)) of the B&H’s
Constitution, entities have agreed to transfer their competencies to the state level in order to realize normal
and efficient functioning of the internal market within the country.
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Bećirović & Dujmović
of the entities and the Brcko district. When it comes to tax treaty policies, competence lies
in the hand of the central state, namely the Ministry of Finance and Treasury of Bosnia and
Herzegovina.
Currently, Bosnia and Herzegovina has 37 bilateral tax treaties (hereinafter: tax treaties or
DTCs) in force.4 DTCs are mostly signed with European countries, including 20 EU countries.
All of the treaties are based on the OECD Model Tax Convention. Besides having treaties with
all neighboring countries (Serbia, Croatia, Slovenia, North Macedonia and Montenegro), it
is important to note that there are still ten tax treaties in force that are implemented on the
basis of succession from the former Socialist Federal Republic of Yugoslavia (hereinafter: ex
SFRY) including the treaties with Belgium, Finland, France, Italy, Germany, among others.5 All
of these treaties are signed during the 80s and reflect the economic and political issues of the
signatory, former Yugoslavia. As a rule, they employ the exemption system with progression,
rather than the ordinary credit method. It is interesting to note that most of them contain
tax forms that do not exist in the current tax system of B&H.6 The oldest treaty dates from
1975 with France as contracting state.7
After B&H gained its independence in 1992, several years passed before the first DTCs
were concluded. The first treaties that B&H, as independent state, has signed were with
Iran in 1996 and with Moldavia several years later, in 2003. The stagnation in the early 1990s
due to the war, is obvious but that also makes the signing of the DTC with Iran in 1996 more
interesting. There is no special reason that we can offer as a key factor for the conclusion of
DTCs with these countries and not with some others.
Subsequently, procedures were initiated to conclude new DTCs during the 2000s,
including the DTC with Croatia and the DTCs with Serbia and Montenegro, which were as
neighboring countries among the first ones. By 2017, when B&H signed its last DTC with
Romania, more than 20 treaties were concluded including those with Slovenia, Czech
Republic, Turkey, Spain, Austria, Greece, Ireland, Albania, Macedonia but also with Qatar,
Malesia, Jordan, United Arab Emirates and Algeria.
Even though B&H belongs to developing countries, all of its treaties are based on the
OECD Tax Convention Model. In the authors opinion this practice is taken over from ex
4
There are 40 treaties signed, but three of them are suspended: Egypt, old treaty with Romania and Iran.
5
Belgium, Sweden, France, United Kingdom, Netherlands, Slovakia, Italy, Norway, Cyprus, Hungary, Finland, Sri
Lank, Germany, Romania, Egypt.
6
For example Income from work of organizations of associated labor (dohodak od jedinica udruženog rada), art.2 of
the Convention between the UK and the Socialist Federal Republic of Yugoslavia for the Avoidance of Double
Taxation with Respect to Taxes on Income, Official Gazette of the former Yugoslavian Republic (“Službeni list –
međunarodni ugovori”, 7/82),
7
None of the DTCs implemented on the basis of succession from former SFRY have been published in the Official
Gazette of Bosnia and Herzegovina.
193
SFRY8 and to our knowledge the possibility of using the UN Tax Convention Model has never
been considered. The model serves as the starting position in negotiations and as informal
guidelines for the employees of the Ministry of Finance and Treasury when negotiating new
tax treaties. All concluded DTCs are publicly available on the official web page of the Ministry.
However, there has been no public discussion regarding its contents during the negotiation.
The reasons for that can be found in a lack of general interest in international double taxation
issues. Also, all stakeholders that have the right to express their opinion on this matter, like
interest groups, non-governmental organizations or individual taxpayers, are not included
in drafting any kind of proposals.
Except the DTCs with France, Egypt, Pakistan, Qatar, Kuwait, and the new treaty with Romania
that concerns only taxes on income, the majority of the concluded agreements cover taxes on
income and on capital – all taxes imposed on total income, on total capital, or on elements
of income or of capital, including taxes on capital appreciation and taxes on gains from the
alienation of movable or immovable property, as well as taxes on the total amounts of wages
or salaries paid by enterprises.
All DTCs, implemented on the basis of succession, do not refer to prevention of tax evasion
in its title. When it comes to new treaties, some of them refer to prevention of fiscal evasion
(Azerbaijan, Albania, Spain, Algeria), while others contain only the purpose of preventing
tax evasion in its title (Poland, Romania, Czech Republic, Spain and Slovenia). The DTCs with
Malaysia and Jordan explicitly refer to prevention of tax evasion of only taxes on income, while
DTCs with Qatar and Kuwait add the prevention of tax evasion of taxes on income and capital.
Since the work on MLI started in 2016, B&H hasn’t concluded any DTC, while only the DTC
with Poland was implemented in 2019. There are no ongoing tax treaty negotiations and it is
difficult to assess if the choices made in the MLI position will be included in future treaties.
Even though practice recently shows certain issues when it comes to cross – borders
workers, business conditions, followed by division of taxing rights among contracting
states, set up in DTCs are still not issues of great importance in B&H. There is only a general
observation that international double taxation is an obstacle to doing business and that, as
such, it should be prevented through DTCs. Furthermore, only a relatively small number of
B&H’s entrepreneurs are engaged in business over the border, and hence exposed to double
taxation. Additionally, entities prescribed unilateral measures in its tax system, enabling
the avoidance of international double taxation even when a DTC has not been concluded.9
Absolut prevalence of the ordinary credit method is evident in national tax legislation. Also,
most of B&H’s DTCs follow the credit method as it is formulated in article 23B of the OECD MC.
Provisions and approaches aimed at countering treaty shopping structures, specific or
general ones, were not found in B&H’s DTCs. Since the MLI has been signed only several
weeks before writing this report, many issues concerning implementation and interpretation
of DTCs and the MLI, are only yet to be determined.
8
Although former Yugoslavia was a socialist country, economic considerations largely influenced and determined
the country’s DTC policy. Furthermore, it was recognised that DTCs between Western and socialist countries were
of great importance as instruments of economic cooperation.
9
Arts. 36.- 39, Corporate Tax Act of Federation of B&H
194
To start determining the direct impact of the BEPS Action Plan and the MLI in Bosnia and
Herzegovina, it is important to underline the facts about the progress of the country to
date with regard to the OECD BEPS project and other related initiatives in international tax
cooperation.
Quite unusually, the work on the MLI in B&H started before joining the Inclusive
Framework on BEPS. The explanation lies in the constitutional competences in tax and
foreign policy of B&H. Namely, taxation of income and capital falls within the competences
of three subnational jurisdictions (two entities, Federation of Bosnia and Herzegovina and
the Republic of Srpska; and the Brčko District), whereas the central government undertakes
all international obligations and coordinates the internal processes of assuming those. The
Ministry of Finance and Treasury of Bosnia and Herzegovina, as a competent authority under
tax treaties, is leading the process of conclusion and implementation of tax treaties. Having
in mind that the MLI modifies the application of tax treaties, the Ministry took necessary
steps to engage into this process as soon as possible upon the invitation.
Membership of the Inclusive Framework on BEPS was part of a separate process. Under the
screening of the EU Code of Conduct Group for Business Taxation, carried out in spring 2017
with the aim of compiling the EU list of non-cooperative jurisdictions for tax purposes, Bosnia
and Herzegovina committed to fulfil several international obligations, namely membership
of the Global Forum on Transparency and Exchange of Information for Tax Purposes and the
Inclusive Framework on BEPS, as well as signing of the Convention on Mutual Administrative
Assistance in Tax Matters by the end of 2019.
Still, Bosnia and Herzegovina joined the ad hoc Group for the MLI only in February 2017,
upon receival of the invitation. After the initial consultations with the OECD Secretariat, the
Ministry of Finance and Treasury organized several meetings with the subnational authorities,
namely with the ministries of finance of the two entities to discuss the position in Bosnia and
Herzegovina in terms of signing the MLI or signing the protocols to bilateral tax treaties. As
the implementation mechanism of the MLI was largely uncertain compared to protocols
to international agreements, especially in the context of Bosnia and Herzegovina, these
discussions took quite a long time. The fact that 25 treaty partners10 listed the treaty with
Bosnia and Herzegovina in their notified agreements, as well as the fact that the neighboring
countries signed or announced signing at the time, contributed to the authorities opting for
the MLI.
The position of B&H was submitted to the OECD in August 2018. After a couple of
months of finalizing the position, there was still a long procedure under way to obtain the
official opinions of all the competent authorities, prescribed by the Law on conclusion and
implementation of international agreements. During the summer of 2019, the approvals of
the Council of Ministers and the Presidency took place.
10
at the time decision to sign the MLI was made.
195
Bosnia and Herzegovina signed the MLI on 30 October 2019,11 after more than 2,5 years
of participating in the work of the ad hoc Group on the MLI.
No prior impact assessment of the MLI on tax compliance and administration, nor on the
economic activity has been made. The authorities seem to have relied on the assessments
presented by the international organizations about the harmful effects of treaty shopping
in terms of global losses of tax revenue and the vast acceptance of the MLI as an instrument
to curb those losses.
Assessing the overall budgetary impact of the MLI in Bosnia and Herzegovina would
be particularly difficult. As part of the standard procedure prior to the signature of the
Convention, the impact on the budget of Institutions of Bosnia and Herzegovina was assessed,
as none. This is due to the constitutional setting, where income taxation is solely within the
competences of the subnational governments, the two entities and Brcko District. The impact
of the MLI is therefore to be expected in the budgets of these three jurisdictions. To the best
of the authors’ knowledge, these effects were not assessed so far.
The MLI is now in the ratification process in Bosnia and Herzegovina, with the Ministry
of Foreign Affairs in charge of this phase, leading to the approvals of the Presidency and the
Parliamentary Assembly of Bosnia and Herzegovina. It is difficult to assess when the process
will be finalized. The implementation challenges are yet to be identified.
As the MLI only directly affects covered tax agreements (CTAs) that have been identified by
both contracting jurisdictions (parties to the agreement), and only to the extent that these
parties have made the same choices, it is important to note that, in line with the practice of
the majority of Inclusive Framework members, Bosnia and Herzegovina listed all tax treaties
that are currently in force, which is 37 tax treaties in total. The list of treaty partners is provided
in the table below.
Notified Agreements
Jurisdiction Other Contracting Jurisdiction
1 Bosnia and Herzegovina Albania
2 Bosnia and Herzegovina Algeria
3 Bosnia and Herzegovina Austria
4 Bosnia and Herzegovina Azerbaijan
5 Bosnia and Herzegovina Belgium
6 Bosnia and Herzegovina China (People’s Republic of)
7 Bosnia and Herzegovina Croatia
8 Bosnia and Herzegovina Cyprus
11
The MLI signing ceremony took place in Sarajevo and coincided with the opening of the first IFA International
Tax Conference in Bosnia and Herzegovina.
196
Notified Agreements
9 Bosnia and Herzegovina Czech Republic
10 Bosnia and Herzegovina Finland
11 Bosnia and Herzegovina France
12 Bosnia and Herzegovina Germany
13 Bosnia and Herzegovina Greece
14 Bosnia and Herzegovina Hungary
15 Bosnia and Herzegovina Ireland
16 Bosnia and Herzegovina Italy
17 Bosnia and Herzegovina Jordan
18 Bosnia and Herzegovina Kuwait
19 Bosnia and Herzegovina North Macedonia
20 Bosnia and Herzegovina Malaysia
21 Bosnia and Herzegovina Moldova
22 Bosnia and Herzegovina Montenegro
23 Bosnia and Herzegovina Netherlands
24 Bosnia and Herzegovina Norway
25 Bosnia and Herzegovina Pakistan
26 Bosnia and Herzegovina Poland
27 Bosnia and Herzegovina Qatar
28 Bosnia and Herzegovina Romania
29 Bosnia and Herzegovina Serbia
30 Bosnia and Herzegovina Slovak Republic
31 Bosnia and Herzegovina Slovenia
32 Bosnia and Herzegovina Spain
33 Bosnia and Herzegovina Sri Lanka
34 Bosnia and Herzegovina Sweden
35 Bosnia and Herzegovina Turkey
36 Bosnia and Herzegovina United Arab Emirates
37 Bosnia and Herzegovina United Kingdom
(Source: OECD Matching Database 04-12-2019)
197
The remaining treaties12 are not included due to inactivity.13

Out of 37 countries, to date 27 countries have also covered the treaty with Bosnia and
Herzegovina in their MLI position, 14 as presented in the table below.
Notified Agreements
1 Albania Bosnia and Herzegovina
2 Belgium Bosnia and Herzegovina
3 China (People’s Republic of) Bosnia and Herzegovina
4 Croatia Bosnia and Herzegovina
5 Cyprus Bosnia and Herzegovina
6 Czech Republic Bosnia and Herzegovina
7 Finland Bosnia and Herzegovina
8 France Bosnia and Herzegovina
9 Greece Bosnia and Herzegovina
10 Ireland Bosnia and Herzegovina
11 Italy Bosnia and Herzegovina
12 Jordan Bosnia and Herzegovina
13 Kuwait Bosnia and Herzegovina
14 Malaysia Bosnia and Herzegovina
15 Netherlands Bosnia and Herzegovina
16 North Macedonia Bosnia and Herzegovina
17 Pakistan Bosnia and Herzegovina
18 Poland Bosnia and Herzegovina
19 Qatar Bosnia and Herzegovina
20 Romania Bosnia and Herzegovina
21 Romania Bosnia and Herzegovina(new)
22 Serbia Bosnia and Herzegovina
23 Slovak Republic Bosnia and Herzegovina
12
Referring to the list provided by the Ministry of Finance and Treasury, at http://mft.gov.ba/bos/index.
php?option=com_content&view=article&id=212&Itemid=136.
13
Egypt, Iran and the old treaty with Romania.
14
When excluding the double counting of the old and new treaty with Romania.
198
Notified Agreements
24 Slovenia Bosnia and Herzegovina
25 Spain Bosnia and Herzegovina
26 Turkey Bosnia and Herzegovina
27 United Arab Emirates Bosnia and Herzegovina
28 United Kingdom Bosnia and Herzegovina
(Source: OECD Matching Database 04-12-2019)
As the country joined the Inclusive Framework on BEPS only in July 2019, it was not reviewed
in the first Peer Review on the BEPS Action 6 – Prevention of Treaty Abuse.15 The authors
therefore provide their own analysis here.
Out of 40 tax treaties, 37 (i.e. 92,5%) have been covered by the MLI position as CTAs. The
remaining treaties are left out due to inactivity. Further, there are 27 matched agreements,
comprising more than two thirds of the tax treaty network (67,5%), that are covered by the MLI.
On the other side, 32 tax treaty partners of Bosnia and Herzegovina have submitted their
MLI position to the OECD Secretariat (whether provisional or final). It is important to note
that a number of treaties with important economic partners are left out of the CTAs by the
other contracting jurisdictions, mostly where the treaty was concluded by former Yugoslavia
and later assumed by Bosnia and Herzegovina as one of the successor states.16
Finally, the direct impact of the MLI lies in the policy choices and matched provisions by
treaty partners.
The choices made in the MLI position of Bosnia and Herzegovina are discussed in this
section.
In the provisional list of reservations and notifications at the time of signature, Bosnia
and Herzegovina has made a choice not to apply articles 3 (Transparent Entities), 4 (Dual
Resident Entities) and 5 (Application of Methods for Elimination of Double Taxation) to its
covered tax agreements. The reason might be that the authorities have not faced significant
problems with regard to mismatches so far.
Under article 6 (Purpose of a Covered Tax Agreement), the list of treaties with the
preamble language was included, where article 6(1) will apply in matched provisions. The
option to include the language from article 6(3) was not chosen, mostly due to the concerns
about it being vague and possibly leading to some underlying obligations and loosening of
the provision overall.
B&H decided to meet the OECD’s BEPS minimum standard on treaty abuse by applying
15
OECD (2019), Prevention of Treaty Abuse – Peer Review Report on Treaty Shopping: Inclusive Framework
org/10.1787/9789264312388-en.
16
Such as Germany and Sweden, but also Austria, where the new treaty is concluded in 2010.
199
the Principal Purpose Test (PPT) of article 7(1). The jurisdiction has not adopted the
discretionary benefits rule laid down article 7(4). The agreements that already contain the
anti-abuse provision were notified.17
Further, not many other provisions of the MLI addressing tax treaty abuse were chosen.
Bosnia and Herzegovina has reserved a right not to apply the minimum holding period for
transactions or arrangements undertaken to access the reduced treaty rate on dividends paid
to a parent company in article 8 of the MLI; as well as the provision denying treaty benefits for
income paid to low-taxed permanent establishments in third jurisdictions that are subject to
little or no tax and exempt from tax in the residence jurisdiction of article 10 of the MLI. The
choice of 9 (4) was made under rules for gains from the alienation of shares or comparable
interests deriving their value primarily from immovable property at any time during the 365-
day period preceding the alienation of the property (article 9 of the MLI).
Provisions preventing the avoidance of permanent establishment status through
commissionaire and similar arrangements (article 12 of the MLI) would apply and the
notification of provisions in listed agreements that will be modified was provided, i.e. where
article 5(4) in the tax treaty will be replaced with article 12(1) of the MLI and, correspondingly,
where 5(5) will be replaced with article 12(2) of the MLI.
The choice was made not to apply the rules for specific activity exemptions (article 13 of
the MLI), or the splitting-up of contracts (article 14 of the MLI).
The provisions providing for mandatory binding arbitration under articles 18-26 of the MLI
have not been included in the position of Bosnia and Herzegovina. This is due to the fact that
authorities have not established a practice of arbitration in tax treaty disputes, as only one out
of 40 tax treaties contains the provision on arbitration which was not referred to up till now.
There are no indications that any of the choices made may be reversed in the near future
with regard to the current MLI position of Bosnia and Herzegovina. The extent of reservations
is similar to that of its treaty partners and mainly refers to issues where authorities have
not faced problems before or where a practice or mechanism that would support a certain
choice within the MLI, does not exist. It is safe to argue that the main goal of preparing the
position was to comply with the BEPS minimum standards. It remains to be seen how this
will be implemented in practice.
As discussed above, there are 27 treaties currently covered by the MLI, out of 37 treaties
that Bosnia and Herzegovina notified. These include countries where the MLI is already in
force or where it is pending ratification or signature. This number is still changing,18 while
Bosnia and Herzegovina aim to ratify the MLI. By the time the Convention is in force, the
number of matched agreements might change significantly, as well as the number of
matched provisions modifying the original treaty provisions.
It is expected that the BEPS Action Plan recommendations and agreed standards have an
indirect impact on the tax treaty network through the negotiation of bilateral or regional
tax treaties that include provisions of the MLI, especially since some of those have also been
incorporated into the 2017 OECD Model Convention.
17
Jordan, Poland.
18
One of the treaty partners, North Macedonia, recently submitted its provisional MLI position.
200
In case of Bosnia and Herzegovina, it is, however, very difficult to assess this impact, as
the MLI was signed only a short while ago. More importantly, the jurisdiction has not entered
in any negotiations to conclude or renegotiate tax treaties for years now.
As it has been a long period since the last tax treaty negotiations were held, and the MLI
was signed very short time ago, it would be safe to conclude that there are no such provisions
that were not included in the MLI but found a place into some of the bilateral treaties.
There are no ongoing tax treaty negotiations and it is difficult to assess if the choices
made in the MLI position will be included in future treaties. This is, however, a reasonable
course of action if authorities are set to implement the BEPS minimum standards and the
corresponding tax treaty policy further. This is particularly relevant when it is unclear how
future changes to the MLI will be implemented in the existing legal framework and practice.
Namely, the MLI and the corresponding position of Bosnia and Herzegovina, are yet to be
adopted in the parliament of Bosnia and Herzegovina in line with the Law on conclusion
and implementation of international agreements, and it remains to be seen how the tax
authorities will establish the procedures for implementation of the MLI alongside the
domestic law and bilateral tax treaties.
The competent authorities in Bosnia and Herzegovina do not have an established practice
of making official reservations to the OECD Model Tax Convention. Hence, the MLI position for
B &H was prepared independently, without a reference to the OECD Model or its 2017 changes.
However, the authorities are aware that the latest version of the OECD Model Tax Convention
is the standard main reference and a starting point for most treaty negotiations and the
information contained is, at least indirectly, influencing discussions around tax treaty policy.
The MLI is now in the ratification process in Bosnia and Herzegovina, with the Ministry of
Foreign Affairs in charge of this phase, leading to the approvals of the Presidency and the
Parliamentary Assembly of Bosnia and Herzegovina. It is difficult to assess when the process
will be finalized. The implementation challenges are yet to be identified.
Being a country that adopted the monist theory, all international agreements, including
DTCs and consequently the MLI, have supremacy over national legislation and cannot be
overridden. Even though judicial practice concerning the interpretation of DTCs barely
exists when it comes to interpretation issues, B&H is obliged to implement its principles as
signatory of the Vienna Convention on Law of Treaties (hereinafter: VCLT); especially pacta
sunt servanda, stipulated in article 26 VCLT., as well as interpretation principles stipulated in
articles 32 and 33. It is still unknown how the MLI and DTCs will be interpreted and how this
new relationship between these agreements will be recognized and acknowledged by the
judiciary. So far that has not been the case.
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Brazil
Branch reporters
Marcus Livio Gomes1
Doris Canen2

Brazil has been active as part of the BEPS steering group and of the Inclusive Framework. As a
consequence of this, many BEPS Actions such as 6 – Preventing Treaty Abuse, 13 – Country by
Country Reporting and 14 – Mutual Agreement Procedures, have been implemented locally.
The country has a local GAAR provision which, though not yet regulated, is still used
by tax authorities and courts to disregard transactions which are not considered to have a
business purpose.
It is also in the process of signing new tax treaties (recent ones include Switzerland,
Singapore, Uruguay and the United Arab Emirates) and renegotiating older ones (such as
the treaties with Argentina and Switzerland).
Brazil can be said to be protective of its taxing rights. It participated in both the UN Model
and OECD Model tax discussions and it is fair to say that it has played a part in the provisions
which protect taxing rights for source countries. Examples of how Brazil protects its taxing
rights can be seen in (i) elevated remittance tax burden such as on imports of services and
royalties and (ii) treaty clauses which protect source country taxing rights, sometimes even
more than the UN model itself, as is the case with the Capital Gains article in most treaties.
However, new treaties can be said to follow MLI orientation in the preamble, and in clauses
such as Permanent Establishment and LOB while the UN model can be noticed in article 12A
regarding services and lack of arbitration in MAP.
Though it has not signed the MLI, influence of the MLI´s text can be se en in the new
treaties signed by Brazil in aspects such as the preamble and LOB clauses.
As will be shown throughout this report, even though there are interesting local
peculiarities in Brazilian treaties, the country has been striving to align with international
standards.
1
Associated research fellow at the Institute of Advanced Legal Studies (IALS/University of London). Federal Judge
in the 2nd Federal Court (Rio de Janeiro). Professor at the Masters, and PhD at UERJ.
2
LLM in International Tax Law – King´s College London (Chevening Scholar), Researcher for International Tax at
UERJ and Taxation of New Technologies at FGV. Tax senior manager and attorney in Brazil.
IFA © 2020 203

Brazil
Treaty Network
1.1. Introduction
The design of tax treaties and their functioning should be understood not only in light of
statutes, regulations, case law and doctrine but also take into account each country´s trends,
domestic law and tax policy.
Consequently, textual, cultural, historical, economic and institutional differences in
tax systems may interfere with the technical approach as proposed by the OECD in the
“Explanatory Statement to the Multilateral Convention to Implement Tax Treaty Related
Measures to Prevent Base Erosion and Profit Shifting” (hereafter the “Explanatory Statement”).
This comprehensive approach makes the MLI comparable worldwide, despite textual,
cultural, economic, historical and institutional differences in the tax systems. It also permits
a more balanced evaluation of the MLI in investigating whether its application, which is
intended to supersede the wording of tax treaties, is feasible.
As a result, a number of relevant issues can be analyzed. These include whether there
remains a longstanding conflict between developing and developed countries with regard to
a fair share of tax revenue, the allocation of the tax base in cross-border transactions, source-
residence conflicts, whether there is effective multilateralism in international taxation, and
whether current efforts on the part of the OECD tend to consolidate the existing status quo,
whereby the division between developing countries and undeveloped countries is reinforced.
Brazil is known for having its own trends and treaty policy but, at the same time, is
unquestionably seeking to align with international standards. The intention of this report
is to show how Brazilian international tax treaties and trends have evolved even though it is
not a signatory to the MLI.
Brazil has concluded 33 comprehensive tax treaties that entered into force prior to the MLI
with the following jurisdictions: Argentina, Austria, Belgium, Canada, Chile, China (People’s
Rep.), the Czech Republic, Denmark, Ecuador, Finland, France, Hungary, India, Israel, Italy,
Japan, Korea (Rep.), Luxembourg, Mexico, Netherlands, Norway, Peru, Philippines, Portugal,
Russia, the Slovak Republic, South Africa, Spain, Sweden, Trinidad and Tobago, Turkey,
Ukraine and Venezuela.3
The country has an interesting treaty policy and was present in both the OECD and UN
Model treaty discussion groups. It can be said that Brazil has its own treaty policy, in many
3
Please refer to the Brazilian Federal Revenue´s website for the copy of such treaties (in Portuguese): http://receita.
economia.gov.br/acesso-rapido/legislacao/acordos-internacionais/acordos-para-evitar-a-dupla-tributacao/
acordos-para-evitar-a-dupla-tributacao.
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Gomes & Canen
ways more favorable to the source country than the UN model itself.4 In this sense, even
though many of the tax treaties were signed before the UN model was issued, it was in
discussion at the time of their signature and Brazil was able to enforce source country rights
based on the referred discussions.5 Such success was not obtained in the OECD Model treaty
discussions.
An example of how Brazil has stronger source country rights than the referred models, is
the capital gains article. This is due to the fact that with relation to residual capital gains (not
expressly included in article 13), even though both Model Conventions establish the exclusive
tax power of the beneficiary’s country of residence for taxation, Brazilian treaties (with the
exception of the treaty with Japan) ensure broader taxing powers for the source country.
Please find below the example of the Brazil-Austria treaty (signed in 1975):
Article 13
Capital Gains
1. Gains from the alienation of immovable property, as defined in article 6, paragraph
2, may be taxed in the Contracting State in which such property is situated.
2. Gains from the alienation of movable property forming part of the business property
of a permanent establishment which an enterprise of a Contracting State has in the
other Contracting State or of movable property pertaining to a fixed base available
to a resident of a Contracting State in the other Contracting State for the purpose of
performing professional services, including such gains from the alienation of such a
permanent establishment (alone or together with the whole enterprise) or of such
a fixed base, may be taxed in the other State. However, gains from the alienation of
ships or aircraft operated in international traffic and movable property pertaining to
the operation of such ships or aircraft shall be taxable only in the Contracting State
in which the place of effective management of the enterprise is situated.
3. Gains from the alienation of any property or rights other than those mentioned in
paragraphs 1 and 2 may be taxed in both Contracting States.
Regarding the Model followed (OECD or UN), though debatable (and this debate can be due
to the similarities of the models), there are arguments to support that most treaties follow
the UN Model.67
An example of this is the royalties article which, in Brazilian treaties, allows the source
country to tax royalties remittance, different to the OECD model where royalties are only
taxed in the country of residence.8 Also, the royalties article in Brazilian tax treaties includes
revenue from the use of scientific, commercial or industrial equipment under the royalties
article, with the exception of the Finnish treaty, as per the example below of the Brazil-Canada
treaty (signed in 1984):
4
SCHOUERI, Luis Eduardo. Contribuição à História dos Acordos de Bitributação: a experiência Brasileira Revista
de Direito Tributário Atual, 2002, p. 280 in: ROCHA, Sergio André, Countries Aggressive Tax Treaty Planning:
Brazil´s Case, Intertax, Volume 44, Issue 4, 2016.
5
ROCHA, Sergio André. Política Fiscal Internacional Brasileira. Lumen Juris, 2017, p. 22, Free Translation.
6
GOMES, Marcus Livio. International Taxation and the Challenges for Multilateralism in the Context of the OECD
Multilateral Instrument. IBFD. Bulletin for International Taxation, 2018 (Volume 72), No. 2. 2017.
7
ROCHA, Sergio André. El Proyecto Beps de la OCDE y el Derecho Fiscal Internacional em Brasil. Revista Direito
Tributário Atual, São Paulo, n. 35, 2016, p. 388-389. Free translation.
8
ROCHA, Sergio André. Estudos de Direito Tributário Internacional, Lumen Juris, 2016, p. 1-3. Free translation.
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Brazil
Article 12
Royalties
1. Royalties arising in a Contracting State and paid to a resident of the other Contracting
State may be taxed in that other State.
2. However, such royalties may be taxed in the Contracting State in which they arise,
and according to the law of that State, but if the recipient is a company which is the
beneficial owner of the royalties, the tax so charged shall not exceed:
(a) 25 per cent of the gross amount of royalties arising from the use of, or the right to
use trademarks;
(b) 15 per cent in all other cases.
3. The term “royalties” as used in this Article means payments of any kind received as
a consideration for the use of, or the right to use, any copyright of literary, artistic
or scientific work (including cinematograph films, films or tapes for television or
radio broadcasting), any patent, trade mark, design or model, plan, secret formula
or process, or for the use of, or the right to use, industrial, commercial or scientific
equipment, or for information concerning industrial, commercial or scientific
experience.
4. Royalties shall be deemed to arise in a Contracting State when the payer is that State
itself, a political subdivision, a local authority or a resident of that State Where,
however, the person paying the royalties, whether he is a resident of a Contracting
State or not, has in a Contracting State a permanent establishment in connection with
which the obligation to pay the royalties was incurred, and such royalties are borne
by such permanent establishment, then such royalties shall be deemed to arise in the
Contracting State in which the permanent establishment is situated.
5. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the royalties,
being a resident of a Contracting State, has in the other Contracting State in which
the royalties arise, a permanent establishment with which the right or property giving
rise to the royalties is effectively connected. In such a case, the provisions of Article
7 shall apply.
6. Where, owing to a special relationship between the payer and the recipient or between
both of them and some other person, the amount of the royalties paid, having regard
to the use, right or information for which they are paid, exceeds the amount which
would have been agreed upon by the payer and the recipient in the absence of such
relationship, the provisions of this Article shall apply only to the last-mentioned
amount. In that case, the excess part of the payments shall remain taxable according
to the law of each Contracting State, due regard being had to the other provisions of
this Convention.
7. The tax rate limitation referred to in paragraph 2(b) shall not apply to royalties paid
before the end of the fourth calendar year following the calendar year in which
this Convention enters into force where such royalties are paid to a resident of a
Contracting State which holds, directly or indirectly, at least 50 per cent of the voting
capital of the company paying the royalties.
Brazil even included a reservation to the OECD 1977 Model Tax Convention stating that
revenue from the rent of such equipment will be treated as royalties.9 In most of the Brazilian
9
ROCHA, Sergio André. Estudos de Direito Tributário Internacional, Lumen Juris, 2016, p. 1-3. Free translation.
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Gomes & Canen
treaties, technical services10 are also to be treated as royalties due to Protocol provisions
(with the exception of Austria, France, Finland and Japan, where, due to an absence of the
determination to treat technical services as royalties in the protocol, technical services are
treated as business profits under article 7 – Sweden was also in this exception but a recent
change in the Protocol (2018) ended this).
Another example of further similarity to the UN Model is that Brazil’s concluded tax
treaties do not contain an equivalent of article 25(5) of the OECD Model (and UN Model
article 25 option B), which envisages the possibility of arbitration regarding a MAP. All of
Brazil’s tax treaties contain the other paragraphs in article 25 of the OECD Model (and can be
said to follow the UN Model article 25 alternative A), although the deadline for requesting
a MAP varies. However, only the tax treaties that Brazil has signed with Argentina, Austria,
Belgium, Denmark, Ecuador, Finland, France, India, Korea (Rep.), Luxembourg, Spain and
Sweden provide for an option to establish a joint commission (article 25.4 of both models).11
The most recent treaty updates pre-MLI in force in Brazil, are with Norway
(original treaty signed in 1980 and update signed in 2014, in force in Brazil as of 2018) which
updated the exchange of information clause and Denmark (original treaty signed in 1974 and
update signed in 2011, in force in Brazil as of 2019) which removed some paragraphs from the
Protocol with relation to article 23 – Methods for Eliminating Double Taxation.
Please refer to section 1.4 for recent Brazilian treaty trends.
(1) Preambles and Definition of the Brazilian Tax Treaty Purposes
Pre-MLI preambles followed the old OECD/UN models stating that the treaty intended to
avoid double taxation and tax evasion (such as the Brazil – Japan treaty signed in 1967). All
new Brazilian treaties post-MLI have followed the MLI orientation for the preamble, such
as the Brazil – Switzerland treaty (signed in 2018, not yet in force), where the objective is
not limited to the elimination of double taxation but also includes the avoidance of treaty
shopping and non-taxation. Please find below examples of both preambles:
10
Technical service taxation has been a subject of years of questioning and litigation in Brazil. After a decision
rendered by the Superior Court of Justice (Special Appeal 1161467) stated that any income derived from technical
services that do not contain transfer of technology should be classified as Business Profits (art. 7) and a more
restrictive legal opinion from the Federal Tax Attorneys (2363/2013) which classifies payments received for
services without transfer of know-how as business profits under art. 7, except for those cases in which a treaty
treats payments related to technical services as royalties (usually art. 12 of Brazilian treaty), new legislation was
enacted in 2014 (Interpretative Declaratory Act 5/2014) stating that: if the treaty’s protocol treats the payments
for technical services and technical assistance under art. 12 (Royalty), the payments will be subject to withholding
taxation in Brazil, irrespective of whether the technical services or technical assistance contain the transfer of
know-how. If the payments falling within the scope of art. 14 of the treaty (Independent Service Professionals
Provision) are made to a resident of a jurisdiction whose treaty allows Brazil to tax such income, withholding
tax will apply, unless the business activity constitutes a permanent establishment in Brazil and payments for
technical services and technical assistance to residents of jurisdictions whose treaties entered into with Brazil
do not treat such payments under arts. 12 and 14, will not be subject to Brazilian withholding taxation on the
grounds of art. 7 (Business Profits).
11
CANEN, Doris and CONTI, Henrique. Can the Brazilian Mutual Agreement Procedure Legislation be Effective
Domestically? IBFD Bulletin for International Taxation, 2019 (Vol. 73), No. 2, January 2019.
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Brazil
Brazil – Japan (1967)

The Government of Japan and the Government of the Federative Republic of Brazil,
Desiring to conclude a Convention for the avoidance of double taxation with respect to
taxes on income,
Have agreed as follows:
(...)
***
Brazil – Switzerland (2018):
The Swiss Confederation and the Federative Republic of Brazil,
Desiring to further develop their economic relationship and to enhance their cooperation
in tax matters,
Intending to conclude a Convention for the elimination of double taxation with respect
to taxes on income without creating opportunities for non-taxation or reduced taxation
through tax evasion or avoidance (including through treaty-shopping arrangements
aimed at obtaining reliefs provided in this Convention for the indirect benefit of residents
of third States),
Have agreed as follows (…)
(2) Treaty Shopping
Domestic specific anti-avoidance provisions (e.g., look-through rules or anti-conduit provisions)12

Article 116 of the Brazilian National Tax Code,13 which deals with the moment when a taxable
event is deemed to have occurred for legal purposes, has a “single paragraph” which is
understood to be the Brazilian General Anti-Avoidance Rule (“GAAR”). The article states that:
The administrative authority may disregard juridical acts or business transactions if they
aim to mask the occurrence of a tax triggering event, or to hide the constitutive elements
of a tax obligation, observing the procedures that are to be established through simple
law” (free translation).14
The provision relates to obligations assumed both in domestic and international tax matters,
and, in theory, should be regulated in order to be applied. Even though this general rule has
not yet been regulated by resulting in its limited application, it is used by tax authorities,
even not being the only argument, to disregard transactions deemed as abusive (with no
business purpose and that have as a main purpose to avoid tax levy, payment or conceal the
occurrence of a taxable event). 15 16
12
Based on the Brazilian branch report presented by Tatiana Falcão at the IFA Congress in Seoul 2018.
13
Brazilian National Tax Code, Law n. 5.172, of 25 October 1966.
14
This provision was added to the Brazilian National Tax Code in 2004. Before that, there was no mention of a GAAR
in the Brazilian tax system, although SAARs such as transfer pricing rules and CFCs were already enforceable.
The sole paragraph was introduced through Supplementary Law 104 of 10 January 2001 (SL 104/01).
15
Federal Administrative Court – CARF Decisions 1402-001.404, 9 July 2013; CARF, Decision n. 1202-001.060, 6
November. 2013; CARF, Decision n. 9101-002.429, 18 August. 2016.
16
There is controversy within the legal doctrine as to whether the regulation of the only para. should happen
via ordinary or supplementary law. Some regard that art. 146 of the Brazilian Constitution would require a
supplementary law to regulate art. 116, sole para.
208
Gomes & Canen
The Brazilian tax legislation has several specific anti-avoidance rules in themes such
as transfer pricing, a list with privileged tax regimes and low tax jurisdictions, and thin
capitalization rules, amongst others.17
Domestic anti-avoidance doctrines (substance over form, sham or business purpose) and/or general
anti-avoidance rules18
It can be said that Brazil had a strictly formalistic approach towards tax planning until the late
1990s, which means that any structure or business model intended to avoid or reduce taxation
was considered legitimate tax planning as long as all actions were legal and executed before
the taxable event. However, the country changed towards a substance over form approach
in the 21st century.
Currently, tax authorities challenge corporate restructuring and business models on the
grounds that they lack business purposes or non-tax justifications. As already mentioned in
the previous section, any structure or model that can be explained only by the savings in tax
they enable, are considered illegitimate forms of tax planning and consequently abusive.
General principles of treaty interpretation, such as the “Guiding Principle” adopted in the 2003 OECD
Commentary19
The nature and function of the guiding principle under the 2003 OECD Commentaries is
really controversial. There are two main possibilities, first to be considered as a treaty GAAR
and second, by contrast, to be considered as a general standard which states are required to
comply with when denying treaty benefits on the basis of a domestic or a treaty GAAR, the
latest may flow from the structure of the 2003 OECD Commentaries to article 1 of the OECD
Model.
Subsequently, the 2014 OECD Commentaries20 provide that: “It is important to note,
however, that it should not be lightly assumed that a taxpayer is entering into the type of
abusive transactions referred to above. A guiding principle is that the benefits of a double
taxation convention should not be available where a main purpose for entering into certain
transactions or arrangements was to secure a more favorable tax position and obtaining
that more favorable treatment in these circumstances would be contrary to the object and
purpose of the relevant provisions.”21 The same spelling was maintained in the 2017 OECD
Commentaries.22
It should be noted that, in practice, general anti-abuse provisions are not a common
17
SAARs are mentioned in the following legal provisions: Law 9,430 of 27 December 1996 (Law 9430/96), Law 10,451
of 10 May 2002 (Law 10451/02), Law 11,727 of 23 June 2008 (Law 11727/08), Normative Instruction 1,037 of 4 June
2010 (NI 1037/10), Law 12,973 of 13 May 2014 (Law 12973/14), Normative Instruction 1,530 of 19 December 2014 (IN
1530/14), Normative Instruction 1,474 of 18 June 2014 (IN 1474/14), Normative Instruction 1,658 of 13 September
2016 (NI 1658/16), Normative Instruction 1,634 of 6 May 2016 (NI 1634/16) and Normative Instruction 1,683 of 29
December 2016 (NI 1683/16).
18
Based on ROCHA, Sergio Andre, Countries’ Aggressive Tax Treaty Planning: Brazil’s Case. Intertax,.
19
Based on GOMES, Marcus Livio, From the Guiding Principle to the Principal Purpose Test: the Burden of Proof
and Legal Consequences, in: Planejamento Tributário Sob A Ótica Do Carf: Análise De Casos Concretos, Lumen Juris,
Rio de Janeiro, 2019.
20
2014 OECD Model Tax Convention on Income and on Capital: Commentary.
21
OECD Model: Commentary on art. 1 para. 9.5 (2014).
22
Commentary; 2017 OECD Model Tax Convention on Income and on Capital: Commentary.
209
Brazil
feature of tax treaties.23 The guiding principle was not able to work as a general anti-abuse
provision in the OECD Model pre the OECD/G20 BEPS initiative. The main issue was the
remarkably diverse positions adopted by states regarding the need and convenience for a
general anti-abuse provision included in tax treaties besides the uncertainty surrounding
the interrelationship between domestic anti-avoidance provisions and anti-avoidance
tax treaties provisions, resulting in an uncoordinated approach on the part of states. The
guidance in the Commentary on article 1 of the OECD Model through the Guiding Principle
was an unsuccessful attempt to overcome all these issues especially inasmuch as the non-
binding nature of the Commentaries on the OECD Model and all controversies related to this
issue in the international tax literature.
The OECD proposal to implement the PPT has been strengthened by this organization
under the new anti-abuse provision; in effect, the conditions for its application are identical
to those features that were designed for applying the Guiding Principle inserted in the
2003 Commentaries to the OECD Model 2003.24 In a nutshell, the OECD concerns the
implementation of the PPT as having little effect on existing tax treaties, understanding
that the implementation of the PPT will not have a high impact, nor will it bring on significant
changes, within the current network of existing treaties.
Whereas the Guiding Principle poses the concept of abusive transactions upon the
circumstances that the benefits of a tax treaty have been made available through a
transaction of which the “main purpose” is to secure a more favorable tax position to the
taxpayer and obtaining that position would be contrary to the object and purpose of the
relevant provisions,25 the application of the PPT relies on the circumstances that obtaining
a treaty benefit was “one of the main purposes” of the transaction that resulted directly or
indirectly in that benefit, aside from it being established that granting the benefit in these
circumstances would be in accordance with the object and purpose of the relevant provisions
of the Convention.
In this sense, the PPT rule as provided under articles 7(1) of the MLI and 29(9) of the 2017
OECD Model, would not merely codify the guiding principle embodied in paragraph 9.5
of the 2003 Commentary to article 126 as already presented. Furthermore, there are main
differences, as the burden of proof,27 scope and its legal consequences. Unlike the guiding
principle, the PPT rule applies “notwithstanding the other provisions of this Convention” and
comes into play “unless it is established that granting that benefit in these circumstances
would be in accordance with the object and purpose of the relevant provisions of the Covered
Tax Agreement”.
23
S. van Weeghel, General Report, in Tax treaties and tax avoidance: application of anti-avoidance provisions sec.
3.3. (IFA Cahiers vol. 95A, 2010), highlighted that States are generally reluctant to insert general anti-abuse
provisions into their tax treaties because this inclusion could be construed as invalidating non-treaty-based
approaches to withdrawing treaty benefits in other tax treaties that lack such explicit provisions.
24
Ibid. n. 73.
25
Commentaries to the OECD Model Tax Convention (art. 1, para. 9.5).
26
OECD Model: Commentary on art. 1 para. 117 (2017). Action 6 Final Report, at 55, OECD Model: Commentary on
art. 29 para. 169 (2017).
27
Regarding burden of proof see M. Lang, BEPS, ‘Action 6: Introducing an Anti-abuse Rule in the Tax Treaties’, 74,
Tax Notes Intl. 7, p. 658 (2014); L. De Broe & J. Luts, ‘BEPS Action 6: Tax Treaty Abuse’. 43 Intertax 137 (2015) on
216; Andréz Báez Moreno, ‘GAARs and Treaties: From the Guiding Principle to the Principal Purpose Test. What
Have We Gained from BEPS Action 6?’ in Intertax, volume 45, issue 6 & 7, 2017, p. 435; V. Chand, The Interaction
of Domestic Anti-Avoidance Rules with Tax Treaties: with special references to the BEPS project, Schulthess, Tax
Policy series, 2018, pp. 186/202; Danon (2018) s. 2.
210
Gomes & Canen
As a result, the Guiding Principle can be regarded as a treaty GAAR,28 which is supported
by the report on BEPS Action 629 and the 2017 draft OECD Commentary.30 As a consequence,
if the relevant tax treaty does not incorporate the PPT, the guiding principle could still be
applied to deny treaty benefits under the commentaries of the Model Convention, but only
for tax treaties that have been concluded after January 2003, as it was introduced only in
that year.31 Nonetheless, conversely to the OECD’s point of view, one may propose that the
PPT weakens the anti-abuse standard previously defined under the Guiding Principle.32
Otherwise, in the Guiding Principle, it looks like a balance between discretion and certainty
as a consequence of the introduction of this provision so the burden of proof is not transferred
or anticipated to taxpayers as it will be in the PPT. Therefore, the discretionary power of the
tax administration may be limited to provide a reasonable offset between protecting the tax
base and safeguarding taxpayers’ rights.
The 2017 updated OECD Commentaries33 now go further, equating the Guiding Principle
to the PPT rule in the sense that where the applicable tax treaty does not contain such a rule,
benefits could be directly denied on the basis of the Guiding Principle.34 Nonetheless, through
the introduction of the PPT rule in the text of the 2017 OECD Model and in some tax treaties
further to the BEPS outcome, the issue of the status and function of the Guiding Principle
will be less important.
From a Brazilian jurisprudential and legislative point of view, please refer to the items on
GAAR and beneficial ownership for a further understanding on the topic.
Interpretation and application of the beneficial ownership concept

In Brazilian domestic law, the concept of beneficial owner is in article 26, I of Law 12.249/2010
which states that “ the beneficial owner shall be regarded as the individual or legal entity
not constituted with the sole or main objective of achieving a tax saving who receives these
amounts for his own account and not as agent, trustee or on behalf of a third party” (free
translation).
However, even before the enactment of such legislation, a leading case on the subject
showed the Brazilian Tax Authorities and Courts interpretation of the issue (later made clear
in the legislation mentioned above). The case (Special Appeal – Recurso Especial 457.228 18
March 2004), judged by the Superior Court of Justice had the following fact pattern – Interest
had been paid by a Brazilian resident (Volvo do Brasil) to a Japanese corporation´s (Itochu
Corporation), Panama branch which, though incorporated in Panama was subject to Japanese
law, as per its bylaws.
28
V. Chand, The Interaction of Domestic Anti-Avoidance Rules with Tax Treaties: with special references to the
BEPS project, Schulthess, Tax Policy series, 2018, pp. 186/202.
29
2015 OECD, Final Report on Treaty Abuse, para. 59 (Commentary in para. 14).
30
2017 OECD Comm (Draft), art. 1, para. 61; 2017 OECD Comm (Draft), art. 29, para. 169.
31
In the same sense V. Chand, The Interaction of Domestic Anti-Avoidance Rules with Tax Treaties: with special
references to the BEPS project, Schulthess, Tax Policy series, 2018, pp. 186/202.
32
M. Lang, BEPS, ‘Action 6: Introducing an Anti-abuse Rule in the Tax Treaties’, 74, Tax Notes Intl. 7, p. 659 (2014); L.
De Broe & J. Luts, ‘BEPS Action 6: Tax Treaty Abuse’, 43 Intertax 137 (2015) on p. 132; Andréz Báez Moreno, ‘GAARs
and Treaties: From the Guiding Principle to the Principal Purpose Test. What Have We Gained from BEPS Action
6?’ in Intertax, volume 45, issue 6 & 7, 2017, p. 435; V. Chand, The Interaction of Domestic Anti-Avoidance Rules
with Tax Treaties: with special references to the BEPS project, Schulthess, Tax Policy series, 2018, pp. 186/202;
Danon (2018) section 2.
33
Action 6 Final Report, at 55, OECD Model: Commentary on art. 29 para. 169 (2017).
34
OECD Model: Commentary on art.1 para. 61 (2017).
211
Brazil
The Brazilian Tax Authorities argued that the reduced treaty rate for WHT under the
Brazil – Japan treaty (12.5%) did not apply as the interest was paid to Itochu Corporation´s
Panama Branch (therefore subject to a 25% WHT rate as Panama is a tax haven in Brazil) and
treaty benefits were not allowed. This argument was successful in both the administrative
and judicial courts.
In this sense, it can be seen that there has been a focus on the substance of each transaction
in order to identify the beneficial owner.
Treaty-based anti-avoidance provisions35

Of the Brazilian treaties in force, five of 33 negotiated before the MLI (Argentina, Israel,
Russia, Trinidad & Tobago and Turkey), contain a GAAR provision. These clauses, which
are limitations of benefits, contain the following language, as per the Brazil – Turkey treaty
(signed in 2010), below:
Article 28
Limitation of Benefits
The competent authorities of the Contracting States may deny the benefits of this
Agreement to any person, or with respect to any transaction, if in their opinion the receipt
of those benefits, under the circumstances, would constitute an abuse of the Agreement
according to its purposes.
The only two verified exceptions to this rule were the treaties with Russia and Israel, which
also carry a beneficial ownership test (Israel and Russia)36 and a provision lifting the allocation
of taxing rights conferred by the tax treaty if a treaty partner concludes the other has applied
very low or no tax on a transaction (Russia).37 These two provisions are likely to have been
requested by Brazil’s negotiating partners.
35
Based on the Brazilian Branch report presented by Tatiana Falcão at the IFA Congress in Seoul 2018.
36
The Beneficial Ownership clause provides: “A legal entity that is a resident of a Contracting State and derives
income from sources within the other Contracting State shall not be entitled in that other Contracting State to
the benefits of this Convention if more than 50 per cent of the beneficial interest in such an entity (or in the case
of a company, more than 50 per cent of the voting power or value of the company’s shares) is owned, directly or
indirectly, by any combination of one or more persons who are not residents of a Contracting State.
The provision of this paragraph shall not apply if such an entity carries on in the Contracting State of which it is
a resident a substantial business activity other than a mere holding of securities or other assets.” (Brazil-Israel
DTC, art 28, Tax Treaties IBFD). See also Brazil- Russia DTC, art. 28 (3), Tax Treaties IBFD).
37
The “double non-taxation clause” provides: “If after the date of signature of this Convention a Contracting State
introduces legislation in terms of which offshore income derived by a company from:
(a) shipping;
(b) banking, financing, insurance, investment or similar activities; or
(c) being the headquarter, co-ordination centre or similar entity providing administrative services or other
support to a group of companies which carry on business primarily in other States, is not taxed in that State
or is taxed at a rate of tax which is significantly lower than the rate of tax which is applied to income from
similar onshore activities, the other Contracting State shall not be obliged to apply any limitation imposed
under this Convention on its right to tax the income derived by the company from such offshore activities
or on its right to tax the dividends paid by the company. (Brazil – Russia DTC, art. 28, Tax Treaties IBFD).
212
Gomes & Canen
(3) Tax treaty abuses
Transactions or arrangements undertaken to access the reduced treaty rate on dividends paid to a
parent company (addressed by article 8 of the MLI)
This is not applicable in Brazil as the current local withholding tax rate on dividends is 0%,
independently of the country it is remitted to.
Transactions or arrangements undertaken to avoid taxation of immovable property situated in a

contracting state, including transactions or arrangements intended to dilute the proportionate value
of shares or comparable interests deriving their value primarily from immovable property situated in
a contracting state (addressed by article 9 of the MLI)
This is not applicable due to the fact that as mentioned in item 1.2.1, Brazilian treaties (with
the exception of the treaty with Japan) ensure broader taxing powers for the source country
as they establish that this country can also tax them. Also, Brazilian domestic legislation
(Law 10.833/03, article 26) states that if property is located in Brazil (which involves assets
and shares), Brazil will tax non-resident capital gains.
The granting of treaty benefits for income paid to low-taxed permanent establishments in third
jurisdictions that are subject to little or no tax and exempt from tax in the residence jurisdiction
(addressed by article 10 of the MLI)
See below.
Avoidance of permanent establishment status through commissionaire and similar arrangements

(addressed by article 12 of the MLI), specific activity exemptions (addressed by article 13 of the MLI),
or the splitting-up of contracts (addressed by article 14 of the MLI)
As mentioned, Brazil has strong source country taxation and therefore does not have concerns
with Permanent Establishment due to the fact that it taxes all revenue at source.
Splitting up of contracts is recommended so that source taxation can take place as per the
nature of the remittance. This is especially sensitive regarding royalties and corresponding
technical services, which are usually in the same contract and consequently on the same
invoice. If there is no split, tax authorities have issued rulings stating that in doubt, the
taxation of the whole contract will be as import of service (such as Ruling 11/2011 from the
Federal Tax Authorities).
However, the Permanent Establishment article of the Brazil-Uruguay and Brazil-UAE
treaties, signed in 2018 (not yet in force) follows the text of the MLI in the sense that it seeks
to avoid BEPS opportunities from contract splits, specific PE exemptions and the artificial
avoidance of PE status through commissionaire arrangements.
(4) Hybrid mismatch arrangements (addressed by articles 3 and 4 of the MLI)
Brazil has not addressed this issue. Note that the most well-known hybrid in Brazil derives
from its own domestic legislation and is the Interest on Net Equity (“Juros Sobre Capital
Próprio – JCP).
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Brazil
(5) MAP and corresponding adjustments (addressed by articles 16 and 17 of the MLI) 38
The OECD Model Tax Convention on Income and Capital recommends the use of article 25
(3) for the corresponding adjustment when article 9(2) is not available, which is the case of
the treaties in Brazil.
Some treaties like the treaties with Argentina, Austria, Korea (Rep), Denmark, Ecuador,
Finland, France, India, Japan, Luxembourg, Spain and Sweden as well as the not yet in force
treaties with Singapore and the United Arab Emirates, allow the possibility of consulting in
cases not provided for in the Convention. However, in Brazil the text of article 25(3) does not
foresee the possibility of competent authorities of the contracting states to consult together
in cases not provided for in the Convention for the elimination of double taxation, as it does
in the OECD Model Tax Convention on Income and Capital.
The only treaty that follows the exact text of the OECD Model is the one with Switzerland,
not yet in force. Also, the treaty with the Netherlands (though it does not refer to cases not
provided for in the Convention), is the only one which expressly mentions that article 9 should
be included in the consultations between the countries. Recently however, a MAP Manual
was published by the Brazilian RFB, expressly allowing taxpayers to initiate a MAP procedure
when transfer pricing adjustments are necessary. Page 10 of the MAP Manual states:
“In cases of transfer pricing adjustments affecting associated companies’ resident in
different jurisdictions, it is advisable for each of these companies to submit a request of a
MAP to the competent authority of the state of which they are resident.”
(6) Mandatory binding arbitration of disagreements between contracting states (addressed by

articles 18-26 of the MLI)
Brazil doesn´t have mandatory binding arbitration in its treaties.
Brazil hasn´t signed the MLI. Though the tax authorities and the government have not given
an official justification for this, it can be understood that the MLI hasn´t been signed as some
OECD proposals may not be in line with Brazil´s treaty policy and also because bilateral
negotiations are less complicated than the MLI39 which leads us to believe that the country
is seeking to preserve as much autonomy as possible in the field of tax treaty policy.
It is important to observe that as mentioned in the OECD Report on Prevention of Treaty
Abuse – Peer Review Report on Treaty Shopping published on February 2019,40 Brazil,
38
Based on CANEN, Doris and CONTI, Henrique. Can the Brazilian Mutual Agreement Procedure Legislation be
Effective Domestically? IBFD Bulletin for International Taxation, 2019 (Volume 73), No. 2, January, 2019.
39
ROCHA, Sergio André and SANTOS, Ramon Tomazela. A convenção Multilateral da OCDE e a Ação 15 do Projeto
BEPS. Revista Fórum de Direito Tributário, Belo Horizonte, ano 16, n 93, p. 167-197, May/June 2018.
40
(OECD (2019), Prevention of Treaty Abuse – Peer Review Report on Treaty Shopping: Inclusive Framework
org/10.1787/9789264312388-en, p. 28.
214
Gomes & Canen
although not signatory or party to the MLI, has concluded amending protocols to implement
the minimum standard. The referred report41 also makes it clear that, as an example on the
treaty with Argentina, Brazil is implementing the preamble statement and the PPT combined
with the LOB (this can also be seen in the updated protocol with Sweden as well as the new
treaties as per section 1.4 of this report). In its response to the questionnaire which originated
this report, Brazil indicated that it contacted all its treaty partners for bilateral negotiations
and it currently has several ongoing negotiations.
Note that there have been new treaties negotiated and signed bilaterally and Brazil has
been endeavouring to implement BEPS recommendations (see details in section 1.4).
New Treaties
Since the MLI, Brazil has signed treaties (not yet effective) with Switzerland, Singapore, United
Arab Emirates and Uruguay.
The interesting point about these countries is that Switzerland, Singapore and United
Arab Emirates have been considered tax havens and consequently part of the Brazilian
Blacklist (Normative Instruction 1037/2010, article 1) at some point in time. While the
United Arab Emirates remains blacklisted, Switzerland was removed in 2014 and Singapore
in 2017. However, some corporate structures of both Switzerland and Singapore are now part
of the Brazilian Grey list. Uruguayan “Sociedades Financeiras de Inversão (Safis)” incorporated
until 2010, are also part of the referred Grey list.
The main characteristics of the Brazilian new treaties is that they can be considered a
“mix” of the UN and OECD models. While they mostly follow the UN model, including a
specific article 12A regarding technical services, the preambles, PE and LOB clauses can be
said to follow the MLI orientation, as shown throughout this report.
Updated Treaties
Argentina (original treaty signed in 1980 – update signed in 2017 and in force in Brazil). Main
updates include:
–– Reduction on WHT rates for interest and royalties;
–– Required holding period for enjoying dividends taxation relief;
–– Limitation of Benefits (LoB) clauses, which are clearly aligned with BEPS aimed at
avoiding treaty-abuse practices and double non-taxation scenarios even though there
can be relaxation under certain specific facts and circumstances;
–– Recognition of treaty benefits when income is assigned to a PE located in a third country
but only to the extent that the taxation level in that third state is at least 60% of what
should have applied in the residency state;
–– Non-discrimination rules would not override domestic legislations regarding limitations
for deductibility of royalty payments made to a controlling company located in the other
contracting state;
41
Ob cit, p. 60.
215
Brazil
–– Use of the foreign tax credit method instead of the exemption method to offset foreign
tax payments.
–– A specific characteristic of this treaty is the definition of “technical assistance” and
“technical services,” in a specific clause which follows Brazilian internal legislation.
Sweden (original treaty signed in 1975 and update signed in 2019, not yet in force in Brazil).
Main updates include:
–– Replacement of the Preamble in line with BEPS standards – treaty shopping;
–– New provision to determinate the person’s residence – rule of transparency;
–– Possibility of determining residence through MAP (but there will be no exemption if
there is no agreement);
–– New rates for dividends, interest and royalties;
–– Inclusion of “beneficial ownership” rules for dividends;
–– Application of tax sparing method, although dividends paid in the other country may
be exempt;
–– Update of MAP provisions;
–– Update of exchange of information provisions in line with OECD standards of transparency;
–– Addition of an Entitlement to Benefits article including new rules of LOB (limitations on
benefits) such as “qualified persons” and “substantial activity”;
–– The main change is to the Interpretative Protocol annexed to the DTT where the
term “royalties” (under article 12) includes all payments relating to the provision of
technical services and technical assistance that involve technology transfers (as do most
Brazilian treaties but Sweden was an exception).
MLI provisions adopted in bilateral or regional treaty negotiations
Brazil has adopted the preamble of the MLI (as previously mentioned), as well as LOB
provisions (as per BEPS suggestions).
An example of the MLI´s influence is the difference between the LOB clauses in the
treaties with Turkey (2010) written in section 1.2. where apparently the application of the
LOB clause is not mandatory, and the renegotiated treaty with Argentina (2017), where the
wording leads to the interpretation that the clause application is mandatory.
Brazil has not signed the MLI. Therefore section 2.1 is not applicable.
Brazil is not (yet) a member of the OECD and has not signed the MLI. In our understanding,
BEPS reports are stronger and given more legal weight in Brazil than the OECD Commentaries,
due to the fact that Brazil has implemented various BEPS Actions such as CbC reporting,
216
Gomes & Canen
enacted internal legislation so that MAP can be used, and defined economic substance as per
Action 6 to avoid abuse. It is also important to state that Brazil is part of the BEPS Inclusive
Framework42 through which it has compromised to implement and apply BEPS. The country
is also part of the BEPS steering group.43
Brazil does not have much case-law regarding the application and interpretation of
double tax treaties.44 Most of the court cases involve allocation of taxing rights under article
7 and local CFC rules (and, until 2014, technical service taxation).Therefore, it is not possible to
affirm if tax treaty interpretation will change after the MLI, though, as shown in other sections
of this report, as of the early 21st century, business purpose should be a driver of transactions.
As previously mentioned, Brazil has been implementing BEPS Actions domestically though
it has not signed the MLI.
New issues brought by the MLI, can be exemplified by the PPT rule which specifically
addresses the prevention of treaty abuse, relying on the core concept of a ‘minimum
standard’ as envisaged by the Action 6 Final Report. We understand that there may be
different approaches considering the various means of interpretation of the PPT clause when
comparing common law and civil law jurisdictions.
A civil law approach such as Brazil will typically interpret the respective statute on the
grounds of its wording (literally), telos, historical background and systematic integration
within the tax system. Compared with a common law approach, it will usually refer to a
‘purposive interpretation’ of the respective statute.45
Brazil has also included LOB clauses in new and updated treaties in order to avoid tax
treaty abuse and, even though it has not signed the MLI, evidence of stricter rules for treaty
benefits can be seen in new treaties. An example is the restrict concept of tax resident in
its new treaty with the UAE (2018) and the recently signed (2018) Brazil – Uruguay and
Brazil – Singapore treaties which are extremely long and detailed (with approximately
nine paragraphs), but do not copy the Action 6 recommendations exactly. However, Brazil
continues without arbitration clauses in its treaties.
42
https://www.oecd.org/tax/beps/inclusive-framework-on-beps-composition.pdf.
43
https://www.oecd.org/tax/beps/steering-group-of-the-inclusive-framework-on-beps.pdf.
44
ROCHA, Sergio André, Interpretation of Double Taxation Conventions, Wolters Kluwer, 2009, p.156.
45
GOMES, Marcus Livio, The DNA of the Principal Purpose Test in the Multilateral Instrument, INTERTAX, Volume
47, Issue 12019 Kluwer Law International BV.
217
Canada
Branch reporters
Kim Brooks1
Shaira Nanji2
Jim Samuel3

This report consists of two parts. Part One canvasses the impact of the Multilateral Instrument
(MLI) and the BEPS Action Plan on Canada’s tax treaty network and its treaty-based doctrines
and practices. Part Two reviews the adoption of the MLI in Canadian legislation and discusses
related implementation issues for Canadian courts, practitioners and taxpayers.
Part One: The MLI’s impact on Canada’s approach to preventing base erosion and profit
shifting
Prior to ratifying the MLI, Canada relied on targeted domestic provisions, a domestic anti-
avoidance rule of general application, judicial doctrines, and anti-avoidance provisions in
treaties to counter abusive treaty shopping and cross-border planning. Due to Canada’s
limited success in addressing treaty shopping, the government contemplated enacting a
domestic anti-treaty shopping provision. In 2013, the government released a consultation
paper, surveying proposals addressing treaty shopping. However, the proposals were
ultimately shelved in anticipation of the OECD’s BEPS initiatives.
The MLI’s effect on Canada’s bilateral treaties will largely depend on the following: (1)
Canada’s adoption of the minimum standards for treaty shopping and dispute resolution;
(2) Canada’s list of reservations; and (3) the list of Covered Tax Agreements (CTAs) to which
Canada has signed. Upon signing the MLI, Canada announced that it would adopt the
minimum standards for treaty shopping using a two-fold approach: (1) the adoption of a
treaty preamble stating that the intention of the CTAs is the elimination of double taxation
without creating opportunities for non-taxation or reduced taxation; and (2) the adoption
of the PPT. Additionally, to meet the minimum standards for mutual agreement procedure,
Canada committed to mandatory binding arbitration.
Canada initially adopted a minimalistic approach to its commitments under the MLI by
registering reservations on all other provisions. However, in May 2018 Canada expressed its
intention to adopt four optional MLI provisions: articles 4, 8, 9 and 5. The first three articles
pertain to dual residence entities, dividend transfer transactions and capital gains from the
alienation of shares or entities deriving their value principally from immovable property.
Article 5 grants Canada’s treaty partners some flexibility in relieving double taxation.
1
Professor at the Schulich School of Law at Dalhousie University in Halifax, Canada and the Purdy Crawford Chair
in Business Law.
2
Senior manager with KPMG LLP and KPMG Law LLP in Calgary, Canada.
3
Partner with KPMG LLP’s international tax group in Calgary, Canada.
The reporters thank Riad Kherallah for the excellent research support.
IFA © 2020 219

Canada
The adoption of the MLI will, at least initially, potentially affect approximately 80%
of Canada’s tax treaties, but this percentage is anticipated to increase as other countries
become signatories to the MLI. To date, 75 of Canada’s 93 tax treaties have been listed as
CTAs. Bill C-82 (the legislation implementing the MLI in Canada) received royal assent on 21
June 2019, although the MLI will only become effective after Canada deposits its instrument
of ratification with the OECD and its effectiveness for a particular CTA will depend on when
Canada’s counterparty to that treaty deposits its own instrument of ratification with the OECD
and the options/reservations selected by that counterparty. The day upon which the MLI will
enter into effect for a particular CTA is different for withholding taxes as compared to other
types of taxes. Finally, the adoption of the MLI will influence most treaties currently being
negotiated or renegotiated by Canada.
Part Two: Implementation of the MLI
The MLI’s implementing legislation, Bill C-82, proceeded through Canada’s House of
Commons and Senate as well as related committees. Bill C-82 was passed and became law
on 21 June 2019. The Department of Finance plans to prepare unofficial synthesized versions
of CTAs. Those synthesized texts will not take precedence over the original enactment in the
event of any inconsistency.
Bill C-82 provides that where the implementing act and the MLI are inconsistent with
Canada’s other laws, the provisions of the implementing act and the MLI prevail. This high-
order ranking is displaced where the Income Tax Conventions Interpretation Act (ITCIA) applies.
The ITCIA permits Canada to override tax treaties by, among other provisions, allowing
the government to apply the general anti-avoidance rule (“GAAR”). Given the language in
subsection 33(2) of Canada’s Interpretation Act and since both the ITCIA and the MLI aim to alter
the bilateral income tax conventions, it is likely that the ITCIA applies to the MLI.
Canada will grapple with how the MLI should affect treaty interpretation and application.
However, given the amendments to the OECD commentaries, the courts will likely have regard
for the MLI changes. For example, the MLI will introduce language into Canada’s treaties
stating that while tax treaties are intended to avoid double taxation, they are not intended
to create non-taxation. This may influence future court decisions, whereas the courts have
previously stated, at least in in one Tax Court of Canada decision, that the preamble was too
vague to be relied on.
The most significant changes to the treaty network will revolve around the introduction
of the principal purposes test (PPT) and Canada’s commitment to mandatory arbitration.
Canada’s experience with the GAAR may shed some light on how the PPT will be applied;
however, there are variances in the provisions that should be noted. First, it is plausible that
the PPT will compel courts to look at the economic substance of a transaction, a step that
courts were largely unwilling to take while applying the GAAR. Second, the PPT may deny
the whole tax benefit while the GAAR permits the decision-maker to recharacterize the
transaction. Further issues include whether both the GAAR and the PPT should be applied,
and the ordering of application.
Finally, how Canada’s commitment to mandatory arbitration will affect dispute resolution
is unclear, given that Canada has limited previous experience with mandatory arbitration.
Canada has reserved on the issue of whether the PPT can be subject to mandatory arbitration;
as a result, it cannot.
220
Brooks, Nanji & Samuel
Treaty Network
1.1. Introduction
In Part One, we highlight certain domestic and treaty-based doctrines and practices adopted
by the Canada Revenue Agency (CRA) prior to signing the MLI, review the path to ratification
of the MLI in Canada and examine the direct and indirect impact of the MLI on Canada’s tax
treaty network.
1.2.1. Tax Treaties entered into before the MLI
Canada’s extensive treaty network includes tax treaties with all of its major trading partners.
At around the time of ratification of the MLI, Canada had 93 treaties in force, an additional
four signed treaties not yet in force, and was in the process of negotiating or renegotiating
eight treaties.4 In addition, Canada had 24 tax information exchange agreements, along with
six others that were either signed, but not yet in force, or under negotiation.5
Canada’s tax treaties generally follow a framework similar to the OECD Model Treaty6
with various modifications. The OECD Model Treaty is considered a crucial interpretive aid
in understanding the legal purpose and context of Canada’s tax treaties. In Crown Forest
Industries Ltd. v. Canada7 (“Crown Forest”), the Supreme Court of Canada noted that the OECD
Model Treaty and commentaries were of “high persuasive value.”
Despite Canada’s general adherence to the OECD Model Treaty, notable distinctions exist
which reflect domestic tax policies and better align Canada’s tax treaties with the Income Tax
Act of Canada(the “Act”).8 For example, although Canada’s treaties generally adopt similar
language and withholding tax rates with respect to articles 10 (dividends) and 11 (interest)
of the OECD Model Treaty, the language and rates in Canada’s treaties can differ from that
of the OECD Model Treaty, and from one treaty to another.
Although the OECD Model Treaty currently provides a maximum withholding tax rate of
15% for dividends and a reduced rate of 5% if the beneficial owner owns at least 25% of the
capital of the payer,9 Canada’s tax treaties reduce dividend withholding rates to 15%, 10%
or 5% contingent on different ownership threshold requirements. In certain cases, Canada
4
Current as of 24 July 2019. See Department of Finance (Canada), “International Tax Treaties, Status of
Negotiations.” Accessible at: https://www.fin.gc.ca/treaties-conventions/treatystatus_-eng.asp.
5
Current as of 24 July 2019. See Department of Finance (Canada), “Tax Information Exchange Agreements.”
Accessible at: https://www.fin.gc.ca/treaties-conventions/tieaaerf-eng.asp.
6
Organization for Economic Cooperation and Development, Model Tax Convention on Income and on Capital:
Condensed Version 2017 (Paris: OECD, November 2017). The prevailing version of this model treaty, as well as any
prior versions is individually and collectively referred to herein as the “OECD Model Treaty”.
7
[1995] 2 SCR 802, at para 62.
8
R.S.C., 1985, c. 1 (5th Supp.). All statutory references herein are to the Act unless otherwise indicated.
9
OECD Model Treaty, art. 10(2).
221
Canada
permits its treaty partner to impose higher withholding tax rates while restricting its own
rate to 15%.10
With respect to capital gains, in its treaties Canada typically exercises broad jurisdiction
over the taxation of the disposition of Canadian real property interests and reserves the
right to tax capital gains on the disposition of shares or other rights whose value is derived
principally from such real property interests. This approach aligns with Canada’s domestic
law which imposes tax on any non-resident of Canada that disposes of “taxable Canadian
property”,11 which very generally includes Canadian real and resource property, and shares
or other equity interests that derive more than half of their value from such properties at any
time during a 60 month look-back period. Unlike the OECD Model Treaty, certain treaties,
including Canada’s treaty with Germany, Netherlands and Luxembourg, carve out gains
on shares of a company if the underlying immoveable property was used to carry on the
company’s active business activities.
1.2.2. Domestic and treaty-based doctrines, provisions, and practices before the MLI
Canada relies on a variety of measures to combat potentially abusive treaty shopping and
cross-border tax planning. These measures include targeted domestic provisions, a domestic
anti-avoidance rule of general application, judicial doctrines, and anti-avoidance provisions
in treaties.
A variety of domestic provisions prevent the erosion of the Canadian tax base by non-
residents in specific circumstances. These include the thin-capitalization rules which limit the
deductibility of interest paid or payable to certain non-resident persons based on a 1.5:1 debt-
to-equity ratio,12 the foreign affiliate dumping rules which protect Canada from being used
as an intermediary jurisdiction by non-residents taking advantage of favourable dividend
treatment of active business income earned by foreign affiliates,13 and anti-conduit rules
that prevent back-to-back loan, rent/royalty and shareholder loan arrangements.14 The Act
also includes certain measures that are targeted at cross-border hybrid arrangements. For
example, the so-called “foreign tax credit generator” rules generally restrict taxpayers from
claiming foreign tax credits, or the equivalent thereof, in circumstances involving certain
types of hybrid arrangements.15 The CRA recently indicated, in an unusual fashion by posting
a notice to tax professionals that references OECD’s BEPS Action Item 2, that they plan to use
existing transfer pricing rules to re-characterize certain types of inbound hybrid financing
arrangements.16
In addition to specific targeted domestic anti-avoidance rules, the general anti-avoidance
rule17 (GAAR) is another measure relied on by the Canadian tax authorities. The GAAR, initially
enacted in 1988 without reference to tax treaties, was retroactively amended in 2005 to apply
10
Asymmetrical withholding rates, for example, apply in Canada’s treaties with Pakistan, Egypt and Thailand.
11
“Taxable Canadian property” defined in ss. 248(1).
12
Ss. 18(4).
13
S. 212.3.
14
Ss. 212(3.1) – 212(3.94) and ss. 15(2.16) – 15(2.192).
15
Ss. 126(4.11) – 126(4.13) and ss. 91(4.1) to 91(4.7).
16
CRA, “Notice to Tax Professionals” July 4, 2019.
17
S. 245.
222
to the misuse or abuse of tax treaties.18 The Income Tax Conventions Interpretations Act (ITCIA),19
which generally provides that the language in Canada’s tax treaties is to be interpreted in
accordance with domestic tax law as it evolves under the Act, was also amended retroactive
to 1988 to ensure that the GAAR applied to tax benefits arising under Canada’s tax treaties.
The GAAR may re-determine the income tax consequences of transaction(s) or series that
(i) result in a tax benefit, (ii) constitute an “avoidance transaction”, and (iii) result in abusive
tax avoidance. An assessment of whether a taxpayer has engaged in abusive tax avoidance
is considered the essence of the GAAR as it seeks to determine whether a transaction(s) that
result in a tax benefit and otherwise satisfy the technical provisions of the Act nonetheless
frustrate the object, spirit or purpose of those same technical provisions, or the Act as a
whole.20 A textual, contextual and purposive analysis of a provision of the Act, or a treaty, may
consider permissible extrinsic evidence (statutory or otherwise) of the underlying statutory
purpose or policy of a provision.21
The potential application of the GAAR to a treaty was first considered in MIL (Investments)
SA v. The Queen (“MIL”),22 where the court held that the GAAR did not apply to the corporate
migration of a holding company from the Cayman Islands to Luxembourg immediately before
the disposition of shares, thereby accessing benefits in Canada’s treaty with Luxembourg.
The court noted that the selection of a foreign jurisdiction by a taxpayer in order to benefit
from treaty exemptions was not abusive and Canada, if concerned with the particular tax
rates of its treaty partners, should renegotiate its treaties instead of relying on the GAAR.23
More recently, in Alta Energy Luxembourg S.A.R.L v. HMQ,24 (“Alta Energy”) the court held that
the GAAR did not apply to transactions undertaken by the taxpayer to benefit from the
exemption in Canada’s treaty with Luxembourg with regards to capital gains arising from
the sale of shares that derive their value principally from immoveable property in Canada, as
the “purpose of the carve-out is to attract foreign direct investments” in Canadian businesses.25
Given the lack of success in applying the GAAR, Canada has used other approaches, albeit,
with limited success. Although many of Canada’s treaties contain a short preamble that refers
to the “avoidance of double taxation and the prevention of fiscal evasion with respect to
taxes,” or include such reference in the title of the treaty itself, this language has not played
a significant role in influencing treaty interpretation. In Alta Energy, the court noted that
although the preamble was “indicative” of the general purpose of a treaty, it was not to be
considered as it remained “vague regarding the application of specific articles” of the treaty.26
The Canadian tax authorities have also attempted to rely on the doctrine of “beneficial
ownership” for purposes of determining whether a dividend, interest or royalty paid to a
non-resident of Canada is eligible for reduced withholding tax rates under an applicable
treaty. However, in both Canada v. Prévost Car Inc. (“Prévost”) 27 and Velcro Canada Inc. v. The
18
Budget Implementation Act, 2004, No. 2, S.C. 2005, Chap. 19, Secs. 52 and 60.
19
R.S.C. 1985, c. I-4.
20
The Queen v. Canada Trustco Mortgage Company, 2005 DTC 5523.
21
Copthorne Holdings Ltd. v. The Queen, [2011] 3 S.C.R. 721, at para. 91.
22
2006 TCC 460; affirmed 2007 FCA 236.
23
Ibid, at para 74.
24
2018 TCC 152. Appeal of the Tax Court of Canada decision filed in October 2018.
25
Ibid, at para 68.
26
Supra, n. 24 at para 77.
27
2009 FCA 57.
223
Canada
Queen28 the court held that the intermediary was the beneficial owner of the income received,
even though funds were subsequently paid by the intermediary to a related party resident
in another country.
The concept of residency has been successfully used by the CRA to limit access to treaty
benefits. As a result of the Supreme Court of Canada’s decision in Crown Forest, a company
is only eligible for benefits under a country’s tax treaty with Canada if it is liable to the
most comprehensive form of income taxation imposed in that country, thereby excluding
taxpayers from claiming residence in a particular country merely to obtain treaty benefits.29
Canada has also taken steps to negotiate various anti-avoidance provisions in certain
treaties. Most notably, Canada’s treaty with the US has a comprehensive limitation on
benefits (LOB) clause and unique provisions that address certain mismatches that arise from
hybrid entities.30 In treaties with other countries, Canada has chosen a different approach.
Canada’s treaties with Germany and Mexico, among others, adopt anti-treaty shopping
provisions that apply if the entity claiming the benefits is subject to more favourable tax
treatment in its country of residency by virtue of the entity being owned by residents of
another country.31 Other treaties, notably with Hong Kong and the UK, contain an anti-
avoidance “main purpose” test to deny reduced withholding rates in the articles pertaining
to dividends, interest and royalties. Several treaties deny treaty benefits to certain residents
already entitled to special tax benefits in their home jurisdiction.32
In 2013, the government contemplated the enactment of an anti-treaty shopping
provision in the Act and released a consultation paper which surveyed a range of approaches
to address the practice of treaty shopping. The paper noted that the courts require “clearer
legislative direction” that treaty shopping is “an improper use of Canada’s tax treaties.”33
Although the enactment of a general purpose-based anti-avoidance provision was proposed,34
the government subsequently announced that instead of releasing draft legislation it would
wait for anticipated OECD BEPS initiatives.35
Aside from treaty shopping, the CRA have also struggled in limiting non-residents
from perceived circumvention of the permanent establishment rules. New permanent
establishment provisions pertaining to services were introduced in a protocol to Canada’s
treaty with the US to override the court’s decision in The Queen v. Dudney.36 In that case, the
court held that a US resident independent contractor hired to provide services, did not have
a fixed place of business in Canada despite a significant and lengthy stay in Canada in order
to perform those services.
28
2012 TCC 57.
29
Supra, n. 7. See also residency issues with respect to trusts in Garron Family Trust v. R., 2012 1 SCR 520 and with
respect to US limited liability companies in TD Securities (USA) LLC v. the Queen, 2010 TCC 186.
30
See art. XXIX-A; art. IV(6) and (7); art. X(2)(a).
31
See art. 26(3) of Canada’s treaty with Mexico and art. 29(3) of Canada’s treaty with Germany.
32
See Canada’s treaty with Barbados which denies certain treaty benefits to persons or entities set up with special
tax benefits under certain domestic legislation. Similarly, Canada’s treaty with Luxembourg provides the treaty
does not apply to certain holding companies.
33
Department of Finance (Canada), “Consultation Paper on Treaty Shopping – the Problem and Possible Solutions”
(12 August 2013). Accessible at: https://www.fin.gc.ca/activty/consult/ts-cf-eng.asp.
34
Department of Finance (Canada), “2014 Budget, Budget Plan” 11 February 2014, at 349-57. Accessible at: https://
www.budget.gc.ca/2014/docs/plan/anx2-1-eng.html
35
Department of Finance (Canada), “Department of Finance Consults on Draft Tax Legislation” 29 August 2014.
Accessible at: https://www.fin.gc.ca/n14/14-113-eng.asp
36
2000 DTC 6169.
224
In terms of disputes, Canada’s treaties generally include provisions pertaining to mutual

agreement procedures (MAP) which are based on the OECD Model Treaty. The notification
requirements, time periods and other procedural aspects of MAP generally vary based on
negotiations with the other contracting state. Senior officials from the CRA form part of the
competent authority and have the authority to resolve such disputes.37
On 7 June 2017, Canada became a signatory to the MLI38 and announced that it intends to meet
the minimum standards for treaty shopping, by adopting the principal purpose test (“PPT”),
and dispute resolution, by adopting mandatory binding arbitration. Canada provisionally
registered reservations on all other provisions of the MLI.39 This minimalistic preliminary
approach to Canada’s commitments under the MLI was not surprising. The government
has noted on various occasions that a “country may expand the scope of its commitment
under the Multilateral Convention by withdrawing or limiting a reservation, but it cannot
subsequently narrow its commitment by adding or broadening a reservation at a later date.”40
In 2018, Bill C-82 – An Act to Implement a Multilateral Convention to Implement Tax Treaty
Related Measures to Prevent Base Erosion and Profit Shifting (Bill C-82) was introduced by the
Canadian government. On 28 May 2018, a Notice of Ways and Means Motion was tabled to
implement the MLI in full.41 At the same time, the Canadian government announced its
intention to remove certain initial reservations and adopt the optional provisions discussed in
part 1.3.3.42 In doing so, the government also reiterated its flexibility, if it so chooses, to adopt
one or more optional MLI provisions at a later date.43 In order for Bill C-82 to become law, it
passed three readings at both the House of Commons and the Senate. Bill C-82 ultimately
received royal assent on 21 June 2019.44
At the time of writing, an Order in Council is still required before Canada can deposit its
instrument of ratification with the OECD. Once this deposit is made, the MLI will enter into
force for Canada on the first day of the month following the third month after the deposit
37
CRA, “Guidance on Competent Authority Assistance under Canada’s Tax Conventions” CRA Document No. 71-17R5
(1 January 2005).
38
Department of Finance (Canada), “Canada Signs Agreement to Combat International Tax Avoidance” (7 June
2017). Accessible at: https://www.fin.gc.ca/n17/17-054-eng.asp.
39
See, for example, Department of Finance (Canada), “Backgrounder: Impact of Multilateral Convention to
Implement Tax.” (7 June 2017). Accessible at: https://www.canada.ca/en/department-finance/news/2017/06/
backgrounder_impactofmultilateralconventiontoimplementtaxtreatyr.html
40
Ibid.
41
Department of Finance (Canada), “Notice of Ways and Means Motion to Introduce an Act to Implement a Multilateral
Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.” (May 2018). Accessible
at: <
42
Department of Finance (Canada), “Backgrounder: The Next Step in the Fight Against Aggressive International
Tax Avoidance.” (28 May 2018). Accessible at: https://www.fin.gc.ca/n18/data/18-037_1-eng.asp
43
Ibid.
44
Parliament of Canada. House Government Bill C-82. Accessible at: See also Department of Finance (Canada),
“Next Steps to Fight Aggressive International Tax Avoidance Become Law” (21 June 2019). Accessible at: https://
www.fin.gc.ca/n19/19-071-eng.asp.
225
Canada
occurs. For example, if Canada deposits its instrument of ratification with the OECD in
September 2019, the MLI enters into force for each of Canada’s covered tax agreements (CTA)
on 1 January 2020. However, the day upon which the MLI will enter into effect for a particular
CTA of Canada depends upon whether, and when, the other party to that treaty deposits its
own instrument of ratification with the OECD. Furthermore, the day upon which the MLI will
enter into effect for a particular CTA is different for withholding taxes as compared to other
types of taxes. In general, the MLI will be effective for withholding taxes starting on the first
day of the next calendar year that begins on or after the year in which the MLI enters into
force for both parties to the CTA. For all other taxes, the MLI will generally be effective for
taxable periods that begin six months after the MLI enters into force for both parties to the
CTA. For example, the earliest dates that the MLI could potentially apply to a particular CTA of
Canada is 1 January 2020, in the case of withholding taxes, and a taxable period of a taxpayer
that begins on or after 1 July 2020, for all other taxes. This would be the case if, for example,
the MLI is already in force for the other party to the CTA and Canada makes its deposit with
the OECD before October 2019.
To date, the Canadian government has not publicly provided any details as to whether
it has assessed the potential impact of the MLI on tax administration, tax compliance, or
economic activity, and the quantum of any such impact. The government has, without
providing specifics, simply suggested that the MLI builds on actions already taken to
enhance the integrity of Canada’s tax system and help identify “billions of dollars” that can
be recovered.45
Upon becoming a signatory to the MLI, according to the Prevention of Treaty Abuse – Peer Review
Report on Treaty Shopping46 (the Peer Review Report), Canada provisionally listed as CTAs, 75
out of its 93 tax treaties in force. This represents approximately 80% of Canada’s tax treaty
network. Notable exclusions from Canada’s CTAs include Germany, Switzerland, and the
US. Canada has indicated that separate bilateral treaty negotiations with Switzerland and
Germany are underway, which is why those two treaties are excluded. The exclusion of the
US from Canada’s CTAs is not surprising as the US has stated it does not intend to sign the
MLI.47 No jurisdiction has raised any implementation concerns or issues about its agreements
with Canada.48
The government has not provided a detailed explanation as to why Canada’s other tax
treaties49 were not provisionally listed as CTAs. It is surmised that the reason for most, but
perhaps not all, of these exclusions is that there was no indication at the time Canada became
45
Department of Finance (Canada), “Canada Takes Next Step in Fight Against Aggressive International Tax
Avoidance.” 28 May 2018. Accessible at: https://www.fin.gc.ca/n18/18-037-eng.asp
46
OECD/G20 Base Erosion and Profit Shifting Project, “Prevention of Treaty Abuse – Peer Review Report on Treaty
Shopping” (14 February 142019). Accessible at: https://read.oecd-ilibrary.org/taxation/prevention-of-treaty-
abuse-peer-review-report-on-treaty-shopping_9789264312388-en#page68.
47
IBFD North America, “US Treasury Official Comments on US Decision not to sign MLI” 13 June 2017. Accessible at:
https://www.ibfd.org/sites/ibfd.org/files/content/pdf/tns_2017-06-13_us_1.pdf.
48
Supra, n. 46.
49
Tthese other treaties are with Algeria, Armenia, Ecuador, Guyana, Ivory Coast, Kuwait, Kyrgyzstan, Oman, Papua
New Guinea, Peru, Chinese Taipei, Trinidad and Tobago, United Arab Emirates, Uzbekistan and Venezuela.
226
a signatory to the MLI, that these other countries also planned to become signatories.50 As the
list of signatories to the MLI grows, it is reasonable to expect that Canada will list additional
tax treaties as CTAs.51
Once Canada deposits its instrument of ratification with the OECD, it appears that
approximately 80% of Canada’s provisional list of CTAs could potentially be initially affected.52
As mentioned earlier, the dates upon which the MLI will become effective for a particular
CTA depends upon when Canada’s counterparty to that treaty deposits its own instrument
of ratification with the OECD.53
Canada intends to meet the minimum standards for treaty shopping using a twofold
approach: (i) the adoption of a treaty preamble which states the intention of a CTA is the
elimination double taxation without creating opportunities for non-taxation or reduced
taxation through tax evasion or avoidance, and (ii) the adoption of a PPT to deny a treaty
benefit where one of the principal purposes of any arrangement or transaction was to obtain
that benefit.54
To the extent an existing CTA of Canada contains a provision similar to the PPT,55
Canada did not exercise its reservation right for that provision to apply in lieu of the PPT.
In adopting the PPT, Canada did not provide any other notifications except for a statement
that the adoption of the PPT is intended to be an interim measure and Canada will attempt
to negotiate the inclusion of a detailed LOB article in its tax treaties in addition to, or in
replacement of, the PPT. 56
To meet the minimum standards for MAP and to improve the resolution of treaty disputes,
50
At the time that Canada became a signatory to the MLI on 7 June 2017, there was no indication that Canada was
in separate bilateral treaty negotiations with any of these other countries. Since that time and as of 28 June 2019,
Papua New Guinea, Peru and United Arab Emirates have all become signatories to the MLI, and Algeria and Oman
have indicated that they plan to become signatories. Although Armenia and Kuwait became signatories to the
MLI on the same date as Canada, these treaties were still not listed as CTAs by Canada.
51
An official with the Department of Finance (Canada) indicated that it is expected that the list of CTAs will grow
to 84. See House of Commons, Standing Committee on Finance, Evidence, 42-1, No 195 (5 February 2019) at See
the minutes from the Standing Committee on Finance meeting dated 5 February 2019 at 1129 to 1135 (Stephanie
Smith) https://www.ourcommons.ca/DocumentViewer/en/42-1/FINA/meeting-195/evidence.
52
As of the time of writing this report, countries Canada listed as CTAs that have not signed the MLI include
Azerbaijan, Bangladesh, Brazil, Dominican Republic, Jordan, Kenya, Moldova, Mongolia, Philippines, Sri Lanka,
Tanzania, Thailand, Vietnam, Zambia, and Zimbabwe. Kenya and Thailand have expressed an intent to sign
the MLI. See OECD, “Signatories and Parties to the Multilateral Convention to Implement Tax Treaty Related Measures
to Prevent Base Erosion and Profit Shifting” (status as of 28 June 2019). Accessible at: http://www.oecd.org/tax/
treaties/beps-mli-signatories-and-parties.pdf
53
As at 28 June 2019, less than one third of the counterparties to Canada’s CTAs had deposited their instruments
of ratification with the OECD.
54
Supra, n. 46.
55
Department of Foreign Affairs, Trade and Development. “Status of List of Reservations and Notifications at
the Time of Signature” (30 May 2017). Accessible at: http://www.oecd.org/tax/treaties/beps-mli-position-
canada.pdf. According to the list of reservations and notifications provided by Canada to the OECD at the time
of signature, these treaties include Chile, Colombia, Estonia, Hong Kong, Israel, Kazakhstan, Latvia, Lithuania,
Mexico, New Zealand, Poland, Ukraine and the United Kingdom.
56
Ibid.
227
Canada
Canada committed to mandatory binding arbitration. This type of arbitration is substantially

similar to that which is currently found in Canada’s treaty with the US.
In May 2018, Canada expressed its intention to adopt four optional MLI provisions. The
first three pertain to dual resident entities (MLI article 4), dividend transfer transactions (MLI
article 8), and capital gains from the alienation of shares or interests of entities deriving their
value principally from immovable property (MLI article 9). The government indicated that the
reason for the adoption of these three provisions was to “foreclose opportunities for taxpayers
to avoid or reduce taxation in inappropriate circumstances.”57 The fourth optional provision
(MLI article 5) allows certain of Canada’s treaty partners to move from an exemption system
to a foreign tax credit system to relieve double taxation.
Aside from announcing an intention to adopt these optional provisions upon ratification
of the MLI, no other details were provided by the government.58 These optional provisions
are only effective for a particular CTA to the extent that Canada’s treaty partner chooses to
adopt the same provision.
MLI article 4 resolves dual resident entity cases such that residence for persons other
than individuals is determined by the applicable competent authorities after taking
into consideration various contextual factors including place of effective management,
incorporation or constitution. Not only is such a provision relevant in resolving dual residency
cases to avoid double taxation, it also prevents entities from manipulating their tax residence
to inappropriately avoid taxation. As a similar type of residency tie-breaker provision already
exists in many of Canada’s tax treaties, the adoption of this provision might not significantly
impact those treaties that are also CTAs. However, to the extent that a particular CTA
already has an “objective” tie-breaker provision (such as place of effective management
or incorporation) for determining residency of a company, the relative certainty provided
by determining residency of that company using a single “objective” criteria, without the
involvement of competent authorities, might no longer be available.
MLI article 8 requires a non-resident corporate shareholder to hold shares for a minimum
of 365 days in order to access preferential treaty reduced dividend withholding tax rates
that are dependent upon that shareholder meeting certain ownership thresholds in the
payer of the dividend. Canada’s tax treaties typically provide for a reduced withholding
tax rate, often at 5% and without regard to a holding period requirement, if the beneficial
owner of the dividend meets certain ownership thresholds in respect of the company that is
paying the dividend. For purposes of this holding period test, changes of ownership resulting
directly from corporate reorganizations involving either the payer or the recipient of the
dividend are not taken into account. Interestingly, the holding period can straddle the date
of the dividend payment; as such, it seems that a corporate taxpayer can benefit from lower
withholding rates even if the minimum percentage of shares is acquired the day before the
dividend is paid provided the shares are held for the required ownership period thereafter.
Such a scenario might cause tax compliance issues given that Canadian withholding tax on
dividends is due on the 15th of the month following the dividend payment. In the absence
of any administrative or statutory relief that might be provided by the government, it would
seem that the dividend payer will need to decide whether to withhold at the (i) lower rate
57
Supra, n. 42.
58
Selections may be made by a country in respect of the application of each of these articles. For example, MLI art.
5 contains three options. Canada has not yet indicated which option it plans to select.
228
and risk exposure if the holding period test is not met, or, (ii) higher rate and require the
shareholder to apply for a refund of the excess withholding amounts.59
MLI article 9 imposes a 365-day look-back period test to determine whether shares, or
other types of equity interests such as those in partnerships or trusts, are considered to derive
their value principally from immovable property situated in the source country. This provision
broadly aligns with Canada’s domestic tax rules pertaining to the taxation of gains arising on
the disposition of “taxable Canadian property”.60 The capital gains articles in Canada’s existing
treaties typically do not contain a look-back period.
Given that the MLI only recently obtained royal assent, it remains to be seen what impact it
will have on Canada’s tax treaty negotiations. As of 24 July 2019, Canada was currently in the
process of negotiating treaties with eight other contracting states – Australia, Brazil, People’s
Rep. of China, Germany, Malaysia, Netherlands, San Marino and Switzerland.61 Since the
commencement of bilateral negotiations with Germany and Switzerland were announced
at the same time as the signing of the MLI, and both countries are signatories to the MLI, it
is safe to assume that the MLI will influence negotiations with these countries. Further, as
Australia, People’s Rep. of China, Malaysia, Netherlands and San Marino are also signatories
to the MLI, it is expected that the MLI will impact ongoing negotiations with these countries.
Given that Canada has indicated its intention to seek the inclusion of a detailed LOB article in
its tax treaties, it seems reasonable to expect such an article would be included in any treaty
negotiated or re-negotiated by Canada.
Part Two: Practical Implementation of the Provisions the MLI
In part two II, we highlight the degree to which Canada’s Parliament considered the content
of the MLI as part of its enacting process, discuss the legal authority of any synthesized texts
that might be produced as part of the MLI’s implementation, and address the possibility of
domestic unilateral treaty overrides.
As noted in part 1.3.1, in order for a bill to become law in Canada it must generally pass through
three readings at both the House of Commons and the Senate. It may also be referred to a
committee in both houses. Bill C-82 proceeded through this standard process.
Bill C-82 was subject to limited discussion at the House of Commons. In this regard Bill
59
Matias Milet et al., “Canada & The MLI: A Review and Update” International Tax Report No: 100 (June 2018).
60
Supra, n. 11.
61
Supra, n. 4.
229
Canada
C-82 was introduced at the House of Commons second reading by a representative of the
Minister of Finance and it was given context by the Parliamentary Secretary to the Minister
of Finance. That context focused on the steps the government has taken to ensure a robust
middle class and tax fairness. The oral introduction offered no additional insight into the
legislative understanding of the role and function of the MLI or its implementation.62 The
discussion that followed, which took place in two separate sittings, did not highlight the tax
topics covered by the MLI and instead ranged more broadly around issues of domestic tax
policy and tax fairness.63
The House of Commons’ Standing Committee on Finance considered Bill C-82 in four
separate sittings. It heard evidence from representatives of the Department of Finance
(Canada), and Tax Legislation Division and witnesses invited from the private and non-
governmental sectors.64 At Committee, the process for Canada to opt in to additional articles
was explained to committee members: Canada does not need to return to Parliament
to withdraw reservations on the MLI. Instead, Cabinet, by order in council, may make
those changes.65 Some specific issues around which provisions should be opted into (or
reservations removed) were discussed. Committee members asked questions about and
heard submissions on Canada’s failure to remove the reservations from articles 3, 7(4), 10, 11,
and 12.66 Ultimately, the Committee is responsible for reviewing Bill C-82 clause-by-clause,
but they only examined the clauses of the implementing legislation, not the provisions of
the MLI itself (which is appended as a schedule).67
After review at the Standing Committee on Finance, Bill C-82 returned to the House of
Commons for third reading. Again, Bill C-82 was presented with a lofty introduction focused
on tax fairness and with almost no discussion of the details of the MLI.68 The House passed
Bill C-82.
At that stage, debate at Senate commenced, in the same format, with fewer interventions.
The first and second readings at Senate were relatively brief and primarily focused on
62
“Bill C-82, An Act to implement a multilateral convention to implement tax treaty related measures to prevent
base erosion and profit shifting”, 2nd reading, House of Commons Debates, 42-1, No 328 (28 September 2018) at
22008 (Jennifer O’Connell).
63
It would be hard to find much in the second reading in the House of Commons to support an understanding of
Parliament’s intent and certainly parliamentarians offered no serious analysis of the provisions within the MLI
itself.
64
House of Commons, Report 28: Bill C-82, An Act to implement a multilateral convention to implement tax treaty related
measures to prevent base erosion and profit shifting (1 March 2019) (Chair: Wayne Easter).
65
House of Commons, Standing Committee on Finance, Evidence, 42-1, No 195 (5 February 2019) at 12:00 (Stephanie
Smith).
66
See House of Commons, Standing Committee on Finance, Evidence, 42-1, No 195 (5 February 2019) at 11:20
(Stephanie Smith); House of Commons, Standing Committee on Finance, Evidence, 42-1, No 196 (7 February 2019)
at 11:10 (Patrick Marley); House of Commons, Standing Committee on Finance, Evidence, 42-1, No 195 (5 February
2019) at 11:55 (Tom Kmiec); See also House of Commons, Standing Committee on Finance, Evidence, 42-1, No 196
(7 February 2019) at 11:25 (Tom Kmiec).
67
House of Commons, Standing Committee on Finance, Evidence, 42-1, No 199 (28 February 2019) at 12:40 (Wayne
Easter).
68
base erosion and profit shifting”, 3rd reading, House of Commons Debates, 42-1, No 400 (8 April 2019); and “Bill
C-82, An Act to implement a multilateral convention to implement tax treaty related measures to prevent base
erosion and profit shifting”, 3rd reading, House of Commons Debates, 42-1, No 408 (2 May 2019).
230
high-level discussion of the advantage of tax compliance and multilateral initiatives.69 As

occurred in the House of Commons, Senators urged their standing committee to conduct
a careful review of the MLI’s provisions. The Senate Standing Committee on Foreign Affairs
and International Trade considered Bill C-82 at two committee meetings. The parties who
appeared before the Senate Standing Committee were similar to those who appeared before
the House of Commons Committee. The Senate discussions were more focused on the content
of Bill C-82, including the provisions of the MLI to which Canada had opted in, than the
discussions in the House Committee. Ultimately, the Senate Committee undertook a clause
by clause review (dealing with the whole schedule as one clause) of Bill C-82, recommending
no changes,70 and Senate passed it.71
A review of the MLI’s process through the Canadian parliamentary process reveals that
it was subject to limited parliamentary scrutiny.72 Parliament recommended no changes
to the various MLI clauses to which the Department of Finance had elected to opt into or
retain reservations on and no interest was expressed in Bill C-82’s implementation steps or
in reviewing the removal of any reservations in the future.
It appears Canada will prepare a synthesis of the tax treaties to which the MLI applies,
although there was initially some uncertainty.73 No legislation or administrative practice
requires consolidations or synthesized treaties to be produced. However, the Department
of Finance (Canada) noted at the 2019 meeting of the International Fiscal Association that
synthetic unofficial treaty texts were being prepared.74
Synthetized versions of tax treaties will be unofficial, which means that they will have
no legal precedential value. From time to time, Canada produces statutory consolidations. A
Legislation Revision and Consolidation Act governs inconsistencies between original statutes,
amendments, and consolidations. It provides that “[i]n the event of an inconsistency between
a consolidated statute published by the Minister under this Act and the original statute or
a subsequent amendment…. The original statute or amendment prevails to the extent of
the inconsistency.”75 So, even if an official synthesized treaty was prepared, it seems safe to
69
See first reading: “Bill C-82, An Act to implement a multilateral convention to implement tax treaty related
measures to prevent base erosion and profit shifting”, 1st reading, Debates of the Senate, 42-1, No 283 (2 May
2019); second reading part 1: “Bill C-82, An Act to implement a multilateral convention to implement tax treaty
related measures to prevent base erosion and profit shifting”, 2nd reading, Debates of the Senate, 42-1, No 286 (9
May 2019); Second reading part 2: “Bill C-82, An Act to implement a multilateral convention to implement tax
treaty related measures to prevent base erosion and profit shifting”, 2nd reading, Debates of the Senate, 42-1, No
290 (16 May 2019).
70
Debates of the Senate, The Standing Senate Committee on Foreign Affairs and International Trade, Evidence,
42-1, No 142 (30 May 2019).
71
base erosion and profit shifting”, 3rd reading, Debates of the Senate, 42-1, No 304 (17 June 2019).
72
This is not atypical. See Allison Christians, “While Parliament Sleeps: Tax Treaty Practice in Canada” (2016) Social
Science Research Network, online: <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2780874>.
73
Laura Gheorghiu, Patrick Marley & Stephanie Smith, “The Multilateral Instrument: A Canadian Perspective”
(Conference Report delivered at the Canadian Tax Foundation 2017 Conference, Toronto, 30 November 2017) at
15:10.
74
See Neal Armstrong, Summaries of 14 May 2019 IFA conference – Stephanie Smith on MLI – GAAR and PPT under
Treaties – MLI, available at https://taxinterpretations.com/ content/528917. We do not know whether the OECD
“Guidance to the development of synthesized text” will influence the Department’s approach to the production
of these synthesized treaties.
75
Legislation Revision and Consolidation Act, RSC 1985, c S-20, s 31(2).
231
Canada
assume that it would not take precedence over the original enactment in the event of an
inconsistency.
Canada has a dualist system: generally speaking, treaties need to be formally enacted in
national law to be enforceable. Bill C-82 provides that where the implementing act and the
MLI are inconsistent with Canada’s other law, the provisions of the implementing act and
the MLI prevail.76
However, Bill C-82 also makes clear that this higher-order ranking is displaced when the
ITCIA applies.77 When the ITCIA applies, those provisions prevail as the ITCIA is designed to
enable override of Canada’s tax treaties. It does so in a few areas, including that it allows the
Canadian government to apply the GAAR, notwithstanding the provisions of a convention,78
as discussed above.
In this section we anticipate some treaty interpretation issues that may arise when cases
that apply the provisions of the MLI reach Canadian courts. Because the MLI has not yet been
interpreted by the courts or the CRA, we begin with a general review of Canada’s approach
to treaty interpretation and reflect on whether the MLI may alter that approach. We then
discuss whether Canada may use aspects of the MLI in interpreting provisions of treaties
that pre-dated its enactment.
The Vienna Convention of the Law of Treaties requires nations to act in accordance with
the principle of pacta sunt servanda.79 The interpretive principles reflected in the Vienna
Convention have generally been endorsed by Canadian courts.80 As discussed in part 1.2.1
of this report, the leading case on treaty interpretation in Canada continues to be the 1995
Supreme Court of Canada decision in Crown Forest, which confirmed that the OECD Model
Treaty and commentary have high persuasive value in interpreting treaties and cases from
other jurisdictions may offer useful guidance.81
Both the courts and the CRA rely on the OECD Model Treaty commentary and other
76
An Act to implement a multilateral convention to implement tax treaty related measures to prevent base erosion and profit
shifting, SC 2019, c 12, s 4(1).
77
Ibid, s 4(2).
78
Ibid, s 4.1. See also Antle v The Queen, 2009 TCC 465 at para 86, 2009 DTC 1305, aff’d 2010 FCA 280, 2010 DTC 5172.
79
The Vienna Convention on the Law of Treaties, 23 May 1969, 1155 UNTS 331 arts. 26-27 (entered into force 27 January
1980) [VCLT].
80
Coblentz v Canada, 96 DTC 6531 at para 11, [1996] FCJ No 1252.
81
Supra, n. 7.
232
OECD documents in assessing the appropriate application of Canada’s treaties. Canadian

courts have relied on OECD reports and commentaries produced after the date a treaty is
entered into, although in both cases with caveats. In Prévost, the Federal Court of Appeal was
willing to consider the OECD Report, “Double Taxation Conventions and the Use of Conduit
Companies” (published in 1986) as helpful as well as the 2003 amendments to the 1977 model
commentary. But the commentary was only seen as helpful “insofar as [it was] eliciting, rather
than contradicting, views previously expressed.”82 Courts do not offer rigid guidance on the
relative weighting of some types of administrative guidance against other types, although
one expects that the OECD Model Treaty commentary on provisions introduced through
the MLI is likely to be given greater weight (and attention) than the preceding BEPS reports.
At an IFA (Canada) meeting, the CRA was asked to comment on the MLI. Echoing the views
of the courts in its response, the CRA noted that the Supreme Court of Canada has observed
that the OECD Model Treaty, “has world-wide recognition as a basic document of reference
in the negotiation, application and interpretation of multilateral or bilateral tax conventions”
and is “of high persuasive value”.83 Neither the courts nor the CRA view OECD commentaries
or guidelines as binding.84
As already discussed, ITCIA applies to conventions entered into between Canada and
another state. There might be some modest initial dispute about whether this Act applies
to the MLI given the language in section 2 that it applies to “any convention or agreement
between Canada and another state”; however, section 33(2) of Canada’s Interpretation Act
confirms that “words in the singular include the plural”.85 Additionally, since the aim of the
MLI is to alter the bilateral income tax conventions, it seems aligned with the purpose of the
ITCIA to interpret it to apply also to the MLI.
Canada is a bijural and bilingual country, which has ramifications for interpretation.86
Canada’s constitution requires that legislation be printed and published in French and
English.87 Each version is considered equally authentic, and discrepancies must be resolved
in a way that makes the two versions compatible.88 This approach is often referred to as the
shared meaning rule, and for a time it was ensconced in legislation.89 The MLI, which has
both an official English and French language version, will likely be interpreted in the same
manner as other bilingual tax legislation.
There is some chance that the change to the preamble of the covered agreements may
influence the interpretation of Canada’s tax treaties.90 Although the Supreme Court of Canada
82
Supra, n. 27 at para 12.
83
CRA, “IFA 2018 Q2 Principal Purpose Test in MLI”, (CRA roundtable delivered at the IFA 2018 International Tax
Conference Canada, Toronto, 16 May 2018), 2018-0749181C6 Taxnet Pro. Citing Her Majesty the Queen v. Crown
Forest Industries Limited and The Government of the United States of America (Intervener). See Crown Forest at
para 62.
84
See e.g. Canada v GlaxoSmithKline Inc, 2012 SCC 52 at para 20, [2012] 3 SCR 3.
85
Interpretation Act, RSC 1985, c I-21, s 33(2).
86
See Michel Bastarache et al, The Law of Bilingual Interpretation (Markham, ON: LexisNexis Canada Inc, 2008).
87
Constitution Act, 1867 (UK), 30 & 31 Vict., c 3, s 133 reprinted in RSC 1985, Appendix II, No 5; Constitution Act, 1982,
s 18, being Schedule B to the Canada Act 1982 (UK), 1982, c 11.
88
See Reference Re Manitoba Language Rights, [1985] 1 SCR 721 at 774-775, [1985] SCJ No 36; See also Constitution Act,
1982, s 18, being Schedule B to the Canada Act 1982 (UK), 1982, c 11.
89
Official Languages Act, RSC 1970, c O-2, as amended by Official Languages Act, SC 1988, c 38, s 110.
90
As the Supreme Court of Canada instructed in Crown Forest at para 29. (“In interpreting a treaty, the paramount
goal is to find the meaning of the words in question. This process involves looking to the language used and the
intentions of the parties.”)
233
Canada
has urged Canadian courts to read treaties in a purposive way, arguably some courts have
been inclined to interpret taxpayer’s transactions and the application of the treaty network
in a more literal fashion.91
To the extent that there may have been some uncertainty about the purposes of tax
treaties, the MLI’s preamble makes it clear that treaties are intended to eliminate double
taxation without creating opportunities for non-taxation or reduced taxation through tax
evasion or avoidance.92 The revised preamble may offer more concrete interpretive guidance
to courts on the purpose of tax treaties and may result in decisions that focus more on the
purpose of the treaties than on a technical application of those treaties to the facts of the
case before the court. Certainly, government officials articulated this purpose clearly in their
discussion with Parliament:
The inclusion of a principal purpose test in all of our tax treaties, in addition to the explicit
preamble language that will now be included in all of our treaties through the MLI, says
explicitly that while tax treaties are intended to avoid double taxation, they are not
intended to create non-taxation. The parties do not intend there to be treaty abuse.93
Canada has a history of grappling with how legal developments after the enactment of a
treaty should affect the treaty’s interpretation and application. Canada’s ITCIA was enacted
in response to a Supreme Court of Canada decision that held the Canada-Germany tax treaty
required a static definition of domestic terms in the treaty because an ambulatory definition
would result in a tax treaty override.94 Section 3 of the ITCIA requires courts to interpret terms
that require review of Canadian tax law to be interpreted in an ambulatory way.95
The issue of whether later treaty amendments (through the MLI) should affect either
treaties that are unaffected by the amendment (for example, because they are not CTAs)
or because the transaction in issue arose before the MLI, is not clear. Given the approach to
amendments to the OECD commentaries, we anticipate that the courts may have regard for
the MLI changes to the extent that they are seen to reflect the intentions of the drafters and
purposes of the treaties prior to the MLI’s introduction.
In this section, we anticipate issues related to how taxpayers and tax administration will
respond to the changes enacted with the MLI, focusing particularly on the expected effects
of the introduction of the PPT and Canada’s commitment to mandatory arbitration. To date,
the CRA has not begun reassessing taxpayers under the MLI provisions.
91
See e.g. Canada v Sommerer, 2012 FCA 207, [2012] DTC 5126.
92
Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, 7 June
2017, art. 6(1) (accession by Canada 21 June 2019).
93
See the testimony of Ms. Smith, Senior Director, Tax Treaties, Tax Legislation Division: Debates of the Senate, The
Standing Senate Committee on Foreign Affairs and International Trade, Evidence, 42-1, (29 May 2019) (Stephanie
Smith).
94
R v Melford Developments Inc, [1982] 2 SCR 504, [1982] 2 SCJ No 76.
95
Supra, n. 19.
234
Section 4.1 of the ITCIA enables domestic tax law (including Canada’s GAAR) to apply
to any benefit provided under a convention, notwithstanding its provisions. There are two
important consequences of the application of the GAAR to Canada’s tax treaties in the light
of the anticipated additional application of the PPT. First, Canada has some experience with
applying the GAAR to tax treaties. That experience may serve as at least some indication of
how the PPT will be applied. Second, practitioners have expressed concerns about how the
two anti-avoidance rules might interact, given their differences.
Canada’s previous experience of applying the GAAR to tax treaties might shed some light
on the application of the PPT.96 Although the Canadian legislature took the step of expressly
enabling the application of the GAAR to benefits under tax conventions, Canadian courts
have been reluctant to apply the GAAR, as discussed in part 1.2.2 above. Notably, in MIL, the
court suggested that “the shopping or selection of a treaty to minimize tax on its own cannot
be viewed as abusive. Instead, it is the use of the selected treaty that must be examined.”97
One question is whether the clear statements from the OECD, including through the MLI’s
required preamble and related commentary, are sufficient to displace Canadian courts’
relative unwillingness to apply the GAAR to treaty shopping.
As a separate matter, practitioners (and decision makers) have to grapple with the
variances between the GAAR and the PPT that might result in their different application,
and some have requested additional guidance from the Canadian government.98 Professor
David Duff, general reporter for this subject, has authored an extended analysis of the
potential application of the PPT in the Canadian context.99 In his work, Duff identifies aspects
of the GAAR and PPT that differ. Notably, the GAAR applies unless the transactions were
arranged “primarily” for bona fide purposes other than to obtain the tax benefit while the
PPT applies only if obtaining a treaty benefit was one of the principal purposes. Second, the
onus differs. The onus is on the taxpayer in an application of the PPT and on the government
in the application of the GAAR.100 Both the GAAR and the PPT require identifying the object
and purpose of the legal framework in issue; although courts will need to grapple with the
difference between Canada’s income tax law and the object and purpose of the tax treaty in
issue. Finally, both the GAAR and the PPT require the decision-maker to assess whether the
granting of the benefit is in accordance with the object and purpose, although the GAAR test
requires an additional consideration of abuse.
Although the OECD suggests that domestic anti-avoidance rules will generally apply in
the same circumstances as the PPT,101 the variances between the PPT and Canada’s GAAR
96
As Senator Thanh Hai Ngo noted in his remarks to Senate, “Honourable senators, I believe the purpose of the
principal purpose test is similar to that of the general anti-avoidance rule already included in the Income Tax
Act and with which Canadian taxpayers are already comfortable when it comes to its implementation.” – Bill
C-82, An Act to implement a multilateral convention to implement tax treaty related measures to prevent base
erosion and profit shifting”, 3rd reading, Debates of the Senate, 42-1, No 304 (17 June 2019) at 8651 (Hon. Thanh
Hai Ngo).
97
Supra, n. 22.
98
See e.g. the testimony of Jared Mackey, a tax associate at Bennett Jones LLP: Debates of the Senate, The Standing
Senate Committee on Foreign Affairs and International Trade, Evidence, 42-1, (29 May 2019) (Jared Mackey).
99
See David G Duff, “International Tax Planning: Tax Treaty Abuse And The Principal Purpose Test-Part 1” (2018)
66:3 Can Tax J 619 [Duff, “Part 1”]; See also David G Duff, “International Tax Planning: Tax Treaty Abuse And The
Principal Purpose Test-Part II (2018) 66:4 Can Tax J 947 [Duff, “Part 2”].
100
Although some suggest that the onus under the PPT is unclear. See e.g. House of Commons, Standing Committee
on Finance, Evidence, 42-1, No 196 (7 February 2019) at 12:00 (Patrick Marley).
101
OECD Model Tax Convention & Commentary, para 77 of the commentary on art. 1.
235
Canada
suggest that there will be variances in their interpretation (and application) by Canadian
courts. It seems plausible that the proposed PPT will compel courts to look at the economic
substance of transactions, a step they have been reluctant to take in applying the GAAR.
Professor Duff argues that the application of the PPT, “depends on an implicit economic
substance criterion that distinguishes genuine cross-border economic activities for which
treaty benefits are properly granted from tax-motivated transactions or arrangements with
little or no economic substance for which treaty benefits may be denied.”102 Government
officials have also suggested that they believe treaty shopping cases will be resolved
differently under the PPT.103
The ordering of the application of the GAAR and the PPT as well as whether they might
be applied in conflicting ways is also actively debated. Duff suggests that the GAAR should be
applied first because it may result in the recharacterization of transactions that will affect the
PPT analysis.104 Brian Arnold argues that the ITCIA gives the GAAR priority over any conflicting
provisions in the treaty, including the PPT, and resolves inconsistencies by deferral to the role
of the GAAR.105 Stephanie Smith, Senior Director, Tax Treaties Section, has suggested that the
appropriate ordering is the PPT first, GAAR second.106
Practitioners have expressed some anxiety about whether the PPT will provide the CRA
with additional assessing powers in a manner that might increase uncertainty. For example,
Osler, Hoskin & Harcourt LLP released a client update that argues the PPT and GAAR should
never assess a taxpayer under both the PPT and the GAAR (on the grounds that if the PPT
applies then there would be no benefit under the relevant treaty and so GAAR should not
apply and that if the PPT does not apply, then there is no basis for the CRA or courts to
conclude there was an avoidance transaction).107 Ultimately these are matters that will need
to be resolved before the courts.
There may be differences in the GAAR and the PPT in terms of the consequences of their
applications. For example, Canada has registered a reservation on article 7(4), which permits
a moderated reduction of claimed treaty benefits in the event the PPT is applied.108 As a
result, the consequence of the application of the PPT is “all or nothing” – in the sense that the
treaty benefit is denied. In contrast, when the GAAR applies, the decision-maker is allowed
to postulate a reasonable alternative transaction.
102
Duff, “Part 1”, Supra note 99 at 1000.
103
See e.g. House of Commons, Standing Committee on Finance, Evidence, 42-1, No 195 (5 February 2019) at 12:05
(Stephanie Smith). (“I think one of the things that we can do is to provide some numbers with respect to a
couple of recent cases the government lost in respect of treaty shopping, and cases for which we would hope
that the anti-abuse rule in this treaty would be applied by Canadian courts.”) and Trevor McGowan (noting that
he considered MIL as a case where the PPT might have been applied) at 1210.
104
Duff, “Part 2”, Supra note 99 at 960.
105
Brian Arnold, “Canada Adopts the Multilateral Legal Instrument” (2019) The Arnold Report, posting 152.
106
See Neal Armstrong, Summaries of 14 May 2019 IFA conference – Stephanie Smith on MLI – GAAR and PPT under
Treaties – MLI, available at https://taxinterpretations.com/ content/528917.
107
Osler, Hoskin & Harcourt LLP, “New PPT rule in the OECD’s Multilateral Instrument to displace Canadian GAAR?”
(27 November 2017), online: <https://www.osler.com/en/resources/regulations/2017/new-ppt-rule-in-the-
oecd-s-multilateral-instrument>.
108
Witnesses at the committee level of both the House of Commons and Senate raised 7(4) and urged the
government to consider removing their reservation on it. See e.g. House of Commons, Standing Committee on
Finance, Evidence, 42-1, No 196 (7 February 2019) at 11:10 (Patrick Marley); and at Senate Laura Gheorghiu (Gowling
WLG (Canada) LLP) – See e.g. Debates of the Senate, The Standing Senate Committee on Foreign Affairs and
International Trade, Evidence, 42-1, (29 May 2019) (Laura Gheorghiu).
236
At the date of writing, since the MLI was only recently granted Royal Assent, and is not
yet in force, there is no reported experience with how practitioners are advising clients about
the application of the PPT in tax planning or CRA assessment. Nevertheless, it is clear that
Canadian tax practitioners are attentive to the introduction of the MLI, raising concerns about
its application,109 and advising clients on the implications of the MLI for tax planning more
generally.110 The CRA has invited taxpayers to submit advanced income tax ruling applications
to pre-determine whether the PPT might be applicable.111
Whether additional guidance will be available for taxpayers in advance of early
assessments under the PPT is unclear, and the process for reviewing proposed reassessments
within the CRA has not been articulated. In 2017, the CRA suggested that a separate
committee might be a useful model to review the application of the PPT to transactions and
to promote consistency.112 This mirrors the CRA’s approach to the application of the GAAR,
which is reviewed by a specialized GAAR Committee.
In addition to the introduction of the PPT, the availability of mandatory arbitration under
some tax treaties has been of interest to tax practitioners. Before the MLI, Canada had two tax
treaties that included mandatory arbitration clauses (with the US and the UK).113 Canada has
opted into the MLI arbitration provisions and the default “final offer” approach to arbitration.
At the time of writing, it appeared that approximately 20 of Canada’s treaties will be updated
to include arbitration as a result of the MLI. Not all treaty partners have elected base-ball style
arbitration, so additional negotiation is necessary in some cases.
How the introduction of these new provisions will affect the resolution of disputes is
not obvious. The CRA releases annual program reports on its use of the MAP which offer
high-level data about the use of MAP in Canada. 114 The CRA has a target resolution time of
24 months for MAP cases. Canadian-initiated MAP cases tend to be completed on average
relatively close to this target period; historically, foreign-initiated MAP cases took notably
longer than the target period, although in the last two years for which data is available, the
109
See e.g. Patrick Marley’s testimony before the House of Commons Standing Committee on Finance: House of
Commons, Standing Committee on Finance, Evidence, 42-1, No 196 (7 February 2019) (Patrick Marley).
110
See e.g. Janette Pantry and Ilia Korkh, “Interest Earned by UK Partners Through a Non-Resident Partnership:
No Withholding Tax” (February 2019) Canadian Tax Highlights (The authors flag the forthcoming anti-treaty-
shopping provisions in the MLI as a development that may affect the application of a CRA ruling on future similar
transactions.); Greg Johnson et al, “Tax Court Affirms Treaty-Based Canadian Holding Structure” (November 9,
2018) Tax Times (The authors note that the MLI will impact the analysis of the appropriateness of the treaty
benefits obtained by a taxpayer in a transaction reviewed by the Tax Court of Canada, anticipating that the PPT
will curtail the use of similar structures).
111
CRA, “IFA 2018 Q2 Principal Purpose Test in MLI”, (CRA roundtable delivered at the IFA 2018 International Tax
Conference Canada, Toronto, 16 May 2018), 2018-0749181C6 Taxnet Pro.
112
CRA, “CTF 2017 Q8 Principal Purpose Test”, (CRA roundtable delivered at the 2017 CTF Annual Conference Canada,
Toronto, 21 November 2017), 2017-0724151C6 Taxnet Pro.
113
See Convention Between Canada and The United States of America With Respect to Taxes on Income and on Capital, 26
September 1980, art XXVI(7) (enacted in Canada by SC 1984 c 20); See also Convention Between the Government
of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital Gains, 15 April 1980, art. 23(6)
(Enacted by SC 1980 c 44).
114
Government of Canada, “Mutual Agreement Procedure 2017 Program Report” (21 February 2019). Accessible
at: https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/competent-
authority-services/2017map.html.
237
Canada
CRA has completed these cases in less than twenty-four months on average.115 The reports do
not separate the cases by treaty-partner country or by identifying those cases that proceed
by way of binding arbitration under the Canada-US treaty (the only treaty that has a binding
arbitration provision). Therefore, it is hard to predict how the mandatory arbitration clause
will affect Canada’s MAP process, caseload, or timelines. However, the general understanding
is that not many of Canada’s MAP cases are resolved by way of mandatory arbitration, so it
is possible that the influence will not be as substantial as anticipated. Canada has reserved
on whether the PPT can be subject to arbitration; as a result, it cannot. The Department of
Finance justification for the reservation is that arbitration better serves factual rather than
legal questions.116
.
115
Additionally, the OECD has conducted a peer review of Canada’s MAP process – see the Stage 1 report: – OECD,
Making Dispute Resolution More Effective – MAP Peer Review Report, Canada (Stage 1): Inclusive Framework on BEPS:
Action, OECD/G20 Base Erosion and Profit Shifting Project, (Paris: OECD, 2017); Stage 2 of the report available on 30
July 2019.
116
Stephanie Smith explained, “baseball-style arbitration is more appropriate for fact-based cases rather than cases
based on questions of law.” Laura Gheorghiu, Patrick Marley & Stephanie Smith, “The Multilateral Instrument: A
Canadian Perspective” (Conference Report delivered at the Canadian Tax Foundation 2017 Conference, Toronto,
30 November 2017) at 15:17.
238
Chile
Branch reporter
Gonzalo Suffiotti1

Chile was one of the 68 jurisdictions that signed the MLI in the ceremony held in Paris on7 June
2017. Chile notified all its 34 treaties, but only 26 will be CTAs (76%). It is expected that the
MLI will have not only a direct impact on Chile’s treaty network but also a relevant indirect
impact on Chile’s treaty policy. The total number of provisions included in Chile’s CTAs is 767.
The MLI will directly impact 133 out of these 767 provisions (17.34%).
Prior to the MLI, treaty abuse was counteracted either through general principles of
treaty interpretation, specific anti-avoidance rules contained in treaties (mainly exclusion
provisions) or in domestic laws or domestic GAAR. In the MLI, Chile decided to meet the
minimum standard on treaty abuse by way of adopting the PPT as an interim measure and
declaring its intention to adopt a SLOB through bilateral negotiations. The PPT contained in
the MLI will affect (directly or to the extent of incompatibility) 24 out of 34 Chilean treaties
(70%). The SLOB contained in the MLI will impact five treaties (14,7%) to the extent of
incompatibility.
As to the minimum standard on dispute resolutions, Chile reserved the right not to apply
the rule that allows the taxpayer to present its case to the competent authority of any of
the two contracting states. Chile commits to fulfill this minimum standard by allowing the
taxpayer to present its case to the competent authority of the state of its residence or, if the
case presented by that person comes under a provision of a CTA relating to non-discrimination
based on nationality, to the state of which that person is a national. Chilean treaties will be
impacted only by changes contained in articles 16(1) second sentence, 16(2) second sentence
and 16(3) second sentence.
Further, Chile notified all the treaties that contain a rule dealing with the transfer of
interests in immovable property companies with the purpose to supplement or replace those
provisions by the general rule of article 9(1) MLI which reflects both the 365-day testing period
and the broad ownership interest concept. Changes contained in article 9(1) MLI will directly
affect nine treaties (26%). While five of these nine treaties will be partially affected (either in
relation to the 365-day testing period or the broad concept of ownership interest), four will
be affected by both changes.
Regarding PE provisions, the rule on low-taxed PEs in third jurisdictions contained in
article 10 MLI will directly affect five out of 34 Chilean treaties (14,7%). Additionally, changes
on the agency PE concept included in article 12(1) MLI, and changes on the independent agent
concept included in article 12(2) MLI, will either replace or modify the provisions contained in
1
Tax partner with Coeymans, Edwards, Poblete & Dittborn Abogados. Gonzalo holds a law degree (LLB) from
Universidad de Chile, an LLM in Taxation from The London School of Economics & Political Science, and an Adv.
LLM in International Taxation from Leiden University. Some parts of this branch report are based on the Adv LLM
paper the author submitted in fulfilment of the requirements of the ‘Master of Advanced Studies in International
Tax Law’ degree at the International Tax Center Leiden (Leiden University).
IFA © 2020 239

Chile
ten treaties (29%). Finally, the anti-fragmentation rule of article 13(4) MLI will impact 18 out
of 34 (53%) Chilean treaties.
Chile reserved the application of the provision on hybrid entities of article 3(1) in treaties
that already contain a similar provision. This provision will impact 12 out of 34 (38%) Chilean
treaties.
Chile fully reserved the provision of article 4 on dual resident entities, article 8 on dividend
transfer transactions, and article 14 on splitting-up of contracts since those aspects have been
already dealt with by Chile’s tax treaties. Further, Chile reserved the right not to apply articles
18 thru 26 (arbitration) since it is considered a complex mechanism on which Chile does not
have enough experience as to its effects.
The MLI has not only directly impacted Chile’s CTAs but also indirectly impacted Chile’s
treaty policy. Chile has not entered into tax treaties after the signature of the MLI. Yet, Chile
has entered into six post-BEPS treaties after 2015, i.e. with Argentina, China, Czech Republic,
Italy, Japan and Uruguay. In general, with the exception of the Czech Republic, these post-
BEPS treaties reflect the principles and provisions contained in the MLI and associated
revisions to the 2017 OECD Model. For instance, the new preamble of article 6 MLI has been
included in these treaties (except with the Czech Republic). Further, treaties with Argentina,
China and Uruguay include a GAAR plus an LOB, whereas only a GAAR has been included in
the treaties with Italy and Japan.
The MLI has not yet entered into force in Chile. Yet, a bill for the ratification of the MLI is
currently under discussion before the Chilean Congress. This bill specifically states that the
MLI is envisaged not only to have a direct impact on tax treaties entered into prior the MLI,
but also an indirect impact on future Chilean treaty policy. In fact, Chilean treaties concluded
from 2015 onwards have consistently adopted provisions based on the MLI and associated
revisions to the 2017 OECD Model, e.g. treaties with Argentina, China and Uruguay include
a GAAR plus an LOB, whereas only a GAAR has been included in the treaties with Italy and
Japan; rules modelled after article 9 MLI (sale of interests in real estate entities) article 12 MLI
(commissionaire or similar arrangements) have also been included, among others.
Once ratified by the Chilean Congress, the MLI will become part of the domestic
legislation and its provisions should prevail over domestic law in case of conflict. The MLI
and more generally BEPS principles have exerted some influence on the interpretation of tax
treaties. In fact, certain recent rulings issued by the tax authority reflect a more purposive or
teleological interpretation of tax treaties.
Treaty Network
1.1. Introduction
The BEPS Action Plan has had a significant impact not only on Chile’s treaty network but
also on Chilean domestic tax laws. In 2014, a new GAAR and CFC rules were introduced into
the Chilean tax system in order to keep our system aligned with the BEPS standards.2 Other
2
Introductory message of Law 20,780 of 2014, para. III.1.f.
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Suffiotti
measures recommended by the BEPS Action Plan have been administratively implemented
(e.g. CbC reporting3; new PE concept4).
Chile was one of the 68 jurisdictions present in the MLI signing ceremony held in Paris on
7 June 2017. In the bill sent to the Chilean Congress for the ratification of the MLI (hereinafter,
the “MLI Bill”), the Chilean government confirmed its strong commitment towards combating
BEPS strategies through the adoption of treaty provisions which guarantee a proper use of
tax treaties.5
According to the MLI Bill, the MLI is envisaged not only to have a direct impact on tax
treaties entered into prior to the MLI, but also an indirect impact on future Chilean treaty
policy.6 The indirect impact of BEPS principles can already be observed in certain treaties
concluded prior to the MLI but after the final BEPS reports came out in 2015.
Chile concluded its first tax treaty following the OECD Model with Canada in 1998, and from
that date on Chile’s treaty network has been growing steadily. As of August 2019, Chile has
concluded 34 tax treaties, being the treaty with the US the only pending of ratification.
In general, Chile’s tax treaties follow the OECD Model with certain deviations.7 While
some of the issues raised by the BEPS Action Plan and the MLI have been addressed by Chilean
tax treaties (e.g. hybrid mismatches arising from dual resident entities), others have not been
comprehensively dealt with (e.g. commissionaire arrangements).
All Chilean tax treaties have been entered into before the signature of the MLI. Yet, a dividing
line has to be drawn between Chile’s treaty policy before 2014 (pre-BEPS treaties) and from
2015 onwards (post-BEPS treaties), since BEPS based provisions are identified in treaties
concluded from 2015.8
Chile has concluded the following pre-BEPS treaties: (1) Australia; (2) Austria; (3) Belgium;
(4) Brazil; (5) Canada; (6) Colombia; (7) Croatia; (8) Denmark; (9) Ecuador; (10) France; (11)
Ireland; (12) Republic of Korea; (13) Malaysia; (14) Mexico; (15) Norway; (16) New Zealand; (17)
Paraguay; (18) Peru; (19) Poland; (20) Portugal; (21) Russia; (22) South Africa; (23) Spain; (24)
3
CbC report was introduced by Resolution No. 126 of 2016 issued by the Chilean tax authority.
4
A new PE concept aligned with the definition contained in art. 5(5) and (6) of the 2017 OECD Model was adopted
by the Chilean tax authority in Circular 57 of 2017 issued by the Chilean tax authority. A new tax reform bill is
currently under discussion before the Chilean Congress and it would seek (among other changes) to introduce
into the Income Tax Law a PE definition which resembles the definition included in the 2017 OECD Model.
5
Mensaje de S.E. el Presidente de la República con el que inicia un proyecto de acuerdo que aprueba la convención multilateral
para aplicar las medidas relacionadas con los tratados fiscales, para prevenir la erosión de las bases imponibles y el treaslado
de beneficios, hecha en París, Francia, el 24 de noviembre de 2016 y suscrita por el Gobierno de la República de Chile, el 7 de
junio de 2017 (hereinafter, “MLI Bill Message”), Mensaje Nº 25-367, p. 3.
6
Ibid.
7
See: Madariaga, J., & Yáñez, F. (2012). Chile. In M. Lang, P. Pistone, J. Schuch, & C. Staringer (Eds.), The Impact of
the OECD and UN Model Conventions on Bilateral Tax Treaties (Cambridge Tax Law Series, pp. 232-260). Cambridge:
Cambridge University Press. doi:10.1017/CBO9781139095686.009
8
Chile did not conclude treaties in 2014.
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Chile
Sweden; (25) Switzerland; (26) Thailand; (27) UK, and (28) US. Post-BEPS treaties have been
concluded with: (29) Argentina; (30) People’s Rep. of China; (31) Czech Republic; (32) Italy;
(33) Japan, and (34) Uruguay.
Pre-BEPS treaties generally follow the OECD Model (1996 to 2014) including certain
elements based on the UN Model (1980 to 2011), while post-BEPS treaties have generally
adopted provisions which reflect the changes enshrined in the 2017 OECD Model.
On certain specific matters Chile’s treaties tend to depart from the OECD Model and
to follow more closely the UN Model (2001-2011), e.g.: (a) service PE provisions generally
allowing source taxation when services are furnished in Chile for more than 183 days in
any 12-month period; (b) capital gain provisions allowing source taxation on gains derived
from the transfer of shares or equivalent interest (even when the value does not derive from
immovable property), among others.
In other cases, Chile’s treaties have particularities which depart from both the OECD and
the UN Model, e.g.: (a) residence provisions do not contain a tie-breaker rule based on the
place of effective management; (b) dividend provisions do not restrict Chilean taxing rights
on outbound dividends, among others.9
Throughout the pre-BEPS period treaty abuse was mainly handled through specific anti-
avoidance provisions and general rules of treaty interpretation.
1.2.2.1. Preamble of Chile’s tax treaties prior to the MLI
Tax treaties of the pre-BEPS period almost invariably (27 out of 28) include a title and a
preamble which allude to the purposes of avoidance of double taxation and prevention of
fiscal evasion.10 This approach is followed since Chile entered into its tax treaty with Canada
in 1998, that is, even before the OECD introduced the prevention of tax evasion as a purpose of
tax treaties into the Commentary in 2003.11 Chile’s tax treaties of the pre-BEPS period do not
include the prevention of fiscal avoidance as a purpose neither in the title nor in the preamble.
Exceptionally, the treaty concluded with Switzerland (2008) follows the wording of the
title and preamble contained in the 1963 Draft Double Taxation Convention on Income and
Capital and in the OECD Model 1977, which only includes the purpose of avoidance of double
taxation. Presumably, Chile just followed the Swiss’ treaty policy on this matter. In fact, over
the same period, Switzerland concluded other tax treaties with a title and a preamble that
alluded only to the purpose of preventing double taxation.12
9
Due to the particularities of its integration system, Chile “retains its freedom of action with regard to the
provisions in the Convention relating to the rate and form of distribution of profits by companies”. OECD Comm.
on art. 10, s. 74.
10
Exceptionally, the treaty with Belgium includes the prevention of tax fraud in the preamble.
11
BEPS Action 6, s. 71, p. 91.
12
For instance, the tax treaties concluded with Estonia (2002); Armenia (2006); Azerbaijan (2006); Colombia
(2007), among others.
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Suffiotti
1.2.2.2. Domestic responses to treaty shopping
Prior to the MLI, treaty abuse was counteracted by applying the following mechanisms:
a. Domestic specific anti-avoidance provisions

Chile’s tax laws do not provide for specific anti-avoidance provisions dealing with tax treaty
matters (either in the form of a look-through or anticonduit provision). In 2014, a new tax
compliance provision was introduced into the Chilean Income Tax Law with the purpose of
granting treaty benefits only to taxpayers who are effectively entitled to such benefits. Such
provision states that reduced treaty rates or exclusive residence taxation would apply to the
extent that foreign taxpayers provide to the Chilean payer: (i) a tax residence certificate issued
by the relevant foreign tax administration; (ii) a sworn statement declaring that it does not
have a PE in Chile to which the relevant income shall be attributed, and (iii) a sworn statement
declaring that it is the beneficial owner of the relevant item of income (when applicable).13
b. General anti-avoidance rule

In 2014, a domestic GAAR was introduced into the Chilean Tax Code14 with the purpose
of keeping our tax system aligned with the BEPS principles.15 The tax authority could
potentially challenge the access to treaty benefits under domestic GAAR when transactions
or arrangement are (either individually or jointly) considered to be an abuse of law or
simulation. Neither judicial nor administrative precedents exist on the application of the
GAAR.
The Chilean tax authority released a catalogue of potentially abusive transactions under
the domestic GAAR.16 Certain cross-border cases have been identified as potentially abusive,
e.g.: (a) incorporation of an instrumental trading entity in a low or nil tax jurisdiction which
enters into non-arm’s length dealings with a mining company in Chile; (b) investment on
preferred and redeemable shares which are treated as equity by Chile and as debt by a foreign
country (hybrid instrument), and (c) migration of a non-resident entity from a non-treaty
jurisdiction to a treaty jurisdiction with the sole purpose of obtaining DTT benefits.17
c. General principles of treaty interpretation

The tax administration has held that the Commentaries to article 1 of the OECD Model must
guide the correct application and interpretation of treaties. Therefore, treaty benefits must
not be available when one of the principal purposes to enter into a certain transaction,
contract or arrangement is to obtain treaty benefits in circumstances where the granting of
those benefits would be contrary to the object and purpose of the treaty.18
Further, the tax authority has construed that treaties not only have the purpose of
avoiding juridical double taxation but also of preventing tax evasion and tax avoidance.19
13
Art. 74(4) of the Income Tax Law.
14
Arts. 4 bis, 4 ter, 4 quáter, 4 quinquies and 160 bis of the Tax Code.
15
This purpose was declared by the Chilean government in the introductory message of Law 20,780 of 2014, s. III(1)
(f).
16
Catalogo de Esquemas Tributarios, Servicio de Impuestos Internos (hereinafter, the “GAAR Catalogue), 2018.
17
Cases No. 2, 3 and 26, of the GAAR Catalogue.
18
Ruling 166 of 2017 and 1052 of 2019.
19
Ruling 843 of 2017 that refers to the treaty with Belgium which was entered into in the pre-BEPS period. The
same principle is mentioned in Circular 57 of 2009 issued by the tax authority, s. I(1).
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Chile
d Interpretation and application of the beneficial ownership concept

The tax authority has stated that the concept of beneficial ownership may be used as an anti-
avoidance tool to deny treaty benefits.20 Circular 57 of 2009 (hereinafter, “Circular 57”) issued
by the tax authority provides guidelines on how the concept of beneficial ownership has to be
construed in the context of the Chilean treaties. Pursuant to Circular 57, the Commentaries
to the OECD Model may be used as an interpretative tool to determine the meaning of the
beneficial ownership concept.21
Circular 57 states that the concept of “beneficial owner” has to be tested on a case-by-case
basis, and that treaty benefits on passive income should not be granted when the recipient
of the item of income, although a resident in the other contracting state, merely acts as an
agent, nominee or conduit company (i.e. with very narrow powers as to the relevant income).
The tax authority has stated that changes and developments on the beneficial ownership
concept occurred after the release of Circular 57 should also be considered when construing
such concept.22
e. Treaty-based anti-avoidance provisions

Tax treaties concluded throughout the pre-BEPS period do not contain a GAAR or another
general provision to tackle treaty abuse. In general, these treaties counteract treaty abuse
through specific anti-avoidance rules.
Pre-BEPS treaties generally contain purpose test provisions which deny treaty benefits
of articles 10, 11 and 12 when the main or one of the main purposes of the transaction,
arrangement or any person concerned with such transaction or arrangement is to take
advantage of those treaty rules. These rules are generally contained in article 10, 11 or 12,
or in some cases in a separate provision23 or in the protocol of a treaty.24 Exceptionally, these
rules also deny treaty benefits granted under the “other income” provision.25 According to
the tax authority, these treaty provisions may apply regardless of whether the beneficial
ownership requirement is met.26
Further, exclusion provisions which target specific type of conduit arrangements can be
found in the tax treaties with Colombia, New Zealand and Russia.27 Under these provisions,
if a company resident in a contracting state is substantially owned, controlled or managed
by one or more persons who are not resident in such contracting state, the exemption or
reduced rate applicable under the treaty would only apply if the dividends, interest and
royalties are subject to taxation under the general rules of the contracting state of residence
of the company.28 Exclusion provisions do not apply when the structure has valid commercial
reasons, and it is not the purpose or one of the main purposes of the structure to obtain treaty
benefits. A more restrictive exclusion provision can be found in the treaty with Switzerland
20
Rulings 876 of 2016 and 843 of 2017.
21
Circular 57, para. II.3.
22
Ruling 1,498 of 2018.
23
For instance, Australia (art. 27(1) “Limitation of Benefits”); Czech Republic (art. 28(4) “Miscellaneous Rules”);
Croatia (art. 24(5) “Mutual Agreement Procedure”); France (art. 27(6) “Miscellaneous Rules”); New Zealand (art.
22(2) “Limitation of Benefits”).
24
For instance, Austria, Spain, Portugal.
25
Tax treaty with the UK, art. 20(5).
26
Circular 57, para. III.3.
27
Colombia (art. 27(1) and (2)), New Zealand (art. 22(1)) and Russia (art. 27(1) and (2)).
28
A similar rule is found in art. 28(5) of the treaty with Canada.
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Suffiotti
which denies treaty benefits of articles 10, 11 and 12 in case of “conduit arrangements”.29 This
type of rule aimed at counteracting “stepping-stone” strategies is commonly found in Swiss
treaties.30
A few Chilean treaties include a subject-to-tax provision. For instance, a limited subject-
to-tax provision can be found in article 28(5) of the treaty with Australia while a broader
provision can be found in article 28(6) of the treaty with Mexico and in the protocol with
Paraguay.
Provisions denominated “Limitation of Benefits” (hereinafter, “LOB”) can be found in
the tax treaties with Australia, Colombia, New Zealand and Russia.31 However, these rules
do not resemble the LOB provision included in BEPS Action 6 and article 7 MLI. These rules
usually contain (a) the exclusion provisions contained in other Chilean treaties (the treaty
with Australia does not contain this rule); (b) the specific purpose test that generally denies
treaty benefits of articles 10, 11 and 12, and (c) an obligation for the contracting states to
consult each other when one or more tax treaty provision is producing a result that was not
intended by the contracting states.
The tax treaty with the US is the only pre-BEPS treaty that contains a LOB clause that
resembles the rule enshrined in article 7 MLI. This provision was clearly introduced by
influence of US tax treaty policy.32 This provision resembles the detailed LOB addressed in
the Commentary on article 29 of the OECD Model 2017.
1.2.2.3. Responses to other treaty abuses
a. Gains from alienation of shares or interest in immovable property companies

In general, three type of rules dealing with the alienation of shares or interests in immovable
property companies can be identified in Chile’s pre-BEPS treaties:
–– “Type 1 Rule”: (a) rule that widely refers to the alienation of any shares or interest (without
limiting the scope to the disposal of rights in a company that is resident in the country
where the immovable property is located), and (b) contains a wide concept of ownership
by referring to shares, comparable interests or other rights.33
–– “Type 2 Rule”: narrower rule applicable to the (a) disposal of rights in a company that
is resident in the country where the immovable property is located, and (b) which is
restricted to the sale of shares or other rights representing the “capital of a company”.34
This rule is generally triggered when the gain is derived in more than a specific percentage
(50%) from immovable property and not -as in the UN Model- when the property of the
company consists directly or indirectly principally of immovable property. Exceptionally,
Type 2 Rule contained in the treaties with Croatia and Korea is triggered when the
“assets” of the company consists or consisted, “principally” or “in more than 50 per cent”,
of immovable property situated in the other state. Exceptionally, article 13(4)(b) of the
29
Number 5 of the protocol.
30
OECD Comm. on art. 1, s. 18 (OECD Model 2014).
31
Treaties with Australia (art. 27); Colombia (art. 27); New Zealand (art. 22), and Russia (art. 27).
32
R.S. Avi-Yonah & O. Halabi, US Treaty Anti-Avoidance Rules: An Overview and Assessment, 66 Bull. Intl. Taxn. 4/5
(2012), Journals IBFD, p. 238.
33
Type 1 Rule can be found in the treaties with Australia (art. 13(4)); France (art. 13(2)), and the US (art. 13(2)).
34
Type 2 Rule is found in art. 13(4) of the treaties with Austria, Belgium, Colombia, Croatia, Korea, Spain, Ireland,
Portugal, Sweden and Switzerland.
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Chile
treaty with the UK is a mixture between Type 1 Rule and Type 2 Rule as it applies to the
disposal of rights in a company that is resident in the country where the immovable
property is located, but it contains a broader concept of ownership.
–– “Type 3 Rule”: most Chile’s pre-BEPS treaties (i.e. 15) do not provide for a specific rule
on the sale of shares or interests in a real estate entity, but a wide rule granting tax
jurisdiction to the source state on the alienation of either: (a) any property other than the
one specifically referred to in the provision (unlike the catch-all provision of article 13(5)
of the OECD Model that grants tax jurisdiction to the state of residence),35 or (b) shares,
instruments or any other rights representing the capital of a company, or comparable
interests or rights in any other person, that is a resident of the other contracting state.36
Therefore, some pre-BEPS treaties already contain a broad concept of ownership “interests”
(Type 1 Rule) as the one included in article 9 MLI. Exceptionally, the treaty with the UK
resembles more closely the wording introduced by the 2017 OECD Model by including a
reference to interest in a partnership or trust. Yet, Chile’s treaties of the pre-BEPS period do
not contain a testing period as the one included in article 9 MLI.
b. PE in third jurisdictions
In general, Chile’s pre-BEPS treaties do not contain rules dealing with PEs located in low tax
jurisdictions. The general absence of these rules in pre-BEPS treaties is potentially due to the
fact that Chile provides double tax relief by applying the credit method.
Exceptionally, a rule similar to the provision of article 10 MLI is included in the pre-BEPS
treaties with Austria and the US.37
c. Avoidance of PE status
–– Commissionaire arrangements
All Chilean pre-BEPS treaties include an agency PE provision. This provision is generally
found in article 5(5) of the treaties, and exceptionally in a different paragraph of article
5.38 The wording of the OECD Model (1996 thru 2010) is followed in 26 out of 28 pre-BEPS
treaties. Thus, a PE is generally deemed to exist “where a person -other than an agent of an
independent status to whom paragraph 6 applies- is acting on behalf of an enterprise and
has, and habitually exercises, in a Contracting State an authority to conclude contracts in the
name of the enterprise (…)”.39
Exceptionally, the treaty with Australia contains a particular wording which neither
resembles the 2001 UN Model nor the 2010 OECD Model as it refers not only to the “authority
to conclude contracts on behalf of the enterprise”, but also includes the case of a person that
“manufactures or processes in a Contracting State for the enterprise goods or merchandise
35
Art. 13(4) of treaty with Brazil, Mexico and New Zealand, and art. 13(5) of treaty with Canada.
36
For instance, Denmark, Ecuador, Malaysia, Norway, Paraguay, Peru, Poland, Russia, South Africa and Thailand.
The treaty with the Czech Republic includes a similar rule but it also refers to “direct or indirect” alienation of
shares.
37
No. 12 of the protocol of the treaty with Austria, and art. 24(5) of the treaty with the US.
38
For instance, Australia in art. 5(7) and New Zealand art. 5(8).
39
Art. 5(5) of the OECD Model 2014.
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Suffiotti
belonging to the enterprise”.40 Article 5(5)(b) of the treaty with Malaysia follows to some
extent the 2001 UN Model, by including in the agency PE provision the case of a person who
does not have the authority to conclude contracts, but habitually maintains in the other State
“a stock of goods or merchandise belonging to the enterprise in respect of which he regularly
receives and fulfils orders on behalf of the enterprise”.
Further, the protocol of the treaty with Australia supplements the agency PE provision
by including certain principles which are further developed in the Commentary to the OECD
Model 2014.41 Particularly, the protocol states that “[a] person who substantially negotiates
the essential parts of a contract on behalf of an enterprise will be regarded as exercising
an authority to conclude contracts on behalf of that enterprise (…), even if the contract is
subject to final approval or formal signature by another person”.42 Similarly, the protocol of
the treaty with Austria clarifies that the phrase “authority to conclude contracts in the name
of the enterprise” is not restricted to “an agent who enters into contracts literally in the name
of the enterprise; the paragraph applies equally to an agent who concludes contracts which
are binding on the enterprise even if those contracts are not actually in the name of the
enterprise”.43 These rules reflect a broader agency PE concept which more closely resembles
the concept contained in article 12 MLI.
The independent agent exceptions included in Chile’s pre-BEPS treaties do not follow
exactly the same wording as the 2014 OECD Model. Most of Chile’s treaties include one of the
requirements provided for in article 5(7) of the 2011 UN Model, namely, that the commercial
or financial relations between the enterprise and the independent agent should be at arm’s
length.44
Exceptionally, the treaties with Canada and the Republic of Korea include the other
element set out by article 5(7) of the 2011 UN Model, namely, that the agent should not
act wholly or almost wholly on behalf of the same enterprise. Following a slightly different
wording, the treaties with Australia and the US state that an agent would only be considered
as independent if it acts both economically and legally independent from the enterprise and
in the ordinary course of his business.45 Accordingly, the treaties with Canada, the Republic
of Korea, Australia and the US would contain a provision that resembles (without being
completely equal to) the independent agent provision enshrined in article 5(6) of the 2017
OECD Model.
–– Specific activities exemption
In general, Chile’s pre-BEPS treaties follow the OECD Model (1996 thru 2010), and the main
deviation is that none of these treaties include the hypothesis of article 5(4)(f) on combination
of preparatory or auxiliary activities. This deviation is consistent with the reservation made
40
Art. 5(7) of the treaty with Australia.
41
OECD Comm. on art. 5, s. 33, 4th sentence.
42
No. 2(a) of the protocol of the treaty with Australia.
43
No. 1 of the protocol of the treaty with Austria.
44
This condition is included in the treaties with Austria, Belgium, Brazil, Colombia, Croatia, Denmark, Ecuador,
Spain, France, Ireland, Malaysia, Mexico, Norway, New Zealand, Paraguay, Peru, Poland, Portugal, Russia, South
Africa, Sweden, Switzerland, Thailand and the UK.
45
No. 2(b) of the protocol of the treaty with Australia and No. 8 of the protocol of the treaty with the US.
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Chile
by Chile on article 5(4) of the OECD Model.46

In addition, as regards to the general hypothesis of article 5(4)(e) involving “any other
activity (…)”, two types of provisions based on the 1963 Draft Double Taxation Convention on
Income and Capital can be identified in Chile’s treaties:47 (A) Model A: treaties that contain
the hypothesis of article 5(4)(e) of the 2014 OECD Model involving “any other similar activity”
but mentioning specific types of activity such as: (i) advertising; (ii) supplying information;
(iii) carrying out scientific research, and (iv) any other similar activity, if such activity is of
a preparatory or auxiliary character;48 and (B) Model B: treaties that contain a hypothesis
similar to treaties Model A but without including a general reference to “any other similar
activity”.49
Under pre-BEPS treaties, the requirement of being “of a preparatory or auxiliary character”
seems to be confined to the hypothesis of letter (e) and not extended to the other listed
ancillary activities.50 Further, pre-BEPS treaties do not include a rule similar to the new anti-
fragmentation rule.
–– Splitting-up of contracts
Chilean pre-BEPS treaties contain provisions on service PE and project PE which set a specific
time threshold (generally 183 days within any 12-month period for service PE or 6 months for
project PE). These treaties include provisions dealing with strategies aimed at fragmenting
activities with the purpose of avoiding the time thresholds. This rule is strangely absent in
the treaty with Austria.
Generally, these rules allow the aggregation of periods during which activities are carried
out by related companies in the source state. In general, the aggregation applies when the
activities carried out by both entities are (a) substantially the same;51 or (b) identical or
substantially similar;52 or (c) connected.53 Exceptionally, the treaty with Belgium allows the
aggregation of periods without requiring a specific link or connection between the activities
carried out by both companies.54
46
According to the reservations to art. 5(4) of the OECD Model, Chile “reserves the right to amend paragraph 4 by
eliminating subparagraph f), replacing the text of subparagraph e) with “the maintenance of a fixed place of
business solely for the purpose of advertising, for the supply of information, for scientific research or for similar
activities, for the enterprise;”, and deleting “or, in the case of subparagraph f), the overall activity of the fixed
place of business,” from the final part of paragraph 4”. OECD Comm. on art 5, s. 210.
47
An exception to these models is the treaty with Brazil that includes a letter (e) in art. 5(4) that follows the 2000
OECD Model.
48
Treaties with Australia, Austria, Belgium (although this treaty does not specifically mention scientific research),
Rep. of Korea, Denmark, Ecuador, France, Ireland, Spain, Malaysia, Mexico, Norway, Peru, Portugal, the UK and
the US.
49
Treaties with Canada, Colombia, Croatia, New Zealand, Paraguay, Poland, Russia, South Africa, Sweden,
Switzerland and Thailand.
50
An example of this structure can be found, among other cases, in art. 5(4)(e) of the treaty with Austria that states
that the exemption applies to “the maintenance of a fixed place of business solely for the purpose of advertising,
supplying information, carrying out scientific research or any other similar activity for the enterprise, if such
activity is of a preparatory or auxiliary character”.
51
For instance, Australia, Croatia, Denmark, Rep. of Korea, among others.
52
For instance, Brazil, Colombia, Ecuador, Mexico, among others.
53
For instance, Canada, France, Ireland, New Zealand, among others.
54
No. 3 of the Protocol of the treaty with Belgium.
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Some treaties state that activities carried out concurrently by an entity and a related party
should only be counted once.55
1.2.2.4. Hybrid mismatch arrangements
–– Transparent entities
In general, Chile’s pre-BEPS treaties do not include a specific provision dealing with
transparent entities. Exceptionally, tax treaties concluded with New Zealand, Sweden, South
Africa, the US and the UK include a provision dealing with transparent entities. This provision
is found in article 4, except for the treaty with the US where the provision is included in the
protocol.
These provisions generally state that an item of income, profit or gain derived through
a person that is fiscally transparent under the laws of either contracting state shall be
considered to be derived by a resident of a contracting state to the extent that the item is
treated for the purposes of the taxation law of that contracting state as the income, profit or
gain of a resident.
Unlike article 3 MLI, provisions contained in Chile’s treaties: (a) refer to income, profit or
gain (instead of only “income”); (b) refer only to income derived through (instead of “through
or by”); (c) limit their scope to “a person”56 that is fiscally transparent (instead of referring to
an “entity or arrangement”), and (d) refer to a person treated as fiscally transparent (instead
of “wholly or partly” fiscally transparent).
–– Dual resident entities
Provisions on dual resident entities contained in Chile’s pre-BEPS treaties depart from the
(pre-2017) OECD and the UN Model.57 Chile defines corporate residence based on the place
of incorporation,58 and consequently, nine pre-BEPS treaties provide a tie-breaker rule based
on the place of incorporation. Except in the case of the treaty with Thailand which explicitly
refers to the state in which a company is “incorporated”, the other treaties set out that a
company is resident only in the country in which it is a national.59 Article 3(1) of these treaties
define the term “national” which includes any company that is incorporated under the laws
of such state. If, based on such a tie-breaker, the company is still national of both or neither
state, the contracting states should endeavor to settle the issue through MAP.
Other pre-BEPS treaties adopt a solution which more closely resembles the solution
provided by article 4 MLI. Instead of adopting a tie-breaker rule, under these treaties, contracting
states should endeavor to settle the question on tax residency of dual resident entities through
55
For instance, Australia, Belgium, Czech Republic, Denmark, France, Ireland, New Zealand, Switzerland, UK and
US.
56
The treaty with the US refers to an “entity” instead of a “person”.
57
This rule is generally found in art. 4(3) of Chile’s pre-BEPS treaties, and exceptionally in art. 4(4) of the treaties
with Canada and South Africa.
58
Art. 11 of the Income Tax Law states that shares issued by a corporation (i.e. sociedad anónima) incorporated in
Chile are deemed to be situated in Chile. The same rule applies for equity interest in limited liability companies.
59
Treaties with Colombia, Ecuador, Ireland, Mexico, Paraguay, Poland, Russia and Sweden.
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Chile
MAP.60 Further, as in article 4 MLI, certain pre-BEPS treaties (Austria, Rep. Korea and Portugal)
include a list of factors that should be considered when settling the issue through MAP.
In the absence of mutual agreement, dual resident entities may be either (a) not entitled
to any relief or exemption provided by the treaty;61 (b) more broadly not entitled to any
benefits, relief or exemption under the treaty,62 or (c) not entitled to any benefits under the
treaty with certain exceptions usually referring to non-discrimination, MAP or double tax
relief.63 Exceptionally, the treaty with Malaysia states that, in absence of agreement, each
contracting state may apply its domestic law. The treaties with Mexico and Switzerland do
not set out specific consequences in the case of lack of agreement.
Exceptionally, neither tie-breaker rule nor MAP procedure apply in the treaty with
Australia. Under this treaty, benefits are immediately denied to dual resident entities except
for benefits under non-discrimination provision.
1.2.2.5. MAP and corresponding adjustments
All Chilean treaties contain MAP provisions which generally follow the OECD Model. Further,
except for the treaty with Brazil, all Chilean treaties include a provision on corresponding
adjustments. Chile does not have relevant experience on cases of MAP or corresponding
adjustment.64
Chile was part of the first group of jurisdictions that signed the MLI on 7 June 2017. The MLI is
considered by the Chilean Congress as a tool which will allow the “modification of bilateral tax
treaties already signed by Chile, in a systematic and coordinated manner, avoiding bilateral
negotiations with each country, which could take years and involve significant material and
human resources”.65 Further, the MLI is seen as an instrument aimed at ensuring the proper
use of tax treaties.66
On 15 April 2019, the MLI Bill was sent to the Chilean Congress in order to start the ratification
process. As of September of 2019, the MLI Bill is undergoing its first constitutional process. It is
expected that the Chilean Congress may approve it by the end of 2019 or early 2020.
60
This rule is found in the treaties with Austria, Belgium, Brazil, Canada, Croatia, Denmark, France, Rep. of Korea,
Malaysia, New Zealand, Norway, Peru, Portugal, South Africa, Spain, Switzerland, UK and US.
61
This rule is found in the treaties with Canada, Colombia, Denmark, Ecuador, France, Ireland, New Zealand,
Norway, Paraguay, Poland, Russia, South Africa, Spain, Sweden and Thailand. Treaties with Belgium and the UK
also include this rule but double tax relief in Belgium and the UK, respectively, is exceptionally granted.
62
This rule is found in the treaties with Brazil, Croatia and Peru.
63
This rule is found in the treaties with Australia, Austria, Rep. of Korea, Portugal and the US.
64
See Chile Dispute Resolution Profile (28 September 2018) available at http://www.oecd.org/tax/dispute/Chile-
Dispute-Resolution-Profile.pdf.
65
Report of the Committee on Foreign Affairs on the Draft Agreement for the approval of the MLI, Boletín No.
12.547-10-1, sec. III (free translation).
66
Ibid.
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Chile notified all its 34 signed treaties as CTA under the MLI “with the expectation of being
able to update and harmonize them in terms of protection against abuse”.67 Except for the
treaty with the US, all notified treaties are currently in force.
The People's Republic of China, Italy and Japan did not list the treaty with Chile as CTA,
and consequently, these treaties are not CTAs and will not be impacted by the MLI. In addition,
Brazil, Ecuador, Paraguay, Thailand and the US have not signed the MLI, and consequently,
the MLI will not impact these treaties either.
Consequently, 26 out of 34 (76,5%) Chile’s treaties will be CTAs under the MLI: (1)
Argentina; (2) Australia; (3) Austria; (4) Belgium; (5) Canada; (6) Colombia; (7) Croatia; (8)
Czech Republic; (9) Denmark; (10) France; (11) Ireland; (12) Rep. of Korea; (13) Malaysia; (14)
Mexico; (15) New Zealand; (16) Norway; (17) Peru; (18) Poland; (19) Portugal; (20) Russia; (21)
South Africa; (22) Spain; (23) Sweden; (24) Switzerland; (25) the UK, and (26) Uruguay.
1.3.3.1. Preamble
Pursuant to article 6(4) MLI, Chile reserved the application of the new preamble in almost all
its treaties concluded throughout the post-BEPS period (Argentina, China, Italy, Japan and
Uruguay), since such preamble is already contained in those treaties.
Chile did not notify treaties under article 6(5) MLI, and therefore, the new text of the
preamble will not apply in place or in absence of such preamble, but in addition to the
wording already contained in Chile’s treaties.
Pursuant to article 6(6) MLI, Chile decided to include the additional wording of article 6(3)
MLI referring to the desire to develop an economic relationship or to enhance co-operation
in tax matters. Chile notified 29 out 34 treaties in order to include this additional wording
into the preamble, excluding the post-BEPS treaties that already contain such wording
(Argentina, People´s Rep. of China, Italy, Japan and Uruguay)
Based on the position adopted by Chile and its treaty counterparties, the MLI will impact
the following treaties:
MLI effect Countries

New text of the preamble of Pre-BEPS: Australia, Austria, Belgium, Canada,
article 6(1) MLI will be included in Colombia, Croatia, Denmark, France, Ireland, Rep.
addition to existing preamble. of Korea, Malaysia, Mexico, Norway, New Zealand,
Peru, Poland, Portugal, Russia, South Africa, Spain,
Sweden, Switzerland and the UK.
Post-BEPS: Czech Republic.
67
MLI Bill Message, comments to art. 2, para. 1 and 2.
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Chile

Additional wording of article 6(3) Pre-BEPS: Australia; Belgium; Croatia; France;
MLI would be included Ireland; Mexico; Norway; Peru; the UK; Russia;
South Africa; Spain and Switzerland.
In sum, the wording of the new preamble contained in article 6(1) MLI will impact 24 Chilean
treaties (70%). Further, additional wording of article 6(3) MLI would be included in 13 pre-
BEPS treaties (38%).
1.3.3.2. Minimum standard on treaty abuse
BEPS Action 6 provided three alternative options to implement the minimum standard on
treaty abuse: (a) adoption of a PPT only; or (b) adoption of a PPT plus a simplified or detailed
LOB, or (c) adoption of a detailed LOB plus other specific rules aimed to counteract certain
conduit arrangements not covered by the LOB.68
In principle, BEPS Action 6 does not give preponderance to one. Yet, it has been argued
that BEPS Action 6 would implicitly prefer a combination of both the LOB and the PPT, based
on the strengths and weaknesses of each rule.69 Consistent with this approach, Chile has
declared its preference for the application of both rules in tandem.70
Pursuant to article 7(15)(b) MLI, Chile excluded the application of the PPT in those treaties
that already contain an equivalent provision (i.e. Argentina, People´s Rep. of China, Japan,
Italy and Uruguay). Further, pursuant to article 7(15)(c), Chile reserved its right not to apply
the SLOB to its CTAs that already contain such provision (i.e. Argentina, People´s rep. of China,
the US and Uruguay).
According to article 7(17)(a) MLI, Chile decided to adopt the PPT as an interim measure
and declared its intention to adopt a SLOB through bilateral negotiations.71 Except for the
cases of Argentina, People´s rep. of China, Japan, Italy, US and Uruguay, Chile notified all
its other treaties identifying the specific anti-abuse provision(s) which would be replaced
by the PPT. Further, Chile opted-in for the SLOB by exercising the option granted by article
7(17)(c) MLI.
68
BEPS Action 6, s. 22, p. 19.
69
Christopher Bergedahl, ‘Anti-Abuse Measures in Tax Treaties Following the OECD Multilateral Instrument – Part
1’, 72 Bulletin for International Taxation 1, (21 December 2017), pp.11-30, at p. 22.
70
MLI Bill Message, s. III(4)(d)(iii).
71
According to art. 7(17)(a) MLI.
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Based on the position adopted by Chile and its treaty counterparties, the MLI will have the
following effect on Chile’s tax treaties:

Specific anti-avoidance rules included in the Pre-BEPS: Australia, Austria, Belgium,
treaties are replaced by the PPT of article Canada, Rep. of Korea, Spain, France,
7(1) MLI, without being applicable (a) the Ireland, Malaysia, New Zealand, Peru,
discretionary relief of article 7(4) MLI, and (b) Poland, Portugal, South Africa, Sweden,
the SLOB. Switzerland, and the UK.
Post-BEPS: Czech Republic

The following effects are expected: (a) Pre-BEPS: Colombia, Denmark, Mexico,
specific anti-avoidance rules will be Norway and Russia
replaced by the PPT of article 7(1) MLI; (b)
the SLOB would apply and supersede the
provisions of the agreement to the extent
of incompatibility, and (c) the discretionary
relief of article 7(4) would not be applicable.
PPT of article 7(1) MLI would apply and Pre-BEPS: Croatia1
supersede the provisions of the agreement
to the extent of incompatibility, without
being applicable (a) discretionary relief of
article 7(4), and (b) the S-LOB.
72
In summary, the PPT contained in the MLI will impact (directly or to the extent of
incompatibility) 24 out of 34 Chilean treaties (70%). The SLOB contained in the MLI will
impact five treaties (14,7%) to the extent of incompatibility.
1.3.3.3. Minimum standard on dispute resolution
Chile reserved the right not to apply the rule that allows the taxpayer to present its case to
the competent authority of any of the two contracting states pursuant to the first sentence of
article 16(1) MLI. Chile intends to meet the minimum standard for improving dispute resolution
by ensuring that a person may present the case to the competent authority of the state of its
residence or, if the case presented by that person comes under a provision of a CTA relating
to non-discrimination based on nationality, to the state of which that person is a national.
Further, Chile commits to implement a bilateral notification or consultation process with
the competent authority of the other contracting state for cases in which the competent
authority to which the MAP case was presented does not consider the taxpayer’s objection
to be justified.
72
This is due to the fact that Croatia did not notify the treaty with Chile, and consequently, art. 7(17)(a), 3rd sentence
of the MLI, would apply.
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Chile

Article 16(1) second sentence Pre-BEPS: Austria; Canada; Colombia; Ireland;
which sets out the three-year Mexico; Norway; Peru; Poland; Russia; Sweden and
term for presenting the case the UK
would apply and supersede the
provisions of the agreement to
the extent of incompatibility.
Article 16(2) second sentence Pre-BEPS: Australia; Austria; Belgium; Colombia;
which states that the agreement Czech Republic; Croatia; Denmark; France; Ireland;
reached will be applicable Rep. of Korea; Malaysia; Norway; New Zealand;
regardless of other terms Peru; Poland; Portugal; Russia; South Africa; Spain;
provided by domestic law would Sweden and the UK
apply.
Post-BEPS: Argentina and Uruguay
Article 16(3) second sentence Pre-BEPS: Australia; Austria; Belgium; Canada;
which allows consultation Colombia; Czech Republic; Croatia; Denmark; France;
between contracting Ireland; Rep. of Korea; Malaysia; Mexico; Norway;
jurisdictions to avoid double New Zealand; Peru; Poland; Portugal; Russia; South
taxation in cases not covered by Africa; Spain; Sweden; Switzerland and the UK
the treaty would apply
In sum, article 16 MLI will partially impact all the Chilean CTAs. Changes contained in articles
16(1) second sentence, 16(2) second sentence and 16(3) second sentence will impact nine
treaties, whereas 14 treaties will only be impacted by articles 16(2) second sentence and 16(3)
second sentence. Only two treaties will be impacted by changes contained in articles 16(1)
second sentence and 16(3) second sentence, and only one treaty will be impacted by article
16(3) second sentence.
1.3.3.4. Other provisions
–– Transfer of shares in immovable property companies
Chile made a partial reservation under article 9(6)(d) MLI in order not to apply the 365-day
testing period to certain post-BEPS treaties period that already include such provision (i.e.
Argentina, China, Japan, Italy and Uruguay).
Additionally, Chile notified all the pre-BEPS treaties that contained either Type 1 Rule or
Type 2 Rule in order to supplement or replace those provisions by the general rule of article 9(1)
MLI which reflects both the 365-day testing period and the broad ownership interest concept.73
73
Type 1 Rule or Type 2 Rule are addressed above in s. 1.2.2.3(a).
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Based on the position adopted by Chile and its treaty counterparties, the MLI will produce
the following effect:

Full impact of both changes included in the general rule Pre-BEPS: Colombia,
of article 9(1) MLI: (a) the 365-day testing period, and (b) France,75 Portugal and Spain.
the broad concept of interests.
Although Chile’s MLI Position does not fully match the

MLI Position of its treaty counterparties which opted for
the consolidated provision of article 9(4) MLI.74
Partial effect only in relation to the broad concept of Pre-BEPS: Belgium.76
interests of article 9(1)(b) MLI. Post-BEPS: Argentina and
Uruguay.77
Partial effect only in relation to the 365-day testing Pre-BEPS: Australia and
period of article 9(1)(a) MLI. Ireland.78
74 75 76 77 78
In sum, changes contained in article 9(1) MLI will directly impact nine treaties (26%). While
five of these nine treaties will be partially impacted (either in relation to the 365-day testing
period or to the broad concept of ownership interest), the other four will be impacted by
both changes.
–– Low-taxed permanent establishments in third jurisdictions
Pursuant to article 10(5)(b), Chile reserved the application of the entire provision of article
10 MLI with respect to its treaties that already contain a similar rule (i.e. Argentina, Austria,
People´s Rep. of China, Czech Republic, Italy, Japan, the US and Uruguay).
74
The general rule of art. 9(1) would still apply to these treaties concluded by Chile. In fact, if only one state opts-
in for the consolidated rule of art. 9(4) and the other state did not opt-in for such an option and did not make
a reservation to the general rule (as in the case of Chile), then the general rule of art. 9(1) still applies. See MLI
Explanatory Statement, s. 133.
75
Although the treaty with France contained a Type 1 Rule (i.e. broad concept of ownership interests) neither France
nor Chile reserved the application of the new broad concept of ownership interests provided by art. 9(1)(b) MLI,
therefore, such broad concept will apply to this treaty.
76
Belgium made a reservation in order to not apply the 365-day testing period included in art. 9(1)(a) MLI. Belgium
MLI Positions, p. 30.
77
In the case of Uruguay and Argentina, both changes contained in BEPS Action 6 will be reflected in the treaty
but only the broad interest concept will be modified by the MLI, as those treaties already include the 365-day
testing period (and Chile made a reservation in order not to modify those testing periods).
78
Chile notified the treaty with Australia and Ireland in order to reflect in art. 13(4) both changes contained in art.
9(1) MLI. However, pursuant to art. 9(6)(e), Australia and Ireland reserved the application of the broad concept of
ownership interests in the case of the treaty with Chile. Australia MLI Positions, p. 17 and Ireland MLI Positions,
p. 26.
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Chile
Based on the position adopted by Chile and its treaty counterparties, the MLI will produce
the following effect:

Article 10(1) thru (3) would apply and supersede Pre-BEPS: Spain, Mexico, New
the provisions of the agreement to the extent of Zealand, Peru and Russia
incompatibility.
In sum, changes contained in article 10 MLI will directly affect five out of 34 Chilean treaties
(14,7%).
–– Avoidance of permanent establishment status through commissionaire and similar

arrangements
Chile notified all its pre-BEPS treaties and the post-BEPS treaty with the Czech Republic in
order to include both (a) the changes to the agency PE concept included in article 12(1) MLI,
and (b) the changes to the independent agent concept included in article 12(2) MLI.
Based on the position adopted by Chile and its treaty counterparties, the MLI will have
the following effect on Chile’s tax treaties:

Changes in connection with agency PE in article Pre-BEPS: Colombia, Croatia,
12(1) MLI and independent agent in article 12(2) MLI France, Mexico, Norway, New
will replace the provisions contained in the treaty. Zealand, Peru, Russia and Spain
Changes in connection with agency PE in article Pre-BEPS: Malaysia79
12(1) MLI will modify the existing provision while
changes on independent agent in article 12(2) MLI
will replace existing provision in the treaty.
79
In summary, article 12 MLI will impact ten out of 34 (29%) Chilean tax treaties on this matter.
–– Avoidance of permanent establishment status through specific activity exemptions
Chile did not make a reservation for the entire article not to apply, but neither opted for option
A nor option B provided by article 13(2) and (3) MLI. Accordingly, these options will not apply
to Chile’s tax treaties. Presumably, this position is based on the reservation made by Chile to
79
The OECD MLI matching database reports a notification mismatch. Chile notified art. 5(5) while Malaysia notified
art. 5(5)(a), and since this mismatch is presumably unintended, the MLI should also apply to this treaty. This
treaty contains a provision that is somehow inspired by art. 5(5)(b) of the 2001 UN Model. The MLI would not
affect this provision based on the UN Model. According to the MLI Explanatory Statement, changes on the agency
PE are not intended to apply “to a provision modelled after art. 5(5)(b) of the 2011 version of the UN Model Tax
Convention and a provision that provides that a person shall be deemed to have a permanent establishment
where the person secures orders for the enterprise. Such provisions would not be affected by the application of
art. 12”. See MLI Explanatory Statement, s. 163.
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article 5(4) of the OECD Model (i.e. excluding subparagraph (f) on combination of activities
from its treaties).80 In fact, if Chile had adopted either option A or option B, subparagraph (f)
would have been included into Chile’s treaties.
Pursuant to article 13(8) MLI, Chile notified the treaties that contain a PE exemption for
preparatory or auxiliary activities in order to include the anti-fragmentation rule provided in
article 13(4) MLI. Chile excluded from this notification the post-BEPS treaties with Italy, Japan
and Uruguay as they already contain an anti-fragmentation rule.
Based on the position adopted by Chile and its treaty counterparties, the MLI will have
the following effect on Chile’s tax treaties:

Only the anti-fragmentation rule of article Pre-BEPS: Australia, Belgium, Colombia,
13(4) MLI will be added. Croatia, France, Ireland, Malaysia, Mexico,
Norway, New Zealand, Peru, Portugal,
Russia, South Africa, Spain and the UK
Post-BEPS: Argentina
In summary, article 13 MLI will partially impact 18 out of 34 (53%) Chilean treaties by way of
adding the anti-fragmentation rule into those treaties.
1.3.3.5. Hybrid mismatch arrangements
Pursuant to article 3(5)(b), Chile reserved the application of the provision on hybrid entities
of article 3(1) MLI with respect to those treaties that already contain a similar provision (i.e.
Japan, New Zealand, South Africa, Sweden, the UK, the US and Uruguay).

Article 3(1) would apply and supersede the Pre-BEPS: Australia; Belgium; Mexico;
provisions of the agreement to the extent Norway; Poland and Russia
of incompatibility.
Post-BEPS: Argentina
Article 3(1) (as modified by the saving Pre-BEPS: Ireland; Malaysia and Spain
clause referred to in article 3(3)) would
apply and supersede the provisions of the
agreement to the extent of incompatibility.
80
OECD Comm. on art 5, s. 210.
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Chile

Article 3(2) would apply. Pre-BEPS: Australia; Belgium; Mexico; New
Zealand; Norway; Poland; Russia; South
Africa and Spain.
In summary, article 3 MLI will impact 13 out of 34 (38%) Chilean treaties. Particularly, eight
treaties will be impacted by both article 3(1) and (2), two treaties will only be impacted by
article 3(1) (Ireland and Malaysia), and three treaties will only be impacted by article 3(2) (New
Zealand, South Africa and Uruguay).
1.3.3.6. Reservations
Chile made a general reservation to the provision of article 4 on dual resident entities.
According to the MLI Bill, the inclusion of such provision is not necessary since this situation
has already been dealt with by Chilean tax treaties.81
Chile also opted-out of article 8 on dividend transfer transactions. This rule was considered
unnecessary since Chile made a reservation to article 10 of the OECD Model based on which
Chile’s taxing rights on outbound dividends are not limited by the reduced treaty rates.82
Further, Chile opted-out of article 14 since it is considered that strategies involving the
splitting-up of contracts are already covered by Chile’s treaties.83 Chile also made a general
reservation to articles 18 thru 26 (arbitration) since it is considered a complex mechanism in
respect of which Chile does not have enough experience as to its effects.84
1.3.3.7. Statistical data
Chile notified all its 34 signed treaties. Finally, 26 out of 34 treaties will be CTAs under the MLI
(76%). The total number of provisions included in Chile’s CTAs is 767. The MLI will directly
impact 133 of these provisions which represents 17.34% of the total number of provisions
contained in Chile’s CTAs.
Chile has concluded tax treaties after the signature of the MLI (i.e. 7 June of 2017). Yet, Chile
has entered into six post-BEPS treaties (i.e. after 2015), namely, with Argentina, People´s Rep.
of China, Czech Republic, Italy, Japan and Uruguay. In general, post-BEPS treaties concluded
by Chile reflect the principles and provisions contained in the MLI and associated revisions
to the 2017 OECD Model.
81
MLI Bill, s. III(3)(b)(ii).
82
MLI Bill, s. III(4)(e)(ii) and OECD Comm. on art 10, s. 74.
83
MLI Bill, s. III(5)(c)(i) and (ii).
84
MLI Bill, s. III(5)(a).
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For instance, a provision dealing with transparent entities similar to the provision
contained in article 3 MLI has been included in the treaties with Japan and Uruguay.
Additionally, except for the treaty with the Czech Republic, all Chile’s post-BEPS treaties
include the new preamble of article 6 MLI. Further, Chile’s treaties with Argentina, China
and Uruguay include a GAAR plus an LOB, whereas only a GAAR has been included in the
treaties with Italy and Japan.
In general, the GAAR included in these treaties follows the wording of article 7(1) MLI. On
the other hand, the LOB provision included in the treaties with Argentina, China and Uruguay
seems to resemble more closely the detailed LOB rather than the SLOB. However, unlike the
detailed LOB addressed by the Commentary to the OECD Model 2017, the rule contained in
Chile’s tax treaties does not include the paragraph on derivative benefits.
Post-BEPS treaties (except the Czech Republic) also include a rule in line with article 9 MLI
aimed at counteracting the circumvention of provisions dealing with the sale of interests in
real estate entities (including the 365-day testing period to assess the value of the alienated
rights).85
Further, post-BEPS treaties have been impacted substantially by BEPS Action 7. Almost
all post-BEPS treaties (except in the case of the Czech Republic) embrace the new wording of
the agency PE concept dealing with commissionaire arrangements and similar strategies. In
particular, the treaties with Italy, Japan and Uruguay contain virtually the same wording as
article 5(5) of the OECD Model 2017 and article 12(1) MLI. Provisions contained in the treaties
with Argentina and China closely resemble the wording of the OECD Model 2017, although
they are not identical.
Similarly, almost all the post-BEPS treaties concluded by Chile (again with the exception
of the Czech Republic) contain the new wording of the OECD Model 2017 that rules out the
independent nature of an agent when it acts exclusively or almost exclusively on behalf of
an enterprise or several enterprises which are closely related.86
Chile’s approach towards preparatory or auxiliary activities has not been consistent in
post-BEPS treaties. On this point, Chile’s post-BEPS treaties have not completely followed
the wording of the 2017 OECD Model. Further, consistent with the pre-BEPS treaty policy and
the reservation made by Chile to article 5(4) of the OECD Model, Chile’s post-BEPS treaties do
not contain the hypothesis of article 5(4)(f) that involves a combination of auxiliary activities.
The new general requirement that all the activities of article 5(4) must be of a preparatory
or auxiliary character has been reflected in the post-BEPS treaties concluded with Argentina,
China, Czech Republic, Italy and Uruguay, while the anti-fragmentation rule has been
included in the treaties with Italy, Japan and Uruguay.87
Although Chile opted-out of article 8 MLI, a provision dealing with dividend transfer
transactions was included in the treaty with Japan (although this rule provides for a reduced
six-month holding period).88 Similarly, although Chile opted-out of articles 18 thru 26 MLI, an
arbitration clause was included in the treaties with Japan, Italy and Uruguay.89
85
Art. 13(4) of the treaty with China goes even beyond and establishes a three-year testing period.
86
The treaties with Argentina and China ,instead of referring to “closely related” refer to “associated” (under art.
9) and “connected” (under art. 5(6)(b)), respectively.
87
Art. 5(4.1) of the treaties with Italy and Uruguay, and art. 5(5) of the treaty with Japan.
88
Art. 10(2)(a) of the treaty with Japan.
89
Art. 25(6) of the treaty with Japan, 24(5) Italy and 25(5) Uruguay. In the treaties with Italy and Uruguay the
contracting states must by mutual agreement resolve the application of the paragraph on arbitration.
259
Chile
The MLI has not yet entered into force in Chile. Yet, the MLI Bill is currently under discussion
before the Chilean Congress.
2.1.1. Procedure adopted in order to implement the MLI
The MLI Bill was sent to the Chilean Congress on 8 April 2019, and it is currently undergoing
the first constitutional procedure of its ratification process. On 11 June 2019, the Commission
Foreign Affairs, Interparliamentary Issues and Latin-American integration, released a report
in which a draft agreement was approved by unanimity.
Throughout the first part of the ratification process, the Chilean Congress has not been
actively involved in looking at or analyzing the details of the MLI content.
Chile is a dualist country where international treaties are not directly applicable but only
after they undergo a constitutional procedure. International treaties have to be approved by
the Chilean Congress before becoming part of domestic legislation.90 Although international
treaties undergo a constitutional procedure which is similar to the creation of domestic law,
it is generally understood that international treaties prevail over domestic laws in case of
conflict.91
Accordingly, the MLI will become part of the domestic legislation once approved by the
Congress and its provisions should prevail over domestic law in case of conflict.92
No specific interpretation issues on the MLI provisions have yet arisen before Chilean courts
or at administrative level.
The MLI and more generally BEPS principles have certainly exerted some influence on the
interpretation of tax treaties. Certain recent rulings issued by the tax authority show a marked
90
This procedure is set out in art. 54(1) of the Chilean Constitution.
91
H. Hurtado, Tributación Internacional, 1st ed., p. 6, para. 3. (Legal Publishing Chile 2018).
92
The primacy of tax treaties has also been endorsed by the Chilean tax authority in ruling 336 of 2002 and more
recently confirmed by ruling 2192 of 2019.
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Suffiotti
trend towards a more purposive or teleological interpretation of tax treaties.93

These rulings emphasize the relevance of the Commentaries to article 1 of the OECD
Model for the interpretation of tax treaties. Particularly, the tax administration has explicitly
endorsed the general principle pursuant to which treaty benefits must not be granted when
one of the principal purposes to enter into a certain transaction, contract or arrangement is
to obtain treaty benefits in circumstances where the granting of those benefits would be
contrary to the object and purpose of the treaty.
It is expected that this approach may be strengthen once the MLI enters into force.
It is not yet clear whether the MLI will have any impact on pre-MLI treaties which will not
be modified by the MLI. Yet, it is possible that the MLI may have certain influence on the
interpretation of tax treaties even before it is approved by the Chilean Congress.
For instance, ruling 843 of 2017 dealing with the application of the pre-BEPS treaty with
Belgium (that contains a title limited to the prevention of “tax evasion”), stated that treaties
not only have the purpose of preventing tax evasion but also tax avoidance (in line with the
purposes declared by the MLI).94
It is expected that the PPT may produce a dissuasive effect on aggressive tax planning,
as it somehow happened with the entry into force of the GAAR in 2014. It is not yet clear
whether the tax authority will release a report (similar to the GAAR Catalogue) addressing
cases potentially abusive under the PPT. Such a report could draw a line on the type of cases
which would prima facie be considered to be abusive by the tax administration under the PPT.
There is no certainty on whether the special procedure for the request of rulings under
the GAAR will be available for requests made under the PPT. Further, under the domestic
GAAR, the existence of abuse of law or simulation must be declared by a Tax Court following
a judicial procedure. It is not yet clear whether cases scrutinized under the PPT will also be
subject to such judicial procedure.
93
For instance, rulings 166 of 2017 and 1052 of 2019.
94
The same principle had already been established in 2009 by Circular 57, s. I(1).
261
China, People’s Republic of
Branch reporter
Na Li1

The People’s Republic of China (hereinafter China) was among the first group of jurisdictions
signing the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent
Base Erosion and Profit Shifting (“MLI”) on 7 June 2017. The MLI, however, has not come into
force in China as of 9 December 2019, because it is still under the ratification process at the
National People’s Congress of China. A total of 102 Chinese tax treaties were listed as the
Covered Tax Agreements (“CTAs”), representing nearly 96% of all Chinese tax treaties by then.
China opted-in all the MLI articles reflecting the minimum standards of the BEPS Actions
6 and 14, namely article 6 (Purpose of a Covered Tax Agreement), article 7 (Prevention of
Treaty Abuse) and article 16 (MAP). Also, China opted-in some articles reflecting the best
practice measures of the BEPS Actions, including article 4 (Dual-resident entities), article 8
(minimum shareholding period), article 9 (alienation of shares) and article 17 (corresponding
adjustments). In the meantime, China opted out of six MLI articles and did not choose the
optional articles for the exemption method and the mandatory arbitration. The new bilateral
tax treaties and re-negotiated tax treaties, which China concluded after the signature of the
MLI, also have included all the MLI articles reflecting the minimum standards of the BEPS
Action Plan, although some of the contracting states are not signatories to the MLI yet. This
may demonstrate China’s determination to implement the outcomes of the BEPS Action
Plan. With regard to the MLI articles beyond the minimum standard measures, the new tax
treaties selectively included some of these articles, perhaps due to different treaty policies
and negotiation results between China with the respective treaty partners.
It is unnecessary to enact a domestic law particularly for the purpose of implementing
the MLI in China, because the implementation mechanism of the MLI is not conflicting with
Chinese domestic laws and China is subject to the monist theory. The State Administration of
Taxation of China shall modify the CTAs in accordance with the matching and compatibility
mechanism of the MLI, when the MLI comes into force in China. If any modified treaty
provision is in conflict with Chinese domestic laws, the treaty provision shall prevail. Such
effect of the MLI on Chinese tax treaties and tax policies is different from the OECD MC and
Commentaries, which have no legally binding effect on China although in practices they have
significantly influenced Chinese tax legislation and administration. As a general principle,
retrospective effect should not arise on Chinese tax laws and tax treaties upon the CTAs being
modified by the MLI, unless the retrospective effect is for a purpose to better protecting the
interest and rights of taxpayers.
Interpretation of the MLI will be a quite debatable issue in China, particularly on
the following two questions: (a) what is the role of the MLI Explanatory Statement in
interpretation of the MLI? And (b) what are the roles of the OECD MCs, Commentaries and
the outcomes of the BEPS Action Plan? Debates already commenced and will become more
1
Lawyer and Associate Professor at East China University of Political Science and Law (Shanghai).
IFA © 2020 263

intensive when the MLI comes into force in China. It is still unclear that whether the MLI
will change the approaches in which tax treaties are interpreted, and the author has not
observed any move in China from the method of static tax treaty interpretation to the method
of ambulatory tax treaty interpretation. However, teleological interpretation is expected to
be more frequently adopted, because a number of the MLI articles opted-in by China are
subject to the purposive test.
A number of anti-tax avoidance doctrines and provisions already exist in both Chinese
domestic tax laws and tax treaties, including the SAARs and GAAR, procedures for treaty
entitlement, concept of “beneficial owners”, PPT and LOB provisions, and treaty provisions
for applying domestic anti-tax avoidance rules. Upon the CTAs being modified by the MLI,
more anti-treaty shopping provisions will be available in the CTAs. The Chinese GAAR will
also be applied by Chinese authorities in parallel with other treaty-based doctrines for
the purpose of tackling treaty abuse. Hence both the taxpayers’ uncertainties and the tax
administration cost are expected to increase, and more tax disputes might arise. However,
as of today, no official document is published with regard to the impact of the MLI on tax
treaties, tax compliance and administration, economic activities and budgetary matters
of China; nor has any measure been enacted by the Chinese government for the purpose of
dealing with the potential uncertainties which the MLI may bring to treaty interpretation
and application in China.
Treaty Network
1.1. Introduction
China has been actively involved in the BEPS Action Plan with drafting and negotiating the
Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion
and Profit Shifting (“MLI”). A senior official from the State Administration of Taxation of China
(“SAT”) took a position as the vice-chair of the Ad Hoc Group for developing the multilateral
instrument under BEPS Action 15,2 and China was amongst the first group of jurisdictions
to sign the MLI on 7 June 2017. As of today,3 the MLI, however, has not come into force in
China yet, because it is still under the ratification process at the National People’s Congress
of China (“NPC”).
There are several reasons for China having such a positive attitude regarding the MLI.
First, China has joined the Inclusive Framework of the BEPS Action Plan, so it is obliged
to implement the treaty-relevant minimum standards. Given that China has concluded
more than 100 bilateral double taxation agreements (“Tax Treaties”), it inevitably needs an
instrument to amend these Tax Treaties in an efficient approach. Using the MLI will be more
efficient for China than negotiating one by one with its treaty partners. Second, a number of
2
Mr. Tizhong Liao, Director General of the International Taxation Department at the SAT was a vice-chair of the
Ad Hoc Group. See the OECD website: http://www.oecd.org/tax/treaties/work-underway-for-the-development-
of-the-beps-multilateral-instrument.htm (last accessed on 9 December 2019).
3
9 December 2019, on which the author submits this national report.
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Li
MLI articles may address China’s long-term concerns in respect of treaty abuse.4 Third, the
SAT views the MLI as a legal framework for multilateral tax cooperation, which is expected
to provide more tax certainties for cross-border taxpayers and to increase confidence of the
cross-border investors.5
Therefore, although China already had a number of anti-tax avoidance doctrines and
provisions existing in both its domestic tax laws and Tax Treaties, it was still actively engaged
in negotiating, drafting and signing the MLI. A total of 102 Chinese Tax Treaties were listed as
the Covered Tax Agreements (“CTAs”) of China upon signature of the MLI, representing nearly
96% of all Chinese Tax Treaties by then. China has opted-in all the MLI articles reflecting the
minimum standards of the BEPS Actions 6 and 14, and additionally opted-in some articles
reflecting the best practice measurers of the BEPS Actions.6
Upon signing the MLI in 2017, China had concluded bilateral Tax Treaties with 105 jurisdictions,
including its two special administrative regions (i.e. Hong Kong and Macau) and Chinese
Taipei.7 This broad treaty network covers all OECD countries and many developing and less-
developed countries.8 Although China did not publish any model convention, the SAT, which
is in charge of negotiating Chinese tax treaties, has been using an internal guideline when
performing its treaty negotiation work.
China’s treaty position has gradually shifted from a source state to a residence state
in the past 40 years.9 China was in the position of a source state when concluding its Tax
Treaties in 1980s. Many treaty articles at that time were adopted from the UN MC, for the
purpose of protecting China’s interest as a source state. These articles could be found in
the first Tax Treaty which China concluded in 1983 with Japan and in the later Tax Treaties
concluded with the US (1984), France (1984), the UK (1984), Belgium (1985), Germany (1985)
and Norway (1986). Since the 1990s, China has been making efforts to conclude Tax Treaties
with developing and less-developed countries, particularly with jurisdictions where Chinese
investment and business go. This is especially obvious in the last several Tax Treaties China
4
Dongmei Qiu, Collecting Unpaid Tax Offshore: Caribbean Tax Havens and Foreign Direct Investment in China, 68(12)
Bulletin for International Taxation.
5
See the SAT’s Announcement on its website on 7 June 2017 for signing the MLI:
http://www.chinatax.gov.cn/chinatax/n810214/n810641/n2985871/n2985883/n2985973/c2989333/content.
html (last accessed on 9 December 2019).
6
See the “Status of List of Reservations and Notifications at the Time of Signature” of People’s Republic of China, which
was notified by SAT to OECD upon signature of the MLI in June 2017.
7
The tax arrangement between the Mainland China and Macau SAR was signed on 27 December 2003 and came
into force on 30 December 2003; the tax arrangement between the Mainland China and Hong Kong SAR was
signed on 21 August 2006 and came into force on 8 December 2006; and the tax cooperation agreement between
the Mainland China and Chinese Taipei was signed on 25 August 2015 and has not come into force yet as of 9
December 2019, Treaties IBFD.
8
Jinyan Li, Chapter 4: Tax Treaties: Network and Interpretation in International Taxation in China: A Contextualized
Analysis, IBFD 2016.
9
China International Taxation Research Institute, Tax Treaty Chapter: 40 years of International Taxation in China,
China Taxation Publishing House, 2018.
265
concluded before the signature of the MLI, namely the Tax Treaties with Uganda (2012),
Botswana (2012), Ecuador (2013), Chile (2015), Zimbabwe (2015) and Cambodia (2016), where
China clearly was in the position of a residence state preferring to the OECD MC.
1.2.2. Domestic and treaty-based anti-tax avoidance doctrines, provisions and practices before
the MLI
All Chinese Tax Treaties, which were concluded before the MLI, have defined in their
preambles that the purposes of the Tax Treaty were to avoid double taxation and to prevent
fiscal evasion. Except for the China-Chile Tax Treaty (2015), none of them mentioned the
purpose of avoiding double non-taxation.
Nevertheless, a number of anti-tax avoidance doctrines and provisions already existed
in both Chinese domestic tax laws and Tax Treaties, particularly in respect of anti-treaty
shopping arrangements. Chinese tax authorities in practice also have implemented these
anti-tax avoidance doctrines and provisions to tackle treaty abuse.
A) Treaty entitlement
Non-Chinese tax residents, who were recipients of interest, dividends, royalties and capital
gains sourced from China, were required by the SAT to obtain an advance approval when
they sought for treaty entitlement.10 Chinese tax authorities would review their application
documents before granting an approval. And according to the circular published by the SAT in
2008, such a treaty entitlement application was rejected by Chinese tax authorities, because
the recipient failed to prove that it was a Barbados tax resident when applying for benefiting
from the China-Barbados tax treaty (2000).11
This pre-approval regime was replaced by the SAT in November 2015 with a a filing
mechanism, where recipients (or their withholding agents) were required to file their tax
returns together with all proofing documents. Although the recipients are able to benefit
from the relevant Chinese Tax Treaties without waiting for an approval from the in-charge
tax authorities, Chinese tax authorities kept a power to review the filing documents without
subject to any statutes of limitation, and they may request the recipients to pay additional
income taxes in China if they have found them ineligible for the treaty entitlement.12
10
SAT, Administrative Measures on Tax Treaty Treatment of Non-Residents (Guoshuifa [2009] No. 124), issued
by the SAT on 24 August 2009; SAT, Notice of the State Administration of Taxation on the Issues concerning
the Application of the Dividend Clauses of Tax Agreements (Guoshuihan [2009] No. 81), issued by the SAT on 2
February 2009.
11
SAT, A Case of the Appropriate Handling of Tax Treaty Abuse by the Xinjiang Unger Autonomous Region State
Tax Bureau (Guoshuihan[2008] No. 1076), issued by the SAT on 30 December 2008.
12
SAT, Public Notice of the State Administration of Taxation on Administrative Measures on Tax Treaty Treatment of
Non-Residents (SAT Public Notice [2015] No. 60), issued by the SAT on 27 August 2015. This filing mechanism will
be replaced by a simpler-filing mechanism effective from 1 January 2020, where non-Chinese tax residents are
required to only file the tax returns. But the non-Chinese tax residents must keep all the proofing documents in
case for an investigation by Chinese tax authorities in the future. See SAT, Public Notice of the State Administration
of Taxation on Administrative Measures on Tax Treaty Treatment of Non-Residents (SAT Public Notice [2019] No.
35), issued by the SAT on 14 October 2019.
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Li
B) Beneficial ownership
All Chinese tax treaties have used the term “beneficial owners” in their articles for passive
incomes, although this term has remained undefined in Chinese domestic laws until 2009.
The SAT commenced to define this term in October 2009 through issuing several tax circulars,13
which request that the beneficial owners as provided in Chinese tax treaties should have both
substantial business operations (such as manufacturing, trading and management, etc.) and
a right to control or dispose the rights or the properties from where the income derives. The
SAT also applied the “substance-over-form doctrine” as a benchmark to test whether the
recipients could qualify as “beneficial owners” under Chinese Tax Treaties. Therefore, the
concept “beneficial owners” in Chinese domestic laws is defined broader than the conduit
situations as provided by the OECD. This might be due to China’s keen interest on tackling
treaty shopping arrangements through using low-tax jurisdictions, which has been a quite
serious issue for China for a long time.14 In practice the Chinese tax authorities have applied
the concept of “beneficial owners” to deny recipients of treaty benefits as well.15
C) PPT and LOB provisions
The purpose tests (“PPT”) provisions have already been included into a number of Chinese Tax
Treaties before the MLI. There were generally two types of PPT provisions. One type is to cover
only the tax benefits with regard to dividends, interest and royalties, and this type of PPT
provisions could be found in the China-Singapore Tax Treaty (2007),16 the China-Belgium Tax
Treaty (2009)17 and the China-Switzerland Tax Treaty (2013).18 Another type is a separate PPT
provision, which covers all kinds of treaty benefits, and this type of PPT provision is provided
13
SAT, Notice of the State Administration of Taxation on how to Understand and Determine the “Beneficial Owners”
in Tax Treaties (Circular 601 [2009]) (27 October 2009) effective from 27 October 2009; SAT, Bulletin on the
Recognition of Beneficial Owners in Tax Treaties (Bulletin 30 [2012]) (29 June 2012), effective from 29 June 2012;
And SAT, Notice of the State Administration of Taxation on Some Issues on the Concept of “Beneficial Owners” in
Tax Treaties (Bulletin 9 [2018]), which the SAT issued on 3 February 2018 and has replaced the afore-said Circular
601 [2009] and Bulletin 30 [2012] on 1 April 2018.
14
See ibid.3.
15
Dongmei Qiu, The Concept of “Beneficial Ownership” in China’ s Tax Treaties – The Current State of Play. 2(2013) Bulletin
for International Taxation, Journals IBFD. Nolan Cormac Sharkey, China’s Tax Treaties and Beneficial Ownership:
Innovative Control of Treaty Shopping Inferior Law-Making Damaging to International Law? 12(2011) Bulletin for
International Taxation, Journals IBFD.
16
Art. 10(6), art. 11(8), art. 12(7) of the Agreement between the Government of the People’s Republic of China and
the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect
to Taxes on Income (7 October 2009); art. 10(6), art. 11(8), art. 12(7) of the Agreement between the Government
of the People’s Republic of China and the Kingdom of Belgium for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with respect to Taxes on Income (11 July 2007)
17
Art. 10(6), art. 11(8), art. 12(7) of the Agreement between the Government of the People’s republic of China and
the Kingdom of Belgium for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect
to Taxes on Income (7 October 2009)
18
Art. 10(6), art. 11(8), art. 12(7) of of the Agreement between the Government of the People’s republic of China and
the Swiss Federal Council for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect
to Taxes on Income and on Capital (25 September 2013)
267
only in a few of Chinese Tax Treaties, including the China-France Tax Treaty (2013)19 and the
China-Germany Tax Treaty (2014).20
The limitation of benefit (“LOB”) provisions were first time included into Chinese Tax
Treaties in 1984 and 1986 respectively, when China and the US signed two protocols to amend
their Tax Treaty with regard to the treaty benefits for dividends, interests and royalties.21 Then
in September 2005, a LOB provision was included into the protocol to the China-Mexico Tax
Treaty (2005) with regard to treaty benefits for dividends, interests and royalties.22 After the
BEPS Action Plan commenced, China and Ecuador included a LOB provision into their Tax
Treaty in 2013, covering all kinds of treaty benefits.23
It is notable that in 2015, the Chile-China Income Tax Treaty (2015) included both a PPT
provision, a LOB provision covering all kinds of treaty benefits, and stating in its preamble
that avoidance of double non-taxation is also a purpose of the treaty.24 This was the first time
that a Chinese Tax Treaty included multiple-layered anti-tax avoidance provisions which are
beyond the requirements of the minimum standards under BEPS Action 6. For this reason,
the SAT believed it was unnecessary to include the China-Chile Tax Treaty (2015) into the list
of the CTAs upon signature of the MLI in June 2017.25
D) Provisions of applying domestic anti-tax avoidance rules
A number of Chinese Tax Treaties (for example, the China-Singapore Tax Treaty (2007), the
China-UK Tax Treaty (2011) and the China-Chile Tax Treaty (2015)) have a provision stating
that “nothing in the tax treaty shall prejudice the right of each contracting state to apply its
domestic laws and measures concerning the prevention of tax avoidance, whether or not
described as such, insofar as they do not give rise to taxation contrary to the agreement”.
19
Art. 24 of the Agreement between the Government of the People’s republic of China and the Government of the
French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes
on Income (26 November 2013).
20
Art. 29 of the Agreement between the Government of the People’s republic of China and the Federal Republic
of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on
Income and on Capital (28 March 2014).
21
Art. 7 of the Protocol to the Agreement between the Government of the People’s republic of China and the
Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with respect to Taxes on Income (30 April 1984). And art. 1 of the Protocol concerning the Interpretation
of para 7 of the Protocol to the Agreement between the Government of the People’s Republic of China and the
Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with respect to Taxes on Income, signed at Beijing on 30 April 1984 (10 May 1986).
22
Art. 6 of the Protocol to the Agreement between the Government of the People’s republic of China and the
Government of the United Mexican States for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with respect to Taxes on Income (12 September 2005).
23
Art. 23 of the Agreement between the Government of the People’s republic of China and the Government of the
Republic of Ecuador for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to
Taxes on Income (21 January 2013).
24
The preamble of the Chile-China Income Tax Treaty (2015) provides that a purpose of the treaty is “the elimination
of double taxation with respect to taxes on income without creating opportunities for non-taxation or reduced
taxation through tax evasion or avoidance”.
25
OECD (2019), Prevention of Treaty Abuse – Peer Review Report on Treaty Shopping: Inclusive Framework on
BEPS: Action 6, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. See Annex A. Jurisdictional
Data.
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Li
This provision provides a ground for Chinese tax authorities to apply domestic anti-tax
avoidance rules when interpreting and applying these Tax Treaties. The Chinese domestic
anti-tax avoidance rules include both a GAAR (which will be described in the following
paragraph) and those specific anti-tax avoidance rules (SAARs), namely the transfer pricing
rule, the cost-sharing arrangement rule, the controlled foreign company rule and the thin
capitalization rule.
E) GAAR
A general anti-avoidance rule (GAAR) was introduced into the Enterprise Income Tax
Law of China (“EIT Law”) in 2008,26 providing that “(w)here an enterprise makes any other
arrangement not having a reasonable business purpose and leading to a decrease of
its taxable income or tax liabilities, the tax authorities shall have the power to make an
adjustment through using a reasonable method”.
Then the SAT in 2009 listed the “abuse of tax treaties” as one of the four specific scenarios
under which Chinese tax authorities can initiate a GAAR investigation.27 Since then, the GAAR
became the most frequently used legal instrument for Chinese tax authorities to tackle
treaty abuse activities.28 When applying the GAAR, the most important element is to test
whether the taxpayer has a “reasonable business purpose” for carrying out the transactions,
and the burden of proof is on the taxpayer. If the taxpayer fails to fulfill the burden of proof,
Chinese authorities may disregard the legal form of a transaction and then tax the transaction
according to its economic substance.
F) MAP and corresponding adjustments
All Chinese Tax Treaties have a mutual agreement procedure (“MAP”) article, and none of
them has adopted an arbitration mechanism. Most of the Chinese bilateral tax treaties
already had a corresponding adjustment provision in their article 9(2)29 before the MLI. The
SAT has enacted several circulars to implement the MAP respectively with regard to the
disputes on interpreting and implementing tax treaties30 and the disputes on negotiations
26
Art. 47 of the Enterprise Income Tax Law of People’s Republic of China, promulgated by the NPC on 16 Mar. 2007
with effect from 1 January 2008
27
SAT, Notice on Issuing the Measures for the Implementation of Special Tax Adjustments (Trial) (Guoshuifa [2009]
No.2), issued by the SAT on 8 January 2009 but with retroactive effect from 1 Jan.2008. The other three specific
scenarios are (i) abuse of tax incentives; (ii) abuse of the legal form of a company; and (iii) tax avoidance by using
tax havens.
28
A GAAR provision was introduced into the Individual Income Tax Law of People’s Republic of China on 31 August
2018. Chinese tax authorities now have the legal ground to investigate treaty abuse conducted by individuals.
29
See ibid.5.
30
SAT, Public Notice of the State Administration of Taxation on Issuing the “Implementation Methods of Mutual
Agreement Procedure under Tax Treaties” (SAT Public Notice [2013] No.56), issued by the SAT on 24 September
2013.
269
of advance pricing agreements and on corresponding adjustments.31

It is reported that the SAT has been making efforts to facilitate Chinese tax residents in
filing MAP applications and to expedite negations with the competent authority of treaty
parties.32 For examples, the SAT sent tax officials to Chinese embassies (consulates) in several
countries to coordinate in resolving tax disputes and the SAT established a unit particularly
responsible for conducting MAP in 2016. During the period from 2015 to 2017, the SAT has
negotiated 211 cases under the MAP of Chinese Tax Treaties.33
1.3. Direct Impact of the BEPS Action Plan and the MLI
1.3.1. Signature, ratification and entry into effect
The Commissioner of the SAT signed the MLI on 7 June 2017. As of today, the MLI is still in the
ratification process at the NPC, and no official announcement is made regarding an expected
ratification time or an update on the ratification process for the MLI. However, given the
fact that the latest multilateral tax agreement (i.e. the Multilateral Convention on Mutual
Administrative Assistance in Tax Matters) took two and half years to complete its ratification
process at the NPC34, the MLI could be expected to complete the ratification process and entry
into effect in China soon.
There is no publication from the Chinese tax authorities of an assessment with regard to
the impact of the MLI on tax compliance and administration or economic activities; there is
also no publication from the NPC, the State Council, or any other governmental institution
of a preliminary assessment of the economic and budgetary impact of the MLI in China.
In total 102 Chinese Tax Treaties have been included into the list of the CTAs upon the
signature of the MLI,35 which represents nearly 96% of all Chinese Tax Treaties. The five Tax
31
SAT, Public Notice of the State Administration of Taxation on Issuing the “Administrative Measures of Special Tax
Investigation and Adjustment and Mutual Agreement Procedure” (SAT Public Notice [2017] No.6), issued by the
SAT on 17 March 2017. It is worthy to note that in the preamble of this Public Notice, the SAT explicitly mentioned
that a purpose of enacting this Public Notice is to actively implement the outcomes of the BEPS Action Plan.
32
Lin Han, Yang Gao, Recent Development and Trend of Tax Treaties from International Perspectives, an Interview with Ms.
Yuying Meng, the Deputy- Director General of the International Taxation Department at the SAT, 6(2017) International
Taxation in China.
33
See the SAT website: http://www.chinatax.gov.cn/chinatax/n810219/n810724/c5139564/content.html (last
accessed on 9 December 2019).
34
China signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters on 27 August 2013
and completed the ratification process on 1 February 2016; See the SAT Website:
http://www.chinatax.gov.cn/chinatax/n810341/n810770/index.html (last accessed on 9 December 2019).
35
The list of the 102 CTAs is slightly different from the tax treaties list shown on the SAT’s website (see http://www.
chinatax.gov.cn/n810341/n810770/index.html). The two differences are: (1) China signed two tax treaties with
Romania, in 1991 and 2016, respectively, which are listed as two treaties in the list of the 102 CTAs, but are counted
as one on the list shown on the SAT’s website; and (2) the tax treaty with Yugoslavia is listed as two treaties (one
applicable to Montenegro and the other applicable to Serbia) in the list of the 102 CTAs, while it is counted as
one on the list shown on the SAT’s website.
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Treaties not on the list of the CTAs are as follows:

–– China–India Tax Treaty (1994);
–– China–Chile Tax Treaty (2015);
–– Tax arrangement between the Mainland China and Macau Special Administrative Region
(SAR) (2003);
–– Tax arrangement between the Mainland China and Hong Kong SAR (2006); and
–– Tax cooperation agreement between the Mainland China and Chinese Taipei (2015).
In the notification sent to the OECD upon signature of the MLI, the SAT did not explain the
reason for not including the above five Tax Treaties into the list, as the signatories were not
obliged to explain the reasons for not selecting a tax treaty to be covered by the MLI. It was
in the OECD Peer Review Report on Treaty Shopping as published in February 2019,36 the SAT
explained that the China-India Tax Treaty (1994) was not included into the list because China
and India were negotiating a new treaty at that time,37 and the China-Chile Tax Treaty (2015)
was not listed because this treaty already has all the articles reflecting the treaty-relevant
minimum standards of the BEPS Action Plan. Although the SAT did not give a reason for not
listing the tax arrangements with the Hong Kong SAR, the Macau SAR, and Chinese Taipei,
one could find that the structure as well as provisions of these tax arrangements are not in
conformity with the OECD MC and the UN MC. So even if these tax arrangements had been
included in the list of the CTAs, it would be difficult to modify these tax arrangements by
application of the MLI.
China opted in eight MLI articles, including all the following three articles reflecting the
minimum standards of BEPS Actions 6 and 14:
–– article 6 (Purpose of a Covered Tax Agreement), reflecting the Action 6 minimum
standard;
–– article 7 (Prevention of Treaty Abuse), reflecting the Action 6 minimum standard through
choosing the PPT provisions; and
–– article 16 (Mutual Agreement Procedure), reflecting the Action 14 minimum standard
through committing to improve the MAP.
China’s opting-in of all the above minimum standard articles may satisfy its obligation under
the Inclusive Framework of the BEPS Action Plan. China also opted into some MLI articles
which are not minimum standard measures. For examples, article 4 (Dual Resident Entities)
and article 17(corresponding adjustments). This may demonstrate China’s determination
to implement the outcomes of the BEPS Action Plan. In the meantime, China opted out of
six MLI articles and did not choose the optional articles for the exemption method and the
mandatory arbitration. Table 1 below is a summary of China’s positions and reservations on
the MLI.
36
See ibid.23.
37
This statement of China is affirmed by the fact that China and India signed a protocol on 26 November 2018 to
amend the China-India Tax Treaty (1994) through including all the treaty-related minimum standards of the
BEPS Action Plan.
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Table 1: China’s positions and reservations on the MLI
MLI Provisions China China China

opt-in made a did not
reservation choose
Part II article 3 – Transparent Entities ✓
Hybrid
article 4 – Dual Resident
Mismatches ✓
Entities
article 5 – Application of
Methods for Elimination of ✓
Double Taxation
Part III article 6 – Purpose of a Covered
✓
Treaty Abuse Tax Agreement
article 7 – Prevention of Treaty
✓
Abuse
article 8 – Dividend Transfer
✓
Transactions
article 9 – Capital Gains
from Alienation of Shares or
Interests of Entities Deriving ✓ ✓
their Value Principally from
Immovable Property
article 10 – Anti-abuse Rule for
Permanent Establishments ✓
Situated in Third Jurisdictions
article 11 – Application of
Tax Agreements to Restrict a
✓
Party’s Right to Tax its Own
Residents
Part IV article 12 – Artificial
Avoidance of Avoidance of Permanent
Permanent Establishment Status through ✓
Establishment Commissionaire Arrangements
Status and Similar Strategies
article 13 – Artificial Avoidance
of Permanent Establishment
✓
Status through the Specific
Activity Exemptions
article 14 – Splitting-up of
✓
Contracts
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MLI Provisions China China China

opt-in made a did not
reservation choose
article 15 – Definition of a
Person Closely Related to an ✓
Enterprise
Part V article 16 – Mutual Agreement
✓ ✓
Improving Procedure
Dispute
article 17 – Corresponding
Resolution ✓
Adjustments
Part VL article 18 – Choice to Apply
✓
Arbitration Part VI
article 19 – Mandatory Binding
✓
Arbitration
article 20 – Appointment of
✓
Arbitrators
article 21 – Confidentiality of
✓
Arbitration Proceedings
article 22 – Resolution of a
Case Prior to the Conclusion of ✓
the Arbitration
article 23 – Type of Arbitration
✓
Process
Article 24 – Agreement on a
✓
Different Resolution
article 25 – Costs of Arbitration
✓
Proceedings
article 26 – Compatibility ✓
A) Dual-resident entities in article 4
China opted in article 4(1) of the MLI and will use it to amend all of its 102 CTAs, in place of
provisions in their dual resident articles for non-individual persons (normally article 4(3) or
4(4) of the CTAs), or in the absence of such provisions.
This will significantly change the current Chinese Tax Treaties, most of which provide for
a tie-breaker rule of either the place of effective management or the place of head office as
the criteria to determine the resident state of a dual-resident entity. These tie-breaker rules
are very important, because the EIT Law provides a broad definition for Chinese resident
enterprises, which include both (1) enterprises incorporated in China according to Chinese
laws, and (2) enterprises incorporated outside of China according to foreign laws but having
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their actual management in China.38 Upon being modified by article 4(1) of the MLI, the tie-
breaker rules in the CTAs will become void, as the competent authorities are obliged only to
have regard to the place of effective management, the place of incorporation and any other
relevant factors. This change might increase the tax uncertainties of taxpayers and the tax
administration cost of both China and its treaty partners.
B) Preamble language in article 6
China opted in article 6(1) of the MLI and will add a purpose of avoiding double non-taxation
into the preamble of all its 102 CTAs. Although article 6(3) of the MLI (i.e. “desiring to further
develop their economic relationship and to enhance their co-operation in tax matters”) is
not a minimum standard of the BEPS Action Plan, China also opted it in and will add article
6(3) into the preamble of all its CTAs, except for the China-Romania Tax Treaty (2016) which
already has a statement similar to the provision of article 6(3).
C) PPT provisions in article 7
China chose the PPT option for the purpose of satisfying the minimum standard for
prevention of treaty abuse, so it committed to add the PPT provisions in article 7 of the MLI
into its 17 CTAs (mainly in their articles on dividends, interest, royalties and/or other income)39
and to apply the PPT provisions in place, or in the absence, of provisions in the remaining 85
CTAs. China did not choose to apply the simplified limitation on benefits (SLOB) provisions in
article 7(8)-(13) of the MLI, and China did not indicate on whether it would agree to allow the
SLOB to be applied by another contracting jurisdiction pursuant to paragraph 7(7)(b) of the
MLI. China did not accept the PPT as an interim measure while intending where possible to
adopt a limitation on benefits provision in addition to or in replacement of the PPT, through
bilateral negotiations.
It is not a surprise that China has opted for the PPT provisions rather than the LOB
provisions. Many Chinese Tax Treaties before the MLI already have the PPT provisions, and
the Chinese GAAR testing the “reasonable business purpose” of the parties is quite consistent
with the functional mechanism of the PPT. Hence Chinese tax authorities already have
experiences in applying the purposive test to tackle tax avoidance.
38
See art. 2 of the EIT Law.
39
See China’s Tax Treaties with France (art. 10(7), art. 11(8), art. 12(7), art. 22(4) and art. 24), the UK (art. 10(7), art.
11(8), art. 12(7) and art. 21(4)), Belgium (art. 10(6), art. 11(8) and art. 12(7)), Germany (art. 29(1)), Denmark (art.
10(6), art. 11(8), art. 12(7) and art. 21(4)), Singapore (art. 10(6), art. 11(8) and art. 12(7)), Finland (art. 10(6), art. 11(8)
and art. 12(7)), New Zealand (art. 4(1)(a) of (a)), the Netherlands (art. 10(7), art. 11(9) and art. 12(7)), Australia (art.
4(5)), Switzerland (art. 10(7), art. 11(8), art. 12(7) and art. 21(4)), Malta (art. 10(6), art. 11(8), art. 12(7) and art. 22(3)),
Russia (art. 10(6), art. 11(8), art. 12(7) and art. 21(3)), Nigeria (art. 10(5), art. 11(7) and art. 12(6)), Czech Republic (art.
21(1) and (3)), Botswana (art. 10(6), art. 11(8), art. 12(7) and art. 21(3)) and Zimbabwe (art. 10(6), art. 11(8) and art.
12(8)), Treaties IBFD.
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D) Minimum shareholding period in article 8
China committed to add into its 36 CTAs article 8 of the MLI, which provides a minimum
shareholding period of 365 days for transactions or arrangements undertaken to access
the reduced treaty rate on dividends paid to a parent company.40 Upon being modified,
recipients of dividends under Chinese Tax Treaties will be subject to different holding
period requirements. Those under these 36 CTAs must satisfy the above requested 365-
day minimum period for the purpose of enjoying lower tax rates under the relevant treaty.
Meanwhile, the recipients of dividends under the other Chinese Tax Treaties are not subjected
to the aforementioned minimum period. The SAT did not explain the reason for selecting
these 36 CTAs in particular but having different holding period requirements in Chinese Tax
Treaties might arise a concern of distorting investment decisions.
E) Alienation of shares in article 9
Although China opted in article 9(1) of the MLI, meanwhile it made a reservation on paragraph
a) of the provision regarding to the 365-day requirement. There is no any official statement
(either in the 2019 OECD Peer Review Report on Action 6 or in any other form) from the SAT
for making this reservation. As a result, China has only committed to add into the capital
gain article of its 81 CTAs41 with the remaining content of MLI article 9(1), providing that gains
derived by a resident of a contracting jurisdiction from the alienation of shares or other rights
of participation in an entity, may be taxed in the other contracting jurisdiction provided
that these shares or rights derived more than a certain part of their value from immovable
property (real property) situated in that other contracting jurisdiction (or provided that more
than a certain part of the property of the entity consists of such immovable property (real
property)) shall apply to shares or comparable interests, such as interests in a partnership or
trust (to the extent that such shares or interests are not already covered) in addition to any
shares or rights already covered by the provisions.
40
See China’s Tax Treaties with France, Belgium, Germany, Denmark, Singapore, Canada, Finland, Thailand, the
Netherlands, Switzerland, Austria, Malta, Luxembourg, Korea, Russia, Ukraine, Armenia, Iceland, Lithuania,
Latvia, Estonia, the Philippines, Ireland, Barbados, Moldova, Cuba, Venezuela, Greece, Trinidad and Tobago,
Georgia, Algeria, Tajikistan, Turkmenistan, Czech Republic, Syria and Zimbabwe, Treaties IBFD.
41
The 21 CTAs which will not be modified by art. 9 are the treaties with Japan, New Zealand, Thailand, Poland,
Kuwait, Romania, Brazil, Belarus, Slovenia, Armenia, Bangladesh, Cuba, Venezuela, Nigeria, Tunis, Trinidad and
Tobago, Brunei, Georgia, the Czech Republic and Syria.
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1.4.1. Opted-in MLI provisions in China’s new tax treaties and re-negotiated tax treaties
After China signed the MLI in June 2017, it has concluded five new bilateral tax treaties42
and has re-negotiated with four contracting states, resulting in either signing a protocol
amending the existing tax treaties or signing a new tax treaty replacing the previous
treaties.43 All the MLI articles reflecting the minimum standards of the BEPS Action Plan
have been included into these new treaties (except for the China-Gabon tax treaty)44and
re-negotiated tax treaties, although some of these contracting states are not signatories
to the MLI yet.
With regard to the MLI articles beyond the minimum standard measures, the new Chinese
tax treaties only selectively included some of them. For example, the China- Argentina tax
treaty (2018) included article 4 of the MLI (dual resident entities), in contrast to the China-
Kenya tax treaty (2017),the China-Gabon tax treaty (2018) and the China Congo tax treaty
(2018) that did not include article 4.45 However, all these new tax treaties have included article
17 of the MLI (corresponding adjustments). The different choices with regard to the MLI
articles are perhaps due to different treaty policies and negotiation results between China
and the respective treaty partners.
1.4.2. Non-opted-in MLI provisions in China’s tax treaties
The LOB provisions of the MLI, which were not adopted by China upon signing the MLI,
have nonetheless been included into the Chinese Tax Treaties with the US (1984), Mexico
(2005), Ecuador (2013) and Chile (2015). However, no LOB provisions were found in the newly
concluded tax treaties or re-negotiated tax treaties after the signature of the MLI.
1.4.3. OECD 2017 MC
China is not an OECD member state, so China made its positions on the OECD MC and
Commentaries in a role of a non-OECD economy. Although the OECD MC and Commentaries
have no legal binding effect on China, they have significantly influenced on Chinese tax
legislation and administration in practice.46 There are no reservations which have been made
42
The five bilateral Tax Treaties were concluded with Kenya (on 21 September 2017), Gabon (1 September 2018), the
Democratic Republic of Congo (5 September 2018), Angola (9 October 2018) and Argentina (2 December 2018).
As of 9 December 2019, none of these new Tax Treaties have come into force. Because the treaty between China
and Angola (2018) is not published yet, the above statements do not reflect the China-Angola Tax Treaty (2018).
43
The re-negotiated treaties with four contracting states were the treaties with India (November 2018), Spain
(November 2018), Italy (March 2019) and New Zealand (April 2019).
44
The China – Gabon tax treaty (2018) did not include the preamble statement for avoiding double non-taxation
nor the PPT provisions.
45
These three tax treaties all have a tie-breaker rule referring to the actual management place of the dual-resident
entities.
46
Tianlong Hu, Na Li, China Tax Treaty and Policy: Development and Updates, in Y. Brauner, P. Pistone eds., BRICS and
the Emergence of International Tax Coordination, IBFD 2015.
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by China to the MLI but not to the 2017 OECD MC or conversely, to reservations made to the
OECD MC but not to the MLI.
Part Two: Practical implementation of provisions of the MLI
2.1.1. Procedure for implementing the MLI
The MLI must be ratified by the NPC for the purpose of entry into force in China. The
Constitutional Law of China explicitly stipulates that it is the power of the Standing
Committee of the NPC to decide the “ratification and abolition of treaties and important
agreements concluded with foreign countries”.47 Debates may arise on a question of whether
the MLI belongs to the category of the “treaties and important agreements” subject to
ratification by the NPC. Although the Constitutional Law did not define the scope of the treaty
category, the Law of the People’s Republic of China on the Conclusion of the Treaty Procedures
provides a list of the “treaties and important agreements”, namely (i) the political treaties
such as friendly cooperation treaties and peace treaties; (ii) treaties relevant to territories
and demarcation of borders; (iii) treaties relevant to judicial assistance and extradition; (iv)
treaties having provisions different from Chinese laws; (v) treaties to which the contracting
parties agree to be approved by the NPC; and (vi) other treaties and agreements subject to
ratification. Clearly, the MLI does not belong to the first three types, but it might fall into
one of the last three types because the provisions of the MLI are different from Chinese
domestic laws and the effectiveness of the MLI, as provided in its text, is subject to ratification/
approval requirements of the signatories. In addition, the Multilateral Convention on Mutual
Administrative Assistance in Tax Matters, which was the latest multilateral tax treaty which
China concluded before the MLI, also went through the ratification process at the NPC.48
With regard to implementation of the MLI in China, no document is published so far by
the NPC or the SAT. But it should be unnecessary to enact a domestic law particularly for the
purpose of implementing the MLI in China, because the implementation mechanism being
provided in the MLI is not conflicting with Chinese domestic laws and China is subject to
the monist theory. Hence, when the MLI comes into force in China, the SAT in the position
of the highest Chinese tax authority in charge of negotiation and application of Chinese
Tax Treaties, shall modify the CTAs in accordance with the matching and compatibility
mechanism of the MLI.
47
Arts. 67 and 81 of the Constitutional Law of China, promulgated by the NPC on 4 December 1982. The same
provisions are also provided in arts. 3 and 7 of the Law of the People’s Republic of China on the Conclusion of the
Treaty Procedures, promulgated by the NPC on 28 December 1990.
48
Decision of the Standing Committee of the National People’s Congress on Ratifying the Multilateral Convention
on Mutual Administrative Assistance in Tax Matters, issued by the Standing Committee of the NPC on 1 July 2015.
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The effect of the MLI on Chinese tax treaties and tax policies shall be different from the
effect of the OECD MC and Commentaries, because the MLI will be used to modify relevant
provisions of 102 CTAs. If any modified treaty provision of the CTAs is in conflict with Chinese
domestic laws, the treaty provision shall prevail.49
Interpretation of the MLI will be a debatable issue in China. First, what is the role of the
MLI Explanatory Statement in interpreting the MLI? The MLI Explanatory Statement was
prepared by the Ad Hoc Group to provide clarification of the approach taken in the MLI and
how each provision of the MLI is intended to affect existing tax treaties. The MLI Explanatory
Statement also indicates its function as to “clarify the operation of the Convention to modify
Covered Tax Agreements”. So, one may argue that China should refer to the MLI Explanatory
Statement, and at least to the purposive context with regard to “the agreed understanding of
the negotiators with respect to the Convention”. However, the MLI Explanatory Statement also
explicitly provides that “it is not intended to address the interpretation of the underlying BEPS
measures (except with respect to the mandatory binding arbitration provision contained in
articles 18 through 26)”. With such a statement, the MLI Explanatory Statement seems to
refuse to play a role in interpretation of the underlying BEPS measures. This will unavoidably
confuse (perhaps also intensify) the debates in China amongst scholars, practitioners, tax
officials, and even judges with regard to the role of the MLI Explanatory Statement in
interpretation of the MLI.
Second, what are the roles of the OECD MCs, Commentaries and outcomes of the BEPS
Action Plan? One may argue that these documents should not make significant contribution
because China is not an OECD member state and the OECD MC and Commentaries have
never officially become interpretive references in China (although they do have significant
influence in practice). With regard to the outcomes of the BEPS Action Plan, they are not
binding in China neither, except for the minimum standard measures. In the meantime, the
opposing views may argue that China has been actively involved in the work of developing
the MLI as well as other outcomes of the BEPS Action Plan, and the provisions of the CTAs,
upon being modified by the MLI, should be interpreted in good faith in accordance with the
ordinary meaning to be given to the terms of the treaty in their context and in light of its
object and purpose. It would therefore be unreasonable for China to not give a value to the
OECD MC, Commentaries and the outcomes of the BEPS Action Plan when interpreting the
MLI in China.
Debates already commenced,50 and will become more intensive once the MLI comes into
49
See art. 58 of EIT Law.
50
Na Li, The Impact of the Multilateral Instrument on China, 17(2018) Asia-Pacific Tax Bulletin; Na Li, Challenges of the
MLI: How to Conduct the Principal Purpose Test, 76(2019) International Taxation in China. Na Li, Challenges of the
MLI: How to Interpret and Apply the ‘Prevention of Double Non-taxation’ Purpose of Tax Treaties, 75(2019) International
Taxation in China; Na Li, Challenges of the MLI: On the Determination of the Residence State for Dual-resident Entities,
74(2019) International Taxation in China.
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force in China. In the author’s opinion, the Chinese government should not wait until disputes
arise from interpretation of the MLI; rather, it would better make its position clear through
enacting new domestic laws regarding the roles of the MLI Explanatory Statement, the OECD
MC, the Commentaries as well as the outcomes of the BEPS Action Plan in interpretation of
the MLI.
Although the official language of China (i.e. Chinese language) is different from the
official languages used by the OECD, the author does not foresee any issues that may arise
due to language differences and there was no such kind of dispute arising before.
A) General approaches of treaty interpretation
The general approach of tax treaties interpretation in China consists of two parts: (i) to
interpret the treaty according to the context of the treaty and according to the Vienna
Convention (1969); and (ii) to recourse to Chinese domestic laws when interpreting the terms
which are not defined in the treaty, according to article 3(2) which is the same as the provision
of article 3(2) of the OECD MC and has been included in all Chinese tax treaties. The SAT
has enacted 30-plus circulars specifically for the purpose of implementing and interpreting
Chinese tax treaties.51 Examples are the definition of the terms “beneficial owners”, “capital
gains”, “indirect shares transfer”, etc.52 Amongst these SAT circulars, Circular 75 provides the
most detailed descriptive definitions and explanations for every single provision in the China-
Singapore Tax Treaty.53
B) Impact of the MLI and the BEPS Action Plan
It is still unclear whether the MLI will change the approaches in which tax treaties are
interpreted, as the MLI has not come into force in China yet. The author has not observed any
move in China from the method of static tax treaty interpretation to the method of ambulatory
tax treaty interpretation. However, it is expected that the teleological interpretation will be
more frequently adopted when the MLI comes into force in China as a number of the MLI
articles opted-in by China are subject to the purposive test. Examples are the double non-
51
For examples, SAT, Notice on Implementing and Interpreting Some Provisions of the Avoidance of Double
Taxation Agreement (Caishuixiezi [1986] No. 15); SAT, Notice on Implementing and Interpreting Some
Provisions of the China-U.S. Avoidance of Double Taxation Agreement (Caishuixiezi [86] No. 033); SAT, Notice
on Implementing and Interpreting Some Provisions of the China-Netherland Avoidance of Double Taxation
Agreement (Guoshuiwaizi [89] No. 038); SAT, Notice on Implementing and Interpreting Some Provisions of the
China-Singapore. Avoidance of Double Taxation Agreement (Guoshuihan [2008] No. 1212).
52
For example, SAT, Tax Issues for Equity Transfers by Non-China Tax Resident Enterprises (Guoshuihan No. 698
[2009]), issued on 15 December 2009 and effective on 1 January 2008; SAT, Announcement on Several Issues
Concerning the Administration of Income Tax on Non-Resident Enterprises (Bulletin [2011] No. 24), issued on
28 March 2011 and effective on 1 April 2011; SAT, Announcement on Issues Concerning Capital Gains Provision
under the Tax Treaties (Bulletin [2012] No. 59), issued and effective on 31 December 2012.
53
SAT, Interpretation Notes on the Double Tax Agreement Concluded between China and Singapore (Guoshuifa No.
75 [2010]), issued and effective on 26 July 2010. In Circular 75 the SAT explicitly provides that the interpretation
approaches being provided in Circular 75 are applicable to interpret all Chinese tax treaties.
279
taxation statement in the treaty preamble, the PPT provisions, and abolishment of the tie-
breaker rule under article 4 of the MLI. Consequently, more uncertainties and even more
disputes may arise when interpreting and implementing tax treaties in China.
With regard to the BEPS Action Plan, its outcomes have already impacted treaty
interpretations and implementations in China.54 When implementing the BEPS Action Plan,
China did not create any new tax, but rather made efforts in issuing new measures to enforce
its existing anti-tax avoidance rules and to improve tax transparency. For example, the SAT
enacted a new circular – Bulletin 9 [2018] to interpret the term of “beneficial owners”55 in
February 2018, and the preamble of Bulletin 9 [2018] explicitly states that this circular was
enacted referring to the outcome of BEPS Action 6. In addition, the Chinese GAAR has been
imposed with a greater value in tackling treaty shopping arrangements. Also, in Bulletin 9
[2018], it is stated that even when the taxpayer is qualified to be a beneficial owner under
the tax treaty, it is still necessary to apply a purposive test according to the PPT provisions of
the tax treaty, or, according to the GAAR under Chinese domestic law, Chinese tax authorities
should apply the Chinese GAAR.
Theoretically speaking, retrospective effect should not arise on Chinese tax laws and tax
treaties, because for both the Legislation Law of the People’s Republic of China explicitly
prohibits retrospective effect unless it is for the purpose of better protecting the interest
and rights of taxpayers.56 Therefore, a Chinese tax treaty should not apply to transactions
that took place before the treaty comes into force and the same principle shall apply to the
CTAs being modified by the MLI.
2.3.1. Taking the PPT into account in tax planning
It should not have been a surprise for tax practitioners when China chose the PPT option,
given that the PPT provisions have been existing in a number of Chinese tax treaties for years
and the Chinese GAAR also applies the “reasonable business purpose” test. In addition, the
SAT has also affirmed in Circular 75 the importance of the purposive test in tackling treaty
shopping with regard to incomes in forms of dividends, interest and royalties.
However, one has to admit that uncertainties may increase when the PPT provisions are
added into the CTAs, especially when the Chinese GAAR (as mentioned in section 2.2.3 of this
54
Tizhong Liao, Impact of the BEPS Project and China’s Reaction, 7(2014) International Taxation in China; Jinyan Li, China
and BEPS: From Norm-Taker to Norm-Shaker, 69(2015) International Tax Bulletin; Na Li, Status of the Implementation
of the OECD/G20 BEPS Initiative in China and Future Developments, 82(2016) International Tax Bulletin.
55
SAT, the Notice of the State Administration of Taxation on Some Issues on the Concept of “Beneficial Owners” in
Tax Treaties (Bulletin 9 [2018]), issued on 3 February 2018.
56
Art. 84 of the Legislation Law of the People’s Republic of China, promulgated by the NPC on 15 March 2000. Also
see the art. 13 of the Administrative Measures for the Formulation of Tax Regulatory Documents, enacted by the
SAT on 16 May 2017.
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report) would also be applied by Chinese authorities in parallel with the other treaty-based
doctrines for the purpose of tackling treaty abuse.57
2.3.2. Assessment of treaty shopping and other treaty abuse
Upon the CTAs being modified by the MLI, more anti-tax avoidance measures (both in Chinese
domestic laws and in the CTAs) will be available for Chinese tax authorities to tackle treaty
abuse arrangements. The concept of “beneficial owners”, the GAAR and SAARs in domestic
laws are still applicable, and the PPT provisions, the double non-taxation statement in the
treaty preamble, and the assessment for dual-resident entities are all powerful instruments
in tackling treaty shopping.
However, uncertainties may arise for the taxpayers when so many anti-avoidance
measures are applicable. It will particularly become a concern under the simpler-filing,
which is a new treaty entitlement procedure effective from 1 January 2020.58 Under this new
simpler-filing mechanism, taxpayers shall conduct a self-assessment of treaty entitlement,
and then make a declaration as follows when filing tax returns with Chinese tax authorities:
I hereby declare: According to the laws, regulations of the other contracting jurisdiction
and the article of resident of the tax treaty, I am a resident of the other contracting
jurisdiction, the principal purpose of the relevant arrangement and transaction is not
to obtain tax treaty benefits. Through self-assessment, I believe that I am in conformity
with the conditions for claiming tax treaty benefits, so I will enjoy tax treaty benefits.
Therefore, I take due legal responsibilities. I will collect and retain relevant materials
for review in accordance with the regulations and accept the follow-up administration
of the tax authority.59
Given that there is no statute of limitation for Chinese authorities to review and check the
assessment of the taxpayers, uncertainties will always remain with the taxpayers for being
requested to provide evidence for treaty entitlement or to pay additional taxes in China if
being denied the treaty entitlement.
It is still unclear whether the Chinese governmental institutions have been aware of
the above described uncertainties which the MLI may bring into treaty practice in China.
According to the statement which the SAT published on its website on the signature day of
the MLI, the MLI was viewed as a legal framework for multilateral tax cooperation to provide
tax certainties for cross-border taxpayers and to increase confidence of the cross-border
investors.60 Given that the MLI has not come into force in China yet, the Chinese government
still has a chance to make a full assessment of the impact of the MLI in China (not only on
tax treaties, but also on all relevant perspectives) and then enact measures to deal with the
potential uncertainties.
57
Y. Long, China (People’s Rep.)/International/OECD – Developments in China’s Treaty Policy: Where is the Dragon Heading?
72(2018) International Tax Bulletin.
58
SAT, Public Notice of the State Administration of Taxation on Administrative Measures on Tax Treaty Treatment
of Non-Residents (SAT Public Notice [2019] No. 35), issued on 14 October 2019.
59
See ibid.
60
See ibid.4.
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Chinese Taipei
Branch reporter
Chi Chung1

Chinese Taipei’s tax treaty network does not seem to have dramatically changed before and
after the Multilateral Instrument (hereafter referred to as the MLI). Chinese Taipei, ranking
as the world’s twelfth largest merchandise exporter and eleventh largest merchandise
importer in 2018 excluding intra-EU trade, is not a party to the MLI but is watching the MLI-
related developments carefully. In Part One, I offer an overview of Chinese Taipei’s tax treaty
network, and describe Chinese Taipei’s positions on the issues that are addressed by the MLI.
In Part Two, I offer observations with respect to the procedure required to implement the
MLI, interpretations issues, and potential influence on tax planning and tax administration.
Although Chinese Taipei is not a party to the MLI, it has addressed some issues in its
domestic law. For example, Chinese Taipei has a general anti-avoidance rule in its Tax
Collection Act and the Act Protecting Taxpayer’s Rights. A treaty-specific anti-avoidance rule
may be found in Chinese Taipei’s Regulations Governing the Application of Agreements for
the Avoidance of Double Taxation with Respect to Taxes on Income. In addition, on 24 June
2019, Chinese Taipei’s Ministry of Finance issued the Explanatory Decree No. 10800577770
regarding “the Application of Beneficial Owner under Agreements for the Avoidance of
Double Taxation with Respect to Taxes on Income.”
Chinese Taipei has also sought to address other issues in bilateral negotiations with its
treaty partners. Chinese Taipei’s treaty partners are, in the order in which the treaty took
effect, as follows: Singapore (1982), Indonesia (1996), South Africa (1996), Australia (1996),
New Zealand (1997), Vietnam (1998), Gambia (1998), Eswatini (1999), Malaysia (1999), North
Macedonia (1999), Netherlands (2001), United Kingdom (2002), Senegal (2004), Sweden
(2004), Belgium (2005), Denmark (2005), Israel (2009), Paraguay (2010), Hungary (2010),
France (2011), India (2011), Slovakia (2011), Switzerland (2011), Germany (2012), Thailand
(2012), Kiribati (2014), Luxembourg (2014), Austria (2014), Italy (2015), Japan (2016), Canada
(2016) and Poland (2016).
On its website, the Ministry of Finance notes that Chinese Taipei is neither a member
of the Inclusive Framework on BEPS of the Organisation for Economic Co-operation and
Development (OECD), nor a party to the MLI. The Ministry also notes that Chinese Taipei, as
a member of the global community, has committed itself to supporting and implementing
international anti-avoidance tax measures. Further, the majority of Chinese Taipei’s 32 tax
treaties, according to Chinese Taipei’s self-assessments, meet the Actions on Base Erosion
and Profit Shifting (BEPS) Minimum Standards set forth in the Final Reports.
My personal interpretation is as follows: Chinese Taipei is willing to support and
implement international anti-avoidance tax measures, but it is premature for Chinese
Taipei to make a general decision regarding all the recommendations of the BEPS Action
1
Assistant Professor, Department of Public Finance, College of Social Sciences, National Chengchi University,
Taipei. Any opinions expressed in this report are the reporter’s personal views.
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Plan. Chinese Taipei, however, does announce on its website its negotiating positions on
some of the issues covered by the MLI. If there continues to be practical difficulties related
to Chinese Taipei’s participation in the Inclusive Framework on BEPS of the OECD, or the MLI,
Chinese Taipei may enact statutes or promulgate regulations that support and implement
international anti-avoidance tax measures.
If Chinese Taipei signed the MLI, it would need to be ratified by Chinese Taipei’s Legislature
to take effect in Chinese Taipei. The Legislature would have to examine the actual content of
the MLI; the Legislature has to approve the actual full content, rather than only the “principle
of” implementing the MLI. Income tax treaties, in contrast, are authorized by Chinese Taipei’s
Legislature through article 5 of the Tax Collection Act to take effect in Chinese Taipei as soon as
the Cabinet (Executive Yuan) approves the income tax treaties. Article 124 of the Income Tax
Act states that whenever a provision of an income tax treaty is more specific than that of the
Income Tax Act, the provision of the income tax treaty prevails over that of the Income Tax Act.
If Chinese Taipei signed and ratified the MLI, the MLI would have primacy over existing
domestic legislation, and it could not be overridden by subsequent domestic legislation.
On the relationship between domestic law and international law, Chinese Taipei adopts
the monist theory; the MLI may be applicable in Chinese Taipei without further domestic
legislation.
The MLI has not given rise to specific interpretation issues in Chinese Taipei, whether by
the government or by the courts. Indeed, and further, the explanatory memorandum of the
MLI, titled “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent
Base Erosion and Profit Shifting: Functioning under Public International Law,” has not been
granted any legal weight in Chinese Taipei.
Chinese Taipei’s interpretation of tax treaties has been a method of dynamic (ambulatory)
interpretation in accordance with the Vienna Convention on the Law of Treaties. Chinese
Taipei’s method of treaty interpretation has not been affected by the MLI. The OECD reports
published during and after the BEPS project were considered when Chinese Taipei either
enacted statutes or promulgated administrative regulations. To the extent the OECD reports
were considered a type of legislative intent or the evidence thereof, they may have legal
value in Chinese Taipei. The same also holds for the OECD Commentaries on its Model Tax
Convention.
Tax professionals in Chinese Taipei should have taken the Principal Purpose Test into
account when advising clients or planning their clients’ affairs. Some court cases may be
expected to arise over time to clearly draw the line between tax avoidance and legitimate
advising on the application of tax law in concrete cases. On the side of tax administration,
there has been no indication or evidence that assessment practices have changed regarding
tax treaty shopping and other tax treaty abuses. Indeed, in Chinese Taipei, as both tax
professionals and tax officers attentively watch the BEPS Action Plan, both of them may be
informed of the possibilities of the abuse of tax law.
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Treaty Network
1.1. Introduction
Chinese Taipei’s tax treaty network does not appear to be dramatically different after the
Multilateral Instrument (hereafter referred to as the MLI) was introduced by the OECD.
Chinese Taipei, ranking as the twelfth largest merchandise exporter and eleventh largest
merchandise importer in 2018 excluding intra-EU trade,2 is not a party to the MLI but it
carefully watches the developments related to the MLI. This part describes the domestic
and treaty-based doctrines, provisions, and practices that may be relevant to the choices that
Chinese Taipei has made regarding the MLI.
As of October 2019, Chinese Taipei has entered into 32 tax treaties with other countries.3
Of these 32 treaties, seven treaties took effect more recently and, therefore, may be said
to have been influenced by the BEPS project or the MLI. The treaty between Chinese Taipei
and Kiribati took effect on 23 June 2014. The treaty between Chinese Taipei and Luxembourg
took effect on 25 July 2014. The treaty between Chinese Taipei and Austria took effect on 20
December 2014. The treaty between Chinese Taipei and Italy took effect on 31 December 2015.
The treaty between Chinese Taipei and Japan,4 signed on 26 November 2015, took effect on
13 June 2016. The treaty between Chinese Taipei and Canada,5 signed in Ottawa on 13 January
2016 and signed in Taipei on 15 January 2016, took effect on 19 December 2016. The treaty
between Chinese Taipei and Poland, signed on 21 October 2016, took effect on 30 December
2016.
When Chinese Taipei negotiates with its treaty partners, the OECD Model Convention
and the UN Model Convention are important references. The tax treaties that Chinese Taipei
enters into differ from the OECD and UN models when the bilateral negotiations require the
differences.
Chinese Taipei’s treaty partners are, in the order in which the treaty took effect, as follows:
Singapore (1982), Indonesia (1996), South Africa (1996), Australia (1996), New Zealand (1997),
Vietnam (1998), Gambia (1998), Eswatini (1999), Malaysia (1999), North Macedonia (1999),
2
Chinese Taipei’s membership profile, available at the website of the World Trade Organization: https://www.
wto.org/english/res_e/statis_e/daily_update_e/trade_profiles/TW_e.pdf (last visited 15 October 2019).
3
Some of such treaties do not carry the word “treaty” in their titles, but that does not affect the legal character of
such legally binding commitments. For the purpose of being concise, I use the word “treaty” to refer to these 32
legal documents even though some of them do not carry the word “treaty” in their titles.
4
Its full title is: Agreement between the Association of East Asian Relations and the Interchange Association for
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income.
5
Its full title is: Arrangement between the Canadian Trade Office in Taipei and the Taipei Economic and Cultural
Office in Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes
on Income.
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Netherlands (2001), United Kingdom (2002), Senegal (2004), Sweden (2004), Belgium
(2005), Denmark (2005), Israel (2009), Paraguay (2010), Hungary (2010), France (2011), India
(2011), Slovakia (2011), Switzerland (2011), Germany (2012), Thailand (2012), Kiribati (2014),
Luxembourg (2014), Austria (2014), Italy (2015), Japan (2016), Canada (2016) and Poland
(2016).
In general, the preambles of Chinese Taipei’s tax treaties are quite cursory and refer to neither
the avoidance of double taxation or the prevention of fiscal evasion. In contrast, the titles of
Chinese Taipei’s tax treaties usually include both the avoidance of double taxation and the
prevention of fiscal evasion.
Chinese Taipei has responded to tax avoidance in general, and tax treaty shopping in
particular, through the following mechanisms:
(1) Domestic specific anti-avoidance provisions (e.g., look-through rules or anticonduit provisions)
The treaty-specific anti-avoidance rule in Chinese Taipei is a clause within an administrative

regulation. The Regulations Governing the Application of Agreements for the Avoidance of
Double Taxation with Respect to Taxes on Income (shiyong suode shui xieding chahe zhunze)
were promulgated by the Ministry of Finance with the authorization of article 80, paragraph 5
of the Income Tax Act (suode shui fa). Article 4, section 2 of the Examination Rules requires that
tax authorities apply tax treaties in accordance with the economic substance of the factual
circumstances and the attribution and enjoyment of the substantive economic benefits
arising out of such circumstances.
Chinese Taipei, meanwhile, has thin capitalization rules. Authorized by article 43-2 and
article 80 of the Income Tax Act, the Ministry of Finance promulgated on 22 June 2011 the
“Examination Rules on the Impermissibility of Treating Interests Accrued on Related-Party
Debt Incurred by Profit-Seeking Enterprises as Expenses or Losses” (yingli shiye dui guanxi ren
fuzhai zhi lixi zhichu bude liewei feiyong huo sunshi chahe banfa).
Chinese Taipei also has transfer pricing rules. The Examination Rules for Non-Arm’s
Length Transfer Pricing by Profit-Seeking Enterprises (yingli shiye suode shui buhe changgui
yizhuan dingjia chahe zhunze), promulgated on 28 December 2004 by the Ministry of Finance,
are authorized by the Legislative Yuan in article 80, section 5 of the Income Tax Act. Taxpayers
who meet the requirements set out in the Examination Rules have to file a transfer pricing
report when their annual tax returns are filed. To adjust the tax obligations of a taxpayer, a
tax authority first has to seek approval of the Ministry of Finance.
Article 66-8 of the Income Tax Act, part of Chinese Taipei’s imputation system, authorizes
a tax authority to adjust the tax obligations of a taxpayer, with the approval of the Ministry
of Finance, when that taxpayer – whether acting alone or with the help of any other office,
organization, or individual – improperly, through sham arrangements, avoids or decreases
the amount of his tax obligations.
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Article 43-36 of the Income Tax Act, enacted on 27 July 2016, specifies Chinese Taipei’s
controlled foreign corporation (CFC) rules for profit-seeking enterprises. Article 12-1 of the
Minimum Income Tax Act (suode jiben shui e tiaoli), the CFC rule for individuals, was enacted on
10 May 2017. These CFC rules, however, have not yet become effective. When enacting article
43-3, the Legislative Yuan (the Legislature) of Chinese Taipei authorized the Executive Yuan
(the Cabinet) to announce the dates on which the CFC rules will become effective.
(2) Domestic anti-avoidance doctrines (substance over form, sham or business purpose) and/or
general anti-avoidance rules
In Chinese Taipei, the domestic general anti-avoidance rule (hereafter referred to as GAAR)
is laid forth in article 12-1 of the Tax Collection Act (shuijuan jizheng fa). Of its seven sections,
the key provision is section 3, which defines tax avoidance (zushui guibi) as occurring when
a taxpayer, motivated by the enjoyment of tax benefits “contrary to” (weibei) the legislative
intent of tax law, abuses the legal form in order to avoid the requisite elements that give rise
to tax obligations. The purpose of tax avoidance is to produce the economic rewards that arise
during the normal course of business.
Article 12-1 of the Tax Collection Act, enacted on 28 April 2009 and effective since 13 May
2009, codified judicial decisions that have been longstanding in Chinese Taipei. Chinese
Taipei’s Tax Collection Act was enacted on 12 October 1976 and has been effective since 22
October 1976. The doctrine of substance-over-form (shi zhi ke shui) developed over time
in Chinese Taipei as the courts attempted to interpret the tax statutes in light of the facts
and circumstances of the cases before them. It should be noted that Chinese Taipei is not a
common law jurisdiction and, therefore, there are technically no “precedents” for the Chinese
Taipei courts to follow. The courts of Chinese Taipei, however, have tried to proffer consistency
in their interpretations of the statutes from case to case. In response to a concern that the
courts, in some cases, may have become de facto legislators, the judicial doctrine of substance-
over-form became codified in article 12-1 of the Tax Collection Act.
As stated earlier, section 3 of article 12-1 of the Tax Collection Act is the domestic GAAR
of Chinese Taipei. There are six other sections of article 12-1. Section 1 states that tax-related
statutes should be interpreted in accordance with their legislative intent and in light of their
economic meaning and the fairness principle as realized with the substance-over-form
doctrine. Section 2 states that when a tax authority attempts to identify the legal requirements
for the imposition of taxes it should do so in accordance with the economic substance of the
facts and circumstances and the attribution and enjoyment of the substantive economic
benefits arising out of such circumstances. Section 4 states that tax authorities bear the
burden of proof for both the tax avoidance referred to in section 3 and the identification of
the legal requirements described in section 2. Section 5, meanwhile, states that taxpayers
are obliged to offer evidence to the tax authority when that evidence is in the custody of
taxpayers. Section 6 authorizes tax authorities to adjust the amount of the taxes payable
in accordance with both the normal course of business and the results of investigations.
Section 7 states that taxpayers may apply for advisory opinions from tax authorities before
6
The numbering of “art. 43-3” indicates that it is the third article inserted between art. 43 and art. 44. The purpose
of such numbering is to avoid re-numbering the articles of statutes too often.
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they decide whether to undertake particular transactions and that tax authorities are obliged
to offer advisory opinions within six months of receiving such an application.
The Act Protecting Taxpayer’s Rights (nashui zhe quanli baohu fa) took effect in Chinese
Taipei on 28 December 2017. Article 7 of the Act further develops the GAAR in Chinese Taipei,
as some portions of it are similar to portions of article 12-1 of the Tax Collection Act. Article 7
consists of ten sections. Sections 1 and 2 repeat the first two sections of article 12-1 of the Tax
Collection Act. Section 3 repeats the definition of “tax avoidance” provided in the Tax Collection
Act and includes a new stipulation that the tax authority may “establish tax obligations” for
taxpayers “in the legal form commensurate with the substantive economic benefits” plus a
monetary penalty and interest. Section 4 states that the tax authorities bear the burden of
proof when applying sections 2 and 3. Section 5 states that “the obligation of taxpayers to
provide any evidence that they hold in their custody” (xieli yiwu; “Mitwirkungspflicht” in the
German language) is not affected by section 4. Section 6, repeating a corresponding provision
in the Tax Collection Act, authorizes tax authorities to adjust the amount of the taxes payable
in accordance with the normal course of business. Section 7 states that the monetary penalty
referred to in section 3 shall be 15% of additional taxes after an income adjustment by the tax
authority. Interest accrues daily at the one-year term deposit rate announced by the Postal
Savings Office, beginning with the deadline for the original taxes and ending on a date in
a notification issued to the taxpayer. Section 8 states that tax authorities cannot punish the
cases covered under section 3 as cases of tax evasion (taolou shuijuan) unless the taxpayer
hides or falsifies statements or offers incorrect materials when filing tax returns or during
investigations, thus causing tax authorities to issue tax assessments of smaller amounts.
Section 9, repeating a counterpart in the Tax Collection Act, allows a taxpayer to seek advisory
opinions from tax authorities. Section 10 states that sections 3, 7, and 8 apply to tax avoidance
cases that are still at the investigation phase at the time when this Act takes effect. While
sections 3, 7, and 8 do not apply to the tax avoidance cases in which an assessment and
monetary penalty have been issued, the amount of the monetary penalty cannot exceed
the monetary penalty and interest as stipulated in section 7. Such transition rules, however,
do not apply when the taxpayer falsifies statements or hides materials or offers incorrect
materials, either when filing tax returns or during investigations, causing tax authorities to
issue tax assessments in smaller amounts than required by law.
(3) General principles of treaty interpretation, such as the “guiding principle” adopted in the 2003
OECD Commentary
The 2003 OECD Commentary, paragraph 9.5, states the following:
It is important to note, however, that it should not be lightly assumed that a taxpayer
is entering into the type of abusive transactions referred to above. A guiding principle
is that the benefits of a double taxation convention should not be available where a
main purpose for entering into certain transactions or arrangements was to secure a
more favourable tax position and obtaining that more favourable treatment in these
circumstances would be contrary to the object and purpose of the relevant provisions.
To my knowledge, the tax agencies or courts in Chinese Taipei have not explicitly relied upon
such a “guiding principle.” However, such a “guiding principle” is similar to the general anti-
avoidance rule in Chinese Taipei as described earlier.
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(4) The interpretation and application of the beneficial ownership concept
On 24 June 2019, Chinese Taipei’s Ministry of Finance issued Explanatory Decree No.
10800577770 regarding “the Application of Beneficial Owner under Agreements for the
Avoidance of Double Taxation with Respect to Taxes on Income.” Explanatory Decree No.
10800577770 consists of three paragraphs.
The first paragraph states that when a resident of the other contracting state who is
earning income subject to taxes in accordance with the relevant income tax laws of Chinese
Taipei ,applies for a reduction in or exemption from taxes in accordance with a tax treaty as
well as relevant regulations, unless otherwise provided for in the applicable tax treaty, the
said resident of the other contracting state may declare himself or herself as the beneficial
owner and, thereby, satisfy the requirement of submitting supporting documents identifying
the said resident of the other contracting state as the beneficial owner of the income.
The second paragraph states that when a foreign institutional investor of the other
contracting state investing in securities issued in Chinese Taipei in accordance with the
Regulations Governing Investment in Securities by Overseas Chinese and Foreign Persons
(huaqiao ji waiguo ren touzi zhengquan guanli banfa), whether through a registered fund or
through the legal relationship of trust with residents of the other contracting state, receives
dividends or interest from sources in Chinese Taipei, and the aforementioned fund or trust
qualifies as a resident of the other contracting state under the applicable tax treaty, the
fund or trust may declare itself as the beneficial owner of the income and, therefore, apply
to receive treaty benefits. This stipulation replaces the documents required by article 15,
paragraph 6 of the Regulations Governing the Application of Agreements for the Avoidance
of Double Taxation with Respect to Taxes on Income.
The third paragraph states that when a tax authority, upon examining the aforementioned
application, may reasonably conclude that the applicant (a resident of the other contracting
state) acts in one of the following capacities, the applicant is not the beneficial owner of the
income:
a. An agent, who earns the income in question in the name of the principal;
b. A nominee, who earns the income in question in his own name but for the benefit of
another person, and who has no right to use the income. An example is a person who
registers a piece of property in his or her name but in fact has no discretion over the
piece of property due to contractual obligations. Another example is a trustee with no
discretion over the income in the legal relationship of a trust;
c. A conduit financing entity, which is a legal person or a legal arrangement with no right
to use the income, and the only purpose of which is to obtain a tax exemption, reduction,
deferral, or refund regarding that income. An entity will not be regarded as a conduit
financing entity when an entity is liable to tax for the receipt of the income in accordance
with the tax laws of the other contracting state, the subsequent distribution of income
by that entity is sourced in the other contracting state, and that entity has no contractual
or legal obligation relating to the receipt of the income to transfer the income to another
person;
d. A person, albeit not falling under the preceding three paragraphs, whose right to use the
income is constrained by a contractual or legal obligation relating to the receipt of the
income to transfer the income to another person.
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(5) Treaty-based anti-avoidance provisions
Of its seven most recent tax treaties, Chinese Taipei’s tax treaties with Kiribati, Luxembourg,
Austria, Poland, Japan, and Italy adopt the Principal Purpose Test. For example, article 26
of the tax treaty between Chinese Taipei and Japan states that “[n]otwithstanding the
provisions of any other Article of this Agreement, a resident of a Territory shall not receive
the benefit of any reduction in or exemption from tax provided for in the Agreement in the
other Territory if the conduct of operations by such resident or a person connected with
such resident had for the main purpose or one of the main purposes to obtain the benefit
of the Agreement.”
Chinese Taipei’s tax treaty with Canada, in contrast, includes a unique anti-avoidance
provision. Section 26, subsection 3 of the tax treaty between Chinese Taipei and Canada states
the following:
The Arrangement will not apply to any company, trust or other entity that is a resident
of a territory and is beneficially owned or controlled, directly or indirectly, by one or
more persons who are not residents of that territory, if the amount of the tax imposed
on the income of the company, trust or other entity by the government of that territory is
substantially lower than the amount that would be imposed by the government of that
territory (after taking into account any reduction or offset of the amount of tax in any
manner, including a refund, reimbursement, contribution, credit, or allowance to the
company, trust or partnership, or to any other person) if all of the shares of the capital
stock of the company or all of the interests in the trust or other entity, as the case may be,
were beneficially owned by one or more individuals who were residents of that territory.
1.2.3. Particular types of tax treaty abuses
(1) Transactions or arrangements undertaken to access the reduced treaty rate on dividends paid to
a parent company (addressed by article 8 of the MLI);
Chinese Taipei may evaluate the transactions or arrangements on the basis of its domestic
general anti-avoidance rule and the application of treaty provisions.
(2) Transactions or arrangements undertaken to avoid the taxation of immovable property situated
in a contracting state, including transactions or arrangements intended to dilute the proportionate
value of shares or comparable interests that derive their value primarily from immovable property
situated in a contracting state (addressed by article 9 of the MLI);
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(3) The granting of treaty benefits for income paid to low-taxed permanent establishments in
third jurisdictions that are subject to little or no tax or exempt from tax in the taxpayer’s residence
jurisdiction (addressed by article 10 of the MLI);
(4) Avoidance of permanent establishment status through commissionaire and similar arrangements
(addressed by article 12 of the MLI), specific activity exemptions (addressed by article 13 of the MLI),
or the splitting-up of contracts (addressed by article 14 of the MLI).
1.2.4. Hybrid mismatch arrangements (addressed by article 3 of the MLI) and mismatches
attributable to dual resident entities (addressed by article 4 of the MLI)
As stated earlier, Chinese Taipei emphasizes both the certainty of legal form and the
economic substance of the relevant transaction or arrangement. An entity or arrangement
that is treated as wholly or partly fiscally transparent under the tax law of either Chinese
Taipei or its treaty partner may fall short of being a resident of a contracting jurisdiction, as
the definition of “resident” may be “any person who, under the laws of that territory, is liable
to tax therein by reason of the person’s domicile, residence, place of incorporation, place of
management or any other criterion of a similar nature.”7
1.2.5. Provisions for a mutual agreement procedure (MAP) and corresponding adjustments
(addressed by articles 16 and 17 of the MLI)
Chinese Taipei’s tax treaties include provisions for a mutual agreement procedure and
corresponding adjustments to tax charged on the profits or an enterprise after a transfer
pricing adjustment. Mutual agreement procedure is usually provided for by a stand-alone
article, while corresponding adjustments are provided by a paragraph in the article governing
associated enterprises (transfer pricing).
In Chinese Taipei, the Ministry of Finance promulgates the Regulations Governing the
Application of Agreements for the Avoidance of Double Taxation with Respect to Taxes on
Income. Articles 30 and 31 of the Regulations are related to mutual agreement procedure
(MAP). Article 30 states that if the status of a taxpayer as a resident (juzhu zhe) is being
determined in a mutual agreement procedure, the tax authority should state the relevant
facts in a letter to the Bureau of Taxation, Ministry of Finance,8 which then consults with the
7
S. 4 of the Arrangement between the Canadian Trade Office in Taipei and the Taipei Economic and Cultural Office
in Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on
Income.
8
Since 1 January 2013, the mutual agreement procedure has been handled by the Department of International
Fiscal Affairs (guoji caizheng si), Ministry of Finance.
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treaty partner’s competent authority to mutually agree on a determination. Further, article

31 states that if a Chinese Taipei resident applies to the relevant tax authority initiating the
mutual agreement procedure in accordance with the relevant income tax treaty provisions,
claiming that the taxation of the treaty partner or the taxation of both contracting parties
violates the income tax treaty, then the relevant tax authority should first review whether the
claims have merit(s), whether there have been any omission(s) of any party, and whether the
claims involve only Chinese Taipei. The relevant tax authority, after such a review, may send
a letter to the Bureau of Taxation, Ministry of Finance, which will consult with the competent
authority of the treaty partner to “mutually agree on the resolution.”
1.2.6. Mandatory binding arbitration of disagreements between contracting states (addressed by

Articles 18-26 of the MLI)
None of the tax treaties entered into by Chinese Taipei provide for mandatory binding
arbitration to resolve disagreements between contracting states.
Chinese Taipei has not signed the MLI. Instead, Chinese Taipei issued preliminary positions
and has pursued bilateral negotiations to update Chinese Taipei’s 32 tax treaties.
Chinese Taipei has not signed the MLI. On its website, the Ministry of Finance notes that
Chinese Taipei is neither a member of the Inclusive Framework on BEPS of the Organisation for
Economic Co-operation and Development (OECD), nor a party to the “Multilateral Convention
to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.” The
Ministry also notes that Chinese Taipei, as a member of the global community, has committed
itself to supporting and implementing international anti-avoidance tax measures. Further,
the majority of Chinese Taipei’s 32 tax treaties, according to Chinese Taipei’s self-assessments,
meet the Actions on Base Erosion and Profit Shifting (BEPS) Minimum Standards set forth
in the Final Reports.
My personal opinion is as follows: Chinese Taipei is willing to support and implement
international anti-avoidance tax measures, but it is premature for Chinese Taipei to make
a general decision regarding all the recommendations of the BEPS Action Plan. Chinese
Taipei, however, does announce on its website its negotiating positions on some of the
issues covered by the MLI. If there continues to be practical difficulties related to Chinese
Taipei’s participation in the Inclusive Framework on BEPS of the OECD, or the “Multilateral
Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit
Shifting,” Chinese Taipei may enact statutes or promulgate regulations that support and
implement international anti-avoidance tax measures.
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As Chinese Taipei has not signed the MLI, it has put forward efforts to work with its treaty
partners to tailor its 32 tax treaties to bilateral needs.
On the website of its Ministry of Finance, Chinese Taipei lays out its preliminary positions on
some of the issues covered by the MLI. My opinion is that such “preliminary positions” indicate
Chinese Taipei’s general policy positions as of October 2019. Those preliminary positions are
described below, and no further statements have been offered by the Ministry of Finance.
For those issues not covered by such preliminary positions, I believe that Chinese Taipei has
not yet formed firm positions.
In its preliminary position on paragraph 2, article 6 (Purpose of a Covered Tax Agreement)
of the MLI, Chinese Taipei would like the following provision, which is presented in paragraph
1 of article 6, to be included in its existing tax treaties in place of or in the absence of the
preamble language:
Intending to eliminate double taxation with respect to the taxes covered by this
agreement without creating opportunities for non-taxation or reduced taxation through
tax evasion or avoidance (including through treaty-shopping arrangements aimed at
obtaining reliefs provided in this agreement for the indirect benefit of residents of third
jurisdictions).
In its preliminary position regarding paragraph 2, article 7 (Prevention of Treaty Abuse) of

the MLI, Chinese Taipei would like the following “Principal Purpose Test” provision, which is
presented in paragraph 1 of article 7, to apply in place of or in the absence of the corresponding
provisions of its existing tax treaties:
Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the

Covered Tax Agreement shall not be granted in respect of an item of income or capital
if it is reasonable to conclude, having regard to all relevant facts and circumstances,
that obtaining that benefit was one of the principal purposes of any arrangement or
transaction that resulted directly or indirectly in that benefit, unless it is established that
granting that benefit in these circumstances would be in accordance with the object and
purpose of the relevant provisions of the Covered Tax Agreement.
1.3.4. Particular types of tax treaty abuses
(1) The minimum holding period for transactions or arrangements undertaken to access the reduced
treaty rate on dividends paid to a parent company in article 8 of the MLI
Chinese Taipei has not announced its negotiating position on this issue.
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Chinese Taipei
(2) The substituted property rule for gains from the alienation of shares or comparable interests
deriving their value primarily from immovable property at any time during the 365-day period
preceding the alienation of the property in article 9 of the MLI
(3) The provision denying treaty benefits for income paid to low-taxed permanent establishments in
third jurisdictions that are subject to little or no tax and exempt from tax in the residence jurisdiction
in article 10 of the MLI
(4) Provisions preventing the avoidance of permanent establishment status through commissionaire
and similar arrangements (article 12 of the MLI), specific activity exemptions (article 13 of the MLI),
or the splitting-up of contracts (article 14 of the MLI)
Chinese Taipei’s preliminary position with respect to paragraphs 1 and 2, and subparagraph a)
of paragraph 5 of article 13 (Artificial Avoidance of Permanent Establishment Status through
the Specific Activity Exemptions) of the MLI is that Chinese Taipei would like to choose the
following provision concerning the activities carried on by an enterprise which would not be
deemed to constitute a permanent establishment, which is presented in paragraph 2 (Option
A) of article 13, to apply in place of the relevant parts of its existing tax treaties:
Notwithstanding the provisions of a Covered Tax Agreement that define the term
“permanent establishment”, the term “permanent establishment” shall be deemed not
to include:
a. the activities specifically listed in the Covered Tax Agreement (prior to modification by
this Convention) as activities deemed not to constitute a permanent establishment,
whether or not that exception from permanent establishment status is contingent
on the activity being of a preparatory or auxiliary character;
b. the maintenance of a fixed place of business solely for the purpose of carrying on, for
the enterprise, any activity not described in subparagraph a);
c. the maintenance of a fixed place of business solely for any combination of activities
mentioned in subparagraphs a) and b), provided that such activity or, in the case of
subparagraph c), the overall activity of the fixed place of business, is of a preparatory
or auxiliary character.
Chinese Taipei has not announced its negotiating position on articles 12 and 14 of the MLI.
1.3.5. Hybrid mismatch arrangements, including in particular mismatches that result from the use
of transparent entities in article 3 of the MLI and mismatches attributable to dual resident
entities (addressed by article 4 of the MLI)
Except for the beneficial ownership rules promulgated in 2019, Chinese Taipei has not
adopted rules specifically for hybrid mismatches that result from the use of transparent
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entities (addressed by article 3 of the MLI).

Chinese Taipei has not adopted rules specifically for hybrid mismatches attributable to
dual resident entities (addressed by article 4 of the MLI). The PEM rule for Chinese Taipei is
article 43-4 of the Income Tax Act, which consists of four sections. Section 1 states that a profit-
seeking enterprise that was incorporated outside of Chinese Taipei but effectively managed
in Chinese Taipei, is subject to Chinese Taipei’s jurisdiction for the purpose of income tax
and, therefore, has to follow Chinese Taipei’s compliance requirements, as if it had been
incorporated in Chinese Taipei. Section 2 states that when the profit-seeking enterprise
specified by section 1 makes payments to sellers of goods (merchandises) or services, such
payments are sourced in Chinese Taipei and the profit-seeking enterprise should follow all
the compliance requirements. When the profits earned in years during which the foreign
profit-seeking enterprise is not effectively managed in Chinese Taipei are later distributed,
it is not taxed by Chinese Taipei since such profit distribution is not sourced in Chinese Taipei.
Section 3 states that a profit-seeking enterprise is considered effectively managed in Chinese
Taipei if that enterprise satisfies the following two conditions: (1) the major management,
financial, and personnel decisions are made by individuals who reside in Chinese Taipei or
by profit-seeking enterprises incorporated in Chinese Taipei, or such decisions are made in
Chinese Taipei; (2) financial statements, accounting records, meeting minutes of the Board of
Directors, or minutes of the shareholders’ meetings are made or stored in Chinese Taipei; or
(3) the principal operations of the enterprise take place in Chinese Taipei. Section 4 authorizes
the Ministry of Finance to promulgate procedural rules for implementing the preceding three
sections.
1.3.6. Provisions for mutual agreement procedure (MAP) and corresponding adjustments to tax
charged on the profits of an enterprise after a transfer pricing adjustment (addressed by
articles 16 and 17 of the MLI)
Article 16 of the MLI concerns the mutual agreement procedure (MAP). The following are
Chinese Taipei’s preliminary positions. With reference to subparagraph a), paragraph 5,
article 16 (Mutual Agreement Procedure) of the MLI, Chinese Taipei would like to make a
reservation for the first sentence of paragraph 1 of article 16, which “permits a person to
present a case to the competent authority of either Contracting Jurisdiction.” In other words,
Chinese Taipei intends not to replace the corresponding provisions of its existing tax treaties
with article 16, paragraph 1 of the MLI. Instead, Chinese Taipei has ensured that its tax treaties
contain the following provision, and, pursuant to the OECD BEPS-related standards, the
competent authority of Chinese Taipei implements “a bilateral notification or consultation
process with the competent authority of the other Contracting Jurisdiction for cases in which
the competent authority to which the mutual agreement procedure case was presented does
not consider the taxpayer’s objection to be justified:”
Where a person considers that the actions of one or both of the Contracting Jurisdictions
result or will result for him in taxation not in accordance with the provisions of this
Covered Tax Agreement, he may, irrespective of the remedies provided by the domestic
law of those Jurisdictions, present his case to the competent authority of the Contracting
Jurisdiction of which he is a resident or, if his case comes under paragraph 1 of article 24,
to that of the Contracting Jurisdiction of which he is a national.
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Chinese Taipei
With reference to item ii), subparagraph a), paragraph 4, article 16 of the MLI, Chinese Taipei
would like the following provision—the second sentence of paragraph 1 of article 16—to
apply in place of provisions of its existing tax treaties that require a case to be presented
within a time period shorter than three years from the first notification, or to apply in the
absence of a provision of its existing tax treaties describing the time period within which
such cases must be presented: “The case must be presented within three years from the first
notification of the action resulting in taxation not in accordance with the provisions of the
Covered Tax Agreement.”
With reference to item i), subparagraph b), paragraph 4, article 16 of the MLI, Chinese
Taipei would like the following provision, which is the first sentence of paragraph 2 of article
16, to apply in the absence of the corresponding provisions of its existing tax treaties: “The
competent authority shall endeavour, if the objection appears to it to be justified and if it is
not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with
the competent authority of the other Contracting Jurisdiction, with a view to the avoidance
of taxation which is not in accordance with the Covered Tax Agreement.”
With reference to item ii), subparagraph b), paragraph 4, article 16 of the MLI, Chinese
Taipei would like the following provision, which is the second sentence of paragraph 2 of
article 16, to apply in the absence of the corresponding provisions in its existing tax treaties:
“Any agreement reached shall be implemented notwithstanding any time limits in the
domestic law of the Contracting Jurisdictions.”
With reference to item i), subparagraph c), paragraph 4, article 16 of the MLI, Chinese
Taipei would like the following provision, which is the first sentence of paragraph 3 of article
16, to apply in the absence of the corresponding provisions of its existing tax treaties: “The
competent authorities of the Contracting Jurisdictions shall endeavour to resolve by mutual
agreement any difficulties or doubts arising as to the interpretation or application of the
With reference to item ii), subparagraph c), paragraph 4, article 16 of the MLI, Chinese
Taipei would like the following provision, which is the second sentence of paragraph 3 of
article 16, to apply in the absence of the corresponding provisions of its existing tax treaties:
“They may also consult together for the elimination of double taxation in cases not provided
for in the Covered Tax Agreement.”
Article 17 of the MLI concerns corresponding adjustments to taxes charged on the profits
of an enterprise after a transfer pricing adjustment. With reference to paragraph 2 and
subparagraph a), paragraph 3, article 17 (Corresponding Adjustments) of the MLI, Chinese
Taipei would like to make a reservation for the following “transfer pricing corresponding
adjustment” provision, which is presented in paragraph 1 of article 17. In other words, Chinese
Taipei intends not to alter its existing tax treaties already containing such a provision, and
Chinese Taipei would like to add the following provision to its existing tax treaties:
Where a Contracting Jurisdiction includes in the profits of an enterprise of that

Contracting Jurisdiction – and taxes accordingly – profits on which an enterprise of
the other Contracting Jurisdiction has been charged to tax in that other Contracting
Jurisdiction and the profits so included are profits which would have accrued to the
enterprise of the first-mentioned Contracting Jurisdiction if the conditions made
between the two enterprises had been those which would have been made between
independent enterprises, then that other Contracting Jurisdiction shall make an
appropriate adjustment to the amount of the tax charged therein on those profits. In
determining such adjustment, due regard shall be had to the other provisions of the
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Chung
Covered Tax Agreement and the competent authorities of the Contracting Jurisdictions
shall, if necessary, consult each other.
1.3.7. Mandatory binding arbitration of disagreements between contracting states (addressed by

articles 18 through 26 of the MLI)
As stated earlier, none of the tax treaties entered into by Chinese Taipei provide for mandatory
binding arbitration to resolve disagreement between contracting states. Also stated earlier,
on the website of its Ministry of Finance, Chinese Taipei lays out its preliminary positions on
some of the issues covered by the MLI, and mandatory binding arbitration is not one of the
issues on which Chinese Taipei has publicized a preliminary position.
Chinese Taipei has not signed the MLI, and it may be difficult to assess the indirect impact
of the BEPS Action Plan and the MLI on Chinese Taipei. The most recent tax treaty to which
Chinese Taipei is a party took effect in 2016. Tax treaties to which Chinese Taipei is a party
are known to the public after they are concluded. In other words, treaty negotiations or
renegotiations in Chinese Taipei are kept confidential.
The Ministry of Finance of Chinese Taipei announced on its website that Chinese Taipei
has considered the OECD Model Convention and the UN Model Convention in its tax treaty
negotiations.9 Therefore, the OECD Model Convention and the UN Model Convention should
have had influence on the negotiations behind Chinese Taipei’s bilateral tax treaties. In
contrast, the provisions of the MLI have not been explicitly referenced by the Ministry of
Finance in its announcement.10
Indirect impact of the BEPS Action Plan and the MLI on Chinese Taipei may be a plausible
observation. As stated earlier, “corresponding adjustments” are a part of the tax treaty
between Chinese Taipei and Canada, and a part of the tax treaty between Chinese Taipei and
Japan. In addition, Chinese Taipei’s tax treaties commonly contain a version of the principal
purpose test, though the specific words used in the treaties differ from treaty to treaty.
9
Treaty Policy, website of the Ministry of Finance, available at:
https://www.mof.gov.tw/Eng/singlehtml/264?cntId=82775 (last visited 15 October 2019). (“The ROC’s general
policies toward Income Tax Agreements are to eliminate double taxation, prevent tax evasion, improve bilateral
investment activities and enhance culture and academic co-operation. The Income Tax Agreements that the
ROC has entered into follow the OECD model and the UN model, and take into consideration matters relating
to the political and fiscal status, economics, and trade of the mutual parties. As a member of the International
Community, ROC supports and implements anti-tax-avoidance measures. For more information, please refer
to the webpage ‘Implementation of the BEPS Tax Treaty Related Measures.’”)
10
Id.
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Chinese Taipei
Chinese Taipei has not signed the MLI. If Chinese Taipei signed the MLI, it would need to be
ratified by Chinese Taipei’s Legislature to take effect. The Legislature would have to examine
the actual content of the MLI; the Legislature has to approve the actual full content, rather
than only the “principle of” implementing the MLI. Income tax treaties, in contrast, are
authorized by Chinese Taipei’s Legislature through article 5 of the Tax Collection Act to take
effect as soon as the Cabinet (Executive Yuan) approves the income tax treaties. Article 124
of the Income Tax Act states that whenever a provision of an income tax treaty (suode shui
xieding) is more specific than that of the Income Tax Act, the provision of the income tax treaty
prevails over that of the Income Tax Act.
If Chinese Taipei signed and ratified the MLI, the MLI would have primacy over existing
domestic legislation, and it could not be overridden by subsequent domestic legislation. On
the relationship between domestic law and international law, Chinese Taipei adopts the monist
theory; the MLI may be applicable in Chinese Taipei without further domestic legislation.
The MLI has not given rise to specific interpretation issues in Chinese Taipei, whether by the
government or by the courts. Indeed, and further, the explanatory memorandum of the MLI,
titled “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base
Erosion and Profit Shifting: Functioning under Public International Law,” has not been granted
any legal weight in Chinese Taipei.
The official language of Chinese Taipei is the Chinese language and traditional Chinese
characters; in other words, it is different from the official languages used by the OECD. The
difference, theoretically, may cause interpretation issues. On the other hand, as the executive
and judicial branches in Chinese Taipei interpret statutes and relevant legal materials by
taking into account their purposes and functions, such potential interpretation issues may
be avoided or resolved satisfactorily.
Chinese Taipei’s interpretation of tax treaties has been a method of dynamic (ambulatory)
interpretation in accordance with the Vienna Convention on the Law of Treaties. Chinese
Taipei’s method of treaty interpretation has not been affected by the MLI.
The OECD reports published during and after the BEPS project were considered when
Chinese Taipei either enacted statutes or promulgated administrative regulations. To the
extent the OECD reports were considered a type of legislative intent or the evidence thereof,
they may have legal value in Chinese Taipei. The same also holds for the OECD Commentaries
on its Model Tax Convention.
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Chung
In some countries, it has been asked whether the MLI may have an impact on the interpretation
of the treaties concluded before the MLI was signed or ratified. No such retrospective effect
is expected to exist in Chinese Taipei, as such retroactivity, or the consideration of such
(strictly speaking) irrelevant matters, adversely affects legal certainty. Specifically, there is
no indication that the amended preamble might be used in a retrospective manner for the
purpose of interpreting tax treaties, as if it were applicable before the MLI became binding.
Neither has any debate arisen over whether the choices that Chinese Taipei makes upon the
adoption of the MLI, can exert a retrospective influence on tax treaty interpretation.
Tax professionals in Chinese Taipei should have taken the Principal Purpose Test into account
when advising clients or planning their clients’ affairs. Some court cases may be expected to
arise over time to clearly draw the line between tax avoidance and legitimate advising on the
application of tax law in concrete cases.
There has been no indication or evidence that assessment practices have changed
regarding tax treaty shopping and other tax treaty abuses. Indeed, in Chinese Taipei, as both
tax professionals and tax officers attentively watch the BEPS Action Plan, both of them may
be informed of the possibilities of the abuse of tax law.
No additional or unusual procedure is adopted by tax administrations when assessing
taxpayers under the Principal Purpose Test. Under some tax treaties, a taxpayer claiming the
resident status under a tax treaty has to apply for a Resident Certificate. (juzhu zhe zhengming;
see also, articles 5, 13, 14, 15, 16, 17 of the Regulations Governing the Application of Agreements
for the Avoidance of Double Taxation with Respect to Taxes on Income) Such application for a
Resident Certificate is separate and distinct from the assessment process. No special Principal
Purpose Test committee has been set up to review potential assessments.
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Colombia
Branch reporter
Jessica Massy Martinez1

Colombia has a network of 14 treaties to avoid double taxation, ten of them in effect and four
signed but not concluded at the time of this report. All the treaties follow the OECD Model
Convention.
As associated party in the developing of the OECD/G20 BEPS package and keen to
implement some of the actions of the BEPS plan, Colombia signed the Multilateral Convention
to implement tax treaty related measures to prevent base erosion and profit shifting (MLI) on
7 June 2017, and notified as covered tax agreements (CTAs) to be modified by such instrument
the treaties with Spain, Switzerland, Chile, Mexico, Canada, France, Portugal, India, the
Republic of Korea and the Czech Republic, all of them in effect at the time of this report.
With the notification of the CTAs several provisions of the MLI targeting treaty abuse where
chosen, amongst them the new preamble, the principal purpose test and the simplified
limitation of benefits (in order to meet the minimum standard as required by Action 6 of the
BEPS plan), the dividends transfer transactions, capital gains from the alienation of shares
or interest in land-rich companies, and the artificial avoidance of permanent establishment
status through commissionaire arrangements.
Colombia has also signed four treaties under the OECD/G20 BEPS project: the treaty
with the United Kingdom before the 2017 OECD Model Convention and the signature of the
MLI, and the treaties with Italy, United Arab Emirates and Japan after the signing of the MLI
and under the 2017 OECD model that generally mirrors the MLI´s provisions. These treaties
already include provisions preventing treaty abuse as those set out in the final Action 6 report
and in the MLI.
The MLI still needs to complete the constitutional procedure for any international treaty
to be incorporated in the Colombian regulation and thus to be able to modify the CTAs.
Once concluded, the MLI will be at the same level and will have the same value as any
other type of Colombian law, therefore as any other law it will be subject to and shall be
respectful of the Colombian Constitution but at the same time protected by this norm or
norms which mandates that in its foreign affairs Colombia shall adhere to the principles of
international law as those enshrined in the Vienna Convention of the law of the treaties and
shall respect its international commitments.
With the aim to ease the interpretation and application of the CTAs modified by the
MLI, it is foreseeable that even though not mandatory for the Colombian taxing authorities,
they will jointly prepare with the tax administrations of other jurisdictions parties to a
CTA, synthesized texts following the “Guidance for the development of synthesized texts”
prepared by the OECD Secretariat.
1
Lawyer, Universidad Colegio Mayor del Rosario (Bogotá, Colombia), postgraduate specialization in tax law, of the
same university, postgraduate specialization in international tax law, Universidad Externado (Bogotá, Colombia),
admitted to a PhD in Law Universidad Complutense (Madrid, Spain), director of the international tax area at
KPMG in Colombia.
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Colombia
With the ratification and conclusion of the MLI, not only the guidelines provided in the
instrument but also in its explanatory memorandum, could be regarded as interpretative aid
by the government and the courts when solving interpretative issues of the CTAs modified
by the MLI and of those signed under the 2017 OECD Model.
The BEPS reports could also be regarded an auxiliary criterion of interpretation of the
treaties signed by Colombia that have been influenced by the BEPS/G20 package, though
they could not be regarded as a mandatory interpretation tool neither for the judges nor for
the tax authorities, given that they do not have the status of internal regulation. Nevertheless,
the status of the BEPS reports may change once Colombia is admitted as OECD member,
when the reports could have more weight as interpretative tools of the new DTTs influenced
by the OECD/BEPS package and those modified by the MLI.
The MLI could also help to interpret those treaties signed under the 2017 OECD model and
previously to the signature or conclusion of the MLI even if those treaties are not modified
by the instrument, under the understanding that the 2017 Model and the MLI have the same
purpose.
By contrast the MLI could not be applied to interpret retrospectively facts and
circumstances that took place under treaties which rules are substantially different to the
MLI´s.
The preambles under the MLI could be used to interpret treaties retrospectively under
the understanding that what matters in a scenario of non-taxation or reduced taxation is
whether it was achieved through tax evasion, as in the majority of the treaties concluded
previous to the MLI is stated as one of the intention of the parties to prevent tax evasion,
which has always been addressed in the OECD Commentaries. The same could be said about
the treaty shopping expressly targeted in the new preamble: this type of treaty abuse has
been challenged in the OECD Commentaries that have accompanied the treaties concluded
before the BEPS Plan, and some of them also include special anti-avoidance and LOB rules
preventing treaty shopping.
It could be envisaged that the new provisions of the MLI and of the 2017 OECD Model
Convention strengthened to target treaty abuse, will demand new efforts of the Colombian
tax administration, not only in identifying tax behaviors that may appear to be abusive but
also in analyzing the proofs prepared by the tax payers supporting that their transactions
have enough economic substance, and are adhered to the terms of the CTA´s provisions and
aligned with the object and purposes of the same. This may require for example a special
committee to assess tax payers under the PPT.
Even though the whole Colombian treaty network includes a mutual agreement
procedure (MAP) to tackle treaty disputes, in the tax reform “Act 1943 of 2018”2MAP was
introduced in the domestic regulation, establishing that the agreements signed by the tax
authority by virtue of this procedure will have the same effects as a final judicial ruling.
Likewise, by means of Resolution 53 of 2019 it is stated for all cases that will grant the right
to the tax payers to apply for the MAP and the requirements that need to be adhered to for
such purpose.
2
This Act was in force until 31 December 2019, however the MAP was included again in Act 2010 enacted at the
end of such year.
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Treaty Network
1.1. Introduction
In this first part of the document the readers will find a detailed overview of the direct and
indirect impact of the BEPS action plan on the Colombian treaty network.
As of today, the Republic of Colombia has concluded bilateral tax treaties to avoid double
taxation (DTT) with the Kingdom of Spain,3 Switzerland,4 the Portuguese Republic,5 Republic
of Chile,6 Canada,7 Mexico, United Estates,8 Republic of Korea,9 Czech Republic,10 India,11 and
the United Kingdom (UK).12These treaties are in effect.
Colombia has also signed DTTs not yet in effect with the France,13 Italy,14 Japan,15 and the
United Arab Emirates (UAE).16
The Colombian bilateral treaty network generally follows the OECD Income and Capital
Model Convention, which can be noticed from several articles of the DTTs. An example is
the permanent establishment article that as opposed to what can be seen in the UN Model
Convention does not include the service permanent establishment, of article 5(3)(b) of the
UN Model. Therefore, for a service provision configuring a PE it will be necessary not only to
have an economic presence but also to have a certain degree of fixed physical presence over
a determined period.
Another example is the delivery of goods which is included in the list of preparatory and
auxiliary activities as compared to the UN Model list where the word “delivery” was omitted
allowing the source country to attract taxation on the delivery of goods activities as well as
in the case of the dependent agent clause that is limited to mentioning that where a person
is acting on behalf of an enterprise and has, and habitually exercises, in a contracting state
an authority to conclude contracts in the name of the enterprise, that enterprise shall be
3
Ratifiedon23October2008.http://apw.cancilleria.gov.co/tratados/SitePages/VerTratados.aspx?IDT=7363a80f-
e15a-4db7-86dc-34a56458ccf3
4
Ratified on 1 January 2012.
5
Ratified on 30 January 2015.
6
Ratified on 22 December 2009.
7
Ratified on 12 June 2012.
8
Ratified on 11 July 2013.
9
10
Ratified on 6 May 2015.
11
12
Ratified on 16 December 2019.
13
Signed on 25 June 2015 and ratified by France on 7 October 2015.
14
Signed on 26 January 2018.
15
Signed on 19 December 2018.
16
Signed on 12 November 2017.
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deemed to have a permanent establishment in that state in respect of any activities which
that person undertakes for the enterprise. This is opposed to the more detailed wording of
the UN Model Convention under which various actions could give rise to a dependent agent
PE and that are now included in the OECD Model Convention of 2017.17 However, it cannot
be denied that the UN Model has also influenced the DTTs although to a lesser extent as it
can be seen in the royalties clause and the building site term of six months to configure a
permanent establishment.
This section describes the different approaches developed by Colombia in order to counter
abuse in general and treaty abuse in particular.
a) Judicial made doctrines
Before 2012 when anti-avoidance regulation was introduced in the Colombian tax system,
there was no general anti-abuse provision (GAAR), however there was notable case law
in which the judges referred to the precedence of the constitutional substance over form
principle18 and to the abuse of law doctrines in order to solve disputes of tax payers with the
Colombian tax administration.
In the different case law it was emphasized that tax legislation cannot be interpreted
literally and the facts fiscally relevant shall be examined according to the economic
substance;19 also that the interpretation of the tax law cannot be adhered to the formal truth,
it must always seek the real truth in determining the tax burden that corresponds to be
paid by the tax payers, because otherwise its action would be nugatory;20and that the tax
officers have the ability to ensure that the substantial tax obligation is not infringed, directly
or through operations that, although apparently legal, are intended to affect the interests
of the tax administration, understanding, moreover, that the interpretation of the tax law
cannot simply follow the formal truth, but must always pursue the real truth, so that the fiscal
action is not ineffective, nor repealed, by agreement of the parties.21
17
A person acts in a contracting state on behalf of an enterprise; in doing so, that person habitually concludes
contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded
without material modification by the enterprise, and these contracts are either in the name of the enterprise or
for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or
that the enterprise has the right to use, or for the provision of services by that enterprise. https://research.ibfd.
org/#/doc?url=/linkresolver/static/tt_o2_02_eng_2017_mo__td2_a5#tt_o2_02_eng_2017_mo__td2_a5
18
Colombian Political Constitution [Const]. art.28. 7 July 1991 (Colombia)
19
The abuse of law principle mentioned by the Constitutional Court in ruling C-015, 1993, cited by the Council of
State, Four Section, June 2014, file 16884.
20
Council of State, Fourth Section, March 1990, decision, case File 1957.
21
Council of State, Fourth Section, 3 July 2003, decision, case File 11650.
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b) Anti-avoidance provisions
As from 2012 the first GAAR was introduced in the Colombian tax regulation with Act 1607,
later modified by Act 1819 of 2016. The GAAR is based on the substance over form principle,
therefore the tax administration can re-characterize or re-configure the operations or set of
operations that constitute tax abuse and reject their tax effects.
The GAAR provides that an operation or series of operations will constitute abuse in tax
matters when they involve the use or implementation of one or more artificial acts or legal
businesses, without no apparent economic and / or commercial reason or purpose, in order
to obtain tax benefits, regardless of any additional subjective intention.
It is noted that the GAAR is also based on the abuse of law and economic substance
principles. It states that a legal act or business is artificial and therefore lacks economic and /
or commercial purpose, when it is evidenced that the legal act or business is not reasonable
in commercial terms or gives rise to a high tax benefit that is not reflected in the economic
or business risks assumed by the taxpayer.
Likewise, the fraus legis concept is embedded in the GAAR when it provides that a legal act
or business is contrived when it is structurally correct but apparent, since its content conceals
the true will of the parties. Then the act or business apparently covered by a legal norm is
used to infringe a tax norm.
Besides, the tax benefit as the purpose or intention of the abusive operation or set of
operations is broadly defined as the alteration, defacing or modification of the tax effects that
would otherwise be generated at the head of one or more taxpayers or effective beneficiaries,
such as the elimination, reduction or deferral of the tax, the increase in the balance in favor
or tax losses and the extension of tax benefits or exemptions.22
The piercing of the veil approach is a complement to the GAAR, in a manner that the tax
administration is authorized to remove the veil of entities when they have participated in
abusive behaviors. In fact, it is provided that in the event of abuse in the terms of article 869
of the Colombian tax code, the tax administration may remove the corporate veil of entities
that have been used or have participated, by decision of its partners, shareholders, directors
or administrators, within the abusive behaviors.23
c) Beneficial owner definition
In the Colombian regulation the definition of beneficial owner was introduced by Act 1819
of 2016, not as an anti-avoidance measure but aimed at facilitating the compliance with
the domestic report of tax information to the taxing authorities and the international
commitments of automatic exchange of information.24
Before the inclusion of such definition, the Colombian Constitutional Court, in the
22
Art. 869 of the Colombian tax code.
23
Art. 869-2 of the Colombian tax code
24
For all tax purposes regulated in the tax code, including for the purposes of arts. 631-5 and 631-6, is understood
by beneficial owner, final or real, any individual who ultimately owns, controls or benefits directly or indirectly
from a legal entity or structure without legal status. It is understood that an individual is a beneficial owner,
final or real, when he complies with some of the conditions provided in the law, e.g., owning 5% or more of the
capital or the voting rights of the legal entity or structure without legal status. art 23-1 of the tax code modified
by art 68 of act 2010 of 2019.
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constitutional control ruling of the treaty with Portugal, mentioned that neither in the
wording of the convention, nor in its protocol is defined what the contracting estates shall
understand as beneficial owner. With all, it estimates that with what the Constitutional Court
stated in a previous decision,25 Colombia could remit to the guidelines as set out in the OECD
Model that are criterion, even not mandatory, for the treaty interpretation.26
There are no judicial or administrative precedents as of today of the appliance of the
domestic definition of beneficial owner in treaty shopping cases. However, it could be
expected that given to the lack of definition of beneficial owner in the DTT, the tax courts
could apply it along with the OECD Commentaries at the moment of analyzing treaty abuse
scenarios.27
d) Treaty-based general anti-avoidance provisions
Preambles in the Colombian tax treaty network

In all the DTTs signed by Colombia that are currently in effect, a preamble can be found in the
following terms: `desiring to conclude a Convention for the avoidance of double taxation and
the prevention of fiscal evasion with respect to taxes on income and on capital`. This follows
the preambles of the OECD Models of Convention, previous the 2017 Model.
In the treaties already signed but not yet in force with France, , Italy, Japan, the United
Arab Emirates, and the recently concluded with the United Kingdom, the wording of the
preamble is the same as the wording in the 2017 OECD Model, which sets out the intention
of the contracting states of eliminating double taxation without creating opportunities
for non-taxation or reduced taxation through tax evasion or avoidance (including through
treaty-shopping arrangements aimed at obtaining reliefs provided in this Convention for the
indirect benefit of residents of third states).28
Anti-avoidance provisions in tax treaties

Except for the treaty with Spain,29 the entire treaty network currently in effect provides an
anti-avoidance provision that can be of different type and scope. Some of them are worth
mentioning.
–– Article 26 of the DTT with Canada

This is a look-through30 and an exclusion provision that prevents a conduit company
benefiting from the treaty, considering that the tax benefits would not apply on the
income or capital of a company, trust, partnership or other entity that though is a
Canadian resident, is beneficially owned or controlled, directly or indirectly by non-
Canadian residents,31 and the tax so imposed on the income or capital of the Canadian
25
In Decision C-690 of 2003, the Constitutional Court pointed out that even though the OECD Transfer Pricing
Guidelines do not have binding force, nor can they be regarded as mandatory interpretative guidelines, they
can be a valuable interpretation criterion for a complex and changing subject such as transfer pricing.
26
Colombian Constitutional Court. Ruling C-667 of 2014, Judge Gabriel Eduardo Mendoza Martelo.
27
Could apply the updated definition of beneficial owner as updated in the 2014 OECD Commentaries.
28
OECD (2017), Model Tax Convention on Income and on Capital: Condensed Version 2017.
29
This was the first treaty negotiated and concluded by Colombia.
30
Another look-through provision can be found in the treaty with the Rep. of Korea.
31
A similar provision is found in paragraph (1) of the DTT with the Rep. of Korea.
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resident is substantially lower than the amount that would have been imposed had the
Canadian entity been held or controlled by Canadian residents.
–– Article 27 of the DTT with Chile

According to this provision when the income of the state of source is received by a
company of the state of residence that is directly or indirectly controlled or managed by
non-residents, or one or more non-residents have directly or indirectly or through one
or more companies a substantial interest in the form of a participation or otherwise in
the same, the benefits of the treaty shall only apply on dividends, interests and royalties
that are levied in the later state under the ordinary taxation rules.
This is a subject-to-tax provision,32under which the benefits of a treaty only apply on the
income that is taxed in the country of residence. However, the provision also includes a
bona fide clause that refrains the limitation already mentioned as long as the tax payer
is able to prove that its principal purpose, its commercial activity and the acquisition
of shares or other goods, from which challenged income is derived, are motivated by
sound business reasons and do not have as a main purpose or one of the main purposes
obtaining the benefits under the treaty.
–– Article 21 of the tax convention with Switzerland

In this article it is laid down that the benefits of the tax treaty may not apply to an item of
income when the tax payer of the country of residence transfers, directly or indirectly, at
any time and in any form, at least one half of that income to any person or persons that
do not reside in that country. This corresponds to a “channel-approach” provision that
denies the treaty benefits in the case of operations between associated parties. 33
With all, the convention also brings a bona fide provision that excludes from the anti-
avoidance rule the situation whereby the tax payer benefiting from the tax treaty proves
that the relevant operations do not have as principle purpose obtaining the benefits of
the treaty, a condition that is supposedly met when i) the item of income is transferred
to non-associated parties; or ii) the item of income is transferred to an associated party
that would be subject to a most favorable treatment under a convention, had this party
received such income directly.
–– Article 26 of the tax convention with Mexico

This is a limitation of benefits clause (LOB), which means that the residents of Colombia
or Mexico in order to be availed with the DTT´s benefits, besides of being a resident of
the relevant treaty country require to meet certain conditions established in this DTT,34
i.e., the LOB demands to be a qualified resident to be benefitted with the DTT.35
Likewise, this treaty has a bona fide provision, thus even in those cases where it is not
possible to meet with the requirements as to be regarded as a qualified resident, the
32
See, Natalia Aristizabal & Benjamin Cubides, Cahiers de droit fiscal international, Vol. 95a, Tax treaties and tax
avoidance provisions: application of anti-avoidance provisions, Rome 2010, p 254.
33
Ibidem.
34
For example, persons other than individuals are required to fulfill requirements either related to the residence of
their natural person shareholders, or in the case of shareholders that are companies, their shares shall be traded
in a recognized Colombian or Mexican stock exchange.
35
This clause is partially based in the US Model Convention, as said by ARISTIZABAL, CUBIDES in the Cahiers de
droit fiscal international, Vol. 95a, The treaties and tax avoidance provisions, p 257.
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treaty will still apply if it is proven that neither the acquisition or incorporation of the
person nor the operations thereof have as principal purpose to obtain the treaty benefits.
Principal purpose test

A provision denying the treaty benefits when the principle or one of the principle purposes
of an operation or transaction was obtaining an advantage of the treaty can be found in the
majority of the DTTs; some of them are of a general nature36 while others are specifically
addressed to some type of income.37 Furthermore, in the treaties with the UK, Italy, Japan
and UAE, that are not in force yet, there is a principal purpose test (PPT) provision under the
terms of the 2017 OECD Model Convention.38
Other treaty provisions preventing treaty abuse based on the MLI

a) Dividend transfer transactions
Article 10 of the Convention with the UAE
This treaty limits the rate applicable on dividends at five per cent of the gross amount of
the same provided the beneficial owner is a company which holds directly at least 25 per
cent of the capital of the company paying the dividends throughout a 365 days period39
that includes the day of payment of the dividend.40
b) Gains from the alienation of shares or interests in “land-rich” companies
Article 13 of the Conventions with UAE, Italy and Japan
These treaties preserve on a general basis the source country´s taxing rights on those gains
derived by a resident of a contracting state from the alienation of shares or comparable
interests, such as interests in a partnership or trust, when at any time during the 365
36
As in the case of the Czech Republic where para. (1) of art. 25 sets out: `Notwithstanding the provisions of any
other articles of this agreement, benefits provided under this agreement shall not be granted to companies of
either contracting state if the purpose of such companies is to obtain benefits under this agreement that would
not otherwise be available`. A similar provision can be found in para. (2) of art. 28 of the treaty with India.
37
As in the treaty with Canada where in para. (1) of art. 26 it is laid down: `the provisions of articles 10, 11 and 12
shall not apply if the purpose or one of the main purposes of any person in relation to the creation or assignment
of a share, a debt-claim, or a right with respect to which dividends, interest or royalties are paid, was to derive
benefits from one or more of those articles through such creation or assignment`. Provisions of the same type
can be found in the treaties with Chile, Portugal, Canada, Rep. of Korea, and in the treaty with France that is not
yet in force.
38
Para. 9 of art. 29 of the OECD 2017 Model Tax Convention on Income and on Capital provides: “Notwithstanding
the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item
of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that
obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly
or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be
in accordance with the object and purpose of the relevant provisions of this Convention.” OECD (2017), Model
Tax Convention on Income and on Capital: Condensed Version 2017. http://www.oecd.org/ctp/treaties/2017-
update-model-tax-convention.pdf
39
Art. 10 (2)(a) of the DTT with Japan provides a withholding rate reduced to 5% in case of a 20% of participation
on the stock during a six months period.
40
Even though the DTTs with Chile, Spain, Switzerland and France have provisions similar to art. 8(1) of the MLI, it is
noted that such provisions do not include a minimum holding period in order to be availed with treaty benefits
on dividends.
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days preceding to the alienation, their value derives in more than 50 percent directly or
indirectly from immovable property.41
c) Provisions denying treaty benefits for income paid to low-taxed permanent establish
ments in third jurisdictions that are subject to little or no tax and exempt from tax in
the residence jurisdictions and provisions preventing the avoidance of permanent
establishment status through commissionaire and similar arrangements or splitting-
up of contracts.
Only the DTTs signed with Italy and Japan includes the commissionaire provision in the
terms of article 12 (1) of the MLI42. Other DTTs signed by Colombia do not have the type
of provisions of articles 10, 12 and 14 of the MLI.
Hybrid mismatch arrangements

The DTT with UK and Japan include in article 1 (2) a provision in the terms of article 3(1) of the
MLI, aimed at addressing any mismatches resulting from transparent entities.
Also, in article 4 of the DTTs with Mexico, UK, Japan, India, Italy and UAE43 there is a
provision in similar terms of article 4 of the MLI, addressing mismatches arising from dual
resident entities.
Mutual agreement procedure and correlative adjustments

The Colombian DTTs include mutual agreement procedure (MAP) provisions that inter alia
set out that the person who considers that the actions of one or both contracting jurisdictions
result or would result in taxation not in accordance with the tax treaty, could present the case
to the competent authority of the contracting jurisdiction of which he is a resident, or in case
paragraph 1 of the non-discrimination clause applies, also to the contracting state of which he
is a national. Only the treaties with the UK and UAE include a provision that expressly states
that the person could present the case to the competent authority of either contracting state
following the wording of article 16 of the MLI.
Likewise, the whole Colombian treaty network includes an “Associated Enterprises”
provision in which is laid down the obligation of the tax authority of applying the
corresponding adjustment to avoid double economic taxation in the case of associated
enterprises after a transfer pricing adjustment. 44
Up till today there is neither administrative nor judicial experience applying any of these
provisions.
Mandatory arbitration
Only the tax treaties signed with France and Italy provide that any unresolved issues arising
from a MAP shall be submitted to arbitration if the two competent authorities and the
person so agree, provided that the person agrees in writing to be bound by the decision of
the arbitration commission.45 However this is not a mandatory arbitration but a voluntary
41
A similar provision preserving the taxing right to the source country in the case of sale of shares or other type of
rights or interests in “land-rich” companies can be found in the treaties with Canada, Mexico, France, Chile, Spain,
Portugal, Switzerland, Rep. of Korea, and India. However, none of these treaties state that before the provision
applies, the value threshold has to be met at any time during the 365 days preceding the alienation.
42
Para. 5 of Art. 5 of the treaty with Italy.
43
In this DTT a person other than an individual, with dual residence, would not be availed with the DTT benefits.
44
It corresponds to the “Associated Enterprises” provision of art. 9 of the treaties signed by Colombia.
45
Art. 24 of the treaties with France and Italy.
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one, considering that it requires that the two contracting states agree to proceed with the
arbitration besides the petition of the interested person.
Colombia does not have any experience with this procedure.
This chapter focuses on the procedure that Colombia needs to observe to conclude the MLI,
which DTTs have been selected as covered tax agreements, the MLI´s provisions chosen by
the jurisdiction as well as the reservations made.
Colombia participated as associated country in the development of the BEPS Action Plan,46
and has been keen in implementing measures addressed in the OECD/G20 BEPS package,
amongst them action 15 “Developing a Multilateral Instrument to Modify Bilateral Tax
Treaties”. Thus, as expected the country signed the MLI on 7 June 2017.
However, the signature of the MLI is not enough to ratify the instrument. In fact if
Colombia decides to ratify or in other words to conclude the MLI, it shall adhere to the
following constitutional procedures:
a) Legislative approval: the bill of the text of the Multilateral Instrument shall be approved
by the Congress of the Republic of Colombia. Without this approval the instrument would
not be applicable not even provisionally.
In absence of a special procedure for the approval of an international treaty, the procedure
legally provided for the approval of an ordinary law shall apply in this case.
b) Constitutional approval: the text approved by the Congress will be submitted for
presidential approval and will then be sent to the Constitutional Court to decide on the
constitutionality of the treaty and of its approving law.47
Once the approval process of the Multilateral Instrument has been carried out, the Colombian
government will be ready to express its consent to be part of the treaty through the execution
of the instrument of ratification, approval or acceptance.48 This procedure has not been
concluded yet.
Once the Colombian government has deposited its instrument of ratification, acceptance
or approval, the MLI will enter into force on the first day of the month following the expiration
of a period of three calendar months beginning on the date of such deposit.49
At the time of this report there is no official document in which the government assesses
the potential impact of the MLI in the tax compliance and economic activity of the jurisdiction.
46
According to note 1 of the Explanatory notes of the OECD/G20 Action Plan on Base Erosion and Profit Shifting,
the references to the OECD and the G20 include likewise to Colombia and Latvia.
47
Jessica Ximena Massy Martinez, ch. “Acción 15: Desarrollar un Instrumento Multilateral.” in Resultados del Plan
de Acción BEPS y su aplicación en Colombia. Ed. Instituto Colombiano de Derecho Tributario, pp 282, 283 (2016)
48
Idem.
49
Ar. 34 (2) of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion
and Profit Shifting. https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-
related-measures-to-prevent-BEPS.pdf
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Colombia has listed as covered tax agreements (CTAs) the DTTs with Canada, Chile, Spain,
Switzerland, Mexico, India, Portugal, Czech Republic, Republic of Korea and France. Colombia
has not listed yet as CTAs the DTTs with UK, UAE, Italy and Japan.
All the treaty countries listed as CTAs have signed the MLI and listed Colombia as CTA as
well, except Switzerland. Therefore, out of the 100% bilateral DTTs signed by Colombia only
71% are listed as CTA by this country but due to Switzerland´s decision to not list Colombia
as CTA, only 62% of the bilateral DTTs are covered by the MLI. 50
In order to meet to the minimum standards on treaty abuse under the OECD/G20 BEPS
package, the Peer Review OECD report51 reflects that all Colombia´s DTTs that are currently
in force and listed under the MLI will implement the preamble statement of the MLI, the PPT
and that Colombia accepted the application of the simplified LOB.52 Therefore, the report
concludes that these DTTs will comply with the minimum standard once the provisions of
the MLI are in effect.
In detail, Colombia has notified to the depositary of the MLI the following positions that
are provisional since they can be modified at the time of ratification:53
Preamble
Colombia reserved the right for the preamble of article 6(1) of the MLI not to apply to its CTA
with France considering that it already contains an article with such preamble language.54
Furthermore, Colombia considered that the treaties with Canada, Portugal, Mexico, India,
Czech Republic, Chile, Spain and the Republic of Korea pursuant to article 6(5) of the MLI,
are not within the scope of a reservation under article 6(4) and contain preamble language
described in article 6(2).55 Therefore, in case all these jurisdictions have made the same
notification with regard to the preamble, it would either be replaced with the text of article
6(1) otherwise added to the existing preamble language.
50
Status as of 29 August 2019. http://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf.
51
Prevention of Treaty Abuse ‑ Peer Review Report on Treaty Shopping INCLUSIVE FRAMEWORK ON BEPS: ACTION
6 Ch. Colombia, p 77.
52
It should be noted that the application of the PPT was accepted by Colombia as an interim measure since it
intends where possible to adopt a limitation on benefits provision, in addition to or in replacement of art. 7(1),
through bilateral negotiation.
53
Status as of 29 August 2019. http://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf
54
Pursuant to art. 6(4) of the MLI the parties may reserve the right of the preamble not to apply to a CTA when it
already contains a preamble language describing the intent of the Contracting Jurisdictions to eliminate double
taxation without creating opportunities for nontaxation or reduced taxation, whether that language is limited to
cases of tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs
provided in the Covered Tax Agreement for the indirect benefit of residents of third jurisdictions) or applies more
broadly.
55
A preamble referring to an intent to eliminate double taxation, whether that language also refers or not to the
intent of not creating opportunities for non-taxation or reduced taxation.
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Principal purpose text
Colombia notified that the treaties with Canada, Portugal, India, Czech Republic, Chile,
Spain and the Republic of Korea,56 are not subject to a reservation to the PPT language as
described in article 7(1) of the MLI and contain a provision that denies all or part of the benefits
that would otherwise be provided under the CTA where the principal purpose or one of the
principal purposes of any arrangement or transaction, or of any person concerned with an
arrangement or transaction, was to obtain those benefits.57
However, Colombia also notified that the acceptance of the PPT provision of article 7(1)
alone is an interim measure, due to its intention to adopt a limitation of benefits provision in
addition or in replacement of the PPT provision, through bilateral negotiations.58
In none of the CTAs did Colombia opt in for the discretionary benefits rule of article 7(4).
Therefore, there would be no possibility of consultation between the tax authorities of the
contracting jurisdictions in the event in which taxpayers request the benefits of the CTA
despite of not complying with the PPT.
Limitation of benefits provision

Colombia has chosen to apply the Limited of benefits provision (LOB) to its CTAs, and notified
that Mexico has a provision in terms similar to those of the LOB described in article 7(14) of
the MLI.59
Dividend transfer transactions

Colombia opted for the provision as set out in article 8(1)60 of the MLI and notified that the
treaties with Spain and France have a similar provision as the one of article 8 (1).
Capital gains from the alienation of shares or interests in land-rich companies

Colombia chose to apply the rule of article 9(4)61 of the MLI and notified that the treaties with
Canada, Chile, Spain, France, India, Rep. of Korea, Mexico, Portugal and Switzerland have a
similar provision.
56
Colombia did not notify Mexico as a jurisdiction for the application of the PPT, given that this country was chosen
for the application of the LOB clause.
57
Therefore, the PPT text of art. 7(1) shall replace the provision of the CTAs or supersede them in the terms of art.
7 (17)(a).
58
Following art. 7(17)(a) of the MLI.
59
The implementation of the LOB to the CTAs notified by Colombia would depend on the decisions of each
contracting jurisdiction, e.g., in the case of Mexico the LOB in terms of art. 17(14) would not apply, given that
Mexico reserved the right for the LOB not to apply arguing that the tax treaty with Colombia already contains
a provision in that sense; in the case of France the LOB would not apply given that this contracting jurisdiction
did not choose to apply this provision; and in the case of India the LOB would supersede any provision of the
tax treaty given that neither of the contracting jurisdictions notified the existence of a LOB but both notified its
decision of applying this provision.
60
Under this provision the dividend withholding tax rate is reduced provided a determining condition as control,
voting rights, stock participation, are met during a 365 days threshold.
61
According to which the taxing right of the country of the source is preserved when the value of the shares or
rights derives directly or indirectly in more than 50% from immovable property situated in such country.
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Artificial Avoidance of Permanent Establishment Status through Commissionaire Arrangements.

Colombia did not reserve the right for the commissionaire rule not to apply to its CTAs and
notified those treaties where there is laid down that a permanent establishment arises
when a person other than an independent agent has and habitually exercises an authority
to conclude contracts and also that a permanent establishment shall not arise from those
activities undertaken by an agent of independent status.62
Splitting-up of contracts
Colombia did not make a reservation for article 14 of the MLI not to apply and notified those
CTAs that contain provisions addressing the division of contracts in multiple parts to avoid
configuring a permanent establishment for specific projects or activities.63
Dual Resident entities

Colombia did not make any reservation for article 4 of the MLI not to apply to the CTAs and
notified the ten CTAs where it considers there are provisions to determine the residence of a
person other than an individual in cases in which the person would otherwise be treated as
resident of the two contracting jurisdictions.
Mandatory arbitration
Colombia did not choose to apply the mandatory arbitration provision of articles 18 to 26 of
the MLI.
Reservations
Colombia listed the following reservations:
a) Transparent entities: reserved the right for the entirety of article 3 not to apply to its CTAs.
However, it is worth mentioning that the provision, intended to avoid mismatches arising
from dual residence scenarios, is included in the DTT with UK and Japan;
b) Anti-abuse rule for permanent establishments situated in third jurisdictions: reserved
the right for the entirety of article 10 not to apply to its CTAs.
1.4. Indirect Impact of the BEPS Action Plan and the MLI
Since the signature of the MLI on 7 June 2017 Colombia has signed three new bilateral DTTs,
namely with UAE, Italy and Japan.
These DTT were directly influenced by the 2017 OECD Model Convention which generally
mirrors the MLI. In the DTTs new anti-abuse provisions can therefore be found such as the
preamble, PPT, LOB, capital gains deriving their value from land-rich companies during a
365-day time threshold, dividends transfer transactions subject to a reduced rate provided
a minimum holding period is met, provisions preventing the avoidance of permanent
establishment status through commissionaire, amongst others.
The influence of the BEPS measures can also be felt in the case of the treaty with the
UK, which was signed before the MLI and was not listed as a CTA neither by the UK nor by
Colombia. The treaty includes the new text preamble, a provision addressing the mismatches
62
The ten CTAs where notified.
63
All the CTAs where notified except Switzerland.
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resulting from transparent entities and dual residence, a comprehensive LOB, and a PPT
with the discretionary benefits rule in the terms of article 7(4) of the MLI, a provision that by
contrast was not chosen by Colombia in any of the notified CTAs.
Even though the current treaty network in force does not include a mandatory arbitration
provision nor was it chosen by Colombia in its CTAs, an arbitration provision can be found
for the first time in the treaties with France and Italy. This is however a voluntary arbitration
instead of a mandatory one.64
Given that the 2017 OECD Model Convention as mentioned generally mirrors the MLI, it is
foreseen that future bilateral DTTs would be negotiated or re-negotiated by Colombia in the
light of such model and thus would be influenced by the MLI; however, differences could be
found with the instrument, e.g., they could include the discretionary benefits rule of article
7(4) of the MLI currently not chosen by Colombia in its CTAs, and also the transparent entities
provision of article 3 of the MLI that though included in the DTTs with Japan and UK, Colombia
reserved the right not to apply it in its CTAs.
It could also be expected that the MLI will be an interpretation aid of new DTTs signed in
the light of the 2017 OECD Model Convention considering that the Constitutional Court has
pointed out that international treaties can also act as a means of interpretation of internal
regulation once the DTTs are ratified by the Colombian government.65
The MLI would be implemented in the Colombian regulation through the constitutional
procedure stated to approve any other type of law, which means that once the text of the
MLI is signed, approved by the Colombian Congress and the president of the Republic of
Colombia, it should be sent to the Constitutional Court for a comprehensive analysis of the
text and of the provisions chosen by the Colombian government by its comparison with the
Colombian Constitution.
Regarding the constitutional approval it has been indicated among other characteristics
that it is integral, since all the material and formal aspects of the treaty and its approving law
are examined confronting such aspects with the entire Constitution, which is preventive,
since it seeks to guarantee both the principle of supremacy of the Constitution as well as the
State’s commitments to the international community and that it is a sine qua non condition
for the ratification of the treaty and the consequent obligation of the State.66
Once the constitutional approval is given by the Constitutional Court the Colombian
64
About voluntary arbitration, see, RIBES RIBES, Aurora. Convenios para evitar la doble imposición internacional:
interpretación, procedimiento amistoso y arbitraje. Madrid: EDERSA, 2003. ISBN 84-8494-067-5, 470, p 460 in
http://rua.ua.es/dspace/handle/10045/13287.
65
Colombian Constitutional Court. Ruling C-750 of 2008, Judge Clara Ines Vargas Hernandez.
66
Colombian Constitutional Court. Ruling C-221 of 2013, by means of which is declared the constitutionality of the
treaty between the Republic of Colombia and the Mexico to avoid double taxation and to avoid tax evasion about
the income tax and the equity tax and its “Protocol” signed in Bogotá D.C on 13 August 2009.
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government could deposit its instrument of ratification, approval or acceptance with the
depositary of the MLI.
At the time of the preparation of this report the MLI is still under approval of the
Colombian Congress, therefore Colombia has not prepared a synthesized document of any
of the CTAs notified. However, it could be expected that once Colombia ratifies the MLI it
will jointly prepare a synthesized text with the authorities of the jurisdictions that also have
ratified the MLI and notified the DTT with Colombia as a CTA.
The preparation of a synthesized text is not provided as a compulsory procedure in the
Colombian regulation, even though it is foreseeable that Colombia would follow the OECD´s
Guidance to the de development of synthesized text with the purpose of facilitating the
application of the CTAs as modified by the MLI. Given that the synthesized text would not
be a source of law,67 it would only be regarded as an auxiliary tool to ease the reading and
application of the CTAs alongside with the MLI.
While the synthesized texts are prepared, the OECD MLI matching Database could also
be used as a tool to make projections as to how the MLI would modify the CTAs, but it would
not have any legal value under the Colombian regulation.
Once the MLI has been approved by the Colombian Congress and its constitutionality has
been reviewed and declared by the Constitutional Court, it will have the nature of law which
implies that, although it will not have a hierarchy superior to the ordinary norms of any type,
it will only be subject to the Constitution, the human rights treaties and those treaties that
define the territorial limits of the state.68
In effect, the Constitutional Court in Judgment C-40869 ruled that in Colombia no
extreme internationalist monism criterion is applied, given that treaties must be subject to
the constitutionality block.70 By contrast the Court pointed out that an intermediate theory,
by Verdross named as moderate monism,71 should apply; thus, the judges of the state and
national authorities shall apply the principle according to which constitutional law precedes
international law, therefore treaties have the value assigned to them by the constitution.
Besides, the constitution provides, in article 9 inter alia, that foreign affairs of the state will
be based on the national sovereignty and on the recognition of the principles of international
law accepted by Colombia as the pacta sunt servanda and bona fide principle of articles 26 and
27 of the Vienna Convention on the Law of Treaties (VCLT).
Therefore, in order to comply with international law, it is necessary that the interpretation
of the internal norms be carried out not only in a harmonious manner with the Constitution,
67
To be a law it would be necessary to submit the synthetized text for Congress and Constitutional Court approval,
which would like to submit each DTT to the same approval and does not seem legally practical.
68
In accordance with art. 4 of the Colombian Constitution, this is a norm of norm thus it prevails over treaties with
the exception of those that recognize human rights and prohibit their limitation in states of exception and those
that define territorial limits of states.
69
By means of which the Constitutional Court reviewed and approved the Vienna Convention treaty, Law 406 of
1997.
70
Formed by the Colombian Constitution and the treaties over rights and territorial limits.
71
Idem
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which provides for compliance with the international principles as the pacta sunt servanda and
bona fide, but also with international commitments.
However, it is also recognized that although the treaties enjoy a moderate supremacy
with respect to domestic law, because they must be observed meeting the constitutional and
international standards, this does not imply that the domestic regulation that is contrary to
the treaties is per se invalidated.72
Therefore, as domestic norms contrary to international treaties do not disappear from
the legal system, they may continue to be valid and may be applicable by legal operators,
without prejudice of the fact that the responsibility of the Colombian state’s may be derived
from its application vis-à-vis the international sphere.
In consequence if after the entry into force of the MLI in Colombian law, subsequently
enacted legislation is contrary to the MLI´s provisions, it should not mean that the MLI will
be overridden73 without creating direct responsibility of the Colombian State for breaching
its international commitments. If that were to be the case it would be understood that the
legal operator is disregarding international principles recognized by the Constitution, as the
Constitutional Court has pointed out that it is the duty of the legal operators to apply the
internal legal norms other than the Constitution so that they harmonize as much as possible
with the international commitments signed by the country.74
Further, if treaties grant rights in favor of individuals (such as those that could result from an
agreement to avoid double taxation), their observance must be guided by a duty of protection
and effectiveness (Colombian Constitution, article 2), which should avoid treaty override.
At the time of this report the MLI has not been approved as Colombian law. Therefore, the
MLI has not given rise to interpretation issues, neither by the Colombian government nor
by the courts.
Once the MLI is ratified and therefore enters into force in Colombian law, it is foreseeable
that not only the guidelines provided in the MLI but also in its explanatory memorandum
could be regarded as interpretative aid by the government and the courts when solving
interpretative issues. As it will be explained in the following chapter, before Colombia is
accepted as member of the OECD, all the OECD guidelines and memorandums would have
no legal value unless they are adopted by virtue of a law. However, they can be accepted as
a valid auxiliary tool of interpretation in the application of international tax regulations.
It can also be expected that following chapter 2.4.13 of the “Guidance to the development
of synthesized texts”,75notwithstanding the official languages of the MLI are English and
French, the synthesized text of each CTA will include boxes with the relevant changes to the
CTAs articles in Spanish, probably mentioning that this is a non-official translation of the
authentic provision of the MLI in English. In case interpretation issues arise, prevalence to the
official languages of the MLI will be given as mandated by article 33 of the VCLT.
72
Colombian Constitutional Court. Ruling C-1189 of 2000, Judge Carlos Gaviria Diaz.
73
Lex posterior derogate legi priori.
74
Colombian Constitutional Court. Ruling C-400 of 1998, Judge Alejandro Martinez Caballero.
75
http://www.oecd.org/tax/treaties/beps-mli-guidance-for-the-development-of-synthesised-texts.pdf.
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The MLI raises two questions about tax treaty interpretation: what will the influence of
the MLI and of the BEPS reports be on treaty interpretation, and will the ambulatory or
static interpretation of the treaties vary because of the MLI, including a more teleological
interpretation than in the past.
In order to determine what would be the value of the MLI and the OECD reports published
during the course of the BEPS project in the interpretation of the tax treaties, it is important
to consider the current status they have within the internal law and what the status would
be once the MLI is ratified and Colombia is accepted as member of the OECD.
As the MLI is currently under process of approval, it has not changed any CTA, nor has it
influenced the interpretation of the treaties signed by Colombia that are in effect. However, as
it has been mentioned in this report, once the MLI is approved by the Colombian Congress and
the Constitutional Court, it would be incorporated in the internal regulation with the nature
of law, and with its ratification it would be considered that the MLI has entered into force.
As law, the MLI will have to observe the pacta sunt servanda and bona fide principles enshrined
in the VCTL and would influence the interpretation of the CTAs that are modified by virtue
of the same.
Concerning the legal value of commentaries on the OECD Model Convention, the
Constitutional Court has ruled that although they constitute a valuable auxiliary interpretation
tool, they are not mandatory, nor can they be invoked by virtue of means of interpretation
of the treaties as laid down in articles 31 and 32 of VCLT. As they do not have the force of law
and as Colombia is not a member of the OECD, they cannot be understood as incorporated
within the treaties or their protocols.76
Based on the position of the Constitutional Court, one can foresee that as it happened
with the OECD´s Commentaries, the BEPS reports can be regarded an auxiliary criterion of
interpretation of the treaties signed by Colombia that have been influenced by the BEPS/G20
package, though they cannot be regarded as a mandatory interpretation tool neither for the
judges nor for the tax authorities.
However, the status of the OECD Commentaries and BEPS reports may change when
Colombia is accepted as an OECD member. By means of Law 1950 of 2019 Colombia approved
the Agreement on the terms of adhesion of the Republic of Colombia to the Convention of the
Organization for Economic Cooperation and Development and accepts the legal instruments
of the OECD in force at the time the country is invited to adhere to the OECD, which includes
the recommendation “C(97)195/FINAL” that inter alia points out that the tax administrations
should follow the OECD commentaries.
Therefore, if Colombia is accepted as OECD member, it can be foreseen that not only the
commentaries but also the BEPS reports would have more weight as interpretative tools of
the new DTTs influenced by the OECD/BEPS package and those modified by the MLI.
In the same sense, as Colombia is not an OECD member it cannot be understood that
when a treaty has received the congress and constitutional approval the commentaries have
also received such approval and hence they have become part of the treaty itself; therefore
a static interpretation of the commentaries could not be concluded, however there is no
evidence of an ambulatory interpretation by the tax authorities neither.
76
Colombian Constitutional Court. Ruling C-460 of 2010, Judge Jorge Ivan Palacio Palacio.
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Colombia
Even though an ambulatory interpretation sounds doable,77 one could expect a more
teleological interpretation once the MLI enters into force, given that not only the tax payers
but also tax administrations should be aligned with the new purpose of the treaties, which is
not only to avoid double taxation but also to avoid non taxation or reduced taxation through
avoidance or evasion, i.e., through practices aimed at eroding the basis of the relevant treaty
countries. However, in my view this teleological interpretation aligned with the OECD/BEPS
project should apply also considering all the facts and circumstances of the tax payers as the
MLI also mandates; otherwise the teleological interpretation without such consideration
may render the treaties inapplicable.
At the time of this report there is no debate about the possibility of applying the MLI
provisions or the modified preamble to retrospectively interpret DTTs signed or concluded
by Colombia before the MLI. Though such a possibility could be analyzed under the light of
the factors mentioned as follows.
The non-retroactive of treaties principle of article 28 of the VCLT sets out that “unless a
different intention appears from the treaty or is otherwise established, its provisions do not
bind a party in relation to any act or fact which took place or any situation which ceased to
exist before the date of the entry into force of the treaty with respect to that party”.
From such article it can be concluded that a treaty can only be applied on facta futura,
facta pendetia, but not on facta praeterita.
The MLI was drafted in order to facilitate the implementation of the treaty-related
measures resulting from the OECD/ G20 Base erosion and profit shifting project, namely
those aimed at preventing treaty abuse, alongside with the 2017 OECD Model Convention that
includes large number of changes resulting from the OECD/G20 BEPS project, in particular
from the final report on Action 6.78
The dynamic interpretation of the OECD Commentaries on former treaties is suggested
by the OECD, as long as they are not the result of an article substantially different to the one
subject to interpretation.
With the foregoing factors in mind, given that the 2017 OECD Model adopted the majority
of the MLI´s rules aimed at countering treaty abuse in light of the OECD/G20 package, those
DTTs currently signed by Colombia under such model and that include the same or similar
provisions as the MLI´s, could be used to interpret such provisions retrospectively.
In such sense the MLI could help to interpret those DTTs signed under the 2017 OECD
Model previous to the MLI´s signature or conclusion, even if those DTT are not CTAs, under the
understanding that the 2017 Model and the MLI have the same purpose. An example of this
scenario could be the DTT with Japan, which was signed under the 2017 Model Convention
77
According to the OECD, existing conventions should as far as possible, be interpreted in the spirit of the revised
commentaries, i.e., in a dynamic manner. However, when the change to a commentary is the result of the
amendment to a specific article of a convention, such commentary should not apply to interpret an article
which is different in substance to the one amended. Ch. 33 to 35 of the OECD Commentaries to the 2017 Model
Convention.
78
Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 – 2015 Final Report, OECD
Publishing, Paris, DOI: http://dx.doi.org/10.1787/9789264241695-en; OECD (2015).
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Martinez
and includes provisions that follow the substance of the MLI, even though the DTT currently
is not a CTA for Colombia.79
Based on the principle pacta tertis nec nocent nec prosunt, according to which treaties are
only binding for the treaty parties and do not harm nor favor third states, the MLI could not
modify DTTs that are not notified as CTAs. However, the MLI could still be a tool to interpret
retrospectively those DTTs signed under the 2017 Model for the reasons already mentioned.
By contrast, the MLI could not be applied to retrospectively interpret facts and
circumstances that take place under a DTT which rules are substantially different to the
MLI´s and before this DTTs are modified by the instrument, e.g., the MLI´s rule about the
principal role80 could not apply in an analysis of a commissionaire situation that takes place
at the time of this report under the DTTs with Canada81or France that currently do not include
such provision.
About the possibility of applying the modified preamble retrospectively, it could
be considered that most of the preambles of the current DTT network,82 even those
signed previously to the OECD/G20 Project, provide that the DTTs are concluded with the
intention not only to prevent double taxation, but also fiscal evasion. Furthermore, the
OECD Commentaries have reiterated that it is also a purpose of a convention to prevent tax
avoidance and evasion.83
With that, in mind, the MLI´s preamble may be applied when interpreting treaties signed
before this instrument is signed or enters into force without breaching the non-retroactivity
principle, given that if a non-taxation or a reduced taxation occurred under the rules of a DTT
before it is modified by the MLI, what would matter is whether that situation was achieved
through avoidance or evasion, concepts already challenged by such DTT and the OECD
Commentaries.
Regarding the non-taxation or reduced taxation achieved through treaty shopping
transactions, the MLI´s preamble could also apply as an interpretative aid retrospectively,
given that the OECD Commentaries have also called the attention of the need of including in
the DTTs measures to counter these transactions, such us the beneficial ownership clauses.
However, in this case the interpretation should be done considering whether there is a special
LOB or anti-abuse clause in the DTT or not, e.g., a subject to tax84 or a channel clause,85in order
to respect the terms of these clauses.
79
E.g., dual residence conflicts in the case of persons other than individuals, dividends and capital gains in land-rich
companies.
80
Art. 12 (1) of the MLI.
81
Signed under the 2008 Model Convention.
82
The DTTs with the UK, UAE, France, Italy and Japan, already signed but not yet in force, include a preamble
provision similar to the MLI´s, pointing out the intention to conclude a convention for the elimination of double
taxation with respect to taxes on income without creating opportunities for non-taxation or reduced taxation
through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs
provided in this convention for the indirect benefit of residents of third states).
83
Para. 7 of the 2014 Commentaries on art. 1 of the Model Tax Convention.
84
As in the case of the DTTs with Chile and Canada.
85
As in the DTT with Switzerland.
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Colombia
The assessment policies of the tax authorities to challenge or deny treaty benefits have not
changed nor increased after the signature of new treaties under the 2017 OECD Model and
the signature of the MLI. However, it could be expected that, with the signature of the DTTs
under the new model and once Colombia ratifies the MLI and the DTTs begin to be modified
by the instrument, which will be a sign of the government´s willingness to strengthen and
make more visible the anti-abuse treaty measures that even nowadays are included in the
treaty network and in the OECD Commentaries,86 the tax administration will design special
assessment programs to materialize such measures.
From the tax practitioners´ side, the tax planning will need to be more than an isolated
and autonomous work, considering not only the facts and tax rules in a determined
transaction and whether or not a vehicle meets the substance standards in a determined
jurisdiction; in order to meet with the PPT standard which is expected to be included in the
treaties pre and post BEPS project, it will be necessary to evaluate matters such as whether
the transaction has economic sense and if financially can be implemented regardless of the
treaty benefits. Therefore, the tax planning and tax re-structuring work will demand that the
tax practitioners work with a pool of professionals that will analyze economic, financial87 and
trade variables that will allow to determine that the transaction is reasonable beyond the
tax benefits of the DTT and can be implemented without the risk of being characterized as
abusive by the taxing authorities. Indeed, the tax practitioner along with other professionals
would have to assess and if necessary, help to support that the transaction is reasonable and
has economic purpose.88
Considering this foreseen new standard, it is also expected that the Colombian taxing
authorities design and implement a specific procedure and create a special group formed
by specialists of several disciplines with the professional skills not only to analyze whether
there are indicia of treaty-abuse in a transaction before challenging the same, but also to
objectively analyze the proofs provided by a tax payer of the economic and commercial
rationale of the challenged transaction.
As regards to the impact of the MLI on the resolution of tax disputes, specifically under the
mutual agreement procedure (MAP),89 by means of article 99 of act 1943 of 201890 it was set
86
E.g., the guiding principle as stated in para. 9.5 of the commentaries to art. 1 of the OECD Model Convention since
2003.
87
Amongst other tests it could be necessary to apply the financial sensibility test, which seeks to define if the
benefit of the DTT is one of the principle purposes of the transaction. In this order of ideas, it must be identified
in which proportion the transaction is affected with the granting or not of the tax benefit of the DTT, or with the
variation of the amount of the benefit. Santiago Eduardo Gómez Cifuentes. Abuso en el Instrumento Multilateral.
Una nueva mentalidad de planeación internacional. Bogotá Universidad de los Andes, Ediciones Uniandes. P 51
(2019).
88
Referring to the reasonableness of the relevant facts and circumstances “In this order of ideas, from an
entrepreneurial perspective, the reasonableness given in terms of economic substance and of business purpose,
which are opposed to the tax avoidance and are aligned with the tax planning” free translation of the author.
Ibidem P 54.
89
The whole current treaty network formed by the DTTs concluded and those signed but not yet in force include
the mutual agreement procedure (MAP) as a mechanism for the resolution of tax disputes and only two of them
include a voluntary arbitration that could apply when it was not possible to achieve a satisfactory result under
the MAP.
90
In force until 31 December 2019 and replaced by art. 107 of act 2010 of the same year.
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Martinez
out that the tax payers can apply before the tax authority for the MAP provided in the DTTs,
and that the agreements signed by the tax authority by virtue of the procedure as stated in
the DTTs will have the same effects of a final judicial ruling and could not be subject to any
further judicial appeal, being binding to the parties. Likewise, in Resolution 53 of 2019 it was
established that the procedure shall be observed by the tax payers that want not only to
obtain a solution of a tax controversy arising from a DTA, but also in those cases that there
are doubts about the right to apply for a DTT´s benefit, residence conflicts and where the DTT
provides that the taxing authority discretionally could determine the possibility of the tax
payer being availed with the DTT´s benefits notwithstanding that the requirements provided
in a LOB are not met.
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Denmark
Branch reporter
Peter Koerver Schmidt1

On 28 March 2019, the Danish Parliament adopted a bill ratifying the OECD Multilateral
Instrument (MLI), and on 30 September 2019 Denmark deposited its instrument of
ratification. Accordingly, the MLI will wield influence on Denmark’s covered tax treaties as
of 1 January 2020.
Denmark does not have an official model convention. Instead, with certain deviations,
Denmark’s point of departure for the negotiation of tax treaties is the OECD Model Tax
Convention on Income and Capital (hereinafter the OECD Model). Denmark’s tax treaties
typically contain a preamble stating that the purpose of the treaty is both to promote
avoidance of double taxation and to prevent tax evasion. Moreover, Denmark’s tax treaties
normally contain the anti-avoidance rules directly mentioned in the OECD Model itself.
As the aim of the MLI is to mitigate base erosion and profit shifting related to tax treaties,
the Danish government was of the opinion that the content of the MLI should apply to all
of Denmark’s tax treaties, despite the fact that they are not completely alike. When signing
the MLI, Denmark therefore listed 65 out of its 70 tax treaties as covered tax agreements. With
respect to the remaining tax treaties, it has been decided to (wholly or partly) implement
the content of the MLI through other complying instruments.
Even though Denmark has decided to include all elements of the MLI, a number of
choices still had to be made between the different available alternatives in some of the MLI
provisions. With respect to general anti-avoidance provisions, Denmark has decided to apply
the principle purpose test (PPT). Denmark’s preference for the PPT was no surprise as Denmark
had already implemented a similar OECD inspired PPT-rule in domestic law in 2015. However,
in line with article 7(7)(a) of the MLI, Denmark will apply the simplified limitation on benefits
provision (SLOB) if the treaty partner has decided to adopt the SLOB.
The relationship between domestic Danish law and international law is based on a
dualistic principle and Denmark’s ratification of the MLI required a statutory basis, which
was established by the parliament’s enactment of a law. Constitutionally, nothing hinders
the Danish parliament from passing a law that is in conflict with the MLI. However, it is
generally recognized that Danish authorities and courts should advance an interpretation
of Danish law that makes it compliable with Denmark’s international law obligations and
should presume that the intention of the parliament has not been to enact legislation in
breach of Denmark’s obligations.
Pursuant to Danish case law, the Commentary to the OECD Model plays a significant role
when it comes to interpretation of Denmark’s tax treaties. In this context, it must be expected
that the Explanatory Statement to the MLI as well as the OECD reports, on which the MLI
rests, will also constitute important means of interpretation onwards.
1
Professor with special responsibilities in tax law, Copenhagen Business School and Academic Advisor, CORIT
Advisory.
IFA © 2020 323

Denmark
All in all, even though Denmark’s ratification of the MLI must be expected to increase
legal complexity and uncertainty in some areas, Danish businesses and lobby groups have
generally been quite positive towards the MLI. An important reason for the positive attitude
was the fact that at the end Denmark decided to opt for mandatory binding arbitration.
Accordingly, the prevailing opinion appears to be that a sensible balance has been struck.
Treaty Network
1.1. Introduction
Danish governments have by turns consistently supported the OECD/G20 Base Erosion
and Profit Shifting Project (the BEPS Project) and actively tried to push forward the anti-
tax avoidance agenda.2 In line with these efforts, the Danish parliament adopted a bill on
20 December 2019 that implemented most parts of the EU Anti-Tax Avoidance Directive
(the ATAD),3 which aims at implementing (some of) the BEPS Actions across the EU in a
coordinated manner.4 Moreover, on 28 March 2019, the Danish parliament adopted a bill
ratifying the MLI.5
Denmark had 70 (comprehensive) tax treaties in force prior to the implementation of the
MLI. The jurisdictions with which Denmark had concluded tax treaties prior to the MLI were
Argentina, Australia, Austria, Azerbaijan, Bangladesh, Belarus, Belgium, Brazil, Bulgaria,
Canada, Chile, (the Peoples Republic of) China, Chinese Taipei, Croatia, Cyprus, Czech
Republic, Egypt, Estonia, Finland, Georgia, Germany, Ghana, Greece, Hungary, Iceland,
India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kenya, Republic of Korea, Kuwait,
2
Political agreement of 17 May 2017 (Aftale om styrket indsats mod international skatteunddragelse). This branch
report is prepared in line with developments that have taken place prior to 15 October 2019.
3
Law no. 1726 of 27 December 2018 (Lov om ændring af selskabsskatteloven, lov om ophævelse af dobbeltbeskatning i
forbindelse med regulering af forbundne foretagenders overskud, momsloven og forskellige andre love). See also Bill L
28 A 2018/19 (1) (Forslag til lov om ændring af selskabsskatteloven, lov om ophævelse af dobbeltbeskatning i forbindelse
med regulering af forbundne foretagenders overskud, momsloven og forskellige andre love) and Council Directive (EU)
2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning
of the internal market (ATAD I), and Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU)
2016/1164 as regards hybrid mismatches with third countries (ATAD II).
4
S. Govind & S. Zolles, The Anti- Tax Avoidance Directive, in Introduction to European Tax Law on Direct Taxation (Michael
Lang et al. eds., Linde Verlag 2018), at p. 220, and D. Smit, The Anti-Tax-Avoidance Directive (ATAD), in European Tax
Law, Vol. 1 (P. Wattel et al. eds., Wolters Kluwer 2018), p. 485 et seq.
5
Law no. 327 of 30 March 2019 (Lov om anvendelse af multilateral konvention til gennemførelse af tiltag i
dobbeltbeskatningsoverenskomster til forhindring af skatteudhuling og overskudsflytning). See also Bill L 160 2018/19
(1) (Forslag til lov om anvendelse af multilateral konvention til gennemførelse af tiltag i dobbeltbeskatningsoverenskomster
til forhindring af skatteudhuling og overskudsflytning).
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Koerver Schmidt
Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Montenegro, Morocco,

Netherlands, New Zealand, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russia,
Serbia, Singapore, Slovak Republic, Slovenia, South Africa, Sri Lanka, Sweden, Switzerland,
Tanzania, Thailand, Trinidad and Tobago, Tunisia, Turkey, Uganda, Ukraine, United Kingdom,
United States, Venezuela, Vietnam, and Zambia.6
Accordingly, the Danish treaty network is rather comprehensive7 and it is an official
political priority to extend and maintain it.8 In this context, it is worth noticing that Denmark
has concluded a multilateral tax treaty with the other Nordic countries9 but currently has no
tax treaties in force with the fellow EU member states of France and Spain. The reason for the
latter is that Denmark chose to terminate the two tax treaties in 2009 due to disagreements
caused by Denmark’s strict negotiation policy aiming to ensure that all of Denmark’s tax
treaties give Denmark the right to impose taxes at source on remuneration of private and
social pensions.10
Denmark does not have an official Danish model convention.11 Instead, Denmark’s point
of departure for negotiation of tax treaties is the OECD Model with certain deviations.12
However, some of Denmark’s tax treaties (primarily the ones with developing countries)
also reflect elements of the United Nations Model Double Taxation Convention between
Developed and Developing Countries (hereinafter the UN Model).13
Denmark has made a number of reservations to particular articles of the OECD Model.14
The first of which is a reservation to article 5 of the OECD Model regarding the definition of
a permanent establishment. The reservation concerns the special problems of applying the
provisions of the OECD Model to offshore hydrocarbon exploration and exploitation and
related activities. In connection to this, Denmark thus reserves the right to insert, in a special
article, provisions related to such activities.15
Further, Denmark has made a reservation to article 8 of the OECD Model on profits from
shipping, inland waterways transport, and air transport. In this regard, Denmark reserves the
6
OECD/G20, Prevention of Treaty Abuse – Peer Review Report on Treaty Shopping, 2019, p. 88-90.
7
For more on the historical developments with respect to Denmark’s tax treaty network see P. K. Schmidt, The
Emergence of Denmark’s Tax Treaty Network – A Historical View, 6 Nordic Tax Journal 1 (2018), p. 49-63, and L.
Weizman, Dobbeltbeskatningsoverenskomster vedrørende indkomst og formue (Jurist- og Økonomforbundets Forlag
1994).
8
Bill L 160, supra n. 5, p. 91.
9
E. Andersson et al. Det nordiska skatteavtalet med kommentarer (Juristförbundets Förlag 1986).
10
Law no. 85 of 20 February 2008 (Lov om bemyndigelse til opsigelse af dobbeltbeskatningsoverenskomster mellem
Danmark og henholdsvis Frankrig og Spanien). See also J. Bundgaard & K. Dyppel, Corporate Tax Implications of
Denmark’s Unilateral Termination of its Tax Treaties with France and Spain, 63 Bulletin for International Taxation 7
(2009), p. 295-301.
11
A. Michelsen et al., International Skatteret (Karnov Group 2017), p. 61.
12
Bill L 160, supra n. 5, p. 94. See also J. Sneum, Forhandling af dobbeltbeskatningsoverenskomster og visse aspekter af
disse, Skat Udland (1990), p. 140-149, S. Ulstrup, Den danske model-overenskomst, Skat Udland (2001), p. 160-166,
and P. Loft, Har vi behov for dobbeltbeskatningsoverenskomster, in Festskrift til Aage Michelsen (P. Krüger-Andersen et
al. eds., Jurist- og Økonomforbundets Forlag 2000), p. 277 et seq.
13
See A.N. Laursen, OECD’s Modeloverenskomst og FN’s Modeloverenskomst: en sammenligning, Skat Udland (2015),
p. 657-669.
14
Denmark made reservations for the first time in connection with the 1992-update of the OECD Model. Largely,
these reservations reflected the already existing Danish negotiation policy at the time. See Schmidt, supra n. 7.
15
Commentary on art. 5 of the OECD Model 2017, para. 189. Denmark has made a corresponding reservation to art.
13 of OECD Model 2017 on taxation of capital gains. See Commentary on art. 13 of the OECD Model 2017, para. 43.
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Denmark
right to insert special provisions regarding profits derived by the air transport consortium
Scandinavian Airlines System (SAS).16
Moreover, with respect to article 10 of the OECD Model on taxation of dividends, Denmark
reserves the right, in certain cases, to consider as dividends the selling price derived from the
sale of shares.17 In line with this, Denmark has also made a reservation to article 13 of the OECD
Model concerning taxation of capital gains. The reservation states that where the selling
price of shares is considered to be dividends under Danish legislation, Denmark reserves
the right to tax such selling price as dividends in accordance with paragraph 2 of article 10
of the OECD Model.18
Concerning article 15 on income from employment, Denmark reserves the right to
insert special provisions regarding remuneration derived in respect of an employment
exercised aboard an aircraft operated in international traffic by the air transport consortium
Scandinavian Airlines System (SAS).19 Finally, with respect to article 25 of the OECD Model
on mutual agreement procedures, Denmark reserves the right not to include paragraph 5 on
arbitration in its tax treaties.20
Denmark’s tax treaties typically contain a preamble stating that the purpose of the treaty
is both to promote avoidance of double taxation and to prevent tax evasion. Moreover,
Denmark’s tax treaties normally contain the anti-avoidance rules directly mentioned in
the OECD Model itself, whereas the various anti-avoidance rules mentioned only in the
Commentary rarely find their way into Denmark’s tax treaties.21
Since the 1980s, Denmark has paid increased attention to problems of abuse of tax
treaties, including treaty shopping.22 In 1983, the Danish government appointed a committee
(Skatteflugtsudvalget) with the purpose of trying to investigate these problems as well as
broader challenges connected with the so-called exodus of taxpayers from Denmark.23 One
offshoot of this increased attention was that Denmark began to terminate a number of
16
13 of OECD Model 2017 on taxation of capital gains. See Commentary on art. 13 of the OECD Model 2017, para. 44.
17
Commentary on art. 10 of the OECD Model 2017, para. 79.
18
19
22 of OECD Model 2017 on taxation of capital. See Commentary on art. 22 of the OECD Model 2017, para. 12.
20
21
J. Wittendorff, Misbrug af dobbeltbeskatningsoverenskomster, in Den evige udfordring – omgåelse og misbrug i
skatteretten (J. Bundgaard et al. eds., Ex Tuto 2016), p. 299. Typically, Denmark’s tax treaties already include
provisions for a mutual agreement procedure as well as corresponding adjustments (as addressed in arts. 16 and
17 of the MLI), but none of Denmark’s tax treaties contain provisions (in force) for mandatory binding arbitration.
See J. Breau & K.S. Nilausen, Denmark, in Cahiers de droit fiscal international 101a (International Fiscal Association
eds., Sdu Financiële & Fiscale Uitgevers 2016), p. 211-221.
22
See Schmidt, supra n. 7.
23
Government Recommendation (Betænkning – Reglerne om beskatning af udenlandsk indkomst i Danmark og for ophør
af skattepligten til Danmark), no. 1060, 1985, p. 127-135. From recent years see also the Tax Legislation Council
(Skattelovrådet), Rapport om skattely, udveksling af oplysninger, hvidvask og straf (2018).
326
Koerver Schmidt
treaties primarily concluded with countries overseas that had previously belonged to the
UK or the Netherlands as colonies.24
With respect to some of the other suggestions made by the committee, the results were
more meager. Thus, no tradition for introducing general anti-avoidance clauses in the Danish
tax treaties arose and it did not become common to include provisions in the Danish tax
treaties that would explicitly establish that the states could apply domestic anti-avoidance
rules.25 However, provisions providing subsidiary taxing rights began to appear in a number
of Danish treaties.26
In recent years, the notion of beneficial ownership has in particular attracted interest.
Accordingly, most of Denmark’s tax treaties contain beneficial ownership clauses in line
with articles 10-12 of the OECD Model on dividends, interest and royalties, and the Danish
tax authorities have raised a number of cases against Danish interest and/or dividend paying
companies for not withholding tax at source.27 In short, the position of the tax authorities is
that the immediate recipients cannot be regarded as the beneficial owners of the received
funds as the immediate recipients lack the powers to make decisions in respect of the
received funds and because their only function has been to simply act as an intermediary
or a conduit company.28
Only one beneficial ownership case has so far been decided by the Danish courts. The
case – which had an atypical fact pattern as the immediate recipient had not re-distributed
the dividends up the corporate chain – was won by the taxpayer.29 However, more cases on
beneficial ownership are currently on their way through the Danish legal system, and on the
level of the National Tax Tribunal, the tax authorities have prevailed in a number of cases
concerning interest payments.30 Furthermore, in some of the ongoing court cases, requests
for preliminary rulings were made to the European Court of Justice (ECJ). On 26 February
2019, the ECJ published its judgements31 in which the ECJ appears to interpret the beneficial
ownership concept rather broadly and to expand the scope of application of the general anti-
24
J.W. Grav, Dobbeltbeskatning – gamle engelske kolonier – 1950 UK-overenskomst, Tidsskrift for skatter og afgifter 85
(1986). See also Weizman, supra n. 7, p. 77.
25
Among the more important exceptions are the LOB clause found in the treaty with the US, the principal purpose
test in the treaty with the UK, and the provision in the treaty with Germany specifically allowing the contracting
states to apply domestic anti-avoidance rules. See J. Bundgaard & P.K. Schmidt, Denmark, in Cahiers de droit fiscal
international 95a (International Fiscal Association ed., Sdu Financiele Uitgevers 2010), p. 261-279.
26
Wittendorff, supra n. 21.
27
See also P.K. Schmidt, Corporate Taxation and the International Challenge, 2 Nordic Tax Journal 2 (2014), p. 113-131.
28
H.S. Hansen et al., Denmark – Danish Beneficial owner cases – A Status Report, 67 Bulletin for International Taxation
4/5 (2013), p. 192-199.
29
Judgement of 20 November 2011, Eastern High Court (Østre Landsret), SKM2012.121.ØLR. The judgment was not
appealed.
30
For example, decision of 22 December 2010, National Tax Tribunal (Landsskatteretten), SKM2011.57.LSR and
decision of 25 May 2011, National Tax Tribunal (Landsskatteretten), SKM2011.485.LSR
31
Judgements of 26 February 2019, European Court of Justice, joined cases C115/16, C118/16, C119/16 and C299/16,
and Judgments of 26 February 2019, European Court of Justice, joined cases C-116/16 and C-117/16.
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Denmark
abuse principle enshrined in EU law.32 The referring Danish courts now have to re-open the
cases and consider the facts against the answers received from the ECJ.
In domestic Danish tax law, a patchwork of anti-avoidance rules has gradually developed
since the early 1990s. In the beginning, the focus was on introducing provisions mitigating
abuse of Denmark’s tax treaties, but it has gradually shifted towards other kinds of abuse and
avoidance.33 For example, Danish domestic law contains rules limiting deductions of interest,
rules on controlled foreign companies, hybrid mismatch rules, and rules on exit taxation.34
Moreover, in 2015, Denmark introduced a statutory general anti-avoidance provision aiming
at mitigating corporate taxpayer abuse of Denmark’s tax treaties (OECD principal purpose test)
and certain EU directives.35 The scope of the provision was broadened with effect from 2019
because of Denmark’s implementation of the GAAR prescribed in article 6 of the ATAD.36
Denmark signed the MLI on 7 June 2017 at the signing ceremony in Paris. On 28 March 2019,
the Danish parliament adopted a bill ratifying the MLI. The adopted bill entered into force
as of 1 July 201937 but the MLI will only start having effect with respect to Denmark’s covered
tax treaties three months after Denmark has deposited its instrument of ratification with
the Depository at the OECD.38 As Denmark deposited its instrument of ratification on 30
September 2019, the MLI will start having effect with respect to Denmark’s covered tax
treaties as of 1 January 2020.39
Denmark’s main reason for signing the MLI is that the MLI is perceived to introduce a
32
For more on the European Court of Justice’s decisions in the Danish beneficial ownership cases see P.A.H.
González-Barreda, European Union – Holding Companies and Leveraged Buy-Outs in the European Union Following
BEPS: Beneficial Ownership, Abuse of Law and the Single Taxation Principle, 59 European Taxation 9 (2019), L.C. van
Hulten & JJ. A.M. Korving, Svig og Misbrug: The Danish Anti-Abuse Cases, 47 Intertax 8/9 (2019), p. 793-800, and E.
Banner-Voigt, EU-Domstolens afgørelser i sagerne om retmæssig ejer, Revision & Regnskabsvæsen 7 (2019), p. 58 et
seq.
33
Wittendorff, supra n. 21, p. 302.
34
For a recent overview of the plethora of Danish anti-avoidance rules see J. Bundgaard & P.K. Schmidt, Denmark,
in Tax Avoidance Revisited in the EU BEPS Context (A. Dourado ed, IBFD 2016), p. 261-284.
35
S. 3 of the Danish Tax Assessment Act, introduced by Law no. 540 of 29 April 2015 (Lov om ændring af ligningsloven,
boafgiftsloven, fondsbeskatningsloven, skatteforvaltningsloven og forskellige andre love). See also Bill L 167 2014/15
(Forslag til Lov om ændring af ligningsloven, boafgiftsloven, fondsbeskatningsloven, skatteforvaltningsloven og forskellige
andre love). Even though no statutory GAAR was adopted until 2015, Danish case law contains several examples
where courts have struck down the arrangements of a taxpayer, inter alia, by taking the substance of the
transaction(s) into account when interpreting and applying the law. See L. Madsen & A.N. Laursen, Denmark,
in 103 Cahiers de droit fiscal international (International Fiscal Association ed., Sdu Fiscale & Financiële Uitgevers
2018).
36
See also s. 1.1 above. For an analysis of this development see for example P.K. Schmidt, Avoidance and Abuse –
A Contemporary Analysis of Danish Tax Law, Revue européenne et internationale de droit fiscal / European and
International Journal of Tax Law 4 (2018), p. 489-499.
37
See also s. 1.1. For more on the Danish implementation process see also s. 2.1.1.
38
39
OECD, Signatories and Parties to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base
Erosion and Profit Shifting – Status as of 30 September 2019 (2019).
328
Koerver Schmidt
number of important measures against base erosion and profit shifting. In the view of the
Danish legislator, this aim should be pursued with respect to all of Denmark’s tax treaties,
irrespective of the various treaties’ differences. In addition, the fact that Denmark sees itself
as a frontline jurisdiction – in the fight against the use of tax havens – also played a role with
respect to Denmark’s decision to support the MLI. Finally, as Denmark expects to continue
using the OECD Model as a point of departure for negotiating new tax treaties – and since
the 2017-version of the OECD Model already includes the content of the MLI – it makes sense
to also align all of Denmark’s existing tax treaties with the MLI.40
As the aim of the MLI is to mitigate base erosion and profit shifting related to tax treaties,
the Danish government was of the opinion that the content of the MLI should apply to
all of Denmark’s tax treaties, despite the fact that they are not completely alike.41 When
signing the MLI, Denmark therefore listed 65 out of its 70 tax treaties as covered agreements.42
These include Denmark’s tax treaties with the following jurisdictions: Argentina, Australia,
Azerbaijan, Bangladesh, Belgium, Brazil, Bulgaria, Canada, Chile, Cyprus, Egypt, Estonia,
Philippines, Georgia, Ghana, Greece, India, Indonesia, Ireland, Israel, Italy, Jamaica, Kenya,
China, Republic of Korea, Croatia, Kuwait, Latvia, Lithuania, Luxembourg, Macedonia,
Malaysia, Malta, Morocco, Mexico, Montenegro, New Zealand, Pakistan, Poland, Portugal,
Romania, Russia, Serbia, Singapore, Slovakia, Slovenia, Sri Lanka, United Kingdom, South
Africa, Chinese Taipei, Tanzania, Thailand, Czech Republic, Trinidad and Tobago, Tunisia,
Turkey, Uganda, Ukraine, Hungary, United States, Venezuela, Vietnam, Zambia and Austria.43
In addition, with respect to Denmark’s tax treaties with The Netherlands, Switzerland,
Germany and the other Nordic countries, it has been decided to implement the content of
the MLI (wholly or partly) through other complying instruments.44 Moreover, Denmark’s tax
treaty with Japan from 2018 is based on the 2017 version of the OECD Model, which already
includes the material content of the MLI.45 Finally, it is the intention that the MLI should also
apply with respect to Denmark’s tax treaty with Armenia that was signed in 2018. At the time
40
Bill L 160, supra n. 5, p. 91 and 115. In the bill, no thorough attempt was made to assess the impact of the MLI on
the state of the budget, tax compliance, administration and economic activity. Instead, it is just stated that the
MLI is expected to have limited budgetary consequences, and that the tax authorities’ costs of implementing
new systems and routines could be estimated – under significant uncertainty – to DKK 1 million per year. Further,
it is stated that the MLI is not expected to entail economic or administrative consequences for businesses and
citizens. See Bill L 160, supra n. 5, p. 128.
41
Bill L 160, supra n. 5, p. 115.
42
OECD/G20, supra n. 6, p. 88-90.
43
Bill L 160, supra n. 5, p. 119-128.
44
Bill L 160, supra n. 5, annex 1. New protocols to the Nordic tax treaty and the treaty with the Netherlands were
approved by parliament in 2018. See Law no. 1294 of 21 November 2018 (Lov om indgåelse af protokol om ændring af
dobbeltbeskatningsoverenskomst mellem de nordiske lande) and Law no. 1293 of 21 November 2018 (Lov om indgåelse af
protokol om ændring af dobbeltbeskatningsoverenskomsten mellem Danmark og Nederlandene). See also J.G. Nielsen,
Nyheder inden for dobbeltbeskatningsoverenskomster – de nordiske lande, Danmark og Nederlandene, Danmark og Japan
samt Danmark og Armenien, Skattepolitisk oversigt (2018), p. 293 et seq.
45
Bill L 160, supra n. 5, p. 115. The new treaty with Japan was approved by parliament in November 2018. See Law
no. 1292 of 21 November 2018 (Lov om indgåelse af dobbeltbeskatnings-overenskomst og tilhørende protokol mellem
Danmark og Japan).
329
Denmark
of writing of this branch report the treaty with Armenia has not yet entered into force, but
when it does, Denmark will notify the Depository that the treaty with Armenia should be
added to the list of Denmark’s covered agreements.46
When signing the MLI on 7 June 2017, Denmark decided to make use of all reservations
possible. In other words, Denmark initially only subscribed to the minimum standard.47 Among
other things, this would have entailed that the rules on mandatory arbitration would not be
applied by Denmark. This received some criticism in both the Danish media and the Danish
academic literature.48
However, these choices were only provisional, and Denmark has now generally embraced
the MLI. The main reason for choosing to include all elements of the MLI was that Denmark
expects to continue using the OECD Model as a point of departure for negotiating new tax
treaties. Accordingly, as the 2017-version of the OECD Model already includes the content of
the MLI, it made sense for the legislator to also align all of Denmark’s existing tax treaties
with the MLI.49
Even though Denmark has decided to include all elements of the MLI, a number of
choices still had to be made between the different alternatives available in some of the
MLI provisions. Below, focus will be on explaining these choices. However, before doing
so it should briefly be mentioned that Denmark will apply article 3 of the MLI concerning
transparent entities as well as article 4 of the MLI on dual residency. These provisions will be
applied in their entirety as Denmark has not made use of any of the available reservations
found in article 3(5) and article 4(3).50
Article 5 of the MLI concerns the application of methods for elimination of double taxation
and the provision includes three alternative ways (options A, B, and C) with which countries
may address problems arising from the inclusion of the exemption method in treaties with
respect to items of income that are not taxed in the state of source.51 All of Denmark’s tax
treaties – except for the 1974 treaty with Brazil – prescribe the use of the credit method to
provide relief for double taxation. Accordingly, the problems addressed by article 5 are not
present in a Danish treaty context. Anyway, Denmark has chosen to opt for option C which
reflects the credit method for the elimination of double taxation and is based on article 23 B
46
Bill L 160, supra n. 5, p. 129. The new treaty with Armenia was approved by parliament in 2018. See Law no. 1291
of 21 November 2018 (Lov om indgåelse af dobbeltbeskatningsoverenskomst og tilhørende protokol mellem Danmark
og Armenien).
47
OECD, Status of List of Reservations and Notifications at the Time of Signature: The Kingdom of Denmark (7 June 2017),
available at http://www.oecd.org/tax/treaties/beps-mli-position-denmark.pdf.
48
For more on Denmark’s initial positions see J. Wittendorff, OECD/G20’s multilaterale instrument (MLI) – et dansk
perspektiv, Skat Udland 197 (2017).
49
Bill L 160, supra n. 5, p. 91 and 115.
50
Bill L 160, supra n. 5, p. 130. In this context, it should be mentioned that Denmark has recently amended its
domestic rules on hybrids in accordance with the ATAD. See s. 2 C and 8 B-8 E, enacted through Law no. 1726,
supra n. 3.
51
OECD, Explanatory statement to the multilateral convention to implement tax treaty related measures to prevent base
erosion and profit shifting (2016).
330
Koerver Schmidt
of the OECD Model (2017). The reason behind this choice is Denmark’s general aim of aligning
its tax treaties with the most recent version of the OECD Model.52
Article 6(1) of the MLI states that covered agreements should be modified to include
preamble language stating that the purpose of the covered tax agreement is to eliminate
double taxation without creating opportunities for non-taxation or reduced taxation through
tax evasion or avoidance. A party may reserve the right not to modify the wording of covered
agreements that already contain a similar statement, pursuant to article 6(4) of the MLI.
However, Denmark has not made use of this option. In addition, Denmark has opted not
to include the additional preamble language in article 6(3) of the MLI which states that the
parties wish to further develop their economic relationship and to enhance their co-operation
in tax matters. The reason is that Denmark considers this part of the preamble text as non-
binding and without significance for the interpretation of the covered agreements.53
Denmark has decided to apply the PPT in article 7(1) of the MLI which states that a benefit
under a covered agreement shall not be granted in respect of an item of income or capital if it
is reasonable to conclude – while having regard to all relevant facts and circumstances – that
obtaining that benefit was one of the principal purposes of any arrangement or transaction
that resulted directly or indirectly in that benefit, unless it is established that granting such
benefit in these circumstances would be in accordance with the object and purpose of the
relevant provisions of the covered tax agreement. Denmark’s preference for the PPT-rule
was no surprise as Denmark had already implemented a similar OECD inspired PPT-rule in
domestic law in 2015.54 Accordingly, Denmark prefers the PPT rather than the other options
for prevention of abuse mentioned in article 7 of the MLI. Among the reasons are that the PPT
was inserted into the OECD Model in 2017 (which is not the case for the other options) and
that Denmark, as explained above, uses the OECD Model as a basis for treaty negotiations.55
Denmark has chosen not to opt for the discretionary benefits rule in article 7(4) of the MLI
because the flexibility provided by the provision (in the eyes of the legislator) already exists
within the general framework for the conduct of competent authorities.56 Furthermore,
Denmark has chosen not to opt for applying the SLOB set out in article 7(8)-(13) of the MLI as
the PPT is considered a preferred and sufficient solution.57 However, in line with article 7(7)
(a) of the MLI, Denmark will apply the SLOB if the treaty partner has decided to go for the
SLOB. Denmark has made this choice in order to ensure not only that the SLOB will be applied
symmetrically but also that the other treaty partner does not have the possibility of opting
out of article 7 of the MLI in its entirety.58
Denmark will apply the rule in article 8(1) of the MLI which requires that a minimum
shareholding period is satisfied in order for a company to be entitled to a reduced rate on
dividends from a subsidiary, pursuant to article 10(2) of the OECD Model (2017). In other
52
Bill L 160, supra n. 5, p. 131-132.
53
Bill L 160, supra n. 5, p. 132.
54
See s. 3(5) of the Tax Assessment Act adopted through Law no. 540 of 29 April 2015 (Lov om ændring af ligningsloven,
boafgiftsloven, fondsbeskatningsloven, skatteforvaltningsloven og forskellige andre love). For more on the domestic PPT
rule see Madsen & Laursen, supra n. 35., and Schmidt, supra 36. Avoidance and Abuse – A Contemporary Analysis of
Danish Tax Law, Revue européenne et internationale de droit fiscal / European and International Journal of Tax
Law 4 (2018), p. 489-499.
55
Bill L 160, supra n. 5, p. 133.
56
Bill L 160, supra n. 5, p. 132.
57
Bill L 160, supra n. 5, p. 133.
58
Bill L 160, supra n. 5, p. 133.
331
Denmark
words, Denmark has not made use of the possibility of entirely opting out of article 8.
Accordingly, the rule will apply to Denmark’s covered agreements if the treaty partner has
made a similar choice.59 However, it should be noted that the new rule will have no practical
effect with respect to foreign parent companies’ receipt of dividends from Danish subsidiaries
(outbound dividends) as a minimum holding period requirement does not exist in domestic
Danish law.60 Similarly, the new rule will not have any practical effect with respect to Danish
parent companies receiving dividends from a foreign subsidiary (inbound dividends).61
Article 9 of the MLI concerns capital gains from alienation of shares or interests of entities
deriving their value principally from immovable property (immovable property shares).
Denmark does not have domestic legislation in place that subjects foreign investors to tax
on capital gains on immovable property shares. Anyway, since a similar provision is found in
the OECD Model 2017, Denmark has chosen to opt for application of article 9(4) of the MLI,
which introduces a specific requirement stating that the source jurisdiction can levy tax if
more than 50 per cent of the value of the shares directly or indirectly comes from immovable
property situated in the source jurisdiction.62
Denmark will apply the anti-abuse rule found in article 10 of the MLI concerning
permanent establishments situated in third jurisdictions. In other words, Denmark has not
made use of any of the possible reservations described in article 10(5).63 Moreover, Denmark
has in its domestic law introduced a similar provision on payments to disregarded permanent
establishments.64
In line with Denmark’s general embracement of the MLI, Denmark will apply article 12 of
the MLI on preventing avoidance of permanent establishment status through commissionaire
structures as well as article 13 of the MLI concerning the specific activity exemptions and article
14 of the MLI on the splitting up of contracts.65 With respect to article 13, Denmark has chosen
to apply option A as this option reflects the text of article 5(4) of the OECD Model (2017).66
Generally, Denmark’s tax treaties already contain provisions on mutual agreement
procedures. Accordingly, in a Danish context, the practical effect of applying article 16 of
59
Bill L 160, supra n. 5, p. 133.
60
S. 2(1)(c) of the Corporate Tax Act. Pursuant to the provision, dividends from a Danish subsidiary should as a main
rule not be subject to taxation at source, if the taxation should be reduced or eliminated according to a tax treaty
or the EU Parent-Subsidiary Directive.
61
S. 13(1)(2) of the Corporate Tax Act. Pursuant to the provision, dividends received by a Danish parent company
from a foreign subsidiary should as a main rule not be subject to tax. See also Bill L 160, supra n. 5, annex 1.
62
Thus, Denmark has not made use of the reservations set out in Article 9(6). See Bill L 160, supra n. 4, p. 134.
63
Nor has Denmark made use of the possibility of opting out of the savings clause found in article 11 of the MLI.
According to the preparatory remarks it is rather obvious that the domicile state has a right to tax in the situations
mentioned in the provision. See Bill L 160, supra n. 4, p. 134. However, this view has been subject to criticism in
Danish literature. See J. Wittendorff, OECD’s multilaterale konvention, Revision & Regnskabsvæsen 8 (2019), p. 24
et seq.
64
Section 8 C(1)(1)(d) of the Corporate Tax Act.
65
Recently, it has been proposed to amend the domestic permanent establishment definition in order to bring it
in line with the definition used in the OECD Model (2017). See draft bill of 13 September 2019 (Forslag til lov om
ændring af selskabsskatteloven, kildeskatteloven, skatteindberetningsloven, skattekontrolloven og forskellige andre love),
journal no. 2019-6665.
66
See the explanatory statement, supra 50. Denmark has not made use of any of the reservations available in Article
13(6) and Article 15(2) (definition of a person closely related to an enterprise). Moreover, even though Denmark
does not see any need for applying Article 14, Denmark does not wish to hinder their treaty partners in applying
such provisions. Accordingly, Denmark has not made use of the reservation available pursuant to Article 14(3).
See L 160, supra n. 4, p. 135-136.
332
Koerver Schmidt
the MLI is that onwards the taxpayer will be able to present his or her case to the competent
authorities in the country of source and not only to the competent authorities in the country
of residence.67
Article 17 of the MLI concerns access to corresponding adjustments. Denmark’s tax
treaties typically already include such a provision and Denmark has therefore opted to make
use of the reservation set out in article 17(3). Accordingly, article 17 of the MLI will only apply
to those of Denmark’s tax treaties where such provision is not already in place.68
After careful consideration, Denmark decided to apply articles 18-26 of the MLI providing
for mandatory binding arbitration of disagreements between the contracting states. In
reaching this decision, it seems to have played a role that Denmark is already forced to apply
mandatory binding arbitration with other EU member states because of the EU directive
on tax dispute resolution mechanisms.69 Furthermore, it appears that the legislator has
acknowledged a need for arbitration as a counter weight to the many new and complex
anti-avoidance rules, which may increase taxpayers’ risk of being subject to double taxation.
Finally, it seems to have been of importance that the rules on mandatory binding arbitration
are now an integrated part of the OECD Model (2017).70
By not making use of the available reservation in article 23(2) of the MLI, Denmark will
by default apply the arbitration process’ final offer, also known as the last best offer arbitration
or simply baseball arbitration. In the view of the Danish legislator, this approach is more
expedient than the so-called independent opinion procedure as final offer and ensures consistent
interpretation, i.e. the interpretation as each of the competent authorities apply.71
Denmark has opted to apply article 23(5) according to which the competent authorities
shall ensure that each person, that presents the case, and their advisors agree in writing not
to disclose to any other person any information received during the course of the arbitration
proceedings. Moreover, with respect to mandatory binding arbitration, Denmark has opted
to make use of the following reservations:
–– Article 19(12) of the MLI, which permits a party to reserve the right to exclude from
arbitration issues a decision that has been rendered by a court.72
–– Article 28(2) of the MLI, according to which Denmark has decided that the rules on
mandatory binding arbitration shall not apply to Denmark’s tax treaties with other EU
member states (as the EU directive on tax dispute resolution mechanisms applies within
the EU).
–– Article 28(2) of the MLI, according to which Denmark has decided that the arbitration
procedure shall only apply if the treaty partner accepts that the chairman of the arbitration
panel has to be a judge and accepts that Denmark publishes a summary of the decision.
–– Article 28(2) of the MLI, according to which the arbitration procedure cannot be used in
situations where the taxpayer is subject to sanctions for tax fraud, intentional neglect or
gross negligence.73
67
Denmark has not made use of the reservation in art. 16(5), according to which the amendments can be introduced
by other means. See Bill L 160, supra n. 5, p. 137.
68
Bill L 160, supra n. 5, p.137.
69
Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union.
70
Bill L 160, supra n. 5, p. 115-116.
71
Bill L 160, supra n. 5, p. 140.
72
The Danish tax authorities cannot deviate from a court decision. However, they may derogate from an
administrative decision. See Bill L 160, supra n. 5, answer to SAU question 4, 5 and 6.
73
L 160, supra n. 5, p. 141-143.
333
Denmark
Since signing the MLI on 7 June 2017, Denmark has entered into a new tax treaty with Japan
(signed on 11 October 2017).74 As already mentioned in the previous section, Denmark expects
to continue using the most recent version of the OECD Model as a point of departure for
negotiating new tax treaties. In accordance with this strategy, the new treaty with Japan is
based on the OECD Model (2017) and includes the OECD minimum standards on treaty abuse
and dispute resolution.
In addition, Denmark has entered into a tax treaty with Armenia (signed on 14 March
2018).75 As the negotiations partly took place before the 2017-version of the OECD Model was
published, the treaty does not fully reflect the OECD minimum standards on treaty abuse
and dispute resolution. As mentioned earlier, the treaty with Armenia has not yet entered
into force, but when it does, Denmark will notify the OECD Depository that the treaty with
Armenia should be added to the list of Denmark’s covered agreements.76
For the time being, there are no signs indicating that the provisions of the MLI generally
will be incorporated directly into Denmark’s tax treaties. Accordingly, from a Danish
perspective, the MLI must be expected to remain as a third layer of international tax law for
the foreseeable future. However, as the 2017-version of the OECD Model will be the point of
departure for Denmark’s future negotiations of tax treaties the provisions of the 2017-version
must to some extent be expected to be reflected in Denmark’s future tax treaties.
Pursuant to section 19(1) of the Danish constitution, the king shall act on behalf of the realm
in international affairs, but – except with the consent of the parliament – the king shall
not undertake any act whereby the territory of the realm shall be increased or reduced and
nor shall he enter into any obligation for which fulfilment requires the concurrence of the
parliament or which is otherwise of major importance. Nor shall the king – except with the
consent of the parliament – terminate any international treaty entered into with the consent
of the parliament.77
Accordingly, as the ratification of the MLI entails that already concluded Danish tax
74
Law no. 1292 , supra n. 45, adopting Bill L 32 of 3 October 2018 (Forslag til lov om indgåelse af dobbeltbeskatnings
overenskomst og tilhørende protokol mellem Danmark og Japan).
75
Law no. 1291, supra n. 46.
76
Bill L 160, supra n. 5, p. 129.
77
S. 19 of the Danish Constitution, Law no. 169 of 5 June 1953 (Danmarks riges grundlov). Even though the provision
refers to the King, it is nowadays the government that acts in the King’s place. Until 1994, the so-called Enabling
Act entailed that the government could enter into new tax treaties without the consent of the parliament. See
Law no. 74 of 31 March 1953 (Bemyndigelsesloven). However, this right was eliminated when the Enabling Act was
abolished in 1994. See Law no. 945 of 23 November 1994 (Lov om ophævelse af lov om indgåelse af overenskomster
med fremmede stater til undgåelse af dobbeltbeskatning mv.). See also Schmidt, supra n. 7.
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Koerver Schmidt
treaties are amended, the Danish implementation of the MLI required a statutory basis.78
This statutory basis was established by the parliament’s enactment of Law no. 327 of 30 March
2019.79
No members of parliament voted against ratifying the MLI, and during the reading of
the bill in the parliament, the debate was very brief, as all political parties could support the
bill.80 However, a few questions were answered by the minister of taxation when the bill was
reviewed by the members of the parliamentary committee of taxation.81
The Danish ministry of taxation contemplates to prepare synthesized tax treaties in
cooperation with the treaty partner in question. As these synthesized texts will have no legal
value of their own, the ministry expects to publish the texts directly on the ministry’s website.
However, the practicalities are not yet finalized.82
By signing and ratifying the MLI, Denmark has accepted an international law obligation.
The relationship between domestic Danish law and international law is based on a dualistic
principle83 and, constitutionally, nothing hinders the Danish parliament from passing a law
that is in conflict with the MLI. However, it is generally recognized that the Danish authorities
and courts should advance an interpretation of Danish law that makes it compliable with
Denmark’s international law obligations and should presume that the intention of the
parliament has not been to enact legislation in breach of Denmark’s obligations. However,
treaty override is possible in Danish law if the parliament has intended to do so.84
The Vienna Convention on the Law of Treaties provides the general rules for the application and
interpretation of treaties, including tax treaties.85 In this regard, the Explanatory Statement
to the MLI should most likely be considered a primary means of interpretation, pursuant
to article 31 of the Vienna Convention.86 Some interpretational guidance can probably also
be found in the legal note published by the OECD, to the extent the note can be seen as a
clarification (the note explains the functioning of the MLI under public international law).
78
Bill L 160, supra n. 5, p. 91.
79
See also s. 1.1.1 as well as Bill L 160, supra n. 5.
80
106 members of parliament voted in favour of ratifying the MLI.
81
Bill L 160, supra n. 5, SAU question 1-6.
82
Phone interview as of 11 October 2019 with Head of Unit, Nina Legaard Kristensen, Office for International
Coordination, Danish Ministry of Taxation.
83
P. Germer, Indledning til folkeretten (Jurist- og Økonomforbundets Forlag 2010).
84
Aa. Michelsen, Tax Treaty Interpretation in Denmark, in Tax Treaty Interpretation (M. Lang ed., Kluwer Law
International 2000), p. 63-76.
85
C. Garberino, Judicial Interpretation of Tax Treaties – The Use of The OECD Commentary (Edward Elgar Publishing
2016), p. 16 et seq.
86
Wittendorff, supra n. 63.
335
Denmark
Pursuant to Danish case law, the Commentary to the OECD Model plays a significant role when
it comes to interpretation of Denmark’s tax treaties.87 In this context, it must be expected
that the BEPS reports, on which the MLI rests, will also constitute important means of
interpretation onwards.88 The legal weight of these BEPS reports will probably be more or less
comparable to the legal weight of the Commentary to the OECD Model (2017), provided that
the statements in the BEPS reports do not conflict with the Commentary. However, overall,
the Danish approach to tax treaty interpretation should not be considered fundamentally
changed as a consequence of the MLI.
In the Danish literature, it is generally agreed that an ambulatory approach to tax treaty
interpretation could and should often be followed. This approach is in line with paragraph 35
of the Introduction to the OECD Model (2017).89 The leading precedent is the so-called Texaco
decision issued by the Danish Supreme Court in 1992.90 However, it is also commonly agreed
that substantive amendments to the articles of the OECD Model and to the Commentary
are not relevant to the interpretation or application of previously concluded tax treaties
where the provisions of those treaties are different in substance from the amended articles/
commentary. In other words, if an amendment cannot be seen as a mere clarification, a static
approach applies.91 Consequently, the substantive changes implemented through the MLI
that are reflected in the 2017-version of the OECD Model should not affect the interpretation
of Denmark’s earlier tax treaties, if the other jurisdiction has not signed the MLI or if it has
signed the MLI but not listed its treaty with Denmark as a covered tax agreement. More
broadly, there have been no indications that the content of the MLI would be used in a
retrospective manner for the purpose of interpreting Danish tax treaties, as applicable before
the MLI entered into force.
It seems that the BEPS project, including the signing of the MLI, has supported an already
ongoing trend, according to which larger Danish headquartered multinationals have moved
towards a more responsible approach to international tax planning. As an indicator, it is worth
mentioning that in recent years many of the largest Danish headquartered multinationals
87
A. Michelsen et al., supra n. 11, p. 79.
88
This was confirmed by the Danish Minister of Taxation during the reading of the bill. See Bill L 160, supra n. 5,
SAU annex 1.
89
See e.g. Michelsen, supra n. 84.
90
Judgement by the Danish Supreme Court (Højesteret), 18 December 1992, TfS 1993, 7 (Texaco).
91
See also J. Wittendorff, Armslængdeprincippet i dansk og international skatteret (Karnov Group 2009), p. 156-159,
A.N. Laursen, Fast driftssted (Jurist- og Økonomforbundets forlag 2011), p. 39-43, N.W. Sørensen et al., Skatteretten
3 (Karnov Group 2013), p. 51-54.
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Koerver Schmidt
have adopted and published tax policies/strategies in which they set limits for their use of
international tax planning.92
As mentioned in section 1.2.2, in 2015, Denmark introduced a statutory general anti-
avoidance provision in section 3 of the Tax Assessment Act aiming at mitigating corporate
taxpayer abuse of Denmark’s tax treaties (the OECD PPT) and certain EU directives. The scope
of the provision was broadened with effect from 2019 because of Denmark’s implementation
of the GAAR prescribed in article 6 of the ATAD (the ATAD GAAR).
In August 2018, the Danish National Tax Board issued a ruling in which the board for
the first time used the statutory PPT to set aside (contemplated) transactions of a taxpayer.93
Roughly described, the decision concerned the company A-Co, domiciled in Denmark, which
was fully owned by B-Co, a company domiciled in Singapore. B-Co had been established a
year earlier by an individual resident in Singapore. A-Co directly and indirectly held shares
in a number of subsidiaries domiciled in Singapore, Denmark, and two other jurisdictions.
Now, A-Co contemplated to make two distributions to B-Co with one distribution in cash and
one distribution in kind consisting of the shareholdings in two Singaporean subsidiaries. A
part of the distribution in cash was meant to be further distributed by B-Co to the individual
shareholder. In connection to these distributions, A-Co asked the National Tax Board to
confirm that the distributions from A-Co would not be subject to Danish taxation at source.
The National Tax Board initially stated that B-Co should not be considered the beneficial
owner of the part of the distribution in cash that was meant to be further distributed by B-Co
to the individual shareholder. Accordingly, this part of the distribution should be considered
subject to Danish taxation at source, pursuant to section 2(1)(c) of the Corporate Tax Act.
With respect to the received dividend in kind and the part of the cash distribution that was
not intended to be re-distributed, B-Co should be considered the beneficial owner and no
taxation at source should take place, pursuant to section 2(1)(c) of the Corporate Tax Act and
article 10 of the tax treaty between Denmark and Singapore.
However, before concluding that the latter distributions should not be subject to Danish
taxation at source, the National Tax Board considered whether the new statutory PPT would
be applicable. In connection to that, the Board initially assessed whether the arrangement
contained a benefit with respect to the tax treaty. As the individual shareholder in Singapore
would have been subject to Danish taxation at source if B-Co had not been interposed in the
ownership structure, the board found that a benefit was obtained.
Subsequently, the board examined whether obtaining the benefit was one of the principal
purposes. In this regard, the board placed emphasis on the fact that the newly established
holding company (i.e. B-Co) did not perform any genuine business activities consisting of the
administration of the underlying companies. As a consequence, the board found that one of
the principal purposes was to obtain the tax benefit.
Finally, the board considered whether it could be established that granting the benefit
under these circumstances would be in accordance with the object and purpose of the
relevant provision of the tax treaty. The board found that B-Co was not founded on the basis
of commercial reasons, and, thus, the board was not convinced by the taxpayer’s arguments,
including the argument that it would be commercially beneficial to gather the Singaporean
92
See Økonomisk Ugebrev Ledelse, Ørsted bedste top 100 til ansvarlig skattepraksis, 12 May 2019.
93
Decision from the National Tax Board (Skatterådet), 28 August 2018, SKM2018.466.SR. The decision is also
analyzed in Schmidt, supra n. 36. It now follows from s. 3(7) of the Tax Assessment Act that cases involving the
application of the GAAR (the PPT as well as the ATAD GAAR) shall be brought before the National Tax Board, in
order for the Board to decide whether or not the taxpayer’s arrangements should be set aside.
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Denmark
subsidiaries directly below B-Co in the corporate structure. The board therefore concluded
that the PPT would be applicable and that the distributions should be subject to Danish
taxation at source.
In sum, the conclusion reached by the National Tax Board appears to be correct – in
particular due to the fact that a pure holding company had recently been interposed in the
ownership structure, and since it is hard to see an adequate commercial reason for a sudden
amendment of the existing structure.94
This decision – and others – seem to illustrate that Danish tax professionals as well as
the tax authorities are increasingly aware of the statutory GAAR found in section 3 of the
Tax Assessment Act. Furthermore, even though the ATAD-part of the GAAR has so far been
more in the spotlight than the PPT-part, the PPT (the statutory PPT as well as the PPT in the
MLI) must be foreseen to have considerable implications for the future use of Denmark’s tax
treaties in (aggressive) tax planning.
All in all, even though Denmark’s ratification of the MLI will increase legal complexity
and uncertainty in some areas,95 Danish businesses and lobby groups have generally been
quite positive towards the MLI. An important reason for the positive attitude was the fact
that at the end Denmark decided to opt for mandatory binding arbitration. Accordingly, the
prevailing opinion appears to be that a sensible balance has been struck.96
94
See also J. Bundgaard et al., Status på omgåelsesklausulen i ligningslovens § 3 – ved overgangen til skatteundgåelses
direktivets GAAR, Skat Udland, 2019.
95
J. Buus & L.K. Terkilsen, Danmark har nu ratificeret den multilaterale konvention af 24. november 2016 (2019), p. 259
et seq., and Wittendorff, supra n. 63.
96
L 160, supra n. 5, annex 1.
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Finland
Branch reporter
Tuomas Ahonen1

Prior to the MLI, Finland had tax treaties with almost 80 jurisdictions. Treaties concluded
by Finland generally follow the OECD Model Convention. There are only a few specific
anti-avoidance doctrines targeting treaty shopping in domestic tax legislation or Finland’s
tax treaties. All of the tax treaties entered into by Finland include provisions for a mutual
agreement procedure but none of them provide for mandatory binding arbitration. New or
amended bilateral tax treaties are in line with the OECD’s minimum standard.
Finland has signed the MLI in 2017 and deposited the instrument of acceptance on
25 February 2019. The MLI entered into force in Finland on 1 June 2019. Finland has listed
almost all of its comprehensive tax treaties as covered tax agreements (CTAs). Due to the
other contracting states’ decisions on signing the MLI or their own CTAs, about two thirds of
Finland’s tax treaties will actually be covered by the MLI.
Apart from choosing to apply part VI of the MLI concerning mandatory binding arbitration,
Finland has chosen to apply only those provisions of the MLI that are necessary to satisfy the
OECD’s minimum standard. This will significantly limit the number of tax treaty provisions
modified by the MLI. Finland has decided to satisfy the OECD’s minimum standard on treaty
abuse by applying the principal purpose test (PPT).
The MLI was ratified in Finland by parliament and entered into force by a decree issued by
the government. Once ratified, the MLI was incorporated into the domestic legislation by an
Act of Parliament. For the treaties that the MLI modifies, synthetized texts of the revised tax
treaties will be made publicly available. However, only the treaties themselves are authentic
for purposes of law.
As of now, the MLI has not given rise to any specific interpretations in Finland. No specific
interpretation guidelines have been published with respect to the MLI. There has not been
notable debate on whether the MLI may have an impact on the interpretation of treaties
concluded before the MLI was ratified or whether the amended preamble might be used in
a retrospective manner for the purpose of interpreting tax treaties.
It is unclear what impact the MLI will have on tax planning and tax administration. There
are no plans to establish a special PPT committee to review potential assessments. Regarding
tax certainty, it is possible for taxpayers to apply for an advance ruling on the application of
the PPT from the tax administration. The number of MAP requests is anticipated to increase
over time as more cases than previously will eventually be resolved in arbitration if the
competent authorities fail to reach an agreement.
1
Senior advisor at the Large Taxpayers’ Office, Finnish Tax Administration. Over ten years of professional
experience with focus on international taxation.
IFA © 2020 339

Finland
Treaty Network
1.1. Introduction
Prior to the MLI, Finland had tax treaties with almost 80 jurisdictions. About two thirds of
these treaties will actually be covered by the MLI. Treaties concluded by Finland generally
follow the OECD Model Convention. There are only a few specific anti-avoidance doctrines
targeting treaty shopping in domestic tax legislation or Finland’s tax treaties. All of the tax
treaties entered into by Finland include provisions for a mutual agreement procedure but
none of them provide for mandatory binding arbitration. New or amended bilateral tax
treaties are in line with the OECD’s minimum standard.
At the time the Multilateral Instrument was ratified in Finland in February 2019, Finland had
comprehensive tax treaties with the following 78 jurisdictions:
1. The Netherlands 27. Kyrgyzstan

2. The United States (US) 28. Republic of Korea
3. The United Arab Emirates (UAE) 29. Greece
4. Argentina 30. Cyprus
5. Armenia 31. Latvia
6. Australia 32. Lithuania
7. Azerbaijan 33. Luxembourg
8. Barbados 34. Macedonia
9. Belgium 35. Malaysia
10. Brazil 36. Malta
11. Egypt 37. Morocco
12. Spain 38. Mexico
13. South Africa 39. Moldova
14. The Philippines 40. Pakistan
15. Georgia 41. Poland
16 Indonesia 42. France
17. India 43. Romania
18. Ireland 44. Zambia
19. The United Kingdom (UK) 45. Singapore
20. Israel 46. Slovakia
21. Italy 47. Slovenia
22. Austria 48. Sri Lanka
23. Japan 49. Switzerland
24. Canada 50. Tajikistan
25. Kazakhstan 51. Tanzania
26. People’s Rep. of China 52. Thailand
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Ahonen
53. The Czech Republic 66. Kosovo2

54. Turkey 67. Croatia2
55. Turkmenistan 68. Montenegro2
56. Ukraine 69. Serbia2
57. Hungary 70. Sweden2
58. Uruguay 71. Denmark3
59. New Zealand 72. Faroe Islands3
60. Uzbekistan 73. Norway3
61. Belarus 74. Iceland3
62. Russia 75. Germany
63. Vietnam 76. Bulgaria
64. Estonia 77. Hong Kong
65. Bosnia and Herzegovina3 78. Portugal4
The tax treaties entered into by Finland generally follow the OECD Model Convention.
However, as the final content of an individual tax treaty is always dependent on the
negotiations between treaty partners, there are some deviations from the OECD Model in
many of Finland’s tax treaties with the above-mentioned jurisdictions. For example, unlike in
the OECD Model, many tax treaties allow the source state to tax royalty income. Moreover, as
many of the tax treaties are relatively old, they do not fully correspond to the current OECD
Model.
In most of Finland’s tax treaties the purpose of the treaty is defined as follows: “Desiring to
conclude an Agreement for the avoidance of double taxation and the prevention of fiscal
evasion with respect to taxes on income and on capital”. The wording of the preamble varies
slightly from treaty to treaty but in essence the purpose of the treaty is defined in a very
similar way. However, in some of the treaties there is no reference to the prevention of fiscal
evasion in the text of the preambular paragraph.
With respect to responding to tax treaty shopping, there are no specific anti-avoidance
provisions such as look-through rules or anticonduit provisions in the Finnish tax legislation.
There is however CFC legislation targeting tax evasion through foreign corporations in low or
no tax jurisdictions and a general anti-avoidance rule in place in Finland. Under the latter, a
transaction or an arrangement can be disregarded for tax purposes if the legal form given to
it does not correspond to the true nature and purpose of the transaction or arrangement. The
beneficial ownership concept is not defined in the domestic tax legislation.
As far as treaty-based anti-avoidance doctrines are concerned, the number of specific
anti-avoidance provisions is very limited in Finland’s treaty network. Only one of Finland’s
tax treaties contains limitation of benefits (LOB) provisions. In many of the treaty provisions
it is however stipulated that the treaty benefit is granted provided the recipient of the royalty,
2
The applicable tax treaty is the multilateral Nordic Convention concluded with Denmark, the Faroe Islands,
Iceland, Norway and Sweden.
3
The applicable tax treaty is the treaty between Finland and former Yugoslavia.
4
The tax treaty between Portugal and Finland is not in force.
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Finland
interest or dividend payment is the beneficial owner of that payment. In addition, some of
the treaties include a general principle purpose test (PPT) or income type specific PPTs.
All of the tax treaties entered into by Finland include provisions for a mutual agreement
procedure (MAP). Most of Finland’s tax treaties also include provisions for corresponding
adjustments to tax charged on the profits or an enterprise after a transfer pricing adjustment.
Finland has relatively extensive experience related to the application of these provisions.
According to the latest statistics published by the OECD, Finland had 40 attribution/allocation
(transfer pricing) cases and 76 other cases in inventory on 31 December 2018.5
None of Finland’s tax treaties provide for mandatory binding arbitration of disagreements
between contracting states. However, Finland is a signatory state to the EU Arbitration
Convention, which establishes a procedure to resolve disputes where double taxation occurs
between enterprises of different member states of the European Union as a result of an
upward adjustment of profits of an enterprise of one-member state.
Finland has signed the MLI in 2017. In the Government Proposal to the Parliament concerning
ratification of the MLI, it is stated that the purpose of the MLI is to prevent fiscal evasion and
that significant increase of tax revenues is not anticipated. According to the Government
Proposal articles 12-15 of the MLI concerning permanent establishments would likely have
an adverse effect on tax revenues because it has been estimated that the number of new
PEs of Finnish companies abroad would be higher than the number of new PEs of foreign
companies in Finland. However, Finland has chosen not to apply these provisions of the MLI.
Regarding the revised provisions on the mutual agreement procedure and the provisions
concerning mandatory binding arbitration, which Finland has chosen to apply, it is estimated
in the Government Proposal that the costs for the authorities caused by these procedures will
increase. On the other hand, these provisions are expected to lower the taxpayers’ tax burden
without causing them any direct costs.
The MLI was formally ratified in Finland in February 2019 and the instrument of acceptance
was deposited on 25 February 2019. The MLI entered into force in Finland on 1 June 2019. For
the purposes of the application by Finland, the reference to “taxable periods beginning on or
after 1 January of the next year beginning on or after the expiration of a period” would apply
(article 35(3)). Finland has chosen not to apply article 35(4), i.e. the provisions of the MLI on
mutual agreement procedure would only apply to taxable periods beginning after the MLI
enters into force.
Finland has listed almost all of its comprehensive tax treaties as covered tax agreements
(CTAs). Four treaties were excluded, including the multilateral Nordic Convention. In total
70 out of Finland’s 78 existing tax treaties (roughly 90%) are covered. Due to the other
5
https://www.oecd.org/tax/dispute/2018-map-statistics-finland.pdf
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Ahonen
contracting states’ decisions on signing the MLI or their own CTAs, 50 tax treaties will actually
be covered by the MLI.6 This equals about 64% of Finland’s tax treaties. In the OECD Peer
Review Report on Treaty Shopping published in February 2019, Finland’s new tax treaty with
Hong Kong is not included in the list of Finland’s tax treaties. Moreover, the tax treaty with
Germany is not mentioned as a non-listed agreement in this report.7
The multilateral Nordic Convention was not listed as a CTA because that convention is
itself a multilateral treaty and amending it with another multilateral convention would,
according to the Government Proposal, be complicated. The Nordic Convention will be
amended to satisfy the minimum standard by means of an amending protocol. Another
treaty left out is the tax treaty with Germany, which will also be amended by negotiating an
amending protocol bilaterally. The tax treaty with Bulgaria was not listed either. The reason
for this was that this treaty is relatively old and in part technically incompatible with the MLI.
Finland intends to satisfy the minimum standard with respect to this treaty through bilateral
negotiations. Finland’s tax treaty with Hong Kong, which entered into force on 1 January 2019,
is already in line with the minimum standard and has therefore been left out.
None of Finland’s CTAs contains the preamble language necessary to satisfy the OECD’s
minimum standard. Therefore, it was not possible for Finland to make any reservations with
respect to the preamble text described in article 6(1). However, Finland has chosen not to
include the text in article 6(3) referring to a desire to develop an economic relationship and
to enhance co-operation in tax matters.
Finland has decided to satisfy the OECD’s minimum standard on treaty abuse by applying
the principal purpose test (PPT) in article 7(1) of the MLI. The discretionary benefits rule in
article 7(4) or the simplified limitation on benefits (SLOB) provisions in articles 7(8)-(13) of
the MLI have not been adopted by Finland. Finland has indicated that it would not agree to
allow the SLOB to be applied by another contracting jurisdiction pursuant to paragraph 7(7)
(b) of the MLI.
The reason for these choices, as stated in the Government Proposal, is that as a general
provision the PPT better suits to cover the entire network of tax treaties as opposed to the
simplified limitation of benefits provisions, which in turn are considered more appropriate
to be negotiated bilaterally. Furthermore, PPT is not targeted at any specific situation but
the scope is instead broad providing for sufficient protection against abuse. Finland has not
issued a notification under article 7(17)(a) of the MLI that it accepts the PPT as an interim
measure while intending, where possible, to adopt a limitation on benefits provision in
addition to or in replacement of the PPT, through bilateral negotiations.
Finland has chosen not to apply any other provisions of the MLI addressing tax treaty
abuse. The reason for this, as stated in the Government Proposal, is that including these
provisions in the tax treaties is better achieved through bilateral negotiations. Furthermore, it
is pointed out in the Government Proposal that the reservations made can later be cancelled
if considered appropriate. Finland has not adopted provisions of the MLI addressing hybrid
6
After the ratification procedure was completed in Finland, Morocco has signed the MLI on 25 June 2019 and listed
the tax treaty with Finland as a CTA.
7
Prevention of Treaty Abuse – Peer Review Report on Treaty Shopping: Inclusive Framework on BEPS: Action 6, OECD/
G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.org/10.1787/9789264312388-en
343
Finland
mismatch arrangements either. In most of Finland’s tax treaties the applicable method for
eliminating double taxation is the credit method.
Finland has, however, chosen to apply part VI (arbitration) of the MLI. Finland has
chosen not to apply article 19(12) pursuant to which cases otherwise within the scope of the
arbitration process shall not be submitted to arbitration, if a decision on this issue has already
been rendered by a court or administrative tribunal of either contracting jurisdiction. In other
words, even these cases are eligible for arbitration. Finland has not reserved the right to
replace the two-year negotiating period with a three-year period (article 19(11)).
Regarding the type of arbitration process, Finland has chosen not to apply article 23(2) of
the MLI, i.e. the arbitration panel shall select as its decision one of the proposed resolutions for
the case submitted by the competent authorities with respect to each issue and any threshold
questions (“baseball arbitration”). However, Finland has chosen not to apply article 23(3) i.e.
even the type of arbitration stipulated in article 23(2) may be applicable with respect to CTAs
with parties that have made such a reservation. Pursuant to article 23(7) of the MLI, Finland
has reserved the right for Part VI not to apply with respect to all CTAs for which the other
contracting jurisdiction makes a reservation pursuant to article 23(6). Pursuant to article
23(4) of the MLI, Finland has chosen to apply article 23(5) regarding non-disclosure of any
information.
With respect to agreement on different resolution (article 24), Finland has chosen to
apply article 24(2) pursuant to which contracting jurisdictions can agree on a different
resolution of unresolved issues within three calendar months after the arbitration decision
has been delivered to them.
Regarding the scope of arbitration, pursuant to article 28(2)(a) of the MLI, Finland has
formulated the following reservations with respect to the scope of cases that shall be eligible
for arbitration under the provisions of Part VI:
1. Finland reserves the right to exclude from the scope of Part VI cases involving the
application of domestic anti-avoidance rules of either contracting jurisdiction to a Covered
Tax Agreement. For this purpose, Finland’s domestic anti-avoidance rules shall include
Act on Assessment Procedure (verotusmenettelystä annettu laki (1558/1995)) sections
27 – 30, Act on the Taxation of Business Profits and Income from Professional Activities
(elinkeinotulon verottamisesta annettu laki (360/1968)) section 6 a, subsection 9 and
section 52 h and Act on the Taxation of Shareholders in Controlled Foreign Companies
(ulkomaisten väliyhteisöjen osakkaiden verotuksesta annettu laki (1217/1994)). Any
subsequent provisions replacing, amending or updating these anti-avoidance rules
would also be included in this reservation. Finland shall notify the Depositary of any
such subsequent provisions.
2. Finland reserves the right to exclude from the scope of Part VI cases involving conduct for
which the taxpayer or a person acting on the taxpayer’s behalf has been found guilty by
a court of tax fraud or other tax related criminal offence in either contracting jurisdiction
to a Covered Tax Agreement. For this purpose, Finland’s domestic rules shall include the
Criminal Code (rikoslaki (39/1889)) chapter 29 sections 1-4. Any subsequent provisions
replacing, amending or updating these rules would also be included in this reservation.
Finland shall notify the Depositary of any such subsequent provisions.
3. Finland reserves the right to exclude from the scope of Part VI cases concerning items of
income or capital where there is no double taxation. Double taxation means that both
contracting jurisdictions to a Covered Tax Agreement have imposed taxes in respect of the
same taxable income or capital giving rise to either additional tax charge, increase in tax
liabilities or cancellation or reduction of losses, which could be used to offset taxable profits.
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Ahonen
4. Finland reserves the right to exclude from the scope of Part VI:
a) with respect to taxes withheld at source on amounts paid or credited to non-residents,
cases which concern taxable events giving rise to such taxes that occur before the
reference date;
b) with respect to all other taxes, cases which concern taxes levied with respect to taxable
periods that begin before the reference date. For the purposes of this reservation, “the
reference date” is the latest of:
i) the date of entry into effect of the convention in both contracting jurisdictions to
the applicable Covered Tax Agreements with respect to such taxes;
ii) the first day of January of the calendar year next following the expiration of a
period of six calendar months beginning on the date of the communication by
the Depositary of the latest definitive reservation withdrawal or notification
which results in the application of Part VI (Arbitration) between both contracting
jurisdictions; and
iii) where the case is a type of case that would be potentially eligible for arbitration
as a result of the withdrawal, subsequent to the entry into effect of Part VI as
between both contracting jurisdictions, of a contracting jurisdiction’s reservation
made pursuant to article 28(2) or article 19(12), the first day of January of the
calendar year next following the expiration of a period of six calendar months
beginning on the date of the communication of the Depositary of the withdrawal
of the reservation.
5. Finland reserves the right to exclude from the scope of Part VI all cases where an
application has been filed under the Convention on the Elimination of Double Taxation
in Connection with the Adjustment of Profits of Associated Enterprises (90/436/EEC) –
as amended, or under other instruments agreed by the member states of the European
Union or under domestic rules which implement such instruments.
Apart from choosing to apply part VI of the MLI concerning mandatory binding arbitration,
Finland has chosen to apply only those provisions of the MLI that are necessary to satisfy the
OECD’s minimum standard. Therefore, and taking into account that not all of Finland’s treaty
partners have signed the MLI, the proportion of tax treaty provisions included in the CTA’s
signed by Finland that will actually be modified following the MLI, is going to be relatively
limited. This conclusion is further supported by the fact that most of Finland’s tax treaties
are already in line with the provisions concerning corresponding adjustments (article 17 of
the MLI). Moreover, only some of Finland’s treaty partners have on their part chosen to apply
part VI (arbitration). Most of the provisions on mutual agreement procedure will be modified
only with respect to permitting a person to present a case to the competent authority of either
contracting jurisdiction. The introduction of the text of the preambular paragraph (article 6)
and the PPT (article 7) can be considered to have the most significant impact of the MLI on
Finland’s tax treaties.
Finland has entered into a new bilateral tax treaty with Hong Kong after the MLI was signed.
This treaty is in line with the OECD’s minimum standard. Those provisions of the MLI which
were not adopted by Finland have not been included in the treaty. In addition, some other
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Finland
tax treaties are currently being negotiated or renegotiated. It can be anticipated that Finland
seeks to satisfy the OECD’s minimum standard with respect to all new or renegotiated treaties.
In Finland, parliament must be involved in ratifying international conventions such as the

MLI. The government has proposed approving the MLI and an associated Act necessary
to implement the MLI by issuing a Government Proposal was prepared by the Ministry of
Finance. In parliament, a committee specialized in matters related to taxation has reviewed
the proposal before it was brought to the plenary session for approval and issued a statement.
In its statement, the committee recommended approving the MLI with the reservations and
notifications proposed by the government.
Regarding the time of the MLI’s entry into force, the government had issued a decree,
which stipulated that the MLI entered into force on 1 June 2019.
For the treaties that the MLI modifies when applied, a publicly available, free-of-charge
website will publish synthetized texts of the revised tax treaties prepared by the Ministry of
Finance. However, this is not compulsory according to Finland’s legal system. The purpose of
having current updates and compilations posted on the web is to make it easier to understand
the entirety of those of the treaties that consist of many parts, namely amending protocols
and the MLI. Previously, only commercial publishers have published consolidated versions
of tax treaties in Finland. However, only the treaties themselves are authentic for purposes
of law. Hence, if there is a divergence between the synthetized text and the actual impact of
the MLI on a tax treaty, the tax authorities or courts are not bound by the synthesis.
In Finland, no synthetized texts have been published by October 2019. However, the
Australian Taxation Office has already published a synthetized text of the MLI and the tax
treaty between Australia and Finland. In that document it is stated that the document was
prepared in consultation with the competent authority of Finland and represents the shared
understanding of both countries’ authorities of the modifications made to the treaty by the
MLI.
In Finland, the applicable international public law doctrine can be characterized as a dualist
theory. Hence, international conventions do not enter into force in Finland without legislative
procedures and the provisions included in such conventions are not in force or applicable
before the legislative procedure is completed. Once ratified, the MLI was incorporated into
the domestic legislation by an Act of Parliament. The Act is very short with reference to the
text of the MLI and Finland’s reservations and notifications, which, in turn, are included in
the decree issued by the government as an attachment.
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Ahonen
As of now, the MLI has not given rise to any specific interpretations in Finland. No specific
interpretation guidelines have been published with respect to the MLI. It is a long-standing
practice in Finland to regard as significant what the Commentary on the OECD Model says
when interpreting tax treaty provisions in accordance with the OECD Model. In view of this,
the fact that Finland’s official languages are different from the official languages used by the
OECD is not likely to be an issue in the interpretation of the MLI.
The legal value of OECD reports published in the course of the BEPS project for treaty
interpretation purposes has not specifically been addressed in the documents published in
connection with the implementation of the MLI. However, in the implementation of other
rules based on the BEPS project, e.g. rules on hybrid entity and hybrid financial instrument
mismatches, OECD reports have been granted legal value as a source of interpretation, as well
as in applying transfer pricing rules. This implies, in the author’s view, that the OECD reports
do have legal value for treaty interpretation purposes.
There has not been notable debate on whether the MLI may have an impact on the
interpretation of treaties concluded before the MLI was ratified or whether the amended
preamble might be used in a retrospective manner for the purpose of interpreting tax
treaties. In earlier court cases, tax treaty provisions have not been considered to prevent
applying domestic anti-avoidance rules although the text of the preamble has not fully
corresponded to the text now modified by the MLI. However, these cases have concerned
denying the deductibility of payments related to cross-border arrangements but not denying
treaty benefits.
As the MLI entered into force in Finland only in June 2019, it is difficult to assess how tax
professionals will take the PPT into account in tax planning or how, if at all, assessment
practices regarding possible tax treaty abuses will change. There are no plans to establish a
special PPT committee to review potential assessments.
Regarding tax certainty, it is possible for taxpayers to apply for an advance ruling on
the application of the PPT from the tax administration. The rulings are binding on the tax
administration provided that the facts and circumstances correspond to what is disclosed
in the application.
It can be anticipated that the fact that Finland has chosen to apply part VI of the MLI
will increase the number of MAP requests over time, as more cases than previously will
eventually be resolved in arbitration if the competent authorities fail to reach an agreement.
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This is partially attributable to the EU dispute resolution directive, which also provides for
mandatory binding arbitration. On the other hand, the average time taken to resolve cases
can be expected to be shorter in the future because countries are likely to avoid arbitration
if possible.
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France
Branch reporter
Nicolas De Boynes1

France is a long-time supporter of both the BEPS initiative and multilateralism. It is therefore
not a surprise that the multilateral instrument implementing the BEPS Action Plan (the “MLI”)
has been endorsed and vigorously promoted by the French government. Such enthusiasm
vis-a-vis the MLI translated in a strong political support by the French parliament during the
ratification discussions: almost all provisions of the MLI were adopted, except when such
provisions contradicted French international tax principles or were not useful or relevant
given domestic tax law. Decisions on options and reservations under the MLI did not result
from an economic/pragmatic approach under which French representatives would have tried
to choose the best options for French taxpayers or tax authorities. For instance, no detailed
impact analysis was prepared by French tax authorities and provided to the members of
parliament. Decisions on the MLI were rather driven by the political and diplomatic objective
of showing France’s support to the MLI initiative.
The direct impact of the MLI on French taxation is quite limited at this stage, for two
reasons. First, the general anti-abuse rule provided by article 7 of the MLI is not expected
to have practical consequences on international tax schemes since French case law already
authorized the tax authorities to apply domestic anti-abuse rules in a tax treaty context.
Second, France’s treaty partners have made choices that do not necessarily match France’s
choices, resulting in very few amendments being in effect at this stage. This is particularly
true in respect of article 12 on agents and commissionaire structures, which is certainly one
of the most important provisions of the MLI in the French context. Recent treaty bilateral
negotiations, such as the new treaty between France and Luxembourg, have shown that
MLI standards are pushed by French tax authorities and comprehensively integrated in new
tax treaties, resulting in a similar outcome as an adoption through the MLI. However, such
bilateral processes were precisely what the promoters of the MLI wanted to avoid. Even
though such evolution in France’s tax treaty policy clearly relates to the BEPS Action Plan, it
is difficult to argue that they stem from the MLI.
From the point of view of tax practitioners, the main recent evolution in the French tax
market practice has resulted from the implementation under French law of the principal
purpose test (“PPT”) for the characterization of abusive transactions. Such standard is
provided in article 7 of the MLI but had actually been introduced into French domestic law
before the MLI took effect, through the implementation of the Anti-Tax Avoidance Directive
(“ATAD”). Since the scope and limits of this PPT concept are uncertain, one could notice a
recent trend showing that taxpayers and tax practitioners tend to be more cautious and
conservative in respect of tax structuring, waiting for guidance and precedents to be provided
by French courts in the years to come. There again, this evolution is clearly a consequence of
the BEPS Action plan, but not so much the MLI. Actually, the ATAD proved to be much more
1
Partner at Sullivan & Cromwell LLP.
IFA © 2020 349

France
efficient than the MLI to accomplish the goals set by the BEPS Action Plan (with a limited
geographical scope though).
Therefore, taking into account the reservations made by France and its key treaty partners
as well as BEPS-inspired changes already enacted under French domestic law, it is fair to say
that the effective impact of the MLI is not significant at this stage. From a practical standpoint,
changes that will significantly impact taxpayers are limited to (i) mutual agreement and
arbitration procedures and (ii) the 365-day period to take into account in respect of dividends
and capital gains on real estate companies. Such impact may be even more limited because
it is not clear whether the reference to a 365-day period in respect of real estate companies
may be applied for French tax purposes. Such provision would be tougher than domestic tax
provisions, and there is a debate under French law as to whether income that is not taxable
in France under domestic law may become taxable by the effect of tax treaties as amended
by the MLI.
On a more optimistic note, since we started this summary by noting that the main goal
seems to have been of a political and diplomatic nature, one could consider that the objective
has been achieved despite its limited practical consequences.
Treaty Network
1.1. Introduction
For the purposes of this report, we have focused on tax treaties that are the most relevant
for French corporate and individual taxpayers, i.e. tax treaties with jurisdictions having close
relationships with France. We have selected a panel of 16 tax treaties (the “Panel”) including
treaties with, by alphabetical order, Australia, Brazil, Canada, People’s Republic of China,
Germany, Italy, India, Spain, Switzerland, the United Kingdom and the United States. We
have also added (i) the tax treaty with Algeria for which the French tax authorities have
released comprehensive interpretative guidelines that are applicable to all tax treaties
signed by France which include the same provisions as such treaty with Algeria and (ii) the
tax treaties with Andorra, Oman, Panama and Saudi Arabia, which are the most recent tax
treaties entered into by France before the BEPS initiative started to influence the French tax
treaty policy (i.e. tax treaties signed before 1 January 2015), and are indicative of France’s most
recent pre-BEPS tax treaty policy.
France had entered into 128 tax treaties prior to the MLI.
Tax treaties entered into by France generally follow the principles set forth in the OECD
Model Convention and Commentaries. The main difference between the French approach
and the OECD principles relates to the treatment of partnerships, for which France made
a reservation in the OECD commentaries. France considers that partnerships are “liable to
tax” even though the tax is effectively collected from the partners and are therefore resident
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for treaty purposes. As discussed below, this is the reason why France made a reservation to
article 3 of the MLI.
France also entered into the OECD Convention on Mutual Administrative Assistance in
Tax Matters.
a) Preliminary remark on the choice between general anti-abuse rules and specific anti-abuse rules
The long-standing approach of the French tax authorities vis-a-vis tax avoidance, both in
a domestic or international context, is that general anti-abuse rules (“GAARs”) are more
efficient than specific anti-abuse rules (“SAARs”) to deal with the variety of abusive schemes
and endless creativity of tax practitioners. French courts have contributed to this strategy by
adopting a rather broad interpretation of the general anti-abuse doctrine. Therefore, abusive
tax schemes may be reassessed by the French tax authorities under GAARs. This being said,
we should note that there is a recent trend towards more specific anti-abuse provisions to
tackle identified tax schemes, but this evolution remains limited in France by comparison
to other jurisdictions.
This approach in favor of GAARs has been followed in the context of tax treaty shopping,
and most of the treaty shopping cases have been contested by the French tax authorities on
the ground of GAARs (as described below). Consistent with such approach, French legislators
have enacted very few domestic SAARs with respect to tax treaty shopping.
Another reason why domestic SAARs are very rare in a tax treaty context is that treaties
prevail over domestic laws under French constitutional principles. Therefore, assuming that
taxpayers are entitled to certain benefits under a tax treaty, the provisions of such tax treaty
would in principle prevail over any domestic SAARs. A landmark decision in this respect
dealt with French CFC rules (article 209 B of the French tax code).2 French CFC rules may be
considered as SAARs3 because their scope is limited to subsidiaries with no (or inadequate)
business substance. Under these rules, profits realized by the relevant subsidiaries are
taxable in France in the hands of their French shareholder. Taxpayers argued that taxation
in France of the profits of a foreign subsidiary having no permanent establishment in France,
was contrary to applicable tax treaties. Although such rules had an anti-abuse objective, the
French Supreme Administrative Court (Conseil d’Etat) decided that they were contrary to tax
treaty provisions and cannot be applied in a tax treaty context.
Such constraint is not applicable with respect to GAARs. In a recent decision, the French
Supreme Administrative Court confirmed that French domestic GAARs are applicable in
respect of abuse of tax treaties even if the relevant tax treaty does not include any anti-
abuse provision.4 Therefore, tax treaty shopping is mainly addressed in France through
domestic GAARs, irrespective of whether tax treaties include an anti-abuse provision. In
this context, the mandatory inclusion under the MLI of an anti-abuse provision as well as
the addition in the preamble of a reference to tax evasion should have no practical effect
on the interpretation of tax treaties. This being said, we should note that a large majority of
2
Conseil d’Etat, 28 June 2002, Schneider, n°232276
3
By contrast to CFC rules applicable in certain jurisdictions such as the United States, which are considered as an
anti-deferral provision in the context of a worldwide taxation system.
4
Conseil d’État, 25 October 2017, Verdannet, n°396954
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France
the tax treaties signed by France (in our Panel, 13 tax treaties out of a total of 16 tax treaties)
refers to the prevention of tax evasion in their preamble. Few treaties (for instance, Andorra,
Colombia, Panama, Singapore) also include a principal purpose test clause similar to article
7 of the MLI or anti-abuse provisions in specific articles of the treaty (for instance, Andorra,
People’s Republic of China, Japan, UK).
b) Application of domestic GAAR to treaty shopping arrangements
French GAARs include one provision focused on schemes with an exclusive tax purpose
(triggering an 80% penalty)5 and two recently enacted provisions referring to tax as the main
or one of the main purposes of the transaction, similar to the PPT included in the MLI (no
specific penalty but bad faith penalty of 40% may be applied by the tax administration).6
As indicated above, such anti-avoidance rules have been used by French courts to sanction
treaty shopping schemes. A key decision was rendered in respect of a situation where a UK
taxpayer had acquired from a US shareholder the usufruct right over shares issued by a French
corporate, in order to benefit from the France-UK tax treaty in respect of the payment of
the dividends.7 French courts applied the general anti-abuse doctrine to conclude that the
UK taxpayer was not the beneficial owner of the dividend and that the arrangement was
exclusively tax driven. The sale of usufruct rights was therefore treated as a loan transaction.
The beneficial ownership concept is used by French courts either in conjunction with the
general anti-abuse doctrine,8 or as a stand-alone ground for reassessment.9 French courts
consider that such concept may be applied by the tax administration even if the relevant
tax treaty does not refer to the notion of beneficial ownership.10 This is consistent with the
position described above, according to which anti-abuse rules may apply in the context of a
tax treaty even if such treaty does not include any anti-abuse provision. Guidance is scarce
on the definition of the beneficial ownership concept. In particular, French courts have not
provided any clear definition. The French tax administrative guidelines indicated that the
beneficiary of an income is not the beneficial owner if it has limited authority on such income
and acts on behalf of other parties.11
In addition, the Committee of the Abuse of Law (which is an official body in charge of
issuing non-binding opinions on tax avoidance cases before they are submitted to courts)
rendered several decisions applying domestic GAARs to tax treaty shopping situations,
in particular when taxpayers tried to use a loophole in the France-Luxembourg tax treaty
resulting in a double exemption on capital gains in respect of French real estate assets.12
5
Art. L.64 of the French Procedural Tax Code.
6
Art. L.64 A of the French Procedural Tax Code and 205 A of the French Tax Code.
7
Conseil d’État, 29 December 2006, Royal Bank of Scotland, n°283314.
8
Ibid.
9
Conseil d’État, 23 November2016, Eurotrade Juice, n° 383838; Administrative court of Appeal of Versailles, 5 March
2019, Rexel, n°16VE02168.
10
Conseil d’État, 23 November 2016, Eurotrade Juice, n° 383838 – See also Conseil d’Etat, 13 October 1999, Diebold
Courtage, n°191191.
11
BOI INT CVB UZB 20, n°120.
12
Decisions 2012-47, 2013-25, 2018-24 and 2013-26 – See also Administrative court of Appeal (Versailles), 24 July
2018, Holding Yaka, n°15VE04006.
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c) Domestic SAARs
As indicated above, the constitutional rule under which treaties prevail over domestic law
limits the possibility for domestic SAARs to apply in a tax treaty context. However, where tax
treaties leave some leeway to contracting states in the implementation of treaty provisions,
domestic SAARs may be applicable. An example may be found in respect of tax credit granted
for source taxation on passive income. Tax treaties signed by France generally provide that
French taxpayers are entitled to a tax credit equal to the local withholding tax on the income,
capped at the amount of French tax attributable to such income. Tax treaties do not provide
for details on the computation of the “French tax attributable to such income”. Absent any
tax treaty constraint, the French legislator has been able to enact specific anti-abuse rules
dealing with stock sale/repurchase transactions, i.e. transactions whereby a French taxpayer
would acquire shares shortly before the payment of dividends, benefit from the tax credit
and resell the shares to the initial holder.13 Since tax treaties are silent on the computation of
the tax credit, such domestic SAAR would in principle not conflict with rights granted under
the treaty. Interestingly, this domestic SAAR includes a safe harbor provision whereby it is
not applicable if the taxpayer can show that the main objective was not to benefit from the
tax credit. One can argue that a SAAR which would not be strictly limited to abusive schemes
(i.e. which would not include any safe harbor applicable when the main objective was not to
benefit from a tax advantage) may be challenged if it limits rights granted under a tax treaty,
even though this has not been tested before the courts yet.
If other domestic SAARs were to be enacted in France against tax treaty shopping and
assuming their scope would be strictly limited to abusive schemes, the courts may decide
to uphold the same approach as the one taken in respect of the general anti-abuse rules
(described above) and accept to apply such domestic SAARs despite the hierarchy of norms
under French constitutional law between treaties and domestic law. However, as discussed
above, this would certainly require that taxpayers benefit from a safe harbor provision, under
which the relevant rule would not be applicable if the taxpayer can prove that the objective
was not tax avoidance.
d) Anti-avoidance provisions in tax treaties
Anti-avoidance provisions are not common in the French tax treaty network. In our Panel,
there is only one tax treaty (with Italy) which includes a condition related to capital ownership
by non-residents in respect of the taxation of dividends (article 10). This article provides that
if more than half of the share capital of the beneficiary company is owned by non-resident
shareholders, the beneficiary company has to provide certain information, upon request by
the French tax authorities, to support that the acquisition of the shares was made in good
faith and for commercial reasons. Such provision has a very narrow scope as it applies only
in respect of the transfer of the French avoir fiscal (which is a tax refund corresponding to
the corporate income tax paid by the distributing entity, in order to avoid economic double
taxation). The French avoir fiscal used to be paid by the French tax authorities to Italian
shareholders under the France-Italy tax treaty. It is not applicable to the withholding tax
reduction provided for under article 10 of the treaty. One could argue that the payment of a
tax refund by the French tax authorities to foreign shareholders is an exceptional benefit, and
13
General Tax Code, art. 220-1-a, para. 3.
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that France was therefore willing to apply exceptional anti-abuse provisions. This is supported
by the fact that such anti-abuse provision is not applicable in respect of the withholding
tax reduction. It is therefore fair to say that such anti-abuse provision is an exception in the
French tax treaty policy.
In our Panel we have not identified (i) provisions denying treaty benefits to non-resident-
owned companies enjoying special tax privileges in the state of residence, (ii) “subject-to-tax”
provisions or (iii) channel provisions denying treaty benefits for income that is used primarily
to satisfy claims of one or more persons not resident in the same state.
Regarding “subject-to-tax” provisions, the French tax authorities have indicated in their
official guidelines with respect to dividends that withholding tax reduction is available only
if “the dividends received are taxable in the residence state of the beneficiary”.14 However, to
our knowledge, French tax authorities do not deny tax treaty benefits in respect of tax-exempt
dividends, such as dividends benefitting from the participation exemption at the level of the
beneficiary. In any case, French courts have confirmed that the effective taxation of a relevant
income is not a condition to benefit from withholding tax reduction under a tax treaty. 15
Even before the BEPS influence, there were many examples in the French tax treaty
network of “principal purpose tests” (“PPT”) that deny treaty benefits when the main purpose
or one of the main purposes of the transaction is to obtain certain treaty benefits. Such PPT
provisions are generally limited to passive income (Japan, Colombia, Andorra, UK) or certain
categories of passive income (Canada and Uzbekistan: interests, royalties).
In addition, France sometimes accepts to include limitation of benefit (LOB)
provisions in its tax treaties if this is requested by the other state. LOB clauses may be bound
in tax treaties with the US, Japan and Colombia. Other tax treaties of our Panel do not include
LOB clauses. As explained above, the general approach of the French authorities has been so
far that domestic GAARs were by comparison to LOB provisions, more efficient to deal with
treaty shopping. The choice of France to go with the “principal purpose test” option in the MLI
(instead of the Simplified LOB provision) is consistent with this approach.
The arrangements addressed by articles 8, 9, 10, 13 and 14 of the MLI were not tackled
by specific provisions in the French tax treaty network, except for very few exceptions. In
particular, certain tax treaties providing for a full withholding tax exemption on dividends
(with the US for instance) include a 12-month holding period, just like article 8 of the MLI.
With respect to article 12 of the MLI, the French Supreme Administrative Court decided in
a landmark decision that commissionaire arrangements did not result in the characterization
of a permanent establishment.16 Since then, French tax authorities have tried to challenge
such structures on other grounds, such as transfer pricing (in respect of the profit allocated to
the French commissionaire) or indirect transfer of goodwill (at the time of the conversion into
a commissionaire), with limited results. Despite the widespread use of such arrangements in
France, no specific remedy has been included so far in tax treaties signed by France.
Regarding article 13 of the MLI on the exceptions to the characterization of a permanent
establishment, tax treaties of our Panel generally provide for an exclusion for specific
activities with no condition as to their “auxiliary or preliminary” character. There are however
tax treaties which apply this condition in respect of advertising, supply of information,
scientific research or similar activities (Switzerland, Italy, Ireland, UK, Luxembourg,
14
BOI-INT-DG-20-20-20-20 n°50.
15
CE, 19 November 2014, n°362800.
16
CE, 31 March 2010, Zimmer, n°304715.
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Germany, Singapore, Australia, India, and Brazil). In addition, a significant number of tax
treaties contain the condition (which is included in the MLI) that, in case of combination
of several specific activities, the overall activity has to remain of an auxiliary or preliminary
character (Algeria, Canada, People´s Republic of China, Colombia, Japan, Singapore, Spain,
US, Uzbekistan)
We have not identified treaty provisions in our Panel dealing with hybrid mismatch
arrangements addressed in articles 3 and 4 of the MLI.
Regarding mutual agreement procedure (MAP), tax treaties of our Panel all include a MAP
clause, with certain differences compared to the MLI, for instance:
–– certain treaties provide a time-limit for introducing a mutual agreement request shorter
than the three-year period set forth in the MLI (Saudi Arabia, Canada, Italy).
–– certain treaties did not provide that the agreement must be implemented
notwithstanding any time limits in the domestic law of each contracting state (Canada,
Ireland, Italy, Luxembourg, Switzerland and Brazil).
Regarding arbitration, the EU directive was implemented in France by the Finance Bill for
2019. Prior to the MLI and the implementation of such directive, tax treaties with Germany,
Canada, Colombia, US, UK and Switzerland already provided for an arbitration mechanism.
There are few differences in the arbitration procedures provided for in such tax treaties, for
instance concerning the appointment of arbitrators or the majority rule, and exceptions that
may be used by tax authorities to refuse arbitration.
France has signed the MLI 7 on June 2017 and notified its instrument of ratification on 26
September 2018, with a date of effect as of 1 January 2019.
The ratification process included (i) long-form reports prepared for special committees
of members of parliament on the MLI and the choices proposed by the French government,
(ii) discussions within such special committees and (iii) plenary debates in both chambers
of the French parliament. The choices proposed by the French government were discussed in
detail before parliament and compared to the choices made by other jurisdictions. However,
the French government did not provide for a detailed explanation of the choices it proposed.
An analysis of the impact of such choices was provided by the government to the members
of parliament but its scope was very limited, and it did not include any quantitative analysis.
Choices made by the French government were generally approved by members of
parliament, except for article 14 for which a reservation was finally made for the reasons set
forth below. The justification for the choices made by the government and parliament are
detailed in the paragraphs below, when available.
Interestingly, any further modification of the choices made by France (including the lifting
of a reservation for instance) will not require the approval of the French parliament. This
has been criticized by certain members of parliament, who wanted to keep control over the
evolution of the MLI. Following such remarks, the government committed to report annually
any changes made in the options under the MLI as well as provide an update on the covered
tax treaties and implementation of the MLI. Such report was supposed to be annexed to
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France
the Draft Finance Bill prepared by the government. However, in the Draft Finance Bill for
2020 released on 27 September 2019, such a report was not included, and one can question
whether the government will effectively follow the commitment taken before parliament.
The government also committed before parliament to release the consolidated version of
the CTAs taking into account the MLI provisions. However, members of parliament criticized
that (i) such version will be prepared unilaterally by France and not endorsed by the other
jurisdictions and (ii) such version will not be binding for the tax authorities and will be
provided “for information only”. The French tax authorities have so far released consolidated
versions of tax treaties with Austria, Ireland, Lithuania, Netherlands, Poland, UK, Slovakia
and Slovenia.
France did not cover all its tax treaty network. Of 128 conventions in connection to income tax
signed, only 91 are covered by the MLI (covered tax treaties or “CTAs”). This group corresponds
generally to jurisdictions that are members of the OECD and the ad hoc group which are
signatories of the MLI (with few exceptions).
Out of the 91 CTAs, 61 treaties are subject to the MLI as the other contracting states
have signed the MLI and listed such treaties as CTAs. This list covers France’s main business
partners, except for the US, Switzerland and Brazil.
Amongst 33 countries where the MLI has come into force, seven do not list France as CTA.
As of today, the MLI is therefore in effect with 26 tax treaties.
As indicated above, guidance on the justifications and rationale for the choices proposed by
the government is minimal. This has been criticized by members of parliament.17 We set forth
below the few indications provided for in the parliamentary debates and reports, as well as
the explanatory note prepared by the French tax authorities.
The general approach taken by the French government and confirmed by parliament
may be summarized as follows:
–– By default, all the provisions of the MLI are considered as useful and have been accepted
by France. The goal of the French government was clearly to publicly show its strong
support to the BEPS initiative and the MLI.
–– Reservations correspond mostly to situations that are not relevant in, or consistent with
the French tax system (such as articles 3 and 10) or for which France has already domestic
tax rules or treaty provisions addressing the same issue (such as articles 5 and 11).
–– As noted above, France also included a reservation to article 14, but it was presented
as a temporary position that may be modified once a comprehensive assessment of its
consequences is done.
–– The sole real disagreement is on article 4 (dual residence), for which it was indicated that
the proposed mechanism to determine the residence of companies was too complex from
an administrative standpoint and lacks certainty for taxpayers.
17
Opinion from Bénédicte Peyrol, Parliamantary report on the ratification act of the MLI, 13 July 2018, p. 80.
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Below is a more detailed description of the choices made by France in respect of the MLI:
–– Article 3: Reservation
As indicated above, France has a unique position regards partnerships, as it considers that
partnerships are “liable to tax” even though the tax is collected at the level of the partners.
The income of the partnership is never viewed as the income of its partners. Therefore, the
wording of article 3 would not be consistent with such an approach, since it provides that, in
respect of non-hybrid partnerships, the income derived by or through such partnerships will
be considered as income of its partners. This explains why France included a reservation on
this article. This being said, one should note that the hybrid mismatch in respect of entities
that are viewed as a corporation by one state and a partnership in another state may still exist
under the French approach. It is correct that the wording proposed in the MLI would not be
the right solution to address such mismatch in the French context, but one would argue that
such mismatch should nevertheless be addressed.
In its tax treaties France generally includes that the residence of legal entities is determined
by the place of effective management. In our Panel, all conventions provide accordingly, with
the notable exception of Canada which has opted for a mutual agreement wording similar
to the MLI.
The reservation is based on the following flaws perceived by the French tax authorities
on the provision included in the MLI: (i) it requires the involvement of tax authorities on
both sides, which would be administratively cumbersome (and possibly inefficient) from
the standpoint of the French tax authorities and (ii) the criteria mentioned in article 4 are far
from clear, in particular the reference to “any other relevant factors” and creates uncertainty
for taxpayers. These perceived flaws were not challenged nor discussed in length before
parliament.
Here again, the position taken by the French tax authorities may be criticized, since
the flexibility of the criteria proposed in the MLI was precisely a tool to address abusive
schemes making use of the strict criterion determining the place of effective management.
This is particularly true for France, which has expressly stated in a reservation to the OECD
Commentaries on the previous version of the OECD Model Convention that the place
of effective management is determined by where the board of directors would regularly
meet.18 For instance, for a non-French holding company receiving dividends from its French
subsidiaries to be eligible to treaty benefits, it would suffice to make sure that the board
meetings of such holding company are held in its state of incorporation, even though other
factors may show that it is not resident in such jurisdiction, for instance because the CEO
is based in a non-treaty country. French tax authorities might be able to challenge such
scheme through the general anti-abuse rules but, in this case, the legal uncertainty and
administrative burden would be similar to that resulting from the MLI proposal. One could
argue that, by construction, anti-abuse rules such as article 4 need to be sufficiently flexible
to make sure taxpayers could not circumvent such rules, and that such flexibility necessarily
results in a greater uncertainty for taxpayers.
18
OECD Commentaries, para. 24, on art. 4 of the OECD Model Convention of 2014.
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France
The French tax authorities indicated that the abusive schemes addressed by Option A, B and C
of article 5 are already covered in tax treaties signed by France since such tax treaties generally
adopt the tax credit mechanism for the elimination of double taxation (and the exemption
mechanism). Therefore, if the relevant income is not subject to tax in the source country, no
tax benefit is granted in France where the beneficiary is located. Such article is therefore not
relevant within the French tax treaty network.
–– Article 6: Option for paragraph 3
In addition to the mandatory first paragraph, France opted for the third paragraph as well.
However, it is expected that such changes will have a limited effect (if any) given the GAARs
introduced by article 7 of the MLI, and more generally given the fact that French Courts
already apply domestic GAARs in a tax treaty context.
–– Article 7: Option for PPT without article 7(4)
The choice for the Principal Purpose Test (“PPT”) was mainly justified by the fact that it is close
to French domestic GAARs, which is already applied in a tax treaty context, as indicated above.
Also, it was noted in the parliamentary reports that 75% of the MLI signatories opted for the
PPT, which guarantees a broad application of this new rule. France has not opted for article
7(4) but no specific guidance may be found on the rationale for this decision.
–– Article 8: No reservation
As indicated above, French domestic law already provides for a SAAR addressing schemes
under which a French taxpayer would acquire shares immediately before the payment of a
dividend, would resell such shares at a loss after the payment of the dividend, and would
claim treaty benefits in order to get a tax credit corresponding to source taxation. Such
SAAR is not based on a minimum holding requirement, but French tax authorities pay very
much attention to sale-repurchase schemes. In addition, few tax treaties already provide
for a holding period in order to benefit from full withholding tax exemption (in our Panel,
see the tax treaty with the US). Parliamentary reports also noted that French taxpayers are
used to holding period requirements since a two-year holding is required in respect of the
participation exemption regime. Therefore, the option for article 8 did not raise much debate.
–– Article 9: No Reservation
For similar reasons as those indicated in respect of article 8, the option for article 9 was not a
moot point. Such clause had already been used in the negotiation of the amendment to the
tax treaty with Luxembourg in 2014.
One interesting point raised during the parliamentary debate was whether the option
for such provision would replace (and annul) exceptions provided under tax treaties to the
definition of real estate companies, such as the exception in respect of real estate assets used
to carry on active business. The explanatory note indicated that such exceptions would be
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preserved19 and the French tax authorities confirmed this interpretation to the parliamentary
reporter.20
The tax treatment of triangular situations is uncertain under French case law. Article 10
assumes that in a triangular situation the income would in principle benefit from the tax
treaty between the source country and the country of incorporation of the beneficiary, such
benefits being denied if the PE is undertaxed. However, such a conclusion is uncertain under
French tax principles and accepting this article would have meant, implicitly, that the French
tax authorities would accept this approach. Since this is an open point under French case law,
it was decided to make a reservation in respect of this article.
More surprisingly, the parliamentary report states that GAARs would be sufficient to
challenge the situations addressed by article 10.21 Such statement may be correct in certain
cases where the main purpose of the scheme is to get the benefit from the treaty with the
state of incorporation, but one should note that there are multiple situations that may fall
into article 10 but not under GAARs.
French tax treaty policy does not generally allow full exemption in the residence state in case
of taxation in the source country. As indicated above, the tax credit method is wide spread
among tax treaties signed by France. Therefore, it was decided that France was sufficiently
protected by its existing treaty provisions, and that article 11 was not necessary.
The parliamentary reports note that a significant number of countries made a reservation
for article 11, as well as article 10, so it seems that the approach taken by the other countries
have influenced, or at least confirmed, the decision of the French government to make a
reservation.
Commissionaire structures have been at the top of the French tax authorities’ agenda for
many years now. As indicated above, the French Supreme Court decided in a landmark
decision that a commissionaire could not be treated as a dependent agent because it was
not acting in the name of the principal.22 Tax authorities have tried to address conversions
of distributors into commissionaires through various approaches, including by arguing that
the conversion resulted in a hidden transfer of goodwill to the principal, or by challenging
the commissionaire fee under transfer pricing rules.
More recently, the French tax authorities have reassessed Google Inc. on the basis of the
permanent establishment created in France through their subsidiary Google France acting
as dependent agent, because Google France provided commercial assistance to Google Inc.,
in particular regarding the negotiation of contracts with clients. However, the tax authorities
19
Explanatory note to the multilateral convention to implement tax treaty related measures to prevent base
erosion and profit shifting, para. 131.
20
Opinion from Bénédicte Peyrol, Parliamentary report on the ratification act of the MLI, 13 July 2018, p. 85.
21
Opinion from Bénédicte Peyrol, parliamentary report on the ratification act of the MLI, 13 July 2018 p. 90.
22
CE, 31 March 2010, Zimmer, n°304715.
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lost their cases before the lower tax court and appellate court,23, or the simple reason that
Google France had no mandate to act in the name of Google Inc. These arrangements were
viewed as abusive by the French tax authorities, as they believed that decisions were actually
made in France by Google France employees, and that the signature of the agreement by
representatives of Google Inc. was merely rubber-stamping. Domestic GAARs might have
been a way to tackle these schemes but the outcome was very uncertain. Given that such
arrangements are widely used in the digital economy in particular, resulting in a very small
portion of the profits related to French client/users being taxed in France, it is not a surprise
that France made no reservation to article 12. Such article was described in the parliamentary
report as “probably the most important progress” made under the MLI.
However, two remarks tend to reduce the importance of such change. First and foremost,
most countries that host companies having put in place such arrangements at a large scale
made a reservation on such article (Ireland and the UK for instance). Luxembourg also made
a reservation under the MLI but accepted this provision in the revised France-Luxembourg
tax treaty.
Second, it was very recently disclosed that Google accepted to pay a significant fine in
a settlement with the French prosecutor for tax fraud in relation to the arrangements for
which it won the cases before the tax courts. Under a separate deal, Google also accepted
to pay the reassessment it had validly contested before the tax court. It is to be noted that
the tax fraud cases were not grounded on permanent establishment characterization but
rather on transfer pricing issues in respect of the remuneration of Google France for its sale/
negotiation functions. Since the legal ground was not identical as the cases won by Google
before the tax courts, the outcome was uncertain before the criminal courts. This example
shows that the French tax authorities have, even before or without the MLI, powerful means
to challenge such arrangements.
–– Article 13: Option B
This article is one of the very few cases where France did not choose the most comprehensive
option compared to the most common choices made by other jurisdictions (putting aside
reservations made because the relevant articles did not bring additional protection to France).
The choice of Option B was driven by a need for certainty for taxpayers. The qualification
of “specific activities” by the condition related to “preparatory and auxiliary” activities was
viewed as not clear and objective enough and would result in a risk of taxation in cases where
no abusive arrangement was put in place. In addition, Option B corresponds to the current
French tax treaty policy.
As indicated above, this article constitutes the unique case where the French tax authorities
changed their approach in the course of the parliamentary debates. The French administration
was first willing to accept article 14, but finally decided to make a reservation. The parliamentary
reports and discussions had stressed the fact that the impact on French companies carrying
out activities abroad could be significant, even though no detailed analysis was provided for
by the reporters and the companies to which an analysis had been asked. Another argument
23
Administrative Court of Appeal of Paris, 25 April 2019, Google, n°17PA03065.
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put forward during the discussion was that the main countries of residence of multinationals
performing activities in France had made a reservation on this article, and therefore such
provision would be applicable mostly regarding developing countries, where French
multinationals would be at risk of being taxed under this new provision. Therefore, effects
that are detrimental to French groups would probably have been more significant than any
advantage for the French tax authorities on foreign entities carrying out operations in France.
It was also noted that, in respect of the most aggressive arrangements using fragmentation of
contracts, domestic GAARs may be sufficient to challenge foreign taxpayers.
No specific justification was offered for article 15, except that France needed to be “consistent
to its voluntarist approach” on MLI articles related to permanent establishments.
–– Articles 16-26: No reservation and option for mandatory arbitration
As indicated above, arbitration mechanisms were already provided for with respect
to France’s main business partner jurisdictions, either through the EU Directive or specific
provisions in tax treaties. The option of mandatory arbitration in the MLI was therefore not
challenged during the parliamentary debates.
In terms of arbitration methods, France took the broader option of choosing for a
mechanism of “final offer” but accepting the other option if so chosen by the counterparty.
For the purpose of this chapter, we have taken into account tax treaties signed after 1 January
2015, based on the assumption that BEPS Action Plan was then sufficiently advanced and may
have influenced bilateral discussions on tax treaties.
France has signed five tax treaties or amendments to existing treaties since 1 January 2015:
–– Singapore (signed on 15 January 2015);
–– Germany (signed on 31 March 2015);
–– Portugal (signed on 25 August2016);
–– Colombia (signed on 25 June 2015);
–– Luxembourg (signed on 20 March 2018).
The main conclusion of our review of the indirect impact of the BEPS Action Plan and the MLI
is that the impact has been pretty limited on treaties signed in 2015-2016 but is much more
significant for the tax treaty with Luxembourg signed in 2018.
However, one should note that the group of four tax treaties or amendments to treaties
signed in 2015-2016 is not necessarily representative of the French tax treaty policy at that
time because three out of four had a very limited scope, mainly to amend specific articles of
existing tax treaties. Since the modified articles had generally no relation to the BEPS action
Plan, it is typical that we do not see impact of the MLI, and this does not mean that the French
tax treaty policy was not at that time influenced by the BEPS discussion.
For instance, the scope of the amendment to the tax treaty with Germany was limited to
the tax treatment of cross-border workers (pensions collected by retirees), the introduction
of a provision authorizing domestic exit tax mechanisms and the inclusion of an arbitration
clause. These changes are unrelated to the BEPS Action Plan.
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France
The amendment to the tax treaty with Portugal was signed in the same context, as the
scope was mainly on the taxation of employment income, which is not BEPS related. However,
France and Portugal took this opportunity to add a general anti-abuse provision including the
principal purpose test. The drafting is slightly different from the MLI version as it does not
refer to “one of the main purposes”. It is difficult to say that this addition was inspired by BEPS
discussions, because before BEPS France had already included a fairly significant number of
general anti-abuse provision in its tax treaties; it is however at the very least consistent with
contemporaneous BEPS discussions.
The tax treaty with Luxembourg is more interesting for this report because it was
negotiated at a time when the BEPS report was already released, and it is a comprehensive
redrafting of the tax treaty. In addition, France and Luxembourg have included the previous
tax treaty as CTAs in their first notification, but this had limited practical consequences
because Luxembourg made a fairly significant number of reservations, in particular with
respect to permanent establishment provisions. The new tax treaty includes almost all MLI
standards that have been accepted by France, including:
–– Article 7 of the MLI on the principal purpose test;
–– Articles 12 to 15 of the MLI regarding permanent establishment;
–– Articles 8 and 9 of the MLI in respect of the 365-day rule;
–– Article 16 on MAP;
–– Arbitration provisions have not been included, but Luxembourg and France are both
covered by the EU Directive on tax dispute resolution.
This new tax treaty shows that through bilateral negotiations France is willing to impose
the MLI provisions that other jurisdictions have not accepted in the multilateral instrument.
Please refer to section 1.3.1 above.
As indicated in section 1.2.2, international treaties prevail over domestic law under French
constitutional law. The MLI being a multilateral tax treaty, will take precedence over domestic
laws and will be incorporated in the category of tax treaties. Provisions of past or future
domestic law that would contradict provisions of the MLI will remain inapplicable, subject
to developments in section 2.2 below.
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The MLI has not given rise to specific interpretations by the French tax authorities or French
courts so far, and no court decision has made reference to the MLI in the context of the
interpretation of tax treaties generally.
This being said, there is one important interpretation issue that will have to be addressed
by French courts. It relates to the situations where provisions of the MLI are more stringent
than French domestic tax law and would effectively give rise to taxation in France while
domestic tax law would not provide for any taxation. An example would be the new rule
under article 9 of the MLI, according to which the characterization as a real estate company is
based on a 365-day period preceding the transfer: a company would be characterized as a real
estate company if it meets the real estate test at any time during such 365 days. Under French
domestic law, the real estate qualification is tested at the close of the last three financial
years preceding the transfer. Therefore, there may be situations where capital gains would
be taxable in France under tax treaties as modified by the MLI but would not be taxable in
France under French domestic tax law. The question is then whether taxpayers may be taxed
based on tax treaties only, or whether the purpose of tax treaties is just to allocate the right
(but not the obligation) to tax, and then the state to which such right is allocated, applies its
domestic law to determine whether the taxpayer is effectively taxable.
This debate is not new in France, as there have been other cases where the situation
of taxpayers would be worsened by tax treaties. For instance, the definition of permanent
establishment is different under most tax treaties and under French domestic laws. Therefore,
taxpayers may be deemed not to have a permanent establishment in France under domestic
law, while a permanent establishment would be characterized under tax treaty provisions.
This situation was addressed (but not completely settled) by the French Administrative
Supreme Court in a decision dated 31 July 2009.24 The court ruled that taxpayers are indeed
taxable in France if France has the right to tax under a tax treaty, irrespective of domestic tax
rules. This conclusion is based on the territoriality provision of the French tax code,25 under
which profits taxable in France are those resulting from a trade or business carried out in
France as well as those attributed to France under tax treaties. In other words, tax treaties
may render certain profits/gains taxable in France even though no domestic tax rule would
allow their taxation absent a tax treaty.
However, this conclusion must be tempered because it is not certain that this principle
would apply to all situations. Various authors,26 as well as the advocate general to the French
Administrative Supreme Court in the case mentioned above, considered that this principle
is applicable when the question relates to the allocation of taxing rights for territoriality
purposes, but not when a type of income is specifically exempted under domestic laws. In
other words, a tax treaty may be used by two states to attribute the tax basis to one state or
the other, and certain profits may become taxable in France even though French domestic
territoriality rules would not cover them. However, if such income is exempted by a specific
domestic tax provision, it would not become taxable by the sole effect of the tax treaty. One
example would be the situation of non-resident shareholder of a French entity merged into
24
CE Overseas 31 July 2009 n°296471.
25
Art. 209 of the French tax code.
26
Pascal Coudin, Réflexions sur la portée du principe de subsidiarité des conventions fiscales internationales,
Mélanges en l’honneur de M. Cozian ; Bruno Gouthière, L’administration peut-elle toujours imposer sur le
fondement d’une convention fiscale ? RJF 24/12, n°8.
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France
another French entity. Assuming that the gains recognized on the share transfer would
be taxable in France under the tax treaty between France and the residence state of the
shareholder, this would not be sufficient to render such gains effectively taxable in France,
since the French merger regime provides for a specific exemption on all gains recognized
upon a merger.
If we assume this difference between territoriality rules and income exemption rules is
valid, it is still not certain how the interpretation issue related to the 365-day rule must be
resolved. One has to determine in which category one should put the domestic tax rule under
which capital gains in respect of shares in a company that does not meet the real estate test
at the end of the last three financial years, are not taxable.
On one hand, such rule may be viewed as a specific exemption provided under French
domestic law: since only certain real estate companies are covered by domestic tax rules,
it necessarily means that capital gains in respect of other entities are exempt. There is no
specific provision stating the exemption (by contrast to the provision on gains in respect of
shareholdings representing less than 25% of the capital, which are specifically exempted)27
but it remains that such gains are not taxable in France under domestic law.
On the other hand, one could argue that such provisions relate to the geographical scope
of French taxation and should be treated in the same manner as the definition of a permanent
establishment in the case law mentioned above. What is at stake here is the connection with
the French territory: capital gains will be taxable in France only if their connection to France,
through the location of their real estate assets, is established. Tax treaties, as amended by
the MLI, define such connection by reference to a 365-day period, while French domestic tax
rules refer to the close of financial years, but the purpose of both sets of rules is to determine
whether the link with France is close enough to justify a taxation in France.
It is difficult to conclude which approach would be endorsed by French courts. We tend to
believe that the rationale on specific exemptions provided by domestic tax rules is relevant
only when such exemptions are applicable to both residents and non-residents. In such a
case, the exemption is clearly not related to territoriality/connection to France. By contrast,
the definition of real estate companies is applicable to non-residents only and aims at
determining when capital gains have a close enough relation to France. The conclusion would
be that such set of rules relates to territoriality, which means that tax treaties may worsen the
situation of taxpayers compared to domestic rules. Article 9 of the MLI would thus be fully
applicable despite domestic tax rules.
At this stage it is difficult to assess the impact of the MLI on aggressive tax planning given
the recent date of effect of the MLI and the limited number of tax treaties amended by the
MLI. However, as indicated above, the PPT standard has been implemented in domestic tax
laws, following the EU ATA Directive, and is applicable to all tax treaties, irrespective of the
effective implementation of article 7 of the MLI. In addition, the European Court of Justice
shed some light on the concept of abuse and PPT in recent decisions dated 26 February 2019.28
27
Art. 244 bis C of the French tax code.
28
ECJ N Luxembourg 1 et a., 26 February 2019, C-115/16.
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De Boynes
Therefore, it is clear that tax practitioners now take into account the PPT standard in their
tax planning strategies.
The first effect of this evolution is the increased uncertainty for taxpayers. In respect of the
previous standard of “exclusive purpose test”, case law had progressively defined the limits
of this concept, and practitioners used to rely on multiple precedents and positions taken by
the tax administration to determine an acceptable “market practice” in terms of international
tax planning. All these references and common standards are potentially obsolete now that
treaty abuse is based on the PPT. Certain authors believe that the PPT is not very far from
the “exclusive purpose test” because only meaningful non-tax purposes are in any case to be
taken into account, both under PPT and “exclusive purpose test”. Therefore, court decisions
based on PPT might be very similar to those issued in respect of the “exclusive purpose test”.
However, the uncertainty has a very pragmatic and immediate consequence: since taxpayers
do not want to take risks and test the courts, they tend to be over-conservative and choose
for the least aggressive structuring alternative.
This evolution may be doubled by symmetrical changes in the practice of the tax
authorities. Since the standards are less clear and established, tax inspectors may consider
that they have a wider margin of appreciation to determine whether tax planning schemes
are valid or not. It is too early to assess the position taken by the French tax authorities in
this respect, but this threat of aggressive tax reassessments fosters the conservativeness
of taxpayers. It is to be noted that these recent changes on the concept of abuse have been
followed by an important reform on criminal procedure regarding tax fraud. Pursuant to such
reform, all taxpayers which are subject to reassessments with a 40% bad faith penalty for the
second time within six years, or with an 80% abuse of law penalty, are subject to an automatic
transfer of their file to the criminal prosecutor, who will decide whether criminal charges are
constituted. For large corporate taxpayers, the threat of having their reassessment becoming
a criminal case is so powerful that the standard applied internally in such organizations has
significantly increased. The recent settlement between Google and the French prosecutor
office regarding tax fraud prosecutions is an interesting example of such a trend. Even though
Google had won lower court trials on tax reassessments decided by the French tax authorities,
the prosecutor started criminal proceedings in respect of the same facts, but with a different
approach. Even though one could think that Google would have had good arguments to
defend its case, it decided to settle the case by paying approximately the same amount as
the total reassessment initially decided by the French tax authorities. This example shows
how criminal prosecutions can be used by French authorities to force a settlement by fear of
the consequences of criminal proceedings in terms of reputation, even when the taxpayer’s
technical position may be valid.
Therefore, it is fair to say that the cumulative effect of the new PPT standard implemented
pursuant to the BEPS initiative and the threat of criminal prosecution for tax practitioners
had a clear impact on curbing aggressive international tax planning, in particular regarding
large corporate taxpayers.
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Germany
Branch reporters
Silke Bruns1
Roland Ismer2

I. Prior to the MLI, Germany had concluded Double Tax Conventions on income and on capital
(in the following: DTCs) with 96 states and jurisdictions. The MLI (which can only amend
existing DTCs) and the BEPS Action Plan have not had any discernible impact on the number
of DTCs.
Preventing treaty abuse already constituted an important aim prior to MLI/BEPS. Most
preambles to German DTCs include a reference to avoiding non-taxation. Subject-to-tax-
provisions, the beneficial owner concept and a proviso for domestic anti-abuse legislation
have formed an integral part of treaty policy. The latter include a provision addressing
treaty- and EU-Directive-shopping regarding reduced source state taxation; CFC rules; exit
taxes; and a domestic general anti-avoidance rule. Germany being a member of the EU, the
European anti-avoidance doctrine is also relevant within the scope of application of EU law.
DTCs often contain further clauses, such as an activity proviso, limiting tax treaty benefits
without, however, being clearly targeted at abuse situations. By contrast, LoB clauses, rules
on third jurisdiction PEs and the avoidance of PEs as well as specific rules for hybrid entities
are still rare. While MAP procedures were regularly included in treaties even before the MLI,
a certain reluctance as to the scope of arbitration is apparent both before and after MLI/BEPS.
Germany, which has signed the MLI, but not yet ratified it, intends to update its
nomination during the ratification process. In respect of the options under the MLI, it has
made a number of reservations. In particular, it has opted for a PPT, but reserved the right
to exclude its application where the DTC already contains a general anti-abuse clause. It
has chosen not to apply article 11 (savings clause) and 12 (artificial circumvention of the
permanent establishment status by commissionaire models and similar strategies). It
has made a reservation to articles 13(4) and 15 for reasons of legislatorial technique and to
article 14 (Splitting-up of contracts). Regarding the artificial circumvention of the PE status
through certain activities, Germany has chosen option A contained in article 13(3) of MLI
so that the exemption of certain activities is limited to cases where these activities are of a
preparatory nature or constitute an auxiliary activity. Regarding the provisions addressing
hybrid mismatch arrangements, Germany has reserved the right not to apply article 3. This is
because many DTCs do not specifically exclude partnerships from the reduced withholding
tax rate under article 10 (2)(a) OECD MC 2014. It has also made a reservation to article 4 as
it does not share the basic assumption that a dual resident company is generally set up as
such in order to obtain tax advantages. Regarding the methods to eliminate double taxation
(article 5 MLI), it has decided against choosing any of the options A to C in article 5. While it
1
Head of Unit for intra-EU tax treaties at the German Federal Ministry of Finance.
2
Chair for Tax Law and Public Law, Friedrich-Alexander-University Erlangen-Nuremberg (FAU). All internet
references last accessed on 6 January 2020.
IFA © 2020 367

Germany
has opted for the application of Part VI, the impact on its DTCs will be limited: It has already
agreed arbitration clauses with most states prepared to accept such clauses. Germany has
formulated reservations excluding cases from arbitration procedures under article 28(2) of
MLI for cases in which an abuse prevention provision applies; cases in which persons act in
breach of regulations or are liable to prosecution; cases where there is no double taxation;
cases falling under the EU Dispute Resolution Directive or the EU Arbitration Convention;
cases of application of the credit method instead of the exemption method; as well as cases
of “mutual agreement on facts” (tatsächliche Verständigung).
The BEPS Action Plan and the MLI have indirectly impacted Germany´s treaty policy. Thus,
the MLI options that Germany has chosen may well already influence treaty negotiations.
Furthermore, the MLI led to a considerable number of such negotiations. However, this was
not a one-way-road: The MLI was partly developed by treaty negotiators of the states and
jurisdictions participating in the BEPS-project. Some treaty provisions that were not common
pre-BEPS, thus found their way into the MLI.
II. The constitutional prerogative of parliament (Parlamentsvorbehalt) and the principles
of legal determination (Gesetzesbestimmtheit) have led Germany to make a reservation
under article 35(7) MLI. Modifications to CTAs will thus be applicable in Germany only when
it has completed the domestic procedures necessary for such application and has notified
the depositary. In addition to ratifying the MLI, Germany therefore needs a second legal
step for each CTA. While it is currently not decided what precise form this domestic law will
take, it appears clear that it is this second step that will determine the content of the then
modified DTC. As an alternative, the DTCs may be amended by means of bilateral protocols,
which may turn out to be the preferred avenue of implementation. This does not imply that
the MLI would be devoid of significance, as it makes such negotiations easier and less time-
consuming.
In the context of the MLI, several distinct interpretation issues arise. They concern
the interpretation of the MLI itself, the interpretation of the DTCs generally as well as the
interpretation of treaties concluded before the MLI. As an international convention, the MLI
has to be interpreted in line with the Vienna Convention on the Law of Treaties. When it comes
to interpreting DTCs concluded after the MLI with signatories to the MLI and which mirror
a clause from the MLI, there are good reasons for interpreting the tax treaty in accordance
with the MLI. Regarding pre-MLI DTCs, several cases need to be distinguished: Where the
tax treaty is not a CTA, the MLI has no legal implications. Where, by contrast, the respective
provision of a CTA is amended by the MLI, the MLI forms the context in the sense of article 3(2)
OECD MC. Particular problems arise where a state does not have to implement a minimum
standard as the treaty already contains an equivalent provision.
Given that Germany has not yet ratified the MLI and the bilateral protocols are still in the
process of negotiation or ratification, the MLI’s impact on tax planning and administration
cannot be predicted with sufficient clarity.
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Treaty Network
1.1. Introduction
Prior to the MLI (understood as prior to 2017), Germany had concluded Double Tax
Conventions on income and on capital (in the following simply referred to as DTCs) with 96
states and jurisdictions. The MLI (which can only amend existing DTCs) and the BEPS Action
Plan have so far not had any discernible impact on the number of DTCs. The aim of preventing
treaty abuse has also played an important role already prior to MLI/BEPS. The same applies
in respect of MAP procedures. A certain reluctance as to the scope of arbitration is apparent
both before and after MLI/BEPS (See 1.2).
Germany is still in the process of ratifying the MLI. Therefore, the MLI has not yet had a
direct impact on its DTC. In addition, even after the MLI will have entered into force, a second
legislative step for each respective CTA is required (See 1.3).
The content of the MLI and the BEPS process as such, however, have had a noticeable
indirect impact on Germany´s treaty policy. The provisions of the MLI that Germany has
preliminary chosen as per 7 June 2017, the day of signature of the MLI, give guidance to a
future update of the current basis for negotiation (Verhandlungsgrundlage3) of DTCs that was
last published in 2013, and to Germany´s present treaty policy. In addition, one can assume
that the options chosen, do already influence ongoing treaty negotiations; this especially as
the MLI and BEPS Action Plan, seem to be the cause for a considerable amount of bilateral
treaty negotiations (See 1.4).
As of 1 January 2017, the following DTCs were in force (see 1.2.1) and the following domestic
and treaty-based doctrines, provisions and practices were in existence (see 1.2.2).
As of 1 January 2017, Germany had concluded DTCs with 96 states and jurisdictions. The
extensive tax treaty network covered all major industrial economies as well as many emerging
economies. Moreover, Germany had ongoing negotiations for first-time DTCs with 15 states
3
German Federal Ministry of Finance, Basis for negotiation for agreements for the avoidance of double taxation
and the prevention of fiscal evasion with respect to taxes on income and on capital (Verhandlungsgrundlage) of
22 August 2013, available at: https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/
Steuern/Internationales_Steuerrecht/Allgemeine_Informationen/2013-08-22-Verhandlungsgrundlage-DBA-
englisch.pdf. On the German Basis for Negotiation see e.g. Lehner, in Vogel/Lehner, DBA, 6th ed. 2015, Grundagen
166 et seq. For background on the German treaty policy see Lüdicke, Überlegungen zur deutschen DBA-Politik,
2008.
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Germany
and jurisdictions as well as 35 ongoing negotiations with the aim of revising existing DTCs.4
The pre-BEPS and pre-MLI state of the German DTC is reflected in the 2013 German basis
for negotiation. While the document represents more than a mere summary of all German
DTCs in force at the time of its publication, it does not aspire to be a full-blown “model
convention” either. Instead, it was devised as a point of departure for negotiations. As such,
it reflects the aims and concerns of German tax treaty policy at that time. In its structure and
its main contents, the Basis for Negotiation as well as the German DTC concluded at the time
follow the OECD Model Convention as it stood in 2010.
Preambles
Most preambles to German DTCs include a reference to the aim of avoiding non-taxation. The
exact wording of the preambles is, however, heterogeneous. This reflects the fact that the
OECD MC did not contain a model wording before 2014, but merely stated that “the Preamble
of the Convention shall be drafted in accordance with the constitutional procedure of both
Contraction States“. In recent years the starting point for negotiations from the German side
has been the wording of the German basis for negotiation (2013):
Desiring to further enhance their economic relationship, to enhance their cooperation in

tax matters and to ensure an effective and appropriate collection of tax,
Intending to allocate their respective taxation rights in a way that avoids both double
taxation as well as non-taxation,
Have agreed as follows:
Responses to treaty shopping – domestic specific anti-avoidance provisions
Section 50d(3) of the German Income Tax Act

Section 50d(3) of the German Income Tax Act (Einkommensteuergesetz – EStG) seeks to
address treaty- and EU-Directive-shopping regarding reduced source state taxation by
limiting relief (refund or exemption) for foreign corporations. The provision has to be seen
against the background that income from capital investment (dividends and interest),
royalties, directors’ fees and as well as from services rendered by non-resident artists,
sportspersons and entertainers, is subject to withholding tax in Germany. Germany generally
applies the system of retain and refund. Withholding tax on income from capital is thus
initially levied regardless of DTCs and EU directives, but can be refunded upon application.
Section 50d(3) EStG denies the relief to a foreign company where persons hold
participations who would not be entitled to such relief had they directly earned such income.
The rule moreover requires that the foreign company (i) either has no business or other valid
reason for inserting the foreign company or (ii) engages in its business activity with a business
4
At the beginning of each year, the German Federal Ministry of Finance publishes an overview of DTCs in force
and of ongoing treaty negotiations. For 2017, see https://www.bvl-verband.de/fileadmin/steuerpolitik/bmf-
schreiben/2017/2017-01-18-stand-DBA-1-januar-2017.pdf.
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Bruns & Ismer
establishment that is not appropriate for its business purpose. The refund is denied to the
extent that the gross income derived in the relevant financial year by the foreign company
does not stem from its own business activity. In response to a contrary ruling previously issued
by the German Federal Tax Court (Bundesfinanzhof),5 the provision explicitly limits the test
to the features of the foreign company itself; thus organizational, economic or otherwise
important characteristics of related persons are not to be considered. The foreign company
moreover is irrefutably deemed not to engage in a business activity insofar as it derives its
income from the administration of business assets or significantly transfers its business
activities to third parties. The provision does not apply to companies actively trading on a
stock exchange. All this means that the provision combines a shareholder test, an active
income test, and an alternative test for the reason for the interposition or the substance
of the interposed foreign entity. The burden of proof regarding the valid reasons for the
interposition as well as regarding the substance requirement lies with the foreign company.
There is no explicit possibility for the taxpayer to show that the specific case at hand was not
characterised by tax avoidance or treaty/directive shopping purposes.
The rule will have to be changed again in the near future following the 2017 CJEU Decision
in Deister Holding et al.6. The application of the provision has already been modified by a
Circular of the German Ministry of Finance7 as far as the entitlement falls within the scope
of the EU Parent-Subsidiary Directive. It is expected that the future wording will take into
account the recent CJEU decisions in Deister Holding et al. as well as in the 2019 Danish anti-
avoidance cases T Danmark, Y Denmark Aps, N Luxembourg X Denmark A/S, C Danmark I and Z
Denmark Aps.8
Section 50j German Income Tax Act

In response to treaty shopping involving dividends (so-called cum-cum-arrangements),
section 50j EStG was introduced with effect as of 1 January 2017. The provision9 denies
benefits under a tax treaty or other bilateral agreement from shareholdings of less than ten
per cent that reduce the applicable tax rate to less than 15 per cent. It applies where the shares
have not been continuously held in the period of 45 days prior and after the due date of the
benefits, or where during that period less than 70 per cent of the risk regarding changes in
value of the shares is borne by the recipient of the dividends, or where all or a predominant
part of the dividends directly or indirectly need to be passed on to other persons.
CFC legislation
Pursuant to current German CFC taxation rules laid down in the Foreign Tax Act
(Außensteuergesetz – AStG), certain low-taxed items of income generated by foreign
corporations is subject to German tax at the level of the German shareholder, regardless
of whether the income has actually been distributed or not. For CFC legislation to apply,
the foreign corporation must fulfil the German ownership requirement and be deemed to
be an interposed corporation (Zwischengesellschaft). The German ownership requirement
5
Bundesfinanzhof of 31 May 2005 – I R 74, 88/04, Bundessteuerblatt II 2006, 118.
6
CJEU of 20 December 2017, C-504/16 and C-613/16.
7
Circular of the German Ministry of Finance of 4 April 2018 (IV B 3 – S 2411/07/1000016-14).
8
CJEU from 26th February 2019, C-116/16, C-117/16, C-115/15, C-118/16, C-119/16 and C-299/16.
9
See for a detailed description:
https://www.bzst.de/EN/Businesses/Capital_Yield_Tax_Relief/Written_application_procedure/Refund_
Procedure_pursuant_50d_1_EStG/refund_procedure_pursuant_50d_1_estg_node.html#js-toc-entry6.
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Germany
demands that German resident taxpayers directly or indirectly hold more than 50 per cent
of shares or voting rights in the corporation. For foreign corporations that derive income of
a capital investment character, a lower threshold of one per cent or even less applies. The
foreign corporation constitutes an interposed corporation where it derives enumerated items
of income, which can be (roughly) summarised under the heading of passive income. EU/EEA
subsidiaries will not be qualified as an interposed corporation if a motive test is fulfilled. For
this, the German shareholders must prove that the specific income is derived from a genuine
economic activity performed in the state of residence of the CFC.
With regard to articles 7 and 8 of the EU-ATAD Directive,10 an extensive revision of German
CFC rules is expected in the near future.11
Exit taxation rule

Germany applies exit taxes upon change of residence or transfer of assets where Germany’s
right to tax the gains on the sale or use of an asset is restricted or excluded both regarding
business assets and regarding significant shareholdings.
In order to secure compatibility with the tax treaty and to prevent double taxation in such
cases, article 13(6) of the German Basis for Negotiation (2013) provides for the following rule:
Where an individual was a resident of a Contracting State for a period of at least 5 years
and has become a resident of the other Contracting State, paragraph 5 shall not affect
the right of the first-mentioned State to treat the individual as having alienated shares
at the time of the change of residence. If the individual is so taxed in the first-mentioned
State, the other State shall, in the event of an alienation of shares after the change of
residence, calculate the capital gain on the basis of the value which the first-mentioned
State applied at the time of the change of residence.
With regard to article 5 of the EU-ATAD Directive,12 an amendment of the German exit taxation
rules is expected in the near future.13
Section 42 General Tax Code – General anti-avoidance rule

A domestic general anti-avoidance rule can be found in section 42 of the General Tax Code
(Abgabenordnung – AO). The rule does not necessarily entail a full denial of any beneficial
provisions. Rather, tax shall be charged to the same extent as if a legal arrangement
appropriate to the economic transactions concerned, had been used. The GAAR has been
relied upon to deny the existence of base companies for tax purposes.14 Beyond that, the
GAAR has not yet played a major role in addressing treaty shopping. In particular, the
Bundesfinanzhof has ruled that CFC legislation as a SAAR may bar the application of the
10
Directive (EU) 2016/1164 of 12 July 2016 (ATAD), amended by Directive (EU) 2017/952 (ATAD II) from 29 May 2017.
11
A first draft has been presented on 10 December 2019, see under:
https://www.bundesfinanzministerium.de/Content/DE/Gesetzestexte/Gesetze_Gesetzesvorhaben/
Abteilungen/Abteilung_IV/19_Legislaturperiode/Gesetze_Verordnungen/ATADUmsG/0-Gesetz.html
(Gesetz zur Umsetzung der Anti-Steuervermeidungsrichtlinie – ATAD-Umsetzungsgesetz – ATADUmsG).
12
Directive (EU) 2016/1164 of 12 July 2016 (ATAD), amended by Directive (EU) 2017/952 (ATAD II) of 29 May 2017.
13
A first draft is included in the draft for the ATADUmsG (fn. 10).
14
Settled case law since German Federal Fiscal Court of 29 January 1975 I R 135/70, Bundessteuerblatt II 1975, 55.
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Bruns & Ismer
GAAR even when the requirements of the SAAR are not met. This requires that the SAAR is
exhaustive and that the requirements of the SAAR itself are not abused.15
Responses to treaty shopping – domestic and EU anti-avoidance doctrines
As a member of the EU, the European anti-avoidance doctrine is relevant for Germany within
the scope of application of EU law. The CJEU has recently ruled16 on the existence of an EU
principle prohibiting abuse. EU member states must thus have a minimum standard in their
national law, whether written or unwritten. The long-established concept of abuse, which
goes back to the van Binsbergen17 and the Emsland Stärke18 cases, has long played a major role
in EU VAT law.19 Recently, the CJEU confirmed in the series of Danish cases regarding the
Parent-Subsidiary-Directive20 and the Interest-and-Royalties Directive21 that the principle
equally applied to direct taxes. It essentially requires a combination of an objective and a
subjective element: failure to achieve the objective of a provision despite formal observance
of the conditions laid down by the EU rules, especially through “artificial arrangements”, and
as a subjective element the intention to obtain a tax advantage. The concept has been further
developed by the CJEU into a “main purpose test” comparable to Action 6 of the BEPS project.
In order to establish abuse, the tax authorities must provide sufficient evidence of abuse
of rights. The taxpayer must then be given the opportunity to refute the presumption of
abuse. The presence of a certain number of indications may demonstrate that there is an
abuse of rights, in so far as those indications are objective and consistent. Such indications
can include, in particular, the existence of conduit companies which are without economic
justification and the purely formal nature of the structure of the group of companies, the
financial arrangements and the loans.
Responses to treaty shopping – general principles of treaty interpretation
There are no guiding principles of treaty interpretation that would form a basis for denying
benefits in cases of treaty shopping. In particular, such general principles cannot be derived
from the OECD MC Commentary, as according to the settled case-law of the German
Federal Tax Court (BFH), tax treaty interpretation in Germany gives little importance to
15
Bundesfinanzhof, Bundessteuerblatt II 08, 619; Prokisch in Vogel/Lehner, DBA, 6th ed., art. 1 m.no. 113. In previous
cases, the Bundesfinanzhof had applied the GAAR, see Bundesfinanzhof, Bundessteuerblatt II 76, 513; 82, 150;
86, 496; 93, 222 [225]).
16
The so-called Danish cases, CJEU of 20 December 2017 – Deister Holding u.a. (C-504/16 und C-613/16).
17
ECJ of 3 December 1974 Case 33/74 – van Binsbergen, ECLI:EU:C:1974:131.
18
ECJ of 14 December 2000, C-110/99 – Emsland Stärke, ECLI:EU:C:2000:695.
19
See CJEU of 27 November 2017 – C-251/16 – Cussens, ECLI:EU:C:2017:881 with further references.
20
CJEU of 26 February 2019, Joined Cases Joined Cases C-116/16 and C-117/16 – T Danmark and Y Denmark Ap,
ECLI:EU:C:2019:135.
21
CJEU of 26 February 2019, Joined Cases CJEU of C115/16; C-118/16; C-119/16; C-299/16 – N Luxembourg 1 and others,
ECLI:EU:C:2019:134.
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Germany
the Commentary.22 This is true at least for DTCs concluded before an amendment in the
Commentary and for situations where after a change to the Commentary, the tax treaty is
amended with regard to provisions unrelated to the change in the Commentary.
Responses to treaty shopping – interpretation and application of the beneficial ownership concept
German DTCs as well as the German basis for negotiation (2013) usually follow the OECD
MC and include the concept of beneficial ownership in their dividends, interest or royalties
articles. The concept has been defined in some German DTCs.23 Beyond that, the general
rule of interpretation in the relevant DTC – which mostly corresponds to article 3(2) of the
OECD MC prior to the 2017 Update – applies. There is no specific administrative guidance
by the German tax administration what this implies for the beneficial ownership concept.
In particular, it is currently not clear whether the term is to be interpreted in accordance
with domestic law or whether an autonomous interpretation is warranted. The German
Federal Tax Court (BFH) repeatedly ruled for cases of dividends paid to a US S-Corp. under
the Germany-US DTC that there was no need for an autonomous interpretation and thus took
recourse to domestic law.24 By contrast, most scholars call for an autonomous interpretation
of the term.25 This is because neither the term “beneficial owner” nor the German equivalent
are generally defined in German domestic (tax) law.26 The concept is understood as being
not merely a legal, but also an economic criterion. The beneficial ownership requirement
is understood as referring to the (dividend, interest or royalty) payment rather than to the
underlying asset (share, debt claim or right).
Responses to treaty shopping – treaty-based anti-avoidance provisions
For addressing treaty shopping through treaty-based anti-avoidance provisions, Germany

does not rely on look-through provisions. LOB clauses as well as PPT clauses are also rare. By
contrast, subject to tax provisions and a proviso for domestic anti-abuse legislation form an
integral part of German treaty policy.
22
See Bundesfinanzhof, 11 July 2018, I R 44/16 with further references:
https://www.bundesfinanzhof.de/entscheidungen/entscheidungen-online. The decision has not yet been
published in the Federal Tax Gazette (Bundessteuerblatt II). Therefore, one may conclude that on these issues
the tax administration wants to bring another case to court.
23
Para. 9 of the Protocol to the DTC between Germany and Italy and para. 4 of the Protocol to the DTC between
Germany and Norway reads as follows (unofficial translation) :”The recipient of the dividends, interest and
royalties is the beneficial owner within the meaning of arts. 10, 11 and 12 if he is entitled to the right upon which
the payments are based and the income derived therefrom is attributable to him under the tax laws of both
States.”
24
Bundesfinanzhof of 26 June 2013, I R 48/12, Bundessteuerblatt II II 2014, 367.
25
Cf. e.g. Tischbirek in Vogel/Lehner, DBA, 6th ed., Vor 10-12, m.no. 15; Schönfeld in Schönfeld/Ditz, DBA, 2nd ed.,
art. 10 m.no. 73.
26
The term is mentioned in ss. 4j and 13a(1)(3) Income Tax Act, s. 141(3) General Tax Code, s. 48a (1) Valuation Act
(Bewertungsgesetz). Moreover, s. 50g (3) No. 1 Income Tax Act does contain a definition, but follows the Interest
and Royalties Directive, which it transposes, and therefore gives indirect guidance only.
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Bruns & Ismer
Subject to tax provisions

Subject to tax provisions form an integral part of German treaty policy. They are mostly
embedded in the method article. Sometimes, specific rules can also be found in the Protocol
to the treaty. Article 22(1)(5)(b) of the German Basis for Negotiation (2013) applies to cases
where the other contracting state may, under the provisions of the tax treaty, tax items of
income or capital, or elements thereof, but does not actually do so. The clause only applies
when the other state does not tax the income or capital at all. A low taxation is not sufficient.
PPT provisions and proviso for domestic anti-abuse legislation

The German Basis for Negotiation (2013) does not contain a PPT provision. The same is
generally true for the current DTCs. There are, however, some notable exceptions. The DTC
Germany-Japan (2015) contains a PPT which corresponds to article 29(9) OECD MC. The DTC
Germany-People’s Republic of China (2014) also comprises a general anti-abuse provision,
with the difference to the PPT, however, that not only one of the main reasons for the
agreement or transaction must be the use of the benefit, but the primary reason is taken
into account. The DTC Germany-UK (2010/2014) does not contain a rule which would mirror
the PPT under article 29(9) OECD MC. The treaty does comprise, however, several anti-abuse
rules27 that are structured as main purpose tests.
The German Basis for Negotiation (2013) contains in its article 28 a proviso for domestic
anti-abuse rules.28 The rule does not lay down a PPT itself but simply states that domestic
anti-abuse may be applied to treaty situations. In contrast to the PPT, this provision merely
states that the DTC does not prevent a contracting state from excluding treaty benefits in
such cases. The provision thus does not contain the anti-abuse rule itself, but merely allows
the application of existing domestic anti-abuse provision. Article 28 of the German Basis for
Negotiation (2013) moreover clarifies that Germany may apply its CFC legislation. One or
both of the provisions of article 28 can be found, albeit often in modified form, in German
treaty practice.29 Sometimes, the scope of the reservation in favour of national legislation to
prevent tax avoidance or evasion, is made more precise. Thus, the Joint Declaration made
on the occasion of the signature of the DTC-Germany-UK (2010/2014) contains a reservation,
which relates to any benefits of the Agreement, but is subject to the proviso that one of the
main purposes of the transaction or arrangement is to obtain a more favourable tax position
(and that this more favourable treatment would, in the circumstances, be contrary to the
27
See arts. 10 (6), 11(5), 12(5) and 21(5) DTC Germany-UK for dividends, interest, royalties and other income.
28
“Application of the Agreement in Special Cases
(1) This Agreement shall not be interpreted as to prevent
1. a Contracting State from applying its domestic legal provisions on the prevention of tax evasion or tax
avoidance;
2. the Federal Republic of Germany from imposing its taxes on amounts to be included in the income of a
resident of the Federal Republic of Germany under parts 4, 5, and 7 of the German External Tax Relations
Act (Außensteuergesetz).”
(2) If the foregoing provisions result in double taxation, the competent authorities shall consult each other
pursuant to paragraph 3 of art. 24 on how to avoid double taxation.”
29
See e.g. art. 28(2) of the DTC Germany-Austria (2000/2010) as well as No. 15 of the Protocol; No. 17 of the Final
Protocol of the DTC Germany-Belgium (1967/2003/2010): art. 29(2) and (6) of the DTC Germany-Canada (2001);
art. 29(2) of the DTC Germany-People’s Rep. of China (2014); art. 21(9) DTC Germany-Japan (2015); art. 27 of the
DTC Germany-Luxembourg (2012); art. 23 of the DTC Germany-Netherlands (2012/2016) and the non-exhaustive
list in No. 15 of the Final Protocol; art. 23 of the DTC Germany-Switzerland (1971/1978/1989/1992/2002/2010) as
well as No. 2 of the Protocol; art. 28 of the DTC Germany-Spain (2011); art. 1(6) of the DTC Germany-U.S.(2008).
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Germany
spirit and purpose of the relevant provisions of the Agreement). This means that domestic
abuse provisions are given priority only to the extent that they are consistent with the abuse
understanding of a PPT. In a similar vein, the Joint Declaration made on the occasion of the
signing of the DTC Germany-Ireland lays down that the contracting states are not prevented
from applying its domestic legal provisions to an abuse of the treaty. The term “abuse” is
then defined as taking place “where a main purpose for entering into certain transactions or
arrangements is to secure a more favourable tax position and obtaining that more favourable
treatment in these circumstances would be contrary to the object and purpose of the relevant
provisions of the Agreement.“
LOB provisions
In contrast to the German Basis for Negotiation (Verhandlungsgrundlage), LOB or similar
provisions can be found in some German DTCs. Their inclusion probably reflects the desire of
the respective negotiating partner. LOB clauses can be found in the DTC Germany-US (2006)
and the DTC Germany-Japan (2015). According to article 29(3) of the DTC Germany-Canada
(2001), the agreement does not apply to certain companies, trusts and partnerships which
receive tax relief on their income in the contracting state in which they are domiciled solely
because their members are not resident in that contracting state. The provision seeks in
particular to address Canadian non-resident-owned investment corporations which are
domiciled in Canada but all of whose shares are held by or for persons not resident in Canada
and whose existing debts, moreover, originate entirely from foreign sources.
Further responses to other tax treaty abuses
In addition to the subject-to-tax clause and the proviso for domestic anti-abuse legislation,
the German Basis for Negotiation (2013) contains further clauses that can be understood as
limiting tax treaty benefits without, however, being clearly targeted at abuse situations. The
method article goes beyond article 23(2) OECD MC and applies the credit method also to
capital gains from land-rich companies, income from employment, directors’ fees, and certain
pensions that may be taxed in the source state.30 Moreover, the method article contains an
activity proviso for income from PEs under the provisions corresponding to articles 7 and 10
30
See art. 22(1)(3) of the German basis for negotiations (2013) that reads: “With respect to the following items of
income, there shall be allowed as a credit against German Tax on income, subject to the provisions of German
tax law regarding credit for foreign tax, [jurisdiction] tax paid under the laws of [jurisdiction] and in accordance
with the provisions of this Agreement on such items of income:
a) dividends within the meaning of art. 10 to which subparagraph 1) does not apply;
b) capital gains to which paragraph 4 of art. 13 applies;
c) income to which art. 15 applies;
d) income to which art. 16 applies;
e) income to which paragraphs 2 and 3 of art. 17 apply.
For the purposes of application of this subparagraph 3), income or capital of a resident of the Federal Republic of
Germany that, under this Agreement, may be taxed in [jurisdiction] shall be deemed to be income from sources
within [jurisdiction] or capital situated in [jurisdiction].”
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Bruns & Ismer
OECD MC as well as capital gains in the sense of article 13(2) OECD MC.31 The credit method
also applies to (i) conflicts of qualification resulting in double taxation, which cannot be
resolved by a mutual agreement procedure, in non-taxation or in lower taxation and (ii)
to items of income or capital where Germany has notified the other contracting state of its
intention to cease to apply the exemption method.32
Treaty practice reveals some further clauses, which, however, may reflect the tax treaty
policy by the other contracting state or may be targeted solutions having been drafted during
the negotiation process. Under No. 6(c)(bb) of the Protocol to the DTC Germany-India (1995),
Germany has reserved the right to change from the exemption method to the credit method
after notification, in order, among other things, “to prevent other arrangements for the abuse
of the agreement”. The DTC Germany-Switzerland (1971/1978/1989/1992/2002/2010) excludes
residence in the case of (Swiss) flat-rate taxation. A further partial exclusion applies to income
and assets attributable to another person.33 Article 24 DTC Germany-UK (2010/2014) contains
a provision for income in respect of which the treaty grants an (exclusive) right of taxation to
the UK regarding income taxed on a “remittance basis”. An exemption or credit is then only
granted if the income has demonstrably actually been taxed in UK. Article 1(7) of the DTC
Germany-US also aims in part to prevent the attainment of undue advantages through the
use of hybrid legal entities.
Article 8 MLI (transactions or arrangements undertaken to access the reduced treaty rate on dividends
paid to a parent company)
While the German Basis for Negotiation (2013) does not include a corresponding provision,
some German DTCs already contain a similar restriction. They address arrangements in
which shares are sold or loaned close to the dividend record date ,only in order to reach the
minimum participation threshold. In article 10(2)(a), the DTC Germany-Japan (2015) includes
a six-month minimum holding period. Article 10(2)(a) of the DTC Germany-Liechtenstein
31
Art. 22(1)(4) of the German basis for negotiations (Verhandlungsgrundlage) reads: “The [exemption method is]
to be applied to items of income within the meaning of art. 7 and Art. 10 and to profits from the alienation of
property within the meaning of paragraph 2 of art. 13 only to the extent that the items of income or profits were
derived from the production, processing, working or assembling of goods and merchandise, the exploration
and extraction of natural resources, banking and insurance, trade or the rendering of services or if the items of
income or profits are economically attributable to these activities. This applies only if a business undertaking
that is adequately equipped for its business purpose exists. This applies accordingly to capital underlying the
income within the meaning of art. 7 and art. 10. If [the exemption method] is not to be applied, double taxation
shall be eliminated by means of a tax credit …”
32
Art. 22(1)(5) of the German Basis for Negotiation (Verhandlungsgrundlage) reads: “Notwithstanding
subparagraph 1), double taxation shall be eliminated by a tax credit as provided for in subparagraph 3), if
a) in the Contracting States items of income or capital, or elements thereof, are placed under different provisions
of this Agreement and if, as a consequence of this different placement, such income or capital would be
subject to double taxation, non-taxation or lower taxation and in the case of double taxation this conflict
cannot be resolved by a procedure pursuant to paragraphs 2 or 3 of art. 24;
b) …
c) after consultation, the Federal Republic of Germany notifies [jurisdiction] through diplomatic channels of
items of income or capital, or elements thereof, to which it intends to apply the provisions on tax credit under
subparagraph 3). Double taxation is then eliminated for the notified items of income or capital, or elements
thereof, by allowing a tax credit from the first day of the calendar year following that in which the notification
was made.” [The subject-to-tax-clause in art. 22(1)(5)(b) has been discussed above].
33
See art. 4(6) and (11) of the DTC Germany-Switzerland (1971/1978/1989/1992/2002/2010).
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Germany
(2011) and article 10(3)(a) of the DTC Germany-US (1989/2006) each contain a twelve-month
minimum holding period.
Article 9 MLI (taxation of immovable property)

Regarding the taxation of immovable property, article 13(4) of the German Basis for
Negotiation (2013) still contained the same clause as the OECD MC prior to its 2017 update.
Many current German DTCs contain such kind of provision although often differing in detail.
Article 10 MLI (third jurisdiction PEs)

The German Basis for Negotiation (2013) does not contain a clause corresponding to article
10 MLI. The DTC Germany-US (1989/2006) includes a provision similar to article 10 (1) MLI.34
The DTC Germany-UK (2010/2014) also comprises such a clause, which is however, limited
to the application of articles 10 (dividends), 11 (interest), and 12 (royalties).35 Within the EU,
the effect of such provision may be limited due to the Parent-Subsidiary Directive36 and the
Interest-and-Royalties Directive37.
Articles 12,13 and 14 MLI (avoidance of PE status)

The text of the German Basis for Negotiation (2013) corresponds to article 5 of the OECD
MC as it stood before the 2017 update. There are no provisions corresponding to articles 12
(commissionaire arrangements) and 14 (splitting-up of contracts regarding building sites or
construction respectively installation projects) as well as article 13(4) (anti-fragmentation
rule) MLI. Regarding article 13 MLI (exceptions for specific activities), Option A corresponds
to existing administrative practice. Germany follows the principle, already laid down in the
Principles of the Administration for the Audit of the Distribution of Income of Permanent
Establishments of Internationally Active Companies38 that the exemption has to be limited
to cases where these activities are of a preparatory nature or constitute an auxiliary activity.
Only in these cases is it justified to assume a small share of profits and to exempt them from
taxation in the source state in order to avoid disproportionate compliance costs. The DTC
Germany-Australia (2015) also contains an explicit anti-fragmentation rule and a definition
of connected persons.39
Responses to hybrid mismatch arrangements (articles 3 and 4 MLI)
Article 1 of the German Basis for Negotiation (2013) contains no specific rule for hybrid entities
and simply states that “This Agreement shall apply to persons who are resident of one or both
of the Contracting States.” However, a few German DTCs do contain a rule along the lines of
34
Art. 28(5) DTC Germany-US (1989/2006).
35
No. 3 of the Protocol to the DTC Germany-UK (2010/2014).
36
Directive 2011/96/EU of 30 November 2011 (PSD) on the common system of taxation in the case of parent
companies and subsidiaries of different member states last amended by Directive 2013/13/EU of 13 May 2013.
37
Directive 2003/49/EC of 26 June 2003 (IRD) on a common system of taxation applicable to interest and royalty
payments made between companies of different member states.
38
Betriebsstätten-Verwaltungsgrundsätze, Bundessteuerblatt 1999 I, p. 1076.
39
Art. 5(6) of the DTC Germany-Australia (2015).
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Bruns & Ismer
article 1(2) OECD-MC (2017).40 In respect of such a rule in the DTC Germany-US (1989/2006),
the Bundesfinanzhof has decided that this provision results in a fictitious residency of the
hybrid entity which then also is the beneficial owner for incoming dividends.41
In respect of the issue of double residency of persons other than an individual, the German
Basis for Negotiation (2013) reads: “Where by reason of the provisions of paragraph 1 a person
other than an individual is a resident of both Contracting States, then it shall be deemed to
be a resident only of the State in which its place of effective management is situated.” The
required determination of the actual place of effective management shall as such serve as a
rule against hybrid mismatch arrangements.
In addition, the subject-to-tax clause and the proviso for domestic anti-abuse legislation
that form part of the German Basis for Negotiation (2013) provide an answer to hybrid
mismatch arrangements and are in essence included in most German double tax conventions.
MAP (articles 16 and 17 MLI)
The MAP provision in the German Basis for Negotiation (2013), which was followed in all
later German DTCs, mirrors the OECD MC as it stood then. A mutual agreement procedure
can thus only be applied for in the state or jurisdiction in which the taxpayer is resident or, if
the case is subject to a provision on equal treatment on the basis of nationality, in the state
or jurisdiction of which he is a national.42 In addition, as Germany is a member of the EU,
the EU Dispute Resolution Directive, which had to be transposed by 1 July 2019, provides for
MAPs for disputes between EU member states.43 Moreover, Germany is a signatory to the EU
Arbitration Convention, which also provides for MAPs.44
The German Basis for Negotiation (2013) mirrors article 9(2) OECD MC and allows
corresponding adjustments in the DTC. The provision can be found in all recent German DTCs.
Arbitration (articles 18-26 MLI)
The agreement of arbitration clauses is in principle in line with German treaty policy. The
certain avoidance of double taxation is a fundamental purpose of the agreement and should
also be ensured if the contracting states cannot agree on a solution by mutual agreement.
Thus, the German Basis for Negotiation (2013) comprises an arbitration clause that largely
40
Art. 1(2) DTC Germany-Australia (2015), No. 2 of the Protocol DTC Germany-Italy ((1989), art. 1(2) DTC Germany-
Japan (2015), Protocol no. I.(2) of the DTC Germany-Netherlands (2012) and art. 1(7) DTC Germany-US (1989/2006).
41
42
Art. 24 (1)-(4) of the German Basis for Negotiation (2013).
43
See Directive 2017/1852/EU (ADRC) of 10 October 2017 on tax dispute resolution mechanisms in the EU.
44
The EU Arbitration Convention 90/436/EWG (EU AC) is a multilateral convention that was signed in 1990 and
entered into force on 1 January 1995.
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Germany
follows article 25(5) OECD MC.45 However, to date only a few German DTAs include an arbitration
provision, some with optional arbitration, and some with mandatory arbitration. Article 25(6)
DTC Germany-Canada (2001), article 25A DTC Germany-France (1959/1969/1989/2001/2015),
article 9(5) DTC Germany-Jersey (2008/2015), article 41(5) DTC Germany-Sweden ((1992)
provide for optional arbitration. Article 25(5) DTC Germany-Austria ((2002/2010), article 25(5)
DTC Germany-Liechtenstein (2011), article 24(5) DTC Germany-Luxembourg (2012), article
25(5) DTC Germany-Netherlands (2012/2016), article 25(5) DTC Germany-Switzerland (1971/
1978/1989/1992/2002/2010), article 26(5) DTC Germany-UK (2010/2014) and article 25(5), (6)
DTC Germany-US (1989/2006) provide for mandatory arbitration. In addition, the arbitration
clauses under the EU Dispute Resolution Directive46 and the EU Arbitration Convention47 apply.
The status quo in respect of the MLI is explained shortly (see 1.3.1). After the MLI will have
entered into force, a second legislative step for each respective CTA is required. Further
explanations can be found in part two of the report. The MLI will affect the following German
DTCs (see 1.3.2) and the following provisions of the MLI will be applicable (see 1.3.3).
Germany has signed the MLI, but has not yet ratified it.
45
Art. 24(5) German Basis for Negotiation (2013) reads:
Where,
1. under paragraph 1, a person has presented a case to the competent authority of a Contracting State on the
basis that the actions of one or both of the Contracting States have resulted for that person in taxation not in
accordance with the provisions of this Agreement, and
2. the competent authorities are unable to reach an agreement to resolve that case pursuant to paragraph 2
within two years from the presentation of the case to the competent authority of the other Contracting State,
and
3. it is not a particular case that the competent authorities agree, before the date on which arbitration
proceedings would otherwise have begun, is not suitable for determination by arbitration, and
4. it is not a case to which Convention 90/436/EEC of 23 July 1990 on the elimination of double taxation in
connection with the adjustment of profits of associated enterprises applies, any unresolved issues arising from
the case shall be submitted to arbitration if the person so requests. These unresolved issues shall not, however,
be submitted to arbitration if a decision on these issues has already been rendered by a court or administrative
tribunal of either State. Unless a person directly affected by the case does not accept the arbitration decision,
that decision shall be binding on both Contracting States and shall be implemented notwithstanding any
time limits in the domestic laws of these States. The competent authorities of the Contracting States shall by
mutual agreement settle the mode of application of this paragraph.
46
Directive 2017/1852/EU (ADRC) of 10 October 2017 on tax dispute resolution mechanisms in the EU.
47
EU Arbitration Convention 90/436/EWG (EU AC) is a multilateral convention that was signed in 1990 and entered
into force on 1 January 1995.
380
Bruns & Ismer
The choice of CTAs has to be seen against the background that the treaty may also be amended
outside the MLI through a protocol. Germany takes the view that the parallel existence of
several instruments amending a tax treaty should be avoided and therefore seems to favour
a bilateral implementation of the contents of the MLI where feasible. Generally, DTCs for
which negotiations on bilateral revision protocols are well advanced have thus not been and
will not be designated as CTAs or, if necessary, removed, e.g. after an amending protocol has
been initialled. This has led to a further development of the provisional designation vis-à-vis
the OECD, as in the meantime discussions have been held with the contracting parties on the
appropriate procedure in each case.
Where, however, treaty partners are not open to negotiate a bilateral revision protocol
and have spoken out in favour of a modification of the double taxation convention by the MLI,
or in cases in which a relatively timely conclusion of bilateral negotiations is not sufficiently
certain, Germany has in principle included the respective double taxation conventions in
the list of CTAs, unless there are obstacles in individual cases. These may, for example, lie in
the fact that the DTA concerned already contains the desired MLI content (Australia) or is in
need of revision overall due to age.
The list of CTAs is thus still preliminary. Some CTAs may still be withdrawn from the
list in case the treaty negotiations will have reached a sufficiently advanced stage before
ratification of the MLI. This is true in particular for those DTCs where Germany and the
respective other contracting state have already initialled an amending Protocol. Some of
these DTCs are still listed as CTA in the OECD MLI Matching Database. Germany intends to
update its nomination in the course of the ratification of the MLI and consequently delete
the relevant DTCs from the list of CTAs.
Against this backdrop, the following picture emerges:
48
Listed by Germany Listed by treaty Presumed and not final updated

(as per 7 June 2017; day Partner – yes/no list taking into account ongoing
of signature of the MLI) (as per December 2019 negotiations and initialled
according to OECD MLI Protocols
Matching Database48) (as per December 2019)
Austria Yes Austria
Bulgaria Yes Bilateral Protocol initialled on 14
August 2018
No Canada
People´s Rep. of China Yes People´s Rep. of China
Costa Rica Yes Costa Rica
Croatia Yes Croatia
Cyprus Yes
Czech Republic Yes Czech Republic
48
https://www.oecd.org/tax/treaties/mli-matching-database.htm.
381
Germany
Listed by Germany Listed by treaty Presumed and not final updated

(as per 7 June 2017; day Partner – yes/no list taking into account ongoing
of signature of the MLI) (as per December 2019 negotiations and initialled
according to OECD MLI Protocols
Matching Database48) (as per December 2019)
Estonia No Bilateral Protocol initialled on 13
July 2018
France Yes France
No Greece
Hungary Yes Hungary
No Iceland
Israel No Israel
Italy Yes Italy
Japan Yes Japan
Latvia No Bilateral Protocol initialled on 18
June 2018
Liechtenstein Yes
Lithuania Yes
Luxembourg Yes Luxembourg
Malta Yes
Mauritius Yes Mauritius
Netherlands Yes Netherlands
New Zealand Yes New Zealand
Norway No Bilateral Protocol initialled on 26
April 2018
Romania Yes
Russia No Russia
Slovak Republic Yes Slovak Republic
Slovenia No Slovenia
Spain Yes Spain
Sweden No Bilateral Protocol initialled on 25
Mai 2018
Turkey Yes Turkey
United Arab Emirates Yes United Arab Emirates
United Kingdom No Bilateral Protocol initialled on 25
July 2018
382
Bruns & Ismer
In addition, a protocol has been initialled, signed or negotiations are ongoing as per 1 January
201949 with the following states:
Angola, Argentina, Belgium (initialled on 15 March 2018), Botswana, Canada, Chile,
People´s Rep. of China, Colombia, Costa Rica, Croatia (initialled on 11 June 2013), Cyprus,
Czech Republic, Denmark (initialled on 14 December 2017), Ecuador (initialled on 19 October
2012), Egypt (initialled on 9 October 2012), Ethiopia, Finland (initialled on 29 November
2017), Greece, Hong Kong, Iceland, India, Iran, Ireland (initialled on 28 February 2018),
Israel, Jordan, Kyrgyzstan, Rep. of Korea, Kosovo, Kuwait, Liberia, Lithuania, Malta, Mauritius,
Mexico (initialled on 6 February 2018), Namibia, Nigeria, Oman (signed on 15 August 2012
and ongoing negotiations), Poland (initialled on 27 November 2017), Portugal (initialled on
26 October 2017), Qatar, Romania, Rwanda, Russian Federation, San Marino, Switzerland,
Senegal, Serbia, Singapore (initialled on 13 March 2018), Slovak Republic, Slovenia, South
Africa (signed on 9 September 2008 and ongoing negotiations), Sri Lanka (initialled on 24
August 2012), Tajikistan, Trinidad and Tobago (initialled on 16 January 2015), Tunisia (signed
on 8 February 2018), Ukraine, Vietnam.
Usually, DTCs with states and jurisdictions with ongoing negotiations are not listed as
CTAs. However, as of 1 January 2017, there are a number of exceptions (e.g. People´s Rep.
of China, Costa Rica, Czech Republic, Greece, Iceland, Israel, Canada, Croatia, Mauritius,
Russia, Slovak Republic, and United Kingdom). This may be explained by the fact that the
list of CTAs is still preliminary and some DTCs may still be deleted from the list in case the
treaty negotiations are at a sufficiently advanced stage before the MLI has been ratified. In
some instances, the course for this overlap may be that the ratification of the MLI is expected
to happen earlier than the conclusion or revision of the DTC. It can be assumed that the
Protocols initialled or signed after the MLI has been signed by Germany, incorporate the
BEPS minimum standard and further optional MLI provisions if there is a match. The same
is true for ongoing negotiations.
In this section the choices as per 7 June 2017, the day of signature of the MLI, are described
and explained.50 The list may undergo some changes as Germany is still in the process of
ratification.
Generally, these choices are also an indication for Germany´s general treaty policy and
will mostly form the guiding principles when implementing the MLI content via bilateral
negotiations if there is a match. However, in the 2017 update some of the MLI provisions
have been further developed. It is to be expected that in these instances the wording of the
2017 Model will be guiding. Germany is currently revising its Basis for Negotiation. This will
provide for a further clarification of the German position in the nearer future.
Preamble (article 6 MLI)

The provisions of article 6(1) of the MLI are mandatory for the signatory states. They form
part of the BEPS minimum standard as formulated in the report on Action 6. In this respect,
49
See overview of tax treaties and treaty negotiations:
https://www.bundesfinanzministerium.de/Content/DE/Downloads/BMF_Schreiben/Internationales_
Steuerrecht/Allgemeine_Informationen/2019-01-17-stand-DBA-1-januar-2019.html.
50
See also Gradl/Kiesewetter, Internationaes Steuerrecht 2018, 1.
383
Germany
the signatory states of the MLI have no discretionary power. However, under article 6(4) the
contracting states may reserve the right not to apply article 6 in respect of treaties whose
preamble already refers to the avoidance of non-taxation or the avoidance of low taxation.
In the case of the DTCs designated by Germany as CTAs, this is the case with regard to the
DTC with Japan (2015) and the DTC with the Netherlands (2012/2016).
The provision in article 6(3) of the MLI corresponds to the German treaty policy.
In addition, the preamble of the German Basis for Negotiation (2013) contains a motive,
which represents the further development of mutual economic relations as an objective of the
agreement. Nevertheless, Germany has decided against the corresponding optional article
6 (3) MLI. This decision is based on the fact that the MLI modifies the application of DTCs
and thus has to take into account the various formulated preamble texts already described
above (see 1.2.2). The application of article 6(3) of the MLI would lead to considerable
uncertainty with regard to the individual preambles in the CTAs, without this being justified
by any reasonable advantage. After all, the preamble is not a directly applicable provision,
in contrast to the individual articles of a DTC. Since article 6(3) is not part of the mandatory
minimum standard, there is no obligation to apply it.
As article 6(3) of the MLI requires a concordant declaration by the respective contracting
parties to a DTC, the rejection of this option by Germany means that this provision is not
applicable to German DTCs.
Minimum standard on treaty abuse (article 7 MLI – LOB or PPT)

In order to comply with the BEPS minimum standard, Germany has opted for a PPT.51 In
accordance with article 7(15)(b) MLI, Germany reserved the right to exclude the application of
the PPT in cases where the DTC already contains a general anti-abuse clause. These DTCs have
been notified, indicating the article and paragraph number of the corresponding provisions.
Germany did not select a provision corresponding to article 7(4) MLI for the CTAs either. Under
the provision, the competent authorities of the contracting states may grant treaty benefits,
although these would have to be denied under the PPT if, based on an application by the
person concerned, they concluded that this person would have been granted the benefits
without the abusive arrangement. While this option may have the potential to reduce legal
uncertainty, it bears the risk of creating incentives for tax planning by mitigating the tax
consequences of the unravelling of an abusive arrangement.
The decision in favour of the PPT also implies that Germany has decided against the
agreement of an LOB. The possibility that the other contracting state might implement it
unilaterally was also rejected. This is based on the considerations that an LOB alone does
not provide sufficient protection against treaty abuse committed by a qualified person. This
is also expressed by the minimum standard on action point 6, since LOBs alone do not meet
the BEPS minimum standard. At the same time, LOBs can lead to the denial of treaty benefits
even though the person concerned receives income for which the benefits were originally
intended. The rule therefore appears both too weak and too strict.52
51
Bruns, in Schönfeld/Ditz, DBA, 2nd ed., art. 29 m.no. 54.
52
Bruns, in Schönfeld/Ditz, DBA, 2nd ed., art. 29 m.no. 32.
384
Bruns & Ismer
Other provisions on treaty abuse (articles 8, 9, 10, 11, 12, 13, 14, 15 MLI)
Article 8 MLI – Minimum holding period for participations: Germany has opted to apply article
8. Under article 8(3), Germany is free to exclude from the scope of article 8 any existing
provisions on minimum holding periods for such shares in its DTCs. The existing minimum
holding periods effectively prevent the short-term transfer of shares. This applies both to
shorter minimum holding periods such as six months, and to longer holding periods. In any
case, the bilaterally agreed minimum holding periods (see under 1.2.2) correspond to the
wishes of the contracting parties and the respective negotiation compromise reached, from
which deviations should only be made in exceptional cases, for example when the minimum
holding period is not effective. As such is not the case, the reservation applies to all existing
minimum holding periods in German DTCs.
Article 9 – Avoidance of abuse in the case of real estate companies: Germany has opted to
apply article 9 and has therefore not entered a reservation against this article. Since similar
structures can also be applied to other forms of companies, such as partnerships, Germany
supports the extension of the scope of application of article 13 (4) of the OECD Model Tax
Convention. In order to standardise the provisions in the existing double taxation agreements,
Germany has decided to replace as much as possible the many existing, but sometimes very
different, provisions. The notification under article 9(8) MLI is intended to replace the existing
provisions by the new version if the other contracting state also favours such replacement.
Article 9(4) of the MLI applies. If the other contracting state does not opt for the application
of article 9(4) of the MLI, the existing provisions on the taxation of gains from the disposal of
shares in real estate companies under article 9(1) shall, subject to notification by the other
contracting state, only be extended in such a way that they also apply to other forms of
companies and/or provide for a 365-day-review period for the real property quota.
Article 10 MLI – Third jurisdiction PEs: Germany has chosen the option. Because the provision
serves the fiscal interests of the source state, it has a limited scope of application for Germany
as such. This is because under domestic law, Germany generally does not levy withholding
tax on interest income. In the EU, the Parent-Subsidiary Directive53 as well as the Interest and
Royalties Directive54 must be observed. In addition, the anti-abuse-rule only applies when the
other contracting state (i.e. the state of residence of the company) does not tax the income
– either due to its national law or on the basis of a DTC with the third state.
Article 11 – Savings clause: Germany has decided not to apply the article, as this provision
is not in line with German treaty policy. Also, in the context of implementation by the MLI,
article 11 cannot directly indicate the exceptions to the so-called saving clause referred to in
each case by indicating the respective provisions. Instead, the provisions must be described
in abstract terms. This creates legal uncertainty. Because of the German reservation to article
11 of the MLI, this provision is in no case applicable to German double taxation agreements,
irrespective of the MLI positions of the respective contracting parties to the double taxation
agreements covered.
Article 12 – Artificial circumvention of the PE status by commissionaire models and similar
strategies: Germany has made a reservation on article 12 of the MLI. Thus, article 12 is in no
case applicable to German DTCs, regardless of the positions of the other contracting state of
53
Directive 2011/96/EU of 30 November 2011 (PSD) on the common system of taxation in the case of parent
companies and subsidiaries of different member states last amended by Directive 2013/13/EU of 13 May 2013.
54
Directive 2003/49/EC of 26 June 2003 (IRD) on a common system of taxation applicable to interest and royalty
payments made between companies of different member states.
385
Germany
a CTA. The reservation is based on the assumption that the provision would also extend to a
number of legitimate and customary arrangements and would thus change the balance of
the delimitation of taxation rights to the detriment of the company’s state of residence. A
redistribution of taxation rights between the state of residence and the source state is not
be the aim of the BEPS project.
Article 13(1)-(3) – Artificial circumvention of the PE status through certain activities: Germany
has chosen option A contained in article 13(3) of MLI. The German DTCs with a catalogue
of exceptions comparable to article 5(4) of the OECD MC have thus been notified. CTAs
with countries that have opted for option B or that have not opted for any option, remain
unchanged in this respect. Germany thus follows the principle that the exemption of certain
activities is limited to cases where these activities are of a preparatory nature or constitute
an auxiliary activity. Only in these cases is it justified to assume that the activities merely
generate a small share of profits and to exempt them from taxation in the source state in
order to avoid disproportionate compliance costs.
Article 13(4) – Artificial circumvention of the PE status by excluding certain activities: Germany
has made a reservation to article 13(4) because the rule depends on the definition under
article 15. Unlike article 5(8) OECD MC (2017), which relates to “a person or enterprise…”, this
definition is incomplete. To avoid uncertainties Germany has decided not to implement this
option via the MLI.
Article 14 – Splitting-up of contracts: The German reservation on article 14 means that the
specific abuse prevention rule for construction and assembly sites does not apply, irrespective
of the selection decision by the other contracting state. The reason for the reservation is in
particular that the solution offered in the MLI is not based on the parties’ intention, but solely
on the exercise of related activities on a construction site by one or more related undertakings.
As a result, the provision could also be applied where the companies have no influence on
the division of the trades or their award, for example in public tenders by lot.
Article 15 – Definition: Germany has made a reservation to this provision. The definition
of a “person closely linked to an undertaking” is necessary only for the purposes of applying
articles 12, 13(4) and 14 to which Germany has made a reservation.
Provisions addressing hybrid mismatch arrangements (articles 3 and 4 MLI)
Article 3:
In accordance with article 3(5)(a) MLI, Germany has reserved the right not to apply article 3.
Irrespective of the reservations or notifications of the other contracting parties, article 3 is thus
in no case applicable to German CTAs. The provision on transparent legal entities is intended
to grant treaty benefits for income received through legal entities that are treated in a fiscally
transparent manner in one or both of the contracting states and that are attributable to a
resident. This is intended to ensure, for example, that partners in a partnership can receive
treaty advantages for their share of the income. At the same time, it is to be avoided that the
advantages of the agreement are indirectly granted to shareholders who are not residents
of a contracting state.
Yet the German Federal Fiscal Court (BFH) ruled on a similar provision in the DTC Germany-
US55 that in the case decided, the lower tax rate on dividends is to be granted to an individual
55
386
Bruns & Ismer
if he receives the dividend through a company that is treated in a fiscally transparent manner
in the US, but a non-transparent corporation under German law, unless the tax treaty contains
a provision to the contrary. While the provision corresponding to article 10 (2)(a) OECD MC
2014, which excludes the reduced rate on dividends for cases where the participation is held
via a partnership, can be regarded as a provision to the contrary, the corresponding addition
in brackets “but not a partnership” is not included in all German double taxation treaties.
The inclusion of a provision on transparent legal entities under the MLI may then lead to
undesirable effects in the application of the dividend articles in the CTAs.
Due to the restriction of the options by the MLI, there is no possibility of inserting the
missing bracket or any other restrictive provisions into the CTAs. Nor is it possible to exclude
individual double taxation conventions from the scope of application of article 3. The conflict
could therefore be avoided only by a general exclusion of article 3 for the German CTA.
Article 4:
Germany has reserved the right not to apply article 4 as a whole. Irrespective of the
reservations or notifications of the other contracting parties, article 4 is thus in no way
applicable to German CTAs.
Article 4 may amend provisions relating to the determination of the tax-treaty residence
of a person other than a natural person who is a resident of more than one contracting state.
The provisions of article 4 MLI lead to a modification of the CTA to the effect that, for the
purposes of the application of the DTC, the residence of the legal entity is determined by
a mutual agreement between the competent authorities of the contracting states (i.e. by
a mutual agreement procedure). This is intended to enable the competent authorities to
examine the overall circumstances of the individual case in order to uncover possible tax
avoidance schemes. Germany does not share the basic assumption that a dual resident
company would have been deliberately set up as such in order to obtain tax advantages.
Furthermore, the simultaneous introduction of such a provision in a large number of existing
double taxation agreements would trigger a considerable need for such mutual agreement
procedures between the competent authorities, and may raise constitutional concerns that
such a provision could lead to an excessively far-reaching restriction of the rights of the
taxpayers concerned. Abusive tax arrangements can be countered in a targeted manner by
applying general or specific anti-abuse rules of national law, and in particular article 7 MLI.
Methods to eliminate double taxation (article 5 MLI)
Germany has decided against choosing any options A to C in article 5. Unlike the other
provisions of the MLI, article 5 exclusively concerns the method of avoiding double taxation
by the state that has chosen one of the options. Germany’s decision thus has no direct impact
on the selection of one of these options by the other contracting state.
Germany has also decided against a reservation under article 5 (8) or (9) of the MLI.
Generally, it is the responsibility of the respective contracting state to determine the
avoidance of double taxation for its own residents in accordance with its treaty policy.
387
Germany
MAP and arbitration (articles 16, 17 and 18 to 26, 28 paragraph 2 and 36)
Article 16 – Mutual Agreement Procedure (MAP):

Article 16 of the MLI relates to the minimum standard set out in action 14 of the BEPS project.
Implementation of the measures is largely mandatory and is in line with established German
treaty policy. MAP are a basic prerequisite for achieving the purpose of the agreement, namely
the avoidance of double taxation, where the contracting states have different views on the
application or interpretation of the DTC. In this context, access to a MAP is of paramount
importance.
Nevertheless, Germany has opted for the reservation under article 16(5)(a) of the MLI.
Therefore, the taxpayer cannot file the application for the MAP under article 16(1)(1) MLI in
either contracting state. The application for the MAP can thus only be applied for in the state
in which the taxpayer is resident or, if the case is subject to a provision on equal treatment
on grounds of nationality, in the state of which he is a national. This also corresponds to
existing German treaty policy and to article 25 (1)(1) OECD MC 2014. In order to comply with
the minimum standard set out in action Item 14 of the BEPS project, the competent authority
of the state in which the MAP may be requested must carry out a bilateral notification or
consultation procedure with the competent authority of the other contracting state if
it considers the taxpayer’s objection to be unjustified. This procedure has already been
introduced and implemented at the administrative level at the Federal Central Tax Office,
the German competent authority, as a result of the recommendations of the BEPS project
on BEPS Action 14.
Beyond that, the selection decision by Germany on article 16 MLI supplements and
completes the German DTCs in cases where the MAP contained in the double taxation
agreement does not yet fully comply with article 25 OECD MC 2014. German treaty policy has
already included the MAP for several years. Only in some older DTCs additions are necessary
and useful, i.e. the CTA Germany-France (1959/1969/1989/2001/2015), Germany-Italy (1989),
Germany-New Zealand (1978) and Germany-Russia (1996/2007).
Article 17 – corresponding adjustments:

While the rules on corresponding adjustments do not constitute a minimum standard
under BEPS Action 14, the measure constitutes a best practice. The inclusion of provisions for
corresponding adjustments in DTCs is an integral part of German treaty policy. Insofar as such
provisions are already contained in existing DTCs, an adjustment is not necessary. For this
reason, Germany has made the reservation provided for in article 17 (3), according to which
existing provisions will remain unchanged. The extensive notification of existing provisions in
German DTCs shows that the vast majority of the CTAs do not require any amendment. In the
following CTA, a procedure for corresponding adjustments is, however, inserted or adjusted
on the basis of article 17: Germany-France (1959/1969/1989/2001/2015), Germany-Italy (1989),
Germany-Lithuania (1979), Germany-New Zealand (1978) and Germany-Russia (1996/2007).
Articles 18 to 26, 28 paragraph 2 and 36 – arbitration:

The arbitration procedure contained in Part VI of the MLI constitutes an optional extension of
the MAP for cases where the competent authorities of the contracting states concerned have
been unable to reach agreement. Signatories may choose to apply the arbitration procedure
in accordance with article 18. Following its previous treaty policy, Germany has opted for the
application in principle. The impact of Part VI on German DTCs will however, be limited: The
number of states that have declared themselves in favour of binding arbitration under the
388
Bruns & Ismer
MLI is comparatively small. Germany has moreover already agreed arbitration clauses in
the DTCs with most of the states that are prepared to accept arbitration clauses themselves.
Moreover, Germany seeks to restrict a duplication of possible arbitration procedures and has
a freely formulated reservation for cases falling within the scope of the EU Dispute Resolution
Directive56 or the EU Arbitration Convention.57 Considering the current CTA and matchings
and leaving the CTA with EU member states aside, the MLI would only have an impact on the
DTC Germany-Mauritius (2011) and Germany-New Zealand (1978).
Germany has made the declaration under article 19(11) of the MLI, according to which the
duration of a mutual agreement procedure before the transition to the arbitration phase may
be extended from two to three years; this is to give the competent authorities sufficient time
to reach an amicable solution even in difficult cases. The declaration also applies to cases in
which the other contracting state has not opted for an extension.
Germany has not made use of article 19(12) MLI, which allows contracting states to reserve
the right not to conduct arbitration proceedings in cases where a court decision on the merits
has already been made, or to terminate the arbitration proceedings if a court decision is
made during ongoing arbitration proceedings. Germany believes that it is important to avoid
double taxation even in cases where two contracting states apply the DTCs in accordance
with their respective national laws and double taxation nevertheless occurs. This option is
nevertheless applicable in cases of arbitration under the MLI where the other contracting
state has chosen this option.
The MLI offers two procedural variants for a decision in arbitration proceedings: the
last best offer (baseball arbitration) as the rule and the independent opinion. Germany
has not formulated a reservation in this respect. Thus, the approach of the last best offer is
generally used as a standard selection. In relation to countries that have expressly opted for
the independent legal opinion approach, this approach is applied. This decision by Germany
thus allows arbitration proceedings to be implemented in relation to all states, irrespective
of the type of proceedings preferred by the other contracting state.
In the interest of the protection of personal data and the maintenance of tax secrecy,
Germany has chosen article 23(5). In case another contracting state reserves the right
according to article 23(6) that this obligation does not apply, Germany has made use of the
possibility in article 23(7) with the result, that in relations with contracting states which have
expressly declared themselves against the obligation, arbitration proceedings are excluded.
Currently, there is no case of application.
Germany has also entered a reservation under article 36(2). Article 36 (1) of the MLI
provides for the application of arbitration under the MLI in cases submitted to the competent
authority of a contracting state as from the entry into force of the MLI for a double taxation
convention. For cases submitted to the competent authority before that date (old cases), the
same applies in principle. However, the competent authorities may defer the possibility of
arbitration for existing cases until they have agreed on how part VI of the MLI is to be applied
and may distribute the days on which such cases may be submitted to arbitration for the first
time, so that not all existing cases are subject to arbitration on the same day. Article 36(2)
allows a party to the MLI to reserve for itself the right to apply arbitration to an old case only
56
57
389
Germany
to the extent that the competent authorities of both parties agree that it applies to that
particular case.
In addition to the options provided by the MLI, article 28(2) of the MLI provides for the
possibility of making freely formulated reservations for the application of Part VI (arbitration).
Germany has reserved the right to exclude the following cases from arbitration procedures
under the MLI:58
1. Cases in which an abuse prevention provision applies
Arbitration proceedings are excluded for cases involving the application of anti-abuse
provisions. This applies notwithstanding whether the relevant provision is a provision
contained in the DTC or a provision in national tax law. The clause reflects the conviction
that where the legislator or the contracting states have taken the decision not to grant tax
advantages or treaty benefits in cases of abuse because the underlying tax arrangement
is undesirable, this decision should not be reversed by arbitration, or its consequences
mitigated.
2. Cases in which persons act in breach of regulations or are liable to prosecution
Just as in the case of abusive arrangements, the legislator has sanctioned certain actions
by law. Also in these cases, it seems not be justified to conduct arbitration proceedings.
3. Cases where there is no double taxation
Arbitration proceedings are also excluded when no material double taxation has actually
occurred. In this case the purpose of the agreement to avoid double taxation is already
fulfilled. In the interest of legal certainty, the reservation contains clear definitions of the
facts that exclude the possibility of double taxation. According to the reservation, this is
always the case if at least one of the contracting states does not tax the income. Income
is deemed not to be taxed if it has not been included in the tax base. This ensures that the
inclusion of income, for example by reducing a loss carried forward, is also to be regarded
as taxation, even if no effective tax burden has been incurred. The application of a tax
exemption for certain income or the application of a zero tax rate under the national law
of one of the contracting states is also considered non-taxation.
4. Cases under the EU Dispute Resolution Directive or the EU Arbitration Convention
Cases falling within the scope of the EU Dispute Resolution Directive59 or the EU
Arbitration Convention60 are excluded from the arbitration procedure under the MLI.
This should prevent the multiplication of possible options to choose.
5. Cases of application of the credit method instead of the exemption method
As pointed out above, German DTCs contain provisions which replace the exemption
method with the credit method. Both methods for avoiding double taxation are contained
in the OECD Model Tax Convention as alternatives. They are on an equal footing, as it
is internationally recognised that they are equivalent in terms of their effectiveness
in preventing double taxation. Therefore, it does not seem appropriate for arbitration
proceedings to be held on the question which of the two methods of avoiding double
taxation is to be applied.
6. Cases of “mutual agreement on facts” (tatsächliche Verständigung)
Germany allows mutual agreement on facts between taxpayers and the tax authorities in
58
See Federal Republic of Germany, Status of List of Reservations and Notifications at the Time of Signature,
available at http://www.oecd.org/tax/treaties/beps-mli-position-germany.pdf.
59
60
390
Bruns & Ismer
situations in which the true facts underlying taxation cannot be ascertained at all or where
such fact-finding would give rise to disproportionate compliance or administrative costs.
In such cases the (unknown) true facts may be replaced by a binding mutual agreement
on facts. The agreements are binding for both the tax administration and the taxpayers
concerned. Arbitrators would, however, not be bound. With regard to the binding effect
of factual understandings, which follows from the general legal principle of good faith,
Germany has entered a reservation according to which cases of factual understanding
are excluded from arbitration proceedings under the MLI.
The BEPS Action Plan to the extent the content relates to DTCs and the MLI have had a
noticeable indirect impact on Germany´s treaty policy. The provisions of the MLI that
Germany has chosen, may be understood as giving guidance to a future update of the basis
for negotiation (2013).
However, it may be concluded that this was not a one-way-road. The content of the MLI
has, among other, been developed by the treaty negotiators of the states and jurisdictions
participating in the BEPS-project. Some treaty provisions that were rather new or uncommon
pre-BEPS found its way into the MLI. For example, a version of a PPT already existed in article
23(2) DTC Germany-Australia (1972/2015). The process may be best described as a mutual
advancement of a minimum standard and best practices for DTCs that were incorporated
into the MLI, into the OECD-MC (2017), and into specific DTCs, and that will in future shape
the world-wide treaty network.
In addition, one can assume that the MLI options that Germany has chosen, already
influence its current treaty negotiations. Furthermore, the MLI was the cause to start a
considerable number of bilateral treaty negotiations. Of the 96 existing German DTCs on
income and on capital, Germany had 50 (as of 1 January 2017, 3561) ongoing negotiations with
the aim to revise existing DTCs on income and on capital, and ongoing negotiations for first-
time DTCs on income and on capital with 16 (as of 1 January 2017, 15) states and jurisdictions.
The recent amending protocol of the tax treaty with Finland (day of signature: 18
November 2019) exemplary demonstrates the indirect impact of the MLI. The content of the
revision protocol mirrors in most part the MLI equivalents.62 Key changes are the change of the
preamble, the introduction of a PPT as well as a proviso for domestic anti-abuse provisions.
Given the ongoing negotiations with other treaty partners,63 it may well mark the first of a
series of comparable protocols.
61
See https://www.bvl-verband.de/fileadmin/steuerpolitik/bmf-schreiben/2017/2017-01-18-stand-DBA-1-
januar-2017.pdf.
62
The Protocol is published on the website of the German Federal Ministry of Finance under https://www.
bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Steuern/Internationales_Steuerrecht/
Staatenbezogene_Informationen/Laender_A_Z/Finnland/2019-11-18-Finnland-Abkommen-DBA.
html;jsessionid=DBD80593A11AEE4A167CC12014F37E46.delivery2-replication.
63
See list in s. 1.3.2.
391
Germany
2.1. Entry into Force and Legal Value of the MLI
Germany is still in the process of ratifying the MLI. Germany has made a reservation under
article 35(3) MLI, so that the changes always take effect on 1 January of the respective year. This
is in line with the usual German convention policy on the application of a DTC. The reservation
is unilateral and applies exclusively to the application of the MLI and thus to the respective
CTAs by Germany. A concordant reservation or a notification by the other contracting state is
not necessary in this respect. As Germany has not made a reservation under article 35(6) MLI
regarding the application of article 35(4) MLI, the modifications to the MAP under article 16
MLI can also be applied to cases relating to assessment periods prior to the entry into force
of the MLI. This is true for all German double taxation conventions for which the respective
contracting party has not made a reservation under article 35(4) MLI either.
More importantly, it must be noted that Germany has opted for article 35(7) MLI, as
the following constitutional principles have to be respected: prerogative of parliament
(Parlamentsvorbehalt)64 and the principles of legal determination (Gesetzesbestimmtheit)65.
Modifications to CTAs will thus be applicable only when Germany has completed the
domestic procedures necessary for such application and notified the depositary. Notification
is needed for each individual CTA and can be effected independently from each other. The
fact that Germany has made use of the option under article 35(7) MLI reflects the view that
a second legislative step is required for each CTA. The two-step approach seeks to provide
clarity both for the legislature and for taxpayers regarding the resulting changes to tax laws.
As the MLI does not directly effect changes to the specific provisions of the respective CTAs,
which form part of German tax law, a legislative order for such changes is needed. This means
that Germany will not follow the integration approach66 according to which the MLI provisions
are in case of a match to be read into the respective CTA making the CTA and the MLI into a
coherent whole.
Both conceptually and in practice, Germany thus differentiates between the MLI as
such (the vessel) and the implementation of its contents (the cargo). The MLI itself is an
international convention which needs to be ratified through a parliamentary procedure.
The German position regarding the MLI will be binding once this process will have been
completed. However, such ratification is not sufficient for modifying the DTCs even when
they are CTAs with matches.67 Instead, as a second step, the MLI needs to be implemented
for specific CTAs. For that purpose, Germany pursues two options:68
–– On the one hand, the DTCs may be amended by means of additional protocols, which
have been agreed upon bilaterally (implementation through protocols). Indeed,
several such protocols are either being negotiated or have already been initialled
and are currently making their way through the ratification process. This is the
conventional approach to changing DTCs and the MLI merely serves as the motivation
64
Reimer, Internationales Steuerrecht 2015, 1 (5).
65
Lehner, in Vogel/Lehner, DBA, 6th ed., Grundlagen m.no. 56. Reimer, Internationales Steuerrecht 2015, 1 (5).
66
Cf. Reimer, Internationales Steuerrecht 2017, 1 (2).
67
Drüen, in Wassermeyer, Doppelbesteuerung, Vor Artikel 1, m.no. 181 (March 2018); Schön, Internationales
Steuerrecht 2017, 681 (687).
68
Cf. e.g. Lehner, Internationales Steuerrecht 2019, 277 (280).
392
Bruns & Ismer
and blueprint for specific changes. As far as the MLI matchings are concerned, it
facilitates and speeds the negotiation process as the content and wording of these
changes have already been pre-coordinated. Moreover, the protocols may be used at
the same time for other changes that are not related to the MLI.
–– On the other hand, the respective content of the MLI may also be implemented
directly (direct implementation). While at first glance direct implementation may
appear easy and straight-forward, it turns out to be fraught with difficulties like
language issues and the positioning of the MLI options chosen within each CTA. For
this purpose, Germany takes a two-step approach. As a first step, the MLI itself will be
ratified. As a second step, a separate domestic law is drafted for the DTCs that are to
be modified. The domestic law should transcribe the operation and effect of the MLI
to each specific CTA. This step requires a consultation with the other contracting state
of some kind to ensure that both contracting states have a common understanding
of the operation of the MLI to the specific DTC. While it is currently not decided what
precise form this domestic law will take,69 it appears clear that from the perspective
of the German tax law, it is this second step that will have to determine the content
of the then modified DTC.
There are several reasons that could lead Germany to prefer the avenue of implementation
through protocols. Negotiations regarding protocols are conducted anyway where there
are other aspects in the respective tax treaty that need changing. Using the protocol then
promises efficiency gains given that no additional instrument is needed. Moreover, the OECD
Update 2017 may be in parts of a better technical quality than the MLI. Technical deficits
such as imprecisions and ambiguities in the MLI can be mended. Thus, contracting states
may be willing to adopt provisions in the tax treaty that they did not accept in the MLI. The
protocols can also be drafted in German (and the other official language of the treaty) rather
than English or French, so that no linguistic imprecisions arise.70 Implementation through
protocols also guarantees that the changes have to be applied in arbitration procedures.
While this might arguably not be necessary for procedures under the EU Dispute Resolution
Directive, given its wide wording, uncertainty may arise under DTCs where the arbitration
clause provides that the arbitration decision needs to be taken on the basis of the tax treaty.
While the DTCs generally do not contain a rule on such basis, this is suggested by the fact that
the initiation of arbitration procedures under DTCs require “taxation not in accordance with
the provisions of this Convention”. Furthermore, implementation through protocols allows
for more differentiation between different contracting states than the MLI so that a more
comprehensive adoption of rules contained in the MLI may be possible through protocols
with some states.
In both constellations (implementation through protocols and direct implementation), a
law will be decisive that lays down the changes. In the first case, the tax treaty will not be a CTA
and thus only indirectly affected. In the second case, the second step implies again that the
law will determine the content of the modifications to the CTA. This does not however, imply
that the MLI would be devoid of significance in case of implementation through protocols. The
69
See Reimer, Internationales Steuerrecht 2015, 1 (5), who points to art. 59(2) of the Basic Law and calls for a law
for each DTC that is to be modified. By contrast, Schön, Internationales Steuerrecht 2017, 681 (683) does not see
such a requirement.
70
Lang, SWI 2017, 11 (22) sees the danger of a Babylonian confusion of languages; Benz/Böhmer, Internationale
Steuer-Rundschau 2017, 27.
393
Germany
importance of the MLI lies in the fact that it forms the context of the negotiations respectively
consultations. Given that there is international consensus, agreements on such points does
no longer have to be reached in the bilateral negotiations. The impact of this consensus goes
beyond the mere guidance offered by the OECD Model Convention. Moreover, the MLI offers
a host of model clauses so that the respective clauses do not have to be drafted individually.
Despite the bilateral nature of protocols, the contents agreed upon are thus harmonised to a
larger degree than under ordinary treaty negotiations, at least when it comes to mandatory
minimum standards. The MLI also provides a fall-back option where the respective DTC is a
CTA, implying that lack of implementation would be exposed in the peer review process. All
this means that the MLI makes such negotiations easier and less time-consuming.
In the context of the MLI, several distinct interpretation issues arise.71 They concern the
interpretation of the MLI itself, the interpretation of the DTCs in general, as well as the
interpretation of treaties concluded before the MLI.
As an international convention, the MLI has to be interpreted in line with the Vienna
Convention on the Law of Treaties. Moreover, the MLI comes with its own interpretation rule
in article 2 MLI. However, it should be noted that the two-step approach implies that for
tax treaty cases, the MLI itself will generally not be interpreted directly. Instead, it is the
domestic law modifying the treaty that needs to be interpreted. The MLI can then become
relevant as the context for that law.72 Given that it can be assumed that Germany wants to
abide by its obligations under public international law in general and under the MLI as a
binding convention in particular, an interpretation of the law in line with these obligations
(völkerrechtsfreundliche Auslegung) generally appears warranted by article 24 of the German
Constitution (Grundgesetz). The purpose of the MLI then supports interpreting a single MLI
provision in the context of the MLI.73
When interpreting tax treaties,74 the preamble has to be taken into account.75 While the
preamble itself may certainly not suffice on its own for reading a PPT or specific anti-abuse
rules into a tax treaty, it represents context in the sense of article 3(2) OECD MC, which is
relevant for the interpretation. This follows a fortiori from the view that the Explanatory
71
For an overview of the issues see Drüen, in Wassermeyer, Doppelbesteuerung, Vor Artikel 1, m.no. 188 (March
2018).
72
See Prokisch, in Festschrift for Moris Lehner, 195 (201).
73
Schön, Internationales Steuerrecht 2017, 681 (687).
74
See also the general issues put down under 1.2.2 – Responses to treaty shopping – general principles of treaty
interpretation.
75
Sceptical on the significance of the preamble Prokisch, in Festschrift für Moris Lehner, 195 (198f.).
394
Bruns & Ismer
Statement also belongs to such context.76 When it comes to interpreting DTCs that are
concluded after the MLI with signatories to the MLI and which mirror a clause from the MLI,
there are good reasons for interpreting the tax treaty in accordance with the MLI.77
2.2.3. Interpretation of earlier tax treaties pre-MLI
It is currently not clear what impact the MLI has on the interpretation of earlier pre-MLI DTCs.
Several cases need to be distinguished: Where the tax treaty is not a CTA, the MLI has no legal
implications. It may, however, have factual implications as the judiciary may pursue a uniform
interpretation of DTCs even where the context is technically different. Where, by contrast,
the tax treaty is a CTA and the respective provision of the tax treaty is amended by the MLI,
the MLI forms, as indicated above, the context in the sense of article 3(2) OECD MC. Finally,
particular problems arise where a state does not have to implement a minimum standard
as the treaty already contains an equivalent provision. In such a situation, it is sometimes
claimed that the interpretation of the tax treaty should not take the MLI into account, as a
change in interpretation could not be foreseen by the taxpayer78 and has not been adopted by
parliament vis-à-vis the relevant DTC. Others point to the fact that the MLI also represents the
context for such an unchanged treaty provision and to the aim of the MLI to reach a uniform
interpretation.79
Given that Germany has not yet ratified the MLI and the bilateral protocols are still in the
process of negotiation or ratification, the impact of the MLI on tax planning and administration
cannot yet be predicted with sufficient clarity. Given its wider wording and in particular the
distribution of the burden of proof between the taxpayer and the tax administration, the
PPT may have a more stringent impact than already existing GAARs. Yet Germany already
had what may be considered a rather robust treaty policy, as expressed for example in its
subject to tax clause and the proviso for domestic anti-abuse legislation. Beyond the (explicit)
duty to inform the other competent authority where Germany as the country of residence
of the taxpayer making the request for a MAP considers the application unfounded,80 the
MLI can be expected to have a fairly limited impact on dispute resolution as far as Germany
is concerned: There are few matches for arbitration. Most of the initial matches concerned
treaties with EU member states, for which Germany might well make a reservation to the
extent that arbitration under the EU Dispute Resolution and under the EU Arbitration will
take precedence. Currently, this leaves the DTCs with New Zealand and Mauritius as the only
relevant initial matches. As Germany has always actively engaged in MAP and, to a lesser
extent, arbitration procedures, there is yet no discernible impact of the MLI on the existing
administrative procedures for MAP and arbitration.
76
On this see Prokisch, in Festschrift for Moris Lehner, 195 (207f.).
77
Same view Schön, Internationales Steuerrecht 2017, 681 (687).
78
Schön, Internationales Steuerrecht 2017, 681 (687).
79
Prokisch, in Festschrift for Moris Lehner, 195 (205).
80
See above at s. 1.3.2.
395
Germany
Addendum regarding 1.3.2 - Covered tax agreements
At the beginning of 2020, the German Federal Ministry of Finance has published its yearly
overview of DTCs in force and of ongoing treaty negotiations.81 On that basis, the updated
information on the presumed list of CTAs and the presumed bilateral implementation of the
contents of the MLI is as below. The general policy considerations behind the choice of CTAs
are explained in the branch report under 1.3.2.
With the following 17 States, bilateral revision protocols or revised/new DTCs have been
initialled respectively signed after 1 January 2017:82
–– Argentina, initialled on 25 October 2019;
–– Belgium, initialled on 15 March 2018;
–– Bulgaria, initialled on 29 July 2019;
–– Cyprus, initialled on 22 March 2019;
–– Denmark, initialled on 14 December 2017;
–– Estonia, initialled on 13 July 2018;
–– Finland, signed on 18 November 2019;
–– Ireland, initialled on 28 February 2018;
–– Latvia, initialled on 18 June 2018;
–– Mexico, initialled on 6 February 2018;
–– Norway, initialled on 26 April 2018;
–– Poland, initialled on 27 November 2017;
–– Portugal, initialled on 26 October 2017;
–– Russia, initialled on 8 October 2019;
–– Singapore, signed on 9 December 2019;
–– Sweden, initialled on 25 May 2018;
–– United Kingdom, initialled on 25 July 2018.
Considering this, the following CTA that are listed as per December 201983 may remain on
the German list of CTAs:
–– With matching Austria, People’s Rep. of China, Costa Rica, Croatia, Czech Republic,
France, Greece, Iceland, Italy, Japan, Liechtenstein, Lithuania, Luxembourg, Mauritius,
Netherlands, New Zealand, Romania, Slovak Republic, Slovenia, Spain, Turkey, Hungary
and United Arab Emirates (DTC may expire on 31 December 2021 according to Article 30
DTC Germany-UAE).
–– Without matching Canada, Israel and Russia.
However, due to ongoing negotiations, Germany may delete further CTAs from the list of CTAs
if the respective bilateral revision protocols are initialled before the parliamentary process
with regard to the ratification of the MLI has been started. In addition, it remains to be seen
whether Germany will add further DTCs to the list of CTAs, e.g. such DTCs where up to now
81
See https://www.bundesfinanzministerium.de/Content/DE/Downloads/BMF_Schreiben/Internationales_
Steuerrecht/Allgemeine_Informationen/2020-01-15-stand-DBA-1-januar-2020.html.
82
Prior to the MLI is understood as prior to 2017. After 1 January 2017, a direct or indirect impact of the BEPS Action
Plan and the MLI is assumed for the purpose of this report.
83
As per December 2019 according to the OECD MLI Matching Database: https://www.oecd.org/tax/treaties/
mli-matching-database.htm.
396
Bruns & Ismer
only the other contracting state has listed its DTCs with Germany as CTAs and where no treaty
negotiations are currently ongoing.
Bibliography
Benz/Böhmer, BEPS: Das Multilaterale Instrument zur Umsetzung der abkommensrechtlichen

Änderungsvorschläge der BEPS-Abschlussberichte, Internationale Steuer-Rundschau
2017, 27.
Gradl/Kiesewetter, D as Mehrseitige Übereinkommen (Multilateral Instrument) zur Umsetzung
abkommensbezogener Maßnahmen aus dem OECD/G20-BEPS-Projekt und dessen
voraussichtliche Auswirkungen auf die deutschen Doppelbesteuerungsabkommen.
Internationaes Steuerrecht 2018, 1.
Lang, Die Auslegung des multilateralen Instruments, SWI 2017, 11
Lehner, Neue Regelungsebenen und Kompetenzen im Internationalen Steuerrecht,
Internationales Steuerrecht 2019, 277.
Lüdicke, Überlegungen zur deutschen DBA-Politik, 2008.
Prokisch, Die Auslegung von DBA im Licht des Multilateralen Abkommens, in Festschrift for
Moris Lehner, 195 (205)
Reimer, Das Multilaterale Übereinkommen (BEPS-Maßnahme Nr. 15) als Instrument einer
flexiblen Anpassung der bestehenden DBA, Internationales Steuerrecht 2015, 1.
Reimer, Meilenstein des BEPS-Programms: Das Multilaterale Übereinkommen zur
Umsetzung der DBA-relevanten Maßnahmen, Internationales Steuerrecht 2017, 1.
Schön, Seminar E (IFA/OECD): Das Multilaterale Instrument, Internationales Steuerrecht
2017, 681.
Schönfeld/Ditz, DBA – Kommentar, 2nd ed., 2019.
Vogel/Lehner, DBA – Kommentar, 6th ed., 2015.
Wassermeyer, Doppelbesteuerung, loose-leaf.
397
India
Branch reporters
Ganesh Rajgopalan1
Rakhi Modi2

India has actively participated in the Base Erosion and Profit Shifting (BEPS) initiative and
its positions have shaped the outcome in some areas of contention. India is largely a source
state from where the foreigners derive income on which India can collect only limited tax,
especially due to the operation of double tax avoidance treaties. However, if the benefits
arising from bilateral treaties are claimed by parties belonging to third countries, it leads to
the erosion of the Indian tax base and imposes an increased tax burden on resident taxpayers
disproportionate to their income. That India embraced the BEPS Project whole-heartedly is
evident from its adoption of most of the BEPS countermeasures contained in the Multilateral
Instrument (MLI). Its reservations and opt-outs are consistent with its policies and practices.
Notable amongst such reservations given by India is with respect to the application of
article 3 on transparent entities. This reservation only echoes India’s stand that the provisions
to flow through the income of a transparent partnership to its partners and the consequent
treaty benefit need to be bilaterally discussed and negotiated. Consistent with its views
against treaty shopping and bilateral agreements being used by residents of third countries,
India disagrees with the OECD’s view that the term “income derived by or through an entity
or arrangement” includes income derived by or through an entity that may not be a resident
of either one of the contracting states, would be an invitation for treaty shopping.
India has, of course, adopted the Preamble and the Principal Purpose Test (PPT), these
being minimum standards, though India expects the PPT to be only an interim measure until
it negotiates a limitation of benefits provision in addition to or in place of the same.
India has opted for other BEPS measures though to some extent some of these
modifications of the Covered Tax Agreements (CTAs) are not necessary as the CTAs already
contain similar provisions. For instance, India adopted the mutual agreement procedure
(MAP) as the provision to determine cases of dual residence for all its CTAs though similar
provisions exist in many CTAs currently. Similarly, some treaties give taxing rights to the
source state on items of assets not specified in article 13 – Capital Gains of those treaties.
Thus, even in the absence of provisions for an extended testing period and enhanced scope of
interests for gains on alienation of shares or other comparable interests in an entity deriving
substantial value from immovable property situated in the source state, India as the source
state would be able to tax such gains under this residuary paragraph in article 13 of a CTA if
its domestic law permits. Thus, these modifications by the MLI are BEPS-Plus. India has also
adopted the savings clause to enable it to tax its residents freely.
With respect to the provisions dealing with artificial avoidance of permanent
establishment status, India has opted in for the enhanced agency PE provisions in article 12.
1
Partner in A.P. Rajagopalan & Co., Mumbai.
2
Senior Manager, Deloitte Haskins & Sells LLP, Mumbai.
IFA © 2020 399

India
It has also opted for provisions requiring the specific activity exemptions to be of a preparatory
and auxiliary character and has adopted the anti-fragmentation rule. For construction PEs, it
has adopted provisions with respect to the splitting of contracts.
India has not adopted mandatory binding arbitration provisions of the MLI. India has
adopted all provisions relating to MAP excluding the provision entitling a person to notify
a case to either contracting jurisdiction. In its place, India has expressed its intent to meet
the minimum standard for improving dispute resolution by ensuring that its CTAs permit
a person to present his case to the state of which he is a resident, or as the case may be a
national, and also by implementing a bilateral notification or consultation process with the
competent authority of the other state where it considers that in the case presented before
it, the taxpayer’s objection was not justified.
India has also signed bilateral treaties with countries post-signing of the MLI with
provisions which are BEPS-inspired.
India has deposited its final list of reservations and notifications. Out of its total 95 tax
treaties, 57 treaties are estimated to be affected by the MLI with approximately 432 treaty
provisions modified. Over and above these numbers, in two treaties, treaty-related BEPS
countermeasures have been incorporated through bilateral negotiations.
Treaty Network
1.1. Introduction
India has actively participated in the Base Erosion and Profit Shifting (BEPS) initiative and its
positions have shaped the outcome in some areas. India is largely a source state from where
foreigners derive income on which India collects only limited taxes, especially due to the
operation of double tax avoidance treaties. However, if the benefits arising from bilateral
treaties are claimed by parties belonging to third countries, it leads to the erosion of the
Indian tax base and imposes an increased burden on resident taxpayers disproportionate
to their income. That India embraced the BEPS project wholeheartedly is evident from its
adoption of most of the BEPS countermeasures contained in the Multilateral Instrument
(MLI).
At the time of signing the MLI, India had 93 comprehensive tax treaties which it listed as
Covered Tax Agreement (CTA) in its provisional list. In its definitive position, India has listed
93 treaties as CTA, which includes the treaty with Hong Kong but excludes treaties with the
People’s Republic of China and Iran. Thirty-three treaty partners have not signed the MLI.
India’s tax treaties follow a mixed approach in adopting the various articles of the OECD
and the UN Models. Some notable provisions that differ from these models are as under:
–– Article 4 on Residence –India’s treaties generally follow the OECD/UN Models. However,
most tax treaties entered into since 2008 provide for mutual agreement procedure (MAP)
400
Rajgopalan & Modi
if the place of effective management (PoEM) cannot be determined for non-individuals.

–– Article 5 on Permanent Establishment (PE) – India’s treaties follow the UN Model and
include provisions for Assembly PE, Supervisory PE, Service PE, PE in case of delivery of
goods and Agency PE if the agent habitually maintains stock of goods or merchandise
from which the agent regularly delivers goods or merchandise on behalf of the enterprise.
Further, in most treaties an agent would not be independent if his activities are devoted
wholly or almost wholly to an enterprise/related enterprise.
–– Article 9 on Associated Enterprises – India’s treaties follow the OECD Model. Several
treaties provide for corresponding adjustment but none include rules for its denial in
case of fraud, wilful default or neglect.
–– Article 25 – Mutual Agreement Procedure: India’s treaties are in line with the OECD Model
but do not include arbitration. In a few cases, there are deviations in the period within
which the taxpayer must present the case.
a. Preamble to tax treaties
The preamble to India’s tax treaties generally provides that ‘the convention is entered into for
the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on
income and capital’. Several treaties contain language like “with a view to promote economic
cooperation”,3 “for the encouragement of mutual trade and investment”, 4 “to promote/
expand/facilitate mutual economic relations”,5 and “for development and strengthening
of bilateral relations”.6 These phrases in the preamble, though similar, are not equivalent in
their meaning with the phrase “to further develop their economic relationship” contained
in article 6(4) of the MLI. None of the treaties contain the phrase “to enhance co-operation
in tax matters”.
In Abdul Razak,7 the Authority for Advance Rulings (AAR) found it significant that the
recital (preamble) in the India-UAE treaty indicated the purpose of entering into treaty as “to
promote mutual economic relations by concluding an agreement for the avoidance of double
taxation and prevention of fiscal evasion with respect to taxes on income and capital”. The
Supreme Court noted the Preamble in the India-Mauritius treaty (“for the encouragement
of mutual trade and investment”) and observed that ‘many developed countries tolerate or
encourage treaty shopping, even if it is unintended, improper or unjustified, for other non-
tax reasons, unless it leads to a significant loss of tax revenues’.8 There are no reported cases
of the preamble used to deny treaty benefits.
3
50 of India’s treaties contain this phrase.
4
Mauritius.
5
Bulgaria, Germany, Poland and United Arab Emirates.
6
Ukraine.
7
Abdul Razak A Meman, In Re [2005] 146 Taxman 115 (AAR).
8
Union of India v. Azadi Bachao Andolan (2003) 132 Taxman 373 (SC)
401
India
b. Treaty shopping
India’s tax treaties have a ‘beneficial ownership’ requirement under the articles dealing with
dividends, interest, royalties and fees for technical services. Most treaties provide that where
by reason of ‘special relationship’ between the payer and the beneficial owner or between
both of them and some other person, the amount of the interest/royalties/fees for technical
services paid, exceeds the amount which would have been paid in the absence of such
relationship, treaty benefits would be restricted only to the last-mentioned amount.
Several of India’s treaties provide that treaty benefits would be denied if the main
purpose or one of the main purposes of the arrangement or transaction is to obtain treaty
benefits. In treaties with Hong Kong, the Republic of Korea, Switzerland, Ukraine and the
UK, anti-avoidance provisions for a specific article like for dividend, interest, royalty and FTS,
capital gains and other Income are present. Under some treaties,9 the benefit of a tax treaty
is provided subject to fulfilment of expenditure or listing or bona fide business requirement.
Limitation of Benefits provision (‘LOB’) have been provided in around nine treaties.10 In the
treaty with Namibia, the LOB article provides that if the right of a contracting state is limited
under the treaty but the other state exempts such income, the first state may tax such income
as if the treaty did not exist.
General Anti-Avoidance Rules (GAAR) were introduced in the Income-tax Act, 1961 (ITA)
effective from 1 April 2017. Under the GAAR, a benefit under a tax treaty could be denied
if the main purpose of an arrangement or transaction is to obtain a tax benefit, and the
arrangement or transaction fails some additional tests and is held to be impermissible.
Before the GAAR was introduced, the Apex Court11 had held that treaty shopping is often
permitted in developing countries to attract scarce foreign capital and technology, and that
in the absence of specific provisions treaty shopping could not be considered as illegal.
c. Other treaty abuses
i. Dividend transfer transactions for availing lower treaty withholding rate
India levies an additional income tax on domestic companies for the amounts declared,
distributed or paid by them as dividends.12 Such dividends are exempt from tax in the hands
of the recipients, and there is no withholding tax.13 Thus, the treaty benefit of a reduced rate
on dividends paid to a company beneficially holding beyond a specified percentage of shares
in Indian companies is inconsequential from the perspective of India as the source state.
ii. Gains on the transfer of ownership of immovable property companies
Many of India’s treaties provide for taxing rights to a contracting state on gains from the
alienation of shares of the capital stock of a company, the property of which consists directly
9
Treaties with Mauritius and Singapore.
10
Albania, Armenia, Iceland, Mexico, Sri Lanka, Tajikistan, Tanzania, United States and Uruguay.
11
Union of India v. Azadi Bachao Andolan (2003) 132 Taxman 373 (SC).
12
ITA, s. 115-O.
13
ITA, s. 10(34).
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Rajgopalan & Modi
or indirectly principally of immovable property situated in that state.14 There are no reported
cases where transactions or arrangements were undertaken to avoid taxation of immovable
property situated in India either by diluting the proportionate value of shares or comparable
interests of an immovable property company deriving its value primarily from immovable
property situated in the country or any other manner.
The indirect transfer provision in the ITA enables India to tax immovable property entities
where it has the taxing rights under its tax treaties which ability was lacking earlier.15 This
provision brings to tax in India gains from transfer of shares of companies/entities outside
India which derive substantial value from assets located in India (whether immovable or
other property), and thus, is broader in scope. However, there is no anti-abuse measure to
ignore any dilution of the value of the shares of an immovable property entity during an
extended testing-period as is sought to be introduced by article 9 of the MLI.
iii. Treaty benefits for the income of low-taxed PEs in third countries
There are no reported cases in Indian courts on disputes relating to grant of treaty benefits by
India as a source state for income paid to a third-country PE which is low-taxed or exempt both
in the PE state as well as in the residence state. The absence of such abusive instances maybe
because dividends, interest and royalties are subject to tax under the ITA at rates which are
generally lower than the treaty rates. Further, as India generally follows the credit method for
eliminating double taxation of its residents with respect to the income attributable to their
PE in third states,16 the possibility of Indian residents deriving treaty benefits in the source
state with respect to such items of income is remote.
iv. Avoidance of PE status
–– Agency PE
The test for the determination of an agency PE in India’s treaties is the ‘contract concluding
authority’ of the agent who would enter into contracts on behalf of and in the name of
his principal. However, most treaties provide that when activities of an agent are devoted
wholly or almost wholly on behalf of a closely related enterprise, he will not be considered an
independent agent. Also, India’s position on the OECD Commentary on the agency PE relating
to negotiation of contracts is that the mere fact that a person has attended or participated
in negotiations in a state between an enterprise and a client, can in certain circumstances,
be sufficient, by itself, to conclude that the person has exercised in that state an authority to
conclude contracts in the name of the enterprise. India is also of the view that a person, who
is authorised to negotiate the essential elements of the contract, and not necessarily all the
elements and details of the contract, on behalf of a foreign resident, can be said to exercise
the authority to conclude contracts.
The ITA has been amended effective from 1 April 2018 to align with the enhanced scope
of the agency PE as per MLI.
14
74 of India’s treaties contain a provision on the lines of art. 13(4) of the OECD Model.
15
ITA, s. 9(1)(i) Explanations 5 to 7 inserted by Finance Act, 2012 with retrospective effect from 1 April 1962.
16
One exception is in India’s treaty with Bangladesh where the profits attributable to a PE is taxed only in the PE
state.
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India
–– Specific activity exemptions

The liaison offices of a foreign entity in India are not allowed to undertake any commercial,
trading or industrial activity and can only act as communication channels between the
customers and the foreign entity. What could be regarded as preparatory or auxiliary activity
has been contentious. In some cases,17 a PE was not found to exist where the liaison office’s
role was limited to playing a support function which was held to be preparatory or auxiliary.
In other cases,18 it was held that a PE was constituted where their liaison offices performed
core business activities like marketing and sales.
–– Splitting of contracts
Indian courts have not favoured aggregating the duration of installation and construction
projects of different entities to ascertain existence of a PE in the absence of specific provisions
enabling such aggregating. Though the issue in this case19 was not the splitting of the contract
between related parties but the aggregation of different contracts of the same taxpayer, it
was held that the onus was on the authorities to establish an alleged artificial splitting of
contracts or sham agreements.
v. Fiscally transparent entities
The ITA treats a partnership as an opaque entity which is a taxable unit subject to tax while
the partners are exempt on their share in the total income of such partnerships. India has
not endorsed the OECD approach to automatically ‘flow through’ the income of partnerships
to partners in cases where its treaty partner treats the partnership as transparent for tax
purposes but taxes its partners who are residents of that state on their share of income from
that partnership unless such provisions are incorporated in the treaties.20 In the absence of
such explicit provisions, India denies treaty entitlement to the partnership as it is not liable to
tax in the other state,21 and also denies treaty benefits to the partners as it is the partnership
that is subject to source state taxation in India and not the partners. The AAR upheld this
position.22
vi. Dual residence
The existing treaties deal with dual resident entities by determining treaty-residence in the
state where the PoEM of such entities is situated. This issue has gained prominence with the
change in residence rules in the ITA from 1 April 2017, when the PoEM rule was introduced
in the domestic law as well. Several treaties require recourse to MAP where PoEM cannot be
determined while in some treaties, MAP is the primary rule for determining treaty residence.
17
For e.g., Sumitomo Corpn v. DCIT (2008) 114 ITD 61 (Del).
18
For e.g., ADIT v. GE Energy Parts Inc. [2019] 101 taxmann.com 142 (Delhi HC).
19
J. Ray Mcdermott Eastern Hemisphere Ltd v. JCIT [2010] 39 SOT 240 (Mum).
20
OECD 2014 Update, India’s position contained in para. 5 of Positions on art. 1 and its Commentary
21
An exception is ADIT v. Chiron Behring GmbH & Co [2008] 24 SOT 278 (Mum) where the ITAT held that a German
KG (fiscally transparent partnership) was entitled to the India-Germany treaty since it was liable to trade tax in
Germany (a tax covered under that treaty). The ITAT did not examine whether the KG was liable to trade tax by
reason of domicile, residence or other connecting factors to determine treaty residence.
22
Schellenberg Wittmer, In Re [2012] 24 taxmann.com 299 (AAR – New Delhi).
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d. Dispute resolution
India’s double tax treaties generally follow article 25 of the OECD Model though there are
some deviations. Some treaties do not permit a taxpayer to present a case for MAP, where
article on non-discrimination applies, to the competent authority of the contracting state of
which he is a national. Provisions contained in article 25(2) of the OECD Model relating to the
implementation of a mutual agreement notwithstanding any time limit under the domestic
laws of the contracting states are found in India’s tax treaties with two exceptions.23
Provisions relating to the corresponding adjustment to the profits of an enterprise
following an initial adjustment made to the profits of its associated enterprise by the
other state are absent in some treaties. However, the Central Board of Direct Taxes (‘CBDT’)
has clarified that it would accept transfer pricing MAP cases and bilateral APA where the
associated enterprise of the Indian resident is a resident of another country with which
there exists a tax treaty even where provisions of article 9(2) (or its equivalent) of the treaty
enabling the corresponding adjustment are absent.24
Provisions similar to article 7(3) of the OECD Model (2010 Update), requiring a contracting
state to grant to an enterprise of that state a correlative adjustment following an initial
adjustment made by the other state in accordance with article 7(2) to the amount of tax
charged on the profits of a PE of the enterprise, are absent.
India generally meets the requirements under Action 14 Minimum Standard in the
resolution of MAP cases though India has a policy of not discussing MAP cases when there
is no double taxation.25 India intends to put in place a documented bilateral consultation or
notification process in cases where its competent authority considers the objection raised
by the taxpayer in a MAP request is not justified.
Though a significant number of MAP cases has been settled in the two years under peer
review, the inventory of MAP cases relating to attribution or allocation as well as other cases
has increased over the same period.
e. Arbitration
India’s tax treaties do not contain an arbitration clause. The Indian policy has been against
adopting a mandatory binding arbitration for resolving tax disputes, including transfer
pricing disputes.
Taxpayers try to take advantage of the differences in trade and tax policies of different
countries, by shifting profits to low or no tax regimes, resulting in low tax revenues for
the developing countries like India. Base erosion by profit shifting not only impacts the
government’s revenue collection but also puts the burden on residents who must bear the
burden of shortfall in tax collections. India has been a net capital importing country with
23
Greece and UK.
24
CBDT’s Press Note dated 27 November 2017.
25
Making Dispute Resolution More Effective – MAP Peer Review Report (Stage 1) OECD, October 2019.
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India
dependence on capital inflows mostly through Foreign Direct Investments (‘FDI’). As per
a report,26 over 53% of the FDI into India comes from low-tax jurisdictions which indicates
extensive treaty shopping. Mauritius and Singapore had been the most exploited routes for
investments into India. Due to rising concerns, India re-negotiated its treaties with these
countries. India also loses substantial tax revenue through excessive payment to foreign-
affiliated companies by way of interest, royalty, fees for technical services, transfer pricing
with related parties and no or low tax on digital payments as the existing treaty provisions
are inadequate to deal with the same.
Due to BEPS measures, concerns have been raised that the attractiveness of India as
an investment destination would get impacted. However, tax is only one of the factors for
investment decisions in any country with other factors like infrastructure, size and growth of
the economy, stable governments playing a greater role.
India signed the MLI on 7 June 2017 and deposited its instrument for ratification with
depository on 25 June 2019. The date of entry into force for India is 1 October 2019 and entry
into effect for both withholding taxes and other taxes for jurisdiction which has deposited
its instrument for ratification before India, is 1 April 2020.
As per the Prevention of Treaty Abuse -Peer Review Report on Treaty Shopping: Inclusive
Framework on BEPS: Action 6 (‘Peer Review Report’)27, out of 95 tax treaties, India has listed 93
tax treaties as CTA barring treaties with the People’s Republic of China and Iran. Thirty-three
of India’s treaty partners have not yet signed the MLI,28 and five have not notified their tax
treaties with India as CTAs.29 In effect, 57 of its 95 treaties (60%) are CTAs that are impacted
by the MLI.
Mauritius and Germany have indicated in the Peer Review Report that bilateral
negotiations would be used for their agreements with India for implementing the Action 6
minimum standards. Interestingly Switzerland has not notified the treaty as a CTA in its final
position though it was included in its provisional list. The India–Hong Kong treaty was not
listed by both countries in their provisional list of reservations and notifications at the time
of signing of the MLI since that treaty was signed only later. Apart from a provision on the
lines of the PPT, the said treaty does not contain any of the provisions for countering BEPS
found in the various articles of the MLI. India has included that treaty in its final position.
Hong Kong is likely to include it as a CTA in its final position.
As per the Peer Review Report, Oman has indicated that its agreement with India
would be amended bilaterally to implement minimum standards. The US reported that its
agreement with India already has a LOB article.
26
Action Plan on Base Erosion and Profit Shifting – An India Perspective by R. Kavita Rao and D. P. Sengupta,
National Institute of Public Finance and Policy.
27
OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris.
28
Including Iran which has not signed the MLI, has not been notified by India.
29
Mauritius, Germany, Switzerland, People’s Republic of China and Hong Kong.
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1.3.3. Applicable provisions of the MLI30
a. New Preamble language
India is a member of the G20 and was part of the Ad Hoc Group of more than 100 countries and
jurisdictions that worked on an equal footing on the finalisation of the text of the MLI. Except
for article 3 of the MLI, India has opted for all the articles from article 4 through 17, subject to
certain reservations in some of the articles which will be discussed later in this report. This
shows India’s commitment to the implementation of MLI provisions.
The preamble to the CTAs would stand modified to include the language of article
6(1) of the MLI. India has not opted for article 6(3) which provides for including in the text
of the preamble a reference to the desire to develop an economic relationship and to
enhance co-operation in tax matters even though under section 90 of the ITA, the purposes
for which treaties can be entered into by the central government include (a) to promote
mutual economic relations, trade and investment, (b) for exchange of information for the
prevention of evasion or avoidance of tax, and (c) for recovery of income-tax. The wordings
of the preamble in India’s treaties are subject of some court rulings which, presumably, could
have influenced India’s decision not to opt for including the language described in article 6(3).
The phrase “to promote economic cooperation” and its variants found in the preamble
of some treaties would continue to be part of the preamble as modified by article 6 and
would continue to be of importance in interpreting treaties where there is no tax evasion or
avoidance (including treaty shopping).
Being a minimum standard, the preamble would be modified as per article 6(1) of the MLI
in 57 treaties which are CTAs. Treaties with the People’s Republic of China and Iran, though
not modified by the MLI, include the language of article 6(1).
b. Principal Purpose Test and Limitation of Benefits provision
India has opted for the Principal Purpose Test (‘PPT’) as an interim measure along with the
Simplified Limitation of Benefit (‘SLOB’) provisions. The option of PPT as an interim measure
indicates India’s intention for applying LOB provisions through bilateral negotiations where
possible in addition to PPT or as replacement of PPT. India has not opted for discretionary
benefits rule contained in article 7(4).
Being a minimum standard, the PPT would apply to all the 57 tax treaties which are
CTAs. Out of these treaties, five countries31 have opted for PPT as an interim measure.
Twelve countries32 have opted for SLOB or allowed implementation of SLOB where the treaty
partner has opted for SLOB, and since India too has opted for SLOB, these treaties would get
modified to include SLOB. Greece is the only treaty partner that has opted for the asymmetric
application of SLOB by India according to its choice notified under paragraph 7(b) of article
7 of the MLI.
30
Status in this report as on 30 October 2019.
31
Canada, Colombia, Kuwait, Norway and Poland.
32
Armenia, Bulgaria, Colombia, Denmark, Greece, Iceland, Indonesia, Kazakhstan, Norway, Russia, Slovak Republic
and Uruguay.
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India
c. Dividend transfer transactions
Article 8 of the MLI provides for a minimum holding period for a company holding more than
a specified percentage of shares in a company resident in the other contracting state to be
entitled to a concessional rate of tax on dividends received from the later company. India
has not made any reservation to the article except for its CTA with Portugal which contains a
minimum holding period longer than 365 days. Of the 25 treaties which provide for a reduced
rate of tax on dividends paid to a parent company, five CTAs are modified by insertion of the
minimum holding period contained in article 8(1) of the MLI.33
India levies a tax on distributed profits on domestic companies, and the recipient of
the dividends is exempt from tax.34 Consequently, a reduced treaty rate of tax on dividends
distributed by Indian companies to foreign companies having a beneficial holding, is not
relevant in the Indian context. On the other hand, dividend income received by Indian
residents from the treaty jurisdiction would be impacted by the minimum holding period
to be entitled to the reduced treaty rate.
d. Immovable property entities
The anti-abuse rule in article 9 of the MLI introduces an extended testing period and expands
the scope of its application to comparable interests, such as interest in a partnership or
trust, in addition to any shares or rights already covered. India has opted for article 9(4) that
incorporates both the modifications contained in article 9(1).
Of the treaties containing the immovable property entity provision, 21 countries have
opted to apply article 9(4) of the MLI. One exception is Turkey which, though having opted
for paragraph 4, has reserved under article 9(6)(f) for that para not to apply to its CTA with
India. Further, the anti-abuse provisions are introduced in five treaties where the immovable
property entity rule is absent.35 Provisions of article 9(1) will apply to four CTAs as the treaty
partner has not opted for article 9(4),36 while Belgium has reserved the application of the
extended period.
e. Treaty benefits for the income of low-taxed PE in a third country
India generally follows the ordinary credit method for relieving double taxation which would
apply for any profits derived by an Indian resident attributable to a PE in another country.37
Since India has not reserved article 10, any treaty benefits to be extended as a source state
to residents of other countries could be denied under this article in conditions specified in
article 10(1), and they could be taxed as per its domestic law. Further, dividends attributable
to a third country PE are not amenable to abuse contemplated by article 10 of the MLI as
dividend paid by domestic companies is exempt in the hands of the recipient. As regards
interest and royalties paid to a non-resident or its PE in another country, the tax levied under
33
Canada, Denmark, Serbia, Slovak Republic and Slovenia.
34
Resident individuals are subject to tax on dividends in certain circumstances.
35
Canada, Egypt (UAR), Japan, Malta and Russia.
36
Australia, Belgium, Fiji, Mexico and Netherlands.
37
Except for India’s treaty with Bangladesh.
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the ITA is 10% on a gross basis which is generally the same as, or lower than, the rate of tax
specified in tax treaties.
However, capital gains on the sale of shares of a company or entity incorporated or
registered outside India, generally enjoy exemption from tax in India as tax treaties allocate
taxing rights only to the contracting state of which the transferor of such asset is resident. If
such shares are attributed to a PE in a third state, the anti-abuse rule contained in article 10
of the MLI could come into play and India could deny such a benefit under the relevant treaty
and tax such gains under its domestic law.
Of the 14 treaty partners who apply the exemption method to relieve double taxation for
their residents, three treaties would be modified by this article. Out of these three treaties,
Slovak Republic has chosen to go for credit method under article 5 of the MLI which makes
this modification under article 10 largely unnecessary.
f. Preventing avoidance of PE status
India has opted for article 12 of the MLI relating to artificial avoidance of PE status through
commissionaire arrangements and similar strategies and 28 treaties are modified by that
article. For specific activity exemptions, India has opted for Option A in article 13 which applies
to 30 CTAs and the anti-fragmentation rule to 35 CTAs. The anti-abuse provisions relating to
splitting-up of contracts in article 14 apply to 22 treaties.
g. Method of elimination of double taxation
India’s treaties follow the ordinary credit method for elimination of double taxation of its
residents barring a few.38 Where India follows the exemption method, India has notified
these provisions for the application of Option C in article 5. India’s opt-in does not modify
treaties with Greece and Bulgaria as these countries have reserved the application of article
5. Both India and the Slovak Republic have chosen Option C and both countries have moved
from the exemption method in their CTA to the credit method. As for its CTA with Egypt,
India’s Option C applies with respect to its residents while Egypt has not selected any option
and the exemption method in the CTA continues to apply to its residents. Of the other
countries which apply the exemption method to relieve double taxation of their residents
in India’s treaties, Austria and the Netherlands have opted for Option A and notified the CTA
provisions but Estonia and Luxembourg have not notified the relevant provisions and have
chosen not to avail of the defensive rule enabling them to tax items of income to which India
has the taxing right but does not tax such income.
In treaties where India follows the credit method but has not notified the existing CTA
provisions, the clarification that India does not need to give credit for taxes levied in the
source state solely because the income is also income derived by a resident of that state,
will be absent. Since the foreign tax credit rules39 in India entitle a resident to be allowed a
credit for any foreign tax paid by him and not by any other person, arguably the absence of
these words should not have any impact. India is unlikely to reverse this opt-out in the future.
38
The exceptions are treaties with Bulgaria, Egypt, Greece and Slovak Republic.
39
Income-tax Rules, 1962, rule 128.
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India
h. Right to tax own residents
India has not made any reservation for the application of article 11 which introduces the
‘savings clause’. Forty-one countries have reserved the application of article 11 leaving 16 CTAs
to be modified by the insertion of the savings clause. The operation of this clause will be
limited as India does not have domestic controlled foreign corporation rules, and it treats
partnerships as fiscally opaque.
i. Transparent entities
India has reserved for article 3 of the MLI relating to transparent entities in entirety. The
taxation of partnerships and trusts has been dealt with in some of India’s treaties though
not in article 1 (Scope) but in article 4 (Residence).40 India disagrees with paragraph 7 of the
Commentary on article 1 (OECD Model 2017 Update) which states that the term “income
derived by or through an entity or arrangement” includes income derived by or through an
entity that may not be a resident of either of the contracting state. India believes that this
term should include only such income that is derived by or through entities that are resident
of one or both states. India is thus reluctant to extend access to a bilateral treaty to third
country resident entities which could encourage treaty shopping. Further, it appears that
India prefers to bilaterally agree on any enhancement of scope of the provisions relating to
transparent partnerships to other fiscally transparent entities after an examination of its
impact in the Indian context. It is unlikely that this reservation will be reversed in the future.
j. Dual resident entities
In its position to the OECD Model, India has reserved the right to include a provision for
recourse to a MAP where the country of residence cannot be determined in case of a dual
resident non-individual.
For a tax treaty residence of a non-individual who is dual resident is determined through
its PoEM rule in 81 of India’s treaties while 12 treaties require residence to be determined
through a MAP. The treaty with Libya does not contain a tie-breaker rule while in the treaty
with Greece, the definition of a resident of a contracting state excludes a person who is a
resident of the other state, and consequently, makes a dual-resident situation impossible.
The denial of any treaty benefit is absolute in the absence of an agreement between the
competent authorities of the contracting states in four CTAs.41
Article 4 of the MLI modifies 13 treaties which contain recourse to MAP as the default rule
where the primary PoEM rule is indeterminate. Four treaties would get modified where the
primary rule for determining treaty residence for dual-resident persons is MAP even though
the intervention of the competent authorities of the contracting states is currently necessary
to settle an issue of dual residence in these treaties.
40
Treaties with the UK, US, Norway and Sweden contain such provisions.
41
Japan, Australia, Indonesia and Fiji.
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Rajgopalan & Modi
k. Mandatory binding arbitration
India has opted not to go for mandatory binding arbitration and has not chosen to apply
articles 18 to 26 of the MLI.
A table showing the proportion of tax treaty provisions included in the CTAs signed by
India that are modified following the MLI, considering the reservations made by India and
its treaty partners, is given in Annexure A.
a. Treaties negotiated bilaterally
To address concerns relating to treaty abuse, India re-negotiated its tax treaty with Mauritius,
Singapore and Cyprus to remove the non-taxation of capital gains on the transfer of shares
in the source state prospectively and applied a LOB provision for capital gain tax benefit on
investment in shares prior to 1 April 2017 (only for Mauritius and Singapore).
India and the People’s Republic of China signed a protocol in 2018 which amends the
treaty between the two countries. Both countries have not notified their treaty as a CTA as the
amended treaty includes the new preamble language, the PPT, provisions relating to fiscally
transparent entities and determining treaty residence for dual resident non-individuals, the
enhanced scope of agency PE and provisions relating to splitting up of construction contracts
though it does not incorporate provisions in the MLI relating to specific activity exemptions
and the anti-fragmentation rule for determining PE.
India signed a treaty with Iran in 2018 but has not included it as a CTA as the treaty sports
several MLI-inspired provisions: the preamble on the lines of article 6(1) and 6(3), a PPT as per
article 7(1), MAP provisions as per article 16 and a rule mandating corresponding adjustment
in transfer pricing cases as per article 17 of the MLI. Apart from these provisions, the other
BEPS issues contained in the MLI are absent in the treaty.
Interestingly, the India-Hong Kong treaty, which was signed after both the parties
signed the MLI, does not incorporate any of the provisions to counter BEPS found in the MLI.
Though Hong Kong has not notified the treaty as a CTA, it would, in all probability, do so in
its definitive position so that the MLI provisions would impact the treaty.
b. Future amendments to CTAs by incorporation of MLI-inspired provisions
In respect of treaties which are modified by the MLI, it is expected that the relevant
amendments will be incorporated into the bilateral treaties only when these treaties are
renegotiated and until such time, the MLI will remain as a third layer of international tax law.
c. Treaty policy as regards the MLI and the OECD Commentary (2017)
India has opted for the application of the enhanced scope of agency PE contained in article
12 of the MLI to its CTAs. These provisions are in accordance with the Action 7 Report on the
Artificial Avoidance of PE, which India actively participated in its drafting and which was
adopted by the G20. However, India has expressed disagreement with the changes made
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India
in article 5 of the OECD Model (2017 Update) on three counts. India reserves the right not to
include the word “routinely” in reference to the role of a person leading to the conclusion of
contracts ‘that are routinely concluded without material modification by the enterprise’.42
India reserves the right not to include the words ‘to which it is closely related’,43 and an agent
can be disqualified from being an independent agent even if he acts exclusively or almost
exclusively for enterprises to which he is not closely related. Lastly, the OECD Commentary
(as well as the Action 7 Report) state that where an enterprise maintains several places
of business carrying out the specified activities in sub-paragraphs a) to e), each place
of business has to be viewed separately and in isolation for deciding whether a PE exists
unless the anti-fragmentation rule applies. However, India’s position is that even when the
anti-fragmentation provision is not applicable, an enterprise cannot fragment a cohesive
operating business into several small operations to argue that each is merely engaged in a
preparatory or auxiliary activity.44
2.1.1. The procedure implemented in order to implement the MLI
a. Domestic procedure for implementing the MLI
India’s Constitution empowers parliament to make law for implementing any treaty. Income
tax treaties are given the force of law by section 90 of the ITA. The central government notified
that the provisions of the MLI shall be given effect in accordance with India’s position under
the MLI.45
The consultations in the Parliamentary Consultative and Standing Committees attached
to the Ministry of Finance of the Union Government, are not publicly available. There is no
formal procedure for public consultation within India during the legislative process or during
strategic negotiations that are part of treaty-making.
b. Synthesised and consolidated texts
The CBDT has published synthesised texts for the application of India’s treaties with the
United Arab Emirates, Japan, Serbia, Finland, Slovak Republic and Singapore till the writing
of this report. These texts have followed the guidance published by the OECD in this regard.
The release of synthesised texts is not mandated under law.
These synthesized texts are prepared jointly by the competent authorities of India and
the respective contracting jurisdiction, and represent their shared understanding of the
modifications made by the MLI except in the case of the treaties with Japan and Singapore.
42
OECD Model (2017 Update) Non-Member Positions on art. 5, para. 17.4.
43
Ibid, para. 19.1.
44
Ibid, para. 51.
45
Notification No. SO 2887(E) dated 9 August 2019.
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Rajgopalan & Modi
Japan has published the synthesised text separately while Singapore has given the effects
of the MLI on the treaty. The UK has published the synthesised text for its treaty with India
which refers to a separate Indian text which is yet to be released.
Interestingly, there are differences in the synthesised texts separately prepared by
countries. For instance, the Indian version of the text for the India-Japan treaty states that
article 17(1) of the MLI replaces article 9(2) of the CTA while the Japanese version states that
the MLI article applies to the convention. Similarly, the synthesised text released by Singapore
states that the existing preamble in its treaty with India is ‘deleted and replaced’ with the new
language while the Indian text (correctly, in the reporters’ view) states that the new language
is ‘included’ in the existing preamble. Also, the UK’s synthesised text refers to ‘different
understanding’ between the two countries as regards applicability of the PPT rule to articles
11(6), 12(11) and 13(9) of the CTA. India has not included these provisions in its notification
under article 7 of the MLI.46 The authentic legal texts of the relevant CTA and the MLI take
precedence and remain the legal texts applicable though these differences are precursor to
future disputes.
The tax authorities in India have not yet published any consolidated texts of the
tax treaties as modified by the MLI; nor have any of India’s treaty partners. There are no
consolidated tax treaties published by private publishers.
c. The validity of the MLI Matching Database
The OECD MLI Matching Database does not have any legal sanctity in India. It is, at best, a
useful tool of reference for tax practitioners and needs to be backed up by an independent
study of country positions and the impact of the various reservations and notifications made
by respective countries.
India follows the dualist theory for the implementation of international law as international
treaties do not automatically become part of its national law.47 Article 73 of the Indian
Constitution provides power to the executive of the Union headed by the President to enter
into treaties. The Constitution does not require the existence of any legislation as a condition
for entering into an international treaty. The decision of whether to enter into a treaty or
agreement is a policy decision. However, treaties are not self-executing and are not on
their own binding upon Indian nationals. Article 253 empowers parliament to make laws
for implementing any treaty or agreement. Thus, the two stages in treaty-making, namely,
the formation of an obligation and its performance are distinct: the making of a treaty is an
executive act, while the performance of its obligations if they entail alteration of the existing
domestic law requires legislative action.48 The power to legislate in respect of treaties lies with
parliament under entries 10 and 14 of List I of the Seventh Schedule. But the making of law
46
Refer s. 2.2.1 below.
47
Jolly George Varghese v. Bank of Cochin, AIR 1980 SC 470.
48
Maganbhai Ishwarbhai Patel v. Union of India 1969 AIR 783.
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India
under that authority (of parliament) is necessary when the treaty or agreement operates to
restrict the rights of citizens or others, or modifies the law of the state.49
In the context of double tax treaties, section 90 of the ITA is a special procedure50 for a
tax treaty to become applicable without requiring an Act of Parliament on each occasion.
Section 90 enables the central government to enter into agreements for granting of relief
from income that is doubly taxed, for the avoidance of double taxation, for recovery of tax
and for exchange of information. The question is whether the legislative sanction to make
treaties for the avoidance of double taxation contained in section 90 is enough for the MLI
to take legal effect under Indian law. Since the MLI seeks to modify the rules of providing
relief from double taxation and for the avoidance of double taxation contained in the tax
treaties by eliminating or reducing opportunities for non-taxation or decreased taxation, such
objectives ought to be covered under the powers of the central government under section
90 of the ITA. Any limitation for relief of double taxation or in the benefits to avoid double
taxation is arguably covered under the law.51 52 Also, existing legislation (like section 90) is
enough to implement a treaty, and it does not require new legislation.
The ITA provides that in relation to the assessee to whom a double tax agreement
applies, the provisions of that Act shall apply to the extent that they are more beneficial to
that assessee.53 The courts have held that the treaties must be interpreted in good faith and
unsettling a treaty position through subsequent amendments to domestic legislation will
be incompatible with the principles of treaty interpretation under the Vienna Convention54
which codifies the principles of customary international law. On the other hand, it is possible
to enact provisions with the express intention to override treaties.55
Since the MLI was only recently notified and became effective for some tax treaties, issues
relating to its interpretation have yet to arise. A mismatch in the notifications given by the
contracting jurisdictions is one such instance which could lead to disputes. For example,
Denmark has notified the entire article 5(4) of the CTA which includes agents habitually
maintaining stock of goods as well as an order securing agent whereas India has notified
only article 5(4)(a) relating to agents having authority to conclude contracts to be replaced
by article 12(1) of the MLI.
Similarly, the UK has notified, while India has not, articles 11(6), 12(11) and 13(9) in the
CTA which deny the relief provided in the source state for dividends, interest and royalties
49
Union of India v Azadi Bachao Andolan (2004) 10 SCC 1.
50
Ibid.
51
For a contrary view see S. Ranjan and V Krishnaswamy, Legal Ramifications on MLI Ratification – An Indian Perspective
Taxsutra 3 July 2019 source <https://www.taxsutra.com/experts/column?sid=1113> accessed on 1 November 2019.
52
The Preamble language is proposed to be inserted in section 90 of the ITA vide the Finance Bill 2020 introduced
in parliament on 1 February 2020. Once introduced, any doubt on this count would be set to rest.
53
ITA, s. 90(2).
54
The Vienna Convention on the Law of Treaties (‘VCLT’). India is not a signatory to the Convention.
55
Sanofi Pasteur Holdings SA v. Department of Revenue [2013] 354 ITR 316 (AP) refers to s. 90(2A) of the ITA which
permits the GAAR to override treaties.
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and fees for technical services where the main purpose or one of the main purposes of a
person concerned with the creation or assignment of the shares, debt claims or other rights
transaction that results in such income, was to take advantage of these treaty provisions
by means of such creation or assignment. Another instance concerns article 24A of the
India-Singapore treaty which denies treaty benefits contained in article 13(4A) and (4C)
[exemption/reduced taxation of capital gains derived by a resident of a contracting state of
shares of a company resident in the other state] where the taxpayer arranges its affairs with
the primary purpose to take advantage of such benefits. However, both Singapore and India
have not notified the provision.
Such interpretation issues could arise on whether these existing provisions in the tax
treaties which are not notified by both contracting jurisdictions, are compatible with the
provisions of the MLI and thereby could co-exist or the MLI provisions supersede these
provisions to the extent that they are incompatible.
Another issue is where a contracting jurisdiction has reserved an article of the MLI
whether the reservation is appropriate. For instance, Norway has reserved the right for the
entirety of article 17 not to apply as it believes that its CTA with India already contains the
provision for the corresponding adjustment as described in that article. However, a closer look
at article 9(2) of the CTA reveals that the other state “may make an appropriate adjustment”
while article 17(1) requires such adjustment to be mandatorily made. The explanatory
statement states that such a provision which gives discretion to a contracting state to make
the adjustment, cannot be reserved.56 Another aspect is the legal validity of the explanatory
statement to the MLI and the extent to which it is legally binding on which there is no debate
yet.
Although India is not a signatory to the Vienna Convention, its principles, being universal
in character, are frequently applied when interpreting treaties.57 All material “contemporanea
exposition”, notes of discussion between the parties which led to the signing of the treaty, press
notes and press releases issued by the CBDT contemporaneously with the signing of the treaty
have been considered as supplementary means of interpretation.58
Though India is not a member of the OECD, courts have referred to the OECD Commentary
while interpreting tax treaties.59 Courts have held that even though the OECD Commentary
is not binding, it is of persuasive value and sheds light on the character and tax treatment
of income.60 The purpose and scope of a provision in the treaty can be understood from the
OECD Commentary when the provisions of a treaty are in pari materia with the OECD Model.61
Since India, as a member of the G20, has worked on equal footing along with other G20
and OECD countries for finalization of the MLI, based on the history of reliance by courts
on the principles laid down in the VCLT for interpretation of tax treaties and the OECD
Commentary, it is likely that the explanatory statement and the interpretation guidelines
provided in the OECD memorandum called “Multilateral Convention to Implement Tax
Treaty Related Measures to Prevent Base Erosion and Profit Shifting: Functioning under
Public International Law” would be followed by Indian courts. These documents could be
considered as supplementary means of interpretation.
56
Para. 213.
57
Ram Jethmalani vs. Union of India [2011] 339 ITR 107 (SC).
58
Abdul Razak A Meman, In Re (2005) 276 ITR 306 (AAR).
59
UOI v. Azadi Bachao Andolan (2004) 10 SCC 1 (SC); DIT v. Balaji Shipping UK Ltd (2012) 24 taxmann.com 229 (Bom).
60
Motorola Inc & Others [2005] 95 ITD 269 (Del SB).
61
Sumitomo Mitsui Banking Corporation v DDIT (2012) 136 ITD 66 (Mum SB).
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India
Interpretational issues relating to the official language

As per article 343(1) of the Constitution, Hindi in Devanagari script shall be the official
language of the Union. However, the continuing use of English as the official language of
the Union has been permitted indefinitely.62 Accordingly, the Central Acts continue to be in
English, and the English version prevails over the Hindi text. India’s double tax treaties are
usually in English and Hindi as well as in the official language of the treaty partner except
for five treaties which are entered only with an English text.63 Where the treaties have multi-
lingual texts, English has been made the operative text in case of any doubt or divergence.
Treaties with Canada and France are the exceptions where the treaties are in English, Hindi
and French, and all texts are equally authentic with no rule as to what prevails in case of
any divergence. As for the MLI, both the English and the French texts are equally authentic.
Consequently, interpretational issues relating to the MLI should not arise, for this reason,
both for India and the respective treaty partner except for these two CTAs.
The discussion on the use of the explanatory statement as supplementary means of

interpretation would equally apply to OECD reports published in the course of the BEPS
project. The OECD reports have been relied upon by Indian judicial authorities and it is
acknowledged that they contain useful discussions relevant for interpreting a tax treaty.64
Since the Preamble of the MLI refers to the package of measures developed under the
OECD/G20 BEPS project which include tax-treaty related measures which are part of the MLI,
there is little doubt that the final BEPS Reports form the context of the MLI and would have
a significant role in its interpretation.
The OECD Commentaries 2017 Update incorporating the changes recommended in the
final BEPS Reports was released only in July 2017, after more than six months from the time
the MLI text was approved in November 2016. Where the OECD Commentaries have deviated
from or have added to the recommendations made in the BEPS Final Reports, there could be
a challenge to include such changed Commentary as part of the context of the MLI.
Courts have followed some broad principles for interpretation of tax treaties.65 The
principles for the interpreting statutes are not applicable for interpreting tax treaties. A treaty
is to be interpreted in good faith and in accordance with its ordinary meaning in the context
and light of its objectives and purpose. It need not to be examined in a precise grammatical
or literal sense. A departure from the plain meaning of the language is permissible to avoid
absurdities and to interpret the treaty in such a manner as to make it workable rather than
redundant. A literal or legalistic interpretation must be avoided if that would frustrate the
basic objective of the treaty. The courts would likely handle the issues of interpretation
relating to the MLI similarly.
There has been some reluctance on the part of the judicial authorities to accept texts that
are later than the treaties. In Gracemac,66 the Revenue argued against using a subsequent
62
Official Languages Act, 1963, s. 3.
63
Bangladesh, Egypt, Greece, Slovak Republic and Zambia.
64
Standard Chartered Bank v. DDIT (2011) 45 SOT 494 (Mum); Factset Research Systems Inc. In Re (2009) 317 ITR 169
(AAR).
65
Azadi Bachao Andolan [2003] 263 ITR 706 (SC), Hindalco Industries Ltd. [2005] 94 ITD 242 (Mum).
66
Gracemac Corpn. v Asst. Director of Income-tax (2010) 43 SOT 550 (Del).
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Rajgopalan & Modi
Commentary where changes in taxing concepts are introduced by bringing changes to the
Commentary rather than the Model thus making the Commentary ambulatory. The Income-
Tax Appellate Tribunal (‘ITAT’) referred to the Supreme Court67 and refused to rely on the later
OECD Commentary.
The courts have interpreted tax treaties purposively considering the historical, social,
political conditions, needs which led to the adoption of the treaty in question and the purpose
of the contracting parties. Such an approach is most likely to be extended to the MLI and the
treaties modified by the MLI as well.
The modified preamble as per the MLI could be applied retroactively to arrangements which
have been entered before modification. As per paragraph 38 of the explanatory statement to
the MLI, for article 3(2) of the tax treaties, the context would include the purpose of the tax
treaty as reflected in the modified preamble.
In one decision,68 the High Court held that the treaty provision when the income accrued,
was relevant and not the provision when the contract leading to that income was originally
signed. Since there are no grandfathering provisions in the MLI, the modified preamble could
be invoked to deny treaty benefits even for arrangements entered into prior to modification.
However, in another decision,69 the ITAT held that a tax treaty, being a delegated legislation,
cannot apply retrospectively (for contracts entered prior to the effective date of the protocol
even if the protocol provides for retrospective application) if it adversely affects rights of
taxpayers. The decision of the High Court is arguably the correct view for applicability of
amended treaties for arrangements entered pre-amendment.
Retrospective influence on existing treaties

Another issue of interest is whether the choices made by India in reserving or notifying the
various provisions of the MLI indicate the understanding of the revenue authorities of the
existing treaty provisions which are to be modified by the MLI. Though there has not been
any debate on this issue, arguably, various provisions of the MLI are intended to modify the
existing treaty provisions and a reservation by India not to apply an MLI provision does not
indicate that a current treaty provision needs no such modification. For instance, India has
reserved the application of article 3 dealing with transparent entities, and its position is
that such a provision for their taxation is to be negotiated bilaterally between contracting
states before incorporating them in the treaties. On the other hand, India opted for Option
C in article 5 but has not notified the CTA provisions where it follows the credit method for
relieving double taxation of its residents. Arguably, it could be the understanding of the
Indian tax authorities that the additional words inserted in that provision by article 5(6)
(relieving India of the obligation to give credit for taxes imposed by the other state solely to
tax its residents) are merely clarificatory and should apply to all treaties.
67
CIT v P V A L Kulandagan Chettiar (2004) 137 Taxman 460 (SC).
68
Timken India Ltd. v. CIT (2002) 130 Taxman 638 (Cal.).
69
Tata Iron & Steel Co. Ltd. v. DCIT [1999] 69 ITD 292 (Mum.).
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India
a. Tax planning after the MLI
The introduction of the PPT in the tax treaties through MLI would bring a sweeping change
in the way in which tax professionals would advise on tax planning. Before recommending
availing of any treaty benefit, the tax professional would require the taxpayer to establish
the economic substance of the transaction or arrangement and articulate a sound business
rationale. Coupled with the applicability of the GAAR in the ITA, the tax professionals’
approach would expectedly be more circumspect and less aggressive.
b. Tax administration after the MLI
Even before the MLI, tax authorities in India have challenged tax treaty shopping.70 However,
courts have consistently relied on the decision of the Supreme Court in the case of Azadi
Bachao Andolan (referred to supra). As the treaties as modified by the MLI would have a
specific provision for denying treaty benefits in case of treaty shopping, tax authorities would
have a stronger case. However, there is no perceptible change in the assessment practices yet.
c. PPT – Special review procedure for potential assessments
As a safeguard against any arbitrary invocation of GAAR, a high-ranking approving panel

examines any reference from the tax authorities. However, there is no provision for a similar
panel or other authority to decide on the applicability of the PPT though safeguards may be
introduced in the future.
d. Dispute resolution
i. Mutual Agreement Procedure

The MAP provisions in the MLI have limited impact on India’s treaties. Since India does not
endorse the provisions that permit a person to present a case to either of the contracting
states, it is required to permit presentation of the case to the state where that person is a
resident or of which he is a national, as the case may be. India is presently implementing
a bilateral notification or consultation process in cases where its competent authority
considers that the objection raised by the taxpayer in a MAP request is not justified. With
these measures, the MAP is expected to become more transparent.
ii. Corresponding adjustments

Though the provisions akin to article 9(2) of the OECD Model are absent in some treaties,
India has clarified that it would accept transfer pricing MAP cases and bilateral APA requiring
a corresponding adjustment nevertheless.71
70
DIT v. Goodyear Tire and Rubber Company [2013]30 Taxmann.com 400 (Delhi).
71
CBDT’s Press Note dated 27 November 2017.
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Rajgopalan & Modi
Annexure A – MLI Impact on India’s Tax Treaties (position as on 30 October 2019)

72 73 74 75 76 77
MLI BEPS Counter- CTA Bilaterally Not Reserved/ Reserved/ Total % of

Article measure description provision addressed a CTA opted-out opted-out treaties treaties
applied by India by treaty modified
by MLI partner by MLI
3 Transparent 572 36 54 95 5.3%
entities
4 Dual Resident 2573 1 15 11 52 50.0%
Entities
5 Elimination of
double taxation
5.1 India 2 1 37 53 2 95 3.2%
5.2 Other State 3 1 37 54 95 4.2%
6 Preamble 57 274 36 95 62.1%
7 Prevention of
treaty abuse
7.1 Principle purpose 57 275 36 95 62.1%
test
7.2 Simplified 12 38 45 95 12.6%
limitation of
benefits
8 Dividend transfer 5 176 13 6 25 24.0%
transactions
9 Gains on alienation
of shares of
Immovable
property entities
9.1 Extended testing 3077 1 37 27 95 32.6%
period
9.2 Expanded scope 31 1 37 26 95 33.7%
10 Anti-abuse rule for 18 38 39 95 18.9%
PE in third state
11 Agreement to 16 1 37 41 95 17.9%
restrict right to tax
own residents
72
Treaty with the People´s Republic of China amended post-signing of MLI by India. Treaties pre-MLI which contain
provisions relating to partnerships and trusts are the UK, US, Sweden and Norway.
73
Includes 17 treaties which have an existing rule for resolution of dual residence through MAP but are still modified
by MLI.
74
The People´s Republic of China and Iran.
75
Treaties with the People’s Republic of China and Iran and art. 28 of the India-Hong Kong Treaty (signed in 2018)
contain provision is a combination of the language contained in the PPT and the Preamble of the MLI but with
divergence.
76
Treaty with Portugal (1998) contains a minimum holding period of not less than two years.
77
MLI modifies 16 treaties where the Capital Gains art. anyway gives taxing rights to the source state for gains on
alienation of assets otherwise not listed in that article.
419
India
MLI BEPS Counter- CTA Bilaterally Not Reserved/ Reserved/ Total % of

Article measure description provision addressed a CTA opted-out opted-out treaties treaties
applied by India by treaty modified
by MLI partner by MLI
12 Artificial avoidance 28 1 37 29 95 30.5%
of PE status –
commissionaire
arrangements
13 Artificial avoidance
of PE status-
specific activity
exemptions
13.1 Over-all of 30 38 27 95 31.6%
preparatory,
auxiliary character
13.2 Anti- 35 38 22 95 36.8%
fragmentation rule
14 Splitting up of 22 1 37 35 95 24.2%
contracts
15 Person closely
related to an
enterprise78
16 Mutual Agreement
Procedure
16.1 Presenting the 95 95 0.0%
case before CA of
either CJs
16.2 Shorter-time limit 7 1 1 9 77.8%
for presenting the
case
16.3 Endeavour to 1 1 100.0%
resolve through
MAP
16.4 Notwithstanding 3 3 4 10 30.0%
time limit in
domestic law
16.5 Resolve difficulties 1 1 100.0%
or doubts arising
as to interpretation
/application
through MAP
16.6 Consult together 4 1 5 80.0%
for cases not
provided for in
Agreement
17 Corresponding 10 11 4 25 40.0%
Adjustments
432 18 600 203 395 1648 26.2%
78
78
The CTAs modified by art. 15 linked with arts. 12 to 14 and is not separately reported.
420
Israel
Branch reporter
Ofir Levy1
Introduction
Since its establishment, Israel has entered into double tax treaties with 58 countries around
the world. The process of negotiating a tax treaty is usually led by the State Revenue
Administration and representatives of the Israeli Tax Authority (hereinafter: the “ITA”).
During recent years, countries around the world, including Israel, are facing with
taxpayers, including multinational entities and individuals, that conduct “treaty shopping”,
which generally means the taxpayers are using the provisions of the tax treaties in order to
reduce their worldwide tax liability, by means of base erosion and profit shifting, which may
eventually lead to “double non-taxation”.
In order to fight this phenomenon, Israel has enacted anti-avoidance rules in its
domestic tax laws since its establishment. In addition, Israel joined the OECD in 2010 and
is now committed to implement Action 15 of the BEPS Project, including signing the new
multilateral instrument that was developed by the OECD, the MLI.
Anti-avoidance rules under domestic tax law
A. General anti-avoidance rule 1 – Artificial transaction
Under article 86 of the Israeli Income Tax Ordinance (the “ITO”), the Israel assessing officer,
at his sole discretion, is authorized to disregard the formal form of a transaction conducted
by a taxpayer or to change its facts, and to impose tax on such transaction according to its
true and economic nature.
In order to do so, the assessing officer must prove that the said transaction is “artificial”.
Artificial transaction generally means a transaction that has only one commercial purpose
of reducing or avoiding tax liability in Israel and/or abroad. Also, the Israeli Supreme Court
determined that this “commercial reason test” is an auxiliary test which is part of broader test
that, inter alia, takes all the facts and circumstances of each case into consideration.
B. General anti-avoidance rule 2 – Reclassification
The Israeli Supreme Court has established the reclassification rule under which the assessing
officer has the authority to view a transaction made by a taxpayer differently than the way
1
Partner, Yigal Arnon & Co. Law Offices; Advocate (Israel), CPA (Israel); MBA (Tel Aviv University).
IFA © 2020 421

Israel
the taxpayer views it, and to reclassify such transaction for tax purposes according to his/
her view and not according to the taxpayer’s view, which may result in higher tax liability
for the taxpayer.
C. Specific anti-avoidance rules – CFC regime
Section 75B of the ITO establishes a Controlled Foreign Corporation (CFC) regime which serves
as a specific anti-avoidance rule. Under the CFC regime, Israeli residents who are controlling
shareholders of a foreign company will be subject to income tax in Israel, on a current basis, on
certain undistributed types of passive income of that foreign company, which will be viewed
as “deemed dividends”. The aim of this CFC regime is to undermine potential tax-deferral
advantages with respect to passive income, which can be achieved by the utilization of foreign
corporations in low tax jurisdictions.
D. Specific anti-avoidance rule – Transfer pricing
Section 85A of the ITO and its accompanying regulations contain elaborate transfer pricing
provisions, including the arm’s-length principle, that apply to any international transaction
in which there is a special relationship between the parties to the transaction and for which
a price was settled for property, a right, a service, or a credit.
Under the arm’s-length principle, in the case that a foreign parent company extends
a loan to its Israeli subsidiary and the loan bears interest which is below the market price,
such loan might result in “notional” interest income for the foreign parent company, based
on the market price charged for such capital notes, unless certain conditions are met. In the
case where section 85A applies, the Israeli subsidiary may be eligible to deduct such interest
expenses and reduce its taxable income in Israel.
E. Beneficial ownership
Generally, when a foreign entity claims tax benefits under a tax treaty, the ITA usually
examines whether such taxpayer is indeed (i) a tax resident of the relevant jurisdiction and
(ii) that it is the “beneficial owner” of the relevant item of income (e.g., dividends, interest
and royalties) or, alternatively, whether the income should be attributed to another entity
(typically an affiliated entity). This includes an examination of whether the foreign entity in
question has sufficient economic substance.
Generally, the ITA interprets the term ”beneficial ownership” to mean the entity is not
a mere “conduit” that passes the income on to others. For this purpose, the ITA published a
number of tax circulars2 listing several factors which may indicate the existence of a ‘conduit
entity’. Such indications include minimal business activity, lack of assets/minimal assets, lack
of justification for the existence and provision of “back-to-back” loans.
2
ITA Circular 22/2004; ITA Circular 3/2001.
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Levy
The MLI
On 7 June 2017, Israel signed the MLI and on 13 September 2018, after ratifying the MLI, Israel
submitted the ratification documents to the OECD. The MLI entered into force in Israel on
1 January 2019.
Israel has listed 53 treaties out of the total of 58 countries with which Israel has signed a
tax treaty, as CTAs.
Israel had no reservations with respect to articles 3 to 15 of the MLI. However, Israel chose
not to apply part VI of the MLI.
Recently, synthesized texts of the tax treaty between Israel and Austria and the tax
treaty between Israel and Japan were published. Such synthesized texts include an explicit
statement that the authentic legal texts of the existing tax treaties and the MLI take
precedence over the synthesized texts.
Also, under Israeli law, the tax treaty provisions should not prevail over the domestic law,
such as the Israeli tax laws, in the event such provisions impose a heavier tax burden on the
taxpayer than the burden imposed on such taxpayer by the domestic law.3 In addition, the
synthesized texts mentioned above include an explicit statement that the authentic legal
texts of the existing tax treaties and the MLI take precedence over the synthesized texts. Also,
it seems that the provisions of the MLI will not have retrospective effect.
Finally, we expect that the assessment practices of the ITA regarding tax treaty shopping
and other treaty abuses will be significantly affected by the MLI.
Treaty Network
1.1. Introduction
Under sections 2 and 89(b) of the Income Tax Ordinance4 (hereinafter: the “ITO”), an Israeli
resident is generally subject to tax in Israel with respect to his worldwide income and capital
gains, whether derived from sources within Israel or abroad. In other words, an Israeli resident
is subject to tax in Israel with respect to his income and capital gains on a personal basis. This
rule is also stated in sections 2 and 89(b) of the ITO, as follows:
“...2. Income tax shall be payable, subject to the provisions of this Ordinance, for each tax
year, at the rates specified below, with respect to an income of a resident of Israel that
was generated or derived in Israel or abroad…”
“...89. (b) (1) an Israeli resident is subject to tax on a capital gain that was generated or
produced in Israel or outside of Israel…”
3
Income Tax Appeal (Tel Aviv) 1255/02 Jetek Technologies Ltd vs. the Income Tax Assessor of Kfar Saba, Misim 19(3)
E-196 (2005); The Interpretation Anthology, S. 196: Double Tax Treaties, pages J-106 and J-107.
4
Income Tax Ordinance [New Version] 5768 – 1961.
423
Israel
Unlike an Israeli resident, a foreign resident is subject to tax in Israel only with respect to his
income and capital gains generated and/or derived from sources within Israel. In other words,
a foreign resident is subject to tax in Israel with respect to his income and capital gains on a
territorial basis. This rule is also stated in sections 2 and 89(b) of the ITO, as follows:
“...2. Income tax shall be payable, subject to the provisions of this Ordinance, for each tax
year, at the rates specified below,… with respect to an income of a foreign resident that
was generated or derived in Israel…”
“...89. (b) (2) a foreign resident is subject to tax on a capital gain that was generated or
produced in Israel.”
As a result of taxing Israeli residents on a personal basis, Israel is taxing the income of an
Israeli resident that was produced and/or generated anywhere in the world, while at the same
time, such income may also be subject to tax in the source country – the foreign country in
which the income was generated and/or produced – based on a territorial basis.
The same is true for foreign residents (i.e., non-Israeli residents). As a result of taxing
the income of foreign residents on a territorial basis, Israel is taxing the income of foreign
residents that was produced and/or generated in Israel, while at the same time, such income
may also be subject to tax in the “residence country” – the foreign country of which such
foreign residents are considered tax residents.
The two schemes mentioned above are the classic cases of double taxation of the same
income, both by the source country and the residence country. Consequently, these two
schemes cause a negative incentive for taxpayers to make international investments and
cross-border transactions.
In order to avoid double taxation, countries around the world are acting to “divide the
tax cake” between them. This is done bilaterally through bilateral tax agreements (double
tax treaties) and unilaterally in the domestic laws of each country.
However, the significant effort of the contracting states to eliminate double taxation
resulted in creating opportunities for non-taxation and/or reduced taxation through base
erosion and profit shifting by treaty shopping.
Under Action 15 of the OECD BEPS Project (Base Erosion and Profit Shifting Project),5 a
new multilateral instrument was developed in order to fight this phenomenon, the MLI.6
Since its establishment, and prior to the MLI, Israel has entered into double tax treaties
with 58 countries, as follows: Uzbekistan, Austria, Australia,7 Ukraine, Azerbaijan, Italy,
Ireland, Estonia, the United States (US), Armenia, Ethiopia, Bulgaria, Belarus, Belgium8,
5
The Organization for Economic Co-operation and Development.
6
The Multilateral Convention to implement tax treaty related Measures to Prevent Base Erosion and Profit Shifting
7
Signed on 28 March 2019 and was not yet ratified.
8
Old treaty was signed on 13 July 1972 and entered into force on 1 April 1975. New treaty was signed with initials
and was not yet ratified.
424
Levy
Brazil, the United Kingdom (UK),9 Georgia, Jamaica, Germany, Denmark, South Africa,
India, the Netherlands, Hungary, Vietnam, Chinese Taipei, Greece, Japan, Luxembourg,
Latvia, Lithuania, Moldova, Mexico, Malta, Macedonia, Norway, People’s Republic of China,
Singapore, Slovenia, Slovak Republic, Spain, Serbia, Poland, Portugal, Philippines, Finland,
Panama, Czech Republic, France, Republic of Korea, Canada, Croatia, Romania, Russia,
Sweden, Switzerland, Thailand and Turkey.
In Israel, the Israeli government is the competent authority to enter into international
agreements with other countries/jurisdictions, including bilateral and multilateral tax
agreements for the avoidance of double taxation with respect to taxes on income and capital
(i.e., tax treaties).
The process of negotiating a tax treaty is led by the State Revenue Administration (SRA)
on behalf of the State of Israel. This process also involves the participation of representatives
of the Israeli Tax Authority (hereinafter: the “ITA”) and the Israel Ministry of Foreign Affairs.
Generally, the Model Tax Convention on Income and Capital of the OECD serves as the
basis for drafting Israel’s tax treaties with other countries/jurisdictions, while reconciling
its provisions with Israeli domestic tax laws and Israel’s official position with respect to the
interpretation and negotiation of tax treaties.10
1.2.2. Domestic and tax treaty-based doctrines, provisions and practices before the MLI
1. The purpose of Israel’s tax treaties as defined in their preambles
Most of the preambles of tax treaties of which Israel is a party, contain a general statement
that the purpose of concluding the tax treaty is to avoid double taxation and to prevent tax
evasion with respect to taxes on income and capital.11
Some of the newer tax treaties of which Israel is a party, contain more elaborate preambles
in which the purpose of concluding a tax treaty is to avoid double taxation and to prevent tax
evasion which includes the elimination of double taxation without creating opportunities
for non-taxation or reduced taxation through tax evasion or avoidance, including treaty-
shopping arrangements aimed at obtaining indirect tax reliefs to residents of third countries.12
In addition, some preambles of the treaties of which Israel is a party, contain a general
9
Signed on 26 September 1962 and entered into force on 1 April 1961. A first protocol to the treaty was signed on
20 April 1970 and entered into force on 25 March 1971. A second protocol was signed on 17 September 2019 and
was not yet ratified.
10
The official position of the Ministry of Finance with respect to tax treaties as stated on its website, as
follows: https://mof.gov.il/ChiefEcon/InternationalTaxation/Pages/DoubleTaXPreventionAgreements.
aspx?WPID=WPQ12&PN=2&ptoken=5920192054430
11
See the preambles of the tax treaties between Israel and: Uzbekistan, Austria, Australia, Ukraine, Azerbaijan, Italy,
Ireland, Estonia, Armenia, Ethiopia, Bulgaria, Belarus, Belgium, Brazil, UK, Georgia, Jamaica, Denmark, South
Africa, India, Netherlands, Hungary, Vietnam, Chinese Taipei, Greece, Japan, Luxembourg, Latvia, Lithuania,
Moldova, Mexico, Malta, Macedonia, Norway, People’s republic of China, Singapore, Slovenia, Slovakia, Spain,
Poland, Portugal, Philippines, Finland, Panama, Czech Republic, France, Republic of Korea, Canada, Croatia,
Romania, Sweden, Switzerland, Thailand and Turkey.
12
See the preambles of the tax treaties between Israel and: Australia (not ratified yet), UK (protocol to the tax
treaty which was not yet ratified) and Serbia.
425
Israel
statement that the purpose of concluding the tax treaty is also to develop the economic
relationship between the parties and to enhance their cooperation in tax matters.13
2. Israel’s response to tax treaty shopping
A. General anti-avoidance rule 1 – Artificial transaction
The term “artificial transaction” sets out the authority of the assessing officer to exercise his
powers under article 86 of the ITO in order to challenge improper tax planning performed by
taxpayers, in both domestic and international transactions.
The essence of such authority is that the tax assessing officer may, under one or more
of the causes specified in article 86, disregard a specific transaction or action that actually
took place and to treat such transaction or action, for tax purposes, as if it never took place.
Moreover, during the years, Israeli courts have determined that the power vested in the
assessing officer by virtue of article 86 also includes the authority to treat a specific transaction
or action that did not take place, for tax purpose, as if it actually took place.
As a result, article 86 of the ITO enables the assessing officer, at his sole discretion, to
disregard the formal form of a transaction or to change its facts, and to tax the parties involved
in such transaction according to its true and economic nature.14
The causes for exercising article 86 of the ITO, include the following cases: (1) a case where
an “artificial transaction” (or action) was conducted; (2) a case where a “fictitious transaction”
(or action) was conducted; and (3) a case where one of the primary purposes of a transaction
(or action) is to reduce or avoid tax charges in an improper way.
Under Israeli case law, there are a few tests used to determine if a certain transaction is
“artificial” or not, and the main test is the “commercial reason test”. Under the commercial
reason test, a certain transaction shall be viewed as an artificial transaction, if it has only one
commercial purpose of reducing or avoiding the tax liability of the taxpayer involved, even
if it has additional purposes that are not commercial.15 In addition, the Supreme Court also
determined that the commercial test is an auxiliary test which is part of a more general test
where all the facts and circumstances are being examined on a case by case basis. This general
test should be exercised while balancing between the taxpayer’s right to plan his taxes, and
the public interest of collecting taxes and maintaining a just and equitable tax system.16
A fictitious transaction (or action) is a transaction done merely for the sake of appearance,
that portrays a false description of the reality in order to hide the real intention of the parties
13
See the preambles of the tax treaties between Israel and: Australia, Germany (new tax treaty), Hungary, Greece,
Slovakia, Serbia, Poland, Romania and Russia (phrased: “..in particular to encouraging international trade and
investment..”).
14
Please note that a similar general anti-avoidance rule also exists in other Israeli laws which include an general
anti-avoidance rule that applies on real estate transactions (art. 84 of the Real Estate Taxation Law (Appreciation
and Acquisition 5723-1963) and general anti-avoidance rule that applies on the Value Added Tax aspects of a
transaction (art. 138 of the Value Added Tax Law 5736-1975).
15
See Civil Appeal 265/67 MPI Ltd vs. Assessing officer of major companies (1967); Civil Appeal 11/74 Assessing officer of
major companies vs. Ulpaney Hasrata Beisrael ltd. (1974); Civil Appeal 83/81 TMB vs. The Assessor of Haifa (1986);
Civil Appeal 390/80 TAS Mor vs. the Real Estate Assessor (1983); Civil Appeal 10666/03 Silvan Shitrit vs. the Assessor of
Tel Aviv no. 4 (2006); Civil Appeal 9412/03 Hazan vs. the assessor of Netanya (2005).
16
Civil Appeal 3415/97 Assessing officer of major companies vs. Yoav Rubenstein (2003); Civil Appeal 4374/05 Doron Reuveni
vs. the Assessor (2007).
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to the transaction and when examined, it is apparent that the transaction does not have any
economic and legal content.
In the Barazani case,17 the Israeli supreme court determined that the characteristic of a
fictitious transaction is that in the first place, the parties did not intend to fulfil the terms of
the transaction and they engaged in such transaction in order to obtain tax benefits.
The difference between an artificial and a fictitious transaction is that an artificial
transaction is presented to the tax authority in a way that disclose the parties’ true wishes,
while a fictitious transaction is presented to the tax authority in a way that does not disclose
the parties’ true wishes.
B. General anti-avoidance rule 2 – Reclassification
Under Israeli case law, the Israeli supreme court has established the reclassification rule
under which the assessing officer has the authority to view a transaction made by a taxpayer
differently than the way the taxpayer presented it, reclassify such transaction for tax purposes
according to the assessing officer’s view, and to tax it in a proper manner.18
The rationale of the reclassification rule is a fundamental principle of the Israeli taxation
system, whereby the true economic nature of any transaction or action should prevail over
the legal framework presented by the taxpayer, if there is a difference between the two. This
principle is also named the “substance over form” principle.
For example, in a case where an Israeli company sells the majority of its assets to a foreign
company and later on ceases its business operations, the assessing officer may reclassify such
a transaction as a merger instead of a sale of assets.
C. Specific anti-avoidance rules – CFC regime
Israeli tax law contains a Controlled Foreign Corporation (CFC) regime, which serves as a
specific anti-avoidance rule. Under the CFC regime, Israeli residents who are controlling
shareholders of a foreign company will be subject to income tax, on a current basis, on certain
undistributed types of passive income of that foreign company. As a result, such undistributed
amounts will be viewed as “deemed dividends”. The aim of this CFC regime is to undermine
potential tax-deferral advantages with respect to passive income, which can be achieved by
the utilization of foreign corporations in low tax jurisdictions.
1. Definition of a CFC
Section 75B of the ITO defines a CFC as any corporation (in Hebrew – “body of persons”),
which is a foreign resident for tax purposes (i.e. not an Israeli resident) and also satisfies all
the following requirements in a particular tax year, cumulatively:
(1) No more than 30% of its shares or the rights in such foreign corporation are listed on a
stock exchange;
(2) The majority (i.e., more than 50%) of the foreign entity’s income in the tax year is derived
from passive income or the majority of its profits in the tax year are derived from passive
income;
17
Civil Appeal 4015/95 Assessing officer of Jerusalem vs. Eliyahu Barazani (1998).
18
Civil Appeal 3415/97 Assessing officer of major companies vs. Yoav Rubenstein (2003).
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(3) The applicable tax rate on the respective passive income in the foreign jurisdictions does
not exceed 15%. The “applicable tax rate” is defined as the total amount of foreign tax
that the corporation would be liable to pay due to its passive income generated in the
applicable tax year – divided by the total amount of profits derived from passive income
in that year;
(4) More than 50% of any one (or more) of the “means of control” 19 in such corporation are
held, directly or indirectly, by Israeli tax residents20 (or an Israeli tax resident that has the
right to prevent the adoption of material management resolutions in such corporation),
either (i) at the end of the tax year in question, or (ii) on any day during the current tax
year and on any day in the subsequent tax year..
Passive income includes, inter alia, capital gains, interest and dividends. In effect as of 1
January 2014, the definition of passive income excludes any dividend derived from income
upon which the taxpayer can demonstrate that foreign tax was paid at a rate higher than
15%.21 The exclusion applies provided that the company receiving the dividend holds, directly
or indirectly, at least 5% of the rights in the foreign company paying the dividend, in the case
where the company is publicly traded on a foreign stock exchange, and, in all other cases, at
least 10% of the rights in the company paying the dividend.22
In effect as of 1 January 2014, the measurement of passive income and profits of a tested
CFC depends on the tax residency of the relevant foreign entity. To the extent that the entity is
a tax resident of a treaty country (i.e., a country that is a party to a tax treaty with Israel), then
the measurement of the passive income should be done in accordance with the tax law of that
country (with certain modifications). In the case of a foreign entity in a non-treaty country,
the measurement of passive income should be done in accordance with Israeli tax laws.
2. Consequences of CFC classification

Generally, any “controlling shareholder” in a CFC i.e., a shareholder who holds, directly or
indirectly, at least 10% of any of the means of control in a CFC that has “undistributed profits”
in a specific taxable year, shall be deemed to receive dividends in an amount equal to such
shareholder’s pro-rata share of such “undistributed profits” at the end of the relevant tax year
(i.e., a “deemed dividend”)
“Undistributed profits” are defined as profits derived from passive income generated
by the CFC in the relevant tax year, which have not been paid to the holders of the rights
of the CFC in the same taxable year. Particularly, the definition of undistributed profits in
section 75B(a)(12) of the ITO excludes dividends received from a foreign corporation with
respect to which it was proven to the satisfaction of the tax assessing officer that they derive
from income upon which foreign tax was paid at a rate greater than 15%. This exclusion
applies provided the company receiving the dividend holds, directly or indirectly, at least 5%
19
The term “means of control” is defined for these purposes as any of the following, whether held by way of
ownership of shares or any other way, including through a trust: (i) The right to participate in profits; (ii) The
right to appoint a director; (iii) Voting rights; (iv) The right to a proportionate share of the assets remaining in
the corporation upon its dissolution, after repayment of the corporation’s outstanding debt; and (v) The right to
instruct any person having any of the above rights as to the application of such right.
20
Other holding requirements apply where the means of control are held by related persons, sec. 75B(a)(1)(d) of
the ITO.
21
S. 75B(a)(5)(a)(2) of the ITO.
22
S. 75B(a)(5)(a)(2) of the ITO.
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of the rights in the case of a company paying the dividend that is publicly traded on a foreign
stock exchange and, in all other cases, at least 10% of the rights in the company paying the
dividend.23
D. Specific anti-avoidance rule – Transfer pricing
Section 85A of the ITO and its accompanying regulations contain elaborate transfer pricing
provisions, including the arm’s length principle, that apply to any international transaction
in which there is a special relationship between the parties to the transaction and for which
a price was settled for property, a right, a service, or a credit.
According to the arm’s-length principle, in the case that a foreign parent company extends
a loan to its Israeli subsidiary, and the loan bears interest which is below the market price,
such loan might result in “notional” interest income for the foreign parent company, based
on the market price charged for such capital notes. In such case, the Israeli subsidiary may be
eligible to deduct such interest expenses and reduce its taxable income in Israel.
Despite the arm’s length principle, section 85A of the ITO shall not apply when certain
conditions are met,24 as follows: (1) The borrower is a company which is controlled by the
lender; (2) The loan is not linked to any index and does not bear any interest or any other yield.
Currency rate will not be regarded as index if the loan is granted in the currency of the lender’s
country of residency; (3) The loan cannot be repaid during a five-year period starting at the
date the loan was granted; (4) The loan repayment is subordinated to all other liabilities.
In general, the regulations are based upon internationally recognized transfer pricing
principles. These regulations generally require the taxpayer to support the pricing of
international transactions with a transfer pricing study, inter-company agreements and
other documentation.
E. Beneficial ownership
The ‘beneficial ownership’ concept – ITA’s view

Generally, when examining the eligibility of a foreign entity for treaty benefits under a tax
treaty with Israel, the ITA examines whether such foreign entity is indeed (i) a tax resident of
the relevant jurisdiction and (ii) the “beneficial owner” of the relevant item of income (e.g.,
dividends, interest and royalties) or, alternatively, whether the income should be attributed
to another person (typically an affiliated person). Among several examinations, the ITA might
attempt to examine whether the foreign entity in question has sufficient substance (i.e.,
economic and business justifications, rather than pure tax avoidance purposes).
From time to time, the ITA issues circulars and other guidelines with respect to various
tax issues. Generally, the ITA guidelines are not binding upon the taxpayers and the Israeli
courts but only binding for the ITA itself. Accordingly, in order for the ITA to argue against
the position expressed in the ITA guidelines, the ITA needs to show a good reason to do so.
In any event, such guidelines are not binding law and the courts are not obligated to follow
23
S. 75B(a)(12) of the ITO.
24
This exception to s. 85A of the ITO was incorporated by the Israeli legislator in order to exclude certain
intercompany loans that are usually inferior to the overall liabilities of the company and bear no interest, which
resemble equity rights in the company (e.g., capital notes and certain convertible loans).
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them.25 Two of such publications which are relevant to this section of the report are ITA circular
22/200426 and ITA circular 3/2001.27
ITA Circular 22/2004 – Beneficial Ownership

In ITA circular 22/2004 which deals with the issue of “beneficial ownership”, ITA’s position is
that the term ‘beneficial owner’ should be given an independent meaning for the purposes
of tax treaties, in the context of the principles of international taxation and in accordance
with the objectives of tax treaties and specifically the objective of preventing treaty abuse.
Per ITA’s view, for the purposes of interpreting the term “beneficial ownership”, it is
possible and advisable to turn to court rulings from other common-law countries which
deal with the meaning of the term ‘beneficial owner’, primarily in the tax context, to the
extent that they are relevant to the provisions of the treaty. In addition, it is possible to rely
upon interpretation rules sourced in international law, including section 31 of the Vienna
Convention which states that provisions of a tax treaty should be interpreted in good faith
and in light of the objectives of the treaty which the parties contracted.
Within the framework of the ITA circular 22/2004, the ITA established the principles
which guide it in determining the identity of the ‘beneficial owner’:
“… the guiding principle in identifying the ‘beneficial owner’ is the examination of the
substantial economic indicators and not the formal indicators such as registration. The
beneficial owner is the one who benefits, in practice, from all of the rights encompassed
within control or ownership of an asset or a right, the one who benefits from their
appreciation and bears the risk of their loss or erosion in value. He is the owner of the
“last word” regarding everything with respect to the manner and extent of the use of a
right or an asset, including the fruits or the yield received from them. For example, he
can determine when and in what manner an interest in a right or an asset will be realized
and what use will be made of the proceeds. A beneficial owner can be an individual, a
company, a trust, or any other legal entity…”
Conduit entity under ITA Circular 22/2004

Generally, the ITA interprets the term ‘beneficial ownership’ to mean the entity is not a mere
“conduit” that passes the income on to others. ITA Circular 22/2004 lists several factors which,
among others, may indicate the existence of a ‘conduit entity’:
–– Minimal business activity;
–– Lack of assets/minimal assets;
–– Senior officer is granted very limited and insignificant responsibilities (often, the only
senior officer is an external attorney);
–– Temporary/interim ownership of the proceeds;
–– Lack of justification for the existence of a certain corporate structure, other than purely
for tax saving reasons;
–– Provision of “back-to-back” loans (equal interest rates, corresponding loan terms and
repayment arrangement etc.);
25
Civil Appeal 831/76 Levy vs. the Tax Assessor (1997); Various Civil Appeal 5388/99 Hefer Vs. the Value Added Tax
Administrator – Acre (2001).
26
Published on 26 August2004.
27
Published on 22 May 2001.
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–– The collateral for the loans is provided by another party (through encumbrance of another
party’s assets, or provision of other securities by another party);
–– The economic/financial risks are carried by another entity;
–– Another entity controls the transferred payments and has the ability to determine the
predestination and the utilization of such payments;
–– The proceeds are not considered taxable income at the level of the intermediary entity
in the country of its residence;
–– Existence of contractual or other obligation to transfer the proceeds to another party;
–– Systematic and continuous transfer of proceeds to another party, even without a formal
obligation to do so.
It should be emphasized that, as noted above, the positions conveyed by the ITA in this
circular are not binding and the ITA is permitted to adopt contrary positions in an assessment
process. Therefore, even when a company is fully compliant with the tests addressed in this
circular, it should not consider itself to be completely free from scrutiny in this matter (even
more so if it is only compliant with part of the factors mentioned in this circular).
ITA Circular 3/2001 – Treaty shopping

Treaty shopping involves the use of the protection offered under a particular treaty by
interposing a person who can claim treaty protection, which would have otherwise been
unavailable. ITA Circular 3/2001 provides examples of treaty shopping as well as several
methods aimed at preventing abusive tax planning strategies.
The methods for prevention of abusive tax planning discussed in ITA Circular 3/2001
are, inter alia, Limitation on Benefits (“LOB”) provisions in the tax treaties, the ‘beneficial
ownership’ requirement in the tax treaties, and the application of general domestic tax law’s
anti-avoidance principles (when a particular tax treaty does not contain a specific anti-abuse
provision).
With respect to the application of the anti-avoidance principles, the ITA clearly
determined that although section 196 of the ITO determines that Israeli domestic law is
inferior to an international tax treaty, Israeli domestic law shall override the tax treaty in
certain cases when it will be possible for the ITA to deny treaty benefits and reliefs, which
were provided under a tax treaty, based on Israeli anti-avoidance rules such as sections 86
and 68A28 of the ITO.
In this regard, as described in section 2-A of our report, article 86 of the ITO generally
authorizes the ITA to disregard actions or transactions that are “artificial” (i.e., designed
to reduce the tax payable by a taxpayer) or such actions or transactions of which the main
purpose (or one of the main purposes) is to avoid payment of taxes in an “improper manner”.
In an Israeli District Court case named Yanko Weiss,29 the court held in a preliminary
proceeding that treaty benefits could indeed be denied in a sham transaction, for the reason
that general (domestic law) anti-avoidance rules are applicable when applying double tax
treaties. The Yanko Weiss decision does not specify all the pertinent facts and circumstances
of the case. The only information provided is as follows: a company was incorporated
in Israel, but in 1999 its shareholders met in Belgium and resolved to make it a Belgian
28
Under s. 68A of the ITO, a foreign corporation (i.e., non-Israeli corporation) will not be entitled to any tax benefit/
reduction/exemption under Israeli domestic law in cases where such foreign corporation is controlled by Israeli
residents and/or in cases where Israeli residents are the beneficiaries or holding rights of at least 25% of its
income and/or profits of such foreign corporation, whether directly or indirectly.
29
Various Civil Requests 5663/07 Yanko Weiss Holding vs. the Holon Assessing Officer (2007).
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resident company by moving the registered office, management and activity to Brussels. The
company also obtained confirmation of Belgian residency from the Belgian tax authorities.
Subsequently, the company claimed a reduced rate of withholding tax (presumably five
percent) under the Israel-Belgium tax treaty on a dividend distributed from an Israeli resident
subsidiary company.
The court held, inter alia, that:
A tax treaty is designed, first and foremost, to create a situation in which a taxpayer
trapped in the tax system of two countries will not be exposed to double taxation. Tax
treaties were not designed, nor can it be said that any such intent existed, whether they
include express provisions or not, for use that will be made of them in a manner which
is not in good faith and in an acceptable manner, or that use can be made of them which
constitutes improper use of provisions set forth and the benefits which they grant. The
States which conclude a treaty are entitled to raise arguments against such improper
use of tax treaty provisions. They can do so by virtue of provisions of domestic law, which
contain anti-avoidance provisions which are the basis for determining tax liability.
In the Yanko Weiss preliminary decision, the District Court ruled that notwithstanding the
fact that the Israel-Belgium tax treaty does not contain a specific anti-avoidance provision,
the ITA may read ITO section 86 into the tax treaty and consequently disallow tax benefits
under a treaty, where the ITA determines that the foreign tax residency status was established
for avoidance of tax in an improper manner.
We note, that this decision was issued by the Tel-Aviv District Court, and as such is not
binding upon other District Courts and only instructive with respect to the lower instances.
However, its main importance is that it is the first occasion on which a court specifically stated
that domestic anti-avoidance provisions can be invoked notwithstanding the existence of a
tax treaty.
On 7 June 2017, the Israeli Finance Minister, Mr. Moshe Kahlon, on behalf of the State of Israel,
signed the MLI in accordance with the recommendation of the BEPS Project (Base Erosion
and Profit Shifting Project).30 After signing Israel ratified the MLI on 13 September 2018 and
submitted the ratification documents to the OECD. The MLI entered into force in Israel on 1
January 2019.
According to a general explanation provided on the official website of the Israeli Ministry
of Finance, the reason Israel signed the MLI is to fight against tax planning of multinational
companies aimed to avoid tax charges by eroding the tax base and/or shifting profits to tax
havens around the world. Also, according to this general explanation, the need to fight tax
planning was intensified by the free movement of capital and the expansion of the worldwide
30
P. 128 of the Prevention of Treaty Abuse – Peer Review Report on Treaty Shopping dated 24 January 2019.
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digital economy, which created “gaps” in the tax legislation that could be exploited for tax
avoidance.31
Israel has listed 53 treaties as CTAs out of the total of 58 countries with which Israel has signed
a tax treaty. The 5 remaining countries that were not listed as CTAs are Australia, the UK,
Germany, Switzerland and Serbia. The percentage of tax treaties which Israel intends to cover
as CTAs, in proportion to all existing tax treaties of Israel, is 91.37%.
In addition, out of the 58 tax treaties signed by Israel (100%), 53 tax treaties have been
listed by Israel as CTAs (91.37%). However, only 41 out of the 53 countries that have been listed
by Israel as CTAs actually entered into the MLI (70.68%).
As of 30 September 2019, The CTAs listed by Israel as CTAs that did not enter into the
MLI are Uzbekistan, Azerbaijan, the US, Ethiopia, Belarus, Brazil, Vietnam, Chinese Taipei,
Moldova, Macedonia, Philippines and Thailand. Please note that Thailand expressed its
intent to sign the MLI in the future.32
In addition, Israel has chosen to adapt articles 3, 4, and 6 to 15 of the MLI on its CTAs with
no reservations, as described below. Accordingly, in order for each of these articles to apply,
both Israel and the other contracting state should not refrain from applying it. Below is a
brief summary of the applicable provisions of the MLI that Israel has decided to adopt into
its domestic law and double tax treaties33.
Article 3 of the MLI deals with transparent entities. A transparent entity is an entity that
produces income and the taxes on such income are not imposed upon such entity but rather
imposed on shareholders and on holders of similar rights (such as partners in partnerships
and trustee in a trust). Action 2 of the BEPS project also deals with transparent entities. As
to the taxation of transparent entities under the MLI, it was determined that the income
derived by or through an entity that is treated as wholly or partly fiscally transparent under
the tax laws of either contracting state, shall be considered to be income of a resident of a
contracting state but only to the extent that the income is treated, for tax purposes by that
state, as the income of a resident of such state.34
As to article 4 of the MLI, a tax treaty generally applies to both contracting states that
signed it. In addition, the residency of the taxpayer (individual or corporation) is an important
31
https://mof.gov.il/ChiefEcon/InternationalTaxation/Pages/DoubleTaXPreventionAgreements.
aspx?WPID=WPQ12&PN=1&ptoken=2920192230580
32
According to the Signatories and Parties to the Multilateral Convention to Implement Tax Treaty Related
Measures to Prevent Base Erosion and Profit Shifting – Status as of 20 September 2019. The link: https://www.
oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf
33
Reservations and Notifications under the Multilateral Convention to Implement Tax Treaty-Related Measures
to Prevent Base Erosion and Profit Shifting – the State of Israel, deposited on 13 September 2018, pp. 10 – 24.
34
The State Revenue Administration (SRA) Report, ch. 19, p. 4. This report is available on the following link:https://
www.mof.gov.il/ChiefEcon/StateRevenues/StateRevenuesReport/DocLib/2015-2016/Report2015-2016_19.
PDF
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factor in determining which contracting states are allowed to tax the taxpayer. Therefore, the
method of determining the residency of the taxpayer is crucial. As a general rule, under most
OECD tax treaties, when an entity is a resident of both contracting states, according to the
tie-breaker rule, the residency of such entity under the treaty is determined by the place in
which such entity is effectively managed. Due to the difficulties of applying the tie-breaker
rule, which was also frequently abused by taxpayers, it was decided that in cases of dual
residency, the residency will be determined by both competent authorities of the contracting
states by mutual agreement.35
Under the MLI, the purpose of double tax treaties is still to avoid double taxation, without
creating opportunities to abuse the provisions of the tax treaties that lead to reducing and/
or avoiding taxes. Accordingly, in order to maintain transparency, the MLI introduced a
new preamble to the tax treaties that specifically mentioned this purpose. Israel had no
reservations with respect to article 6 of the MLI.
Israel has also chosen to apply the principal purpose test (PPT) under article 7 of the MLI
on its CTAs, which is a general anti-abuse rule based on the principle purpose of transactions
or arrangements. Please note that the PPT is the only approach that can satisfy the minimum
standard on its own.
Under the OECD Model Convention, the withholding tax upon payment of dividend
to a resident of a contracting state is limited, in cases where the parent company holds
certain percentage of the outstanding shares of its subsidiary (can be higher than 25%,
lower than 25% and sometimes it can be 5%). In order to prevent the abuse of a lower rate
of withholding tax by transferring the rights in the subsidiary to a third party before the
dividend is distributed, article 8 of the MLI suggests to also include a condition under which
the eligibility to a lower rate of withholding tax will apply only if the beneficial owner of the
rights in the subsidiary held such right for a period of 365 days that includes the day on which
the dividend was distributed.
According to the OECD Model Convention, the general rule applicable to sale of an asset
is that the capital gains are taxed first at the residence country of the seller. However, upon
a sale of a real estate, the general rule is that the capital gains are taxed first at the source
country (the country in which the real estate is situated). There is also a similar provision
that applies in a case of sale of shares that derives more than 50% of its value, directly and/or
indirectly, from real estate (hereinafter: the “Holding Condition”). In such a case, the capital
gains are taxed first at the source country (the place in which the real estate is situated). In
order to prevent an abuse of this article, the MLI includes an additional article – article 9 of
the MLI – under which the source country will be the first to tax the capital gain from the
sale of such shares in cases where the Holding Condition is met for at least one day out of
the 365 days prior to the sale.
Action 7 of the BEPS project deals with the issue of permanent establishment and five
articles of the MLI deal with this subject as well, namely articles 10 to 15 of the MLI. The
purpose of the changes under the MLI with respect to permanent establishment is to ensure
that the income will be taxed in the place in which the economic activity is conducted. Under
the MLI, an additional anti-tax planning article was added to the treaty that deals with a
permanent establishment in a third country. The purpose of this new article is to prevent
allocation of the income to a permanent establishment located in a third country which is a
tax haven (in cases where the tax rate in the third country is lower than 60% of the tax that
35
The State Revenue Administration (SRA) Report, ch. 19, pp. 3 – 4.
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would have been imposed by the residence country of the person managing the business
operations). Israel had no reservations with respect to these articles of the MLI. Accordingly,
in order for these articles to apply, both Israel and the other contracting states should not
refrain from applying these articles.
Israel chose not to apply part VI of the MLI. Israel’s choice not to apply part VI of the MLI
seems to be a significant reservation. According to a State Revenue Administration (SRA)
Report, it seems that the reason for this reservation is the fact that a significant amount
of tax treaties does not include arbitration mechanisms and the experience with it is very
limited.36Also, a senior official from the Ministry of Finance has informed us that this
reservation was done in accordance with guidelines from the Israeli Ministry of Justice but
the guideline not to apply part VI of the MLI, may well be reversed in the future.
Since Israel signed the MLI on 7 June 2017, new tax treaties with Armenia and Serbia were
signed.37
Israel had expressed its intent to include the articles of the MLI in a way of adding new
articles to the existing tax treaties or replacing the existing article with the articles of the MLI.38
Israel stated that the new MLI provisions will be added to the 2017 version of the OECD Model
Convention and will not replace them. In that respect, Israel indicated that it will continue
to apply the provisions of the 2017 version of the OECD Model Convention.39 Also, please see
our conclusions in section 1.3.3 of this report.
Part Two: Practical implementation of Provisions of the MLI
2.1.1. Procedure Implemented in order to implement the MLI
Israel deposited the MLI instrument of ratification with the OECD Secretary-General on 13
September 2018. The MLI entered into force on 1 January 2019.
Recently, the State of Israel and Republic of Austria published a synthesized text of the
revised tax treaty between them. The provisions of the MLI that are applicable with respect to
the provisions of this tax treaty are included in boxes throughout the text of the synthesized
text.40
In addition, the State of Israel and Japan published a synthesized text of the revised
tax treaty between them. The provisions of the MLI that are applicable with respect to the
36
The State Revenue Administration (SRA) Report, ch. 19, p. 7.
37
38
39
40
The Synthesized text of the MLI and the Convention between the government of the State of Israel and the
government of the Republic of Austria for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with respect to Taxes on Income and on Capital.
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provisions of this tax treaty are also included in boxes throughout the text of the synthesized
text.41
According to section 196 of the ITO, the provisions of a double tax treaty which Israel had
signed and ratified, supersede the provisions of the ITO.42
Despite the provisions of section 196 of the ITO specified above, there is a common
principle that a double tax treaty is intended to better the taxpayer’s tax status and not to
worsen the taxpayer’s tax status. In other words, the provisions of a tax treaty, should not
prevail over the provisions of the domestic law, such as the Israeli law, in the event such
provisions impose a heavier tax burden on the taxpayer than the burden imposed on him
by the domestic law.
Moreover, a tax treaty should not create a tax liability that does not exist under the
domestic law nor extend its scope. This principle stems from the very nature of tax treaties:
tax treaties set limits to the taxation authority of contracting countries, but they do not extend
such taxation authority (the “To Ease and not to Worsen Principle” or the “TEW Principle”). 43
This TEW Principle is also the official position of the Israeli Income Tax Authority, which
is mentioned explicitly in the Interpretation Anthology,44 as follows:
“The purpose of the tax treaties is, first and foremost, to prevent double tax liability
and to avoid evasion of tax liability, for which the tax conventions establish rules and
arrangements for the division of the right to impose taxes on various kinds of income between
the Contracting States.”
“…1.9 … The agreement shall be valid, in the words of Section 196:” Notwithstanding
the provisions of any law”. As a result, the Convention effectively receives a validity of a
Preferred Law. The meaning of a Preferred Law in present case is that if the treaty grants
relief in comparison with the existing law, the provisions of the convention will apply,
notwithstanding the provisions of the law.
1.10 However, it should be borne in mind that although it is a Preferred Law, the
Convention cannot be more stringent than the existing tax laws in the country. Therefore,
if there are burdensome provisions in the convention, the local law will prevail, since the
convention is intended to provide relief and not to worsen…”
As an example, the TEW Principle can also be found, inter alia, in article 6(2) of the
US-Israel double tax treaty. This article determines that the provisions of the treaty cannot
limit tax benefits provided to an individual or corporation under the domestic law (i.e., the
41
Synthesized Text of the MLI and the Convention between Japan and the State of Israel for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income.
42
Income Tax Appeal 1292/07 Ron Alfassi vs. the Income Tax Assessor Ramla (2012); Income Tax Appeal 49525-02-14
Gmul America Ltd vs. the Income Tax Assessor of Tel – Aviv 4 (2016); Income Tax Appeal 31489-01-13 David Kenig vs.
the Income Tax Assessor of Tel – Aviv 3 (2015); Miscellaneous Civil-Related Petitions (Tel Aviv) 5663/07 Yenko Weiss
Holdings (1996) Ltd. vs. the Income Tax Assessor of Holon (2007).
43
Doron Levy and Eitan Asnafi, International Taxation – the Law in Israel, pp. 1286 – 1288 (2008); Income Tax Appeal
(Tel Aviv) 1255/02 Jetek Technologies Ltd vs. the Income Tax Assessor of Kfar Saba, Misim 19(3) E-196 (2005); The
Interpretation Anthology, Section 196: Double Tax Treaties, pp. J106 and J-107.
44
The Interpretation Anthology, Section 196: Double Tax Treaties, pp. J106 and J-107.
436
Levy
domestic laws in the US and in Israel).45

Despite the foregoing, it is possible that the TEW Principle may not apply in certain cases
where the taxpayer prefers not to utilize the tax treaty and be taxed solely based on Israeli
domestic law.46
In the synthesized texts of the revised tax treaties between Israel to Austria and Israel and
Japan, there is a provision inserted in the first page of the text that stresses a very important
rule regarding the interpretation of the synthesized text of such treaties: the authentic legal
texts of the existing tax treaty and the MLI take precedence over the synthesized text and
remain the legal texts applicable.
According to our finding in sections 1.3.3 and 2.1.2 of this report, we hold the view that the
connection between the MLI and earlier OECD reports in the course of the BEPS project have
given some value to those reports for treaty interpretation issues, in particular in the light of
the principles enshrined in the Vienna Convention of the Law of Treaties.
In addition, the BEPS reports and the OECD Commentaries should have a similar legal
weight in Israel.47
Also, it is possible that teleological interpretation will be more applicable today due to
the adoption of the MLI by Israel.
In the synthesized texts of the revised tax treaties between Israel and Austria and between
Israel and Japan, according to the State Revenue Administration (SRA) Report it seems that
the provisions of the MLI will not have retrospective effect.
As to this point, there is no indication that the amended preamble will be used in a
retrospective manner for the purpose of interpreting tax treaties applicable before the MLI
entered into force. Also, as far as we know, there was no debate arisen on whether the choices
made by Israel upon the adoption of the MLI may exert a retrospective influence on tax treaty
interpretation.
45
Dr. Gideon Klugman & Meir Kapota, The Convention between the Government of the State of Israel and the
Government of the United States of America with Respect to Taxes on Income, p. 108 (1993).
46
For example, a case where a foreign company generates business income in Israeli without any Israeli permanent
establishment. In this example, we assume that the tax treaty between Israel and the other contracting party
includes the provisions of s. 7 of the OECD Model Tax Convention. In such case, although the foreign company
is entitled not be taxed in Israel, it may still prefer to be taxed in Israel and not in its foreign country. Please see:
Levy & Frankel, International Tax Treaties – will they Walk Side by Side? (Missim 25/1, February 2011).
47
The State Revenue Administration (SRA) Report, ch. 19, pp. 1 and 2.
437
Israel
The tax professional should address each of the tax treaties in their jurisdictions, whether
the synthesized text of the treaty was published or not. While doing so, the tax professionals
should verify that they incorporate the provisions of the treaty, along with the MLI
amendments, in light of the PPT, into their ongoing tax planning of cross border transactions.
Currently, we don’t have indications if any assessment practices have changed regarding
tax treaty shopping and other tax treaty abuse because the MLI entered into force in Israel
just recently, on 1 January 2019. However, we expect that the assessment practices regarding
tax treaty shopping and other treaty abuses will be affected by the MLI.
Also, at this point, we don’t have indications if the Israeli tax administrators have adopted
or will adopt the PPT when assessing taxpayers because the MLI only recently entered into
force in Israel. However, we expect that the procedures of the Israeli tax administrators will
be affected by the PPT when assessing the taxpayers.
We also have no indications if the MLI has impacted the resolution of tax disputes under
the mutual agreement procedure and arbitration because the MLI entered into force only
recently. However, we expect that the resolution of tax disputes under the mutual agreement
procedure will to a certain extent be affected by the MLI. As for arbitration procedures, we
don’t expect any significant effect of the MLI since Israel chose not to apply part VI of the MLI.
438
Italy
Branch reporter
Alban Zaimaj1

Italy signed the MLI in the course of the inaugural signing ceremony held in Paris on 7 June
2017, although it has not ratified it yet.
At the date of signature of the MLI Italy had 99 tax treaties in force, which generally follow
the OECD Model Tax Convention.
Italy notified 80 of its 99 tax treaties (i.e. more than 80%) as covered tax agreements
under the MLI. However, 18 out of the 80 notified treaties are with countries that have not
signed the MLI or have not included Italy among their CTAs. Therefore, all in all, 62 out of
99 treaties currently in force are covered by the MLI (i.e. more than 60% of the Italian treaty
network).
On prevention of treaty abuse, Italy (i) notified all its CTAs in order for the preamble
text provided for under article 6 (1) of the MLI to apply and (ii) decided to comply with the
minimum standard by applying the principal purpose test under article 7(1) of the MLI.
However, the application of article 6(1) and 7(1) should not significantly affect the notified
CTAs. As a matter of fact, the abuse of tax treaties has generally been challenged by the tax
authorities (i) under the “abuse of law” doctrine developed by the Italian Supreme Court
starting from the leading cases of 23 December 2008, No. 30055, 30056 and 30057, (ii) under
the general anti-avoidance rule introduced in article 10-bis, Law of 27 July 2000, No. 212
or (iii) under general or specific anti-avoidance rules contained in the tax treaties, such as
PPT clauses or the beneficial ownership requirement. Furthermore, the preamble of almost
all Italian CTAs includes in the purpose of the treaty the prevention of fiscal evasion; in
addition, the majority of the treaties entered into by Italy contains a reference to either (i)
the prevention of fiscal evasion or (ii) the prevention of fiscal evasion and tax fraud in the title.
With respect to taxation of capital gains realized upon alienation of shares or comparable
interest in real estate companies, Italy opted for the application of article 9(4) of the MLI,
which gives primary taxing rights to the source state if, at any time during the 365 days
preceding the alienation, more than 50 per cent of the value of the shares or comparable
interest was derived directly or indirectly from immovable property situated therein. Article
9(4) would significantly affect the Italian CTAs as only a few of these contain similar clauses.
As far as permanent establishment articles of the MLI are concerned, Italy opted out of
article 10 (Anti-abuse Rule for Permanent Establishments Situated in Third Jurisdictions), article
12 (Artificial Avoidance of Permanent Establishment Status through Commissionaire Arrangements
and Similar Strategies) and article 14 (Splitting-up of Contracts). As regards article 13 (Artificial
Avoidance of Permanent Establishment Status through the Specific Activity Exemptions), Italy chose
to apply Option A, which in practice provides for the adoption of the new article 5, paragraph 4
1
Tax advisor at Studio Gattai, Minoli, Agostinelli & Partners in Milan.
IFA © 2020 439

Italy
of the OECD Model Convention under which the exception from the definition of permanent
establishment only applies if each of the listed activities has a preparatory or auxiliary nature.
Italy has chosen to apply Part VI of the MLI and adopt the mandatory binding arbitration
procedure as a dispute resolution mechanism. It will apply the so-called “final offer”
arbitration process (otherwise known as “last best offer” arbitration). The application of Part
VI of the MLI is one of the most significant and innovative choices made by Italy in the context
of the MLI, as only few of its tax treaties include a mandatory arbitration clause.
Reservations made by Italy on the content of the MLI are particularly significant. Further
to the reservations made in relation to the permanent establishment articles 10, 12 and 14,
Italy has also opted out of article 3, concerning hybrid mismatches created through the use
of transparent entities, out of article 4 on dual resident entities, and chosen to apply none
of the options under article 5, relating to methods for the elimination of double taxation.
As regards the indirect impact of the BEPS Action Plan, it must be noted that the new
treaties entered into by Italy after the signature of the MLI are generally consistent with its
MLI (provisional) position. In particular, the most recent treaties with the People’s Republic
of China (PRC), Colombia, Jamaica and Uruguay include:
–– a preamble language consistent with article 6(1) of the MLI;
–– a PPT provision with the same language of article 7(1) of the MLI;
–– a clause providing for source taxation of the gains from the alienation of shares deriving
more than 50 per cent of their value directly or indirectly from immovable property
situated in the source state.
There are however some discrepancies between the MLI-position and the latest treaties
entered into by Italy. For instance, the majority of these treaties does not contain a mandatory
arbitration clause. In addition, certain provisions of the MLI which have not been adopted by
Italy could be found in the most recent treaties. This is the case for instance of article 4 of the
MLI on dual resident entities, which was included in the treaties entered into with Colombia,
Jamaica, the PRC and Uruguay.
Finally, as the MLI has not been transposed in the Italian domestic system yet, neither
tax authorities nor courts have issued specific guidelines dealing with interpretation issues
which might arise from its implementation.
Part One: Impact of the BEPS Action Plan and the MLI on the Tax
Treaty Network
1.1. Introduction
Italy signed the MLI on 7 June 2017, although it has not ratified it yet. Therefore, reservations
and notifications made at the time of signature could still be subject to amendments upon
ratification of the MLI instrument.
The MLI will affect the Italian tax treaty network primarily through direct reform of the
notified covered tax agreements. At the date of signature of the MLI Italy had 99 tax treaties
in force, which generally follow the OECD Model Tax Convention. It notified 80 of its 99 tax
treaties as covered tax agreements although it was not notified as CTA by 18 out of such 80
notified jurisdictions either because such countries have not signed the MLI so far or because
they have not included Italy among their CTAs. Therefore, to sum up, 62 out of 99 treaties in
force are covered by the MLI.
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Zaimaj
In addition to the direct impact on the Italian treaty network through amendments to
the notified CTAs, the MLI is having an indirect impact on the tax treaty network through its
influence on the negotiations of recent tax treaties. In fact, the most recent treaties entered
into by Italy with China, Colombia, Jamaica and Uruguay include several provisions of the
MLI, such as a preamble language consistent with article 6(1) of the MLI, a PPT provision with
the same language of article 7(1) of the MLI and article 4 of the MLI on dual resident entities.
There are however some discrepancies between the MLI position, and the latest treaties
entered into by Italy. For instance, in the MLI Italy opted for the application of a mandatory
arbitration clause whereas the majority of these treaties does not contain a mandatory
arbitration clause. In addition, certain provisions of the MLI not adopted by Italy, such as
article 4 of the MLI on dual resident entities, were included in the most recent treaties entered
into with Colombia, Jamaica, the PRC and Uruguay.
At the date of signature of the MLI, Italy had 99 tax treaties in force2which generally follow the
OECD Model Tax Convention, except for certain deviations, which, for the sake of simplicity,
could be grouped into three main categories:
1. Deviations deriving from reservations made to the OECD Commentaries or adoption of
alternative provisions provided for by the Commentaries:
a. transfer pricing “corresponding adjustments”: none of the treaties entered into by
Italy before 1992 contained any provision patterned after article 9 (2) of the Model
Convention as Italy had made a reservation not to insert such provision in its treaties.
After the cancellation of the reservation, treaties entered into by Italy after 1992
contain a provision similar to article 9 (2) with the specification that corresponding
adjustments will be made only under the mutual procedure agreement procedure
provided for by the applicable treaty. The new treaty practice has been confirmed by
the reservation Italy made to the 2008 OECD Model Convention according to which
2
Namely with Albania, Algeria, Argentina, Armenia, Australia, Austria, Azerbaijan, Bangladesh, Barbados,
Belarus, Belgium, Bosnia and Herzegovina, Brazil, Bulgaria, Canada, Chile, the PRC, the Democratic Republic of
Congo, Croatia, Cyprus, the Czech Republic, Denmark, Ecuador, Egypt, Estonia, Ethiopia, Finland, France, Georgia,
Germany, Ghana, Greece, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Israel, Ivory Coast, Japan,
Jordan, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Latvia, Lebanon, Lithuania, Luxembourg, Macedonia, Malaysia,
Malta, Mauritius, Mexico, Moldova, Montenegro, Morocco, Mozambique, the Netherlands, New Zealand, Norway,
Oman, Pakistan, Panama, the Philippines, Poland, Portugal, Qatar, Romania, Russia, San Marino, Saudi Arabia,
Senegal, Serbia, Singapore, the Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland,
Syria, Tajikistan, Tanzania, Thailand, Trinidad and Tobago, Tunisia, Turkey, Uganda, Ukraine, the United Arab
Emirates, the United Kingdom, the United States, Uzbekistan, Venezuela, Vietnam and Zambia. Italy no longer
applies the U.S.S.R. treaty of 26 February 1985 in relations with Turkmenistan, which has not been included
among the treaty partners in the response Italy released in the Peer Review Report on the Treaty Shopping
questionnaire. In addition, Italy has concluded an agreement with Chinese Taipei for the avoidance of double
taxation with respect to taxes on income. However, due to the legal status of Chinese Taipei, this agreement has
not been enacted through the ordinary ratification procedure of international treaties but through an ordinary
law (no. 62 of 7 May 2015) which provides for specific derogations to domestic tax provisions in the case taxable
persons who are residents of one or both territories.
441
Italy
Italy will make adjustments under article 9 (2) only in conformity with the MAP
procedure;
b. definition and source taxation of royalties: treaties signed by Italy after 1992 generally
include income derived from the leasing of industrial, commercial or scientific
equipment in the definition of royalties even if as of the 1992 update of the OECD
Model Convention they have been carved out from such definition. Moreover, in
almost all its tax treaties, Italy has preserved source taxing rights on royalties in
conformity with its reservation to article 12 (1) of the OECD Model;
c. taxation of income from independent personal services: treaties signed by Italy after
2000 contain a separate article corresponding to article 14 of the OECD Model as it
stood before its elimination in 2000 in line with the reservation recorded by Italy to
the Commentary of article 7 of the Model Convention.
2. Deviations deriving from the interpretation of tax treaties by the Italian Supreme Court
and the Italian tax administration not in line with the Commentaries:
a. permanent establishment: the principal deviation relates to the interpretation
that the Italian Supreme Court has provided over the years of the term “permanent
establishment”. In particular, following the Philip Morris case,3 the Italian Supreme
Court has affirmed, inter alia, that: (i) an Italian company may constitute a multiple
permanent establishment of foreign affiliate companies; (ii) the analysis on the
existence of a permanent establishment shall be carried out having regard to the
actual activities carried out by the Italian subsidiary and following a substance-
over-form approach; and (iii) the participation of Italian employees in the phase
of negotiation or conclusion of contracts for the foreign affiliate entity could give
rise to an agency permanent establishment even if such contracts are not formally
entered into by the Italian employees. Following the Philip-Morris case and the
subsequent amendments of the OECD Commentary, Italy made an observation to
the Commentary on article 5 aimed at clarifying that the interpretation of its tax
treaties must take into account its jurisprudence;4
b. beneficial owner (BO): under the most recent case law of the Italian Supreme Court,
beneficial ownership is deemed a general clause embedded in the international
tax system aimed at preventing the abuse of tax treaties. The BO requirement
should apply even if not expressly provided for by the relevant article of the treaty.5
In addition, Italian tax authorities have provided a complex interpretation of the
“beneficial owner” requirement, not always consistent with the OECD Commentary.
According to the tax authorities, such requirement is met when the recipient: (i) is
the person to whom income is attributable (ii) has full availability to use and possibly
dispose of the relevant item of income and (iii) has sufficient “substance” in terms
of premises, staff and equipment. This interpretation has been recently confirmed
by the operative instructions issued by the Italian Tax Police in 20176 where it is
3
See judgements of the Italian Supreme Court of 7 March 2002, nos. 3367 and 3368; 25 May 2002, no. 7682 and 6
December 2002, no. 17373.
4
Para. 181 of the Commentary on art. 5 (2017 Version), according to which “Italy wishes to clarify that, with respect
to paragraphs 97, 116, 117 and 118, its jurisprudence is not to be ignored in the interpretation of cases falling in
the above paragraphs”.
5
Italian Supreme Court, 16 December 2015, no. 25281 and 25 May 2016, no. 10792.
6
Notice no. 1/2018 of 27 November 2017, Vol. III, p. 336.
442
Zaimaj
maintained that the beneficial ownership requirement is met if the person receiving
the item of income:
i. is not acting as a nominee, agent or delegate;
ii. from a legal point of view, is the legitimate owner of the item of income;
iii. further to legal ownership, has actual and economic ownership, in the sense that
it can exercise autonomously full decision-making powers on the items of income,
without being affected, contractually or de facto, by another party;7
iv. assumes all entrepreneurial risks related to its business;8
v. has an adequate structure in terms of assets, capital and staff as well as legal and
economic substance, such as to exclude that its creation and existence are aimed
at benefitting from a treaty.
3. Deviations deriving from the treaty policy of the treaty partner. Such deviations are found
mostly in treaties concluded with non-OECD countries. For example, the tax treaties Italy
had entered into with the PRC,9 Turkey and India contain the so-called “service permanent
establishment” provision under which the term “permanent establishment” includes
the furnishing of services by an enterprise of the resident state through employees or
other personnel in the source state if such activities continue for the same project or a
connected project for a certain period of time.10
The majority of the treaties entered into by Italy contain in the title a reference either to (i)
the avoidance of double taxation and prevention of fiscal evasion11 or (ii) the prevention of
fiscal evasion and tax fraud.12 Furthermore, almost all the preambles of the CTAs notified by
7
In this respect, the Notice no. 1/2018 makes reference to the Circular Letter n. 47/E of 2 November 2005, resolution
no. 17 of 27 January 2006, resolution n. 167 of 21 April 2008, circular letter n. 41/E of 5 August 2011, of the Italian
Revenue Agency as well as to the Commentary on arts. 10, 11 and 12 of the OECD Model Convention.
8
The Italian tax police further clarifies that the “assumption of risk” concept should be interpreted as the ability
to manage and control risk and to have the financial resources to deal with it in conformity with the indications
provided for in the Final Report on Actions 8-10 of the BEPS project.
9
In particular, pursuant to art. 5(2)(i) of the tax treaty in force with the PRC (1986), the term “permanent
establishment” shall include especially “the furnishing of services, including consultancy services, by an
enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided
that such activities continue for the same project or a connected project for a period or periods aggregating more
than six months within any twelve-month period”. Similar provisions are found, for example, in the tax treaties
concluded with India (2006 Protocol) and Turkey (art. 5(2)(g)(ii)).
10
For a comprehensive analysis of the main departures of the Italian tax treaties from the OECD Model Convention
see G. Zanetti, Chapter 14: Italy in Departures from the OECD Model and Commentaries: Reservations, observations and
positions in EU law and tax treaties (G. Maisto ed., IBFD 2014), Books IBFD (accessed 10 Oct. 2019).
11
Treaties entered into with Albania, Argentina, Armenia, Australia, Austria, Azerbaijan, Bangladesh, Belarus,
Brazil, Bulgaria, Canada, the PRC, Cyprus, Croatia, Czechoslovakia, Denmark, Ecuador, Egypt, Estonia, Ethiopia,
Finland, Georgia, Germany, Ghana, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Ivory Coast, Latvia,
Lebanon, Jordan, Kazakhstan, Kuwait, Lithuania, Macedonia, Malaysia, Malta, Mauritius, Mexico, Moldova,
Mozambique, Norway, New Zealand, Oman, Pakistan, the Philippines, Poland, Portugal, Qatar, Romania, Russia,
Saudi Arabia, Senegal, Singapore, Syria, South Africa, Republic of Korea, Slovenia, Spain, Sri Lanka, Sweden,
Tanzania, Thailand, Trinidad and Tobago, Tunisia, Turkey, Uganda, Ukraine, United Arab Emirates, the United
Kingdom, Uzbekistan, Vietnam and Zambia.
12
Treaties entered into with Algeria, Belgium, France, Luxembourg and the United States.
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Italy
Italy stipulate that the purpose of the treaty is, in addition to avoiding double taxation, to
prevent tax evasion.13
In recent years, the case-law of the Supreme Court has been consistent with the principle
that the aim of the tax treaties is to avoid double taxation, without creating opportunities for
double non-taxation. In its recent decision no. 25585 of 27 October 2017,14 the Court upheld
that interpretation of tax treaties should be carried out pursuant to article 31 of the Vienna
Convention, i.e. in good faith in accordance with the ordinary meaning to be given to the
terms of the treaty in their context and in the light of its object and purpose. In the view of
the Supreme Court, the object and purpose of a tax treaty would be defeated if the treaty
were utilized to achieve double non-taxation or to obtain undue tax benefits.
In general, Italy has countered tax treaty shopping practices either through (i) domestic
anti-avoidance provisions or case-law doctrines, or (ii) general or specific anti-avoidance
provisions included in its tax treaties.
Except for cases in which anti-avoidance clauses are contained in the treaty, Italian
tax authorities generally make use of either the beneficial ownership requirement or the
domestic GAAR to counter the abuse of tax treaties and deny treaty benefits in the context of
cross border transactions 15 As far as domestic anti-avoidance rules or doctrines are concerned,
before the entry into force of article 10-bis, Law of 27 July 2000, No. 212, Italy had a semi-
general anti-abuse rule provided for by article 37-bis, Presidential Decree of 29 September
1973, No. 600. In order for the above anti-avoidance rule to apply, the taxpayer had to be
a part of acts, facts and agreements: (i) made without valid business purposes; (ii) aimed
at circumventing the application of obligations or prohibitions established under tax laws;
(iii) aimed at obtaining tax reductions or refunds, that were otherwise undue. The above
rule, however, was not applicable to the generality of taxpayers but was limited to certain
transactions indicated under article 37-bis.
In addition, the Italian Supreme Court developed, through a number of decisions, an
“abuse of law” doctrine referring to cases that, regardless of the applicability of the anti-
avoidance rule contained in article 37-bis, would allow the Italian tax authorities to disregard
transactions not supported by sound business reasons. In particular, in the leading cases of 23
December 2008, No. 30055, 30056 and 30057, the Italian Supreme Court inferred the general
anti-abuse of law principle from article 53 of the Italian Constitution, under which each person
is required to concur to public expenses on the basis of its ability to pay. In particular, the
Court affirmed that such general principles prevent the taxpayers from obtaining tax benefits
through a distorted use of transactions lacking valid economic reasons, other than the mere
expectation of a tax advantage, irrespective of the existence of any specific anti-avoidance
provision.16
Further to the case law of the Supreme Court, a new general anti-abuse rule (GAAR) was
introduced in the Italian tax system as of 1 October 2015, in article 10-bis, Law of 27 July 2000,
13
The only exceptions are the treaties with Bosnia and Herzegovina, Japan, Morocco, the Netherlands, Serbia and
Switzerland which contemplate only the purpose of avoiding double taxation.
14
Similarly, see decision 16004 of 14 June 2019.
15
See, for instance, Revenue Agency, Circular 6/E of 30 March 2016.
16
See also Supreme Court Decision No. 1465 of 21 January 2009; Supreme Court Decision 8 April 2009, No. 8481;
Supreme Court Decision 8 April 2009, No. 8487; Supreme Court Decision 13 May 2009, No. 10981; Supreme Court
decision 21 January 2011, No. 1372.
444
Zaimaj
No. 212 17 Under the GAAR, one or more transactions are deemed to be abusive when they
lack economic substance and, while formally consistent with tax law and irrespective of the
intention of the taxpayer, they are aimed at obtaining undue tax advantages, defined as tax
benefits which, even if not realized in the short-run, are contrary to the object and purpose
of tax provisions or to the principles of the tax system. Under the GAAR, transactions lack
economic substance when they consist of facts, contracts and deeds, taken individually or
in connection with each other, that are unsuitable to generate significant legal or economic
effects but from tax savings. Furthermore, lack of economic substance may be found when the
taxpayer has made use of instruments which differ from normal market standards or when
the characterization of each specific transaction considered separately is not consistent with
the legal rationale of the transaction considered as a whole.
When transactions are deemed abusive, tax authorities would disregard any tax
advantages derived by them and assess the actual tax due applying the rules and principles
which have been circumvented. It must be noted however, that the GAAR is a residual anti-
avoidance provision and abuse of law can be assessed under the GAAR only when the tax
advantage cannot be disregarded pursuant to a specific anti avoidance rule 18
The GAAR applies without prejudice to the taxpayer to choose the least tax onerous
regime among those made available by the tax system As regards the notion of “beneficial
owner”, the Italian Supreme court and the Italian tax authorities have developed a complex
definition. The Supreme Court has qualified the beneficial owner requirement as a
general clause embedded in the international tax system aimed at preventing the abuse
of tax treaties through treaty-shopping practices by taxpayers who would otherwise not be
entitled to treaty benefits.19 Under the Supreme Court case law interpretation, the beneficial
ownership requirement is fulfilled when the relevant item of income is actually available to
the recipient from both a legal and economic standpoint. Moreover, the beneficial ownership
concept is considered immanent to the international tax system, therefore it should apply
even if not expressly provided for by the relevant article.20
Italian tax authorities have provided, through clarifications given in several circumstances,
a complex notion of beneficial owner. In the view of the tax authorities such requirement must
be examined in terms of: (i) attribution of income to the recipient; (ii) availability of income
to the recipient; and (iii) “substance” requirements (i.e. premises, staff and equipment) of
the entity receiving the income.
As to the first two requirements, beneficial owners of an item of income are those persons
to whom such income can be attributed for tax purposes and who have actual availability
of the income, in the sense that the latter is in the condition to benefit and use such item of
income at its discretion.21 Based on the above, tax authorities maintain that the beneficial
ownership requirement is not met when factual circumstances highlight, despite the “formal”
17
As regards the application of anti-abuse measures under Italian law see, inter alia: F. Gallo, L’abuso del diritto nell’art.
6 della Direttiva 2016/1164/UE e nell’art. 10-bis dello Statuto dei diritti del contribuente: confronto tra due nozioni, in Rass.
trib., n. 2/2018; A. Contrino, La trama dei rapporti tra abuso del diritto, evasione fiscale e lecito risparmio d’imposta, in
Dir. Prat. Trib., 2016, 1407; G. Corasaniti, Il dibattito sull’abuso del diritto o elusion nell’ordinamento tributario, in Dir.
Prat. Trib., 2016, I, 465 ss; A. Giovannini, L’abuso del diritto tributario, in Dir. Prat. Trib., 2016, 895.
18
Art. 10-bis, paragraph 12, Law no. 212, 27 July 2000.
19
Italian Supreme Court, 16 December 2015, no. 25281 and 25 May 2016, no. 10792.
20
Italian Supreme Court, 16 December 2015, no. 25281.
21
See Revenue Agency, Circular No. 306/E of 23 December 1996; Resolution No. 104/E of 6 May 1997, Circular No.
47/E of 2 November 2005.
445
Italy
ownership, the role of mere intermediary of the recipient of the income sourced from Italy.
Such circumstances might be, inter alia, the following: (i) legal and/or factual coincidence
between the income payments sourced from Italy and the income payments effected by
the intermediate company with the ultimate investors (e.g. “mirroring” of amounts, income
flows and timing of payments); (ii) low risk/capitalization of the intermediate company;
(iii) significant limitations on the possibility to perform a business activity; (iv) no actual
possibility to use the flows of income derived by the intermediate company from the Italian
source. Furthermore, it should be observed that such constraints may also be found on the
basis of facts and circumstances which prove, in substance, that the recipient does not have
the actual power to use and enjoy the income received.
In addition, under the approach taken by the tax authorities in the course of tax audits,
the qualification of “beneficial owner” is denied in case the foreign entity is not provided with
enough “substance”. To this purpose, the foreign entity is required to prove the suitability of its
organization to carrying out the statutory activity (in terms of premises, staff and equipment),
as well as its actual autonomy from other entities. Such challenges are frequently addressed
to non-resident holding companies claiming treaty benefits. It must be noted, however,
that the Italian Supreme Court has clarified that the substance requirement on holding
companies must be examined in the light of their activity. In particular in its decision in case
27113 of 2016, the Italian Supreme Court held that a lack of substantial economic activity (in
terms of premises and personnel) is typical for holding companies, as they do not require
such elements to carry out their activities. The Supreme Court considered other elements as
decisive for the application of the treaty, such as the fact that (i) the company is potentially
entitled to retain and use the income received and (ii) the key management decisions
necessary for the conduct of its business are made in its state of establishmen.t22
As regards treaty based anti-avoidance rules, Italy generally includes two different type
of rules in its tax treaties, i.e. (i) provisions aimed at preventing tax treaty abuse and double
non-taxation and/or (ii) provisions aimed at ensuring the compatibility and application of
domestic anti-abuse rules notwithstanding the provisions of the treaty.
Several treaties entered into by Italy contain a “principal purpose test” clause that denies
all of the benefits that would otherwise be provided under the treaty where the principal
purpose or one of the principal purposes of any arrangement or transaction, or of any person
concerned with an arrangement or transaction, was to obtain those benefits. In particular,
such clause can be found in the treaties concluded with Azerbaijan (article 30(1)), Estonia
(article 28(1)), Hong Kong (article 27; article10(6); article11(8); article12(7); article 21(4)),
Iceland (article 8 (a) Protocol), Kazakhstan (article 29(1)), Kuwait (Protocol b) article 6),
Latvia (article 30(1)), Lebanon (article 29(1)), Lithuania (article 30(1)), Mongolia (article 29(1)),
Qatar (article 29(1)), San Marino (article 29(1)), Saudi Arabia (article 29(1)). The treaty with
the United States provides for a limitation of benefits clause under which treaty benefits are
available only to those resident persons who have a sufficient nexus in the contracting state
from which the treaty benefits are claimed.
Certain treaties contain subject-to-tax clauses, aimed at preventing cases of double non-
taxation. For instance, the protocol of the treaty entered into with France stipulates that “in
cases where, in accordance with the provisions of this Convention, income must be exempted
by one of the States, the exemption shall be granted if and to the extent such income is
22
The Court also confirmed that the circumstance that a sub-holding company is ultimately held by non-EU
residents, is not an element sufficient to deny treaty entitlement to the non-resident sub-holding company.
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taxable in the other State.”23 Another example can be found in paragraph n) of the protocol of
the treaty with Canada which provides that “The Convention shall not apply to any company,
trust or partnership that is a resident of a Contracting State and is beneficially owned or
controlled, directly or indirectly, by one or more persons who are not residents of that State,
if the amount of the tax imposed on the income of the company, trust or partnership by that
State is substantially lower than the amount that would be imposed by that State if all of the
shares of the capital stock of the company or all of the interests in the trust or partnership,
as the case may be, were beneficially owned by one or more individuals who were residents
of that State”.
Several treaties contain specific anti-abuse provisions aimed at denying the applicability
of the treaty in relation to specific articles or items of income. For instance, the generality
of the treaties concluded by Italy provide for the beneficial ownership requirement in the
relevant articles dealing with taxation of dividends, interest and royalties. Other specific
anti-abuse provisions can be found in the following treaties:
–– articles 10(6) of the treaties with Panama and Romania (new treaty) stipulate that the
provisions of article 10 shall not apply if it was the main purpose or one of the main
purposes of any person concerned with the creation or assignment of the shares or other
rights in respect of which the dividend is paid to take advantage of this article by means of
that creation or assignment. Similar provisions dealing with the payment of interest and
royalties are found, mutatis mutandis, in articles 11(8) and 12 (7) of the above-mentioned
treaties with Panama and Romania;
–– article 10(2)(a) of the treaty with Pakistan subjects the application of the reduced
withholding rate on dividends to an “activity test”. In particular, source taxation is capped
at 15% if the recipient company holds directly at least 25% of the capital of the company
paying the dividends and the latter company is engaged in an industrial undertaking;
–– as regards taxation of capital gains on immovable property, the treaties with the United
States, Israel, India, Canada, the PRC, the Philippines and Hong Kong attribute primary
taxing rights to the state where the property is located even if the capital gain is realized
through alienation of shares in companies whose value is derived principally from the
immovable property situated in the situs state.
In some cases, in addition or in place of the above-mentioned treaty anti-abuse provisions,

Italian treaties contain a provision which stipulate that the application of domestic anti-
abuse rules is not hindered by the treaty itself or by specific clauses of the treaty 24 As regards
dispute resolution mechanisms, Italian taxpayers could avail themselves of the following
instruments:
–– the mutual agreement procedure (MAP) provision included in the Italian tax treaties;
–– the Convention on the Elimination of Double Taxation in Connection with the Adjustment
of Profits of Associated Enterprises 90/436/EEC of 23 July 1990;
–– the Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution
mechanisms in the European Union.
23
Para. 15 of the Protocol.
24
See treaties with Azerbaijan, Barbados, Canada, Japan, the Netherlands, Thailand, United Kingdom and United
States.
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Italy
All of Italy’s tax treaties include a provision relating to MAP which generally follows paragraphs
1 to 3 of article 25 of the OECD Model Convention. The MAP clause generally inserted in the
Italian tax treaties lays on the treaty partners only a general duty to negotiate and not to
achieve a result. The scope of the MAP is broad, as it is designed to solve three categories
of disputes: (i) disputes arising where a taxpayer is or will be taxed not in accordance with
the treaty; (ii) disputes or difficulties arising between the states as to the interpretation or
application of the treaty; (iii) elimination of double taxation in cases not provided for in the
treaty 19 of the Italian tax treaties provide for an arbitration procedure as a final stage to the
MAP, of which 18 are in force 25 According to the MAP Peer Review Report26 the Italian treaty
network is largely consistent with the requirements of the Action 14 Minimum Standard,
except for the following circumstances:
–– more than three quarters of its tax treaties do not include the full equivalent of article
25(1) of the OECD Model Convention (2015), mainly due to a protocol provision requiring
taxpayers to initiate domestic proceedings before a MAP request can be filed;
–– more than two-third of its tax treaties do not include a provision stating that mutual
agreements shall be implemented notwithstanding any time limits in domestic law
(which is required under article 25(2), second sentence), or include the alternative
provision for article 9(1) and article 7(2) to set a time limit for making transfer pricing
adjustments; and
–– more than half of its tax treaties do not include a provision equivalent to the second
sentence of article 25(3) of the Model Convention (2015) allowing competent authorities
to consult together for the elimination of double taxation in cases not provided for in
the treaty.
The functioning of the MAP however has not been particularly satisfactory in recent years.
The Peer Report highlights that in 2016 the Italian MAP inventory was 437 cases, 291 of which
concern attribution/allocation cases and 146 other cases. The average time to resolve such
cases was 27.53 months, i.e. above the 24-months timeframe which is the pursued average
for resolving MAP cases received after 1 January 2016. Moreover, 158 cases started and only
29 closed in 2016. The statistics show that Italy has not been sufficiently sourced in relation
to the resolution of MAP cases, which is particularly evident for the resolution of attribution/
allocation cases, as Italy solved less than 10% of the pending cases in 2016 27 Finally, the
Peer Report highlights that as of 2016, Italy has taken steps to improve and accelerate
the resolution of MAP cases. The principal actions undertaken include, among others, the
increases in personnel to handle MAP cases and the amendment to its domestic legislation
in order to allow corresponding adjustments for transfer pricing cases to be made without
having to recourse to a MAP, which was previously required.
Updated statistics available for 2018 show that on 31 December 2018, the MAP inventory
concerning cases started after 1 January 2016 was 522 cases, 401 of which concern transfer
pricing cases and 121 other cases. During the period 1 January 2018 and 31 December
25
Treaties with Armenia, Canada, Chile, Congo, Croatia, Georgia, Ghana, Hong Kong, Iceland, Jordan, Kazakhstan,
Lebanon, Moldova, Mongolia, San Marino, Slovenia, Uganda, the United States and Uzbekistan.
26
OECD (2017), Making Dispute Resolution More Effective – MAP Peer Review Report, Italy (Stage 1): Inclusive
Framework on BEPS: Action 14, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris,
https://doi.org/10.1787/9789264285835-en.
27
It is expected that after the reorganization of the competent authority function, which was assigned to the
“Agenzia delle Entrate”, resolution of MAP cases will be more timely and effective.
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Zaimaj
2018, 256 cases started, and 66 cases were closed, 59 of which concerning transfer pricing
disputes 28 In addition to treaty MAP, Italy is party to the European Arbitration Convention,
which was signed in 199029 by the 12 Members of the European Community and entered into
force on 1 January 1995 after the last state, Portugal, ratified it. The Arbitration Convention
applies only in respect to transfer pricing adjustments involving associated enterprises or
the attribution of profits to permanent establishments. The most important feature of the
arbitration convention is the appointment of an advisory commission when the competent
authorities are not able to reach an agreement within two years of the date on which the case
was first presented. The principal duty of the advisory commission, which is composed of
both representatives of the member states and independent persons, is to issue a reasoned
opinion aimed at eliminating double taxation within six months from the date on which the
matter was referred to the commission. Competent authorities have six months to take a
decision by mutual consent which may deviate from the opinion of the advisory commission.
Member states, therefore, may depart from the decision of the arbitration if they are able
to reach a different agreement. If a decision is not taken within six months, the opinion of
the advisory commission becomes definitive and must be implemented by the competent
authorities. There are, however, some circumstances under which member states are not
obliged to initiate or continue the mutual agreement aimed at solving the dispute under
the Arbitration Convention:
i. when the dispute is not well-founded
ii. in the case of serious penalties imposed in relation to the transactions which gave rise to
double taxation
iii. when the member state is not allowed to derogate from judicial decisions and the
taxpayer does not renounce domestic judicial review Finally, on 10 October 2017, the
Economic and Financial Affairs Council formally adopted a Directive on tax dispute
resolution mechanisms in the European Union 30 The directive, which applies to Italy, lays
down rules to resolve disputes between member states arising from the interpretation
and application of treaties that provide for the elimination of double taxation of income
and, where applicable, capital. Recital 7 clarifies that the scope of the Directive includes
both tax treaties and the EU Arbitration Convention. The directive is binding for EU
member states only and applies to disputes arising between member states in relation
to the application of tax treaties and the EU Arbitration Convention. However, to date
Italy has not transposed the directive into its domestic tax system.
1.3.1. Signature, ratification, entry into force and entry into effect
On 7 June 2017 Italy signed the MLI and released its provisional list of expected reservations
and notifications to be made pursuant to articles 28(7) and 29(4) of the MLI. The MLI has not
been ratified yet. In this respect, it must be noted that Italy is expected to release an updated
28
OECD, Mutual Agreement Procedure Statistics per jurisdiction for 2018, Italy available at the following link: http://
www.oecd.org/tax/dispute/2018-map-statistics-italy.pdf.
29
Convention on the Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated
Enterprises 90/436/EEC of 23 July 1990, Official Journal L 225, 20 August 1990 pp. 10-24.
30
Council Directive (EU) 2017/1852 of 10 October 2017.
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Italy
list of reservations and notifications together with the ratification. Therefore, the positions
taken at the time of the signature may still be subject to amendments.
Pursuant to article 2 of the provisional list of Reservations and Notifications, Italy has
notified 80 of its 99 tax treaties currently in force as covered tax agreements, namely the
agreements concluded with Argentina, Armenia, Australia, Austria, Azerbaijan, Bangladesh,
Barbados, Belgium, Bosnia and Herzegovina, Brazil, Bulgaria, Canada, the People’s Republic
of China, Ivory Coast, Croatia, Cyprus, the Czech Republic, Denmark, Egypt, Estonia, Finland,
France, Georgia, Germany, Greece, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland,
Israel, Japan, Jordan, Kazakhstan, Republic of Korea, Kuwait, Latvia, Lebanon, Lithuania,
Luxembourg, Malaysia, Malta, Mauritius, Mexico, Moldova, Morocco, the Netherlands, New
Zealand, Norway, Pakistan, the Philippines, Poland, Portugal, Qatar, Romania, Romania
(new), Russia, San Marino, Saudi Arabia, Senegal, Serbia, Singapore, the Slovak Republic,
Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tanzania, Thailand, Tunisia,
Turkey, Ukraine, Uganda, the United Arab Emirates, the United Kingdom, the United States,
Vietnam and Zambia. It has also notified as CTAs the treaties concluded with Gabon, Kenya
and Mongolia, which are not yet in force.31
Therefore, 80 out of the 99 treaties concluded by Italy which are currently in force (i.e.
more than 80%) have been notified by Italy as CTAs.
However, 1832 out of the 80 notified treaties are with countries that have not signed the
MLI yet or have not included Italy among the CTAs. This means that, all in all, 62 out of 99
treaties in force are covered by the MLI (i.e. more than 60% of the Italian treaty network).
According to scholars, the exclusion of certain tax treaties could be due to (i) the intention
to renegotiate such treaties, (ii) the circumstance that the tax treaty was recently (post-BEPS)
negotiated33 or (iii) because of ongoing negotiations with the treaty partner.
Italy has notified all its CTAs in order for the preamble text provided for under article 6 (1)34
to apply. The adoption of a new preamble, however, should not have innovative effects as the
preamble of almost all Italian CTAs include in the purpose of the treaty the prevention of fiscal
31
19 out of the 99 treaties which are currently in force, namely those with Albania, Algeria, Belarus, Chile, Congo,
Ecuador, Ethiopia, Ghana, Kyrgyzstan, Macedonia, Montenegro, Mozambique, Oman, Panama, Syria, Tajikistan,
Trinidad and Tobago, Uzbekistan and Venezuela, have not been notified as CTAs.
32
Treaties with Azerbaijan, Bangladesh, Bosnia and Herzegovina, Brazil, Jordan, Kuwait, Lebanon, Moldova,
Morocco, Norway, Philippines, Sri Lanka, Tanzania, Thailand, Uganda, the United States, Vietnam and Zambia.
33
E.g. the tax treaty between Italy and Chile, ratified with law 212 of 3 November 2016.
34
Which reads: “Intending to eliminate double taxation with respect to the taxes covered by this agreement
without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including
through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect
benefit of residents of third jurisdictions).”
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evasion.35 Furthermore, as anticipated in section 1.2.2, the majority of the treaties entered
into by Italy contain in the title a reference to either (i) the avoidance of double taxation and
prevention of fiscal evasion or (ii) to the prevention of fiscal evasion and tax fraud. As regards
the preamble language stipulated by article 6(3),36 Italy has chosen not to apply it.
On prevention of treaty abuse, Italy has decided to comply with the minimum standard
by applying the principal purpose test under article 7(1) of the MLI. In this respect, pursuant
to article 7(15)(b) of the MLI, Italy reserves the right for article 7(1) not to apply to its CTAs
that already contain provisions that deny all of the benefits that would otherwise be
provided under the CTA where the principal purpose or one of the principal purposes of any
arrangement or transaction, or of any person concerned with an arrangement or transaction,
was to obtain those benefits. The following agreements contain provisions that are within
the scope of this reservation: Azerbaijan, Estonia, Hong Kong, Iceland, Kazakhstan, Kuwait,
Latvia, Lebanon, Lithuania, Mongolia, Qatar, San Marino and Saudi Arabia.
The discretionary benefits rule provided for by article 7(4) of the MLI has not been
adopted by Italy.
Italy has not chosen to apply the SLOB clause, nor has it indicated that it would allow the
SLOB to be applied by another treaty partner pursuant to article 7(7)b of the MLI.
The choice made by Italy to apply the PPT to satisfy the minimum standard in relation to
article 7 could have been motivated by the circumstance that in its treaty network PPT clauses
are more frequent than LOB clauses. Furthermore, the compatibility of LOB clauses with the
EU fundamental freedoms remains uncertain.
Italy has opted for the application of article 9(4) of the MLI which provides that “gains
derived by a resident of a Contracting Jurisdiction from the alienation of shares or comparable
interests, such as interests in a partnership or trust, may be taxed in the other Contracting
Jurisdiction if, at any time during the 365 days preceding the alienation, these shares or
comparable interests derived more than 50 per cent of their value directly or indirectly from
immovable property (real property) situated in that other Contracting Jurisdiction.”
The purpose of article 9(4) is to align the treaty regimes for the direct and indirect transfer
of immovable property. The choice made by Italy is to some extent innovative. In fact, only
a minority of the Italian CTAs contain similar provisions.37 From an operative standpoint,
the choice to apply article 9(4) needs to be coordinated with domestic provisions. In fact,
Italy does not have in its domestic legislation any provision which allows source taxation on
the alienation of companies whose shares derive more than 50% of their value directly or
indirectly from immovable property situated in Italy. Therefore, even if Italy has opted for the
application of article 9(4), its domestic law would not allow taxation on capital gains realized
by non-residents on the sale of interest in another non-resident entity, even when the latter
derives more than 50% of its value from immovable property located in Italy.38 Therefore,
35
C. Garbarino – P. Occhiuto, Lo strumento multilaterale per la modifica dei Trattati contro le doppie imposizioni, Fiscalità
e commercio internazionale 2, p. 44 et seq. (2018).
36
Which reads: “Desiring to further develop their economic relationship and to enhance their co-operation in tax
matters”.
37
Armenia, Azerbaijan, Barbados, Canada, the PRC, Estonia, Finland, France, Hong Kong, India, Israel, Kenya,
Mexico, New Zealand, Pakistan, Philippines, Romania, Saudi Arabia, Sweden and Ukraine.
38
Art. 9(4) would only apply in those cases in which the capital gain is realized upon sale of the shares of an Italian
company which owns the real estate asset located in Italy.
451
Italy
Italy would likely need to amend its domestic source taxation rules to apply article 9(4) in a
comprehensive manner.39
As regards article 13 of the MLI concerning the artificial avoidance of permanent
establishment status through the specific activity exemptions, Italy has chosen to apply
Option A under which, notwithstanding the provisions of a CTA, the term “permanent
establishment” shall be deemed not to include:
a) the activities specifically listed in the CTA as activities deemed not to constitute a
permanent establishment, whether or not that exception from permanent establishment
status is contingent on the activity being of a preparatory or auxiliary character;
b) the maintenance of a fixed place of business solely for the purpose of carrying on, for the
enterprise, any activity not described in subparagraph a);
c) the maintenance of a fixed place of business solely for any combination of activities
mentioned in subparagraphs a) and b),
provided that such activity or, in the case of subparagraph c), the overall activity of the fixed
place of business, is of a preparatory or auxiliary character.
In addition, as Italy has not opted out of article 13(4), Italian CTAs will include the anti-
fragmentation rule.
In relation to the MAP, Italy has reserved the right to opt out of the first sentence of article
16(1), which includes the possibility to present the MAP request to the competent authority
in either contracting jurisdiction, irrespective of the remedies provided by the domestic law
of those contracting jurisdictions. Italy intends to meet the minimum standard by ensuring
that under each of its CTAs (other than a CTA that permits a person to present a case to the
competent authority of either Jurisdiction) the person may present the case to the competent
authority of the contracting jurisdiction of which the person is a resident (or a national,
for those cases relating to non-discrimination provisions based on nationality) and the
competent authority of that contracting jurisdiction will implement a bilateral notification
or consultation process with the competent authority of the other contracting jurisdiction
for cases in which the competent authority to which the mutual agreement procedure case
was presented, does not consider the taxpayer’s objection to be justified.
In addition, Italy has chosen to apply Part VI of the MLI and adopt the mandatory binding
arbitration procedure. This part shall apply in relation to two contracting jurisdictions with
respect to a CTA only when both contracting jurisdictions have made such a notification. In
this regard, Italy has made the following reservations:
–– any unresolved issue arising from a mutual agreement procedure case otherwise within
the scope of the arbitration process provided for by the treaty shall not be submitted
to arbitration, if a decision on this issue has already been rendered by a court or
administrative tribunal of either contracting jurisdiction;
39
Unless art. 9(4) is characterized as an anti-avoidance provision, in which case it would not, in principle, require a
specific provision under domestic law. However, the prevailing opinion in tax literature is that clauses such as art.
9(4), even if originally designed to prevent avoidance of taxes on the gains from the sale of immovable property
through the use of real-estate holding companies, represent autonomous distributive rule whose application
is not limited to abusive situations: see S. Simontacchi, Immovable Property Companies as Defined in Article 13(4) of
the OECD Model, Bulletin for International Taxation, 2006, p. 29; F. Haase, Reconceptionalization of the “Immovable
Property Clause” in Article 13 Paragraph 4 OECD Model Convention by Means of the Multilateral Instrument?, Intertax,
2017, p. 284. Moreover, should art. 9(4) be characterized as an anti-avoidance provision, it would likely be deemed
not compatible with EU fundamental freedoms as its application is not limited to abusive situations.
452
Zaimaj
–– if, at any time after a request for arbitration has been made and before the arbitration
panel has delivered its decision to the competent authorities of the contracting
jurisdictions, a decision concerning the issue is rendered by a court or administrative
tribunal of one of the contracting jurisdictions, the arbitration process shall terminate.
Italy is willing to apply the so-called “final offer” arbitration process (otherwise known as “last
best offer” arbitration), except to the extent that the competent authorities agree differently.
Under such procedure, the competent authorities will each submit to the arbitration panel a
proposed resolution which addresses all of the unresolved issues. The arbitration selects as
its decision one of the proposed resolutions submitted by the competent authorities.
Furthermore, Italy has formulated certain reservations with respect to the scope of cases
eligible for arbitration under the provisions of Part VI. In particular it shall exclude from the
scope of Part VI:
–– cases concerning items of income or capital that are not taxed by a contracting jurisdiction
because they are not included in the taxable base in that contracting jurisdiction or
because they are subject to an exemption or zero tax rate provided under the domestic
tax law of that contracting jurisdiction;
–– cases involving the application of an anti-abuse rule in a CTA or in Italy’s domestic
legislation, namely article 10-bis of L 212/2000 (as enacted by Legislative Decree 128/2015).
Any subsequent rules replacing, amending or updating this anti-abuse rule would also be
comprehended. Italy shall notify the Depositary of any such subsequent rule;
–– cases concerning dual resident persons;
–– cases involving penalties related to tax fraud, willful default and gross negligence.
Reservations made by Italy on the content of the MLI are particularly significant. In fact, Italy
has reserved the right:
–– not to apply to its CTAs the entirety of article 3 concerning hybrid mismatches created
through the use of transparent entities;
–– not to apply to its Covered Tax Agreements the entirety of article 4 on dual resident
entities;
–– to apply none of the options under article 5 relating to methods for the elimination of
double taxation;
–– for the entirety of article 8 not to apply to its CTAs;
–– for the entirety of article 10, containing the anti-abuse rule for permanent establishments
situated in third jurisdictions, not to apply to its CTAs;
–– for the entirety of article 11 not to apply to its CTAs;
–– not to apply article 12 aimed at preventing the artificial avoidance of permanent
establishment status through commissionaire arrangements and similar strategies;
–– not to apply article 14 countering the splitting-up of contracts to avoid the creation of a
permanent establishment in the source state.
The new treaties entered into by Italy after the signature of the MLI are generally consistent
with the MLI position notified by Italy. In particular the most recent treaties with Colombia,
Jamaica, the PRC and Uruguay include:
–– a preamble language consistent with article 6(1) of the MLI;
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Italy
–– a PPT provision with the same language of article 7(1) of the MLI;
–– a clause providing for source taxation of the gains from the alienation of shares deriving
more than 50 per cent of their value directly or indirectly from immovable property
situated in the source state.
As regards arbitration, it must be noted that while Italy has expressed the choice to apply Part
VI of the MLI and to adopt mandatory binding arbitration, the treaty with the PRC does not
include an arbitration clause at all, whereas treaties with Uruguay and Colombia stipulate that
unresolved issues shall be submitted to arbitration only if the two competent authorities so
agree. Only the treaty with Jamaica provides for a mandatory binding arbitration procedure.
In addition, certain provisions of the MLI which have not been adopted by Italy, could be
found in the most recent treaties. This is the case for instance of article 4 of the MLI on dual
resident entities.40 In fact, on the one side, Italy has opted out of article 4 of the MLI but, on
the other side, it has included the language of article 4(1) in the most recent treaties entered
into with the PRC, Colombia, Jamaica and Uruguay. This deviation seems reasonable in that
a wide-ranging and immediate application of article 4(1) of the MLI to all CTAs in order to
substitute the general tie-breaker rule, would create legal uncertainty to a significant number
of taxpayers whereas the inclusion of such provision in a separate new treaty would leave
taxpayers sufficient time to adapt their business model to the new provision.
Another relevant deviation concerns article 12 of the MLI which deals with the artificial
avoidance of permanent establishment status through commissionaire arrangements and similar
strategies.41 As anticipated, Italy has chosen not to apply this article. However, its treaties with
Colombia, Jamaica and Uruguay include a provision which resembles article 12 (1) of the MLI.
In general terms, international treaties are enacted into the Italian legal system following
a process that implies signature of the relevant treaty, ratification and exchange of the
ratification instrument.
40
Pursuant to art. (4)1 of the MLI, “where by reason of the provisions of a Covered Tax Agreement a person other
than an individual is a resident of more than one Contracting Jurisdiction, the competent authorities of the
Contracting Jurisdictions shall endeavour to determine by mutual agreement the Contracting Jurisdiction of
which such person shall be deemed to be a resident for the purposes of the Covered Tax Agreement, having
regard to its place of effective management, the place where it is incorporated or otherwise constituted and
any other relevant factors. In the absence of such agreement, such person shall not be entitled to any relief or
exemption from tax provided by the Covered Tax Agreement except to the extent and in such manner as may
be agreed upon by the competent authorities of the Contracting Jurisdictions”.
41
The reason of the reservation made to art. 12 is unclear. In fact, both Italian case law and tax administration have
interpreted the concept of agency PE in a very broad way. In particular, in the Phillip Morris case the Supreme Court
maintained that the participation of employees of a resident company in the negotiation of contracts concluded
in the name of a foreign company might fall within the concept of “authority to conclude contracts”, even where no
power of representation is granted.
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Zaimaj
As to the signature phase, treaties are generally negotiated and entered into by the
Italian government. Tax treaties are negotiated by representatives of the tax authorities and
eventually signed by the Minister of Foreign Affairs or the Minister of Economy and Finance.
As far as the ratification process is concerned, it must be noted that tax treaties are
incorporated into the Italian system by way of a parliamentary process required by article
80 of the Italian Constitution according to which “The Houses [of the Parliament] authorize
by law the ratification of international conventions which have political nature, or which
provide for arbitration or adjudication, or entail changes to the national territory or financial
burdens or changes in law”.42 Once the Houses of Parliament have approved the Treaty, it
is submitted to the President of the Italian Republic for ratification.43 The ratification is
subsequently countersigned by the proposing minister and the President of the Council of
Ministers pursuant to article 89 of the Constitution.44
After completion of the ratification procedure, the Ministry of Foreign Affairs effects the
exchange of the instruments of ratification. The process of enactment of international tax
treaties into the Italian law system is completed by publication of the treaty in the Official
Journal of the Republic of Italy.
The MLI has not been enacted yet in the Italian tax system. It is expected that its
transposition will follow the above procedure.45
Under the Italian legal system, international treaties are considered external sources of law
which require a formal transposition in the domestic law system through the ratification
process described in section 2.1.1 above.
In general terms, tax treaties rank superior to domestic laws pursuant to article 117(1) of
the Italian Constitution, which stipulates that legislative power is exercised by the state and
the regions in compliance with the Constitution and the constraints deriving from EU law
and international obligations. Therefore, subsequent domestic legislation cannot override
the provisions of tax treaties.
The above relation is indirectly confirmed by article 169 of the Presidential Decree 22
December 1986 no. 917 (Income tax act) which stipulates that notwithstanding international
double tax treaties, the provisions of the income tax act apply if more favorable to the
taxpayer.
42
See among others C. Garbarino, La tassazione del reddito transnazionale, Padova, Cedam, 1990, p. 495 and G. Melis,
Vincoli internazionali e norma tributaria interna, in Rivista di Diritto Tributario, 2004, Vol. I, p. 1087. According to a
minority position among scholars, the constitutional basis for the parliamentary procedure is to be found in art.
23 of the Constitution, according to which “No obligations of […] a financial nature may be imposed on any person
except by law”: V. Uckmar, I trattati internazionali in materia tributaria in Corso di diritto tributario internazionale,
Padova, Cedam, 2002, p. 44.
43
Pursuant to art. 87(8) of the Constitution, according to which “The President shall […] ratify international treaties
which have, where required, been authorized by the Houses”.
44
According to art. 89 of the Constitution “No act of the President of the Republic is valid if it is not signed by the
proposing Ministers, who take responsibility for it. The acts which have force of law and those indicated by law,
are also countersigned by the President of the Council of Minsters”.
45
See A. Crazzolara, Il Trattato Multilaterale BEPS è self-exdcuting?, Rivista di Diritto Tributario, Supplemento online,
24 May 2017.
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Italy
When the MLI will be in force, it will have the same rank that tax treaties generally have
vis-à-vis domestic legislation.
Neither tax authorities nor the courts have issued specific guidelines dealing with
interpretation issues which might arise from the transposition of the MLI into the domestic
system.
The author would not expect that the adoption of the MLI would change the systematic way
tax treaties are generally interpreted in Italy. However, to date no official pronouncements
or guidelines are available on this issue.
Italy is expected to release an updated list of reservations and notifications when it will
ratify the MLI. The circumstance that the positions taken at the time of the signature may
still be subject to changes does not allow a cautious assessment of how such provisional
reservations and notifications could affect the interpretation of treaties entered into prior to
the signature of the MLI. In addition, no official statements or guidance have been issued by
the tax authorities in relation to the interpretation issues on earlier tax treaties which might
arise from the adoption of the MLI.
As regards the effects that the amended preamble might have on earlier tax treaties, it
must be noted that pursuant to the most recent case law of the Supreme Court, the purpose
of the tax treaties is to avoid double taxation, without creating opportunities for double
non-taxation.46 In addition, the majority of the treaties entered into by Italy contain in
the title of the treaty a reference to either (i) the prevention of fiscal evasion or (ii) to the
prevention of fiscal evasion and tax fraud whereas almost all the preambles of the CTAs
notified by Italy stipulate that the purpose of the treaty is, in addition to avoiding double
taxation, to prevent tax evasion. Therefore, the author does not expect that the adoption of
the preamble language of the MLI will create significant interpretative issues in relation to
earlier tax treaties.
As the MLI has not been transposed into the Italian tax system, it remains unclear how it
will affect tax planning behaviors and how tax administration will react. It must be noted,
46
See, inter alia, Supreme Court Decision no. 25585 of 27 October 2017 and 16004 of 14 June 2019.
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Zaimaj
however, that in recent years, the Italian tax administration has thoroughly scrutinized
cross-border transactions and focused its tax audit activities on international tax matters.
In 2016 the tax authorities issued Circular 6/E which provides some guidance on the way tax
authorities investigate cross-border transactions and counter treaty-shopping practices. An
important excerpt of the Circular reads as follows:
[…] In other words, these intermediate entities may be considered as having no economic
substance on the basis of at least one of the following characteristics:
a. a “light” organizational structure (for example, personnel, premises and equipment
could be made available by service providers through management service contracts),
without actual activity and real consistency and, in particular, without actual
decision-making autonomy except for under a formal point of view (for example,
the investment management plan is predetermined and the company is the mere
ratifier and performer of the same) – artificial arrangement or conduit company;
b. a back-to-back financial structure in relation to a specific operation, in which sources
and uses have identical contractual and economic conditions (in terms of duration,
amounts, modalities and maturity of interests) or, in any event, functional to allow
correspondence between the amounts received and those paid and the non-
application of any withholding tax in the jurisdiction in which they are tax resident
– conduit operations.
In such circumstances, that is to say, in the presence of intermediate investment structure

without economic substance, as a whole or with reference to the single transaction, in
the absence of non-marginal non-tax purposes, the undue tax benefits obtained through
such structure could be denied […]
It follows that, where it is demonstrated, by virtue of a national anti-avoidance provision,
that [the foreign entity is, an.] a mere artificial arrangement and has been constituted for
the essential purpose of enjoying undue tax benefits in the absence of valid economic
reasons, the tax regime applicable would be the one avoided (imposition of gain on the
state of the source) instead of the treaty provisions (imposition of capital gains in the
state of residence) 47
In the light of the position expressed by the tax authorities in 2016, tax professionals have
adopted a more cautious approach with implementing tax planning structures in recent
years. Therefore, one might expect that the entry into force of the MLI and of the PPT rule
should not materially affect neither the assessment practices of the Italian tax authorities in
countering treaty-shopping nor the approach of tax professionals.
As regards dispute resolutions, the application of Part VI is one of the most significant
and innovative choices made by Italy in the context of the MLI as only few of its tax treaties
include a mandatory arbitration clause. In order to administer the expected additional flow
of work and to improve and accelerate the resolution of MAP cases, Italy has increased the
personnel designated to handle MAP cases in recent years.
47
Unofficial translation.
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Japan
Branch reporter
Mayuko Nakamura1

Japan signed the MLI on 7 June 2017 and deposited its instrument of acceptance of the MLI
on 26 September 2018, after the MLI was approved by the National Diet of Japan in May 2018.
The MLI entered into force for Japan on 1 January 2019.
At the time the MLI came into effect for Japan, Japan had 71 tax treaties in force, or more
precisely, 61 tax treaties applicable to 71 jurisdictions. Out of the 71 existing tax treaties, Japan
listed 39 tax treaties as Covered Tax Agreements (“CTAs”). Japan intends to list as a CTA any
tax treaty with a contracting state that has signed the MLI and listed the tax treaty as a CTA,
after Japan confirmed there is no inconsistency between its notification and the notification
from the other contracting state. Therefore, all 39 tax treaties listed as CTAs by Japan are also
listed as CTAs by the other contracting states (tentatively at the time of signing or definitively
at the time of ratification). This is because Japan wants to avoid uncertainty regarding the
application of the MLI due to an inconsistency between the notifications. In addition, Japan
also intends to exclude from the list of CTAs newly concluded or revised tax treaties in which
measures to prevent BEPS provided in the MLI have already been incorporated through
bilateral negotiations.
As one of the countries that has taken the initiative in the BEPS project, Japan has made
choices under the MLI to incorporate measures to prevent BEPS to the greatest extent
possible, other than those measures that Japan considered unnecessary to introduce through
the MLI. The main provisions that Japan chose not to adopt are: (i) article 5 (application of
methods for the elimination of double taxation); (ii) article 7 (Simplified Limitation on
Benefits); (iii) article 8 (dividend transfer transaction); (iv) article 11 (the “saving clause”);
and (v) article 14 (splitting-up of contracts). As for (i), it is not necessary for Japan to apply
this provision because Japan has not adopted the exemption method for eliminating double
taxation. The reasons for not adopting (ii),(iii), and (v) are that similar provisions have already
been incorporated in existing tax treaties, or Japan has a policy to implement measures to
prevent BEPS different from the MLI (especially with regard to (v), Japan intends to use the
Principal Purpose Test (PPT) as it feels article 14 may prevent legitimate business activity).
As for (iv), the saving clause is just for purposes of clarification, so Japan chose not to adopt
this provision under the MLI, considering the complexity involved in coordinating with other
contracting states with regard to what provisions are exceptions to the saving clause. In light
of these reasons, it is unlikely that Japan will make any changes with regard to its choices
under the MLI in the near future.
Since signing the MLI on 7 June 2017, Japan has signed 15 bilateral tax treaties. The
provisions of the MLI and associated revisions to the 2017 OECD Model Tax Convention have
a significant impact on these new tax treaties. The same or similar provisions under the MLI
or 2017 OECD Model Tax Convention, as modified according to Japan’s choices, have been
1
Attorney at Nishimura & Asahi.
IFA © 2020 459

Japan
incorporated into the bilateral tax treaties signed after the MLI. However, there are some
differences between these treaties and the MLI. For example, Japan chose not to adopt the
saving clause under article 11 of the MLI, but the saving clause has been incorporated into
the new bilateral tax treaties. In addition, Japan chose Option A under article 13 of the MLI
so that all of the exemption activities would be subject to the requirement of “preparatory
or auxiliary character”. However, most of the new bilateral tax treaties signed after the MLI
adopted a modified Option B, and thus, some limited activities (“delivery” is omitted from
Option B) will not be subject to the requirement of “preparatory or auxiliary character”. This
is because bilateral treaty negotiations enable Japan to make more flexible adjustments
or adopt customized provisions, while the MLI only allows each contracting state to adopt
prefixed provisions.
Publication of the synthetized text is not mandatory in Japan, but due to policy
reasons (to provide clarification and foreseeability for taxpayers and tax authorities), the
synthesized texts of the revised tax treaties have been made publicly available at the website
of the Ministry of Finance (https://www.mof.go.jp/english/tax_policy/tax_conventions/mli.
htm#a05).
So far, no specific interpretation issues regarding the MLI have been officially raised,
either by the Japanese government or by the courts. However, some issues must have arisen
through the making of the synthetized texts, as the MLI left some ambiguity in interpretation,
especially on how it modifies each CTA. It is also unknown whether the method of tax treaty
interpretation is being changed because of the MLI. Further, it is unclear as to whether there
is any change in the assessment practice regarding tax treaty abuse. Some changes might be
observed if a case involving the implementation of the PPT arises, because the application of
the PPT has not been known in Japan, although some tax treaties have already introduced
the PPT provisions. Because of the MLI, the number of tax treaties with PPT provisions will
increase significantly, thereby allowing us to observe how the PPT will be applied in Japan
in the future. As Japan has no experience with the PPT, and there are currently no special
guidelines or procedures for the application of the PPT provisions, it is still unclear how the
PPT provisions will be implemented or interpreted in Japan. In this respect, examples in the
OECD Commentaries would to some extent be helpful .
As Japan chose to apply the arbitration clause of the MLI, the number of tax treaties with
arbitration clauses will also increase. However, many countries, including those that have a
considerable number of tax disputes with Japanese taxpayers such as the People’s Republic of
China, India, Indonesia, and the Republic of Korea, have chosen not to adopt the arbitration
clause, so the impact of the MLI on tax disputes might be limited.
Part One: Impact of the BEPS Action Plan and the MLI on the
Tax Treaty Network
1.1. Introduction
Japan signed the Multilateral Convention to Implement Tax Treaty Related Measures to
Prevent Base Erosion and Profit Shifting (the “MLI”) on 7 June 2017, which entered into force
for Japan on 1 January 2019. When Japan deposited the instrument of acceptance of the MLI in
September 2018, it listed as Covered Tax Agreements (“CTAs”) tax treaties with 39 jurisdictions
(out of 71 jurisdictions), excluding the jurisdictions that were not expected to join the MLI and
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the jurisdictions with which Japan had already concluded or planned to conclude a new tax
treaty that contained measures to prevent BEPS. In order to implement measures to prevent
BEPS to the greatest extent possible, Japan adopted most of the provisions of the MLI, except
for some of the provisions that were inconsistent with Japan’s policy.
The provisions of the MLI have been incorporated into new bilateral tax treaties agreed
upon after the MLI or the publication of the BEPS final report.
Japan had entered into 71 tax treaties (conventions entered into principally for the elimination
of double taxation, and more precisely, 61 conventions applicable to 71 jurisdictions2,
excluding non-governmental tax agreements with Chinese Taipei) as of 1 January 2019, when
the MLI entered into force for Japan.
Japan’s tax treaties generally follow the OECD Model Tax Convention (some of the tax
treaties with developing countries include provisions originating from the UN Model, such
as the service PE). However, there are some differences between Japan’s tax treaties and the
OECD Model Tax Convention, such as the following:
–– Similar provisions included in the MLI:
–– Application of the tax treaty for fiscally transparent entities, anti-abuse treaty
provisions such as limitation on benefit (“LOB”) and principal purpose test (“PPT”),
arbitration clause.
–– Provisions not included in the MLI:
–– Source taxation on profit from silent partnership (tokumei kumiai), limitation
on reduced tax rate for deductible dividends, exemption on enterprise tax for
international transportation.
1.2.2. Domestic and treaty-based doctrines, provisions, and practices before the MLI
After the publication of the BEPS final report and before the signing of the MLI, Japan agreed
to and signed several tax treaties in which the same or similar provisions of the MLI are
included: tax treaties with Chile (signed in January 2016), Slovenia (signed in September
2016), Belgium (signed in October 2016), Latvia (signed in January 2017), and Austria (signed
in January 2017). In order to make an explicit comparison between tax treaties “before the
MLI” and tax treaties “after the MLI”, in this section, the term “tax treaties before the MLI” does
not include these tax treaties in which measures to prevent BEPS have been incorporated
based on the recommendations in the OECD BEPS report.3
2
As the tax conventions with the former Soviet Union and former Czechoslovakia were succeeded by more than
one jurisdiction, the number of jurisdictions does not correspond with that of the tax conventions. See “Japan’s
Tax Convention Network” on the Ministry of Finance website (https://www.mof.go.jp/english/tax_policy/tax_
conventions/190801e.pdf).
3
For this reason, Japan has not listed these tax treaties as CTAs under the MLI. See s. 1.3.2.
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Japan
1.2.2.1. Preambles before the MLI
Japan’s existing tax treaties before the MLI typically had preambles that stated the following:
“Desiring to conclude [a Convention/an Agreement] for the avoidance of double taxation
and the prevention of fiscal evasion with respect to taxes on income, have agreed as follows”.
Preambles that are the same as that of the MLI have been incorporated into the Japan-
Germany tax treaty signed in December 20154 and the tax treaties signed thereafter.
1.2.2.2. Measures addressing treaty shopping before the MLI
(1) Domestic specific anti-avoidance provisions

In Japan, there are certain specific anti-avoidance provisions in domestic legislation, such
as transfer pricing, CFC (Controlled Foreign Company) rules, thin capitalization rules, and
earning stripping rules. However, there are no domestic legislative provisions specifically
addressing treaty shopping such as look-through rules or anti-conduit provisions.
(2) Domestic anti-avoidance doctrines (substance over form, sham or business purpose) and/or
general anti-avoidance rules
Currently, there are no general anti-avoidance rules (“GAAR”) in Japan, although Japan has
a quasi-GAAR applicable only to family corporations and corporate reorganization (articles
132 and 132-2 of the Corporation Tax Act).
With respect to judicial doctrine, Japanese courts sometimes disallow transactions
made for the purpose of tax avoidance through the process of fact finding (finding it a
sham transaction) or by narrowing the interpretation of relevant provisions in light of their
objectives and purposes (the Resona Bank Case, Supreme Court, 19 December 2005).5
(3) General principles of treaty interpretation (such as the “guiding principle” adopted in the 2003
OECD Commentary)
Japanese tax authorities have tried to use the general principle adopted in the OECD
Commentary – the benefits of a double tax convention should not be available where a main purpose
for entering into certain transactions or arrangements was to secure a more favourable tax position
and obtaining that more favourable treatment in these circumstances would be contrary to the
object and purpose of the relevant provisions- to deny tax treaty benefits in abusive transactions.
However, Japanese courts continue to disfavour using principles not provided in the treaty
text to deny tax treaty benefits (the Guidant Japan Case (Tokyo High Court, 28 June 2007)6 and
the Japan-Ireland Tax Treaty Case (Tokyo High Court, 29 October 2014).7
4
The Japan-Germany tax treaty was agreed to in July 2015, before the publication of the BEPS final report, so
measures to prevent BEPS were not fully incorporated. Therefore, Japan has listed this treaty as a CTA under the
MLI, while it made a reservation under art. 6(4).
5
Minshu Vol. 59, No. 10. English summary is available at: http://www.courts.go.jp/app/hanrei_en/detail?id=800.
6
Hanrei Jihou Vol. 1985, p. 23.
7
Zeimu Sosyo Siryo Vol. 264 No. 12555. (https://www.nta.go.jp/about/organization/ntc/soshoshiryo/kazei/2014/
pdf/12555.pdf).
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(4) Interpretation and application of the beneficial ownership concept

Following the OECD Model Tax Convention, the terms “beneficial owner” or “beneficially
owned” have been included in many tax treaties concluded by Japan, such as in articles
10 (Dividends), 11 (Interest), and 12 (Royalties). However, no case of using the “beneficial
ownership” concept to deny tax treaty benefits is publicly known in Japan to date.

Before the MLI, Japan adopted LOB provisions in several tax treaties since the Japan-US tax
treaty was signed in 2003. In some tax treaties, Japan adopted the PPT alone or in addition
to LOB as anti-avoidance provisions.
(a) LOB
Japan has adopted LOB provisions in several tax treaties applicable only to certain
investment income such as dividends, interests, royalties, capital gains, or other income,
which are exempt from source country taxation (tax treaties with the UK, France, Australia,
the Netherlands, Switzerland, New Zealand, and Sweden) or applicable to all benefits
(tax treaties with the US and Germany). Japan’s basic policy is to limit the applicability of
the LOB to tax exemptions for investment income, balancing the administrative burden of
the LOB on taxpayers and tax authorities with the risk of abuse such as treaty shopping.8
(b) PPT
Japan has adopted the PPT, which is applicable to specific benefits for investment income
in tax treaties with the UK, France, Australia, Hong Kong, and Oman, and applicable to
all benefits in tax treaties with South Africa, Switzerland, Saudi Arabia, Portugal, New
Zealand, the UAE, Sweden, Qatar, and Germany.
(c) Anti-conduit provisions (channel provisions)
In some of Japan’s tax treaties, anti-conduit provisions9 have been provided in addition
to the LOB and/or PPT provisions (tax treaties with the US, the UK, France, Australia, the
Netherlands, and Switzerland).
(d) Subject-to-tax provisions granting treaty benefits only for income that is subject to tax
Some of Japan’s existing tax treaties have provisions that limit treaty benefits for non-
permanent residents who are only subject to remittance-based taxation10 (such as tax
treaties with the US, the UK, Australia, the Netherlands, France, New Zealand, and
Switzerland).
8
Kentaro Ogata, “Debate about Anti-Tax Avoidance Measures under the BEPS Project, etc.” Financial Review,
Vol.126 (https://www.mof.go.jp/pri/publication/financial_review/fr_list7/r126/r126_09.pdf; English abstract is
available at https://www.mof.go.jp/english/pri/publication/financial_review/fr126e.htm#08).
9
An example of such a provision is art. 11, para. 11 of the Japan-US tax treaty:
“A resident of a Contracting State shall not be considered the beneficial owner of interest in respect of a debt-claim if such
debt-claim would not have been established unless a person:
(a) that is not entitled to benefits with respect to interest arising in the other Contracting State which are equivalent to, or
more favorable than, those available under this Convention to a resident of the first-mentioned Contracting State; and
(b) that is not a resident of either Contracting State;
held an equivalent debt-claim against the first-mentioned resident.”
10
An example of such a provision is art. 4, para. 5 of the Japan-US tax treaty: “Where, pursuant to any provision of this
Convention, a Contracting State reduces the rate of tax on, or exempts from tax, income of a resident of the other Contracting
State and under the laws in force in that other Contracting State the resident is subject to tax by that other Contracting
State only on that part of such income which is remitted to or received in that other Contracting State, then the reduction
or exemption shall apply only to so much of such income as is remitted to or received in that other Contracting State.”
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Japan
(e) Exclusion provisions denying treaty benefits if enjoying special tax privileges
The Japan-Sweden tax treaty has a provision denying treaty benefits to entities enjoying
certain special tax privileges (article 21B of the Japan-Sweden tax treaty).
(f) Other provisions denying treaty benefits
The Japan-Rep. of Korea tax treaty (which entered into force in 1999) has a provision
denying treaty benefits if the competent authorities agree that taking advantage of those
provisions constitutes an abuse of the treaty (paragraph 3 of the Protocol on the Japan-
Rep. of Korea tax treaty).
1.2.2.3. Provisions addressing other forms of treaty abuse
(1) Dividend transfer transactions (addressed in article 8 of the MLI)

Most of Japan’s existing tax treaties entered into before the MLI require a six-month minimum
holding period before the reduced tax rate for dividends may be applied, while some tax
treaties (Indonesia, Australia, Germany, and Portugal) require a 12-month holding period
or longer. Many of these minimum holding periods are computed before the date on which
entitlement to the dividends is determined, or before the end of the accounting period in
which the distribution of profits takes place.
(2) Gains from alienation of shares or interests of entities deriving their value principally from
immovable property (addressed in article 9 of the MLI)
Although older tax treaties have no provisions addressing this issue, after the 2003 OECD
Model Tax Convention update, the same provisions as contained in the OECD Model have
been introduced in tax treaties. Before the MLI, the time period for determining whether
the relevant value threshold was met (in the MLI, “anytime during the 365 days preceding
the alienation”) had not been provided.
Some of these tax treaties contain an exception for certain portfolio investments in listed
entities (5% or less of shares or comparable interests traded on a recognized stock exchange).
(3) Permanent establishment situated in a third jurisdiction (addressed in article 10 of the MLI)
Before the MLI, there were no specific provisions addressing the issue of PE situated in third
jurisdictions.
1.2.2.4. Avoidance of permanent establishment status
(1) Commissionaire arrangement (addressed in article 12 of the MLI)

Agency PE provisions in Japan’s existing tax treaties generally follow the OECD Model Tax
Convention (before the 2017 update), but some tax treaties (especially with Asian countries
such as India, Indonesia, Thailand, the People’s Republic of China, the Philippines, Vietnam,
and Malaysia) provide that a fills-order agent and/or a secures-order agent shall be deemed
to be a PE.
(2) Specific activity exemptions (addressed in article 13 of the MLI)

Provisions regarding an exception to PE in Japan’s existing tax treaties generally follow the
OECD Model Tax Convention (before the 2017 update), although some tax treaties do not
provide for the case of a combination of the activities mentioned in each subparagraph of
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Nakamura
paragraph 4 of article 5. In a case where the issue of whether a warehouse used for storage
and delivery of goods by a non-resident internet retailer, constitutes a PE under the Japan-US
tax treaty was disputed, the court ruled that every activity mentioned in each subparagraph
shall be of a preparatory or auxiliary character even without explicit provision, based on the
2003 OECD Commentary (Tokyo High Court, 28 January 2016).11
(3) Splitting-up of contracts (addressed in article 14 of the MLI)

Most of Japan’s tax treaties have no specific provisions addressing this issue. However,
some tax treaties such as the ones with Australia and New Zealand provide that the period
of activities by associated enterprises shall be aggregated for the purpose of determining
whether a construction activity constitutes a construction PE.
1.2.2.5. Provisions addressing hybrid-mismatch
(1) Fiscally transparent entities (addressed in article 3 of the MLI)

Even before the MLI, similar provisions for the application of tax treaties to fiscally transparent
entities had been included in some tax treaties, such as those with the US, the UK, Australia,
the Netherlands, Switzerland, New Zealand, France, and Portugal.
(2) Dual resident entities (addressed in article 4 of the MLI)

Before the MLI, some tax treaties had provisions stating that a dual resident entity shall be
deemed to be a resident of the state in which its head or main office is situated, and other tax
treaties had provisions that the resident state of a dual resident entity shall be determined
by mutual agreement between the competent authorities.
1.2.2.6. Mutual agreement procedure and corresponding adjustment
(1) Mutual agreement procedure (addressed in article 16 of the MLI)

All of Japan’s tax treaties have some kind of mutual agreement procedure (“MAP”) provision,
but before the MLI, MAP was available only for residents or nationals. Some tax treaties did
not have the same MAP provisions as the MLI, such as the time period within which a case
must be presented (three years) or the obligation to implement the agreement between the
competent authorities notwithstanding any time limits in domestic laws.
(2) Corresponding adjustment (addressed in article 17 of the MLI)

Some older tax treaties have no corresponding adjustment provisions such as those with
Ireland, Italy, Indonesia, the People’s Republic of China, and Brazil. Other tax treaties have
corresponding adjustment provisions, but some of them explicitly require an agreement
between the competent authorities before the adjustment.
11
The judgement (in Japanese) is available at: http://www.courts.go.jp/app/files/hanrei_jp/117/086117_hanrei.pdf.
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1.2.2.7. Arbitration clause (addressed in articles 18-26 of the MLI)
Before the MLI, Japan introduced arbitration clauses in several tax treaties, such as those
with Hong Kong, the Netherlands, Portugal, New Zealand, Sweden, Germany, and the US.
The form of arbitration is not provided in these treaties, except for the Japan-US tax treaty,
which provides for baseball (final offer) arbitration which entered into force in August 2019.
To date, Japan has not experienced any arbitration case under these tax treaties.
Japan signed the MLI on 7 June 2017. It is explained that the objective of the MLI is to
implement the tax treaty related measures to prevent BEPS with respect to a large number
of its existing tax treaties at the same time and in an efficient manner. The reason for signing
the MLI is that Japan, as one of the countries which has taken the initiative in the BEPS project,
intends to take appropriate steps toward proper implementation of the achievement of the
BEPS project.12
The MLI was approved by the National Diet of Japan (kokkai, Japanese parliament) in May
2018. Thereafter, Japan deposited its instrument of acceptance of the MLI on 26 September
2018. The MLI entered into force for Japan on 1 January 2019.
Though there is no quantitative assessment of the impact of the MLI, the government of
Japan explained the economic and budgetary impact of the MLI during the approval process
in the Diet.13 As per the impact on economic activity, it explained that the MLI will provide
a level playing field for Japanese enterprises and also facilitate eliminating double taxation
by ensuring effective MAP including arbitration procedures, so the MLI will not put more
burden on enterprises which have paid tax properly. For budgetary impact, the government
explained that the MLI also enables Japan to impose tax properly on foreign enterprises
doing business in Japan.
Japan had 71 tax treaties in force as of 1 January 2019, when the MLI entered into force for
Japan.14 Out of the 71 existing tax treaties, Japan listed 39 tax treaties as CTAs (increased from
35 in the provisional list at the time of signing).
All 39 tax treaties Japan listed as CTAs are also listed as CTAs by the other contracting
states tentatively at the time of signing or definitively at the time of ratification (deposit
12
Press release by Ministry of Finance on 8 June 2017 “Convention to Implement Measures to Prevent BEPS was
Signed” (https://www.mof.go.jp/english/tax_policy/tax_conventions/press_release/20170608mli.htm).
13
Committee on Foreign Affairs of the House of Representatives (Shugiin) on 18 April 2018 and Committee on
Foreign Affairs and Defense of the House of Councilors (Sangiin) on 17 May 2018, by Toshiro Iijima, Deputy
Assistant Minster of the Ministry of Foreign Affairs (MOFA).
14
According to the OECD Report “Prevention of Treaty Abuse – Peer Review Report on Treaty Shopping” (OECD
(2019)), Japan had 68 tax agreements in force at that time, but thereafter tax treaties with new treaty partners,
Lithuania (31 August 2018), Estonia (29 September 2018), and Iceland (31 October 2018) have come into effect.
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of instrument of ratification, acceptance or approval). Therefore, out of the 71 tax treaties,

54.93% has been listed as CTAs by Japan and also 54.93% will be actually covered by the MLI.
Japan listed only some tax treaties as CTAs. According to the Peer Review Report, Japan
indicated that the tax treaties not subject to a complying instrument have not been listed
under the MLI as they were concluded with treaty partners that were not expected to join
the MLI at the time of Japan’s signature. More specifically, Japan wants to avoid uncertainty
of application of the MLI due to an inconsistency between the notifications, so Japan intends
to list a tax treaty with a contracting state as CTA if that state has signed the MLI and listed
the tax treaty as a CTA, and when Japan also has confirmed there is no inconsistency between
its notification and the notification from the other contracting state.15 In addition, Japan also
intends to exclude from the list of CTAs newly concluded or revised tax treaties in which
measures to prevent BEPS provided in the MLI have already been incorporated through
bilateral negotiations16 (i.e., tax treaties with Chile, Latvia, Slovenia, Austria, Belgium, Estonia,
Lithuania, Russia, Denmark, Iceland, Spain, Croatia, Columbia, Ecuador, Argentina, Uruguay,
Peru, Jamaica, Uzbekistan, and Morocco).
Therefore, it is expected that an additional tax treaty will be listed as a CTA by Japan if
the other contracting state signs the MLI and lists the tax treaty as a CTA. For example, Qatar
signed the MLI in December 2018 and listed the Japan-Qatar tax treaty as a CTA. Japan did not
list the Japan-Qatar tax treaty as a CTA at the time of the deposit of instrument of acceptance
in September 2018 (Qatar had not signed the MLI at that time), but it is highly possible that
Japan will add that treaty in the list of CTAs after it confirms there’s no inconsistency between
the notifications, as measures to prevent BEPS have not been incorporated in that treaty.
As Japan recognizes itself as one of the countries that has played a leading role in promoting
the BEPS project, it seems to have made its choices under the MLI to incorporate measures
to prevent BEPS to the greatest extent possible, other than those that Japan considers not
necessary to introduce through the MLI. The reason for some of those choices has been
explained by the official of the Ministry of Finance17 but not all the choices have been given
an official explanation.
1.3.3.1. Preamble language (article 6)
Minimum standard preamble language will be included in CTAs, except for the one with
Germany, which already contains the same language (Japan made reservation under article
6(4)).
For optional preamble language under article 6(3), Japan has opted to include the
language. No reason has been publicly given for this choice, but there seems to be no reason
for Japan not to include this language.
15
Koji Nakazawa “Application of the Convention to Implement Measures to Prevent BEPS” International Taxation
(kokusai zeimu) Vol. 39, No.1 (2019), p.27.
16
Nakazawa, Id.
17
Koji Nakazawa “the Convention to Implement Measures to Prevent BEPS” Sozei Kenkyu No. 820 (2018.2).
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1.3.3.2. How to satisfy minimum standard on treaty abuse (article 7: PPT and/or LOB)
In order to satisfy the minimum standard on treaty abuse, Japan has adopted PPT in article
7(1) under the MLI, not as an interim measure. PPT is the easiest way to satisfy the minimum
standard, and Japan has already introduced PPT in some of the existing tax treaties as stated
in 1.2.2.2(5)(b).
Japan has not adopted the discretionary benefits rule under article 7(4). This reason is
not officially explained, but this additional rule has not been introduced in Japan’s existing
tax treaties with PPT, so Japan might feel no necessity to introduce this rule.
Japan has not chosen the Simplified Limitation On Benefit clause (SLOB) under the MLI.
It also has not allowed the SLOB to be applied by another contracting jurisdiction pursuant
to article 7(7)(b). It is explained that Japan already introduced the LOB in a more appropriate
way in existing tax treaties18, i.e., most of the LOB provisions in the existing Japan’s tax treaties
are a limitation only for the specific benefits (certain investment income such as dividends,
interest, royalties) as explained in 1.2.2.2(5)(a).
1.3.3.3. Choices of other provisions on treaty abuse under the MLI
(1) Article 8 Dividend transfer transactions

Japan made a reservation of the right for the entirety of article 8 of the MLI not to apply to the
CTAs. It is explained that Japan already introduced the minimum holding period in a more
appropriate way in existing tax treaties.19 As explained in 1.2.2.3(1), most of Japan’s minimum
holding periods provided in existing tax treaties are six months, and the reference date is
the date on which entitlement to the dividend is determined, not the day of the payment
of the dividend.
(2) Article 9 Gains from alienation of shares or interests of entities deriving their value principally
from immovable property
Japan opted to apply article 9(4) of the MLI, as Japan considers it necessary to prevent BEPS.
(3) Article 10 Permanent establishment situated in third jurisdictions

Japan chose to apply article 10 of the MLI (made no reservation), as Japan considers it
necessary to prevent BEPS.
(4) Article 11 Application of tax agreements to restrict a party’s right to tax its own residents
Japan made a reservation of the right for the entirety of article 11 of the MLI not to apply to
its CTAs. It is explained that the saving clause is just for purposes of clarification, so Japan
chose not to adopt this provision under the MLI, considering the complexity involved in
coordinating with other contracting states with regard to what provisions are exceptions to
the saving clause.20
18
Id. p.172.
19
Id.
20
Id.
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Nakamura
1.3.3.4. Provisions preventing avoidance of permanent establishment status
(1) Article 12 Commissionaire arrangements and similar strategies

Japan chose to apply article 12 (made no reservation), as Japan considers it necessary to
prevent BEPS.
(2) Article 13 Specific activity exemption

Japan chose to apply Option A and also chose to apply article 13(4) (made no reservation), as
it considers these provisions necessary to prevent BEPS, especially for Option A to address
problematic warehouse cases.21 Under the Option A of article 13(2), all activities are subject
to the requirement “of a preparatory or auxiliary character”.
(3) Article 14: Splitting-up of contracts

Japan made a reservation of the right for the entirety of article 14 of the MLI not to apply
to the CTAs. It is explained that article 14 may prevent legitimate business activity22. In
2018, the definition of PE in Japan’s domestic tax legislation was also amended to reflect
recommendation from the BEPS final report, and it addresses the issue of splitting-up of
contracts by applying PPT instead of introducing provisions similar to article 14 of the MLI.
1.3.3.5. Hybrid Mismatch
(1) Article 3 Fiscally transparent entities

Japan chose to apply article 3(1), however, it made a reservation of the right for article 3(2)
not to apply to its CTAs. The reason for this reservation is not officially explained, however,
such concept of elimination of double-taxation for fiscally transparent entities has not been
adopted in Japan’s existing tax treaties nor in domestic tax legislation.
(2) Article 4 Dual-resident entities

Japan chose to apply article 4, however, it made a reservation of the right not to apply the
paragraph “except to the extent and in such manner as may be agreed upon by the competent
authorities of the Contracting Jurisdictions” in the last sentence of article 4(1). The reason for
this reservation is not officially explained, but such kind of exception has not been introduced
in Japan’s existing tax treaties.
(3) Article 5 Application of methods for elimination of double taxation (article 5)

Japan has not chosen to apply article 5. It is explained that it is not necessary for Japan to
apply this provision because Japan has not adopted the exemption method for eliminating
double taxation23.
21
Id.
22
Id.
23
Id.
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Japan
1.3.3.6. Arbitration Clause (articles 18 to 26 of the MLI)
Japan chose to apply the arbitration clause under Part VI of the MLI. The arbitration clause is
desirable for Japanese companies to resolve cases of double taxation or taxation inconsistent
with tax treaties.
Japan chose “independent opinion” arbitration by making a reservation of the right not
to apply “final offer” (baseball) arbitration under article 23(1). The reason for such choice
is not officially explained, but as explained in 1.2.2.7, almost all the arbitration clauses in
Japan’s existing tax treaties (except for the Japan-US tax treaty which provides for baseball
arbitration) do not include a provision regarding the type of arbitration.
Japan also made a reservation of the right to apply rules under article 19(12). The reason
for such a choice is not officially explained, but similar provisions are already included in the
arbitration clause of Japan’s existing tax treaties.
Japan considers that all cases should be subject to the arbitration clause,24 but finally has
made two reservations with respect to the scope of cases eligible for arbitration. Firstly, Japan
reserved the right to exclude cases determining whether a person other than an individual
shall be treated as a resident of one of the contracting jurisdictions. It is explained that this
reservation is only for clarification purposes,25 as the Explanatory Statement also explained
that cases in which benefits are denied due to a failure of the competent authorities of
the contracting jurisdictions to reach agreement, would not be eligible for arbitration.26
In addition to this reservation, Japan has added a reservation with respect to the scope of
arbitration, at the time of the deposit of instrument of acceptance, so as to make a limitation
on the arbitration clause in CTAs reciprocal when the other contracting jurisdiction made a
reservation with respect to the scope of the arbitration.
1.3.3.7. Expectation that choices made by Japan may be reversed in the near future
The main provisions Japan chose not to adopt are: (i) article 5 (application of methods for
the elimination of double taxation); (ii) article 7 (SLOB); (iii) article 8 (dividend transfer
transaction); (iv) article 11 (saving clause); and (v) article 14 (splitting-up of contracts). As for
(i), it is not necessary for Japan to apply this provision because Japan has not adopted the
exemption method for eliminating double taxation. The reasons for not adopting (ii), (iii) and
(v) are that similar provisions have already been incorporated in existing tax treaties, or Japan
has a policy to implement measures to prevent BEPS, different from the MLI. As for (iv), the
saving clause is just for purposes of clarification, so Japan chose not to adopt this provision
under the MLI. In light of these reasons, it is unlikely that Japan will make any changes with
regard to its choices under the MLI in the near future.
24
Id. p.170.
25
Id. p.170.
26
MLI Explanatory Statement, para 58 (para. 3 of art. 4).
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Nakamura
1.3.3.8. Reservations made by Japan
Reservations made by Japan other than those explained above, are the reservation of the right
not to apply the preamble or arbitration clause under the MLI to CTAs that already provide
for such a preamble or mandatory binding arbitration.
As some of the MLI provisions such as article 3(2), last sentence of article 4(1), article 8,
and article 14 are not consistent with Japan’s policy, its existing tax treaty provisions or its
domestic legislation, reservations under the MLI seem to be significant for Japan, giving
some flexibility to implement measures to prevent BEPS.
Since signing the MLI on 7 June 2017, Japan has signed 15 bilateral tax treaties: Lithuania
(July 2017), Estonia (August 2017), Russia (September 2017), Denmark (October 2017), Iceland
(January 2018), Spain (October 2018), Croatia (October 2018), Colombia (December 2018),
Ecuador (January 2019), Argentina (June 2019), Uruguay (September 2019), Peru (November
2019), Jamaica (December 2019), Uzbekistan (December 2019), and Morocco (January 2020).
In addition, even signed before the signature of the MLI, Japan considers that measures to
prevent BEPS have been incorporated into tax treaties with Chile (January 2017), Slovenia
(September 2016), Belgium (October 2016), Latvia (January 2017), and Austria (January 2017)
based on recommendation of the BEPS final report. Therefore, Japan has not listed these tax
treaties as CTAs.27
In addition, a tax treaty with Serbia has been agreed in principle, and tax treaties with
Tunisia, Greece, Finland, and Nigeria are currently negotiated or renegotiated.
The provisions of the MLI and associated revisions to the 2017 OECD Model Tax Convention
have a significant impact on these new tax treaties. The same or similar provisions under the
MLI or the 2017 OECD Model Tax Convention, as modified according to Japan’s choices, have
been incorporated into bilateral tax treaties signed after signing of the MLI. The differences
between these treaties and the MLI are as follows:
–– Saving clause: Japan made a reservation of the right not to apply the saving clause under
article 11 of the MLI, but the saving clause has been incorporated into new bilateral
tax treaties such as those with Croatia, Colombia, Ecuador, and Argentina, reflecting
paragraph 3, article 1 of 2017 OECD Model Convention.
–– Specific activity exemption of PE: Japan has chosen Option A under article 13 of the MLI,
so all the activities would be subject to the requirement of “preparatory or auxiliary
character”. However, most of the new bilateral tax treaties signed after the MLI adopted
Option B (Lithuania) or modified Option B provisions (Estonia, Russia, Denmark,
Iceland, Croatia, Ecuador, Argentine, Uruguay ), and thus, some limited activities (in
modified Option B provisions, “delivery” is omitted) are not subject to the requirement
of “preparatory or auxiliary character”.
27
Ministry of Foreign Affairs “Explanatory material of the Multilateral Convention to Implement Tax Treaty Related
Measures to Prevent Base Erosion and Profit Shifting (https://www.mofa.go.jp/mofaj/files/000343382.pdf).
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Japan
–– All the new tax treaties have PPT provisions to satisfy the minimum standard but many
of those also have LOB provisions, which only limit the benefit for certain investment
income.
–– Japan made a reservation of the right not to apply article 8 and article 14 of the MLI.
However, in some tax treaties, the minimum holding period for reduced tax rate on
dividends is 12 months (Russia, Spain, Croatia) or provisions similar to article 14 of the
MLI are introduced (Colombia), which might be the result of bilateral negotiations.
The reason for the difference is that bilateral treaty negotiations enable Japan to make
more flexible adjustments or adopt customized provisions, while the MLI only allows each
contracting state to adopt prefixed provisions. Except for the above-mentioned provisions,
the policies adopted in the MLI and the 2017 OECD Model Tax Convention are basically the
same. However, in the 2017 OECD Model Tax Convention Japan has not made an observation
or reservation with regard to the minimum holding period under paragraph 2 of article 10 and
for eliminating double-taxation for fiscally transparent entities under article 23, with respect
to which Japan made a reservation under the MLI (nonetheless Japan has not adopted these
provisions in bilateral tax treaties, except for the 12 months period in some tax treaties).
As measures to prevent BEPS or the MLI provisions have been introduced or will be
introduced in these new tax treaties through bilateral negotiations, Japan basically considers
not to list them as CTAs.
2.1.1.1. Implementation procedure
Japan signed the MLI in June 2017 and obtained the approval of the Diet (Japanese Parliament)
in May 2018. After that, it deposited the instrument of acceptance in September 2018, and the
MLI entered into force for Japan on 1 January 2019. Upon signature and acceptance of the MLI,
the Cabinet made those decisions, in the same manner as an ordinary treaty.
The Diet approved the conclusion of the MLI by Japanese government, so the entire text
was subject to the Diet’s approval. The Japanese government considers reservation and
choice of optional provisions as implementation of the Convention and within the authority
of the government, and hence not subject to the Diet’s approval. However, in a manner
consistent with the past practices, the government explained to the Diet what reservations
and choices it intended to make.28
28
The reservations and choices are explained in Ministry of Foreign Affairs “Explanatory material of the Multilateral
Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting” which was
submitted to the Diet.
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Nakamura
2.1.1.2. Synthetized text
Publication of the synthetized text is not mandatory in Japan, but due to policy reasons (to
provide clarification and foreseeability for tax payers and tax authorities),29 the synthesized
texts of the revised tax treaties have been made publicly available at the website of the
Ministry of Finance.30 Also one publisher has published tax treaty texts including these official
synthesized texts. These synthetized texts follow the OECD’s “Guidance for the development
of synthesised texts”. It is explained that in principle the synthetized text has been mutually
confirmed with the other contracting state.31
The disclaimer of the synthetized text states that “the sole purpose of this document
is to facilitate the understanding of the application of the MLI to the Convention and the
document does not constitute a source of law. The authentic texts of the Convention and
the MLI are the only legal texts applicable.” Therefore, it is unlikely that the synthetized text
bounds the tax administration in case of a divergence between the text and the actual impact
of the MLI on a treaty, but it would be a very significant guideline for interpretation of the
MLI and the CTAs in practice.
In Japan, conclusion of a convention does not require conversion to domestic legislation

(monist theory), and international law (including the MLI) is considered to have primacy over
existing domestic legislation and cannot be overridden by subsequent domestic legislation.
So far, no specific interpretation issues regarding the MLI have been officially raised, either
by the Japanese government or the courts. However, some issues must have arisen through
making of the synthetized texts, as the MLI left some ambiguity in interpretation, especially
on how it modifies each CTA32. Specific interpretation issues will be raised in the future by
taxpayers through actual cases.
As there is no other authoritative guideline, the explanatory statement of the MLI and
the OECD guideline about functioning under public international law would become a very
significant guideline for the government to interpret the MLI. As Japan had not concluded
any multilateral convention that modifies a lot of bilateral agreements before the MLI, the
29
Nakazawa (2019), and Koji Nakazawa “the Convention to Implement Measures to Prevent BEPS” International
Taxation (kokusai zeimu) Vol.38 No.5 (2018.5) p.74.
30
https://www.mof.go.jp/english/tax_policy/tax_conventions/mli.htm#a05.
31
Koji Nakazawa (2019) p.31.
32
For example, in Japan-New Zealand synthesized text (https://www.mof.go.jp/tax_policy/summary/international/
press_release/SynthesizedTextforJapan-NZEN.pdf), para. 4 of art. 9 of the MLI replaces para. 2 of art. 13 of the
Japan-NZ tax treaty, thereby erasing the exception for 5% or less listed shares or interests. This conclusion seems
somewhat unreasonable for taxpayers, as this exception has still been introduced into new tax treaties signed
after the MLI.
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Japan
OECD guideline would be especially helpful to understand how the MLI works from the
international law perspective.
As the Japanese text is not an authentic text in the MLI, difference of the language will
not be an issue in Japan (in many of Japan’s tax treaties, Japanese text is also authentic text,
but most of those treaties provide that English text shall prevail in case of divergence of
interpretation).
In the Glaxo Case of 29 October 2009,33 the Supreme Court of Japan ruled that the OECD
Commentary is a supplementary means of interpretation (Vienna Convention of the Law
of Treaties (VCLT), article 32). As the Explanatory Statement of the MLI refers to BEPS final
reports in interpretation of the substantive provisions, and relevant parts of the BEPS final
reports have been incorporated into 2017 OECD Commentary, it is possible that the BEPS
report would be given similar legal value as the OECD Commentary i.e., supplementary
means of interpretation (VCLT Article 32), though unlike the OECD Commentary, Japan and
other parties have not been allowed to make reservation or observation to those materials.
So far it is unknown whether the method of tax treaty interpretation is being changed
because of the MLI. Some changes might be observed if a case involving the implementation
of the PPT arises, because the application of the PPT has not been known in Japan, although
some tax treaties have already introduced the PPT provisions. Because of the MLI, the number
of tax treaties with PPT provisions will increase significantly, thereby allowing us to observe
how the PPT will be applied in Japan in the future.
Generally, if the earlier tax treaties have been modified by the MLI, the interpretation of
these tax treaties would change due to the modification of the texts. However, if there is no
amendment or modification of the text, retrospective effect should not arise because it would
harm taxpayer’s foreseeability, which is inconsistent with the principle of no taxation without
law under the Constitution of Japan (article 84). However, it is possible to have a retrospective
effect without modification of the texts in the cases where the MLI clarifies the interpretation
that should have existed before the MLI.
2.2.3.1. Retrospective influence of the amended preamble
The preambles modified by article 6 of the MLI would be used in the interpretation of tax
treaties in accordance with article 31 of the VCLT (A treaty shall be interpreted in good faith in
accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the
light of its object and purpose). However, since Japanese courts continue to be negative to deny
tax treaty benefits without express anti-avoidance provisions (as explained in 1.2.2.2 (3)), and
it is unlikely that the amended preamble itself will be used for denying tax treaty benefits.
33
Minshu Vol. 63, No. 8. English summary is available at http://www.courts.go.jp/app/hanrei_en/detail?id=1030.
474
Nakamura
2.2.3.2. Retrospective influence of the choices made by Japan
As for the retrospective influence of the choices made by Japan, the possible issue is
whether the guiding principle in the OECD Commentary will be applied even if there is no
PPT provisions, as Japan chose to apply the PPT, which is considered to merely confirm the
guiding principle in the OECD Commentary (paragraph 61 of article 1). However, as explained
in 1.2.2.2 (3), Japanese courts continue to be negative to deny tax treaty benefits without
express anti-avoidance provisions and it is less likely that Japanese courts will change its
jurisprudence after the MLI.34
Another possible issue is whether the requirement “of preparatory or auxiliary character”
will still be required of all activities provided in each subparagraph of specific activity
exemption of article 5 in the older OECD Model, even without express provisions, as ruled
by the Tokyo High Court on 28 January 2016. Japan chose to apply Option A in article 13 of the
MLI, but in the cases where the other contracting state has not chosen Option A in order to
provide greater certainty for tax administrations and taxpayers, taking the view that these
activities should not be subject to the conditions that they be of a preparatory or auxiliary
character, it might be still arguable.
2.3.1. How tax professionals take the PPT into account in tax planning
It is generally explained that taxpayers have to examine and reconsider their investment
structures if there is no economic substance. Other tax professionals explained that taxpayers
have to produce evidence to demonstrate a legitimate business purpose to tax authorities
at the time of investigation.
2.3.2. Change in the assessment practice regarding tax treaty abuse
As the data on the assessment practice specifically focusing on the denial of tax treaty benefits,
is not publicly available, it is not clear whether tax authorities deny tax treaty benefits more
often than before. However, the National Tax Agency of Japan is focusing on investigation
in international transactions, especially withholding tax on the payments to non-residents,
and it pointed out 1,684 cases of tax leakage and collected additional withholding tax of 7,823
million yen in the 2017 business year (increased from 1,556 cases, 4,253 million yen in 2016
business year)35. These cases might include cases denying tax treaty benefits.
34
See discussions in Yoshihiro Masui, Keiji Aoyama, Yushi Hirakawa, and Masao Yoshimura:”Changes in tax treaties
and important issues in domestic law” Rule of Law, No.193, p. 27.
35
National Tax Agency “Summary of investigation achievement on corporate tax, etc. in 2017 business year” (https://
www.nta.go.jp/information/release/kokuzeicho/2018/hojin_chosa/pdf/hojin_chosa.pdf).
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Japan
2.3.3. Implementation of LOB/PPT
With respect to LOB, as Japan has introduced LOB since 2004, there would be no change in
practice because of the MLI (taxpayers have to file an application to obtain benefits under
tax treaties with LOB provisions).
With respect to PPT, there are currently no special guidelines or procedures for the
application of the PPT provisions. As Japan has no experience with applying the PPT (or
GAAR), it is unclear how the PPT provisions will be implemented or interpreted in Japan.
Kentaro Ogata, former Director of International Tax Policy of the Ministry of Finance of Japan,
explained that the PPT is expected to apply only to very exceptional abuse cases.36 Some
practitioner pointed out that the cases of abuse of tax legislation, such as the Resona Bank
Case (Supreme Court, 19 December 2005, see 1.2.2.2(2)), and the cases of application of quasi-
GAAR for corporate reorganization (the Yahoo Japan Case, Supreme Court, 29 February 201637),
might be helpful.38 Also, the examples in the OECD Commentaries would be helpful to some
extent, but further guidance is awaited.
2.3.4. Impact of the MLI on the resolution of tax disputes under MAP and arbitration
As Japan chose to apply the arbitration clause of the MLI, the number of tax treaties with
arbitration clauses will increase (so far, the arbitration clause of the MLI has been introduced
in tax treaties with Australia, Canada, Finland, France, Ireland, Luxembourg, and Singapore).
However, many countries, including those who have many tax disputes with Japanese
taxpayers such as the People’s Republic of China, India, Indonesia, and the Republic of Korea,
have chosen not to adopt the arbitration clause, so the impact of the MLI on tax disputes
might be limited.
The actual impact of the MLI on the practice of the mutual agreement procedure other
than arbitration is also unknown. The Peer Review of Action 14, rather than the MLI, might
bring some improvement on implementation of the mutual agreement procedure (MAP).
According to the MAP Peer Review Report (Stage 1),39 Japan meets most of the elements of the
Action 14 Minimum Standard overall, except that Japan needs to amend and update a certain
number of older tax treaties through the MLI or through bilateral negotiations. However, as
the number of cases of MAP with non-OECD countries (mostly Asian countries) increases, it
takes longer time to resolve the cases because of less resources and less experience of the
counterpart competent authorities.40
36
Ogata, supra note 8.
37
Minshu Vol. 70, No. 2. English summary is available at http://www.courts.go.jp/app/hanrei_en/detail?id=1446.
38
Yushi Hirakawa comments in round-table discussion “Changes in tax treaties and important issues in domestic
law”, supra note 34.
39
“Making Dispute Resolution More Effective – MAP Peer Review Report, Japan (Stage 1)” (http://www.oecd.org/
tax/beps/making-dispute-resolution-more-effective-map-peer-review-report-japan-stage-1-9789264304307-
en.htm).
40
Mikio Hata “Recent situations of MAP” International Taxation (kokusai zeimu) Vol.39 No.6.
476
Republic of Korea
Branch reporter
Jae-chan Park1

As of today, 93 tax treaties are in force with the Republic of Korea (hereinafter Korea). In
order to prevent the abuse of tax treaties, (i) the tax laws of Korea set forth the substance-
over-form doctrine (see article 14 of the National Basic Tax law (NBTL) and article 2-2 of
the International Tax Coordination Law (ITCL)], and (ii) based on the assumption that
the above provisions also apply to the interpretation and application of tax treaties, the
Supreme Court of Korea restricts a nominal owner from enjoying tax treaty benefits when
the nominal owner is different from the beneficial owner and such difference is intended
for avoiding tax, and (iii) the tax treaties signed by Korea include provisions regarding the
limitation of treaty benefits, the prevention of abuse of tax treaties for each type of income
and the concept of a beneficial owner for each type of income, i.e. dividend, interest and
royalty income.
On 7 June 2017, the Korean government signed the Multilateral Convention to Implement
Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). According
to the bill to ratify the MLI submitted by the Korean government on 20 August 2019, the
existing tax treaties concluded by Korea will be amended pursuant to the provisions on the
limitation on benefits (article 7), the provisions on tax dispute resolution process (article 16)
and the provisions on corresponding adjustments between two contracting jurisdictions for
tax dispute resolution (article 17) under the MLI. Upon its entry into force, the MLI is expected
to impact 73 out of 93 tax treaties signed by Korea.
Indeed, in order to reflect the provisions of the MLI and the OECD framework on base
erosion and profit shifting (BEPS), the governments of Korea and the Czech Republic executed
the amended tax treaty as of 12 January 2018 by (i) newly incorporating article 26, paragraph 1
to deny the benefits of the treaty when the enjoyment of the benefits is the principal purpose
of a transaction or an act and (ii) modifying article 23, paragraph 1 to allow a taxpayer to file
an application for mutual agreement procedure with the authorities of both contracting
jurisdictions.
In principle, the MLI applies to the existing laws of Korea. However, the issue of interpreting
or applying the MLI has not been specifically discussed in the court or government of Korea
to date. If such an issue is raised, the document or guidance published by the OECD may be
cited as a reference, albeit having no legal binding force.
The MLI will not fundamentally change the current Supreme Court’s methodology of
interpreting and applying tax treaties. However, it should be closely monitored whether the
MLI will make the court expand the application scope of the substance-over-form doctrine.
In practice, business entities are expected to adjust their business or transaction
structure for tax planning purposes in consideration of the “limitation of tax treaty benefits”
provisions under the MLI, while the National Tax Service of Korea (NTS) is anticipated to
1
Attorney, Kim & Chang’s Tax Practice Group, Seoul.
IFA © 2020 477

Republic of Korea
tighten up on aggressive tax avoidance practices of multinational enterprises, such as

business restructuring and denial of permanent establishment status for tax avoidance
purposes.
Treaty Network
1.1. Introduction
The key provisions of the MLI signed by the Korean government pertain to (i) the
introduction of the limitation on benefits under tax treaties (see article 7) and (ii) the
improvement of tax dispute resolution procedures (see article 16). Such provisions constitute
the minimum standards to be met by a signatory of the OECD/G20 BEPS package. The
government made reservations on other provisions of the MLI.
The Korean government already submitted the bill to ratify the MLI to the National
Assembly of the Republic of Korea (hereinafter Korea). If the governments of Korea and the
other contracting states submit the instrument of ratification to the OECD, the relevant tax
treaties would be automatically amended without any additional legislative measures. If
the MLI enters into force, 73 of 93 tax treaties involving Korea as a party would be affected.
Currently, tax treaties concluded with 93 jurisdictions are in force in Korea. Except for the
tax treaty with the US (which reflects the US model tax convention), most of them basically
follow the OECD Model Tax Convention on Income and Capital (OECD Model Tax Convention)
with some differences in certain clauses.
Specifically, the provisions of article 22 (Capital) of the OECD Model Tax Convention are
reflected in only 16 tax treaties. Since the capital tax system is currently not in place in Korea,
the Korean government incorporated the provisions in its tax treaties only when requested
by the other contracting states.
The provisions of article 5 (Permanent Establishment) of the OECD Model Tax Convention
is not reflected in any of the tax treaties. In this respect, the tax treaties strengthened the
source taxation doctrine by, e.g., basing certain provisions on the United Nations Model
Double Taxation Convention, and significantly vary from jurisdiction to jurisdiction.
As for the provisions of article 7 (Business Profits), most of the tax treaties relied upon the
provisions of the pre-amendment of the OECD Model Tax Convention of 2010.
While article 12 (Royalties) of the OECD Model Tax Convention sets forth the residence
taxation doctrine, the tax treaties signed by Korea prescribe the source taxation doctrine.
The tax treaties signed by Korea also contain provisions not stipulated in the OECD
Model Tax Convention. Such provisions pertain to independent personal services, teachers,
limitation of benefits, most-favored nation treatment, etc.
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Park
The 73 tax treaties signed by Korea state their purposes as “the avoidance of double taxation
and the prevention of fiscal evasion with respect to taxes on income and capital gains” or to
a similar effect in their preambles.
The Korean authorities have prevented the abuse of tax treaties based on laws, court
precedents and special provisions of tax treaties.
For example, article 14 of the NBTL and article 2-2 of the ITCL provide for the substance-
over-form doctrine which can be understood as the general anti-avoidance rule.
The Supreme Court of Korea ruled that if the nominal owner of property is not capable of
controlling or managing the property and there is another person who substantially controls
or manages the property through the control over the nominal owner and such gap between
form and substance is intended for avoiding tax, the income arising from the property shall
be deemed to be owned by the person who substantially controls or manages it and the
person shall be treated as a taxpayer (see Supreme Court En Banc Decision No. 2008Du8499
rendered on 19 January 2012). The Supreme Court also held that unless specifically restricted
by other provisions, the foregoing principle shall be applied in interpreting and applying such
tax treaties as having the same effect as laws (see Supreme Court Decision No. 2010Du11948
rendered on 26 April 2012).
The Supreme Court applied the substance-over-form doctrine and denied the
applicability of benefits under tax treaties to (i) interest income (see Supreme Court Decision
No. 2013Du23317 rendered on 9 November 2016) and dividend income (see Supreme Court
Decision No. 2013 Du7711 rendered on 26 March 2015) for which the tax treaties contain
beneficial ownership-related provisions as well as to (ii) capital gains for which the tax treaties
do not contain beneficial ownership-related provisions (see Supreme Court Decision No.
2014Du40166 rendered on 19 August 2015).
The tax treaties signed by Korea prevent their abuse by (i) incorporating special provisions
regarding “limitation of benefit” (19 tax treaties), (ii) incorporating anti-abuse provisions
in the clause of each type of income (eight tax treaties), or (iii) reflecting the concept of
“beneficial owner” in the clause of each type of income, i.e., dividend, interest and royalty
income (76 tax treaties), or (iv) by other means (eight tax treaties).
The “limitation of benefit” provisions under the tax treaties differ from the specific
provisions for preventing tax treaty abuse as described in the OECD final report on BEPS Action
6. Further, their titles vary from treaty to treaty, such as “Limitation of Relief,” “Miscellaneous
Rules” and “Application of the Agreement in Special Cases.”
The contracting states that incorporate, in their tax treaties with Korea, the provisions to
prevent the abuse of tax treaties through direct/indirect control by third country residents,
include, among others, the US, Bahrain, Ecuador, Uruguay, India, the People’s Republic of
China, Canada, Colombia, Kuwait and Panama.
The contracting states that incorporate, in their tax treaties with Korea, the provisions to
deny treaty benefits to the transactions or arrangements whose principal purpose(s) is(are)
the enjoyment of treaty benefits, include, among others, Germany, Bahrain, UAE, Ecuador,
Uruguay, India, Japan, Qatar, Colombia, Kuwait, the Republic of Tajikistan, Panama, Peru and
Hong Kong. The tax treaties with Saudi Arabia and Kyrgyzstan also contain such “principal
purpose” test but provide for the application of anti-tax avoidance provisions under domestic
law – not the denial of treaty benefits – in the event of the satisfaction of the test. The tax
treaty with Japan denies the applicability of treaty benefits when the abuse of the treaty is
recognized by the competent authorities of both contracting states.
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The contracting states that incorporate, in their tax treaties with Korea, anti-abuse
provisions in the clauses of certain types of income (e.g., dividend, interest and royalty
income), include, among others, Mexico, Azerbaijan, the UK, Oman, Uzbekistan, Ukraine,
Chile, Papua New Guinea and Qatar.
The tax treaties with the Netherlands, New Zealand and Thailand restrict the application
of the provisions for eliminating double taxation when the application of such provisions is
the principal purpose of transactions, arrangements, etc.
The tax treaty with the US declaratorily sets forth anti-treaty shopping rules in article 30
(Assistance in Collection).
The tax treaties with Chile, Canada, Colombia and Hong Kong provide in the “resident”
clause that when a person other than an individual is a resident of both contracting states,
the competent authorities of the contracting states shall by mutual agreement endeavor to
settle the status of such person and that insofar as no such agreement has been reached,
such person shall not enjoy treaty benefits as a resident.
On 7 June 2017, the Korean government (Signatory: Representative of Korea to the OECD)
signed the MLI.
According to the MLI, the scope of the authorities which reserve the authority to prevent
the abuse of a tax treaty and the consequent tax avoidance and with which a taxpayer may file
an objection to the unfair taxation by either contracting state of a tax treaty, was expanded
from the tax authorities of the residence country of a taxpayer to the tax authorities of both
contracting states. In this regard, the Ministry of Economy and Finance of Korea predicted
that taxpayer rights would be further strengthened.
Due to the signing of the MLI, the mutual agreement procedure-related provisions of
tax treaties should be amended, which will incur financial costs. However, the amount of
such costs is, by nature, difficult to be estimated, and thus has not been estimated by the
Korean government.
The Korean government submitted the bill to ratify the MLI to the National Assembly on
20 August 2019. Although the schedules for the follow-up processes, including the ratification
by the National Assembly, are highly contingent upon political circumstances and thus hardly
predictable, the MLI is anticipated to enter into force upon the ratification by the National
Assembly at the end of 2019 at the earliest, or at the end of 2020 at the latest.
Among the 93 tax treaties executed by the Korean government, 73 treaties (78.5%) will be
subject to the MLI.
The remaining 20 treaties will not be subject to the MLI since the other contracting states
have not signed the MLI.
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The Korean government did not make reservations on article 6 (Purpose of a Covered Tax
Agreement), article 7 (Prevention of Treaty Abuse), article 16 (Mutual Agreement Procedure)
and article 17 (Corresponding Adjustments) of the MLI and made reservations on the other
clauses. Such action is indicative of the government’s intention to reflect the minimum
standards to be met by a signatory of the OECD/G20 BEPS package (e.g., limitation of tax
treaty benefits and improvement of tax dispute resolution procedures) in tax treaties first
and then monitor the developments of the MLI and decide whether to accept (or lift the
reservations on) the reserved provisions.
According to the MLI ratification bill submitted by the Korean government, the tax
treaties signed by Korea will be amended on the basis of the provisions constituting the
minimum standards (articles 7 and 16) and on the provisions regarding the corresponding
adjustments by both contracting jurisdictions for resolving a tax treaty dispute (article 17)
under the MLI. The noteworthy details of the provisions are as follows.
“A benefit under the Covered Tax Agreement shall not be granted if it is reasonable to
conclude, having regard to all relevant facts and circumstances, that obtaining that benefit
was one of the principal purposes of any arrangement or transaction that resulted directly
or indirectly in that benefit, unless it is established that granting that benefit in these
circumstances would be in accordance with the object and purpose of the relevant provisions
of the Covered Tax Agreement” (article 7, paragraph 1 of the MLI).
“Where a person [i.e., taxpayer] considers that the actions of one or both of the
Contracting Jurisdictions result or will result for that person in taxation not in accordance
with the provisions of the Covered Tax Agreement, that person may present the case to the
competent authority of either Contracting Jurisdiction. The case must be presented within
three years from the first notification of the action resulting in taxation not in accordance
with the provisions of the Covered Tax Agreement” (article 16 of the MLI).
“Where a Contracting Jurisdiction includes in the profits of an enterprise of that
Contracting Jurisdiction — and taxes accordingly — profits on which an enterprise of the
other Contracting Jurisdiction has been charged to tax in that other Contracting Jurisdiction
and the profits so included are profits which would have accrued to the enterprise of the
first-mentioned Contracting Jurisdiction if the conditions made between the two enterprises
had been those which would have been made between independent enterprises, then that
other Contracting Jurisdiction shall make an appropriate adjustment to the amount of the
tax charged therein on those profits” (article 17 of the MLI).
Pursuant to article 7, paragraph 17, subparagraph a) of the MLI, the Korean government
determined that 22 of the tax treaties signed by Korea include the provisions of which a party
may not reserve such right as prescribed in article 7, paragraph 15, subparagraph b) of the
MLI and which are stipulated in article 7, paragraph 2 of the MLI.
1.4. Indirect Impact of the BEPS Action Plan and the MLI
On 12 January 2018, the Korean government signed a new tax treaty with the Czech Republic
to replace the existing tax treaty of 2015. The new tax treaty (i) explicitly states, in the
preamble, its purpose as the prevention of double taxation and double non-taxation, (ii)
newly incorporates article 26, paragraph 1 to provide that treaty benefits may be denied
when the enjoyment of the benefits is the principal purpose of a transaction or an action
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(for preventing the abuse of the tax treaty), and (iii) amends article 23, paragraph 1 to allow
a taxpayer to file for mutual agreement procedure with both contracting states.
The new Korea-Czech tax treaty is the first tax treaty in which the Korean government
reflected such minimum standards for tax treaties as established under the OECD BEPS
Project. The Korean government remarked that it has expressed its intention to reflect such
minimum standards in all tax treaties negotiated after the signing of the above treaty.
In order for the MLI to have the same effect as that of domestic law of Korea, the Korean
government shall obtain the consent to the ratification thereof from the National Assembly
of Korea (see article 60, paragraph 1 of the Constitution of the Republic of Korea), and for
consenting to the ratification, the National Assembly shall review and examine the specific
provisions of the MLI.
If any tax treaty is amended based on the MLI, the amended tax treaty would become
effective as of the first day of the month that comes three (3) months after the governments
of Korea and the other contracting state submit the instrument of ratification to the OECD;
any other legislative measure is not required for such effectuation.
The tax treaties concluded according to constitutional procedures may be accepted and
have the same effect as domestic laws only upon promulgation (see article 6, paragraph 1
of the Constitution of the Republic of Korea). Accordingly, the MLI must be published and
promulgated in an official gazette in Korea so as to have the same effect as that of domestic
law of Korea.
Whether the corresponding amendments to tax treaties in accordance with the MLI are
also required to be promulgated has yet to be separately discussed, and there is no legal basis
to mandate such promulgation.
Since only the laws enacted by the National Assembly of Korea and the subordinate
statutes enacted by the Korean government based thereon, may have legal binding force
upon the Korean government, the “Guidance to the Development of Synthetized Text”
released by the OECD in November 2018 and the “MLI Matching Database” of the OECD may
be referred to in interpreting and applying laws but may not have legal effect.
In the event of conflict or inconsistency between laws having the same effect as one another,
a special law prevails over a general law, and a new law prevails over an old law. Given that the
tax treaties concluded with the National Assembly’s consent (i) have the effect equivalent to
that of law and (ii) have the status of special laws and thus have precedence over domestic
laws in terms of the legal relationship governed by the tax treaties, the MLI shall, in principle,
prevail over domestic laws in Korea.
However, the priority between the MLI and such domestic law as enacted or amended
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after the ratification of the MLI will be determined on a case-by-case basis considering,
among others, the legislative objective, provisions and applicable scope of such domestic
law.
The interpretation or application of the MLI has yet to be specifically discussed in the court
or government of Korea. In the event of any terminological difference between the MLI and
the domestic law of Korea, however, the interpretation of the MLI provisions might become
an issue.
In such case, the document or guidance published by the OECD – including the OECD’s
memorandum entitled “Multilateral Convention to Implement Tax Treaty Related Measures
to Prevent Base Erosion and Profit Shifting: Functioning under Public International law?”
– may be used as a reference, albeit having no legal binding force.
Article 31, paragraph 1 of the Vienna Convention on the Law of Treaties stipulates that a treaty
shall be interpreted in good faith “in accordance with the ordinary meaning to be given to the
terms of the treaty in their context and in light of its object and purpose.”
In addition, a lower court of Korea held that the Commentaries on the articles of the
OECD Model Tax Convention and the reports published by the OECD, which set forth
the international standards for reasonable interpretation of tax treaties, may be used as
references in interpreting the treaties signed between OECD member countries in relation
to, for example, the substance-over-form doctrine of domestic laws (see Seoul High Court
Decision No. 2012Nu11388 rendered on 12 October 2012).
In light of the foregoing, if any issue arises about the interpretation of the MLI and the
tax treaties to be amended according to the MLI, the MLI and the OECD report on BEPS
(which served as the basis to execute the MLI) would serve as the significant standards for
the interpretation. However, the legal significance of the OECD’s BEPS report would not
be recognized as being equivalent to that of the Commentaries on the OECD Model Tax
Convention, nor has any court of Korea explicitly recognized as such.
To date, no discussions have taken place as to (i) whether the amendments to the preambles
of tax treaties (based on article 6 of the MLI) or the reservations made on certain clauses of
the MLI by its contracting states may affect the interpretation of the tax treaties concerned
and if so, (ii) how they may affect the interpretation.
In this regard, the Supreme Court of Korea has upheld the substance-over-form doctrine
for the purpose of preventing the abuse of tax treaties on the grounds that tax treaties should
be interpreted and applied in accordance with the logical and systematic methodology that
makes it possible to clearly identify the ordinary and logical meaning of the wording therein
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to a reasonable extent based on their systematic relevance as established considering their

legislative intent, objective, etc.
Although the above methodology of interpreting and applying tax treaties would not be
fundamentally changed by the MLI, it should be closely monitored whether the MLI is likely
to expand the applicable scope of the substance-over-form doctrine.
Since one of the main purposes of the OECD’s BEPS Action Plan is to cope with the aggressive
tax planning of multinational enterprises, etc. and the principal purpose test (PPT) provisions
of the MLI are supposed to serve such purpose, tax practitioners are expected to take into
account the PPT provisions for their tax planning going forward.
On 16 May 2019, the NTS announced its plan to crack down on aggressive tax avoidance
schemes, such as business restructuring and denial of permanent establishment status
by multinational enterprises, as well as conventional schemes of evading tax through tax
havens. As such, the NTS is anticipated to take more aggressive actions to limit tax treaty
benefits on the basis of the substance-over-form doctrine.
However, any legislative action to amend domestic law to reflect the MLI provisions –
such as amendment to establish a separate committee to review the applicability of the
PPT provisions or to improve tax dispute resolution procedures – has yet to be identified.
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Branch reporter
Irene Salvi1

Liechtenstein has signed the Multilateral Convention to Implement Tax Treaty Measures to
Prevent Base Erosion and Profit Shifting (hereafter MLI) in June 2017. The entry into force
of the MLI is expected for 1 January 2020. The ratification report, by which the government
submits its proposal to parliament, has been released on 8 October 2019. Parliament will be
asked to approve the text of the MLI and the relevant reservations and notifications thereto,
but not consolidated versions of the covered tax agreements (CTA), as in the view of the
administration a consolidate reading of MLI and CTA is not possible. In order to still make
the effect of the MLI easier to understand for the reader and taxpayer, Liechtenstein will
publish synthesized texts of the “amended“ bilateral CTA. For this purpose, Liechtenstein
is in the process to consult with its treaty partners how and where the MLI exactly modifies
the respective treaty.
The signing of the MLI by Liechtenstein has led to a systematic review of tax treaty policies
by the government and tax authority regarding treaty abuses. The treaties of Liechtenstein
pre-MLI contain quite a few anti-abuse provisions, but with varying texts and scopes of
application, leaving a fairly heterogenic impression. The development of the MLI brings order
to this diversity and standardizes the provisions.
As it stands now, Liechtenstein will use the MLI as an efficient opportunity to include some
of the standardized treaty-abuse provisions developed in the OECD-lead project countering
Base Erosion and Profit Shifting (BEPS) into all its existing tax treaties. The instrument
eliminates the need for bilateral renegotiations and revisions, which are time-consuming
and administratively expensive. Liechtenstein will activate the BEPS minimum standards
set by BEPS Action 6 (treaty abuse) and Action 14 (mutual agreement procedure) plus just
a few more provisions of the MLI, to avoid too much complexity. Liechtenstein will also use
the opportunity provided by the MLI to improve dispute resolution through arbitration. The
MLI is intended to adapt those fourteen Liechtenstein tax agreements that do not already
fully meet the prescribed minimum standards.
It is important to make a differentiation between the MLI instrument and the broader tax
policy of Liechtenstein. The tax treaty policy clearly encompasses more of the BEPS-project-
generated anti-avoidance provisions than just the minimum standard. Accordingly, it is
fully expected that the newly signed Liechtenstein tax treaties will contain more provisions
along the lines of the OECD 2017 Model Tax Convention than the ones Liechtenstein will be
adopting through the MLI. This is confirmed by the MLI ratification report of the government
to parliament, which states that the implementation of further BEPS measures in the
Liechtenstein tax treaties will take place within the framework of bilateral negotiations,
where it is possible to respond to the individual needs of the contractual partners.
The interpretation of the MLI is expected to be as for any other international treaty of
1
Counsellor and former Head of the International Division of the Fiscal Authority of Liechtenstein.
IFA © 2020 485

Liechtenstein
Liechtenstein. Liechtenstein’s administration and courts routinely use the Commentary to the
OECD Model Convention for the interpretation of its tax treaties. The MLI has own explanatory
notes which have been prepared and approved by the Ad-Hoc-Group together with the text
of the MLI and thus reflect the views of the MLI negotiators, of which Liechtenstein was a
party. These notes, the OECD Model Convention 2017 and its Commentary will be used by
Liechtenstein’s administration and courts to assist in the interpretation of the new treaty
clauses. Liechtenstein has a strong tradition of static interpretation and it is not expected
that the MLI will change treaty interpretation by the Liechtenstein Supreme Court from static
to dynamic. Irrespective of this, it is undisputable that the BEPS-project has had an impact
on actual behaviours of taxpayers and that the practical impact of the BEPS-related treaty
clauses – whether introduced through the MLI or in bilateral negotiations – is substantial
and had an effect well before the entry into force of the MLI. It has become best practice
for tax practitioners to take the PPT and other anti-abuse clauses into account in any tax
consideration.
Treaty Network
1.1. Introduction
Lichtenstein joined the Inclusive Framework (IF) in spring 2016 and started to implement
the measures against cross-border tax abuse proposed by the Organization for Economic
Cooperation and Development (OECD) as part of the OECD/G20 project on base erosion and
profit shifting (BEPS).
To implement the tax treaty related measures as quickly and efficiently as possible,
Liechtenstein decided to use the multilateral concept and process proposed by the OECD,
which allows to change the existing tax treaties without having to go through uncertain
and time -consuming bilateral processes. Officials of the Liechtenstein Fiscal Authority
participated in the Ad-Hoc-Group of 96 jurisdictions which designed the Multilateral
Convention to Implement Tax Treaty Measures to Prevent Base Erosion and Profit Shifting
(hereafter MLI). The signing of the MLI by Liechtenstein took place at the multilateral signing
ceremony on 7 June 2017 in Paris. The MLI allows Liechtenstein to amend its existing tax
treaties where necessary, without having to go through bilateral negotiations and amend
each end every single treaty, and to use the global process offered by the OECD for matching
the applicable provisions with the partner countries. For reasons of simplification, the MLI is
to include only the BEPS minimum standards, a provision on the method article to prevent
an unwanted tax exemption, and a provision on the introduction of arbitration proceedings.
The implementation of further BEPS measures in the Liechtenstein tax treaties will take
place within the framework of bilateral negotiations, where it will be possible to respond to
the individual needs of the actual treaty partners.
Liechtenstein’s MLI is published on the homepage of the OECD, together with its
position on options and reservations to the MLI which was deposited with the OECD upon
signing. The MLI is not yet in force. To enter into force, the MLI will have to be ratified by
the Landtag (the Liechtenstein parliament) and signed by the Prince. The government has
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approved the report of the Ministry of Finance for submitting the MLI to the parliament
on 8 October 2019. 2
Prior to the signature of the MLI in June 2017, Liechtenstein has entered into eighteen tax
treaties with (in alphabetical order): Andorra, Austria, Czech Republic, Georgia, Germany,
Guernsey, Hong Kong, Hungary, Iceland, Luxembourg, Malta, Monaco, San Marino, Singapore,
Switzerland, United Arabian Emirates, United Kingdom, and Uruguay.3
These treaties in general follow the OECD Model Convention. The most notable departure
is the treatment of retirement pensions paid to individuals from prior work in Liechtenstein,
where Liechtenstein’s policy is the source state principle. Furthermore, for public-funded
artists and sportspersons, Liechtenstein uses the residency principle.
An analysis of the Liechtenstein tax treaties entered into before the signature of the MLI in
June 2017 shows that the policy of Liechtenstein regarding such tax treaties followed the
following guidelines:
1.2.2.1. Reference to fiscal evasion in the title of the treaty and/or the preamble
Many pre-MLI Liechtenstein tax treaties include a preamble defining the development of
the economic relations as a purpose of the treaty.4 Some of them also make reference to the
wish to enhance cooperation in tax matters.5 Most of the Liechtenstein tax treaties contain a
reference to fiscal evasion in the preamble and in the treaty title. With only three exceptions,6
Liechtenstein’s pre-MLI treaties follow one of the alternate recommendations in the pre-BEPS
OECD Commentary to not only include a reference to the avoidance of double taxation in
the title of the convention, but also a reference to the prevention of fiscal evasion. All these
2
See press release https://www.regierung.li/de/mitteilungen/222967/?typ=content&nid=11072, and full report
to parliament BuA 114/2019, Bericht und Antrag der Regierung an den Landtag betreffend das Multilaterale
Übereinkommen zur Umsetzung steuerabkommensbezogener Massnahmen zur Verhinderung der
Gewinnverkürzung und Gewinnverlagerung (https://www.llv.li/inhalt/16478/amtsstellen/aktuelle-berichte-
und-antrage).
3
See also the OECD Peer Review Report on Liechtenstein (Inclusive Framework on BEPS: Action 14 Making Dispute
Resolution More Effective – MAP Peer Review Report, Liechtenstein (Stage 1); in series: OECD/G20 Base Erosion
and Profit Shifting Project; Published on 15 December 2017). A list of all Liechtenstein tax treaties including the
link to the full text is published by the Fiscal Authority under https://www.llv.li/files/stv/int-uebersicht-dba-tiea-
engl.pdf.
4
Treaty with: Andorra, Austria, Czech Republic, Germany, Georgia, Iceland, Malta, Monaco, Hungary, San Marino,
United Arab Emirates, and Uruguay.
5
Treaty with: Andorra, Germany, Guernsey, Iceland, Malta, Austria, San Marino, Czech Republic, and Uruguay.
6
San Marino, Switzerland, and Uruguay.
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treaties also list the prevention of fiscal evasion as a goal of the treaty in the preamble.7 Nearly
all of the tax treaties signed after the summer of 20148 include a preamble with a reference to
the goal not to create opportunities for non-taxation or reduced taxation through tax evasion
or avoidance (or even the final BEPS preamble including the reference to treaty shopping).
1.2.2.2. Provisions on treaty shopping:
a) Domestic provisions
In 2016, Liechtenstein introduced the correspondence principle into its domestic law9 to
address one of the structuring practices to achieve double non-taxation: Under these
provisions in the Liechtenstein Tax Act (Steuergesetz, SteG),10 dividends received from
participations (with a threshold of 25%) are taxed in the hands of the resident shareholder, to
the extent the income has been deducted from the tax base in the country of the distributing
entity (articles 15(2) lit. n, 48(1) lit. e and (2) lit. b SteG).
Two years later, in 2018, Liechtenstein introduced the following specific anti-avoidance
provisions in the SteG11 to address cross-border abuses and treaty shopping situations:
–– A denial of the participation exemption on dividend income in the hands of the domestic
shareholder in specific situations: Under the new articles 15(2) lit. n and 48(3) to (5) SteG,
dividends from foreign participations are taxable (i.e. no participation exemption is
available), if the total revenue of the foreign legal entity sustainably consists of more
than 50% in passive income, and if the net income of the foreign legal entity is directly or
indirectly subject to no or low tax. The provision does not apply to cases where the income
of the foreign legal entity is the result of an actual economic activity.
–– A denial of the capital gains exemption in specific situations: Articles 15(2) lit. o and 48
(6) SteG provide that capital gains from the sale or liquidation as well as non-realized
appreciations of participations in foreign legal entities are taxable in Liechtenstein, if the
foreign legal entity fulfils the criteria described under the previous bullet.
Before the introduction of these specific anti-abuse provisions, the Fiscal Authority only
had the general anti-avoidance rule (GAAR) in article 3 SteG available to deal with cross-
border abuses and treaty shopping. This GAAR is sometimes difficult to apply in cross-border
situations, because its stated purpose is to protect the enforcement of the Tax Act as such. 12
b) General principles of treaty interpretation

Most of Liechtenstein’s pre-MLI-tax treaties include a reference to the prevention of fiscal
evasion in the title, or even include the prevention of tax avoidance into the object and
purpose of the treaty. This reference could be viewed as referring to treaty abuse. However,
7
Except the treaty with Georgia which has no preamble at all.
8
Andorra, Austria, Czech Republic, Iceland, Monaco; except Georgia, Switzerland, and United Arab Emirates.
9
Report to the Liechtenstein parliament (Bericht und Antrag, BuA) BuA 91/2016, in force 1 January 2017. https://
bua.regierung.li/BuA/.
10
Liechtenstein Tax Act, LGBl 2010.340 LR-Nr 640 – Gesetz vom 23 September 2010 über die Landes- und
Gemeindesteuern (Steuergesetz; SteG); https://www.gesetze.li/konso/2010.340.
11
Tax reform 2018, report to parliament BuA 35/2018.
12
Art. 3 SteG requires that the tax result achieved by the abusive arrangement violates the meaning and purpose
of this act.
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a closer look at the reports to parliament on the early treaties of Liechtenstein in which the
administration gives explanations on the meaning of the various clauses and provisions given
by the parties during the negotiations, leads to another conclusion. The reference to fiscal
evasion in these treaties was not meant to cover treaty shopping, but refers to the exchange
of information agreed upon in the treaty (see 2.2.3. of this branch report).
Nevertheless, this does not preclude the possibility to apply the “guiding principle” of
treaty interpretation adopted in the 2003 OECD Commentary, under which the benefit of
tax treaties should not be granted to arrangements that constitute an abuse,13 especially in
view of the general obligation to interpret a treaty in good faith pursuant to article 31 of the
Vienna Convention of the Law on Treaties.14 The general purpose of the tax treaties is clearly
not to cover abusive transactions.
Most of Liechtenstein’s pre-MLI-treaties know the beneficial ownership concept (for
example in the dividend provision). While there is no specific domestic written guidance
issued on its practical application, the authorities rely on the OECD Commentary for
interpretation.
c) Treaty-based anti-avoidance provisions

Nearly two thirds15 of Liechtenstein’s pre-MLI treaties contain treaty-based anti-avoidance
provisions:
Quite a few treaties contain a purpose test similar to the principal purpose test (PPT)
in the OECD Model Convention 2017 and the MLI. These treaties specifically deny some
or all treaty benefits where one of the principle purposes16 or the main purpose17 of the
transaction or arrangement that would otherwise result in a treaty benefit was to obtain this
treaty benefit. One treaty does not include a specific purpose test, but gives the competent
authorities the authority to deny the benefits of the agreement to any person, or with respect
to any transaction, if in its opinion the granting of those benefits would constitute an abuse
of this agreement.18
Complementing such purpose test, these treaties include procedural rules addressed
to the competent authorities. These procedural rules either (i) require the competent
authorities to consult with each other before denying treaty benefits19 or (ii) require
them to notify the incident to the other competent authority,20 or (iii) they allow the
taxpayer to make a request to the competent authority for treaty benefit, if in the absence
of the transaction or arrangement such benefit would have been granted, and require
consultation between the authorities before rejecting such request (discretionary benefits
13
2003/2014 OECD Comm. art. 1, para. 9.4.
14
2003/2014 OECD Comm. art. 1, para. 9.3.
15
Eleven out of the eighteen: Andorra (art. 27, protocol to art.4), Austria (art. 26A(1), protocol to art. 4 and 26), Czech
Republic (art. 28, protocol to art. 4), Germany (art. 31, protocol to art. 4 and 31), Hungary (art. 28, protocol to art.
4), Iceland (art. 28 s. 1, protocol to art. 4), Jersey (art. 27 (1)), Monaco (art. 27), Switzerland (protocol to arts. 10, 11,
12 and 21 and to art. 4), United Arab Emirates (art. 28 (1)), and United Kingdom (art. 10(6), 11(5), 12(5) and protocol
to art. 4).
16
Austria (art. 26A(1)), Hungary (art. 28), Iceland (art. 28(1)), Jersey (art. 27(1), Monaco (art. 27), and United Kingdom
(art. 10(6), 11(5), 12(5)).
17
Andorra (art. 27), United Arab Emirates (art. 28(1)), and protocol to art. 10, 11, 12 and 21 of the treaty with
Switzerland.
18
Czech Republic (art. 28).
19
Andorra, Czech Republic, Hungary, United Arab Emirates.
20
Austria, Iceland, Monaco.
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rule).21 The purpose of these procedural rules is to ensure that the competent authorities of
both contracting states are informed about concrete issues arising in the other state and
can actively discuss them.22
None of the Liechtenstein treaties contains a Limitation Of Benefit (LOB) provision that
limits treaty benefits to specific persons or categories of income.
The treaty with Germany contains a provision on the application of the treaty in specific
cases in line with the German “Aussensteuergesetz” (AStG).23 It limits the treaty benefits to
companies which derive the respective income from a substantial active business. It lists
activities which are not considered to be of an active business nature. Certain investment
funds are specifically excluded from this limitation.
One old Liechtenstein treaty (the treaty with Austria of 1969) contained an exclusion
provision denying benefits to non-resident-owned companies enjoying special tax privileges
in the state of residence.24 This wording was considered to be potentially discriminatory and
against the spirit of the European Economic Area (EEA) agreement, as it treated Liechtenstein
residents different than EEA residents. In 2010 Liechtenstein abolished these special tax
privileges. The treaty has been revised and the exclusion provision has been replaced by the
BEPS principal purpose test.25
Some treaties contain a subject-to-tax provision excluding certain entities which are only
subject to a minimal taxation in the country of residence from the entitlement to the treaty.26
None of the Liechtenstein treaties contain specific channel provisions denying tax
benefits for income received by a company resident in the other contracting state that is
used primarily to satisfy claims of non-resident persons who have a substantial interest in the
company and/or exercise control over the company. Such provision would be difficult in light
of the Agreement on the European Economic Area (EEA Agreement).27 The EEA Agreement
guarantees equal rights and obligations within the Internal Market for individuals and
economic operators in the EEA. It provides for the inclusion of EU legislation covering the
four freedoms – the free movement of goods, services, persons and capital – throughout
the 31 EEA states.28
21
Jersey art. 27(2).
22
BuA 2016/136.
23
Art 31 and protocol thereto.
24
Art. 26 of the old treaty with Austria, before revision: „Einschränkung des Geltungsbereichs“: Dieses Abkommen
findet auf Gesellschaften und Treuhandvermögen, die nach dem liechtensteinischen Steuerrecht von einer
Vermögens-, Erwerbs- und Ertragsteuer befreit sind (aufgrund von Art. 83 und 84 des Steuergesetzes vom 30.
Januar 1961) nur insoweit Anwendung, als an solchen Gesellschaften oder Treuhandvermögen in Liechtenstein
ansässige natürliche Personen oder Körperschaften, Stiftungen und Anstalten des liechtensteinischen
öffentlichen Rechts unmittelbar beteiligt oder begünstigt sind.
25
BuA 2016/138.
26
Protocol to art. 4 and 26 of the Austrian treaty, Protocol to art 4 of the treaties with Andorra, Czech Republic,
Germany, Hungary, Iceland, Switzerland, and United Kingdom.
27
The EEA agreement, which entered into force on 1 January 1994, brings together the EU member states and the
three EEA / EFTA states — Iceland, Liechtenstein and Norway — in a single market, referred to as the “Internal
Market”.
28
EU member states plus Norway, Iceland and Liechtenstein.
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Complementing the domestic provision of the correspondence principle described above

(under section 1.2.2.2.a), a few treaties of Liechtenstein contain a clause in the respective treaty
article which regulates the method for elimination of double taxation similar to the clause
of Option A of article 5 of the MLI. The clause ensures that a provision for exempting income
under the treaty does not apply when the partner jurisdiction applies an exemption under the
treaty.29 Furthermore, the treaty with Germany contains specific anti-abuse provisions related
to the application of the exemption method:30 Dividends from a tax exempt company may
not benefit from the exemption method otherwise granted by the treaty with Germany. The
same goes for tax deductible dividends and income from passive permanent establishments
in Germany; to such income, the credit method applies.
1.2.2.3. Provisions against other treaty abuses
Seven of the pre-MLI Liechtenstein treaties31 contain a clause addressing the dividend transfer
transaction issue covered by article 8 of the MLI: They ensure that the treaty rate for dividends
only apply if the ownership conditions are met throughout a full year period. However, they
do not explicitly include the MLI exception for changes of ownership that would directly result
from a corporate reorganization, such as a merger or divisive reorganization, of the company
that holds the shares or that pays the dividends.
The provisions regulating the taxation of capital gains on immovable property in the pre-
MLI Liechtenstein treaties generally follow the wording of the pre-BEPS OECD Model. They
give the taxing right to the jurisdiction where the real estate is located, even if the immovable
property is held indirectly and thus capture certain transactions or arrangements undertaken
to avoid taxation. The same is reflected in a Liechtenstein domestic provision that captures
the sale of real estate that is held indirectly through a company.32 None of the treaties
contain a specific 365 days rule as in in article 9 MLI or specifically deal with transactions or
arrangements intended to dilute the proportionate value of shares or comparable interests
from immovable property situated in a contracting state addressed by article 9 MLI. Some
of the newer treaties 33 broaden the scope of the anti-abuse provision for capital gains on
immovable property from the alienation of shares to the alienation of other similar interests.
Liechtenstein treaties do not deal with the granting of treaty benefits for income paid
to low-taxed permanent establishments in third jurisdictions (addressed by article 10 of the
MLI).
With respect to abuses related to permanent establishments, an analysis of Liechtenstein’s
pre-MLI treaties shows the following: While most pre-MLI treaties do not address
commissionaire and similar arrangements (captured by article 12 of the MLI), the newer
Liechtenstein tax treaties show that the policy of Liechtenstein changed in 2016 to include the
clause developed during the BEPS-project into its treaties in order to counteract abusive uses
29
Hungary art. 23(2), Jersey art. 22(2), Luxembourg art. 22(1).
30
Germany art. 23(1).
31
Austria, Czech Republic, Germany, Iceland, Luxembourg, San Marino and Switzerland.
32
Art. 35(3)(b) Tax Act.
33
Czech Republic art. 13(4), Germany art. 13(2), Hungary art. 13(4), United Kingdom art. 13(4).
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of commissionaire arrangements.34 All of Liechtenstein’s pre-MLI treaties follow the OECD’s

2014 Model recommendation for preparatory or auxiliary activities in article 5(4), listing the
specific activity exemptions. The issue treated by article 13 of the MLI – to explicitly state that
the activities listed in article 5(4) will be deemed not to constitute a permanent establishment
only if they are of a preparatory or auxiliary character – is not dealt with by Liechtenstein’s
treaties. It seems that Liechtenstein considers that some of the activities referred to in article
5(4) of the 2014 version of the OECD Model Tax Convention are intrinsically preparatory or
auxiliary and takes as other countries the view that these activities should not be subject to
a specific condition in the treaty text that they be of a preparatory or auxiliary character, in
order to provide greater certainty for the taxpayers. Further, Liechtenstein’s pre-MLI treaties
do not contain provisions dealing with the BEPS concerns related to the abusive splitting-up
of contracts (as addressed by article 14 of the MLI) and rely on the PPT-provision to address
such potential strategy for the artificial avoidance of permanent establishment status.
1.2.2.4. Provisions addressing hybrid mismatch arrangements
One recent pre-MLI-treaty of Liechtenstein contains a provision on the treaty application to

fiscally transparent entities similar to the one in article 3 MLI. The provision goes back to the
OECD partnership report. It ensures that the benefits of the treaty are not granted where
neither contracting jurisdiction treats the income of an entity or arrangement as income
of one of its entities.35 Accordingly, income originating in a contracting jurisdiction which
is obtained through a fiscally transparent entity can only then enjoy treaty benefits, if such
income is attributed by the other jurisdiction to a resident person. This provision seems to
have become part of Liechtenstein’s newer treaty policy.36
Only few Liechtenstein pre-MLI-treaties contain a provision to address mismatches
attributable to dual resident entities similar to the one in article 4 MLI.37 In these treaties, the
decision of how to treat a dual resident company is delegated to the competent authorities
of the contracting jurisdictions. The competent authorities are mandated by the treaty to
endeavour to determine by mutual agreement the contracting jurisdiction of which such
dual resident person shall be deemed to be a resident for treaty purposes. Given that the
34
See treaties with Iceland BuA 97/2016 II.1.1.2 and Monaco BuA 59/2017 I.2. Both treaties contain the BEPS-
provision in art. 5(5) saying: “Notwithstanding the provisions of paragraphs 1 and 2 but subject to the provisions
of paragraph 6, where a person is acting in a Contracting State on behalf of an enterprise and in doing so,
habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that
are routinely concluded without material modification by the enterprise, and these contracts are (a) in the name
of the enterprise, or (b) for the transfer of the ownership of, or for the granting of the right to use, property owned
by that enterprise or that the enterprise has the right to use, or (c) for the provision of services by that enterprise,
that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which
that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in
paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business
a permanent establishment under the provisions of that paragraph.” The treaty with Iceland also includes the
related party-definition in art. 5(6).
35
Iceland art. 1(2).
36
BuA 81/2018 on the treaty with Jersey I.3, Latvia art. 1(2).
37
Iceland art. 4(3), United Kingdom art. 4(4).
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newest treaties contain this provision, it seems that it has become a standard part of the
Liechtenstein treaty policy.38
1.2.2.5. Provisions for Mutual Agreement Procedures (MAP)
The framework of Liechtenstein related to MAP proceedings was reviewed in the peer
review process lead by the OECD on Action 14 of BEPS in 2017.39 The peer review assessed
the jurisdiction against the terms of reference of the BEPS minimum standard according to
an agreed schedule of review. According to the report to this peer review, Liechtenstein meets
almost all of the elements of the Action 14 minimum standard.
All of the pre-MLI Liechtenstein tax treaties contain provisions for a mutual agreement
procedure along the lines of article 25 of the OECD Model (addressed by article 16 MLI). All
but one tax treaty reflects paragraph 1 to 3 of article 25 of the OECD Model. One treaty40 does
not require that mutual agreements shall be implemented notwithstanding any time limits
in the domestic law. This treaty also does not have the provisions in article 9(1) and article
7(2) setting a time limit for making transfer pricing adjustments, which would qualify as
alternatives under the minimum standard of BEPS Action 14.
A few newer pre-MLI treaties allow to present the case in either contracting jurisdiction.41
The period for presentation of the case is consistently three years from the first notification
of the action resulting in taxation, in all of Liechtenstein’s treaties. All but one treaty42 also
contain a provision equivalent to article 9(2) of the OECD Model requiring the competent
authorities to make a corresponding adjustment to the tax charged on the profits of an
enterprise in case a transfer pricing adjustment is made by the treaty partner (addressed
by article 17 of the MLI). The treaty between Liechtenstein and the Czech Republic contains
a specific anti-abuse clause in article 9(3): it provides an exclusion from corresponding
adjustment which shall not apply in the case of fraud, gross negligence or wilful default.
The domestic administrative framework of Liechtenstein allows access to MAP in
all eligible cases, specifically also in transfer pricing cases, in cases which relate to the
application of anti-abuse provisions (being it treaty or domestic provisions), and in cases of
audit settlements. The MAP Peer Review Report notes that the country has also introduced
a notification process for those situations in which Liechtenstein’s fiscal authority considers
the objection raised by the taxpayer in a MAP request as not justified and where the relevant
tax treaty does not enable the taxpayer to submit its MAP request to the competent authority
of the other jurisdiction.
The practical results of MAP procedures in Liechtenstein are difficult to research: While
Liechtenstein publishes the general competent authority agreements on difficulties or
doubts arising as to the interpretation or application of its tax treaties, it only does so for
38
Also, Latvia art. 1(2).
39
Inclusive Framework on BEPS: Action 14 Making Dispute Resolution More Effective – MAP Peer Review Report,
Liechtenstein (Stage 1); in series: OECD/G20 Base Erosion and Profit Shifting Project; Published on 15 December
2017.
40
Switzerland art. 24(2).
41
Austria art. 25(1), which wording was introduced in the treaty revision of 2016 (BuA 138/2016); Iceland art. 24(1),
Jersey art. 24(1), Monaco art. 24(1).
42
Austria has no art. 9(2).
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resolutions reached with treaty partners in 2016 and in subsequent years,43 but it does
not publish any of the resolutions reached in specific MAP cases. A publication of the core
elements of specific resolutions on a no-name basis would be welcomed by the practitioners.
However, the statistical data available on the OECD website show a positive picture: At the
end of 2017, Liechtenstein had an inventory of 12 open MAP cases, one more than at the end of
2016, and the average resolving period of one case is 17 months, which is below the OECD’s 24
month benchmark.44 The peer review report holds that the current available resources for the
MAP function are in principle adequate to manage the influx of new MAP cases, and that MAP
cases are resolved in an efficient manner; but the report also holds that additional resources
may be necessary in Liechtenstein to achieve a net reduction of the number of open cases.45
On the procedural side, Liechtenstein has issued a detailed guidance on MAP,46 in which
the Fiscal Authority describes the procedure and also clarifies (1) the relationship between
the MAP and domestic law administrative and judicial remedies, that (2) no fees are charged
to taxpayers for a MAP request, that (3) the fact that a Liechtenstein court has rendered
judgement in a case covered in a MAP request does not per se prevent a mutual agreement
procedure from being initiated, and that (4) access to MAP is also granted in cases where the
double taxation results from an adjustment made by a taxpayer himself in good faith to a
previously submitted tax return, when the adjustment made was related to the attribution
of permanent establishment profits or transfer prices.47
While a formal advance pricing agreement (APA) procedure is not in place, the Fiscal
Authority of Liechtenstein is authorized to enter into bilateral APAs. Taxpayers are also
allowed to request multi-year resolution of recurring issues through the MAP.48
Interest or penalties resulting from adjustments made pursuant to a MAP agreement
are waived or dealt with as part of the MAP procedure if requested. One last item to note is
that Liechtenstein’s domestic procedure does not provide for suspension of collection during
the period a MAP is pending.49
1.2.2.6. Arbitration
Liechtenstein is part of the group of countries of the Inclusive Framework that has committed
to mandatory binding arbitration, and it has participated in the sub-group on arbitration
of Action 15 of the BEPS-project.50 There are no limitations in the domestic law that would
prevent or limit arbitration procedures.
While Liechtenstein’s tax treaties show that the country has not been entirely successful
in concluding a mandatory binding arbitration provision with all its treaty partners, 12 pre-
43
Published in the original language and on the webpage of the Liechtenstein Fiscal Authority. http://www.llv.li/
files/stv/int-uebersicht-dba-tiea-engl.pdf.
44
http://www.oecd.org/tax/dispute/mutual-agreement-procedure-statistics-2017-per-jurisdiction-all.htm.
45
P. 11 of the MAP Peer Review Report on Liechtenstein.
46
https://www.llv.li/files/stv/int-mb-mutualagreementprocedure-en.pdf.
47
Ss. 3.1.1 and 3.1.6 of Liechtenstein’s MAP guidance.
48
MAP Peer Review Report on Liechtenstein, Best Practices.
49
MAP Peer Review Report on Liechtenstein, B.8 and Best Practices BP.11 and BP.8.
50
MAP Peer Review Report on Liechtenstein, C.6.
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MLI tax treaties of Liechtenstein contain arbitration clauses:51 In addition to these treaties,
three further treaties contain in their protocol a most-favoured-nation clause providing for
negotiations for the inclusion of an arbitration provision should Liechtenstein’s treaty partner
enter into such provision with a third state.52
The existing treaty provisions do not elaborate on the form of the arbitration. Liechtenstein
has to-date no actual experience with arbitration proceedings in the tax area.
Liechtenstein has signed the MLI at the first signing ceremony in Paris on 7 June 2017. It has
taken part in the international peer review process lead by the OECD published in February
2019.53 The reason for the government to sign the MLI was efficiency in implementing the
treaty-based BEPS-measures.54
The MLI has been put forward to the parliament for ratification. The proposal to
parliament has been published on 8 October 2019.55 It is expected to be scheduled for the
parliamentary session of November 2019. While the date for ratification and entry into force
is open, pending the parliamentary decision and subsequent signature by the Prince, it is
quite likely to be the beginning of 2020.
1.3.2. Covered tax agreements56
Upon signature of the MLI in 2017, fifteen tax treaties had been listed by Liechtenstein as
Covered Tax Agreements (CTA). These are nearly all of Liechtenstein’s pre-MLI tax treaties.
The three treaties not listed by Liechtenstein already comply with the minimum standards
through inclusion of the preamble statement and the PPT.
All the contracting jurisdictions to Liechtenstein’s CTA have signed the MLI and all but
one 57 have listed their treaty with Liechtenstein as a CTA, so fourteen treaties are currently
scheduled to be subject to the MLI. These are the treaties with Andorra, Czech Republic,
Georgia, Germany, Guernsey, Hong Kong, Hungary, Luxembourg, Malta, San Marino,
Singapore, United Arabian Emirates, United Kingdom, and Uruguay. Statistically speaking,
out of all the 18 pre-MLI tax treaties signed by Liechtenstein, 84% have been listed by
51
Germany art. 25(5) to (7), Georgia art. 24(5), Guernsey art 24(5), Hong Kong art. 24(5), Iceland art. 24(5),
Luxembourg art. 24(5), Malta art. 24(5), Monaco art 24(5), San Marino art. 25(5), Switzerland art. 25(5) to (6),
Uruguay art. 25(5), and United Kingdom art. 24(5) to (6).
52
Andorra, Czech Republic, Hungary.
53
OECD Report 2019 on Prevention of Treaty Abuse – Peer Review Report on Treaty Shopping: Inclusive Framework
on BEPS.
54
Liechtenstein government press release 7.June 2017.
55
BuA 114/2019.
56
See OECD Report 2019 on Prevention of Treaty Abuse – Peer Review Report on Treaty Shopping: Inclusive
Framework on BEPS, p. 147.
57
Switzerland.
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Liechtenstein as CTA and 77% have also been listed by the other contracting jurisdiction,
leading to 77% being planned to be actually covered by the MLI.
Upon signature of the MLI, Liechtenstein has selected to make reservations to most of the
provisions which are not the OECD’s minimum standard (BEPS-conform preamble and anti-
abuse-clause as per Action 6; MAP as per Action 14), except for a provision to avoid unwanted
tax exemptions (option A of article 5 on the application of methods for elimination of double
taxation) and for the arbitration provision.58 The submission of the MLI to Liechtenstein’s
parliament contains no changes to the reservations made and options taken upon signature:
The application of the MLI on Liechtenstein’s CTA will be limited to the BEPS minimum
standards plus two topics: the avoidance of double non-taxation through the exemption
method, and the mandatory arbitration. This approach has been chosen in order to avoid
complexity and ease implementation of the MLI. The report to parliament notes that
the implementation of further BEPS measures in the Liechtenstein tax treaties will take
place within the framework of bilateral negotiations, where it is possible to respond to the
individual needs of the contractual partners.
This section of the branch report will list the choices proposed by Liechtenstein‘s
government to parliament and will give reasons for these choices where possible. As the
ratification is still pending, these choices may be subject to change. There is, however,
currently no expectation that the choices may be reversed in the near future.
There are no statistical data available on the proportion of treaty provisions included in
the CTA’s signed by Liechtenstein actually modified following the MLI, taking into account
the reservations made by the other contracting jurisdictions.
1.3.3.1. Preamble (article 6 MLI)
In addition to subscribe to the minimum standard of the preamble in article 6(1) MLI,59
Liechtenstein also proposes its treaty partners the preamble language of article 6(3) MLI
which refers to desiring to further develop the treaty partner’s economic relationship and to
enhance the co-operation in tax matters.
58
Published by the OECD under https://www.oecd.org/tax/treaties/mli-database-matrix-options-and-reservations.
htm.
59
“Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating
opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through
treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of
residents of third jurisdictions).”
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1.3.3.2. Principal purpose test to address treaty abuse (article 7 MLI)
Liechtenstein plans to satisfy the OECD’s minimum standard on treaty abuse by adopting the
principal purpose test (PPT) in article 7(1),60 thus making sure all of its treaties include such
general anti-abuse clause. It has also proposed to its treaty partners the discretionary relief
rule of article 7(4) MLI, which gives the competent authority the possibility to nevertheless
grant the denied treaty benefit if, upon request of the taxpayer and after consideration of
the relevant facts and circumstances, it determines that such benefits would have been
granted to that person in the absence of the transaction or arrangement. The discretionary
relief rule also requires the competent authority to which the request has been made by a
resident of the other contracting jurisdiction, to consult with the competent authority of
the resident’s jurisdiction before rejecting the request. The choice of the PPT corresponds
with Liechtenstein’s domestic tradition of relying on a general anti-avoidance rule rather
than on a number of specific provisions (see article 3 SteG). By exercising the option for the
discretionary relief rule, taxpayers get the possibility to demonstrate that there was no
intention to abuse the treaty; and the consultation mechanism in the said provision ensures
that the competent authorities are informed about concrete cases dealt with by the treaty
partner and can have an active consultation on the abuse issues raised.
Liechtenstein has not chosen to apply the simplified limitation on benefits provision in
article 7(8)-(13) of the MLI, and will not agree to allow the simplified LOB to be applied by
another contracting jurisdiction pursuant to 7(7)(b) MLI, nor has it issued a notification under
7(17)(a) that it accepts the PPT as an interim measure while intending where possible to adopt
a LOB provision in addition to or in replacement of the PPT through bilateral negotiations.
1.3.3.3. Provisions to address specific treaty abuses (article 8 to 15 MLI)
Liechtenstein is not planning to adopt any other provision of the MLI addressing tax treaty
abuse.
Specifically, Liechtenstein is expected to make reservations to (a) the minimum holding
period for transactions or arrangements undertaken to access the reduced treaty rate on
dividends paid to a parent company in article 8 MLI; (b) the substituted property rule for
gains from the alienation of shares or comparable interest deriving its value primarily from
immovable property at any time during the 365-day period preceding the alienation of the
property in article 9 MLI; and (c) to the provision denying treaty benefits for income paid to
low-taxed permanent establishments in third jurisdictions that are subject to little or no tax
and exempt from tax in the residence jurisdiction in article 10 MLI. Although the measures
in articles 8 and 9 MLI do not conflict with Liechtenstein’s treaty policy (indeed, the features
in article 8 and 9 MLI can be found in Liechtenstein’s newer treaties, see section 1.2.2.3),
Liechtenstein intends to place reservations to both articles of the MLI, to avoid too much
complexity in the implementation of the MLI. As Liechtenstein‘s treaties do not contain a
60
“Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall
not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant
facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or
transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit
in these circumstances would be in accordance with the object and purpose of the relevant provisions of the
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provision dealing with the granting of treaty benefits for income paid to low-taxed permanent
establishments in third jurisdictions, Liechtenstein plans a reservation to article 10 MLI.
Liechtenstein further plans to reserve against the MLI-provisions related to the avoidance
of permanent establishment status through commissionaire and similar arrangements,
the amendment of the specific activity exemptions, and the treaty avoidance through the
splitting-up of contracts (articles 12 through 15 MLI). While its newer treaty policy does not
contradict with the MLI provisions in article 12 on commissionaire and similar arrangements,
the reservation is driven by the wish to avoid excessive complexity. The reservations expected
to be made against articles 13 through 15 MLI seem to be more content-driven (see section
1.2.2.3 of this report), but also cater to the stated goal to keep the MLI implementation as
simple as possible.
1.3.3.4. Provisions against hybrid mismatch arrangements (articles 3 and 4 MLI)
Liechtenstein intends to place reservations to the provisions of the MLI addressing hybrid
mismatch arrangements.
Article 3 MLI addresses mismatches resulting from the use of transparent entities and
matches the tax treatment of transparent entities in one jurisdiction with the treatment
by the other contracting partner. Similar provisions can be found in pre-MLI-treaties
of Liechtenstein, ensuring that the benefits are not granted when neither contracting
jurisdiction treats the income of an entity or arrangement as income of one of its entities.
However, article 3(3) MLI contains a so-called savings clause: a provision stating that in no
case the transparent entity approach may be construed to affect a treaty party’s right to tax
its residents. Such savings clause does not correspond with Liechtenstein’s treaty policy, and
leads to a reservation by Liechtenstein to the whole article 3 MLI.
While already a few pre-MLI-treaties contain a provision to address mismatches
attributable to dual resident entities similar to the one in article 4 MLI and this provision
seems not to contradict the newer Liechtenstein treaty policy, Liechtenstein intends to
place a reservation to this article to avoid excessive complexity in the implementation of
the instrument.
1.3.3.5. Application of methods for elimination of double taxation (article 5 MLI)
Article 5 MLI offers three options for amending the so-called method article, which regulates
the elimination of double taxation. The options are intended to ensure that the application
of the method article does not lead to unwanted double non-taxation. Liechtenstein plans
to exercise option A61 and make a reservation to option C (the complete change from the
exemption method to the credit method). While in principle each contracting jurisdiction
may choose how to avoid double taxation for persons resident in its territory, and an
asymmetrical application of the methods is not unusual in tax treaties, Liechtenstein wants
to prevent the unilateral change of method outside of bilateral negotiations. As things stand
today, the reservation related to option C will only impact the position of Uruguay.
61
Except for the treaty with Germany and Hungary, see further details in BuA 114/2019 p. 19.
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Option A adds a clause to the CTA providing that the jurisdiction of residence does not
grant exemption from income if, as a result of a different assessment of the facts or different
interpretation of the agreement, double non-taxation or unintentional reduced taxation of
this income arises. Accordingly, the provisions on the exemption of income do not apply if
the source state applies the tax treaty in such a way that it exempts income from taxation
or reduces the withholding tax rate. Instead, the credit method shall apply. Option A is
contained in numerous Liechtenstein tax treaties and is part of Liechtenstein’s treaty policy.
1.3.3.6. Mandatory binding arbitration (articles 18-26 MLI)
Part IV of the MLI proposes a mandatory binding arbitration procedure for cases where
the treaty partners cannot settle a MAP dispute within a period of two years. Liechtenstein
intends to offer via the MLI such mandatory binding arbitration to all the treaty partners
which have not yet included such procedure in their bilateral treaties;62 the period for the
prior MAP resolution is extended from two to three years (article 19(11) MLI).
The standard arbitration process proposed by the MLI in article 23 is the “Final Offer
Arbitration“ (”Baseball Arbitration“). Under this process, the competent authorities of both
contracting jurisdictions present a final proposal including the respective reasoning to the
arbitrators. The arbitrators then choose between the two proposals. Liechtenstein plans to
go for this standard process and not to choose the ”Independent Opinion Arbitration“, where
the decision is made based on all relevant facts by the arbitrators. The final offer arbitration
should give the competent authorities a better control over the process.
Liechtenstein has entered into new bilateral tax treaties since the MLI was signed and is
currently negotiating further new treaties.63
The treaty-related BEPS-work clearly had an impact on the respective negotiations, as
Liechtenstein has incorporated quite some of the recommendations beyond the minimum
standards in its tax treaty policy (see the specific references in the analysis of Liechtenstein’s
treaty policy laid out in section 1.2.2. above), which it has chosen to place a reservation
against in the MLI to reduce the administrative burden of implementation of a multilateral
instrument. Liechtenstein’s policy adopted regarding the MLI is clearly different to the
policy adopted regarding the 2017 version of the OECD Model: While the choices made by
Liechtenstein under the MLI do not cover much more than the BEPS minimum standard, the
Liechtenstein treaty policy has embraced many further BEPS recommendations reflected in
the 2017 OECD Model during its recent bilateral treaty negotiations. Since a number of the
provisions of the MLI will be incorporated into Liechtenstein’s bilateral tax treaties instead, it
is reasonable to expect that the MLI itself will in practice have only a limited effect as a third
layer of international tax law in Liechtenstein.
62
Andorra, the Czech Republic, Hungary, Singapore, and the United Arab Emirates.
63
Double taxation treaty with Italy initialed 10 July 2019, Netherlands initialed 19 December 2018.
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The MLI has the standing of a multilateral convention and will have to be approved by the
Liechtenstein parliament and the Prince. Parliament will only approve the text of the MLI and
the relevant reservations and notifications thereto, but not consolidated versions of the CTA.
In general, Liechtenstein law64 requires that the legal provisions published in the official
gazette (”Landesgesetzblatt“) are shown in a consolidated fashion. However, this will not
be the case for the MLI and the CTA. After intense internal debates, it is now foreseen that
there will be no consolidated versions of the CTA as amended by the MLI. The view of the
administration is that the provisions in the MLI do not have a similar effect on a CTA like a
revision protocol. The wording in the MLI and in the respective bilateral treaty is too much
apart, which prevents a consolidated reading. For example, the MLI speaks of “covered tax
agreement”, and the bilateral treaties generally use the term “convention”. Rather, the MLI
and the bilateral CTA will have to be read in parallel to each other. Accordingly, the MLI will
be applied in parallel to the existing bilateral tax treaties, it neither replaces the existing
treaties nor does it amend the text of the CTA directly.
In order to make the effect of the MLI on the respective CTA easier to understand for
the reader and taxpayer, Liechtenstein will communicate the modifications applicable to
the CTA by publishing synthesized texts (reading instructions) of the ”amended“ bilateral
CTA after the MLI has entered into force. These synthesized texts will be produced for
information purposes only and will not have a legal effect of their own. They will not be part
of the ratification package to parliament. The synthesized texts will be published on the
website of the Fiscal Authority.
To simplify the production of such synthesized texts and avoid misunderstandings with
the respective treaty partner jurisdiction, Liechtenstein is in the process to consult with each
of its treaty partners how and where the MLI exactly modifies the respective treaty. Where
necessary, the Fiscal Authority may conclude competent authority agreements ensuring a
common understanding, based on article 32(1) MLI and the respective articles on competent
authority agreements of the CTA.
The MLI will apply to a CTA when Liechtenstein notifies the OECD that the domestic
procedure to amend the CTA has been finalized (article 35(7) MLI), provided that the other
treaty partner has already deposited his notification. In order to clarify the applicability of the
MLI to a specific Liechtenstein CTA, it is planned to make a separate specific announcement
of the respective date.
The legal value of the MLI in Liechtenstein is equal to all international tax treaties of the
country. Liechtenstein is a “monist” state, i.e. international treaties do not need to be
64
Art. 15a Kundmachungsgesetz 17 April 1985, LGBl. 170.50.
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translated into national law.65 The ratification of the treaty immediately incorporates it into
national law. It has primacy over existing domestic legislation. There are no court cases which
specifically hold whether a tax treaty can be overridden by subsequent domestic legislation
or not.
Since the MLI has not yet entered into force in Liechtenstein, there is no practical experience
with its interpretation. However, it is fully expected that its interpretation will be as for any
other international treaty.
Liechtenstein’s administration and courts routinely use the Commentary to the OECD Model
Convention or the interpretation of its tax treaties, where appropriate. Based on today’s
knowledge, it is unlikely that the MLI will change the ways in which tax treaties will be
interpreted in Liechtenstein.
The MLI has own explanatory notes which have been prepared and approved by the Ad-
Hoc-Group together with the text of the MLI and published by the OECD (the Explanatory
Statement). The Explanatory Statement serves to clarify the MLI’s approach and the effects
of each of its provisions on the respective CTA. The Explanatory Statement thus reflects the
views of the MLI negotiators.
Aside the Explanatory Statement, the administration and courts are directed by
Liechtenstein’s report to parliament to also refer to the respective BEPS reports issued by
the OECD. However, as these reports were published earlier than the MLI negotiations took
place, it remains to be seen how much weight will be given by the courts to content that was
not incorporated into the MLI, its Explanatory Statement or into the OECD Model Convention
2017 and its Commentary. Liechtenstein is not an OECD member and only joined the BEPS
efforts as part of the Inclusive Framework after the BEPS-reports were written.
Liechtenstein has a strong tradition of static interpretation of its treaties. While there
has not yet been any actual case in Liechtenstein before the courts, it is highly unlikely that
the MLI will move treaty interpretation by the Liechtenstein Supreme Court from static to
dynamic.
The MLI will only have an impact on the interpretation of affected CTAs. There are no
indications in Liechtenstein that the amended preamble might be used in a retrospective
manner for the purpose of interpreting tax treaties, as applicable before the MLI entered into
force. The choices made by Liechtenstein upon the adoption of the MLI should not exert a
65
VGH 2013/093 with further references, regarding the EEA-agreement.
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Liechtenstein
retrospective influence on tax treaty interpretation. As mentioned, Liechtenstein’s Supreme

Court has a strong tradition of static treaty interpretation and the branch reporter has no
reasons to expect any deviation thereof.
One specific point to note in this context is the interpretation of preambles and treaty
titles which refer to the prevention of fiscal evasion without making specific reference to
treaty shopping and to non-taxation through tax evasion and avoidance.66 As laid out in
section 1.2.2.1 of this report, most of the Liechtenstein pre-MLI-tax treaties make reference
to fiscal evasion in the preamble and in the treaty title, even before it became Liechtenstein’s
policy in the fall of 2014 to include a preamble with a reference to the goal not to create
opportunities for non-taxation or reduced taxation through tax evasion or avoidance (or even
the final BEPS preamble including treaty shopping). One could question the meaning of the
reference to fiscal evasion in these treaties. However, an analysis of the reports to parliament
related to these treaties clearly shows that the reference to fiscal evasion was not meant to
cover treaty shopping, but relates to the exchange of information agreed upon in the treaty.67
2.3. Tax planning and tax administration after the BEPS Actin Plan and the MLI
It is undisputable that the BEPS-project has had an impact on actual behaviours of taxpayers.
The impact of the BEPS-related treaty clauses – whether introduced through the MLI or in
bilateral negotiations – is substantial. It has become best practice for tax practitioners to
take the PPT and other anti-abuse clauses into account in any tax consideration. This best
practice has developed in the course of the finalization of the BEPS project, well before the
MLI enters into force.
Similarly, Liechtenstein’s assessment practice has become more stringent regarding
tax treaty shopping and other tax treaty abuses over time. For example, since the 2010 tax
revision, the Fiscal Authority does not issue tax residency certificates to entities which do
not pay regular tax under the Tax Act SteG. As Liechtenstein is not a member of the OECD,
this concrete practice developed independently of the BEPS project, but may well have been
strengthened by the thought process captured in the BEPS-project.
The Liechtenstein Fiscal Authority has not set-up special procedures (such as a special
committee) for assessing taxpayers under the PPT. It is not yet possible to say what impact
the MLI and the respective bilateral clauses will have on the resolution of tax disputes under
the MAP and arbitration.
66
Germany (17 November 2011), Georgia (signed 13 May 2015, convention title only), Hong Kong (signed 12 August
2010), Luxembourg (26 August 2009) Malta (27 September 2013), Singapore (27 June2013), United Arab Emirates
(1 October 2015), and United Kingdom (11 June 2012).
67
For example, BuA Hong Kong 2010/99 I.3.
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Luxembourg
Branch reporters
Oliver R. Hoor1
Andreas Medler2

Luxembourg signed the MLI on 7 June 2017. Prior to this date, Luxembourg had signed
and ratified 81 double tax treaties which broadly followed the OECD Model Convention,
as amended. Almost all of these double tax treaties defined the purpose of the respective
treaty to eliminate double taxation and combat tax fraud. Each of these 81 double tax treaties
contains a mutual agreement procedure, 66 a corresponding adjustment provision while
only 13 provide for a mandatory binding arbitration. Luxembourg currently has 83 double
tax treaties (DTT, hereafter used for singular and plural) in force of which 81 are covered by
the MLI.
With regard to the principal purpose test (PPT), it is interesting to note that Luxembourg
withdrew a reservation in the 2017 version of the OECD Model Convention. Here, Luxembourg
did not share the view that there is generally no conflict between anti-abuse provisions under
the domestic law of a contracting state and the provisions of its DTT. Instead, absent a specific
provision in an applicable DTT, Luxembourg considered that a contracting state can only
apply its domestic anti-abuse provisions after recourse to the mutual agreement procedure.
Such domestic anti-abuse provisions further need to be interpreted in accordance with the
rules laid down in the respective DTT so as to prevent treaty overrides.
Since Luxembourg does not levy withholding taxes (WHT) on arm’s length interest and
royalty payments and dividend payments may (under certain conditions) benefit from a
domestic WHT exemption, the potential conflict between domestic and treaty-based anti-
abuse provisions was limited to exceptional cases and treaty shopping could have been
addressed through treaty-specific provisions.
Luxembourg’s MLI choices are mostly limited to the minimum standards, including
the adoption of the PPT and an amended preamble as well as measures that are beneficial
for taxpayers such as the mutual agreement procedure (including mandatory binding
arbitration) and the corresponding adjustments provision.
In addition, Luxembourg opted for the provision on transparent entities which aims to
avoid qualification conflicts and according to which DTT benefits should only be granted
if and to the extent income derived by or through a transparent entity or arrangement is
brought into account for tax purposes as the income of a resident taxpayer of that jurisdiction.
The application of this provision is, however, subject to the condition that Luxembourg’s
taxation rights shall not be limited.
Overall, the adoption of the PPT is the most significant change for Luxembourg’s DTT
network. As Luxembourg is a major hub for international investments (for example, private
equity, venture capital, real estate and infrastructure) and business activities, the question
1
Partner in the International and Corporate Tax department of ATOZ.
2
Principal in the International and Corporate Tax department at ATOZ.
IFA © 2020 503

Luxembourg
arises as to what will be the impact of the PPT on investments. It is reasonable to conclude
that investments are made for legitimate commercial purposes (generating regular income,
maximisation of value, etc.). Therefore, the PPT should in accordance with the guidance
provided in the Commentary to the OECD Model generally not apply regardless of the fact
that tax implications cannot be completely neglected when investments are made. Likewise,
multinational groups that implemented an investment platform in Luxembourg to manage,
for example, their subsidiaries in Europe should in general not be affected by the PPT.
There remains, however, some uncertainty as to when foreign tax authorities may deny
DTT benefits. Given the attitude of some foreign tax authorities in regard to the application
of anti-abuse provisions, it might be expected that the PPT will be interpreted differently in
different jurisdictions. Therefore, it would be wise for taxpayers to establish the reasoning of
their choice to invest via a Luxembourg company or investment platform so as to be prepared
for potential questions from foreign tax authorities.
In an EU context, the jurisprudence of the Court of Justice of the European Union (“CJEU”)
is particularly helpful for the interpretation of anti-abuse provisions such as the PPT. Apart
from established case law, the more recent decisions on French and German anti-abuse rules
confirm the CJEU’s adherence to its longstanding “wholly artificial arrangement” tenet which
puts strict limitations to the scope of anti-abuse legislation.
In contrast to these cases, a recent decision of the CJEU regarding the denial of WHT relief
by the Danish tax authorities, did not contribute much to legal certainty. While it was not for
the CJEU to assess the facts in the cases, the CJEU specified indicia of abusive or fraudulent
acts and when an EU parent company may not be the beneficial owner of interest income
with a view to guide the national court in the assessment of the cases. It is now for the Danish
courts to finally decide the cases in accordance with the guidance provided by the CJEU and
its previous case law.
Nevertheless, the application of the PPT is a key challenge for tax advisors in times that
are characterized by chronic legal uncertainty.
Treaty Network
1.1. Introduction
1.2.1. Double tax treaties entered into before the MLI
Prior to the signing of the MLI by Luxembourg in June 2017, Luxembourg had signed and
ratified 81 DTT with the following jurisdictions (some of which entered into force after the
MLI):
1 Andorra 7 Belgium 13 Croatia 19 Georgia
2 Armenia 8 Brazil 14 Czech Republic 20 Germany
3 Austria 9 Brunei 15 Denmark 21 Greece
4 Azerbaijan 10 Bulgaria 16 Estonia 22 Guernsey
5 Bahrain 11 Canada 17 Finland 23 Hong Kong
6 Barbados 12 China 18 France 24 Hungary
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25 Iceland 40 Malaysia 55 San Marino 70 Tajikistan

26 India 41 Malta 56 Saudi Arabia 71 Thailand
27 Indonesia 42 Mauritius 57 Senegal 72 Trinidad and
28 Ireland 43 Mexico 58 Serbia Tobago
29 Isle of Man 44 Moldova 59 Seychelles 73 Tunisia
30 Israel 45 Monaco 60 Singapore 74 Turkey
31 Italy 46 Morocco 61 Slovakia 75 Ukraine
32 Japan 47 Netherlands 62 Slovenia 76 United Arab
33 Jersey 48 Norway 63 South Africa Emirates
34 Kazakhstan 49 Panama 64 South Korea 77 United Kingdom
35 Laos 50 Poland 65 Spain 78 United States
36 Latvia 51 Portugal 66 Sri Lanka 79 Uruguay
37 Liechtenstein 52 Qatar 67 Sweden 80 Uzbekistan
38 Lithuania 53 Romania 68 Switzerland 81 Vietnam
39 Macedonia 54 Russia 69 Chinese Taipei
These DTT broadly follow the OECD Model Convention, as amended (the OECD MC). However,
Luxembourg does generally not apply some of the concepts of the 2017 OECD MC as discussed
in further detail below in relation to the MLI.
The preambles of 71 out of these 81 DTT defined the purpose of the respective DTT to eliminate
double taxation and combat tax fraud (five of these 71 also included the intention to enhance
the economic cooperation of both countries). The remaining DTT basically referred to the
elimination of double taxation.
Each of these 81 DTT contains a mutual agreement procedure, 66 a corresponding
adjustment provision and 13 provide for a mandatory binding arbitration (Estonia, Germany,
Greece, Hong Kong, Isle of Man, Jersey, Liechtenstein, Mauritius, Mexico, San Marino,
Seychelles, Switzerland and Uruguay). Of the latter, only the DTT with Mexico prescribed
the form this arbitration shall take (independent opinion) while all other DTT let the method
open to the agreement between both contracting states.
Until the last revision of the OECD MC in 2017, Luxembourg did expressly not share the
interpretation in paragraphs 9.2, 22.1 and 23 of the OECD MC which provide that there is
generally no conflict between anti-abuse provisions of the domestic law of a contracting
state and the provisions of its tax conventions. Absent a specific provision in the applicable
DTT, Luxembourg considered that a contracting state can only apply its domestic anti-abuse
provisions after recourse to the mutual agreement procedure.3
Luxembourg interpreted its domestic anti-abuse provision in accordance with the
rules laid down in the respective DTT and respected its treaty obligations.4 Most of the DTT
concluded by Luxembourg contain restrictions on DTT benefits. For example, reduced or zero
WHT rates on dividend, interest and royalty payments are generally subject to the condition
that the recipient is the beneficial owner of the income.
3
See Commentaries on art. 1, 27.6, of the OECD MC in its 2014 version.
4
See § 6 of the fiscal adaptation law, as amended.
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Luxembourg
With regard to the interpretation of the beneficial ownership concept under domestic tax
law, Luxembourg generally applies an economic approach (substance over form).5
Where Luxembourg is the source state of income, WHT are often zero under domestic tax
law. As a matter of principle, no WHT is levied on arm’s length interest and royalty payments.
Excessive payments may, however, be reclassified into deemed dividend distributions which
are generally subject to 15% WHT.
With regard to dividend payments, the domestic tax provisions regarding an exemption
from WHT are generally more extensive than the WHT relief in most of the DTT concluded
by Luxembourg.6
Hence, the potential conflict between domestic and DTT-based anti-abuse provisions
should be limited to exceptional cases and DTT shopping has mostly been addressed through
DTT-specific provisions. Such provisions include, for example, subject-to-tax clauses with
regard to the application of the exemption method (e.g., in the DTT with Germany) and
limitation-on-benefits clauses (e.g., in the DTT with the US).
Luxembourg signed the MLI on 7 June 2017. The Luxembourg government considers the
MLI as a necessity to implement the measures agreed upon in the BEPS Action Plan with a
view to combat harmful tax practices which may lead to base erosion and profit shifting.7
Luxembourg deposited its ratification instrument for the MLI with the OECD on 9 April 2019.
The MLI has therefore entered into force in Luxembourg on 1 August 2019.
Luxembourg decided that all of its 81 DTT in force at the time the MLI was signed should be
covered tax agreements (“CTA”) that come within the scope of the MLI.8 Thus, Luxembourg
currently has 83 DTT in force of which 81 are covered by the MLI. The DTT with Cyprus (which
is not a CTA) entered into force on 1 January 2019.
Out of these 81 CTA, 66 are currently mutually considered as CTA by the respective treaty
partners.
In making its MLI choices, Luxembourg generally applied a prudent approach in line with
its current treaty policy. The reservations made by Luxembourg were mainly due to the
5
Parliamentary documents 571-1 (1955), comments on former art. 114 LITL, p. 294ff.; Conseil d’Etat, 15 July 1953, no.
5248; Tribunal Administratif, 25 August 1999, no. 10456 and no. 10457, confirmed in appeal on 23 March 2000, no.
11565C and no. 11566C, and Cour administrative d’appel, 26 June 2008, no. 24061C.
6
Art. 147 of the Luxembourg income tax law.
7
See bill no. 7333 introduced on 3 July 2018, Exposé des motifs.
8
See law of 7 March 2019, MLI positions, art. 2.
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Hoor & Medler
unpredictability of the impact of certain provisions in the MLI. Nevertheless, the Luxembourg
treaty negotiators have the flexibility to implement such measures in bilateral DTT,
considering the overall balance of a given bilateral DTT.9
Transparent entities
Luxembourg opted for the application of article 3 on transparent entities with the exception
of paragraph 2.10
According to article 3 (1) of the MLI which aims to avoid qualification conflicts leading to
both double taxation and double non-taxation, DTT benefits should only be granted if and
to the extent income derived by or through a transparent entity or arrangement is brought
into account for tax purposes as the income of a resident taxpayer of that jurisdiction.
Further, Luxembourg has made the reservation in subparagraph a) of paragraph 3 of
article 11 according to which the following sentence will be added at the end of paragraph
1: “In no case shall the provisions of this paragraph be construed to affect a Contracting
Jurisdiction’s right to tax the residents of that Contracting Jurisdiction.”11
In line with article 3 (6), Luxembourg considers the Belgian, US and Swedish CTA to
contain a provision described in paragraph 4 that is not subject to a reservation under
subparagraphs c) through e). However, of these three states, only Belgium is a signatory of
the MLI and made a matching choice and notification (Sweden entirely opted out of article
3 and the US have not signed the MLI).
Dual resident entities

Luxembourg entirely opted out of article 4 on dual resident entities.12 Here, Luxembourg
prefers to rely on the tie-breaker rule and the concept of place of effective management
to determine the tax residency of a person other than an individual as it was considered
that this concept effectively resolves cases of dual residency.13 Indeed, the tie-breaker rule is
tried and tested and provides for clear cut results in practice without involving a significant
administrative burden.
Application of methods for elimination of double taxation

With regard to the elimination of double taxation, Luxembourg chose Option A. Accordingly,
the credit method should apply instead of the exemption method when the other contracting
state interprets the provisions of the DTT so as to exempt or limit the taxation on certain
items of income.14 This provision broadly corresponds to article 23 A of the OECD MC and has
already been adopted in a number of DTT concluded by Luxembourg. Luxembourg has made
a notification with regard to almost half of its CTA (i.e., 39) that contain a provision similar to
that provided under article 5 (3).15
Further, since article 5 does not require a matching choice by both contracting states,
Luxembourg reserved the right not to permit the other contracting state to apply Option C
9
See bill no. 7333 introduced on 3 July 2018, Exposé des motifs.
10
Art. 3 (5) (f) of the MLI.
11
Art. 3 (3) in conjunction with art. 11 (3) a) of the MLI.
12
Art. 4 (3) a) of the MLI.
13
See bill no. 7333 introduced on 3 July 2018, commentaries to art. 4.
14
Art. 5 (8) in conjunction with art. 5 (2) and (3) of the MLI.
15
See bill no. 7333 introduced on 3 July 2018, commentaries to art. 5 and law of 7 March 2019, MLI positions, art. 5.
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Luxembourg
and identified 20 CTA to which this reservation applies.16 The reservation is driven by Option
C being a major change to a DTT which, from Luxembourg’s point of view, should be part of
explicit bilateral negotiations rather than the MLI.17
Purpose of a CTA
The preamble constitutes a minimum standard and could only be opted out if a CTA already
contains preamble language.18
Luxembourg opted for the inclusion of the following preamble language in article 6 (3)
which requires a matching choice by the other contracting state: “Desiring to further develop
their economic relationship and to enhance their co-operation in tax matters.”19 Luxembourg
notified that more than two third of its CTA did not already contain such language.20
Prevention of treaty abuse

Luxembourg opted for the minimum standards with regard to the implementation of
measures aiming at preventing DTT abuse.21
Accordingly, Luxembourg mainly opted for the implementation of the PPT.22
Luxembourg further opted for the application of article 7 (4) of the MLI according to which
taxpayers may request the tax authorities of a contracting state that have denied (fully or
partially) benefits under a DTT on the basis of the PPT to grant full DTT benefits, if it may be
established that, regardless of the PPT, such benefits would have been granted to that person
in the absence of the transaction or arrangement. Such requests may only be rejected after
consultation between both contracting states. The provision only applies if both contracting
states have made a matching choice.23
Luxembourg has rejected the application of the (simplified and extended) limitation on
benefits provisions provided under the MLI as it is considered that these provisions should
be part of bilateral treaty negotiations.24
Articles 8 – 12, 14 and 15 of the MLI

Luxembourg entirely opted out of the (optional) application of:
(i) article 8 on dividend transfer transactions imposing additional restrictions with regard
to the granting of certain DTT benefits;
(ii) article 9 on capital gains from the alienation of shares or interests in companies deriving
directly or indirectly more than 50% of their value from immovable property situated in
the other contracting state;
16
Art. 5 (9) of the MLI in conjunction with the law of 7 March 2019, MLI positions, art. 5: Austria, Belgium, Bulgaria,
Estonia, France, Germany, Hungary, Iceland, Liechtenstein, Monaco, Morocco, Netherlands, Panama, Poland,
Romania, San Marino, Saudi Arabia, Seychelles, Slovakia and Switzerland.
17
See bill no. 7333 introduced on 3 July 2018, commentaries to art. 5.
18
Art. 6 (4) of the MLI; this is only the case for the CTA with Senegal.
19
20
21
Art. 7 of the MLI.
22
Except for the CTA with Senegal that already contains an MLI-compliant PPT provision (in accordance with art.
15 b) of the MLI).
23
Art. 17 b) of the MLI.
24
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(iii) article 10 on anti-rules for permanent establishments situated in third jurisdictions

(Luxembourg applies the exemption method for permanent establishments);
(iv) article 11 on the restriction of a contracting state’s right to tax its own residents;
(v) article 12 on the artificial avoidance of permanent establishments through
commissionaire structures (most of Luxembourg’s DTT contain similar provisions
involving dependent agent structures);
(vi) article 14 on the splitting up of contracts (Luxembourg considers that such abusive
structures may be prevented on the basis of the PPT); and
(vii) article 15 on the definition of persons closely related to an enterprise (given that
Luxembourg opted out of the concerned provisions using such definition).25
Since the aforementioned provisions only apply if both contracting states have made a
matching choice, the CTA with Luxembourg will not be modified by these provisions.26
Artificial avoidance of permanent establishments through the specific activity exemptions

Article 13 (which relates to article 5 (4) of the OECD MC) includes a list of exceptions with
regard to the creation of a permanent establishment status where a place of business is used
solely for specifically listed activities.
Luxembourg elected Option B according to which the listed activities do not constitute a
permanent establishment as they are intrinsically preparatory or auxiliary and are therefore
not subject to the condition that they be of a preparatory or auxiliary character, unless a specific
CTA provides otherwise. Furthermore, other non-listed activities that are of preparatory or
auxiliary character as well as a combination of listed and non-listed preparatory or auxiliary
activities do not constitute a permanent establishment, provided that the overall activity of
the fixed place of business is of a preparatory or auxiliary character.27
Luxembourg states that it chose Option B as it has always interpreted article 5 (4) of the
OECD MC in this way. Further, Luxembourg opted out of the fragmentation rule in article 13
(4) and notified that article 13 shall apply to all of its CTA.28
This provision only applies, however, if both contracting states have made a matching
choice and a notification with regard to the respective CTA.29
Mutual agreement procedure

The mutual agreement procedure (“MAP”) provision in article 16 of the MLI is a minimum
standard consisting of six different elements. In this regard, contracting states could make
reservations under certain conditions (matching choices are required for the respective CTA
to be amended).30
Luxembourg has made no reservations to article 16.31
According to article 16 (1) 1st sentence, a taxpayer may present his case to the competent
authority of either contracting state. Contracting states could make a reservation on the basis
25
See bill no. 7333 introduced on 3 July 2018, commentaries to art. 8, 9, 10, 11, 12, 14 and 15 and law of 7 March 2019,
MLI positions, art. 8, 9, 10, 11, 12, 14 and 15.
26
Art. 8 (4), art. 9 (7) and (8), art. 10 (6), art. 11 (4), art. 12 (5) and (6), art. 14 (4) and art. 15 (2) of the MLI.
27
See art. 13 (3) of the MLI and paras 168 and 169 of the explanatory statement to the MLI.
28
29
Art. 13 (7) and (8) of the MLI.
30
31
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Luxembourg
that they intend to meet the minimum standard for improving dispute resolution under the
OECD/G20 BEPS package as prescribed in paragraph (5) a).
The 2nd sentence of article 16 (1) provides taxpayers with a three-year period from the first
notification of the action resulting in taxation which is not in accordance with the provisions
of the CTA to present their case. This three-year period also applies to CTA that provide for a
shorter period.32 Contracting states could make a reservation on the basis that they intend
to meet the minimum standard as prescribed in paragraph (5) b).
The three-year period shall not apply with regard to CTA providing for periods of at least
three years, where any contracting state has made such a notification with respect to that
CTA.33 Luxembourg has made respective notifications with regard to 66 CTA, i.e., to this extent,
these CTA will remain unchanged.34
The MAP as well as the mutual agreement principle with regard to any difficulties or
doubts arising as to the interpretation or application of the CTA shall apply to CTA which do
not contain such provision on the basis of a mutual notification by both contracting states.35
In the case of Luxembourg, this merely concerned the CTA with Belgium and France (which
both made a matching notification).36
According to article 16 (2) 2nd sentence, any agreement reached in a MAP shall be
implemented notwithstanding any time limits in the domestic law of the contracting
states. Contracting states could make a reservation on the basis that they intend to meet
the minimum standard as prescribed in paragraph (5) c). Luxembourg has made a notification
with regard to 19 CTA that currently do not contain such a provision.37
According to article 16 (3) 2nd sentence, contracting states may also consult together for the
elimination of double taxation in cases other than those provided for in the CTA on the basis
of a mutual notification by both contracting states. This is the case for the CTA with Belgium,
Italy, Portugal and Ukraine, all of which made matching notifications.38
Corresponding adjustments
Broadly speaking, article 17 states that, where a contracting state makes a transfer pricing
adjustment on the basis of the arm’s length principle and taxes profits on which an enterprise
of the other contracting state has already been taxed on in that other contracting state, then
that other contracting state shall make an appropriate adjustment to the amount of the tax
charged therein on those profits.
Subject to certain conditions, contracting states could make a reservation in accordance
with article 17 (3) which Luxembourg did not do.
32
Luxembourg has notified that seven CTA provide for a period of shorter than three years (Belgium, Canada,
Indonesia, Italy, Morocco, Portugal and San Marino).
33
Art. 16 (6) b) ii) of the MLI.
34
35
Art. 16 (6) c) i) and 16 (3) 1st sentence of the MLI.
36
See law of 7 March 2019, MLI positions, art. 16 and MLI positions taken by Belgium and France under http://www.
oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf.
37
38
See law of 7 March 2019, MLI positions, art. 16 and MLI positions taken by Belgium and France under http://www.
oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf.
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Arbitration
Luxembourg opted for the application of part VI of the MLI on arbitration which is only
applicable on the basis of mutual notifications by both contracting states.39
Luxembourg did not opt for the extension to a three-year period in article 19 (11) in case
the authorities cannot reach an agreement in a MAP within two years. However, if one of the
contracting states has made this reservation, the beginning of an arbitration procedure can
only be requested if no agreement has been reached after three years. Luxembourg made the
reservation in paragraph 12 to exclude from arbitration such issues with respect to which a
decision has been rendered by a court or administrative tribunal of either contracting state.40
Luxembourg opted for the default rule in article 23 (1) providing for a “final offer”
arbitration process which applies, except to the extent that the competent authorities
mutually agree on different rules. In this form of arbitration, the arbitration panel cannot
come up with its own solution but has to select one of the proposed resolutions submitted
by the competent authorities involved by way of a simple majority of the panel members and
will not include any rationale or explanation. Since Luxembourg has made no reservation
according to paragraph 3, the “independent opinion” approach laid down in paragraph 2
allowing the arbitration panel to reach its own decision will apply if the other contracting
state has made the reservation according to paragraph 2.41
In addition, Luxembourg has opted to apply article 23 (5) to ensure that each taxpayer
involved in the arbitration case and their advisors agree in writing not to disclose any of the
information received during the course of the arbitration proceedings. A material breach of
this agreement between the time at which the request for arbitration was made and before
the arbitration panel has delivered its decision, will result in the termination of the mutual
agreement procedure and the arbitration proceedings with respect to the case.42
Moreover, according to article 24 (1), Luxembourg opted into the application of article 24
(2) according to which, the competent authorities may depart from the arbitration decision
and agree on a different resolution within three calendar months after the decision has been
delivered to them. However, since Luxembourg also made the reservation according to article
24 (3), this only applies for CTA to which the “independent opinion” approach applies (article
23 (2)).43
Since the negotiations on the MLI were concluded in November 2016, Luxembourg has (re-)
negotiated DTT with Argentina, Botswana, Cyprus, France, Kosovo, Senegal (the “Post-MLI
Treaties”). Some of these Post-MLI Treaties have not yet entered in force due to the ongoing
parliamentary procedures to ratify these DTT. Some other DTT were concluded or amended
shortly before the conclusion of the MLI (inter alia with Austria, Brunei, Hungary, Serbia and
Uruguay, together the “Pre-MLI Treaties”) while other DTT are currently being (re-) negotiated
but the related texts were not available to the public at the moment of this publication.
39
See law of 7 March 2019, MLI positions, art. 18 and art. 18 of the MLI.
40
41
42
See law of 7 March 2019, MLI positions, art. 23 and art 23 (4) and (5) of the MLI.
43
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Luxembourg
The indirect impact of the MLI will be examined with regard to the eleven DTT mentioned
above.
The impact of the MLI on the new Treaties is clearly visible as all of these DTT contain MLI
preamble language and a PPT. The Pre-MLI Treaties did not contain preamble language or
a PPT but were all CTA in the sense of the MLI and also mutually covered by both countries,
except for Brunei which is not a party to the MLI.
In line with its MLI choices, Luxembourg has included the tie-breaker rule (i.e. relying
on the place of effective management for determining tax residency for DTT purposes)
principle in both the Pre- and Post-MLI Treaties to resolve cases of dual residency for a
person other than an individual. So far, the mutual agreement approach set forth under the
MLI has not been included in any DTT concluded by Luxembourg and this is not expected
to change.
With regard to the definition of permanent establishment, all Pre- and Post-MLI Treaties
concluded by Luxembourg contain rules in relation to commissionaire structures similar to
article 12 of the MLI as well as specific activity exemptions drafted along the lines of Option
B in article 13 of the MLI (excluding provisions on fragmentation).
The only exception to the above is the DTT with France that also contains the fragmentation
rules in article 13 of the MLI and splitting-up of contract rules provided in article 14 of the MLI,
which might be considered as the preference of France.
The method to eliminate double taxation in most of the DTT concluded by Luxembourg
before and after the MLI (including the Pre- and Post-MLI Treaties) broadly corresponds to
article 23 A of the OECD MC and article 5 (2) of the MLI.
While Luxembourg has opted out of the property-rich clause provided in article 9 of the
MLI with regard to the sale of shares or interests of entities deriving their value principally
from immovable property, a number of Luxembourg’s DTT include such a provision.
More precisely, four out of six of the Post-MLI Treaties (Argentina, Cyprus, France and
Senegal) and two out of five of the Pre-MLI Treaties (Hungary and Uruguay) contain a
provision corresponding to article 9 of the MLI.
All of the Pre- and Post-MLI Treaties contain MAP and corresponding adjustment
provisions similar to article 16 and 17 of the MLI, except the DTT with Austria which is a
mutually covered CTA in the sense of the MLI and will therefore be amended accordingly.
However, only two out of six Post-MLI Treaties (France and Kosovo) and one out of five
Pre-MLI Treaties (Uruguay) contain an arbitration provision.
While a certain minimum standard is clearly visible in all recently concluded DTT,
these results suggest that the inclusion or omission of certain provisions depends on the
particularities of the bilateral negotiations in each case with a view to achieve a balanced
DTT on an overall basis.
Upon the initial signing of the MLI by Luxembourg on 7 June 2017, the initial positions (as
published by the OECD) were taken by the government only and therefore subject to change
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with each of the final positions being subject to confirmation by the regular legislative
procedure.
The draft law ratifying and transposing the MLI into domestic law included comments
outlining the intention of the legislator on each position taken and was submitted to the
Luxembourg parliament for discussion and vote, taking into account the opinions from the
Council of State (Conseil d’État), the Chamber of Commerce and the Finance and Budget
Commission (Commission des Finances et du Budget).44
The Luxembourg tax authorities have not published consolidated or synthesised versions
of the revised DTT. However, consolidated revised versions of some DTT have been issued by
private publishers.45
The OECD “MLI matching database” has no legal value in Luxembourg and may only
serve as guidance.
In Luxembourg, the constitution, as amended and revised, is the highest ranked law in the
hierarchy of norms in the absence of international commitments.
Luxembourg applies a monist theory according to which domestic law including the
constitution must be amended or may be disregarded to the extent it is incompatible with
international law (such as European primary and secondary law).46
International treaties (such as DTT or the MLI) first have to be ratified through the
Luxembourg legislative procedure and transposed into domestic law. Therefore, such
international treaties rank higher than domestic law and may not be overridden by
contradictory Luxembourg legal provisions.47
So far, no specific interpretation issues have been the subject of a court decision or were raised
by the government. Given that French is one of the official languages in Luxembourg, issues
arising from the translation of the MLI should therefore not be relevant.
Any additional publications by the OECD have not been mentioned during the legislative
procedure and therefore do not have a direct legal value in Luxembourg but in practice clearly
serve as a source of guidance for the interpretation of the MLI.
44
See https://chd.lu/wps/portal/public/Accueil/TravailALaChambre/Recherche/RoleDesAffaires?action=do
DocpaDetails&id=7333 for more details on the different stages of the legislative procedure.
45
For example, IBFD.
46
See ACA Europe seminar, 18 December 2013; Court of Cassation (Cour de cassation), orders of 8 June 1950 (Pasicrisie
lux. 15, p. 41) and 14 July 1954 (Pasicrisie lux. 16, p. 151); Council of State (Conseil d’État) (Comité du contentieux)
[Litigation Committee], order of 28 July 1951, Dieudonné vs. Tax Authority (Administration des contributions)
(Pasicrisie lux. 15, p. 263); Court of Appeal (Cour d’appel), order of 13 November 2001, no. 396/01 V (Annales du
droit luxembourgeois, 2002, ed. Bruylant, p. 456); Superior Court of Justice (Cour supiérieure de justice), order of 5
December 2002, no. 337/02 (Annales du droit luxembourgeois, 2003, ed. Bruylant, p. 683).
47
Art. 37 and 49 bis of the Luxembourg constitution.
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Luxembourg
2.2.2. Interpretation of double tax treaties generally
Luxembourg formally approved the Vienna Convention on the Law of Tax Treaties through the
law of 4 April 2003 according to which DTT should be interpreted in good faith in accordance
with the ordinary meaning to be given to terms of the treaty in their context in the light of
their object and purpose.48
This gives some weight to the commentaries to the OECD MC (and the OECD BEPS reports
that resulted in changes to these commentaries) regarding the interpretation of terms.
There is some debate over whether subsequent changes to the commentaries to the
OECD MC should be used as an aid to interpretation of earlier DTT. While there is a minority
view that the commentaries are only relevant to those DTT subsequently concluded,
the introduction to the commentaries to the OECD MC indicates clearly that the later
commentaries are intended by OECD member states to be used for interpretation and
application of DTT concluded before their adoption (except where the OECD MC has been
changed in substance).
Accordingly, unless it is apparent that:
(i) the substance of the OECD MC has itself changed since a DTT was negotiated; or
(ii) the DTT in question does not conform to the OECD MC; or
(iii) unless the commentaries make clear that a former interpretation has actually been
substantively altered, rather than merely elaborated, as a matter of practice, the most
recent commentaries to the OECD MC should at least be considered as well as the one
which may have been available at the time of negotiation. Often, if a DTT provision is to
be fully understood, the changes that have occurred to the relevant commentaries to the
OECD MC over time will need to be examined and considered.
The MLI should have no impact on CTA and DTT that are not covered before the MLI was
signed or ratified. As outlined in section 2.1.2, the MLI has no legal value in Luxembourg until
it has been ratified and transposed into domestic law and will subsequently only impact CTA.
This also applies for the preamble which, like the rest of the MLI, should not be used
in a retrospective manner to interpret DTT. Most of the DTT concluded by Luxembourg
already include a preamble that mentions the fight against tax fraud or tax evasion. The
new preamble, which goes beyond that, should only apply for a given CTA after the MLI has
come into effect and provided the CTA is mutually covered by both contracting states.
The PPT in general

The PPT would deny a DTT benefit when it is reasonable to conclude that obtaining this
DTT benefit was “one of the principal purposes” (emphasis added) of any arrangement or
transaction unless the taxpayer is able to establish that granting the benefit would be “in
accordance with the object and purpose” of the relevant DTT provisions.
48
Art. 31 of the Vienna Convention on the Law of Tax Treaties.
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Hoor & Medler
The contradictory message of the PPT is that DTT benefits are available to qualifying
taxpayers unless taxpayers intend to gain from those benefits. Obviously, this injects a
subjective element into every aspect of determining whether DTT benefits are available.
Moreover, the PPT imposes a significant burden on the taxpayer (“establish that the
granting of tax benefit would be in accordance with the object and purpose of provision in
the convention”), whereas the onus on the tax administration is set at a relatively low level
(“reasonable to conclude”, “one of the main purposes”, “directly or indirectly”).
The commentaries to the OECD MC emphasise, however, that it is important to
undertake an objective analysis of the aims and objects of all persons involved in putting
that arrangement or transaction in place or being a party to it. It is interesting to note the
paradox contained in this undertaking: an objective analysis is made seeking a conclusion
on the subjective aims and objects of various persons.
It is further stated that tax authorities should not lightly assume that obtaining a
benefit under a DTT was one of the principal purposes of an arrangement or a transaction.
Furthermore, merely reviewing the effects of an arrangement will not usually enable tax
authorities to draw a conclusion about its purposes.
Overall, the PPT creates significant uncertainty for taxpayers (and their advisors) because
of the unpredictable outcomes and causes serious concerns for bona fide businesses. Holding,
financing, IP management and other investment activities are all legitimate and genuine
business activities that may fall within the scope of the PPT. In the view of the authors, a
PPT-like rule should be designed to tackle only clear-cut cases of DTT abuse in arrangements
that are set up for the predominant purpose of obtaining DTT benefits.
Crucially, the commentaries to the OECD MC limit the scope of the PPT through the
statement that a purpose will not be a principal purpose when it is reasonable to conclude
that obtaining the benefit was not a principal consideration and would not have justified
entering into an arrangement or a transaction that has resulted in the benefit. This limitation
in its first part suffers from being somewhat circular: a purpose is not a principal purpose if its
consideration was not a principal consideration. However, the second part of the limitation,
(i.e. that if the DTT benefit would not justify entering into the arrangement), then the purpose
of obtaining a DTT benefit is not a principal purpose, is clearer and may be helpful.
When it comes to the interpretation of the examples in the commentaries to article 29
of the OECD MC, it is explicitly stated that the examples are “purely illustrative” and should
not be interpreted as providing conditions or requirements that similar transactions must
meet in order to avoid the application of the PPT. Therefore, it cannot be construed that
the PPT should apply if a particular aspect described in the examples is missing. Instead, it
has to be determined on a case-by-case basis whether one of the principal purposes of an
arrangement or a transaction was obtaining DTT benefits. Nevertheless, it is interesting to
note that the examples in the commentaries to the OECD MC conclude that it would not be
reasonable to deny the benefit of DTT in case of cross-border investments unless specific facts
and circumstances can be established that prompt the application of the PPT.
The PPT in an EU context

A large part of the investments of Luxembourg companies is made in other EU member
states. In an EU context, however, it is not only the guidance included in the commentaries
to the OECD MC that is decisive for the application of the PPT. Instead, the application of the
PPT should be subject to a stricter standard, which is determined by the jurisprudence of the
Court of Justice of the European Union (“CJEU”).
As a rule, the fundamental EU freedoms of establishment and free movement of capital,
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as interpreted in CJEU case law, provide that a given structure may only be disregarded if it is
proven to be a “wholly artificial arrangement” which does not reflect economic reality and the
purpose of which is to unduly obtain a tax advantage. Such a purely artificial structure may
be present in case of “letterbox companies”. 49 As early as in 2006, the CJEU acknowledged in
the Cadbury Schweppes case that a taxpayer is free to rely on its EU freedoms for tax planning
purposes as long as the underlying contractual arrangements are not “purely artificial”.50
The right of a member state to protect its tax base against abusive arrangements is limited
by the fundamental freedoms. It follows that “tax jurisdiction shopping” is a legitimate
activity in an internal market, even if the choice of the jurisdiction is principally based on
tax considerations. Why should an investor be obliged to choose a high-tax jurisdiction or
arrange his affairs in such a way as to be liable to more tax than necessary? Nevertheless,
EU member states are free to protect their tax bases by way of anti-abuse rules which are
exclusively directed at “wholly artificial arrangements”.51
An abusive situation does not depend only on the intention of the taxpayer to obtain
tax ad-vantages (i.e. a motive test) but also requires the existence (or absence) of certain
objective factors.52 Amongst these objective elements, the CJEU emphasised the importance
of the existence of an “actual establishment” in the host state (for example, premises, staff,
facilities and equipment) and a “genuine economic activity” performed by the foreign
company.53 Here, a company may even rely on staff and premises of affiliated companies
resident in the same jurisdiction.
The notion of “genuine economic activity” should be understood in a very broad manner
and may include the mere exploitation of assets such as shareholdings, receivables and
intangibles for the purpose of deriving what is often described as “passive” income. The
nature of the activity should not be compromised if such passive income is principally sourced
outside the host state of the entity.54
In addition, no specific ties or connections between the economic activity assigned to the
foreign entity and the territory of the host state of that entity can be required by domestic
anti-abuse provisions. Therefore, insofar as the EU internal market is concerned, the mere
fact that an intermediary company is “active” in conducting the functions and assets allocated
to it (rather than being a mere letterbox company) should suffice to be out of the scope of
domestic anti-abuse rules or the PPT in DTT concluded between EU member states.
49
See Cadbury Schweppes case (CJEU, 12 September 2006, Case C-196/04, Cadbury Schweppes plc, Cadbury
Schweppes Overseas Ltd v. Commissioners of Inland Revenue (“Cadbury Schweppes”), http://eur-lex.europa.
eu/LexUriServ/LexUriServ.do?uri=CELEX:62004CJ0196:EN:PDF); see Dr. Eric Robert, Driss Tof, “The Substance
Requirement and the Future of Domestic Anti-Abuse Rules within the Internal Market”, European Taxation,
IBFD, November 2011, p. 437; see Oliver R. Hoor, Georges Bock “Luxembourg in International Tax Planning: The
importance of Substance and Arm’s Length Conditions”, Tax Notes International, p. 491.
50
See “Cadbury Schweppes”, n. 24, para. 36, 37, 55.
51
See “Cadbury Schweppes”, n. 3, para. 51; see Dr. Eric Robert, Driss Tof, „The Substance Requirement and the Future
of Domestic Anti-Abuse Rules within the Internal Market“, European Taxation, IBFD, November 2011, p. 438; see
José Calejo Guerra, “Limitation on Benefits Clauses and EU Law”, European Taxation, IBFD, February/March 2011,
p. 93.
52
See “Cadbury Schweppes”, n. 3, para. 55.
53
See “Cadbury Schweppes”, n. 3, para. 54.
54
In addition, the mere fact that a structure may help to shift income from a high-tax to a low-tax jurisdiction does
not alone suffice to conclude that the structure is “abusive” (even if the structure has innovative features); See
Dr. Eric Robert, Driss Tof, “The Substance Requirement and the Future of Domestic Anti-Abuse Rules within the
Internal Market“, European Taxation, IBFD, November 2011, p. 438.
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It is interesting to note that until now, national courts have not deviated from the
“wholly artificial arrangement” doctrine laid down by the CJEU. While the CJEU does not
seem to require an extensive level of substance, from a risk management perspective, it
may nevertheless be wise to exceed the minimum standard of substance in order to limit
foreign tax risks.
As such, the PPT poses significant compatibility issues with EU Law. In fact, the PPT may
deny DTT benefits on the sole grounds that one of the main purposes was to obtain DTT
benefits. Accordingly, even companies having economic substance in their state of residence
and performing bona fide business activities, may not be entitled to DTT benefits.
However, within the EU, restrictions can only be justified by the need to prevent tax
avoidance when a specific anti-avoidance rule targets “wholly artificial arrangements”
aimed solely at escaping national tax normally due. Considering that the PPT imposes a
lower “abuse” threshold than the standard set by the CJEU, serious doubts can be raised on
the compatibility of the PPT with EU law.
This concern has been confirmed by more recent case law of the CJEU that may be helpful
when analysing the potential scope of the PPT in an EU context. On 7 September 2017, the
CJEU issued its decision in the French case C-6/16 regarding the application of a (former)
French anti-abuse provision that automatically denied the WHT exemption on dividends
under the EU Parent-Subsidiary Directive dated 23 July 1990 (90/435/EC), as amended, (“PSD”)
when dividends were paid to an EU parent company that was controlled by one or more
entities established in non-EU countries. Under this provision, the recipient of the dividends
only qualified for the exemption if it could prove that benefiting from the exemption was not
the main purpose or one of the main purposes of the structure. Accordingly, this provision
was broadly similar to the PPT in the 2017 version of the OECD MC.
The CJEU ruled that the French anti-abuse provision infringed both the PSD and the
freedom of establishment as it only took into account the taxpayer’s motive for the structure.
It did not, however, make an individual examination of the whole operation and it did not
contain an “economic activity” (or “substance”) test as required under EU Law. In addition, the
burden of proof automatically rested with the taxpayer, whereas the French tax authorities
did not even have to evidence tax avoidance when denying the dividend WHT exemption.
German tax law also provides for an anti-abuse provision that denies WHT exemptions
(or reductions) granted under domestic tax law or DTT unless the recipient of the income
complies with certain (excessive) substance requirements.55 On 20 December 2017, the CJEU
gave its decision in two German cases (Cases C-504/16 and C-613/16) which were joined for
the purposes of the judgment.
In line with its decision in the French case, the CJEU ruled that the German anti-abuse
provision infringed both the PSD and the freedom of establishment, re-emphasizing its
“wholly artificial arrangement” standard. Indeed, a general presumption of fraud or abuse
cannot justify either a fiscal measure which compromises the objectives of the PSD or a
fiscal measure which prejudices the enjoyment of the fundamental freedoms guaranteed
by the DTT.
Then again, on 14 June 2018, the CJEU decided on another case involving German anti-
abuse legislation in its 2011 version (GS v. Bundeszentralamt für Steuern, Case C-440/17).
Here, the CJEU held that also the amended version of the German anti-abuse provision is
incompatible with EU Law. Notably, as a reaction to the first decision of the CJEU, the German
55
§50d EStG.
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Luxembourg
Ministry of Finance already released in April 2018 a Circular that eliminates most of the
compatibility issues highlighted by the CJEU, evidencing the importance of the CJEU’s case
law.
On 26 February 2019, CJEU issued its decisions in six cases which deal with the
interpretation of the PSD and the EU Interest & Royalties Directive dated 3 June 2003
(2003/49/EC) (“IRD”, together the “Directives”).
For the purposes of the judgments, the cases T Danmark (C-116/16) and Y Denmark Aps
(C-117/16) regarding the interpretation of the PSD, and the cases N Luxembourg 1 (C-115/16),
X Denmark A/S (C-118/16), C Danmark I (C-119/16) and Z Denmark ApS (C-299/16) regarding
the interpretation of the IRD, were joined.
The CJEU had to answer to questions raised by the Danish Court in relation to six cases
where the Danish tax authorities refused to apply the WHT exemption as provided in the
PSD and IRD.
While it was not for the CJEU to assess the facts in the cases, the CJEU specified indicia
of abusive or fraudulent acts and when an EU parent company may not be the beneficial
owner of interest income with a view to guide the national court in the assessment of the
cases. In contrast, Advocate General Kokott analysed in her opinion, rather in which cases
anti-abuse legislation should not apply and when EU parent companies should be considered
as beneficial owner. The approach taken by the CJEU in its decisions, describing situations
where abuse might be present rather than detailing when the benefits of the PSD and the
IRD should be granted, somehow creates the perception of a broad interpretation of abuse
and fraudulent acts. In addition, some of the criteria mentioned by the CJEU seem to lower
the threshold of abuse when compared to previous decisions (e.g. dividends are very soon
after their receipt passed on by the EU parent company to entities which do not fulfil the
conditions of the PSD) which is not helpful when it comes to legal certainty.
However, it can be assumed that the CJEU examined the very same elements in previous
cases when analysing the existence of abusive or fraudulent acts and the compatibility of
anti-abuse legislation in an EU context. In several judgements in 2017 and 2018, the CJEU
reiterated its “wholly artificial arrangement” doctrine that the CJEU systematically followed
since the Cadbury Schweppes case in 2006 (see the cases Eqiom SAS (C-6/16), Deister Holding
AG (Case C-504/16), Juhler Holding A/S (Case C-613/16), GS v. Bundeszentralamt für Steuern
(Case C-440/17). Thus, national anti-abuse legislation must be targeted to prevent conduct
involving the creation of “wholly artificial arrangements” which do not reflect economic
reality and the purpose of which is to unduly obtain a tax advantage.
It is now for the Danish courts to finally decide the cases in accordance with the guidance
provided by the CJEU and its previous case law. Unfortunately, it might still take years until
these cases will be finally solved given that appeals might be filed with the Danish Supreme
Court. Thus, the present case law of the CJEU did not contribute much to legal certainty in
times that are characterised by chronic legal uncertainty.
Treaty benefits
It remains to be seen whether foreign tax authorities will try to challenge the availability of
DTT benefits to Luxembourg taxpayers on the basis of the PPT in many cases. However, the
application of the PPT requires an analysis on a case-by-case basis.
From a Luxembourg perspective, it is expected that the Luxembourg tax authorities will
apply the PPT in a reasonable manner, considering the guidance provided by the OECD in
the commentary to the OECD Model.
The PPT is an integral part of the tax assessment procedure and therefore has to be
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considered by each tax inspector in charge of a certain taxpayer and it is not expected that a
specific committee within the tax authorities will be established to review tax assessments
separately in light of the PPT.
However, given that Luxembourg does not levy WHT on arm’s length interest, and royalty
payments and dividend payments may (under certain conditions) benefit from a domestic
WHT exemptions, the potential application of the PPT by the Luxembourg tax authorities
should in practice be rather limited in scope.
MAP and arbitration

All DTT concluded by Luxembourg before the MLI already included a MAP provision. To this
end, the authors therefore do not expect any material impact of the MLI, except for some
adjustments to the parameters of the MAP procedure as implemented by the MLI.
With regard to arbitration procedures within the EU, the EU Arbitration Convention
already provided for a tool to resolve cross-border tax disputes within clearly defined
timeframes which were often more favorable than the timelimits set out in the concerned
DTT. In addition, the new EU Directive 2017/1852 on tax dispute resolution mechanisms in the
European Union was adopted on 10 October 2017 and must be implemented in the national
laws of the member states by the end of 2019. To this end, the impact of the MLI may be
expected to be limited.
With regard to CTA with non-EU countries, given the limited number of CTA that contain
an arbitration provision, the MLI may, as a matter of principle, have a stronger impact by
providing a tool to taxpayers to initiate an arbitration procedure if no mutual agreement
has been reached between two contracting states. Whether this will have a strong practical
impact remains to be seen. Since the time period to settle an MAP and a subsequent
arbitration as well as the related costs may be significant, the authors expect the practical
impact to be rather limited to cases with a very significant amout of taxes at stake.
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Mexico
Branch reporters
José I. Pizarro-Suárez V.1
Luis Trillo2

Mexico is and has been an active member state of the OECD and G20. As such, Mexico
has been an enthusiastic participant in the BEPS Action Plan. As early as 2014, prior to the
publication of the BEPS reports, Mexico was a pioneer including in its domestic tax laws anti-
hybrid mismatch rules under Action 2.
Furthermore, it is highly likely that new rules will be included as part of Mexico’s domestic
legislation as proposed in the 2020 Tax Bill presented before Congress for next year (“2020
Tax Bill”). Such rules amongst others refer to: (i) taxation of the digital economy (Action 1);
(ii) broadening of current anti-hybrid rules including “imported hybrid” rules (Action 2); (iii)
changes to Mexican CFC rules (Action 3); (iv) interest deduction limitation based on 30%
EBITDA rule (Action 4); (v) broadening the scope of the permanent establishment (“PE”)
clause and restricting the application of the “preparatory and/or auxiliary test” (Action 7); (vi)
mandatory disclosure rules (Action 12); and, (vii) introduction of a general anti-abuse rule
(“GAAR”) applicable for all tax purposes i.e. not limited to income tax.
Although Mexico used to take a more formalistic approach regarding the granting of
benefits under Double Taxation Treaties (“DTT’s”), based on the foregoing it is expected for
Mexico to take a pro-active approach once the MLI comes into full force and effect. At the
moment of publication of this report the same has been executed by the Executive Branch
i.e. 2017 but has not been ratified by the Mexican Senate. There is no clear indication on the
timing for ratifying the MLI, but it is expected to take place in 2020.
Once approved, the MLI will be hierarchically superior to both Federal and Local laws but
always subordinate to the Federal Constitution.
As the reader will recognize from this report, as a result of the MLI, the international
tax arena will be a new level playing field. Many DTT’s included as Covered Tax Agreements
(“CTA’s”) will be modified in the sense that the principal purpose test (“PPT”) will be applicable,
the PE status rules will be strengthened i.e. anti-fragmentation provision, triangular
provision, and dependent agent rules will be included (it is highly likely that this rules will
already be included in domestic legislation as per the 2020 Tax Bill).
Once the MLI comes into force, look-back provisions regarding minimum holding periods
for capital gains and dividends will be applicable to practically all of Mexico’s CTA’s. In practice
this could present some infirmities which may give rise to litigation for example shares could
be considered “regular” under domestic legislation and “real property” shares under a DTT.
Other important issues will be related to the interpretation of the CTA’s executed in
languages that are not English or French, since this DTT’s will have to be interpreted in several
languages, which seems a bit odd. However, in our view this is more an academic discussion,
1
Partner, EY Mexico.
2
Solo practitioner focused on private equity and mergers and acquisitions.
IFA © 2020 521

Mexico
since Mexican courts will likely apply the Spanish text of both the CTA and the MLI.
The MLI together with the 2020 Tax Bill will result in Mexican tax authorities having
broader powers to curtail tax evasion schemes derived from treaty shopping, amongst other
undesirable taxpayer conducts. Therefore, tax professionals and taxpayers should not view
lightly the enactment of the MLI and the changes of the same as a result of the matching
elections between member states.
Performance of a correct analysis will be of the utmost importance and it would be
advisable for the Mexican tax authorities to publish condensed versions of the CTA’s as
amended by the MLI. This practice has taken place in Mexico previously; however, such
condensed versions are only of an informative nature and if the same have an error, the
same could not be claimed as a right by a taxpayer; we believe it would be a best practice for
the Mexican tax authorities, given the complexity of the changes that will derive from the
MLI, to continue publishing condensed version of the CTA’s, even exclusively for informative
purposes.
Apparently due to sovereignty issues, Mexico will at this time pass on the opportunity
to accept a binding arbitration framework to solve disputes between the members states.
Finally, it must be noted that Mexico changed its initial position regarding article 3 of the
MLI pertaining hybrid mismatches in the case of transparent entities by including a reserve to
such provision so Mexico will continue not to recognize the transparency of foreign entities.
Apparently, this change is the reason behind the MLI not yet being ratified by the Senate.
Treaty Network
1.1. Introduction
The purpose of this report is to provide the reader with an overview of the post-BEPS landscape
making particular reference to the MLI and its direct and indirect impact on Mexico’s treaty
network and interpretation of such treaties once the MLI comes into full force and effect.
As of the date of submission of this report, Mexico has not yet enacted the MLI i.e. the
same has been executed but has not been ratified by the Senate. As further described herein
below, Mexico has followed several actions of the BEPS Action Plan and has been a pioneer
in including such actions in its domestic legislation.
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Mexico has a tax treaty network of 61 treaties3 in force with a variety of jurisdictions. After the
MLI was signed on 7 June 2017, Mexico has not signed any DTT; however, it is in negotiations
with Egypt, Iran, Ireland (amending instrument), Lebanon, Malaysia, Morocco, Nicaragua,
Oman, Pakistan, Slovenia, Thailand and Vietnam. In their vast majority, such treaties follow
the OECD Model Convention,4 provided that Mexico, as way of policy, typically has included
certain measures that deviate from the OECD Model Convention in order to protect source
taxation, many of them expressed through reservations and observations to the OECD Model
Convention and its Commentaries.
Some of those deviations are as follows: (i) extended definitions of dividends and interest;
(ii) right to tax royalties at source; (iii) payments relating to software and the lease of industrial
commercial or scientific equipment and containers are treated as royalties; (iv) in the case
of capital gains, a de minimis participation threshold is included, and when exceeded, even if
the shares are not real-property shares, Mexico reserves the right to tax such capital gains as
source country (in some cases a beneficial rate is applicable under such provisions); and, (v)
in the case of other income as per article 21 of the OECD Model Convention, Mexico reserves
the right to tax such income pursuant to its domestic law.
It is important to note that Mexico was one of the first countries to include certain of the
BEPS Action Plan recommendations in its domestic law, particularly those related to anti-
hybrid mismatch arrangements which were included in the Mexican Income Tax Law since 1
January 2014 (even before the publication of the drafts of the BEPS Action 2 reports in March
2014). Moreover, prior to the MLI Mexico already included a principal purpose test (“PPT”)
clause in some of its treaties, such as the DTT executed with Spain, which under its protocol
dated 17 December 2015 (in force since 2017) clearly states that treaty benefits should not
be granted when it is reasonable to conclude, taking into consideration all the relevant facts
and circumstances, that the transaction or agreement, directly, or indirectly, giving rise to the
right to claim such benefits has amongst its main purposes obtaining of such benefits, save
for cases when the granting of the same in such circumstances would be consistent with the
objectives and purposes of the treaty. This provision is drafted under the standards provided
by BEPS Action 6.
In the BEPS context, recently a tax bill for 20205 (the “2020 Tax Bill”) was submitted by the
Mexican President before Congress which includes significant changes aimed to curtail base
erosion and profit shifting, as well as to impose further compliance (informative) obligations
for both taxpayers and tax professionals. The explanatory notes make several references to
3
Such countries are: Australia, Austria, Bahrain, Barbados, Belgium, Brazil, Canada, Chile, People’s Republic of
China (PRC), Colombia, Czech Republic, Denmark, Ecuador, Estonia, Finland, France, Germany, Greece, Hong
Kong, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Kuwait, Latvia, Lithuania, Luxembourg,
Malta, the Netherlands, New Zealand, Norway, Panama, Poland, Portugal, Peru, Qatar, Spain, Romania,
Russia, Saudi Arabia, Singapore, Slovakia, South Africa, Republic of Korea, Sweden, Switzerland, Turkey, United
Kingdom, United Arab Emirates, United States of America, Uruguay and Ukraine. The DTT with Venezuela was
signed in 1997 but has not been ratified.
4
Mexico is a member of the OECD since 1994.
5
The tax bill is subject to discussion at the time this report was prepared. If approved, it is expected to be applicable
as of 1 January 2020. We do not anticipate substantial changes during the legislative process.
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Mexico
the BEPS Action Plan and the OECD’s recommendations in order to justify the proposed
amendments and/or additions and include several provisions pertaining to: taxation of the
digital economy (Action 1); broadening current anti-hybrid rules including “imported hybrid”
rules (Action 2); changes to Mexican CFC rules (Action 3); interest deduction limitation based
on 30% EBITDA rule (Action 4); broadening the scope of the permanent establishment (“PE”)
clause and restricting the applicability of the “preparatory and/or auxiliary test” (Action 7);
mandatory disclosure rules (Action 12); and introduction of a general anti-abuse rule
(“GAAR”).
Prior to the MLI, save for some particular cases (such as Spain), the preamble of treaties used
to follow the original wording of the OECD Model Convention (i.e. the purpose of the treaty
is to avoid double taxation and the prevention of tax evasion).
Although there are no public records of precedents regarding treaty shopping, as Mexico
used to take a more formalistic approach in order to grant treaty benefits, basically requesting
the certificate of residence issued by the residence country of the relevant taxpayer, Mexico
has taken steps toward curtailing tax avoidance, including treaty shopping both in its
domestic law and under certain treaties.
Domestic rules currently include a provision which allows the Mexican tax authorities
to declare a sham exclusively for tax purposes. The ambiguity of this provision has led to
different interpretations by tax practitioners and tax authorities. In principle, such anti-
abuse provision appears to be only applicable to Mexican CFC’s (which apply when a Mexican
resident or a foreign resident through a PE in Mexico obtains income through a foreign figure
or entity which pays less than 75% of the income tax that would be payable in Mexico or
through fiscally transparent vehicles). However, Mexican tax authorities are of the view that
said provision also applies to all Mexican sourced income;6 thus, the Mexican tax authorities
when aware that the owners of a foreign entity claiming benefits are resident elsewhere
i.e. conduit entity scenario, said authorities could in principle deny the benefits under the
relevant treaty, if the same determine that the relevant facts and circumstances give rise to
a sham transaction, provided that the transactions is re-characterized and taxed as another
transaction (i.e. the transaction indeed carried out by the parties). This ambiguity is coming
to an end as the 2020 Tax Bill includes language in the sense that it applies for all income
tax purposes.
Under the provisions already in force, i.e. Income Tax Law provisions, i.e. not the proposed
GAAR, the Mexican tax authorities need to determine the real act/transaction and the sham,
quantify the tax benefit derived from the sham, and point to the elements based on which
they concluded the existence of a sham, including the intention of the parties to simulate
the act/transaction.
Although not clearly stated in domestic law, the Mexican tax authorities as a matter of
procedure frequently request the business purpose when auditing a taxpayer or a particular
transaction. When said authorities are not convinced by the business purpose stated by the
taxpayer, they will typically disallow the relevant deduction in hands of a Mexican resident
6
The Tax Ombudsman has issued a criterion that this broad interpretation made by the Mexican tax authorities
is incorrect (vid. 8/2014/CTN/CS-SASEN).
524
taxpayer stating that the act/transaction lacks materiality or that the same is not strictly
necessary for the conducting of the taxpayer’s business. Although this position is based
on general provisions pertaining to the requirements that need to be met in order for a
deduction to be allowed, such provisions are typically invoked by Mexican tax authorities
when conducting an audit and issuing an assessment. If the 2020 Tax Bill is approved, this
will no longer be the case, as the GAAR makes specific reference to the concept of “business
purpose” and the meaning of such concept; thus when issuing an assessment tax authorities
will likely refer to the specific GAAR provision and to the general provisions.
Under the proposed GAAR, legal acts lacking a “business reason” which give rise to a tax
benefit may be re-characterized to those that would have been otherwise carried-out to
obtain the economic benefit or will be deemed non-existent for tax purposes, when such
economic benefit is non-existent.
The lack of a business reason will be deemed to exist when the quantifiable, future or
present, economic benefit has a lower value than the tax benefit. For the purposes of this
anti-abuse provision the tax benefit will not be considered as part of the economic benefit.
As is the case with most of the OECD’s framework, for these purposes the Mexican tax
authorities will have to take into consideration the facts and circumstances of the taxpayer.
It will also be deemed, unless proven otherwise, that a series of acts lack a business reason
when the sought economic benefit could have been realized through a lower number of
legal acts if the taxes would be higher in this case i.e. Mexico is expressly including the step-
transaction anti-abuse provision.
For the purposes of the GAAR a tax benefit will be deemed to include any reduction,
elimination or deferral of a tax (in a broad sense). This includes those obtained through
deductions, exemptions, non-subjection, non-recognition of a gain or taxable income,
adjustments or lack of adjustments of the taxable base of any contribution, crediting of
contributions, the re-characterization of a payment or activity, or a change of tax regime,
amongst others.
Although the wording of the GAAR is, in our opinion, broad, it is very likely to be approved
as presented by the President.
Paragraph 9.5 of the Commentaries to article 1 of the OECD Model Convention establishes
what is known as the “guiding principle” which must be met, or otherwise treaty benefits
could be disallowed i.e. the benefits granted under a DTT should not be made available when
a main purpose for entering into certain transactions or arrangements was to secure a more
favorable tax position and obtaining that more favorable treatment.
Although Mexico currently has an anti-abuse provision (in our view limited) in principle,
it seems that for DTT’s which do not contain a specific anti-abuse provision, the guiding
principle and/or a domestic law provision including the GAAR proposed under the 2020 Tax
Bill would not be sufficient to combat treaty shopping, thus, the MLI will definitely change
the landscape in connection with this type of practices.
The foregoing being the case that Mexico as a civil law country used to take a more
formalistic approach when granting treaty benefits and/or when negotiating its DTT’s,
and the fact that the PPT will be in line with the GAAR to be enacted, it appears difficult in
principle to claim that the anti-abuse provision could not override the treaty when you have
the PPT in a CTA (i.e. the instrument with higher hierarchy is complemented by domestic
legislation through the GAAR).
To the extent that a foreign resident company claiming treaty benefits is not entitled
to manage and/or dispose of the income it obtains from a Mexican source, we are of the
view that the Mexican tax authorities will likely take the position that such entity is not the
525
Mexico
beneficial owner of such income. Such concept of beneficial ownership is likely to be more
relevant in the case of the application of treaty provisions that make reference to the same,
such as interest income, than in domestic law.
Mexico’s treaty network includes several treaty-based anti-abuse provisions, for example,
the treaties executed with the United States and Panama only apply when certain ownership
thresholds are met by residents of the contracting states (i.e. if at least X% is not owned
by a resident of a contracting state or NAFTA state in the case of the United States-Mexico
Treaty benefits thereunder may be denied pursuant to an objective limitation of benefits
mechanism).
The majority of tax treaties executed by Mexico only apply to “subject to tax” residents.
Some, as in the case of the treaty executed with Barbados, do not apply to international
business companies.
In other treaties, as is the case with the treaty executed with the Grand Duchy of
Luxembourg, the source state may require the state of residence to issue a certification
that the income over which treaty benefits are claimed is subject to tax. Most of the treaties
executed by Mexico apply only when the foreign resident entity is subject to tax, as is the
case of the treaty with Austria, Belgium, Canada, France, Germany, Italy, Netherlands,
Philippines, Singapore, Spain, Switzerland, United Kingdom, United States, amongst many
others. However, there is discussion whether it suffices for such foreign entities to be subject
to tax (liable) or should they actually need to pay taxes over any income in order for treaty
benefits to apply, for example in case of capital gains obtained by a foreign resident taxpayer
that are exempt in Mexico or subject to a preferential rate under the relevant treaty, if such
benefits should apply when a participation exemption applies and/or when a credit is granted
and no tax is actually paid. This latter system we understand applies in Barbados, amongst
other jurisdictions.
Since 2014, also under the BEPS context, a domestic provision was included as procedural
requirement for purposes of applying treaty benefits. Under such provision, Mexican tax
authorities may request a sworn oath signed by the legal representative of the foreign related
party stating that the income subject to tax in Mexico to which the treaty benefit is being
sought, is also subject to tax in the state of residence. Some exceptions were introduced
thereafter through administrative rules, in terms of which such sworn statement is not
required in the case of income not taxed in the state of residence due to participation
exemption provisions, countries with territorial taxations systems or income exempt under
a treaty mechanism for avoiding double taxation.
For pre-MLI treaties, depending on the pre-amble, in cases were the participation
exemption applies, since it is just a mechanism to avoid double taxation as a credit would
be, we are of the view that Mexico should respect such benefits. However, once some of
these treaties are modified by the MLI this will definitely change. Regarding cases such as
Argentina, Guatemala, Philippines and Spain, since the preamble already makes reference
that the benefits should not result in non-taxation, Mexican tax authorities could deny
benefits based on the fact that non-taxation would occur which is not consistent with the
intent of the contracting states as expressed in the preamble. Moreover, in the case of Spain
the preamble states that the purpose is not to give rise to opportunities for non-taxation or
reduced taxation through tax evasion or elusion (including arrangements for the abusive
use of the treaties allowing residents of a third country to indirectly take advantage of the
benefits granted under such treaty).
Typically, treaties executed by Mexico exclude as residents the persons whom are only
subject to tax over income obtained from sources located in the country of residence. However,
526
Mexico has treaties executed with several territorial taxation systems, such as Costa Rica,
Guatemala, and Panama; thus, in such cases we are of the view that companies residing in
such partner jurisdictions should be considered “residents” pursuant to the relevant treaties,
which is consistent with the Commentaries to the OECD Model Convention.
To the best of our knowledge, except for Spain, none of the pre-MLI treaties include
provisions denying benefits when the resident company in the partner country is used
primarily to satisfy claims by non-residents who have a substantial interest in the company
and/or exercise control over the same.
The treaties with Argentina, Guatemala, Philippines and Spain, include a PPT provision.
Under some treaties in order for dividend income to be exempt or subject to a reduced
withholding tax rate in the source country, there are some minimum participation
requirements that have to be met by the recipient, i.e. typically 10% or more of the voting
stock of the Mexican resident paying company, such is the case with Panama and Switzerland,
amongst other partners. In some other cases, provided the recipient is the effective
beneficiary, and if a predetermined participation threshold is met, a lower rate or exemption
will apply and if not, just a lower rate would apply, such is the case in the treaties executed
with Australia, Austria, Germany, Belgium, Canada, France, Italy, Lithuania, Luxembourg,
Singapore, United Kingdom, United States, amongst others.
To the best of our knowledge none of the pre-MLI treaties has a minimum holding period
requirement as the one provided for under article 8 of the MLI (i.e. 365 days). Based on the
theory that treaties restrict the scope of taxing powers by a state, we are of the view that
Mexican domestic legislation should be modified in order to be consistent with the thresholds
established by the MLI to avoid unnecessary litigation in the future. The foregoing being the
case that in fact although the minimum holding period could be claimed to be a procedural
requirement under any given CTA, it also may be viewed as a requirement established by
the treaty that is not provided for under domestic law, which could be badly viewed by the
relevant Mexican courts.
In the case of real-property located in Mexico, save for the case of the treaty executed with
Luxembourg, Mexico reserves the right to tax such capital gains, pursuant to its domestic
laws (i.e. 25% over the gross proceeds (general rule) or, alternatively, 35% over such gain),
provided certain procedural requirements are met.
In the case of real-property shares, Mexico reserves the right to tax direct and indirect
sales of such shares both in its domestic law and in the majority of the treaties in force.
Indirect sales are not taxable when the owner of the intermediate company is a Luxembourg
entity, provided procedural requirements under both the treaty and domestic law are met,
and in some cases as with the Netherlands, when the shares are publicly traded the same
are excluded from source taxation.
Neither in domestic legislation, nor in any of the treaties currently in force has Mexico
established a mechanism which clearly states the mechanics to value real-property shares
(i.e. fair market value vs. book value), nor has it included an anti-abuse provision similar to
the de minimis period established pursuant to article 9 of the MLI.
Currently Mexico has no “triangular provision” in its domestic laws, nor in its DTT’s. We
will make reference to this scenario when referring to article 10 of the MLI herein below.
In connection with PE’s through commissioners and similar arrangements, Mexico has
stringent provisions in its domestic law which, amongst other scenarios, give rise to a PE
when an agent is deemed a dependent agent; however, such rules are loosened in some of
the existing treaties, such as the case of the DTT with Luxembourg. The 2020 Tax Bill broadens
the scope of the PE provision in order to align domestic law with changes included in the MLI.
527
Mexico
Under the 2020 Bill the PE concept is broadened to include the dependent agent scenario
when a person concludes agreements or carries out a role that leads to the conclusion of
agreements executed by the foreign resident, when: (i) such agreements are executed in
the name or on behalf of the foreign resident; (ii) include the sale of property rights, lease of
goods possessed by the foreign resident or over which it has rights to use; or (iii) bind such
foreign resident to render a service.
Moreover, an independent agent will be deemed a dependent agent when the same acts
exclusively or almost exclusively on behalf of the foreign resident related parties.
Some exceptions continue to apply for activities of a preparatory nature. However, they
should not apply in the case of an artificial breakdown of activities just to avoid a permanent
establishment.
As mentioned above, Mexico was a pioneer country by adopting certain BEPS
recommendations in its domestic legislation since 1 January 2014, particularly in the form of
disallowing the deduction of interest or royalty payments made to a foreign entity controlled
by or controlling the Mexican resident payor, when such entity is transparent (with some
exceptions) or when the payment is deemed non-existent abroad or not taxable abroad.
Those provisions are extended in the 2020 Tax Bill.
The vast majority of DTT’s executed by Mexico include a mutual agreement procedure
mechanism.
It is worth mentioning that none of the DTT’s executed by Mexico establish a mandatory
binding arbitration framework. Presumably due to sovereignty issues, Mexico has been
reluctant to accept binding arbitration in its tax treaties.
Mexico signed the MLI on 7 June 2017, listing a total of 61 DTT’s as CTA’s, including the
agreements executed with Argentina, Philippines and Spain, which are already compliant
with the MLI’s minimum standards. Although listed, the DTT’s with Costa Rica and Guatemala
were not yet in force when Mexico signed the MLI.7
To the best of our knowledge, there has not been an assessment of the impact of the MLI
on tax compliance, administration, nor economic activity, at least, which has been made
available to the public. Moreover, neither Congress, nor any other Mexican governmental or
private institution has made any calculations regarding the budgetary and economic impact
of the MLI.
Nevertheless, as mentioned before, both tax bills filed by the Mexican President before
Congress and including some of the BEPS initiatives in 2014 and 2020, did make reference
to the BEPS Action Plan. The Mexican tax authorities also informally use BEPS reports in
order to challenge positions taken by taxpayers that are considered as unacceptable under
the BEPS Action Plan.
7
DTT executed with Costa Rica will be applicable as of 1 January 2020, and the DTT executed with Guatemala has
only been ratified by Mexico.
528
The MLI was signed in 2017 but has not entered into force. As any other international
convention, the Mexican Senate shall ratify the MLI. There is no indication on the timing for
ratifying the MLI, but this is expected to take place in 2020.
As previously mentioned, Mexico included all of the executed DTT’s as CTA’s, including some
that are still not in force (i.e. Guatemala). However, not all treaty partners signed the MLI or
listed Mexico as covered by the MLI.
Initially, out of the 61 DTT’s included by Mexico, only 44 were considered as CTA’s due to the
inclusion by the treaty partner (i.e. 72% of the DTT’s). Since the signing ceremony of the MLI,
other countries have included Mexico as covered by the MLI. The last one was Switzerland,
which upon ratification of the MLI on 29 August 2019, included Mexico as covered by such
convention. Therefore, the number of CTA’s has been increased to 54 (i.e. 88.5% of the DTT’s).
In the case of other countries such as Brazil and the United States, such countries did not sign
the MLI; however, for instance the DTT with the United States already includes LOB provisions
in order to prevent granting treaty benefits in inappropriate circumstances.
In the following chart we are providing a list of all DTT’s included by Mexico, and those
which cannot be regarded as CTA’s due to different circumstances.
CTA CTA after signing Listed by Mexico

the MLI but not CTA
Argentina Japan Barbados Bahrein
Australia Rep. of Korea Estonia Brazil
Austria Kuwait Jamaica Ecuador
Belgium Latvia Panama Philippines
Canada Lithuania Peru Guatemala
Chile Luxembourg Qatar Indonesia
People’s Rep. of Malta Saudi Arabia United States
China
Colombia New Zealand Switzerland
Costa Rica Norway Ukraine
Czech Republic Poland United Arab
Emirates
Denmark Portugal
Finland Romania
France Russia
Germany Singapore
529
Mexico
CTA CTA after signing Listed by Mexico

the MLI but not CTA
Greece Slovak Republic
Hong Kong South Africa
Hungary Spain
Iceland Sweden
India Netherlands
Ireland Turkey
Israel United Kingdom
Italy Uruguay
Mexico opted to include language in the preamble regarding the further development of
economic relationships and enhancing cooperation in tax matters as provided for in article
6(3) of the MLI.
Mexico decided to include in the preamble to CTA’s the MLI’s express statement that the
intention of the parties is to eliminate double taxation without creating opportunities for
non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-
shopping arrangements aimed at obtaining reliefs provided in the CTA’s for the indirect
benefit of residents of third jurisdictions). Mexico reserved the right for article 6(1) not to
apply to CTA’s with Argentina, Guatemala, Philippines and Spain, since such DTT’s contain
preamble language that is within the scope of this reservation.
In addition, to address treaty abuse, Mexico elected to supplement the PPT with a
Simplified Limitations on Benefits Provision (“LOB”) in terms of meeting the minimum
standard of Action 6. However, most of Mexico’s treaty partners did not elect to apply the
simplified LOB provision and as such, the PPT rule (without the simplified LOB) would apply
as the default position. Canada for example elected the PPT as an interim measure with the
intention to negotiate a LOB provision in its CTA with Mexico in the future.
It is important to note that the MLI allows the possibility for countries to apply the
LOB provision asymmetrically and allows countries that prefer the LOB provision to make
a reservation to the entire article (if treaty counterparties do not allow the application of
the simplified LOB), forcing bilateral negotiation outside of the MLI. Mexico did not make
either of these types of elections or reservations and as such, has agreed to the PPT in all
instances.
As a general rule, therefore, most countries signing the MLI opted for the default provision
of the PPT. However, various countries in Latin America including Argentina, Chile, Colombia,
and Uruguay joined Mexico in opting for the simplified LOB provision along with the PPT.
Mexico has notified that 37 DTT’s contain a provision regarding a minimum holding
period for granting treaty benefits to dividend income (article 8(1)) that is not subject to
a reservation described in article 8(3)(b). Therefore, if the respective countries so elect and
a match occurs, the applicable requirements have to be met at least 365 days prior to the
530
payment of any dividends in order for the recipient to be enabled to claim treaty benefits in
connection with such income.
In the case of property shares pursuant to Mexico’s domestic law there is no catch-up time
period as suggested in article 9 of the MLI, nor is there a provision clearly establishing the
value to be taken into consideration (i.e. fair market value vs. book value).
We are of the view that book value should be the one taken into consideration; and,
only when such shares at the time of sale/transfer, directly or indirectly, derive more than
50% of their value from underlying real property located in Mexico should such shares be
considered real property shares (i.e. domestic law does not require to look back in time and
make a different determination). However, Mexico has listed 56 treaties that it deems to have
a provision similar to the one in article 9(1) of the MLI.
Based on such list, if there is a match a look-back test (365 days) would be applied in
respect of those shares in order to determine if the same fall within the scope of real property
shares irrespective of the fact that the same are not real property shares at the moment such
alienation takes place, in order to address strategies designed to dilute the equity proportion
of immovable property during a certain period of time prior to the sale of the shares.
It seems that the best scenario for the Mexican Congress would be to include such a look
back test in the Mexican tax statute because, if treaties restrict the taxing powers of a state it
seems that in this scenario under domestic law the shares would not be deemed real property
shares but no treaty benefits could be claimed due to the look-back test. It may be argued
that meeting the test during the 365 day period is a procedural requirement and therefore
if the same is not met as of the date of a sale or transfer, no treaty benefits may be claimed;
however it has to be noted that the more stringent requirement would become applicable
pursuant to the treaties modified by the MLI and not domestic law which seems to give rise
to some sort of infirmity.
Article 10 contains the anti-abuse rule for PE situated in third jurisdictions, the so-called
“triangular provision”. The article provides that treaty benefits will be denied if an item of
income (obtained in the source state) derived by a resident of the other contracting state
(residence state) and attributable to a PE in a third jurisdiction, is exempt from tax in the
residence state and the tax in the PE jurisdiction is less than 60% of the tax that would be
imposed in the residence state if the PE were located there. The article makes an exception
for cases where the income is derived in connection to or incidental to an active trade or
business carried out through the PE and allows discretionary relief to be requested when
treaty benefits are denied under this article.
Mexico decided to apply article 10 of the MLI (i.e. no reservations or specific notifications
were made) in connection with this provision which is consistent with the fact that the tax
treaties executed by Mexico do not have this type of anti-abuse provision.
In connection with the artificial avoidance of a PE through commissionaire arrangements
and similar arrangements, article 12 of the MLI broadens the concept of “dependent agent”
in order to include cases where a person is acting in a contracting jurisdiction on behalf
of an enterprise when such person habitually concludes contracts or habitually exercises
the principal role leading to the conclusion of such contracts when the same are routinely
concluded without any material modification by the enterprise, provided some exceptions
apply, particularly pursuant to paragraph 2 of article 12 of the MLI, were an independent
agent acts in the ordinary course of business for the enterprise, the previous restrictions
should not apply, provided that if such agent acts exclusively or almost exclusively on behalf
of an enterprise to which it is “closely related” the agent shall not be deemed independent.
Provisions in this sense are already included in the 2020 Tax Bill.
531
Mexico
Mexico did not make any reservation to article 12 of the MLI; thus, the same shall apply
to treaties that already contain a similar provision when the relevant treaty partners make
the same election, such is the case with France, Japan, Netherlands and Spain.
Regarding the artificial avoidance of PE status through specific activity exemptions,
Mexico elected option A of article 13 of the MLI, pursuant to which the term PE excludes (i)
activities previously excluded in a CTA, whether or not such exemption is contingent on the
activity being of a preparatory or auxiliary character, (ii) the maintenance of a fixed place of
business solely for the purposes of carrying on for the enterprise an activity not described as
excepted, (iii) the maintenance of a fixed place of business solely for a combination of the
activities herein previously described, provided such activity or in the case of (iii) the overall
activity is of a preparatory or auxiliary nature.
Paragraph 4 of article 13 of the MLI, which contains the anti-fragmentation provision was
not the subject matter of any reservation by Mexico; thus, the same is included and will be
applicable with countries that opted for its application such as Belgium, France, Ireland, Italy,
Japan, Netherlands, Spain and the United Kingdom.
2020 Tax Bill proposes changes to the PE provision in order to align treaty provisions
derived from the MLI with domestic provisions.
Regarding hybrid mismatches in the case of transparent entities, Mexico initially made no
reservation to article 3 of the MLI; thus, the same should have been applicable, which would
actually have been a beneficial rule which would have extended the range of application of a
relevant treaty to transparent entities or partnerships that otherwise would not be enabled
to claim treaty benefits since they are not regarded as a “person” from a Mexican domestic
law perspective. Some of the partner jurisdictions adopting this provision include Belgium,
Ireland, Japan, Luxembourg, Netherlands, Spain and the United Kingdom.
Notwithstanding the above, it has to be noted that the 2020 Tax Bill proposes rules
regarding transparent entities which in principle take a different approach than the MLI.
Transparent entities i.e. LLC’s (legal personality) and transparent figures i.e. Canadian LP’s
and Trusts (no legal personality) will be deemed as opaque for Mexican tax purposes since we
have been informally notified that Mexico changed its initial position with respect to article
3 of the MLI. Apparently, this change is the reason behind the MLI not yet being ratified by
the Senate.
Moreover, if such entities or figures are effectively managed in Mexico, they will be
deemed Mexican resident taxpayers (this is not new in our opinion with respect to entities,
but it is clearly stated for the first time).
Several questions arise under the domestic provisions proposed by the 2020 Tax Bill i.e.
if a contribution is made by a Mexican resident taxpayer to an LP or Trust will it be treated as
a sale/transfer for tax purposes? We believe this should not be the case. Which withholding
rate will be applicable to Mexican sourced income, the regular rate or the penalty rate for
payments made to low tax jurisdictions? This is still uncertain at this point in time and it
may give rise to litigation if branches of Tax authorities lacking expertise in the international
taxation arena omit reference to the MLI in such cases.
Article 4 of the MLI modifies the rules for determining the tax residency for treaty
purposes of a person other than an individual when the same is a resident of more than one
contracting jurisdiction, the residency of such dual resident entity will be determined by
a mutual agreement procedure having regard to place of effective management, place of
incorporation and other relevant factors. Mexico made no reservations with respect to dual
resident entities; thus, the mutual agreement procedure will be required to determine the
residency of such entities when the other relevant partner jurisdiction took the same position.
532
As the reader is probably aware, if an agreement is not reached by the treaty partners the dual
resident entity will not be entitled to claim treaty benefits, which may give leeway to Mexican
tax authorities in the sense that they may have an incentive not to reach an agreement
through such procedure.
Some of Mexico’s treaty partners, including, the PRC, Ireland, Japan, Netherlands and
the United Kingdom took the same position, and in recent treaties such as the DTT’s with
Panama, Qatar and Malta, as well as in previously executed DTT’s, Mexico already included
this type of provision (before the implementation of the BEPS Action Plan).
At this moment Mexico has not opted for mandatory binding arbitration between
contracting states. It seems unlikely that Mexico will do so.
As the reader may already be aware, Mexico practically adopted the entirety of the anti-
abuse provisions of the MLI; thus, we do not foresee Mexico changing its position in the near
future i.e. no reversal of the initial positions.
Regarding the reservations made by Mexico in connection with article 4 of the MLI, it
reserved the right for the entirety of such article not to apply to its CTA’s that already address
cases of dual resident entities by denying treaty benefits without requiring the competent
authorities of the contracting jurisdictions to endeavor to reach mutual agreement on a
single contracting jurisdiction of residence; this is the case of the treaties with Indonesia
and the United States.
Moreover, Mexico reserved the right for the entirety of article 4 of the MLI no to apply
to CTA’s that already address cases where a person other than an individual is a resident of
more than one contracting jurisdiction by requiring the relevant authorities to endeavor to
reach a mutual agreement on a single jurisdiction of residence, and establish the treatment
of such person when such agreement can´t be reached. This is the case of the treaties with
Argentina, Austria, Barbados, Brazil, Canada, Chile, Colombia, Czech Republic, Denmark,
Germany, Hong Kong, Hungary, Iceland, Latvia, Lithuania, Malta, Netherlands, Panama, Peru,
Qatar, Russia, Slovakia, South Africa, Switzerland, Turkey and Uruguay.
Regarding the preamble language, Mexico reserved the right for paragraph 1 of article
6 not to apply to its CTA’s that already contain preamble language describing the intent
to eliminate double taxation without creating opportunities for non-taxation or reduced
taxation. This is the case of the DTT’s executed with Argentina, Guatemala, Philippines and
Spain. Save for the treaty with Guatemala (which is under ratification process), the remainder
of the treaties previously mentioned are recently in full force (i.e. after signing the MLI).
In connection with the prevention of treaty abuse, Mexico reserved the right for paragraph
1 of article 7 not to apply to its CTA’s that already contain provisions denying all of the benefits
that would otherwise be provided under such agreements where the principal purpose of any
arrangement or transaction, or of any person concerned with an arrangement or transaction.
was to obtain such benefits. That is the case of the treaties with Argentina, Philippines and
Spain.
Regarding the Simplified Limitation on Benefits Provision, Mexico reserved the right
for the same not to apply to its CTA’s with Argentina, Barbados, the PRC, Colombia, Costa
Rica, Guatemala, India, Israel, Jamaica, Kuwait, Panama, South Africa, Ukraine, United Arab
Emirates and the United States.
Although the United States are not a party to the MLI, Mexico made a reservation
regarding the application of tax agreements to restrict a party’s right to tax its own residents
for the entirety of article 11 not to apply in connection with the treaty with the United States.
Regarding the splitting-up of contracts Mexico reserved the right for the entirety of article
14 not to apply to its CTA’s.
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Mexico
Regarding the Mutual Agreement Procedure, Mexico reserved the right for the second
sentence of paragraph 2 of article 26 not to apply to its CTA’s on the basis that for the purposes
of the same it intends to meet the minimum standard for improving dispute resolution under
the OECD/G20 BEPS package by accepting in its bilateral treaty negotiations a provision in
the following manner:
(i) the contracting jurisdictions shall make no adjustment to profits attributable to a PE of an
enterprise of one of such jurisdictions after a period that is mutually agreed to between
both contracting jurisdictions from the end of the taxable year in which the profits would
have been attributable to the PE, such provision not to apply in the case of fraud, gross
negligence or willful default; and,
(ii) the contracting jurisdictions shall not include in the profits of an enterprise, and tax
accordingly, profits that would have accrued to the enterprise but that by reason of the
conditions referred to in a provision in such agreement relating to associated enterprise,
have not so accrued after a period that is mutually agreed between both contracting
jurisdictions from the end of the taxable year in which the profits would have accrued to
the enterprise, such provision should not apply in the case of fraud, gross negligence or
willful default.
In connection with the provision of corresponding (transfer pricing) adjustments set forth in
article 17 of the MLI, Mexico reserved the right for such provision not to apply to the majority
of its CTA’s (i.e. 46 of such agreements) including, amongst others, the treaties with Australia,
Canada, Chile, Denmark, Finland, Germany, India, Ireland, Israel, Japan, Luxembourg,
Netherlands, New Zealand, Peru, Russia, Saudi Arabia, Spain, Sweden, and the United States.
To the best of our knowledge there are no technical official explanations of the reasons
behind Mexico’s reservations described above.
Even though at the moment this report is written, the MLI has not entered into force, in the
negotiations of the most recent treaties such as with Spain, Mexico already has been including
a preamble practically identical to the one used in the MLI. Moreover, Mexico has been taking
the position that benefits under such treaties should not apply when the principal purpose
or one of the main reasons of setting up a type of structure was to obtain benefits granted
under the same (i.e. treaty shopping). It is expected that in future negotiations Mexico will
include BEPS provisions.
Also, it is important to point out that Mexico has included some BEPS provisions in current
domestic legislation, even before the respective reports were published (i.e. anti-hybrid
mismatch rules under Action 2). Further measures may likely be adopted in domestic law as
proposed in the 2020 Tax Bill, as referred above in section 1.2.1.
Furthermore, the approach of the Mexican tax authorities towards tax planning is highly
supported by BEPS. This is starting to change the discussions between taxpayers and tax
administration and eventually is giving rise to some isolated cases based on more substance
than formalities. This is noteworthy in civil law countries such as Mexico, with a long tradition
in rule of law. The GAAR introduced in the 2020 Tax Bill will likely give rise to many discussions
between taxpayers and tax authorities.
534
Under Mexican constitutional law the executive branch is entrusted with the power to
negotiate treaties such as the MLI. In order for such treaties to become applicable law, such
instruments have to be ratified afterwards by the Mexican Senate and published in the
Federal Official Gazette. Typically, the Senate will take at face value the relevant instrument
as negotiated by the executive branch, in this case through the Treaty Negotiations Direction
of the Ministry of Finance and Public Credit.
As of today, the MLI has not been approved by the Senate, nor has the same been
published. Moreover, in recent years the Tax Administration Service has incorporated
the practice of publishing consolidated versions of tax treaties when the same have been
modified by protocols. However, due to the change of the political party in power, we are not
positive that this desirable practice will continue in place.
To our knowledge no private publishers have made a synthetized version of the
consolidated tax treaties available to the public. However, it is likely that this will happen
once the MLI is ratified by the Senate.
Be advised that should the Tax Administration Service issue a consolidated version of the
treaties, the same is only for informative purposes i.e. should the same have some infirmities
the same could not be claimed by a taxpayer in case of an audit or an assessment.
Should there be no consolidated versions of the CTA’s, the “MLI matching Database”
published by the OECD could be used as a supplemental means of proof that a certain
position is correct under the MLI. However, the publication would not be law, just additional
proof (i.e. it lacks legal value).
Once approved the MLI will be hierarchically superior to both Federal and Local laws but
always subordinate to the Federal Constitution. Thus, as a way of law in Mexico there is no
treaty-override; both the MLI and other laws will form part of the Mexican legal regime, i.e.
Mexico follows a monist theory regarding international law.
Taking into account that the MLI has not yet been approved by the Senate, it is difficult to
point out specific interpretation issues raised by the Mexican government or courts at this
time, as there have been no cases regarding the provisions of such instrument.
Although there is no clear provision in the Federal Constitution, the MLI will be published
in Spanish as is custom, and such translation will be the instrument applicable in Mexico.
Thus, if an error occurs in the translation benefiting the taxpayers, such error is likely to be
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Mexico
held by a court of law. However, based on article 33 of the Vienna Convention on the Law
of Treaties (the “Vienna Convention”) we are of the view that in case of conflict between
Mexico and any of its partner jurisdictions, the same should be resolved based on the official
versions (i.e. English or French), since that is what the contracting jurisdictions agreed upon.
Of course, based on paragraph 2 of article 33 of the Vienna Convention should the contracting
jurisdictions accept another language, the same would be authentic. However, since this is a
multilateral instrument, the question arises if such language should be accepted by all parties
to the MLI or just between Mexico and a particular contracting jurisdiction.
Additionally, a situation arises since the majority of CTA’s are originally in languages
other than English and French, therefore taxpayers and authorities will have to use several
languages to interpret a CTA which seems at the very least odd. As a way of example, for the
treaty executed with Italy the official languages are Spanish and Italian. However, the same
will be amended considering the MLI which official languages are English and French, and
moreover Mexican taxpayers will typically read the version published in the Federal Official
Gazette which will be in Spanish.
To the extent the contracting jurisdictions accepted the reports issued by the OECD regarding
BEPS as an instrument related to the treaty in connection with the execution of the MLI, such
reports would be applicable pursuant to paragraph 2, subparagraph b) of article 31 of the
Vienna Convention, as part of the context for the interpretation of the MLI. Even though, to
our understanding this is not the case, both Mexican tax authorities and courts would typically
take into account the same as additional means of interpretation of any obscure provisions
of the MLI, pursuant to article 32 of the Vienna Convention which states that recourse may
be had to supplementary means of interpretation, including the preparatory work of the
treaty i.e. reports and the circumstances of its conclusion, in order to confirm the meaning
resulting from article 31 or to determine the same when the interpretation according to such
article leaves the meaning ambiguous or obscure or leads to an absurd or unreasonable result.
Although the BEPS reports should be deemed supplementary means of interpretation
under the Vienna Convention, in our opinion such reports do not have the same legal weight as
the OECD Commentaries. This is based on the fact that the applicability of the Commentaries
as a means of interpretation of treaties has been previously upheld by Mexican courts, and
on the fact that currently there is an administrative resolution establishing that taxpayers
and tax authorities should take the OECD Commentaries in consideration when interpreting
the provisions of a tax treaty. Nevertheless, it is likely that in the future, once the MLI is in full
force and effect, the Mexican Tax Administration Service will issue a rule in the same sense
regarding the BEPS reports and the MLI.
Mexico takes a dynamic interpretation of terms not defined in treaties unless the context
otherwise requires; in our view this approach will not change as a consequence of the entry
into force of the MLI.
CTA’s, in full force and effect, prior to the MLI entering into force in Mexico would be amended
by such instrument as of the date of its entry into force.
536
Should the preamble be applied retroactively to a situation that arose before the CTA
was amended by the MLI in prejudice of a taxpayer, we are of the view that the same may
claim that such application infringes the no retroactive application of laws principle provided
by the Federal Constitution. Such claim is likely to be confirmed by a Mexican court of law.
Take note that this in no way is a treaty override; it just confirms that treaties are subject to
individual rights and other provisions of the Federal Constitution since they are part of the
Mexican monist system.
Mexican tax professionals better not take the PPT lightly when performing international
tax planning activities, since the Mexican tax authorities will have leeway in determining
if “one of the main purposes” in carrying out a particular transaction or setting it up in a
certain manner, was to get a benefit under a CTA, moreover if the 2020 Tax Bill passes as
approved there are some disclosure provisions which make reference to cases on which treaty
benefits are claimed.. This means that tax professionals will have to disclose when clients
claim treaty benefits under certain thresholds to be provided in the future by the Mexican
Tax Administration Service; failure to comply will result in a fine in excess of USD$1M to be
imposed.
This of course does not come without its challenges, for example if a seller of an offshore
company which is the holding of a Mexican subsidiary, sells the shares of the offshore holding
and the taxpayers involved in such structure were entitled to benefits under a CTA, but the
purchasers would not be if they implemented an identical structure, in principle if there are
sound business reasons for acquiring the shares of the offshore holding company and not
the Mexican holding company, the PPT should not impair the application of the relevant
CTA; however, this is a grey area where the Mexican tax authorities may have an incentive to
deny benefits under a CTA. Moreover, if the GAAR included in the 2020 Tax Bill is approved
as proposed, the Mexican tax authorities will have additional mechanisms i.e. domestic law
provisions to challenge this sort of transactions and the treaty benefits derived therefrom.
To our knowledge tax assessment practices regarding tax treaty shopping practices and
other potential treaty abuses have not changed significantly exclusively as a result of the
execution of the MLI. However, as mentioned, it has become standard practice for Mexican tax
authorities to make references to the BEPS Action Plan and request a valid business reason
when carrying audits and issuing assessments.8
At this time, it is impossible to state which internal procedures the Mexican tax authorities
will adopt to assess taxpayers under the PPT, i.e. will there be a special committee to review
this. However, if a transaction is a “reportable transaction” pursuant to the 2020 Tax Bill
proposed changes for the Federal Tax Code, the same will be assessed by a committee formed
by members of the Ministry of Credit and Public Finance and the Tax Administration Service.
The rules pursuant to which such committee will function, will be published in the future
so we are unable to make reference to the same. However, such committee will have an
eight-month period to review the “reportable transaction” which will be binding for the tax
professional, taxpayers and tax authorities. In lieu of an opinion being issued such “reportable
transaction” shall be deemed law compliant until there is a notification in a contrary sense.
8
The right to do so has even been recognized by the Federal Tax Court in a precedent dated November 2017.
537
Mexico
Be advised however, that any other Mexican tax authority could use the PPT’s of both the
DTT’s and domestic legislation if the 2020 Tax Bill is approved, when issuing an assessment
i.e. it is not an exclusive power of the above descried Committee.
We would expect that in the near future Mexico would take a more modern view regarding
binding arbitration for the resolution of tax disputes; however, this requires a change in what
appears to be a policy based on a sovereignty doctrine.
538
Netherlands
Branch reporters
David Tiesinga1
Erisa Nuku2

The impact of the BEPS Action Plan on the Dutch treaty network is largely the result of the MLI,
which entered into force for the Netherlands on 1 July 2019. As of that time, the Netherlands
had listed 81 of its 96 treaties as potential covered tax agreements (CTAs) under the MLI.
Relevant background for assessing the impact on the treaty network is the monistic legal
system of the Netherlands according to which treaties take precedence over conflicting
domestic law. The Dutch Supreme Court has traditionally been reluctant to apply the
domestic anti-abuse doctrine of fraus legis (an ultimum remedium) to treaty situations. In
relevant cases, the Supreme Court has attached importance to the text of the treaty provision
and assessed whether the application of this domestic doctrine is supported by a shared
intention of the contracting states as expressed in the text of the treaty or the explanatory
notes of both contracting states. Absence of taxation was not considered a violation of the
object and purpose of the treaty, if this was not supported by the treaty text or the explanatory
notes of both contracting states. The Supreme Court has also denied treaty benefits in some
abusive cases where it was not clear whether the Supreme Court applied fraus legis/fraus
conventionis or a qualification method such as ‘substance over form’; most of these cases
concerned ‘last minute tax planning’.
In the past, the Dutch treaty policy focused on exchange of information, mutual assistance
in recovery and an arm’s length profit attribution, whereas (specific) anti-abuse rules gained
policy attention in later years.
Before the BEPS Reports, the Dutch treaty network contained several anti-abuse rules,
such as main purpose tests, LOBs, provisions for low-taxed PEs, hybrid entity rules and
anti-splitting rules. A (negative) definition of the beneficial ownership concept was also
introduced in Dutch domestic law. Dutch treaties are moreover aligned with the OECD MC
beneficial ownership concept. All treaties contain mutual agreement procedures (MAPs) for
dispute resolution and arbitration clauses have been part of Dutch treaty policy for decades.
The government has endorsed the BEPS Action Plan and intends to implement almost
all of the proposed BEPS provisions in all Dutch tax treaties, mostly through the MLI. Four
considerations were noted in this regard. First, combatting tax avoidance is a policy priority
of the government; the MLI was described as an instrument to prevent inappropriate use
of the treaty network by better aligning treaty application with economic reality. Second,
measures against international tax avoidance are considered particularly meaningful if they
are coordinated at an international level. Third, the MLI corresponds with the government’s
efforts to implement anti-abuse rules in Dutch tax treaties with developing countries.
1
Senior international tax policy advisor at the Dutch Ministry of Finance.
2
Associate in the tax department of Freshfields Bruckhaus Deringer in Amsterdam.
IFA © 2020 539

Netherlands
Fourth, the government supports more effective dispute resolution mechanisms, especially
by mandatory and binding arbitration.
The government proposed for 87 (91%) of the Dutch treaty partners implementation
of BEPS provisions, mostly by the MLI; for treaties under renegotiation, the government
proposed for pragmatic reasons a bilateral implementation. As of 1 October 2019, these
efforts resulted in agreed BEPS provisions for two-thirds of the Dutch treaty network.
The impact of the BEPS provisions as of 1 October 2019 mainly concerns the BEPS minimum
standards of BEPS Action 6 (treaty abuse) and BEPS Action 14 (dispute resolution); for two-
thirds of the treaty network implementation of a PPT and the new preamble language was
agreed and the start of a MAP in either contracting jurisdiction was agreed for more than
40% of the treaty network. The other BEPS provisions have a more limited effect, mostly
because BEPS provisions endorsed by the Netherlands were not chosen by treaty partners
under the MLI. The impact of the BEPS Action Plan on possibilities against treaty abuse and
to improve dispute resolution is stronger when existing treaty provisions are taken into
account; provisions against treaty abuse and tax avoidance were agreed for more than 75%
of the Dutch treaty network (by PPTs, main purpose tests, LOBs and treaty provisions on the
application of domestic anti-abuse rules); for more than 45% of the treaty network a provision
was agreed on the treaty application in cases of hybrid entities; for 40% of the treaties a MAP
tiebreaker was agreed and mandatory and binding arbitration has been agreed for more than
30% of the treaties, while in total 55% contain a form of arbitration.
The BEPS Action Plan has also had an impact on bilateral negotiations. The Netherlands
has agreed on at least the BEPS minimum standards in the eight most recently agreed
amending protocols/treaties. Before the BEPS Reports, the Netherlands had already
approached 23 developing countries in order to implement provisions against treaty abuse.
The Dutch parliament approved the Dutch MLI position unanimously, although a majority
voted for a reservation not to apply the provision concerning commissionaire arrangements.
The government expressed its intention to publish the consequences of this MLI position for
Dutch tax treaties, although this is not obligatory.
The MLI will prevail over conflicting domestic law in the monistic Dutch legal system.
There is however no jurisprudence yet on interpretation issues concerning the MLI.
The impact of the PPT on tax planning has led to more risk assessments and an increased
importance of (transfer pricing) documentation. Taxpayers are being advised that the
relevant substance of entities in the Netherlands must be commensurate to the activities
performed in the Netherlands. Procedures for the PPT application by the tax authorities are
not published, although a new ruling policy on inter alia PPT application was published; in
cases of a lack of sufficient nexus with the Netherlands, avoidance of Dutch or foreign tax or
transactions with low-taxed or non-cooperative jurisdictions, ruling requests will be denied.
Finally, according to the BEPS Action 14 peer review report (Stage 2), Dutch efforts to
implement BEPS Action 14 minimum standards have had a positive impact on dispute
resolution.
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Tiesinga & Nuku
Treaty Network
1.1. Introduction
Part One provides a detailed overview of the direct and indirect impact of the BEPS Action
Plan on the tax treaty network of the Netherlands, largely as a result of the MLI. Section 1.2
outlines the tax treaty network as of the date of signing the MLI and provides an overview
of domestic and treaty-based anti-avoidance doctrines, provisions and practices. Section 1.3
details the direct impact of the BEPS Action Plan and the MLI on the tax treaty network of the
Netherlands as of 1 October 2019. Section 1.4 reviews the indirect impact of the BEPS Action
Plan and of the MLI on the negotiation of bilateral tax treaties.
The Netherlands signed the MLI on 7 June 2017. On that date, the tax treaty network consisted
of 91 treaties for the avoidance of double taxation with respect to taxes on income (and
capital) covering 90 jurisdictions,3 and four tax arrangements4 (Table 1). The treaties listed
as (potential) covered tax agreements (CTAs) under the MLI concern 81 treaty partners (Table
1, white fill). Thirteen tax treaties/arrangements were deemed to fall outside the scope of
the MLI (Table 1, grey fill).
Most Dutch tax treaties generally follow the OECD Model Convention (MC). However, several
treaties with developing countries contain characteristics of the UN Model Convention (MC),
particularly regarding permanent establishment provisions. All treaties contain deviations
from both the OECD and the UN MC based on the treaty policies of both treaty partners. For
the impact of the BEPS Action Plan relevant deviations concern:
–– treaty-based anti-abuse provisions, especially limitation-on-benefit provisions (LOBs)
and main purpose tests (MPTs);
–– treaty application in cases of transparent entities;5
–– anti-splitting rules concerning offshore activities;
–– the absence of, or limitation to, source state taxation for capital gains concerning shares
deriving their value principally from immovable property;
3
Two treaties were concluded with Zambia. The new treaty with Zambia, and the treaties with Kenya and
Malawi, had not yet entered into force on 7 June 2019. Treaties applicable after state succession are presented
as (different) treaties of the jurisdictions that apply the treaty.
4
These tax arrangements are similar to tax treaties; three are governed by domestic law because they concern
other parts of the Kingdom (Aruba, Curaçao, and Sint Maarten); one is a unilateral tax arrangement with Chinese
Taipei (of which the content is reciprocally applied).
5
Based on the Dutch observation in para. 27.1 to the OECD Commentary on art. 1 of the OECD MC as read prior to
the 2017-update.
541
Netherlands
–– application of the credit method instead of the exemption method for low-taxed
permanent establishments (PEs);
–– arbitration clauses (before they became part of the OECD MC).
These deviations from the OECD MC are explained in more detail in the following sections.
Table 1. Tax treaty network of the Netherlands as of 7 June 2017. White fill indicates
treaties that were listed by the Netherlands as (potentially) covered by the MLI; grey fill
indicates treaties deemed to fall outside of the MLI scope.
1. Albania 20. Curaçao* 39. Japan 58. Norway 77. Suriname
2. Argentina 21. Denmark 40. Jordan 59. Oman 78. Switzerland
3. Armenia 22. Egypt 41. Kazakhstan 60. Pakistan 79. Sweden
4. Aruba* 23. Estonia 42. Kenya 61. Panama 80. Tajikistan
5. Australia 24. Ethiopia 43. Republic of 62. Philippines
81. Chinese
Korea Taipei*
6. Austria 25. Finland 44. Kuwait 63. Poland 82. Thailand
7. Azerbaijan 26. France 45. Latvia 64. Portugal 83. Tunisia
8. Bahrain 27. Georgia 46. Lithuania 65. Qatar 84. Turkey
9. Bangladesh 28. Germany 47. Luxembourg 66. Romania 85. Uganda
10. Barbados 29. Ghana 48. Macedonia 67. Russia 86. Ukraine
11. Belarus 30. Greece 49. Malawi 68. Saudi Arabia 87. United Arab
Emirates
12. Belgium 31. Hong Kong 50. Malaysia 69. Serbia 88. United
Kingdom
13. Bulgaria 32. Hungary 51. Malta 70. Singapore 89. United
States
14. Bosnia and 33. Iceland 52. Mexico 71. Slovak 90. Uzbekistan
Herzegovina Republic
15. Brazil 34. India 53. Moldavia 72. Sint 91. Venezuela
Maarten*
16. Canada 35. Indonesia 54. Montenegro 73. Slovenia 92. Vietnam
17. People’s 36. Ireland 55. Morocco 74. South Africa 93. Zambia †
Republic of
China
18. Croatia 37. Israel 56. New 75. Spain 94. Zambia †
Zealand
19. Czech 38. Italy 57. Nigeria 76. Sri Lanka 95. Zimbabwe
Republic
* Tax arrangements
†
See footnote 3.
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Tiesinga & Nuku
Prior to the MLI, preambles to Dutch tax treaties have generally defined their purpose as
being twofold, namely to avoid double taxation and to prevent fiscal evasion.6 However,
some treaties that were concluded before a reference to the prevention of fiscal evasion or
avoidance of double taxation was included as a footnote to the title of the OECD MC on 23
July 1992, only contain a reference to the avoidance of double taxation.7 Recently concluded
treaties contain preamble language following the BEPS Action 6 minimum standard.8
In the Netherlands, treaties take precedence over conflicting domestic law provisions
as stipulated in article 94 of the Dutch constitution. The monistic nature of the Dutch legal
system (see section 2.1.1) is important in order to better understand the reasoning of the
Supreme Court in treaty cases.
Domestic anti-avoidance rules and doctrines
In Dutch tax law domestic general anti-avoidance rules and doctrines include the statutory
‘richtige heffing’ and the judicially developed fraus legis/fraus conventionis. These doctrines can
be distinguished from interpretation methods as the ‘sham transaction doctrine’ and ‘fiscal
qualification’.9 The richtige heffing has become obsolete due to the development of fraus legis
and will therefore not be discussed in this report.10
According to fraus legis, legal actions that would not have been undertaken (i.e. that have
no real practical significance) except to make the future levy of tax wholly or partly impossible
should be disregarded and for their effects, recharacterized into the closest fact pattern,
which enables taxation provided that the following conditions are cumulatively met:
1. tax avoidance is the predominant motive of the taxpayer in concluding the legal
transactions (subjective condition); and
2. the tax effects of the created situation are contrary to the object and purpose of the law
(objective condition).
Fraus legis serves as an ultimum remedium and should therefore only be applied if the ‘sham
transaction doctrine’ or an independent fiscal determination of the facts (fiscale kwalificatie)
has not resulted in an outcome that is consistent with the object and purpose of the law.11
The Supreme Court has been reluctant to apply fraus legis in treaty situations. This is best
illustrated by case BNB 1994/259 concerning a ‘cash-box structure’. Capital gains derived by a
US resident on the alienation of his Dutch shareholding could for the treaty application not be
recharacterized as dividends, as advocated by the State Secretary applying the domestic fraus
legis doctrine: neither the treaty text nor the explanatory notes revealed a mutual intention to
6
This was the case in 76/91 tax treaties concluded by the Netherlands.
7
Austria, Bosnia and Herzegovina, Hungary, Italy, Montenegro, Serbia, Spain and Tajikistan.
8
Algeria (Protocol), Denmark, Germany, Ghana, Iraq, Ireland, Ukraine, Uzbekistan and Switzerland.
9
See also Kok R. & Mosquera Valderrama I.J. (2018), The Netherlands. In: Rosenblatt P., Tron M. E. (red.) Anti-
avoidance measures of general nature and scope – GAAR and other rules. Cahiers de droit fiscal international, nr. 103(a):
SDU. 5-22.
10
Ibid, p. 7.
11
Ibid. See also R.L.H. IJzerman, the Netherlands (2002), Form and substance in tax law, Cahiers de droit Fiscal
International, nr. 87a, SDU, pp. 452 and 455.
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Netherlands
include – under the definition of dividends – income that was treated as dividends due to the
application of fraus legis under domestic law. The Supreme Court reached similar conclusions
in cases BNB 1994/294 (concerning fraus legis) and BNB 2007/36, 39, 40 and 42 that concerned
fraus conventionis (abuse of the treaty itself, instead of the application of the domestic fraus
legis doctrine in treaty cases).
In BNB 1990/45, however, the Supreme Court denied the application of the Tax
Arrangement for the Kingdom12 in the case of a Dutch Antilles company, which was
interposed between a Canadian parent company and a 100% held Dutch subsidiary and
which subsequently received dividends from this subsidiary13 because the interposition was
done solely to prevent the normal levy of dividend withholding tax under the Netherlands-
Canada tax treaty.14 In BNB 1994/252, the Supreme Court reached a similar conclusion. The
case concerned a Dutch entity that transferred its shares to a newly established Dutch
Antilles entity, partly as a capital contribution and partly as a sale. The entity subsequently
repurchased some shares on the same day, requesting that the purchase price be paid to the
selling shareholders free from dividend withholding tax based on the Tax Arrangement for
the Kingdom. The Dutch tax authorities concluded that the repurchase was done directly
from the two original shareholders instead of the Dutch Antilles entity and, therefore,
withholding tax was due. The Court of Appeal, whose decision was later confirmed by the
Supreme Court, noted that the Dutch Antilles entity was never the economic owner of the
shares and that its interposition had the sole aim of avoiding Dutch dividend withholding
tax. Arnold and Van Weeghel noted that this case is generally regarded as an application of
fraus legis. However, Wattel deems it possible that, as with BNB 1990/45, the court did not
apply fraus legis, but came to its decision based on an independent fiscal determination of
the facts (fiscale kwalificatie).15
In BNB 1994/253, a case with a fact pattern almost identical to BNB 1994/252, the
Supreme Court concluded the opposite stating that the mere circumstance that the shares
were contributed/sold for tax reasons was not contrary to the object and purpose of the Tax
Arrangement for the Kingdom or of the Dutch Dividend Tax Act. The different conclusion
reached in BNB 1994/252 (as opposed to BNB 1994/253) can be explained by the fact that
the latter case concerned a long-term interposition, which could not be denied (i.e. the Dutch
Antilles entity was interposed in April but a dividend distribution from the Dutch entity was
only done in December). The Supreme Court therefore so far seems to have taken the view
that a long-term interposition of an entity is possible even if the interposed entity is passive
and low-taxed.
The Supreme Court has been reluctant in allowing fraus legis to apply to treaty situations,
but, as Peters and Roelofsen highlighted, the Court denied treaty benefits in cases of evident
‘last-minute tax planning’.16 It is still debatable whether in the latter cases, the Supreme Court
applied the fraus legis doctrine or an independent fiscal determination of the facts.
12
The Tax Arrangement for the Kingdom established between the Netherlands and its overseas territories, prevents
double taxation in the same fashion as tax treaties.
13
The decision to distribute dividends from the Dutch subsidiary had been taken one month prior to the
interposition of the Dutch Antilles entity.
14
15
BNB 1994/252, note Wattel. See also Conclusion AG Wattel, 18 December 2001, ECLI:NL:PHR:2002:AD8510, pt.
4.8.
16
F. Peters and A. Roelofsen, the Netherlands, Tax treaties and tax avoidance: application of anti-avoidance provisions.
Cahiers de droit Fiscal International. International Fiscal Association, Volume 95A, SDU, 2010, p. 562.
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Tiesinga & Nuku
The case law is relevant background for the observation made by the Netherlands in the
OECD Commentary adopted in 2003,17 where the Netherlands noted that it did not adhere
to the statement that, as a general rule, domestic anti-avoidance rules and CFC provisions
do not conflict with tax treaty provisions.
Tax Treaty Policy
In 1987, the State Secretary took the position that the fraus legis doctrine should, in principle,
apply to treaty situations just as it does to domestic situations; under both scenarios, the
object and purpose of a rule may be disregarded when that rule is applied to a particular
fact pattern. However, he recognized that when it comes to domestic law, it is far easier for
courts to identify the object and purpose of a particular domestic rule as opposed to a treaty
provision, which is the result of negotiations and compromise between two jurisdictions.18
The remarks made by the State Secretary preceded the case law of the Supreme Court
discussed above.
The 1996 Memorandum on Tax Treaty Policy indicated that abusive situations could
generally be countered through existing domestic law provisions, while base erosion could
be tackled through the arm’s length principle. According to the State Secretary, exchange of
information, cross-border checks and the possibility of cross-border recovery of tax could
prevent tax avoidance and fraud; the Netherlands strived to increase cross-border exchange
of information through its tax treaties. However, depending on the facts and circumstances,
the State Secretary recognized that more specific anti-abuse provisions in tax treaties might
also be desirable.19
The 1998 Memorandum on Tax Treaty Policy paid specific attention to anti-abuse rules
in the context of tackling harmful tax competition; the Netherlands did not conclude any
tax treaties with tax havens and, where necessary, anti-abuse provisions were included if a
privileged “tax haven” regime would apply to certain items of income.
The 2011 Memorandum on Tax Treaty Policy laid more focus on anti-abuse provisions than
the preceding policy memoranda. It indicates that tax treaties concluded by the Netherlands
increasingly contain anti-abuse clauses, which generally fall into one of two categories:
person/entity-based (e.g. LOBs) or transaction-based provisions (e.g. MPTs).
In 2013, the government decided to approach 23 developing countries in order to include
anti-abuse provisions in their treaties with the Netherlands (see section 1.4).
In summary, in the past, exchange of information, mutual assistance and the arm’s length
principle were considered the most important cornerstones underpinning the Dutch tax
treaty policy on tax evasion and avoidance. However, in recent years prior to the BEPS project,
more attention was paid to treaty based anti-abuse rules.
17
This observation has been withdrawn in 2017.
18
Answers of the State Secretary of Finance to questions related to Kamerstukken II 1987/88, 20 365, No. 2
concerning the Dutch Tax Treaty Policy document of 1987.
19
Ibid.
545
Netherlands
Specific anti-avoidance doctrines
Since treaties prevail over conflicting domestic law in the Dutch monistic system, Dutch
domestic tax law does not contain anti-avoidance provisions specifically addressing treaty
abuse,20 aside from a negative definition of the term “beneficial owner”,21 which was included
in domestic law as of 2001 to counteract dividend stripping. The dividend stripping rule is
applicable if the actual recipient of the dividends is not considered the beneficial owner. Prior
to the introduction of the dividend stripping rules and until now, the Dutch Supreme Court
has taken a legalistic approach when interpreting the term “beneficial owner”.
The Netherlands also has various treaty-based anti-avoidance provisions.22 MPTs are an
important example of such provisions: 24 tax treaties have been listed by the Netherlands
under the MLI as already containing anti-avoidance provisions23 that will be replaced by the
PPT, while certain treaties/arrangements that are not listed contain a provision that explicitly
allows the application of domestic anti-avoidance rules.24 Of the 24 treaties, 12 treaties
include a separate paragraph within articles 10 (dividends), 11 (interest) or 12 (royalties),
generally stating that the exemption from withholding tax or the reduced rate contained
in either of those articles will only be granted provided that the relationship between the
company paying the income and the company receiving it has not been created or maintained
primarily for the purpose of enjoying the benefit of the exemption or reduced rate.25 In some
of these treaties, comparable terms to ‘primarily’ are used, such as, ‘principally’,26 ‘in the first
place’,27 ‘virtually only’,28 ‘mainly for the purpose’29 and ‘with the main objective’.30 Nine of the
24 treaties deny the granting of benefits if the main purpose or one of the main purposes
is to unduly take advantage of the treaty.31 One of the 24 treaties, namely the treaty with
Azerbaijan, refers to treaty benefits being denied if there are no ‘bona fide commercial
20
21
Note: the concept of beneficial ownership following the OECD MC is included in Dutch tax treaties.
22
Treaty based anti-avoidance provisions not relevant in the context of the BEPS Action Plan have not been
included.
23
Treaties/arrangements (e.g. the Tax Arrangement for the Kingdom of the Netherlands) not listed by the
Netherlands as potential CTAs under the MLI also contain anti-abuse rules.
24
For example the Tax Arrangement for the Kingdom of the Netherlands (art. 35a), and the Tax Arrangement
between the Netherlands and Curaçao (arts. 12 and 22), the Tax Arrangement between the Netherlands and
Sint Maarten (arts. 12 and 22), and the treaties with Panama (art. 27), the PRC (art. 23), Hong Kong (art. 27) and
Germany (art. 23).
25
Suriname in art. 10(2)(a)), Morocco (art. 10(2)(a)), Latvia (art. 10(8)), Egypt (art. 10(4), Lithuania (art. 10(8)), Jordan
(art. 10(3)), Estonia (art. 10(8)), Mexico (art. 11(8) and 12(7)), Tunisia (art. 10 (3)), Malta (Protocol IV (1)), Kazakhstan
(Protocol XI (2)).
26
Morocco (art. 10(2)(a)).
27
Suriname (art. 10(2)(a)).
28
Jordan (art. 10(3)).
29
Mexico (art. 11(8), Kazakhstan (1996) Protocol XI (2).
30
Mexico (art. 12(7)).
31
China (art. 10(7), 11(9) and 12(7)), United Kingdom (arts. 10(3), 11(5), 12(5) and 20(4)), Malawi (arts.10(10), 11(9)
and 12(8)), Zambia (2015) (arts. 10(6), 11(8) and 12(7)), Kenya (arts. 10(8), 11(8) and 12(7)), South Africa (art. 10(8)),
United Arab Emirates (art. 10(9)), Croatia (art. 10(9)), Romania (art. 10(7))
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reasons’.32 Various treaties, such as those with the US, Hong Kong, Japan and Ethiopia, contain
LOB provisions. Eight recently concluded treaties contain a PPT (see section 1.4).33
Other types of treaty abuses, such as the use of the exemption method for low-taxed
PEs in triangular situations (now addressed by article 10 MLI), were addressed by the
application of the credit method instead of the exemption method in cases of low-taxed PEs
.The splitting-up of contracts (now addressed by article 14 MLI) was addressed in relation to
offshore activities; these provisions were included in 41 of the 81 tax agreements listed by the
Netherlands under the MLI. In addition to the offshore provisions, the Netherlands has also
agreed to include anti-splitting rules in the treaties with Germany,34 Norway35 and Suriname.36
The Netherlands has also traditionally addressed hybrid mismatches arising from the
use of transparent entities (article 3 MLI) and dual-resident entities (article 4 MLI) in its tax
treaties.
Following the 1999 Partnership Report, the Netherlands made an observation to article
1 of the OECD MC noting that it would adhere to conclusions of the Partnership Report only
insofar as such conclusions would be explicitly confirmed in a tax treaty, through a MAP
between competent authorities or as unilateral policy.37 As a result of this observation, many
treaties concluded by the Netherlands contain a provision addressing the treaty application
to transparent entities. Based on the treaties that were listed by the Netherlands as potential
CTAs, the following categories can be distinguished.38 The treaties with Japan, Switzerland,
United Kingdom and the United States contain detailed provisions in essence similar to the
BEPS provision included in the MLI. The treaties with Albania, Ethiopia, Georgia, Ghana,
Indonesia, Kenya, Malawi, Norway, Oman and Zambia, contain a general provision for
solutions based on MAP in order to avoid double taxation or double non-taxation. The treaties
with Panama, Slovenia and Uganda, also resort to the MAP procedure but add a provision to
ensure that economic double taxation is avoided. The tax treaty with Bahrain and Germany
contain provisions similar to the MLI; the treaty with Bahrain contains even a provision similar
to the (limited) saving clause (article 3(3) MLI) and adds a provision to ensure that economic
double taxation is avoided. The tax treaties concluded by the Netherlands with Barbados
and Hong Kong also address hybrid mismatches arising from the use of transparent entities
in the same way at the MLI. However, these treaties do not include a (limited) saving clause.
Before implementation of the BEPS-project, almost 20 treaties already contained a tie-
breaker rule based on the MAP. Most notably, the tie-breaker rule in the tax treaty with the
UK provides that when a company is considered a dual-resident, this issue will be solved
through a MAP.
32
Azerbaijan (arts. 11(9) and 12(8)).
33
Algeria, Denmark, Ghana, Iraq, Ireland, Ukraine, Uzbekistan and Switzerland.
34
Prot. III.
35
Prot. III.
36
Art. 5(2)(h)(i).
37
Para. 27.1 to the OECD Commentary on art. 1 of the OECD MC as read prior to the 2017-update.
38
The treaties not listed as potential CTAs contain hybrid entity rules as well; an interesting example is the treaty
with Belgium.
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Netherlands
Dispute resolution
Regarding MAP (article 16 MLI), aall tax treaties concluded by the Netherlands include MAP
provisions. According to the BEPS Action 14 Peer Review Report (Stage 2), the Dutch treaty
network is largely consistent with the requirements of the Action 14 Minimum Standard.
Concerning corresponding adjustments (article 17 MLI), 65 of the 81 tax treaties listed
by the Netherlands as (potential) CTAs under the MLI contain a provision for corresponding
adjustments after a primary transfer pricing adjustment by the other contracting state.39
Lastly, arbitration has been a longstanding treaty policy of the Netherlands as described
in the Memorandum on Tax Treaty Policy as early as 1987. It follows from the BEPS Action 14
Peer Review (stage 2) that the Netherlands has incorporated arbitration clauses in over 40
tax treaties; 14 are based on article 25(5) of the OECD MC while the other clauses provide for
a voluntary and binding arbitration.
The direct impact of the BEPS Action Plan on the structure of the Dutch tax treaty network
has largely – although not solely – resulted from the MLI. For all signed instruments
(MLI, amending protocol or treaty) to implement BEPS outcomes (hereafter: complying
instrument), this chapter details the reasons for and implications of (1) signing the MLI
(section 1.3.1), (2) listing treaties under the MLI (section 1.3.2) and (3) selecting BEPS provisions
for implementation in the treaty network, and provides a quantitative overview of the impact
of each BEPS provision (section 1.3.3). This chapter reflects the impact as per 1 October 2019.
After its signing on 7 June 2017 and the Dutch parliamentary approval procedure (section
2.1.1), the MLI entered into force for the Netherlands on 1 July 2019. It entered into effect on
1 January 2020 for 21 tax treaties of the Netherlands;40 the entry into effect for other treaties
depends on the date of deposit of the MLI ratification of the treaty partner.
The government endorsed the MLI as an efficient way to implement treaty-related
BEPS measures in its treaty network without the need for bilateral negotiations.41 The
considerations expressed by the government for signing the MLI concern four key points.
39
As per 1 October 2019 – before the entry into effect of the MLI – the following Dutch treaties lack a provision
concerning corresponding adjustments: Austria, Bosnia and Herzegovina, the Czech Republic, France, Israel,
The Republic of Korea, Luxembourg, Malaysia, Morocco, Montenegro, the Philippines, Serbia, Singapore, the
Slovak Republic, Tajikistan and Thailand.
40
The MLI entered into effect in the Netherlands with respect to (at least) taxes withheld at source on 1 January
2020 for the Dutch treaties with Australia, Austria, Canada, Finland, France, Georgia, Iceland, India, Israel, Japan,
Lithuania, Luxembourg, Malta, New Zealand, Norway, , Serbia, Singapore, Slovak Republic, Slovenia, United Arab
Emirates and United Kingdom. The MLI did not enter into effect in respect of Russia and Sweden, because these
states made the reservation of article 35(7) of the MLI and had not made the required notification for the entry
into effect as of 1 January 2020.
41
Kamerstukken II 2017/18, 34853, nr. 3, p.2-3.
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Tiesinga & Nuku
First, combatting tax avoidance has been a policy priority of the Dutch government.42 The
MLI is an instrument that prevents inappropriate use of the treaty network by better aligning
treaty application with economic reality.43 The treaty-related BEPS provisions would therefore
be offered to all treaty partners by the MLI or bilaterally in (current) negotiations.44
Second, the government considered measures against international tax avoidance to
be particularly meaningful if they are coordinated at an international level.45 Application
of internationally agreed upon BEPS provisions was presumed to be more beneficial for
businesses than uncertainty about their tax position as a result of unilateral measures or
disputes with tax authorities without an internationally agreed framework.46 It was noted
that the MLI provisions would be included in the OECD MC and UN MC.47
Third, the MLI was considered favorable for developing countries and would correspond
with the government’s efforts to implement anti-abuse rules in Dutch tax treaties with 23
developing countries (see section 1.4).48
Fourth, the government supported the MLI proposals for a more effective dispute
resolution mechanism, especially by mandatory and binding arbitration.49 Arbitration has
been part of the Dutch tax treaty policy for decades.50
The budgetary impact of the MLI was found to be negligible for the Netherlands. MLI
provisions were deemed to be particularly relevant for jurisdictions whose source taxation
is (inappropriately) limited by a tax treaty, while the Netherlands only has a withholding tax
on dividends.51 Moreover, the provisions concerning permanent establishments would not
result in a shift in tax revenues for the Netherlands. The government further stressed that
the MLI would have a deterrent effect.
1.3.2. Covered tax agreements (CTAs)
As of 1 October 2019, the 81 treaties listed by the government as (potential) CTAs under
the scope of the MLI (Table 1, white fill) represented 84% of the 96 treaty partners of the
Netherlands.52 Fifty-five treaty partners had signed the MLI and listed their treaties with the
Netherlands, resulting in matched agreements covering 68% of the agreements listed by the
Netherlands and covering 57% of the Dutch tax treaty network. Twenty-three treaty partners
had ratified the MLI (28% of the listed agreements and 24% of the Dutch tax treaty network)
generally resulting in the MLI entering into effect for these treaties on 1 January 2020.
42
Kamerstukken II 2017/18, 25087, nr. 184.
43
Kamerstukken II 2017/18, 34853, nr. 6, p.2.
44
Kamerstukken II 2017/18, 34853, nr. 6, p.3 and 17.
45
Kamerstukken II 2017/18, 34853, nr. 6, p.2-3.
46
Kamerstukken 2017/18, 34853, nr. 6, p. 3.
47
Kamerstukken II 2016/17, 25087, nr. 135, p. 3-4.
48
Kamerstukken II 2017/18, 34853, nr. 6, p. 6.
49
Kamerstukken II 2017/18, 34853, nr. 6, p. 4 and 37.
50
See for example the Memorandum on Tax treaty policy published in 1987, Kamerstukken II 1987-1988, 20365, nr.
2, p. 25.
51
The Netherlands plans to introduce conditional withholding taxes on interest and royalty payments to low-tax
jurisdictions and in abusive cases as from 1 January 2021.
52
Algeria and Iraq became treaty partners after the signing of the MLI by the Netherlands.
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Netherlands
The following categories of treaties/arrangements were not listed under the MLI:
–– treaties for which renegotiations were underway when the MLI was signed and
for which a bilateral implementation was therefore preferred. This concerns the
treaties with Belgium, Brazil, Bulgaria, Denmark, Ireland, Ukraine, Poland, Spain and
Switzerland; as of 1 October 2019, the negotiations with Denmark, Ireland, Ukraine
and Switzerland have resulted in an amending protocol or a new treaty compliant
with (at least) the BEPS minimum standards.
–– tax arrangements governed by domestic law for which the MLI is not the appropriate
way of implementing BEPS provisions (Aruba, Curaçao, Sint Maarten, Chinese Taipei).
–– new treaties with treaty partners in relation to which no treaty relation existed at
the time of signing the MLI. This concerns the (signed) treaties with Algeria and Iraq
(both compliant with the BEPS minimum standards).
The Netherlands had agreed upon amending protocols implementing the BEPS minimum
standards with Ghana and Uzbekistan, before the Netherlands signed the MLI; the
Netherlands listed these treaties as potential CTAs under the MLI as well.
Of the overall 96 treaty partners of the Netherlands, complying instruments were signed
by the Netherlands for 87 (91%) of the treaties; 63 (66%) were also signed by treaty partners
(Table 2). All of these treaty relations were therefore affected by the BEPS Action Plan.
In this section, we assess the impact of the treaty-related BEPS provisions included in the MLI
on the treaties for which both the Netherlands and the relevant treaty partner had signed
the MLI or another complying instrument (Table 2, white fill). We first address provisions
addressing base erosion and profit shifting (in order of the number of affected treaties: BEPS
Actions 6, 7 and 2) followed by dispute resolution provisions (BEPS Action 14).
The impact described in this section concerns the adoption of provisions proposed in
the BEPS project and does not represent the effects on the possibilities for combatting
tax avoidance, nor for resolving disputes; some treaties already contained provisions
corresponding (BEPS Action 14) or similar (BEPS Action 6 and 2) to provisions included in
the MLI.
BEPS Action 6 (Prevention of Treaty Abuse)
The PPT and the new preamble language required as minimum standards have the largest
impact on the structure of the Dutch tax treaty network, while the other provisions of BEPS
Action 6 have a limited effect on the structure of Dutch treaties (Table 3).
The government decided to satisfy the minimum standard by opting for the PPT because
of its flexibility to neutralize various forms of treaty abuse without overkill due to an automatic
denial of treaty benefits for certain cases; the simplified LOB (SLOB) was assumed to be too
rigid. The discretionary relief provision and the PPT, which would correct the inflexibility
arising from the LOB, would also reduce the supposed advantage of tax certainty.53 The
53
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Table 2. Treaty network affected by the BEPS Action Plan (as per 1 October 2019).
White fill indicates treaty relations for which both treaty partners signed a complying
instrument. Grey fill indicates for which relations no complying instrument had been
signed by both treaty partners.
1. Albania 21. Curaçao 41. Japan* 61. Oman 81. Sweden*
2. Algeria 22. Denmark* 42. Jordan 62. Pakistan 82. Tajikistan
3. Argentina 23. Egypt 43. Kazakhstan 63. Panama 83. Chinese
Taipei
4. Armenia 24. Estonia 44. Kenya 64. Philippines 84. Thailand
5. Aruba 25. Ethiopia 45. Rep. of 65. Poland 85. Tunisia
Korea
6. Australia* 26. Finland* 46. Kuwait 66. Portugal 86. Turkey
7. Austria* 27. France* 47. Latvia 67. Qatar 87. Uganda
8. Azerbaijan 28. Georgia* 48. Lithuania* 68. Romania 88. Ukraine
9. Bahrain 29. Germany 49. Luxembourg* 69. Russia * 89. United Arab
Emirates*
10. Bangladesh 30. Ghana* 50. North 70. Saudi Arabia 90. United
Macedonia Kingdom*
11. Barbados 31. Greece 51. Malawi 71. Serbia* 91. United
States
12. Belarus 32. Hong Kong 52. Malaysia 72. Singapore* 92. Uzbekistan*
13. Belgium 33. Hungary 53. Malta* 73. Slovak 93. Venezuela
Republic*
14. Bulgaria 34. Iceland* 54. Mexico 74. Sint Maarten 94. Vietnam
15. Bosnia and 35. India* 55. Moldava 75. Slovenia* 95. Zambia
Herzegovina
16. Brazil 36. Indonesia 56. Montenegro 76. South Africa 96. Zimbabwe
17. Canada* 37. Iraq 57. Morocco 77. Spain
18. People’s Rep. 38. Ireland 58. New 78. Sri Lanka
of China Zealand*
19. Croatia 39. Israel* 59. Nigeria 79. Suriname
20. Czech 40. Italy 60. Norway* 80. Switzerland
Republic
* The complying instrument had been ratified by both the Netherlands and the relevant treaty partner.
551
Netherlands
Netherlands has not opted in for a symmetrical or asymmetrical application of the SLOB for
treaty partners that had chosen a SLOB.54
The Netherlands moreover adopted the discretionary relief provision regarding the
PPT (article 7(4) MLI). Although the government did not explicitly motivate this choice, it
generally presumed that obligations to notify treaty partners before applying anti-abuse
rules could prevent overkill and contribute to a more uniform application of these rules.55
Moreover, no reservations have been made on the proposed preamble language, and
the Netherlands has opted in for the additional language concerning the development of
the economic relationship and the enhancement of co-operation in tax matters (article 6(3)
MLI) as this was considered to be possibly relevant for the interpretation of tax treaties.56 The
Netherlands has also not made any reservations to the other provisions proposed in BEPS
Action 6, except for the saving clause that was considered redundant and confusing with
respect to treaties where a saving clause is not included and regarding treaty obligations
that should be respected.57
Furthermore, the minimum holding period for the reduced rate on dividends (article 8
MLI) was seen as an effective mechanism against dividend stripping that would not harm
corporate reorganizations.
The Netherlands opted in for article 9 of the MLI, introducing a ‘look-back period’ of
365 days to capital gain provisions concerning shares deriving their value principally from
immovable property or interests comparable to shares. The government considered that
bilaterally agreed exemptions to these provisions to spare economic genuine cases would be
preserved. This provision only affects treaties that already contain a provision similar to article
13(4) of the OECD MC. Article 9(4) of the MLI, which implements article 13(4) of the OECD MC,
has not been adopted. The Netherlands made a reservation to that provision in the OECD MC.58
The Netherlands also opted in for article 10 of the MLI, which denies treaty benefits
for income paid to low-taxed permanent establishments in third jurisdictions. This was
considered fair according to the government because treaty partners have made assumptions
as regards the level of taxation of income for which they limit their taxing rights.59 The
government noted that many Dutch treaties already contain a provision for applying – in
accordance with domestic law – the credit method in case of low-taxed passive permanent
establishments abroad.60
BEPS Action 7 (Permanent Establishment)
The effects of the BEPS Action 7 provisions regarding permanent establishments on the Dutch
treaty network mainly concern amendments to the specific activity exemptions (article 13
MLI) (Table 3).
54
55
56
57
58
Para. 51, OECD Commentary on art. 13 of the OECD MC.
59
60
Kamerstukken II 2017/18, 34853, nr. 6, p. 32. An example of this provision is art. 23(4) of the treaty with Denmark.
This provision refers to domestic law (currently this refers to art. 15g of the Wet op de vennootschapsbelasting
1969).
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Tiesinga & Nuku
The government initially intended to adopt article 12 of the MLI, concerning

commissionaire arrangements and similar strategies. However, a full reservation regarding
this provision was made following an amendment by parliament to the MLI approval bill.
According to a parliamentary majority, implementation of article 12 should be postponed
until profit allocation rules concerning this provision are sufficiently clear or until an effective
dispute resolution mechanism has been implemented (e.g. arbitration implemented by
enough parties to the MLI).61
The Netherlands opted in for article 13 (Option A) of the MLI in order to ensure that
the application of the specific activity exemptions regarding permanent establishments
is limited to activities with a preparatory or auxiliary character, while each case will have
to be examined on its own merits. Activities that may have had an auxiliary character in
the past could constitute a core business in the present (digitalized) economy, according
to the government.62 The anti-fragmentation rule of article 13 was also adopted to prevent
fragmentation of activities in order to apply for the specific activity exemptions.
The provision against splitting-up of contracts to prevent circumvention of time thresholds
for permanent establishments (article 14 MLI) was considered to correspond with similar
rules in Dutch treaty provisions concerning offshore activities. However, the Netherlands
made a reservation preserving anti-splitting rules in its offshore provisions, because these
rules contain a 30-day threshold that could be affected by the 30-day exemption of the anti-
splitting rule in article 14 of the MLI.63
BEPS Action 2 (Hybrid Mismatches)
The main impact of BEPS Action 2 on the treaty network concerns provisions regarding
the MAP-tiebreaker for dual resident entities (article 4 MLI) and the elimination of double
taxation (article 5 MLI).
The government accepted the MAP-tiebreaker as it considered the provision less
susceptible to manipulation than a provision solely based on the place of effective
management (POEM).64 The government acknowledged that temporary uncertainty was
possible, but stated that a MAP should provide more tax certainty than the POEM because
both competent authorities are ultimately committed to the same outcome.65 It was also
noted that similar provisions had been agreed upon in approximately 20 Dutch treaties.
Furthermore, the Netherlands opted in for applying an ordinary credit instead of an
exemption in cases where a covered tax agreement is used to exempt or limit the tax rate
(article 5 MLI, Option A). The government supported the conclusion that the exemption
method is not appropriate when treaty partners do not tax the relevant income because of
different interpretations of the facts or treaty provisions at stake.
Moreover, the treaty application rule for income derived by or through hybrid entities
(article 3 MLI) was adopted by the Netherlands, although a reservation was made to preserve
more detailed existing treaty provisions on this subject based on article 3(5)(d) of the MLI.
According to the government, adopting the MLI provision corresponds to the Dutch plea for
61
Kamerstukken II 2018/19, 34853, nr. 8.
62
63
64
Kamerstukken II 2016/17, 25087, nr. 135, p. 7 and Kamerstukken 2017/18, 34853, nr. 6, p. 23.
65
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Netherlands
a legal basis concerning solutions for the treaty application of hybrid entities.66 Article 3 MLI
has presumably a limited effect on the Dutch treaty network, although almost 30 treaties
already contain provisions regarding treaty application to hybrid entities.
BEPS Action 14 (Dispute Resolution)
The impact of BEPS Action Plan 14 on the treaty network of the Netherlands mainly concerns
access to MAP, as implemented by article 16(1), first sentence of the MLI, and the alignment
of provisions regarding corresponding adjustment to article 9(2) of the OECD MC (article 17
MLI). The Netherlands did not make any reservation to these articles. Most Dutch treaties
already complied with the BEPS Action 14 minimum standards before the signing of the MLI.
The Netherlands opted in for mandatory and binding arbitration (Part IV, articles 18-26
MLI). This was considered the most effective way of improving dispute resolution because it
would ensure a timely resolution of MAP cases.67 Therefore, the Netherlands did not make
any (free form) reservations regarding the scope of cases eligible for arbitration. However,
the Netherlands has preserved existing mandatory and binding arbitration provisions in its
covered tax agreements by opting for the reservation under article 26(4) of the MLI. The scope
of existing arbitration provisions could therefore not be limited by (free form reservations of
treaty partners regarding) the MLI.68
The Netherlands did not make a reservation against final offer arbitration because
acceptance of this type of arbitration would result in a swift implementation of arbitration
in as many tax treaties as possible. If the Netherlands had chosen for independent opinion
arbitration, implementation would have been (temporarily) blocked by treaty partners that
made a reservation against this type of arbitration (article 23(3) MLI).69
Quantitative overview of the direct impact of each BEPS provision

The direct impact of the MLI on the structure of the Dutch tax treaty network as of 1 October
2019 is shown in Table 3. Among all complying instruments that have been signed by both
the Netherlands and a treaty partner, each row provides the percentage that contains a BEPS
provision as a direct result of signing the MLI or other complying instrument.
Tables 2 and 3 show that, as of 1 October 2019, two-thirds of the Dutch treaty network
will be amended as a result of the BEPS Action Plan. The most important effect will be the
implementation of the PPT and the new preamble language in two-thirds of the treaty
network. The other BEPS provisions for which the Netherlands opted in, have a more limited
effect (Table 3), mostly because other treaty partners made a reservation not to apply these
BEPS provisions. However, for the impact of the BEPS Action Plan it is also relevant to consider
the effect of the MLI and other complying instruments on the overall amount of treaty-
based anti-avoidance provisions and provisions concerning dispute resolution in the Dutch
treaty network. As of 1 October 2019, for more than 75% of the Dutch treaty network, the
Netherlands and its treaty partners had agreed on either a PPT, a main purpose test, a LOB or
a provision expressly allowing for the application of domestic anti-abuse rules and doctrines
66
67
68
69
Ibid.
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Tiesinga & Nuku
to treaty situations;70 for more than 45% of the Dutch treaty network, a provision has been
agreed upon for treaty application in cases of entities that are considered fiscally transparent
by at least one of the treaty partners; for 40% of the Dutch treaty network, a corporate
tiebreaker rule had been agreed upon based on a mutual agreement procedure for cases
of dual resident entities; for more than 30% of the Dutch treaty network, the Netherlands
and its treaty partners have agreed on mandatory and binding arbitration while in total any
form of arbitration has been agreed upon for 55% of the Dutch treaties. With respect to the
mutual agreement procedure, it is relevant that the effect of the MLI provisions concerning
the availability and access to MAP and the implementation of the agreed upon MAP shown
in Table 3 is limited because most Dutch tax treaties are already compliant with these BEPS
Action 14 minimum standards.
Table 3. Direct impact of MLI provisions on the treaty network of the Netherlands, based
on complying instruments that had been signed by both the Netherlands and its treaty
partners (as of 1 October 2019)
MLI provision Impact on Impact on (8) Impact on

(55) matched bilaterally total treaty
agreements agreed network
(MLI) complying (96 treaty
instruments partners)
BEPS Action 6 (Treaty abuse)
Preamble – minimum standard (art. 6(1) 98% 100% 65%
MLI)
Preamble – reference to economic 56% 88% 40%
development and co-operation in tax
matters (art. 6(3) MLI)
PPT – minimum standard (art. 7(1) MLI) 100% 100% 66%
PPT – discretionary relief (art. 7(4) MLI) 20% 50% 16%
Dividend transfer transactions (art. 8(1) 35% 13% 21%
MLI)
Capital gains concerning shares deriving 20% 13% 13%
their value principally from immovable
property (art. 9(1) MLI)
Anti-abuse rule for permanent 29% 0% 17%
establishments situated in third
jurisdictions (art. 10 MLI)
70
This concerns 74 treaties; regarding treaties for which the treaty partner has not signed a complying instrument
implementing a PPT, the Dutch treaty network contains (1) main purpose tests (Azerbaijan, Jordan, Kenya,
Malawi, Suriname, Zambia), (2) LOB provisions (Ethiopia, US) and (3) a provision on the applicability of domestic
anti-abuse rules and doctrines (Aruba, Curaçao, Sint Maarten).
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Netherlands
MLI provision Impact on Impact on (8) Impact on

(55) matched bilaterally total treaty
agreements agreed network
(MLI) complying (96 treaty
instruments partners)
BEPS Action 7 (Permanent Establishments)
Specific activity exemptions – required 51% 0% 29%
preparatory or auxiliary character (art.
13(2) MLI (Option A))
Anti-fragmentation rule (art. 13(4) MLI) 55% 13% 32%
Anti-splitting of contracts rule (art. 14 MLI) 35% 13% 21%
BEPS Action 2 (Hybrid Mismatches)
Treaty application concerning transparent 27% 13% 17%
entities (art. 3(1),(3) MLI)
Transparent entities – elimination of 24% 0% 14%
double taxation (art. 3(2) MLI)
MAP tie-breaker (art. 4(1) MLI) 38% 25% 24%
Methods for elimination of double 55% 25% 33%
taxation, Option A (art. 5(2) MLI)
BEPS Action 14 (Dispute Resolution)*
Start MAP in either contracting jurisdiction 62% 63% 41%
(art. 16(1) 1st sentence, MLI)
Present MAP cases within three years (art. 24% 75%† 20%
16(1) 2nd sentence MLI)
Implementation MAP results 25% 38%† 18%
notwithstanding domestic time limits
(art. 16(2) 2nd sentence MLI)
Corresponding adjustments provision – 49% 63%† 33%
art. 9(2) OECD MC (art. 17(1) MLI)
Mandatory binding arbitration (art. 18 27% 50% 20%
MLI)
* Article 16(2) 1st sentence MLI and article 16(3) MLI are left out; (almost) all treaties already contain these
MAP-provisions.
†
All treaties subject to bilateral complying instruments contain provisions as included in article 16(1) 2nd
sentence, article 16(2) 2nd sentence and article 17(1) MLI.
This section outlines the impact of the BEPS Action Plan on bilateral negotiations regarding
treaties that are not covered by the MLI as per 1 October 2019. This concerns treaties that
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Tiesinga & Nuku
have not been listed by the Netherlands under the MLI, or treaties that have been listed by
the Netherlands but not by the relevant treaty partner.
The first category of treaties on which the BEPS Action Plan had an indirect impact,
concerns existing treaties that had not been listed by the Netherlands under the MLI. Since
the signing of the MLI, (re-)negotiations with Denmark, Ukraine, Switzerland and Ireland
resulted in three amending protocols and a new treaty (Ireland). While some treaties contain
more BEPS provisions (e.g. Ireland) than others, all contain (at least) the minimum standards.
The second category of treaties concerns new treaty relations that had not been listed by
the Netherlands under the MLI. The newly agreed upon treaties with Algeria and Iraq contain
the minimum standards and other BEPS provisions (e.g. mandatory and binding arbitration).
The third category of treaties on which the BEPS Action Plan had an indirect impact,
concerns developing countries. Since 2013, the government has approached 23 developing
countries to implement anti-abuse provisions in their treaties with the Netherlands. This
resulted in amending protocols with Ethiopia, Ghana, Uzbekistan, Ukraine and in new
treaties with Kenya, Malawi and Zambia. The negotiations started after an analysis of Dutch
treaties with developing countries by the International Bureau for Fiscal Documentation
(IBFD) which concluded that hardly any of the treaties with these countries contained anti-
abuse rules, although the treaties were similar to treaties concluded between developing
countries and other jurisdictions comparable to the Netherlands.71
The amending protocols with Ghana, Uzbekistan and Ukraine were concluded after
the publication of the BEPS Reports and are compliant with the minimum standards.72 The
treaties with Ghana and Uzbekistan were listed under the MLI, as these amending protocols
were concluded before the Netherlands signed the MLI.
The anti-abuse provisions agreed upon with Kenya, Malawi and Zambia concern MPTs,
while a LOB was agreed upon with Ethiopia. All these treaties were additionally listed under
the MLI.
For future negotiations, it is relevant that the endorsement of the treaty-related BEPS
provisions is reflected in the Dutch position on the OECD MC and Commentary. However, the
Netherlands had not made reservations to the saving clause (article 1(3) OECD MC) and the
provision addressing commissionaire arrangements (article 5(5-6) OECD MC), notwithstanding
the reservations on the equivalent provisions in the MLI (articles 11-12). The government did not
explicitly motivate the position of the Netherlands regarding the OECD MC and Commentary,
although the reasons for the reservations under the MLI had been revealed (see section 1.3.3).
The other MLI reservations, not reflected in the OECD Commentary, concern the preservation
of existing (more detailed) treaty provisions (see section 1.3.3).
In reaction to parliamentary questions about the expected relation between the MLI
and bilateral treaties, the Dutch government compared the MLI to an amending protocol
and stated that the MLI is not intended to freeze treaty relations. Although the government
acknowledges that it is theoretically possible that jurisdictions may agree fewer anti-abuse
rules in their bilateral treaty relations in the future, it foresees a tendency for more BEPS
provisions that have now become part of the OECD or UN MC being agreed upon on a bilateral
basis.73
71
https://zoek.officielebekendmakingen.nl/blg-247787.pdf.
72
BEPS: Action 6, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris.
https://doi.org/10.1787/9789264312388-en, p. 166.
73
557
Netherlands
The parliament was involved in the MLI position of the Netherlands both before and after its
signature since parliamentary approval is required for the Netherlands to be bound by any
treaty (article 91(1) Constitution).
A parliamentary majority voted for an amendment to the approval bill requiring a
reservation on the provision concerning commissionaire arrangements (article 12 MLI, see
section 1.3.3). The parliamentary procedure resulted in a unanimous approval of the MLI
(on 12 February 2019 (Second Chamber) and on 5 March 2019 (First Chamber)). After the
required publication of the MLI and of the approval bill, required for a legally binding effect
(see section 2.1.2.), the instrument of approval of the MLI was deposited at the OECD on 29
March 2019. This resulted in the MLI entering into force for the Netherlands as of 1 July 2019.
The government intends to publish the consequences of the MLI for covered tax
agreements in the Bulletin of Treaties (Tractatenblad) in the foreseeable future. This
publication is not compulsory in the Netherlands but will help clarify the MLI for taxpayers.74
Since the Netherlands has not yet published synthesized texts, it is uncertain whether
the tax authorities will consider synthesized texts published by treaty partners as having
binding legal value on their own. However, the OECD proposes that synthesized texts include
a disclaimer that the authentic legal texts of the tax treaty and the MLI take precedence and
remain the legally binding texts.
Regarding the OECD’s “MLI matching database”, the OECD noted that this database
might contain errors and that the only texts with legal value are the equally authentic English
and French texts of the MLI itself, the authentic texts of Covered Tax Agreements, and the
MLI Positions of the Signatories and Parties to the MLI. The Netherlands has not made any
statement in relation to the potential legal value of this database.
The Netherlands follows a monistic system. Accordingly, international law has direct internal
effect and is considered an integral part of Dutch law. This is true for both written and
unwritten rules of international law.75 Dutch courts are consequently bound to comply with
international law. The principle of direct internal effect also manifests itself in article 93 of
the Dutch Constitution according to which the legal rights and obligations of Dutch citizens
can be directly affected by international law. According to this article, both treaty provisions
and decisions of international organizations, which are binding by nature (i.e. self-executing),
have binding force in the Netherlands after being published. Regarding treaties, courts must
disapply any provision of domestic law that conflicts with a treaty that has been published in
the Bulletin of Treaties. Moreover, it is up to the courts to determine the content and meaning
of treaty provisions and such interpretation should be done in compliance with international
74
75
See F. Engelen, p. 526
558
Tiesinga & Nuku
law, and particularly articles 31, 32 and 33 of the Vienna Convention on the Law of the Treaties
(VCLT). The MLI provisions therefore have primacy over domestic legislation based on article
93 of the Constitution.
The MLI entered into effect for the Netherlands for the first 21 treaties on 1 January 2020.
Therefore, no cases regarding the interpretation of the MLI and the status of the Explanatory
Statement have been raised in court yet. The legal weight of the Explanatory Statement
has also not been raised in court. The Supreme Court applied article 31 of the VCLT in treaty
interpretation cases and, considered that the OECD Commentary is of “great significance”
insofar as the treaty provision to be interpreted is (practically) the same as the OECD MC
provision.
It remains to be seen whether a similar legal value will be given to the Explanatory
Statement.
The connection between the MLI and the OECD Commentary has been addressed by the
State Secretary of Finance in a letter to parliament in which questions were raised regarding
the value of the OECD Commentary and the existing case law on the amendments to tax
treaties resulting from the MLI.76 The State Secretary of Finance refers to article 31 of the
VCLT for purposes of interpreting the new MLI provisions noting that, where existing terms
are used in the new provisions, the current OECD Commentary may have an impact on their
interpretation. In the same way, existing case law may also influence the interpretation
of existing terms used in the new MLI provisions. When it comes to the interpretation of
completely new provisions, however, there is no jurisprudence yet, and it is up to the courts
to determine how those provisions should be applied.77
Although there is no formal indication as to whether the MLI may have an impact on the
interpretation of treaties concluded before the MLI was signed or ratified, the approach of
the policy of the Netherlands when it comes to a static versus dynamic interpretation of the
OECD MC and Commentary is as follows. For cases where the OECD Commentary has been
amended after the relevant bilateral treaty but the OECD MC has not been amended, the
Dutch policy is generally to follow the so-called dynamic interpretation that treaties should
be interpreted on the basis of the most recent OECD Commentary.78 If the OECD Commentary
76
Kamerstukken II 2016/17, 25087, nr. 148, p. 22
77
Ibid.
78
Notitie Fiscaal Verdragsbeleid 2011, p. 24.
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Netherlands
is amended in order to provide a different interpretation than in the past, it will, according
to the 2011 Memorandum on Tax Treaty Policy, have to be assessed on a case-by-case basis
whether it is reasonable to apply the new OECD Commentary to a treaty that was concluded
prior to the amendment. If, in addition to the OECD Commentary, the text of an article in the
OECD MC is also amended, this will generally only be relevant for treaties concluded after the
amendment and that contain a similar text in line with the amendment. However, it is even
in these cases, according to the 2011 Memorandum on Tax Treaty Policy, depending on the
circumstances, defensible to apply a dynamic interpretation.79 It remains to be seen whether
a similar approach will be followed with the MLI.80
As concerns the question whether the MLI might have retrospective influence on tax
treaty interpretation, there have been discussions in the tax practice and academia as to
whether the PPT might apply to certain transactions/arrangements that were concluded
before the adoption of the MLI. These discussions have arisen as a result of the wording of
the PPT that uses the past tense: “obtaining that benefit was one of the principal purposes
of any arrangement or transaction that resulted directly or indirectly in that benefit.” The
unanswered question in the tax practice is whether one should test the application of the
PPT based on the situation as it was in the past, as a result of the wording of the PPT, or based
on the current situation.
2.3. Tax planning and tax administration after the BEPS Action Plan and MLI
PPT from the perspective of tax professionals

Currently, there is no case law in the Netherlands concerning the application of the PPT. Since
the government noted that domestic anti-abuse rules (e.g. regarding the domestic dividend
withholding tax exemption (inhoudingsvrijstelling)) fall within the scope of the PPT, there is
an expectation in the tax practice that when the Netherlands applies the PPT in its position
as source state, this application will generally be in line with how the Netherlands currently
applies its domestic dividend withholding tax exemption.81 However, it is unclear how the
PPT will be applied by other source states when income is being paid to a Dutch resident.
In this respect, tax professionals are carrying out risk assessments by identifying
treaties that provide a taxpayer or group of taxpayers with the most significant benefits.
Tax professionals are also advising taxpayers to document the business purposes of their
transactions/arrangements/structures in their legal documentation. In this regard, transfer-
pricing documentation is considered to be important (Global Master File, Local Country File,
CbCR report). Tax professionals are also advising the preparation of a PPT defense file (a
position paper documenting the principal purposes of their transactions/structures). In terms
of the Netherlands as a residence state, tax professionals are generally advising that the
substance at the level of the Dutch entity is commensurate to the activities that this entity
performs in order to prevent a successful PPT challenge from the source country.
79
Ibid.
80
It is unclear whether the approach of the CJEU in the Danish beneficial ownership cases will have any impact on
the position of the Netherlands and on the approach followed by Dutch courts.
81
The Danish beneficial ownership cases have raised doubts in this respect.
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Tiesinga & Nuku
PPT from the perspective of tax authorities
Procedures for the application of the PPT have not been revealed, although a new policy on
preliminary consultation and (international) rulings was published in a Decree applicable as
of 1 July 2019.82 The application of the PPT by the Netherlands is one of the listed issues for
which a taxpayer can request certainty beforehand. A ruling may be denied under certain
circumstances. In order to secure a coherent issuing of rulings, a newly formed International
Tax Certainty Board will have to approve rulings with an international character, following
a preliminary consultation handled by a specialized team of the Dutch tax authorities in
cooperation with the tax inspector handling that particular case.
Preliminary consultation for a ruling will be denied if the taxpayer requesting the ruling
lacks sufficient economic nexus with the Netherlands, in cases where the decisive reason of
an arrangement or transaction is the avoidance of Dutch or foreign tax, or when the request
pertains to transactions with entities that are resident in low-taxed or non-cooperative
jurisdictions, as defined in a domestic regulation.83
Impact on dispute resolution by MAP and arbitration
The BEPS Action Plan and the MLI have had a positive impact on dispute resolution in
the Netherlands, as revealed in the BEPS Action 14 peer review report (Stage 2).84 This
concerned all four key aspects of the BEPS Action 14 minimum standard: prevention of
disputes, availability and access to MAP, resolution of MAP cases and implementation of
MAP agreements.
The Netherlands has used the MLI to modify its treaties to be compliant with the BEPS
Action 14 minimum, although the treaty network of the Netherlands was already largely
consistent with the BEPS Action 14 minimum standard. Where treaties will not be modified
by the MLI, the Netherlands reported its intention to amend the treaties through bilateral
negotiations.85
MAP statistics show that MAP cases closed in 2016-2017 were resolved within 15.63
months on average, which is far below the required 24-month period and an almost two-
fold reduction in the average timeframe for cases closed prior to 2016 (29.15 months). The
timeframe for transfer pricing cases was considerably longer but also improved, despite an
increase in MAP inventory: from an average of 33.77 months prior to 2016 to 25.44 months
during 2016-2017.86
The Dutch government supports mandatory and binding arbitration as a mechanism
to ensure resolution of disputes on the interpretation or application of treaties within a
specified timeframe. The MLI increases the number of treaties that contain these arbitration
82
Decree of 19 June 2019, nr. 2019/13003, Staatscourant (official gazette) 2019, nr. 35519.
83
Regulation of 31 December 2018, DB 2018/216528.
84
OECD (2019), Making Dispute Resolution More Effective – MAP Peer Review Report, Netherlands (Stage 2):
Inclusive Framework on BEPS: Action 14, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing
Paris, https://doi.org/10.1787/cce92832-en. (MAP Peer Review Report, Netherlands (Stage 2)
85
MAP Peer Review Report, Netherlands (Stage 2), p. 9.
86
MAP Peer Review Report, Netherlands (Stage 2), p. 10 and p. 61.
561
Netherlands
clauses.87 Arbitration had also been implemented in Dutch domestic legislation as of 1 July
2019 as a result of the implementation of Council Directive (EU) 2017/1852 of 10 October 2017
on tax dispute resolution mechanisms in the European Union. This Directive is applicable
to all treaty-related tax disputed between EU members. For transfer pricing disputes, the
Netherlands is a signatory to the EU Arbitration Convention. The different possibilities for
arbitration provide taxpayers with the choice to apply the mechanisms they prefer.
87
An overview of the different arbitration clauses agreed upon by the Netherlands is provided in Annex A of the
MAP Peer Review Report, Netherlands (Stage 2), p. 89-94.
562
New Zealand
Branch reporters
Brendan Brown1
Melissa Siegel2

As at 8 June 2017, when New Zealand signed the Multilateral Convention to Implement Tax
Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”), New Zealand
had a network of 40 double tax agreements (“DTAs”) that covered almost all its major trading
and investment partners. Since signing the MLI, New Zealand has commenced negotiation
of DTAs with several countries with which New Zealand does not currently have a DTA, as
well as on amendments to existing DTAs.
There is no publicly available New Zealand model DTA or other official explanation of
New Zealand’s negotiation positions. Ascertaining New Zealand’s treaty policy, therefore,
requires examining New Zealand’s DTAs and its reservations in respect of the OECD Model.
Though generally following the OECD Model, New Zealand has made reservations and
observations in respect of it, generally to preserve greater source country taxing rights than
the model would allow. The most notable of these include: a broader definition of permanent
establishment (“PE”), especially as regards the ability to tax income from the exploitation of
natural resources; its reservation in respect of the so-called “Authorised OECD Approach” to
profit attribution now reflected in article 7 of the OECD Model (2017); and its preservation of
source country taxing rights to “other income” and of greater source country taxing rights to
interest and royalties than under the OECD Model.
New Zealand signed the MLI when it opened for signature in June 2017, and was one of
the first countries to ratify it. It is expected that 31 of New Zealand’s 40 DTAs will be covered
by the MLI, although several of the DTAs not covered already include, or will be amended to
include, provisions consistent with the MLI.
Although the extent to which a particular DTA will be modified will depend on the
positions of the relevant DTA partner, New Zealand’s approach has been to adopt as many
MLI provisions as possible.3 This is considered consistent with New Zealand’s policy of seeking
to protect source country taxing rights.
Even so, domestic law anti-avoidance measures are likely to have a greater practical
impact on cross-border arrangements than the MLI. In the past few years, New Zealand has
implemented amendments to its interest withholding tax, thin capitalisation and transfer
pricing rules, further limiting opportunities for tax planning and increasing the effective tax
1
Partner in Russell McVeagh.
2
Senior Policy Advisor, Policy and Strategy Division, Inland Revenue.
Opinions expressed are the personal opinions of the reporters and not necessarily those of Inland Revenue. The
report does not take into account developments announced or occurring on or after 1 January 2020. The Branch
reporters would like to thank Matt Woolley (Senior Solicitor, Russell McVeagh) and Carmel Peters (Strategic
Policy Advisor, Policy and Strategy Division, Inland Revenue) for their valuable contributions.
3
Finance and Expenditure Committee International treaty examination of the Multilateral Convention to Implement
Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (February 2018) at [32]–[34].
IFA © 2020 563

New Zealand
rate on inbound investment. New Zealand has also implemented comprehensive anti-hybrid
mismatch rules, reflecting the recommendations in the OECD’s BEPS Action 2 Report.
Further, New Zealand has a general anti-avoidance rule (“GAAR”) which the courts have
interpreted broadly and that, following recent amendments, may apply to override relief
that would otherwise be available under a DTA. New Zealand has opted for the principal
purpose test (“PPT”) in article 7(1) of the MLI as the mechanism for countering treaty-abuse,
but the PPT is likely to be similar in effect to the GAAR, such that its addition will not have a
major impact in practice.
New Zealand has also enacted a new specific anti-avoidance provision directed at
arrangements that, in reliance on a DTA that is not modified by article 12 of the MLI (artificial
avoidance of PE status through commissionaire arrangements and similar strategies) avoid
the creation of a PE. This provision, like the GAAR, may apply to override relief that would
otherwise be available under a DTA.
The MLI has only recently been ratified by New Zealand, and as at the date of this report
is not yet in force in relation to all of New Zealand’s covered tax agreements. It will therefore
likely take some time before the practical consequences of its application emerge.
One issue that has already emerged is that article 4 of the MLI (which replaces the tie-
breaker test for dual resident companies (generally based on place of effective management)
with the need to obtain a competent authority determination) may be problematic,
particularly in the context of New Zealand’s DTA with Australia. The fact that both countries
have broad domestic law residence definitions for companies, combined with the close
integration of the two economies, increases the possibility of a company inadvertently
becoming a dual resident.
The effect of article 4 of the MLI is that such a company will not be entitled to DTA relief
in the absence of a determination by the competent authorities as to its residence for the
purposes of the DTA. New Zealand and Australia have recognised the practical difficulties
to which article 4 of the MLI gives rise by agreeing on a practical administrative approach
(allowing a dual-resident company to self-determine its residence for the purposes of the
DTA based on its place of effective management) if it meets certain criteria.
New Zealand’s experience in respect of article 4 of the MLI illustrates one of the practical
challenges associated with amending bilateral DTAs through a multilateral instrument.
That is that a given amendment, even if it has a sound rationale in theory, may have
undesirable consequences in the context of a particular DTA and the relevant domestic
laws, which the relevant parties do not foresee when formulating their positions in the
context of the MLI.
Treaty Network
1.1. Introduction
As a small and (following economic reforms in the late 1980s) increasingly open economy,
New Zealand supports the work of multilateral organisations like the OECD (of which it has
been a member since 1973) in advancing what is often described as an international “rules-
based” framework. In the tax context, this is reflected in New Zealand’s active participation in
564
Brown & Siegel
the work of the OECD’s committee on fiscal affairs, and the influence that OECD-led initiatives
(especially its recent work on BEPS) has had on the design of domestic tax laws.
Overview
New Zealand entered into its first DTA in 1947. In the period since then, New Zealand has
established a network of DTAs, primarily with key trading and investment partners. As at 8
June 2017 (when New Zealand signed the MLI), New Zealand had 40 DTAs in force and was
negotiating DTAs with Luxembourg, Portugal, Saudi Arabia and the Slovak Republic.4 At
that time, the two oldest DTAs in New Zealand’s network were with Malaysia and Fiji (both
signed in 1976), and the most recent was with Samoa (signed in 2015).5 Since New Zealand’s
ratification of the MLI in 2018, a new treaty with the People’s Republic of China (PRC) and
an amending protocol to the existing DTA with Switzerland have been signed, though the
protocol to the existing DTA with Switzerland has not yet entered into force.6
New Zealand generally follows the OECD Model
New Zealand’s DTAs in most respects follow the approach of the relevant edition of the OECD
Model Tax Convention on Income and on Capital (“OECD Model”). Many of the articles in New
Zealand’s DTAs are identical to the equivalent articles in the OECD Model.
New Zealand became a full member of the OECD in 1973. In doing so, it assumed an implied
obligation to follow the recommendations made by the OECD to its member countries. The
4
New Zealand had DTAs with Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Fiji, Finland,
France, Germany, Hong Kong, India, Indonesia, Ireland, Italy, Japan, Republic of Korea, Malaysia, Mexico,
Netherlands, Norway, Papua New Guinea, Philippines, Poland, PRC, Russian Federation, Samoa, Singapore,
South Africa, Spain, Sweden, Switzerland, Chinese Taipei (this DTA was made between the New Zealand
Commerce and Industry Office and the Taipei Economic and Cultural Office in New Zealand), Thailand, Turkey,
United Arab Emirates, United Kingdom, United States and Vietnam.
5
See the Agreement between the government of New Zealand and the government of Malaysia for the avoidance
of double taxation and the prevention of fiscal evasion with respect to taxes on income 1051 UNTS 39 (signed 19
March 1976, entered into force 2 September 1976); Agreement between the government of New Zealand and
the government of Fiji for the avoidance of double taxation and the prevention of fiscal evasion with respect to
taxes on income signed 27 October 1976, entered into force 11 February 1977); and the Agreement between the
government of New Zealand and the government of Samoa for the elimination of double taxation with respect
to taxes on income and the prevention of tax evasion and avoidance (signed 8 July 2015, entered into force 23
December 2015).
6
See the Agreement between the government of New Zealand and the government of the People’s Republic
of China for the elimination of double taxation with respect to taxes on income and the prevention of tax
evasion and avoidance (signed 1 April 2019, entered into force 27 December 2019) and the Protocol amending
the convention between New Zealand and the Swiss Confederation for the avoidance of double taxation with
respect to taxes on income (signed 8 August 2019, not yet in force).
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New Zealand
approach taken by New Zealand in DTAs reflects the OECD Council’s recommendations for
all member countries:7
1. To pursue their efforts to conclude bilateral tax conventions on income and on capital
with those Member countries, and where appropriate with non-member countries, with
which they have not entered into such conventions, and to revise those of the existing
conventions that may no longer reflect present day needs.
2. When concluding new bilateral conventions or revising existing bilateral conventions, to
conform to the Model Tax Convention, as interpreted by the Commentaries thereon.
3. That their tax administrations follow the Commentaries on the Articles of the Model
Tax Convention, as modified from time to time, when applying and interpreting the
provisions of their bilateral tax conventions that are based on those Articles.
Departures from the OECD Model
New Zealand’s inbound investment flows have, over time, exceeded outbound investment
flows (i.e., New Zealand is a “net capital importer”). Accordingly, New Zealand has a general
bias towards taxing income derived in New Zealand from the use of foreign imported capital
through the imposition of withholding taxes on outbound payment flows. Some of New
Zealand’s departures from the OECD Model reflect New Zealand’s position as a net capital
importer by providing for greater source state taxation than the OECD Model. This is reflected,
for example, in New Zealand’s DTAs containing an “other income” article allowing source state
taxation of income not dealt with in other articles.
Some aspects of New Zealand’s DTA policy follow neither the OECD Model nor the UN
Model Double Taxation Convention between Developed and Developing Countries (“UN
Model”). For example, New Zealand prefers to make specific provision in the PE definition
for natural resources (including standing timber) and substantial equipment. New Zealand
also departs from the OECD Model and UN Model in relation to the definitions of immovable
property, dividends, royalties, and interest, to ensure consistency with domestic law.
Owing to a domestic court decision,8 New Zealand does not use the phrase “borne by
such permanent establishment”, but instead uses the phrase “deductible in determining the
profits attributable to”. Some DTAs include both phrases, but the latter has been included
since that court decision to ensure that the DTAs, as construed under New Zealand law, apply
consistently with the OECD Model commentary.
Double tax agreement preambles
At the time New Zealand signed the MLI, the preamble in almost all of New Zealand’s DTAs
referenced, as objects of the DTA, the avoidance of double taxation and the prevention of fiscal
evasion. Exceptions to this are: the DTA with Austria (which refers to the DTA as an agreement
7
The recommendations were issued by the OECD Council on 23 October 1997, but follow similar recommendations
that have been in place since before New Zealand joined the OECD.
8
See Commissioner of Inland Revenue v JFP Energy [1990] 3 NZLR 536 (CA).
566
Brown & Siegel
“with respect to taxes on income and on capital”); the DTA with Switzerland (which refers only
to the “avoidance of double taxation”, but will be amended once the recently signed Protocol
takes effect to include the preamble language found in article 6(1) of the MLI); and the DTA
with Samoa (which already incorporates the preamble language from the MLI).
Domestic anti-avoidance rules relating to treaty shopping
New Zealand’s domestic law contains no rule specifically directed at treaty shopping. The
GAAR might, however, apply in such cases. The GAAR (sections BG 1 and GA 1 of the Income
Tax Act 2007 (“Act”)) has long been a feature of New Zealand’s tax laws. It is drafted in general
terms, rendering void as against Inland Revenue any arrangement with a purpose or effect
(not being a merely incidental purpose or effect) of tax avoidance.9
The GAAR itself contains no test for distinguishing between acceptable tax planning
and tax avoidance, meaning it has been left to the courts to develop guidance in the context
of particular cases. During the past decade court decisions have given the GAAR a broader
application than was previously the case, such that taxpayers need to consider the possible
application of the GAAR even in relation to relatively simple tax planning, and not just in the
case of highly artificial tax-driven arrangements.
Until recently, section BH 1 of the Act (the provision under which DTAs take effect as part
of New Zealand law) provided for each DTA to apply “despite anything” in the Act. Since the
GAAR is part of the Act, one view was that the effect of section BH 1 was that if the application
of the GAAR would conflict with the provisions of a DTA, the DTA should prevail. A contrary
view was that the amendment to section BH 1 (described below) was clarificatory only, on
the basis that, read in the light of the OECD commentary, it was implicit that a DTA should
not be construed to allow relief in cases of tax avoidance.
The amendment to section BH 1, effective from 30 March 2017, inserted an exception to
the rule that a DTA applies “despite anything” in the Act, for section BG 1 (the GAAR).10 There
followed amendments creating two further exceptions.11 One exception was for section RF
11C, which allows New Zealand to tax as New Zealand-sourced interest certain amounts that
would otherwise be characterised under the relevant DTA as a dividend arising in the other
state (which New Zealand would not be permitted to tax). This rule does not depend on an
arrangement having features of tax avoidance or treaty shopping. The other exception was
for a newly enacted PE avoidance rule (section GB 54) which does have as one of its criteria
that New Zealand or foreign tax is avoided by the arrangement.
The PE avoidance rule, although enacted after New Zealand had signed the MLI and referring
to a provision of the MLI, in one sense precedes the MLI because it applies in respect of DTAs
that are not covered by the MLI or that are not modified by article 12 of it. The rule deems an
enterprise that is resident in a country or territory with which New Zealand has a DTA that
includes a definition of PE, to have a PE in New Zealand where the following criteria are met:12
–– a non-resident makes, under an arrangement, a supply of goods and services to a person
(the “recipient”) in New Zealand;
9
Income Tax Act 2007, s YA 1 definition of “tax avoidance arrangement”.
10
Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017.
11
See Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018, s 4.
12
Income Tax Act 2007, s GB 54.
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New Zealand
–– a facilitator carries out, in New Zealand, under the arrangement, an activity for the
purpose of bringing about the supply to the recipient;
–– the facilitator is associated with the non-resident (or is an employee of the non-resident),
or derives 80% or more of its assessable income for the year of the activity and in the
previous income year from services provided to the non-resident (or to persons associated
with the non-resident);
–– the activity is more than preparatory for, or auxiliary to, the facilitated supply;
–– income of the non-resident is within the scope of a DTA but not a DTA that incorporates
article 12(1) of the MLI or an equivalent provision that enters into force after 7 June 2017;
–– income of the non-resident from the supply is not otherwise attributable to a PE in New
Zealand of the non-resident;
–– the arrangement has a purpose or effect of affecting the imposition on the non-resident
of New Zealand or foreign income tax, and that purpose or effect is more than merely
incidental; and
–– the non-resident, or a group of persons that includes the non-resident, is part of a
consolidated accounting group that has annual consolidated group revenue for the
preceding income year or period prior to the relevant income year of more than EUR
750 million.
The consequence of the rule applying is that the non-resident will have a PE, through which
the supply to the recipient (in New Zealand) is deemed to be made, for the purposes of all
articles of the relevant DTA, not just the business profits article. For example, royalties paid
to non-residents in respect of supplies deemed to be made through the deemed PE could
be considered to “arise” in New Zealand. New Zealand could then assert that the royalties
could be taxed as New Zealand-sourced income, consistently with the royalties article of the
relevant DTA.
The enactment of section GB 54 and the provision (in section BH 1) for it not to be
overridden by inconsistent DTAs raised a concern as to whether section GB 54 was an attempt
by New Zealand to unilaterally amend DTAs in circumstances where the other party to the
DTA has expressly chosen not to make such an amendment. The concern is driven in part
by the fact that section GB 54 applies only in circumstances where the income of the non-
resident is subject to a DTA, but the DTA is either not covered by the MLI or the other party
has elected not to adopt article 12 of the MLI.
Inland Revenue addressed this point in its guidance on the application of the PE avoidance
rule:13
While [the PE anti-avoidance rule] will override DTAs, it should not conflict with New
Zealand’s obligations under those DTAs. This is because New Zealand’s DTAs are based
on the OECD’s Model Treaty. The OECD Commentary is an important part of the context
in which these DTAs are internationally understood. [The PE anti-avoidance rule] is an
anti-avoidance provision, as it only applies to an arrangement with a more than merely
incidental purpose of tax avoidance. The OECD Commentary states that, as a general rule,
there will be no conflict between such anti-avoidance provisions and the provisions of a
13
Inland Revenue “BEPS – Permanent Establishment anti avoidance rules” (Tax Information Bulletin, Vol. 31, No 3,
April 2019) at 33.
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Brown & Siegel
DTA. It also confirms that states are not obliged to grant the benefits of a DTA if the DTA
has been abused (noting that this should not be lightly assumed).
The commentary regarding article 1 of the OECD Model (2017) sets out a “guiding principle”
regarding the benefits of a DTA:14
… A guiding principle is that the benefits of a double taxation convention should not be
available where a main purpose for entering into certain transactions or arrangements
was to secure a more favourable tax position and obtaining the more favourable treatment
in these circumstances would be contrary to the object and purpose of the relevant
provisions. That principle applies independently from the provisions of paragraph 9 of
Article 29, which merely confirm it.
Given the breadth of the GAAR, and the recent amendment excluding it from the rule in
section BH 1 (that a DTA applies despite the provisions of the Act), it might be considered
unnecessary for Inland Revenue or a court to consider this guiding principle in cases of alleged
tax avoidance involving a DTA. Instead it might be thought that it is as simple as applying
the GAAR to deny the tax benefits.
This may be too simplistic, however. For one thing, the GAAR does not apply in a vacuum.
The courts have held that a touchstone for distinguishing permissible tax planning from tax
avoidance to which the GAAR applies is whether the tax benefit in question would have been
intended in the circumstances. In the case of a benefit under a DTA, this would require an
examination of the DTA and applicable commentary.
Further, the New Zealand courts have recognised that international law may be relevant
when interpreting domestic law (and therefore the “guiding principle” could be relevant for
determining the breadth of the GAAR in a particular case). For example, the New Zealand
Court of Appeal has stated (albeit in a non-tax context):15
We begin with the presumption of statutory interpretation that so far as its wording
allows legislation should be read in a way which is consistent with New Zealand’s
international obligations …
Treaty-based anti-avoidance provisions: “beneficially owned”
Requiring certain types of passive income to be “beneficially owned” (or a similar term) by a
resident of a contracting state for the relevant DTA benefits to apply is sometimes referred
to as having an anti-avoidance purpose. The commentary to the OECD Model (2017), for
example, states that:16
14
OECD “Model Tax Convention on income and on Capital: Condensed Version 2017” (21 November 2017) OECD
Library <https://read.oecd-ilibrary.org/> at page 73, paragraph 61.
15
New Zealand Airline Pilots’ Association v Attorney-General [1997] 3 NZLR 269 (CA) at 289 per Keith J.
16
Library <https://read.oecd-ilibrary.org/> at page C(10)-6, para. 12.5.
569
New Zealand
… While the concept of “beneficial owner” deals with some forms of tax avoidance (i.e.
those involving the interposition of a recipient who is obliged to pass on the dividend to
someone else), it does not deal with other cases of abuses, …
Just under half of New Zealand’s DTAs specify (either in the General Definitions article or in
a Protocol to the relevant DTA) that in the case of New Zealand (and occasionally the other
contracting state), dividends, interest or royalties in respect of which a trustee is subject to
tax in the applicable country, shall be treated as being beneficially owned by that trustee.
This provision is not a general definition of “beneficially owned”, however. Rather, it confirms
that, in the case of income derived by a trustee on trust, it is not necessary to treat the trust
beneficiaries as the beneficial owner even if the income is recognised as income of the trustee.
Following recent updates, the OECD commentary now contains an explanation, consistent
with that provision, of how the concept of “beneficially owned” should apply to trusts and
similar arrangements.17
The interpretation of the beneficial ownership concept in DTAs has not been expressly
considered by a New Zealand court, and as a matter of New Zealand tax law it does not have
a settled meaning. That said, as a matter of New Zealand tax law, if a person holds something
or does something as a nominee (which includes a bare trustee) for another person, the other
person is deemed to hold or to do that thing, and the nominee is ignored.18 This provision
(to the extent it might affect the application of a DTA) would be consistent with the OECD
commentary referred to.
Prior to New Zealand signing the MLI, only a few of New Zealand’s DTAs incorporated
comprehensive anti-avoidance provisions. The approaches taken have included:
–– The DTA with the United States contains a limitation on benefits article reflecting the
US Model, and based on objective criteria (rather than a purpose-based test) to prevent
treaty-shopping.19
–– The DTA with Japan likewise contains a limitation on benefits article but also contains
a purpose-based test applicable where the main purpose of any person concerned with
the creation or assignment of any right or property from which income is derived was to
take advantage of the DTA.20
17
Library <https://read.oecd-ilibrary.org/> at page C(10)-4, paras. 12 to 12.7.
18
Income Tax Act 2007, s YB 21.
19
Convention between New Zealand and the United States for the avoidance of double taxation and the prevention
of fiscal evasion with respect to taxes on income 1643 UNTS 251 (signed 23 July 1982, entered into force 2 November
1983), art 16.
20
Convention between New Zealand and Japan for the avoidance of double taxation and the prevention of fiscal
evasion with respect to taxes on income (signed 10 December 2012, entered into force 25 October 2013), art 22.
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Brown & Siegel
–– New Zealand’s DTAs with Australia, Canada, Hong Kong, Singapore, United Kingdom
and Vietnam contain a principal purpose test in relation to arrangements securing relief
under the dividends, interest or royalties articles.21
–– The DTA with Chile contains, in relation to the dividends, interest or royalties articles,
a principal purpose test, as well as a provision allowing relief for dividends, interest
or royalties received by a company owned or controlled by non-residents only if the
amount is subject to tax in the state where the company is resident. The DTA with Chile
also provides for the competent authorities to recommend amendments to the DTA in
cases where the provisions of the DTA are used to provide benefits not contemplated or
intended.22
–– The DTA with Samoa, although signed almost two years before New Zealand signed the
MLI, incorporates, in article 21, a principal purpose test equivalent to article 7(1) of the MLI.
Accordingly, New Zealand’s comprehensive adoption of the MLI anti-avoidance provisions

(as outlined in section 1.3.3 of this report) could, depending on whether a given DTA is
covered by the MLI, and if so, on the extent to which the relevant treaty-partner chooses
to adopt particular provisions of the MLI, add significantly to New Zealand’s treaty-based
anti-avoidance provisions.
Mutual Agreement Procedure
Each of New Zealand’s DTAs includes provisions for a mutual agreement procedure (“MAP”),
and most also contain a provision relating to corresponding adjustments to tax charged on
the profits of an enterprise after a transfer pricing adjustment. New Zealand’s DTAs that do
not contain a provision relating to corresponding adjustments were signed in the 1970s or
early 1980s.
21
See, for example, the Agreement between the government of Australia and the government of New Zealand for
the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income 1938 UNTS
208 (signed 26 June 2009, entered into force 19 March 2010), arts. 10(9), 11(9) and 12(7); Convention between New
Zealand and Canada for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes
on income (signed 3 May 2012, entered into force 26 June 2015), arts. 10(9), 11(10) and 12(7); Agreement between
the government of New Zealand and the government of the Hong Kong Special Administrative Region of the
People’s Republic of China for the avoidance of double taxation and the prevention of fiscal evasion with respect
to taxes on income 2824 UNTS 115 (signed 1 December 2010, entered into force 5 March 2012), arts. 10(8), 11(10)
and 12(7); Agreement between the government of New Zealand and the government of the Republic of Singapore
for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income 2722
UNTS 319 (signed 21 August 2009, entered into force 12 August 2010), arts. 10(6) and 12(7); Convention between
the government of the United Kingdom of Great Britain and Northern Ireland and the government of New
Zealand for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income
and capital gains 1416 UNTS 130 (signed 4 August 1983, entered into force 16 March 1984), arts. 11(6), 12(9) and
13(7); and the Agreement between the government of New Zealand and the government of the Socialist Republic
of Viet Nam for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on
income (signed 5 August 2013, entered into force 5 May 2014), arts. 10(6), 11(7) and 12(7).
22
Convention between New Zealand and the Republic of Chile for the avoidance of double taxation and the
prevention of fiscal evasion with respect to taxes on income 2523 UNTS 181 (signed 10 December 2003, entered
into force 10 June 2006), art. 22.
571
New Zealand
New Zealand’s MAP inventory is small compared to other countries. This may be in
part due to Inland Revenue encouraging the use of advance pricing agreements (“APAs”),
particularly in relation to intangibles and specialised services where there may be few
comparable arrangements. Most of these APAs are unilateral APAs as they are generally
more efficient where the majority of the tax risk lies in New Zealand.
As at 31 December 2017, ten MAP cases were pending.23 Profit attribution cases were
taking an average of 14.48 months to resolve, while other cases were taking an average
of 10.75 months to resolve. Across all cases, the average was 11.79 months.24 New Zealand
has submitted the following 2018 MAP statistics to the OECD in accordance with the MAP
Statistics Reporting Framework:
Inventory Cases Cases closed Inventory

1/1/2018 started 31/12/2018
Attribution/allocation 5 7 6 6
Other 5 6 4 7
Total 10 13 10 13
Most of New Zealand’s MAP cases relate to New Zealand’s DTA with Australia. This at least
in part reflects the fact that Australia is one of New Zealand’s most significant sources of
inbound investment.
Binding arbitration
Prior to New Zealand’s ratification of the MLI, only New Zealand’s DTAs with Australia (signed
in 2009) and Japan (signed in 2012) provided for binding arbitration. There have been no
arbitration cases to date. New Zealand’s experience to date is that the existence of arbitration
provides an incentive for the tax authorities to resolve a MAP case more efficiently. Given that
the average time of completion of MAP cases in New Zealand is relatively low, arbitration will
likely be invoked only in exceptional cases.
New Zealand signed the MLI on 7 June 2017 and ratified it on 27 June 2018, meaning the
MLI entered into force on 1 October 2018. The reasons for New Zealand signing the MLI
23
OECD “Making Dispute Resolution More Effective – MAP Peer Review Report, New Zealand (Stage 1)” (2018)
OECD Library <https://read.oecd-ilibrary.org/> at p. 9.
24
OECD “Making Dispute Resolution More Effective – MAP Peer Review Report, New Zealand (Stage 1)” (2018)
OECD Library <https://read.oecd-ilibrary.org/> at p. 10.
572
Brown & Siegel
are summarised in the publicly available international treaty examination of the MLI. In
summary:25
26. Given the important role the OECD Model Tax Convention plays in informing New
Zealand’s treaty policy, as well as New Zealand’s commitment to resolving BEPS more
generally, New Zealand is committed to including these minimum standards as well as
the optional best practice provisions in its DTAs, where they are in line with overall New
Zealand treaty policy.
27. New Zealand’s treaty negotiation resources are limited and to update New Zealand’s
entire DTA network would take several years, if not decades, particularly as many of
New Zealand’s treaty partners would likely place greater importance on updating more
significant treaties. This would limit New Zealand’s ability to meet the OECD minimum
standard in a timely fashion.
The cabinet paper preceding the New Zealand government approving New Zealand’s
signature to the MLI stated that:26
39. Data limitations prevent officials from accurately estimating the actual impact on net tax
revenue. However, as New Zealand is a capital importer and the MLI covers the majority
of New Zealand’s DTA network, it is expected that overall impact on tax revenue will be
positive.
New Zealand’s “Status of List of Reservations and Notifications upon Deposit of the
Instrument of Ratification” was deposited with the OECD on 27 June 2018. That document
lists 37 DTAs to be covered by the MLI.27 New Zealand’s DTAs with Samoa, Chinese Taipei and
the United States were not listed. Samoa was excluded on the basis that the DTA was signed
in 2015 and included the BEPS minimum standards. In addition, that DTA is Samoa’s only
comprehensive DTA, so bilateral negotiations would be more appropriate if changes are
needed. The DTA with Chinese Taipei was excluded as it is an agreement between the New
Zealand Commerce and Industry Office and the Taipei Economic and Cultural Office in New
Zealand. The DTA with the United States was not listed as the United States had indicated
that it would not sign the MLI.
Most of New Zealand’s DTA partners have listed the treaty with New Zealand in their
MLI notifications. Of the 37 DTAs listed by New Zealand, it is expected that only six will not
be covered by the MLI.
Austria, Norway and Switzerland have signed the MLI, but did not list New Zealand in
their notifications. Austria and Norway did not list their respective DTAs with New Zealand
on the basis that negotiations for a new treaty or a protocol were underway or pending.
25
International treaty examination of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent
Base Erosion and Profit Shifting (Report of the Finance and Expenditure Committee, February 2018) at [26].
26
Cabinet paper “Signature and ratification of the Multilateral Convention to Implement Tax Treaty Related
Measures to Prevent Base Erosion and Profit Shifting”.
27
Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Fiji, Finland, France, Germany, Hong Kong,
India, Indonesia, Ireland, Italy, Japan, Rep. of Korea, Malaysia, Mexico, Netherlands, Norway, Papua New Guinea,
Philippines, Poland, PRC, Russian Federation, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand,
Turkey, United Arab Emirates, the United Kingdom and Vietnam.
573
New Zealand
Switzerland excluded the New Zealand DTA due to underlying differences in legal systems.
New Zealand and Switzerland signed an amending protocol in 2019, however, to ensure that
the BEPS minimum standards are met.
A further three treaty partners have not yet signed the MLI (Philippines, Thailand and
Vietnam). This means that while New Zealand has listed 92.5% of its DTAs to be covered
by the MLI, the actual coverage is expected to be 31 DTAs (or 77.5% of New Zealand’s DTA
network) assuming the Philippines, Thailand and Vietnam do not subsequently sign the MLI.
New Zealand’s approach to adopting provisions under the MLI was summarised in the
publicly available international treaty examination of the MLI: 28
33. As noted above, New Zealand’s strategy in formulating its notifications and reservations
has been to adopt as many of the MLI provisions as possible. This is because they are base
protection measures that are in line with New Zealand’s existing treaty policy (which has
a greater source state emphasis than the OECD Model Tax Convention) or are taxpayer
friendly measures that provide improved access to dispute resolution. For example, New
Zealand generally takes a broader approach in its DTAs than the current OECD Model Tax
Convention in determining whether a permanent establishment exists. This means that
the recommendations under Action 7 (preventing the artificial avoidance of permanent
establishment status) of the OECD/G20 BEPS Action Plan which are contained in Articles
12 to 15 of the MLI are not contrary to New Zealand’s general treaty policy and, in New
Zealand’s view, represent an improvement to the OECD Model Tax Convention.
Preamble language in article 6(3) of the MLI
New Zealand has opted not to include the preamble language in article 6(3) of the MLI
(“desiring to further develop their economic relationship and to enhance their co-operation
in tax matters”). New Zealand did not include it in any of its DTAs prior to signing the MLI,
although since New Zealand ratified the MLI, it has signed a new DTA with the PRC which
includes the additional preamble wording.29
OECD minimum standard on treaty abuse
New Zealand has adopted the principal purpose test (“PPT”) in article 7(1) of the MLI, as
well as the discretionary benefits provision in article 7(4). New Zealand has not adopted the
simplified limitation on benefits (“LOB”) provisions, and nor has it opted under article 7(7)
(b) to allow a treaty partner to apply it in a one-sided manner, since the PPT is New Zealand’s
preferred way of meeting the minimum standard. For the same reason, New Zealand did not
28
Base Erosion and Profit Shifting (Report of the Finance and Expenditure Committee, February 2018) at [33].
29
Agreement between the government of New Zealand and the government of the People’s Republic of China
for the elimination of double taxation with respect to taxes on income and the prevention of tax evasion and
avoidance (signed 1 April 2019, entered into force 27 December 2019).
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Brown & Siegel
choose under article 7(17)(a) of the MLI to accept the PPT as an interim measure pending
negotiation of a LOB provision.
Minimum holding period for dividend transfer transactions (article 8 of the MLI)
In the OECD Model, and under some of New Zealand’s DTAs, the permitted source country tax
is reduced where the shareholder is a company that beneficially owns more than a specified
proportion of the voting power in the company paying the dividend. Certain provisions in
these DTAs do not include a minimum holding period as a prerequisite to treaty relief from
withholding tax on dividends.
Accordingly, New Zealand has notified that it wishes for article 8(1) of the MLI to apply to
the relevant notified provision in New Zealand’s DTAs with Australia, Canada, Hong Kong,
Japan, Mexico, Singapore, Turkey and Vietnam. As noted in the consultation document
preceding New Zealand’s signing of the MLI, “[t]his is to stop shareholders buying shares
temporarily to access the reduced [withholding tax] rates and then immediately selling
them.”30
Requiring the question of whether a company is “land rich” to be tested over a 365-day period, rather
than at a single point in time (article 9 of the MLI)
Many of New Zealand’s DTAs contain a land-rich company rule which, broadly, allows the
source country to tax income derived from the sale of shares in a company when the assets of
the company consist substantially of real property situated in the source country. To prevent
a contrived reduction in the value of real property held by a company just before sale of the
shares, New Zealand has chosen that article 9(4) of the MLI should apply. Broadly, article 9(4)
requires that the value of the land relative to the value of the shares is measured over the 365
days preceding the sale of the shares.
Adopting the anti-abuse rule for PEs situated in a third state (article 10 of the MLI)
New Zealand has not made any reservations with respect to article 10 of the MLI, and has
not notified any existing agreements as containing a provision described in article 10(4) of
the MLI. The effect of New Zealand’s choice is that (where applicable) the benefits of a DTA
would not apply to any item of income on which tax in the third jurisdiction is less than 60%
of the tax that would be imposed on the item of income if the PE were situated in the country
that has the DTA with New Zealand.
30
Inland Revenue and the Treasury, New Zealand’s implementation of the Multilateral Convention to Implement Tax
Treaty Related Measures to Prevent BEPS: an official’s issues paper (March 2017) at 16.
575
New Zealand
Addressing the avoidance of PE status through commissionaire and similar arrangements (article 12
of the MLI)
The PE definition in each of New Zealand’s DTAs includes a rule deeming an enterprise to
have a PE in a state where a person (other than an agent of an independent status) is acting on
behalf of an enterprise and has, and habitually exercises, in that state, authority to conclude
contracts on behalf of the enterprise. In some DTAs, the provision applies where the person
has and habitually exercises authority to “substantially negotiate or conclude” contracts,
so the rule can apply even if the formal steps necessary to conclude the contract are not
undertaken by that person in that state.
Article 12 of the MLI would extend this “dependent agent” rule to include situations where
the person acting on behalf of the enterprise habitually plays the principal role leading to
the conclusion of contracts that are routinely concluded without material modification by
the enterprise. This formulation is arguably broader again than the “substantially negotiate
or conclude” language that appears in some of New Zealand’s DTAs. New Zealand has not
made any reservations with respect to article 12.
Many of New Zealand’s close trading partners, including Australia, have, however,
reserved the right for article 12 not to apply. In these cases, and in the case of DTAs that are
not covered by the MLI, section GB 54 of the Act (an anti-avoidance provision directed at
arrangements that avoid the creation of a PE in New Zealand) may apply (see further our
comments in section 1.2.2 above).
Addressing the avoidance of PE status through specific activity exemptions (article 13 of the MLI)
New Zealand has not made any reservations with respect to article 13 of the MLI and has
chosen to apply “Option A” under article 13(1). The effect of “Option A”, where applicable,
is broadly to limit the activities deemed not to constitute a PE by making such treatment
contingent on the specified activity in fact being of a preparatory or auxiliary character.
Addressing the avoidance of PE status through the splitting-up of contracts (article 14 of the MLI)
Some of New Zealand’s DTAs provide for certain construction sites and other activities (e.g.,
activities involving exploration for or exploitation of natural resources) to constitute a PE if
the site or activity lasts for more than a specified period of time (commonly either six months
or 12 months). The consultation document preceding New Zealand’s ratification of the MLI
commented (using a 12 month time period as an example) that “[e]ntities were abusing
[the] 12 month limit by having back-to-back 12 month contracts so they never exceeded
the 12 month threshold” and that “[g]enerally the contracts were undertaken by different
companies within the same group of companies.”31
New Zealand has not made any reservations with respect to article 14 of the MLI and
pursuant to article 14(4) of the MLI has notified that it considers 18 of the 37 DTAs it wishes
to be covered tax agreements contain a provision described in article 14(2) that is not subject
31
Inland Revenue and the Treasury, New Zealand’s implementation of the Multilateral Convention to Implement Tax
Treaty Related Measures to Prevent BEPS (March 2017) at 18.
576
Brown & Siegel
to a reservation under article 14(3)(b). The effect of these notifications, where applicable
(and again, subject to the positions adopted by the relevant DTA partners), is that certain
connected activities carried on at the same site during different periods of time, each
exceeding 30 days, by one or more closely related enterprises, are taken into account for the
purpose of determining whether the threshold has been met.
Anti-hybrid mismatch rules
Hybrid entities (i.e., entities recognised for tax purposes as entities in one state, but
disregarded in the other) may result in a DTA not applying as it should, and in double
taxation, or double non-taxation depending on the circumstances. New Zealand’s DTAs with
Australia, Belgium, Chile, Japan and the United States contain a provision addressing fiscally
transparent entities.32 For example, article 4(4) of the DTA with Chile states:
An item of income, profit or gain derived through a person that is fiscally transparent
under the laws of either Contracting State shall be considered to be derived by a resident
of a Contracting State to the extent that the item is treated for the purposes of the taxation
law of that Contracting State as the income, profit or gain of a resident.
New Zealand has not made any reservation in respect of article 3 of the MLI, and has notified
that article 3(1) of the MLI should apply in place of the relevant listed provision in New
Zealand’s DTAs with Australia, Belgium, Chile and Japan to the extent provided for by article
3(4) of the MLI. The effect of this notification is likely to be limited in the case of New Zealand’s
DTAs with Australia and Chile because the existing fiscally transparent provision is similar
to article 3(1) of the MLI.
New Zealand’s domestic tax law contains various rules to address dual resident companies
obtaining inappropriate tax advantages. For example, dual resident companies are not able
to offset losses against the income of other companies in their group.
Most of New Zealand’s DTAs also contain a tie-breaker test (generally based on place of
effective management) for determining access to treaty benefits where a company is dual
resident. Some commentators were concerned when it was proposed that New Zealand
would adopt article 4(1) of the MLI, which replaces the existing DTA tiebreaker test for dual
resident companies with the need to obtain a competent authority determination. New
Zealand did not, however, make any reservation in respect of article 4 of the MLI.
32
See the Agreement between the government of Australia and the government of New Zealand for the avoidance
of double taxation and the prevention of fiscal evasion with respect to taxes on income 1938 UNTS 208 (signed
26 June 2009, entered into force 19 March 2010), art. 1(2); Convention Between the government of New Zealand
and the government of Belgium for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income (signed 15 September 1981, entered into force 8 December 1983), art. 4(1); Convention
between New Zealand and the Republic of Chile for the avoidance of double taxation and the prevention of
fiscal evasion with respect to taxes on income 2523 UNTS 181 (signed 10 December 2003, entered into force 10
June 2006), art. 4(4); Convention between New Zealand and Japan for the avoidance of double taxation and the
prevention of fiscal evasion with respect to taxes on income (signed 10 December 2012, entered into force 25
October 2013), art. 4(5); and the Convention between New Zealand and the United States for the avoidance of
double taxation and the prevention of fiscal evasion with respect to taxes on income 1643 UNTS 251 (signed 23
July 1982, entered into force 2 November 1983), art. 1(6).
577
New Zealand
Following the MLI taking effect with respect to New Zealand’s DTA with Australia,
further concerns were raised regarding the impact of article 4 of the MLI. In response to those
concerns, Inland Revenue finalised with the Australian Tax Office a practical administrative
approach for non-individual dual residents, which allows eligible taxpayers to self-determine
their place of effective management for the purpose of determining their residence under
the New Zealand-Australia DTA. To be eligible to use this administrative approach a taxpayer
must satisfy criteria that relate to its legal form, its income and the value of its intangible
assets, and its compliance history. The approach will not be useful to larger businesses given
that one of the eligibility criteria is that “[t]he taxpayer’s group annual accounting income
is less than A$ 250 million or NZ$ 260 million [approximately US$ 160 million] based on
prepared financial statements for the most recent reporting period”.33
In addition to adopting the anti-hybrid mismatch articles of the MLI, New Zealand has
implemented comprehensive anti-hybrid mismatch rules, reflecting the recommendations in
the OECD’s BEPS Action 2 Report (Neutralising the Effects of Hybrid Mismatch Arrangements).
Those rules broadly take effect for income years beginning on or after 1 July 2018.
Mandatory binding arbitration
New Zealand has chosen to apply part VI of the MLI (articles 18-26), which provides for
mandatory binding arbitration. New Zealand’s preference is for final offer (or “baseball”)
arbitration due to its simplicity and cost effectiveness.
Consequently, an increased number of New Zealand’s DTAs will include arbitration.
Previously only two New Zealand DTAs provided for arbitration34 and one of those (with
Australia) provided for arbitration on questions of fact only. Australia and New Zealand have
elected to amend their existing arbitration provisions through the MLI, whereas the existing
arbitration provisions in the DTA with Japan will not be amended by the MLI. The MLI will
also result in DTAs with a further 13 states including provision for arbitration where previously
they did not.
New Zealand has reserved the right to exclude from arbitration any case involving the
application of its GAAR or a provision relating to arrangements that avoid the creation of a
PE in New Zealand. This is consistent with the fact that under domestic law, those provisions
will apply even if they are inconsistent with the terms of a DTA (see further our comments
in section 1.2.2 above).
Provisions of the MLI New Zealand has chosen not to adopt
As discussed above, New Zealand has chosen not to adopt article 6(3) of the MLI, reflecting
a long-standing treaty policy. New Zealand has recently signed a revised DTA with the PRC
33
Inland Revenue “Australia and New Zealand’s administration approach – MLI Article 4(1)” (May 2019) Inland
Revenue Tax Policy <http://taxpolicy.ird.govt.nz/publications>.
34
See the Agreement between the government of Australia and the government of New Zealand for the avoidance
of double taxation and the prevention of fiscal evasion with respect to taxes on income 1938 UNTS 208 (signed
26 June 2009, entered into force 19 March 2010), art. 25(6); and Convention between New Zealand and Japan for
the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (signed 10
December 2012, entered into force 25 October 2013), art. 26(5).
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Brown & Siegel
which includes the full OECD preamble, including article 6(3) of the MLI. While New Zealand
is open to including the wording in future DTAs on a case-by-case basis, it is unlikely that it
will reverse its MLI position.
New Zealand has chosen not to apply article 5 of the MLI, relating to the elimination of
double taxation, as New Zealand applies the credit method and not the exemption method.
Therefore article 5 of the MLI is not relevant for New Zealand.
New Zealand’s MLI reservations
New Zealand did not make significant reservations with respect to the MLI, except for two
reservations to limit the scope of cases that may be submitted for arbitration. Those were,
as noted above, to exclude from binding arbitration cases concerning New Zealand’s GAAR
and the PE avoidance rule.
Impact of the MLI on the negotiations of DTAs since the MLI
New Zealand, like many countries, put most DTA negotiations on hold while the OECD/G20
BEPS Action Plan (including the development of the MLI) was being progressed. This was to
ensure that all negotiated DTAs reflected the wording agreed upon and included in the 2017
update to the OECD Model. Negotiations have since resumed.
A new DTA with the PRC was signed on 1 April 2019.35 The new DTA includes all of the BEPS
minimum standards as well as other provisions contained in the MLI. Based on the PRC’s
provisional notifications (the PRC has not yet ratified the MLI), the new DTA with the PRC goes
beyond the impact of the MLI on New Zealand’s existing DTA with the PRC. The transparent
entities (article 3), updated preamble (article 6(3)), dividend transfer transactions (article
8), land rich companies (article 9) and avoidance of PE status (articles 12 to 15) provisions
would not, given the PRC’s reservations in respect of the MLI, apply to the existing DTA. But
equivalent provisions are included in the recently signed DTA. One provision in the recently
signed DTA that does not reflect New Zealand’s MLI position is the inclusion of the additional
preamble wording found in article 6(3) of the MLI.
An amending protocol to the DTA with Switzerland has been negotiated, because the
MLI does not apply to the existing DTA due to differences in the legal systems of the two
jurisdictions. The DTA with Switzerland is being reviewed as part of the peer review process
for Action 6 and Action 14, so the conclusion of the amending protocol has been a focus for
New Zealand in 2019. The amending protocol was signed on 8 August 2019 and contains
all of the BEPS minimum standards, along with several best practice provisions where they
coincide with both jurisdictions’ MLI positions, including mandatory binding arbitration.36
35
Agreement between the government of New Zealand and the government of the People’s Republic of China
for the elimination of double taxation with respect to taxes on income and the prevention of tax evasion and
avoidance (signed 1 April 2019, entered into force 27 December 2019).
36
Protocol amending the convention between New Zealand and the Swiss Confederation for the avoidance of
double taxation with respect to taxes on income (signed 8 August 2019, not yet in force).
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New Zealand
Incorporating provisions of the MLI into DTAs
The MLI and its provisions will remain as a “third layer” of international law. As new DTAs are
negotiated (either for the first time, or to replace an existing DTA), New Zealand’s current
intention is for the relevant provisions to be directly incorporated into those DTAs, rather
than listing those new DTAs as covered tax agreements under the MLI.
OECD Model versus MLI reservations
New Zealand has not made any reservations in relation to the 2017 update to the OECD
Model Convention and New Zealand’s policy regarding the 2017 update corresponds with
New Zealand’s final MLI notifications and reservations. This is because New Zealand has
taken a broad approach with respect to the MLI and has adopted provisions where they are in
line with New Zealand’s overall treaty policy. As noted, while New Zealand has not adopted
article 6(3) of the MLI due to a long-standing treaty policy, the provision has recently been
included in the new DTA with the PRC.
Under New Zealand domestic law, bilateral and multilateral tax treaties are given effect under
section BH 1 of the Act by way of Order in Council made by the Governor-General. Parliament
does not directly consider the content of New Zealand’s DTAs, although in accordance with
the Standing Orders of the House of Representatives, DTAs must undergo examination by a
parliamentary select committee.37 Parliamentary select committees are made up of members
of parliament, and membership normally reflects the political party representation in the
House of Representatives.
The MLI was referred to the Finance and Expenditure Select Committee for treaty
examination on 10 August 2017. The Finance and Expenditure Select Committee met on 31
January and 21 February 2018 to consider the MLI and issued its report in February 2018. That
report concluded that:38
This treaty is a core part of New Zealand’s policy response to base erosion and profit
shifting, and the OECD’s recommendations. We consider it important that New Zealand
take all steps it can to ensure compliance with tax legislation, and therefore support the
treaty. [Note for Anja: “take” is the word used in the report to which the quote relates.]
37
Standing Orders of the House of Representatives 2017, SO 397.
38
Base Erosion and Profit Shifting (Report of the Finance and Expenditure Committee, February 2018) at 3.
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Brown & Siegel
The examination did not include consideration of the detailed impact of the MLI on each of
New Zealand’s DTAs as treaty partners’ notifications and reservations could change.
The resulting Order in Council to give effect to the MLI, the Double Tax Agreements
(Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base
Erosion and Profit Shifting) Order 2018, was made on 14 May 2018. New Zealand deposited
its instrument of ratification on 27 June 2018 and the MLI entered into force for New Zealand
on 1 October 2018.
Since New Zealand’s ratification of the MLI, Inland Revenue has been working on
synthesised texts for New Zealand’s DTAs, but only once the relevant DTA partner has ratified
the MLI. This is to ensure that the synthesised text properly reflects the two jurisdictions’ final
notifications and reservations. Inland Revenue intends to follow as closely as possible the
“Guidance to the development of the synthesized text” published by OECD in November 2018,
with minor modifications for readability and to ensure consistency with other documents
published on its website.
Where possible, Inland Revenue has been working with the DTA partner counterpart
to ensure that there is alignment in the understanding of the MLI’s impact on a given DTA.
The texts are not yet available on the Inland Revenue website but have been published by
Inland Revenue’s counterparts in Australia, Japan, Poland and the United Kingdom.39 Where
a synthesised text has been jointly prepared, wording to that effect will generally be included
in the disclaimer.
Inland Revenue has never published consolidated texts for DTAs and amending protocols.
In the past, some New Zealand publishers have published consolidated texts, but it is not
yet certain whether they would do the same for the MLI. There is no requirement under
New Zealand domestic law for consolidated texts or synthesised texts to be published;
instead these synthesised texts are intended to provide clarity on the effect of the MLI on
New Zealand’s DTAs.
New Zealand operates a “dualist” system meaning that for international treaty obligations
to be given the force of law domestically, they generally must be incorporated into domestic
legislation. As noted, the MLI has been incorporated into New Zealand’s domestic legislation
by Order in Council pursuant to section BH 1 of the Act (i.e., in the same way that a DTA is
incorporated into domestic law).
The application of the MLI under domestic law could be subsequently amended
or repealed. This follows from the principle (central to New Zealand’s constitution) of
parliamentary supremacy: a future parliament would always have the power to repeal or alter
any law, including a law incorporating into New Zealand law the terms of an international
treaty.
39
Inland Revenue “Tax treaties” (18 July 2019) Inland Revenue Tax Policy <http://taxpolicy.ird.govt.nz/tax-treaties>.
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English is one of New Zealand’s official languages, meaning that translation of the MLI by the
New Zealand government for incorporation into New Zealand domestic law is not necessary.
The New Zealand courts have not yet considered any issues relating to the MLI, which is to be
expected given that New Zealand tax disputes ordinarily take a number of years following
the completion of a review or audit before being considered by a court.
The Explanatory Statement to the MLI is not referred to in the Order in Council
incorporating the MLI into domestic law, and neither is the OECD memorandum “Functioning
under Public International Law”.40 The interpretative value of those documents would likely
be determined in accordance with the approach taken to the interpretation of tax treaties
generally, as discussed in the next section.
In cases concerning the interpretation of a DTA, the New Zealand courts have taken into
account the commentary to the OECD Model. For example, the Court of Appeal has observed
that the “OECD Convention rules have an international currency” and that provisions of the
relevant DTA “should be construed on broad principles of general acceptation and having
appropriate regard to the Commentary and any travaux préparatoires”.41 The approach
generally permits taking into account background materials as well as subsequent practice
in a treaty’s application.
Inland Revenue has reflected this in its guidance, for example, in relation to claiming a
foreign tax credit where the foreign tax paid is covered by a DTA:42
70. In CIR v JFP Energy Inc (1990) 12 NZTC 7,176 (CA), Richardson J stated that appropriate
regard should be given to the Model Commentary. While the Model Commentary is not
binding, the Commissioner considers it extremely influential and an important tool for
interpreting DTAs.
71. The Commissioner considers the Model Commentary can form part of the legal context
of a DTA under art 31(1) of the Vienna Convention, provided the DTA article is the same
or similar to the Model Convention and the Model Commentary was in existence at
the time the DTA was signed. The Model Commentary may still be relevant if it was
written after the DTA was signed, provided the changes to the Model Commentary are
for clarification only. Similarly, the Model Convention can be a relevant supplementary
means of interpretation under art 32 of the Vienna Convention.
Given the New Zealand approach to interpreting DTAs permits taking into account
background materials, including the OECD commentary, it is expected that commentary
explaining the relevant provisions of the MLI (including the Explanatory Statement) could
40
OECD Directorate for Legal Affairs “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent
Base Erosion and Profit Shifting: Functioning under Public International Law” (18 July 2019) OECD
<http://www.oecd.org/tax/treaties>.
41
Commissioner of Inland Revenue v. JFP Energy Inc. (1990) 12 NZTC 7,176 at 7,179.
42
Inland Revenue Tax Information Bulletin (Vol. 28, Number 12, December 2016) at 48.
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also be taken into account. Potentially, too, the OECD’s reports on the various BEPS Actions
might be considered relevant in helping to explain the mischief to which a provision of
the MLI is directed. Reports (such as the BEPS Actions reports) would, however, carry less
weight than the Explanatory Statement: whereas the Explanatory Statement was prepared
contemporaneously with, and purports to explain the text of, the MLI, the earlier reports are
mere historical background.
In accordance with article 28 of the Vienna Convention on Treaties, it is not expected that the
MLI would have retrospective effect in New Zealand in relation to DTAs that are modified
(or are not modified) by the MLI. Article 28 of the Vienna Convention on Treaties states that:43
Unless a different intention appears from the treaty or is otherwise established, its
provisions do not bind a party in relation to any act or fact which took place or any
situation which ceased to exist before the date of the entry into force of the treaty with
respect to that party.
This arguably suggests that a DTA that is not covered by the MLI, or a particular provision that
has not been modified by the MLI, should be interpreted as it would have been interpreted in
the absence of the MLI. Since the primary determinant of a DTA’s meaning is the text, it would
be unlikely for the text of a DTA to mean something different as a result of a country having
decided not to have the MLI apply to that DTA, or to a particular provision of it.
We take the example of whether a commissionaire arrangement entered into by a resident
of country A results in a PE in country B. If country B had reserved against the adoption of (say)
article 12 of the MLI, it would seem unlikely that this would be taken as evidence that article
12 was considered unnecessary and that the existing DTA had the same effect as if article 12
of the MLI did apply. Country B’s reservation might, more likely, be explained by country B
having made a conscious decision for its DTAs not to apply in accordance with the test set
out in article 12 of the MLI.
As to the effect of the MLI on the general approach to interpreting DTAs, we would expect
the MLI to reinforce the primacy of the text of each DTA (to the extent amended by the MLI)
as the source of its meaning. The fact that some DTAs are amended by the MLI while others
are not, would tend to reinforce the notion that a DTA as amended by the MLI has a different
meaning from a DTA not amended by the MLI. When differences reflect conscious decisions
by the states in question, it is more problematic for a court to dismiss those differences as
merely different ways of expressing the same concept.
Given the MLI has been in force only since 1 October 2018 for New Zealand and is not yet in
force in relation to all of New Zealand’s covered tax agreements, it is too early to say what
43
Vienna Convention on the Law of Treaties 1155 UNTS 331 (opened for signature 23 May 1969, ratified by New
Zealand on 4 August 1971) entered into force on 27 January 1980, art. 28.
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effect (if any) it may have on Inland Revenue’s audit strategy and practices. However, Inland
Revenue has stated “[w]e closely monitor all significant enterprises with a turnover greater
than [NZ]$80m [approximately US$ 50 million] and all foreign-owned corporates with a
turnover in excess of [NZ]$30m [approximately US$ 20 million].”44 That increased scrutiny
has included requiring these significant enterprises to “submit a Basic Compliance Package
(BCP) every year”, “[t]he BCP comprises a group structure, financial statements and tax
reconciliations.”45
Of the BEPS-related reforms that New Zealand has implemented, it is likely that the
domestic law reforms are having a more noticeable impact on tax planning than the MLI.
Those reforms include extending the scope of non-resident withholding tax on interest,
an effective reduction in permitted interest expense under the thin capitalisation rules,
further limiting related-party interest deductions by effectively imposing a “cap” on the
permitted interest rate on related-party debt, and the adoption of a comprehensive set of
rules countering hybrid and branch mismatch arrangements.
In addition, to the extent New Zealand’s DTAs are modified by the MLI to include anti-
avoidance measures (such as the principal purpose test) this is unlikely to have a significant
effect on tax planning in practice. This is because New Zealand’s GAAR, which the courts
have interpreted broadly, has had the potential to limit DTA benefits even without taking
into account the MLI, at least since an amendment, effective from March 2017, providing
for the GAAR to apply even when inconsistent with the terms of a DTA (see section 1.2.2 of
this report).
The establishment of a PPT committee is not envisaged. Inland Revenue has checks and
balances in place to ensure that anti-avoidance provisions such as the PPT are administered
appropriately.
With the MAP provisions of certain older DTAs being modified by the MLI, Inland
Revenue expects further improvements in the timeliness of dispute resolution. In addition,
the prospect of binding arbitration being available to a taxpayer after 24 (or, in some cases,
36) months is likely to affect the positions taken by competent authorities, with additional
resources being applied to improve turnaround times.
Inland Revenue has been assessed by the FTA MAP Forum as having sufficient resources
to deal with the current inventory of MAP cases. Inland Revenue has acknowledged that if
this caseload were to increase markedly, additional resources would be applied to meet New
Zealand’s objective of resolving cases within 12 months of receiving a request for assistance.
Inland Revenue continues to encourage multinationals in particular to enter into early
dialogue to resolve difficult issues upfront, including by seeking binding rulings in advance
of tax returns being filed and positions becoming entrenched.
44
Multinational Enterprises Compliance Focus (Inland Revenue, November 2019) at 7.
45
At 4 and 7.
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Branch reporter
Cyril Ikechukwu Obika1

The Multilateral Convention to Implement Tax Treaty Measures to Prevent Base Erosion and
Profit Shifting (Multilateral Instrument-MLI) was signed into law by Nigeria on 17 August
2017. The MLI came into effect on 24 November 2016, at Paris and prior to that time, Nigeria
had signed DTTs with 18 countries, with different dates for the DTTs to come into effect and
other treaties having no dates to come into effect specified yet . The DTT with Singapore
which is the nineteenth country was signed on 02 August 2017, after the MLI came into effect.
Nigeria’s DTTs are in compliance with the OECD and UN Model, though it tilts more
towards the UN Model Convention which generally favours and gives greater weight to the
retention of greater taxing rights under a tax treaty to the “source country”, which is the host
country of investment.
The direct impact of the MLI on Nigeria’s DTT are incorporated in the Nigeria’s BEPS MLI
Position document which contains a provisional list of expected reservations and notifications
to be made by Nigeria pursuant to articles 28(7) and 29(4) of the MLI Convention.
Signature and ratification, acceptance or approval of the MLI
Article 27 of the MLI deals with signature and ratification, acceptance or approval and states
that as from 31 December 2016, the Convention shall remain open for signature and is
subject to ratification, acceptance or approval. This implies that even if it is signed but not
ratified, accepted or approved, then the mere fact that it has been signed will not suffice. It
is noteworthy to also state that even though Nigeria signed the MLI on 17 August 2017, it has
not deposited the instrument of ratification, acceptance or approval as required by article 34
of the MLI and consequently, it has not come into force.
Preamble statement, principal purpose test (PPT), beneficial interest and treaty shopping
Nigeria is implementing the preamble statement and the Principal Purpose Test (PPT) of the
MLI, meant to tackle treaty shopping. Consequently, it has adopted article 7 (1) & (2) of the
MLI that provides for prevention of treaty abuse. The provision is to the effect that irrespective
of the provisions of a CTA/DTT, a benefit under it shall not be granted in respect of an item of
income or capital if it is reasonable to conclude, that obtaining that benefit was one of the
1
Coordinator of the Postgraduate Unit and a Revenue and Taxation Law Lecturer at the Department of Business
Law, Faculty of Law, Enugu State University of Science and Technology (ESUT), Enugu State of Nigeria and an
intern at the Tax Practice Group of ǼLEX, a full service Commercial and Dispute Resolution Law Firm with offices
in Nigeria and Ghana.
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Nigeria
principal purposes of any arrangement or transaction that resulted directly or indirectly in

that benefit, unless it is established that granting that benefit in these circumstances would
be in accordance with the object and purpose of the relevant provisions of the Covered Tax
Agreement.
Interpretation of tax treaties
The interpretation of tax treaties is generally the same with that of other statutes in Nigeria,
except that with respect to section 45 (1) of the Companies Income Tax Act (CITA), where
there is a conflict with the double taxation treaty, the latter will prevail. The imposition of
taxes is based on a tax law establishing it. There is no retrospective use or application of tax
laws in Nigeria.
Anti-tax avoidance provisions
Nigerian legislature undertakes periodic amendments to our tax laws with a view to
addressing incidences of tax avoidance, evasion, BEPS and even treaty shopping. We have
certain provisions of our laws intended to curb avoidance or curtail it. Some of the provisions
are stated sections 22 and 94 of Company Income Tax Act 2004,2 section 20 Capital Gains Tax
Act,3 and sections 7, 9, 17, 95 and 96 of the Personal Income Tax Act.4 The guiding principle
is that the benefits of a double taxation convention should not be available when the
main purpose for entering into certain transactions or arrangements was to secure a more
favourable tax position etc.
Tax treaties currently being negotiated or renegotiated
Nigeria has entered into a comprehensive bilateral tax treaty with Singapore which came
into force on 1 January 2019, since the MLI was signed. There are other tax treaties negotiated
and signed, but have not come into force. Nigeria currently has some DTTs that are yet to be
ratified.
Conclusion
Nigeria’s DTTs are in compliance with the OECD and UN Model, though it tilts more towards
the UN Model Convention which generally favours and gives greater weight to the retention
of greater taxing rights under a tax treaty to the “source country”, such that the host country
of investment enjoys more taxation rights or power, compared to those of the “residence
country” of the investor, as stipulated in the OECD Model.
2
See Cap C. 21, Laws of the Federation of Nigeria, 2004.
3
See Cap C. 1, Laws of the Federation of Nigeria, 2004 (as amended 2011).
4
See Cap P. 8, Laws of the Federation of Nigeria, 2004 (as amended 2011).
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It is hoped that Nigeria will do the needful with respect to the MLI, enter into more DTT/
CRA and speedily domesticate them so as to encourage more investment and business
activities in the economy. The DTT between Nigeria and Mauritius is a typical example and
it was entered into in 2012+ there is no gain saying that it is long overdue for ratification as
these delays in the ratification of the DTTs are currently holding back the flows of certain
foreign direct investment into Nigeria.
Part One: Impact of the MLI and the BEPS Action Plan on the
Tax Treaty Network
1.1. Introduction
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion
and Profit Shifting (Multilateral Instrument-MLI) and the Base Erosion and Profit Shifting
(BEPS) Action Plans have greatly impacted the tax treaty network, especially in Nigeria.
The Organisation for Economic Cooperation and Development (OECD) released its final
Base Erosion and Profit Shifting (BEPS) report on 5 October 2015, incorporating measures
that will change the existing international tax rules.5 The need to generate more revenue
to run government following the global financial crisis led the governments of the G20 to
commission the OECD to come up with plan to curb BEPS in September of 2013. This report
is the result of a two-year extensive consultation with stakeholders including Nigeria and
has made an impact on Nigeria’s tax regime even though Nigeria is not a member of the
OECD, especially with respect to Nigeria’s TP Regulations tailored in line with the changes
to TP Guidelines inter alia.
Deloitte6 captured the impact of the outputs of the BEPS projects on Nigeria’s tax
landscape on the short and long term as follows:
a. Introduction of more stringent and transparent transfer pricing compliance requirements.
Regulation 11 (b) of Nigeria’s Income Tax (Transfer Pricing) Regulations, No 1, 2012, and
the 2018 TP Regulation automatically incorporates the OECD Transfer Pricing Guidelines
into Nigeria’s local TP jurisprudence; including any future supplements or amendments
that may be made to the Guidelines. Consequently, the recommendations contained
in the reports on BEPS Action 8 (Guidance on transfer pricing aspects of intangibles)
and Action 13 (Guidance on transfer pricing documentation and Country by-Country
reporting) involving revisions to Chapters I, II and V of the OCED Guidelines will become
immediately applicable in Nigeria once the recommendations are approved.
b. Modification of Nigeria’s Bilateral Tax Treaties to incorporate outputs of the BEPS project
and swiftly address BEPS concerns.
Given the significant connection Nigeria’s treaty countries have with OECD, it would be
expected that adoption of the proposed multilateral tax treaty instrument by OECD will
trigger a wave of review and modification of Nigeria’s current and pending DTAs.
5
PWC- Impacts of the OECD BEPS Project on companies operating in Nigeria, https://pwcnigeria.typepad.com/
files/pwc-tax-alert_impacts-of-beps-on-nigeria.pdf.
6
Deloitte Nigeria Tax Newsletter November 2014: Changing international tax landscape What is the local impact
of Base Erosion and Profit Shifting (BEPS) anti-tax avoidance initiatives? https://www2.deloitte.com/content/
dam/Deloitte/ng/Documents/tax/taxnewsletter/Tax_%20Newsletter_November2014.pdf.
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Nigeria has also issued a provisional list of expected reservations and notifications to be
made by Nigeria pursuant to articles 28(7) and 29(4) of the MLI Convention,7 by giving a status
of List of Reservations and Notifications at the time of signature, contained in a document
titled, “Reservations and Notifications under the Multilateral Convention to Implement Tax
Treaty-Related Measures to Prevent Base Erosion and Profit Shifting”.
The MLI came into effect in Paris on 24 November 2016 and prior to that time, Nigeria had
signed DTTs with 18 countries8 as shown in Table 1 below, with different dates for the DTTs to
come into effect and some others having no dates specified yet for them to come into effect.
The DTT with Singapore which is the 19 country was signed on 2 August 2017, after the MLI
came into effect.
Nigeria’s DTTs are in compliance with the OECD and UN Model, though it tilts more
towards the UN Model Convention which generally favours and gives greater weight to the
retention of greater taxing rights under a tax treaty to the “source country”, such that the
host country of investment enjoys more taxation rights or power, compared to those of the
“residence country” of the investor, as stipulated in the OECD Model.
The direct impact of the BEPS Action Plan and the MLI on Nigeria’s DTT are incorporated in
the Nigeria’s BEPS MLI Position titled, Reservations and Notifications under the Multilateral
Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit
Shifting. As stated above, Nigeria at the time of signing the document, gave a provisional list
of expected reservations and notifications to be made by Nigeria pursuant to articles 28(7)
and 29(4) of the MLI Convention. The Table is outlined below:
Table 1
No Title Other Original/ Date of Date of

Contracting Amending Signature Entry into
Jurisdiction Instrument Force
1 Agreement between the Belgium Original 20-11-1989 03-12-1994
government of the Federal Republic
of Nigeria and the government of
the Kingdom of Belgium for the
Avoidance of Double Taxation and
the Prevention of Fiscal Evasion
with respect to Taxes on Income
and on Capital Gains.
7
Nigeria BEPS MLI Position titled, Reservations and Notifications under the Multilateral Convention to Implement
Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting.
8
Table 1.
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2 Agreement between the Canada Original 04-08-1992 16-11-1999
Canada for the Avoidance of Double
Taxation and the Prevention of
Fiscal Evasion with respect to Taxes
on Income and on Capital Gains.
3 Agreement between the People’s Original 15-04-2002 21-03-2009
government of the Federal Republic Republic of
of Nigeria and the government of China
the People’s Republic of China for
the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion
with respect to Taxes on Income.
4 Agreement between the Czecho- Original 31-08-1989 02-12-1990
government of the Federal Republic Slovak
of Nigeria and the government Socialist
of the Czech Republic for the Republic
the Prevention of Fiscal Evasion (Czech
with respect to Taxes on Income Republic)
5 Agreement between the Czecho- Original 31-08-1989 02-12-1990
government of the Federal Republic Slovak
of Nigeria and the government Socialist
of the Slovak Republic for the Republic
the Prevention of Fiscal Evasion (Slovak
with respect to Taxes on Income Republic)
6 Agreement between the France Original 27-02-1990 02-05-1991
of Nigeria and the government
of the French Republic for the
7 Agreement between the Federal Rep. of Original 06-11-2006 N/A
Republic of Nigeria and he Korea
Republic of Korea for the Avoidance
of Double Taxation and the
Prevention of Fiscal Evasion with
respect to Taxes on Income and on
Capital Gains.
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8 Agreement between the Mauritius Original 10-08-2012 N/A
the Republic of Mauritius for the
the Prevention of Fiscal Evasion Amending 09-05-2013 N/A
with respect to Taxes on Income Instrument
and on Capital Gains. (a)
9 Agreement between the Federal Netherlands Original 11-12-1991 09-12-1992

Republic of Nigeria and the
Kingdom of Netherlands for the
10 Agreement between the Pakistan Original 10-10-1989 07-03-1990
the Islamic Republic of Pakistan for
11 Agreement between the Philippines Original 30-09-1997 18-08-2013
the Republic of the Philippines for
12 Agreement between the Qatar Original 28-02-2016 N/A
the State of Qatar for the Avoidance
Capital Gains.
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13 Agreement between the Romania Original 21-07-1992 18-04-1993
of Romania for the Avoidance
Capital Gains.
14 Agreement between the Singapore Original 02-08-2017 N/A
the Republic of Singapore for the
15 Agreement between the South Africa Original 29-04-2000 05-07-2008
The Republic of South Africa for
16 Agreement between the Spain Original 23-06-2009 N/A
of the Kingdom of Spain for the
17 Agreement between the Sweden Original 18-11-2004 N/A
of Nigeria and The Government
of the Republic of Sweden for the
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18 Agreement between the United Arab Original 18-01-2016 N/A
government of the Federal Republic Emirates
the United Arab Emirates for the
19 Agreement between the United Original 09-06-1987 27-12-1987
government of the Federal Republic Kingdom
of Nigeria and the government of Great
of The United Kingdom of Great Britain and
Britain and Northern Ireland for Northern
the Avoidance of Double Taxation Ireland
1.2.2 (1). Definition of the purpose of the Nigerian tax treaty by its preamble
Article 6 of the MLI deals with the purpose of a Covered Tax Agreement (CTA/DTT) and
provides that it shall be modified to include the following preamble text:
“Intending to eliminate double taxation with respect to the taxes covered by this
agreement without creating opportunities for non-taxation or reduced taxation through tax
evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining
reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions).”
Whereas the Nigerian tax treaty preambles generally state as follows:
“Desiring to conclude an Agreement for the avoidance of double taxation and the
prevention of fiscal evasion with respect to taxes on income and capital gains.”
Consequently, Nigeria has chosen to apply article 6 (3) of the MLI, which states that a party
may also choose to include the following preamble text with respect to its CTA/DTT that does
not contain preamble language referring to a desire to develop an economic relationship
or to enhance co-operation in tax matters. To that extent, the following sentence has been
included in all the DTTs of Nigeria as follows:
“Desiring to further develop their economic relationship and to enhance their co-
operation in tax matters.” This is pursuant to article 6 (6) of the MLI Convention.
1.2.2 (2). Anti-treaty shopping Provisions
Nigeria has adopted article 7 (1) & (2) of MLI that provides for Prevention of Treaty Abuse.
The provision is to the effect that irrespective of the provisions of a CTA/DTT, a benefit
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Obika
under it shall not be granted in respect of an item of income or capital if it is reasonable to

conclude, that obtaining that benefit was one of the principal purposes of any arrangement
or transaction that resulted directly or indirectly in that benefit, unless it is established that
granting that benefit in these circumstances would be in accordance with the object and
purpose of the relevant provisions of the Covered Tax Agreement.
1.2.2 (2)(3). Anti-avoidance provisions
Nigeria has certain sections of domestic laws that are intended to curtail tax avoidance. Some
of the sections are sections 95 and 96 of the Personal Income Tax Act and Section 94 of the
Companies Income Tax Act which all have provisions targeted at persons that promote or
facilitate tax avoidance. Other domestic anti-avoidance provisions contained in the Nigerian
tax laws are section 22 of Company Income Tax Act 2004,9 section 20 Capital Gains Tax Act,10
and sections 7, 9 and 17 of Personal Income Tax Act.11 Article 9.5 of the Model Tax Convention
makes it important that steps should be taken to ensure that a taxpayer does not enter
into abusive transactions where it seeks to be granted the benefits of a double taxation
convention, especially in situations where arrangements that constitute an abuse of the
provisions of the convention have been entered into. The guiding principle is that the benefits
of a double taxation convention should not be available when the main purpose for entering
into certain transactions or arrangements was to secure a more favourable tax position and
obtaining that more favourable treatment in these circumstances would be contrary to the
object and purpose of the relevant provisions.
1.2.2 (2)(4). Interpretation and application of the beneficial ownership concept
The beneficial ownership concept is applicable in Nigerian tax treaties with respect to
dividend, interest, royalty etc. The interpretation and guiding principle vary depending on
the nature of the transaction and as stated earlier, tax statutes are also subject to most of the
usual statutory interpretations.
1.2.2 (2)(5). Treaty-based anti-avoidance provisions
There is no specific treaty based anti-avoidance provisions.
1.2.2 (2)(5) (f). LOB and PPT application in Nigeria
Nigeria is in agreement with the OECD’s minimum standard on treaty abuse, Principal
Purpose Test (PPT), the simplified limitation on benefits (SLOB) provisions that limit treaty
benefits to specific persons or categories of income, and mutual agreement procedure (MAP).
9
See Cap C. 21, Laws of the Federation of Nigeria, 2004.
10
See Cap C. 1, Laws of the Federation of Nigeria, 2004 (as amended 2011).
11
See Cap P. 8, Laws of the Federation of Nigeria, 2004 (as amended 2011).
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The import of the Principal Purpose Test (PPT) implies that an entity will be denied treaty
benefits under the guiding principle/the PPT rule if it is proved that “a main purpose” or “one
of the principal purposes” for entering into the transaction/arrangement (respectively) was to
obtain a tax benefit. The OECD uses this terminology as opposed to “the main purpose” test
or “the sole purpose” or “the predominant purpose”. This implies that, even if an arrangement
has many main/principal purposes and to obtain a tax benefit was one of the main/principal
purposes, the arrangement undertaken by the taxpayer will satisfy this test. Tax professionals
in Nigeria will likely take this into account in tax planning, even though Nigeria is not a
member of the OECD and has not ratified and approved the MLI.
1.2.2.3. Tax treaty abuses
Article 7 of Nigeria’s list of reservations and objections provides for prevention of treaty abuse.
It states that pursuant to article 7(17) (a) of the MLI Convention, Nigeria considers that its
DTTs contain a provision described in article 7(2) of the MLI, to the effect that irrespective of
the provisions of a DTT, any benefit under it shall not be granted with respect to any income
or capital if given all the circumstances, it is reasonable to conclude that obtaining that
benefit was one of the principal purposes of the arrangement or transaction that resulted
directly or indirectly in that benefit, unless it is established that granting that benefit in
these circumstances would be in accordance with the object and purpose of the relevant
provisions of the DTT.
1.2.2.3 (1). Dividend transfer transactions
Article 8 of MLI deals with dividend transfer transactions. However, article 8 of the list of
reservations for Nigeria stipulates that pursuant to article 8(3) (a) of the MLI Convention,
Nigeria reserves the right for the entirety of article 8 not to apply to its Covered Tax
Agreements.
1.2.2.3 (2). Transactions or arrangements undertaken to avoid taxation of immovable property
Article 13 (4) of the Nigerian DTTs with Korea, Spain and Singapore and article 15 (4) of the
DTT with the United Arab Emirates contain provisions in line with article 9(1) of the MLI on
Capital Gains from Alienation of Shares or Interests of entities deriving their value principally
from immovable property. To the extent that, the provisions of a Covered Tax Agreement
providing that gains derived by a resident of a contracting jurisdiction from the alienation
of shares or other rights of participation in an entity may be taxed in the other contracting
jurisdiction provided that these shares or rights derived more than a certain part of their
value from immovable property (real property) situated in that other contracting jurisdiction
(or provided that more than a certain part of the property of the entity consists of such
immovable property).
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1.2.2.3 (4). Avoidance of permanent establishment status through commissionaire and similar

arrangements
Articles 5 (5), 5 (6) (a) and 5 (7) (a) of the various Nigerian DTTs contain provisions described
in article 12 (3) (a) of the MLI which addresses the issue of artificial avoidance of Permanent
Establishment status through commissionaire arrangements and similar strategies. It
states that notwithstanding the provisions of a CTA/DTT that defines the term “permanent
establishment”, but subject to paragraph 2, where a person is acting in a contracting
jurisdiction to a CTA on behalf of an enterprise and, habitually concludes contracts, or
habitually plays the principal role leading to the conclusion of contracts that are routinely
concluded without material modification by the enterprise, and these contracts are:
a) in the name of the enterprise; or
b) for the transfer of the ownership of, or for the granting of the right to use, property owned
by that enterprise or that the enterprise has the right to use; or
c) for the provision of services by that enterprise,
that enterprise shall be deemed to have a permanent establishment in that contracting
jurisdiction in respect of any activities which that person undertakes for the enterprise unless
these activities, if they were exercised by the enterprise through a fixed place of business of
that enterprise situated in that contracting jurisdiction, would not cause that fixed place of
business to be deemed to constitute a permanent establishment under the definition of
permanent establishment included in the CTA.
Article 5 (6), (a) & (b) of the DTT between Nigeria and Belgium on the other hand with
respect to Permanent Establishment provides as follows:
“A person (other than an agent of an independent status to whom the provisions of
paragraph 5 of this Article apply) who acts in a Contracting State on behalf of an enterprise
of the other Contracting State shall be deemed to be a permanent establishment of that
enterprise in the first-mentioned Contracting State if:
(a) he has, and habitually exercises in that State, an authority to conclude contracts or carries
on any business activities on behalf of the enterprise, unless his activities are limited to
those mentioned in paragraph 3 of this Article; or
(b) he habitually secures orders for the sale of goods or merchandise in the first-mentioned
State exclusively or almost exclusively on behalf of the enterprise or other enterprises
controlled by it or which have a controlling interest in it”.
1.2.2.4. Hybrid mismatch arrangements and mandatory binding arbitration of disagreements
There is no specific provision for hybrid mismatch arrangements and mandatory binding
arbitration in DTTs of Nigeria.
1.2.2.5. Mutual agreement procedure (MAP)
The tax treaties entered into by Nigeria include provisions for a mutual agreement procedure
(MAP), pursuant to article 16(6) (a) of the MLI Convention. These provisions are contained
in articles 24(1), first sentence, 25(1), first sentence and 26(1), first sentence, of the various
DTTs of Nigeria.
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The provisions of article 16 (1) & (2) of the MLI are set out hereunder as an aid of an easier
distinction of the difference it has with the DTTs of Nigeria.
Article 16 of MLI– Mutual Agreement Procedure
1. Where a person considers that the actions of one or both of the Contracting Jurisdictions
result or will result for that person in taxation not in accordance with the provisions of
the Covered Tax Agreement, that person may, irrespective of the remedies provided by
the domestic law of those Contracting Jurisdictions, present the case to the competent
authority of either Contracting Jurisdiction. The case must be presented within three
years from the first notification of the action resulting in taxation not in accordance with
the provisions of the Covered Tax Agreement.
2. The competent authority shall endeavour, if the objection appears to it to be justified
and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual
agreement with the competent authority of the other Contracting Jurisdiction, with
a view to the avoidance of taxation which is not in accordance with the Covered Tax
Agreement. Any agreement reached shall be implemented notwithstanding any time
limits in the domestic law of the Contracting Jurisdictions.
However, with respect to the DTTs of Nigeria, it states that pursuant to article 16(6) (b) (i) of
the MLI Convention, Nigeria considers that its DTTs with certain countries have a provision
that provides that a case referred to in the first sentence of article 16(1) must be presented
within a specific time period that is shorter than three years from the first notification of
the action resulting in taxation not in accordance with the provisions of the Covered Tax
Agreement. The article and paragraph number of each such provision are also outlined in
the Nigerian BEPS MLI Position and List of Reservations and Notification.
Also pursuant to article 16(6) (b) (ii) of the Convention, Nigeria considers that some of
its DTTs contain provisions that provide that a case referred to in the first sentence of article
16(1) must be presented within a specific time period that is at least three years from the first
notification of the action resulting in taxation not in accordance with the provisions of the
Covered Tax Agreement.
Furthermore, pursuant to article 16(6) (c) (ii) of the MLI Convention, Nigeria considers that
some DTTs do not contain a provision described in article 16(4) (b) (ii) and pursuant to article
16(6) (d) (ii) of the MLI Convention, Nigeria also considers that certain DTTs do not contain a
provision described in article 16(4) (c) (ii).
Nigeria’s tax treaties ensure that eligible taxpayers are able to access the Mutual
Agreement Procedures (MAP) embedded in treaties; the implementation of administrative
processes that promote speedy resolution of disputes and ensures that treaty obligations of
treaty partners with regards to MAPs are fully implemented.
Nigeria signed the MLI on 17 August 2017, but there is no deposit of Instrument of Ratification,
Acceptance or Approval, as it has not been ratified, accepted or approved and it has not fully
entered into force in Nigeria. Section 12 of the 1999 Constitution of the Federal Republic of
Nigeria (as amended) provides that the treaty must be domesticated or passed into law by
the National Assembly of Nigeria before it can have the force of law.
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Even in the absence of an official documentary review published by either the government
or parliament, there is no gain saying the fact that Nigeria like all other nations of the world
that implement the MLI, has gained immensely from the act. We earlier mentioned the fact
that the extant Transfer Pricing (TP) Regulation of Nigeria, 2018, automatically incorporates
the OECD Transfer Pricing Guidelines into Nigeria’s local TP jurisprudence; including any
future supplements or amendments that may be made to the Guidelines. Consequently, the
recommendations contained in the reports on BEPS Action 8 (Guidance on transfer pricing
aspects of intangibles) and Action 13 (Guidance on transfer pricing documentation and Country
by-Country reporting) involving revisions to Chapters I, II and V of the OECD Guidelines will
become immediately applicable in Nigeria once the recommendations are approved.
1.3.1.1. Nigeria’s signing of the MLI
As earlier stated, Nigeria has signed the MLI but has not ratified it. Even in the absence of
any official report of the assessment of the MLI by Nigerian tax authorities, parliament or by
any governmental institution, the benefits are quite huge.
1.3.1.2. MLI ratification by Nigeria
Nigeria has yet to ratify the MLI.
Even though Nigeria has entered into CTA/DTTs with some countries, it has yet to domesticate
the MLI, as stated earlier.
1.3.2 (1). Treaties listed as DTTs/CRAs
Nigeria has listed all its DTTs/CRAs.
1.3.2 (2). Percentage of other contracting states to the DTTs/CRAs that have signed the MLI
Out of the 19 DTTs/CRAs listed by Nigeria, two contracting states have not yet signed the MLI,
while a number of other contracting states that have signed them are yet to ratify it. Only a
few of them have ratified and had it entered into force.
That means that only 10.53% of the other contracting states have not signed the MLI,
while about 89.47% of the other contracting states have signed.
Nigeria is yet to domesticate it. The other issues raised here have been already addressed
in the report.
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The MLI and 2017 OECD Model Convention have great impact on Nigeria’s bilateral and
regional tax treaty network as discussed earlier, even though it has not domesticated them.
The other issues other than the one addressed immediately below, have also been
addressed above.
1.4.1. Tax treaties currently being negotiated or renegotiated
Nigeria has entered into a comprehensive bilateral tax treaty with Singapore which came into
force on 1 January 2019, since the MLI was signed. There are other tax treaties negotiated but
yet to be executed. Nigeria currently has DTTs with some countries like Mauritius and the
Republic of Korea that have not entered into force. The treaty with Mauritius was entered
into in 2012 and there is no gain saying that it is long overdue for ratification; not to mention
the fact that these delays in the ratification of the DTTs are currently holding back the flows
of certain foreign direct investment into Nigeria. Delay in ratification of treaties also gives
room for uncertainty in the law amongst the treaty’s stakeholders.
Part Two: Practical implementation of the Provisions of the MLI
N/A for the aforementioned reason above, Nigeria having not domesticated it.
The MLI is not yet domesticated and therefore has not entered into force.
N/A as Nigeria is yet to domesticate it.
Same as above.
Applicable theory as between monist and dualist theory
Nigeria applies the dualism theory and not the monist theory. The concept of dualism
dates back to the doctrine of separation of powers and in the English positivist school of
the seventeenth and eighteenth century, that rejected the monist concept which believes
in the unity of domestic and international law that favours the distinction of domestic from
international law on the basis of the sovereignty of nations. Dualists regard international
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law and domestic law as two completely different systems of law. While international law
governs the relationship between states, domestic law governs the rights and obligations of
individuals within states, and while international law originates from custom, domestic law,
is a product of legislation. Thus, international law creates rights and duties among states, for
which each individual state must determine the manner how it complies with it.
The main features of the monist theory are the unity of international and domestic law,
the automatic incorporation of international law into domestic law, and the supremacy of
international law over domestic law in cases of conflict between the two. Generally, it is the
Constitution of States that prescribes the manner in which international law is automatically
incorporated into domestic law and for the primacy of international law over domestic law.
This is not applicable as the MLI has not been domesticated in Nigeria.
The interpretation of tax treaties is generally the same in Nigeria as discussed above, except
that with respect to section 45 (1) of the Companies Income Tax Act (CITA), where there is a
conflict with the double taxation treaty, the latter will prevail. The imposition of taxes is based
on a tax law establishing it. There is no retrospective use or application of tax laws in Nigeria.
There are no specific interpretation issues as the MLI has not been ratified in Nigeria. The
general principles and rules of judicial interpretation will apply.
The preambles of the Nigerian tax treaties clearly defined the purposes of the treaties. The
wordings and intendment of the preambles are substantially the same and read as follows:
“Agreement between the Government of the (… contracting state) and the Government of
the Federal Republic of Nigeria for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with respect to taxes on Income and Capital Gains”. The only exception is Italy
that applies only to income arising from business of operating aircraft or ships.
Nigerian legislature undertakes periodic amendments to our tax laws with a view to
addressing “treaty shopping” which connotes a premeditated effort to take advantage of the
international tax treaty network and a careful selection of the most favourable tax treaty for
a specific purpose.
As earlier stated, though Nigeria has signed the MLI, the deposit of the Instrument
of ratification, acceptance or approval has not yet happened because it has not been
domesticated (i.e. ratified, accepted or approved). However, in order to curb and fight
aggressive tax planning, it is in agreement with the OECD’s minimum standard on treaty
abuse, Principal Purpose Test (PPT), the simplified limitation on benefits (SLOB) provisions
that limit treaty benefits to specific persons or categories of income as discussed above, and
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treaty shopping. Consequently, the entity will be denied treaty benefits under the guiding
principle/the PPT rule if it is proved that “a main purpose” or “one of the principal purposes”
for entering into the transaction/arrangement (respectively) was to obtain a tax benefit.
The OECD uses this terminology as opposed to “the main purpose” test or “the sole purpose”
or “the predominant purpose”. This implies that, even if an arrangement has many main/
principal purposes and to obtain a tax benefit was one of the main/principal purposes, the
arrangement undertaken by the taxpayer will satisfy this test. Tax professionals in Nigeria
will likely take this into account in tax planning, even though Nigeria is not a member of the
OECD and has not ratified and approved the MLI.
The tax treaties entered into by Nigeria comply with the MLI and consequently, include
provisions for a mutual agreement procedure (MAP) and corresponding adjustments to
tax charged on profits or an enterprise after a transfer pricing adjustment. Nigeria’s tax
treaties ensure that eligible taxpayers are able to access the MAP embedded in treaties; the
implementation of administrative processes that promote speedy resolution of disputes and
ensures that treaty obligations of treaty partners with regards to MAPs are fully implemented.
ANNEX
The annex can be accessed on the IFA website together with the report.
1. Reservations and Notifications under the Multilateral Convention to Implement Tax

Treaty-Related Measures to Prevent Base Erosion and Profit Shifting.
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Branch reporters
Therese Miljeteig1
Mariken Solberg2

Norway signed the MLI on 7 June 2017, and deposited its instrument of ratification 17 July
2019. For Norway, the MLI will enter into force on 1 November 2019, effective from the income
year 2020. Consequently, it is difficult to assess the practical impact of the MLI now and in
the future at this point in time, such as potential interpretation issues or the influence the
MLI may have on other treaties not covered by the MLI.
Prior to the MLI, some Norwegian tax treaties contained treaty based anti-avoidance
provisions. These are, however, limited in number. Examples of such are exclusion provisions,
LOB provisions and purpose test-rules. Furthermore, Norwegian domestic legislation contains
both a non-statutory GAAR and several SAARs. None of these are specifically aimed at treaty
shopping or treaty abuse situations. However, such domestic rules are applicable in both
domestic and cross border situations, and therefore may be applicable in cases of treaty
abuse within the scope of the treaty in question. Some domestic SAARs are influenced by
the OECD/G20 BEPS work.
Norway has an extensive treaty network that covers more than 90 jurisdictions. These
generally follow the OECD Model. Approximately a third of the treaties are listed as Covered
Tax Agreements under the MLI. It is reasonable to expect that all these CTAs will eventually
be covered by the MLI as well. In considering which treaties to cover under the MLI, Norway
has considered whether a treaty is suited for MLI coverage. Norway has also chosen to not
include treaties that were already subject to bilateral negotiations.
As for the content of the MLI, Norway has opted to include most of the optional provisions.
Most noteworthy of the provisions opted out from, perhaps, is the provision relating to the
simplified Limitations on Benefits (LOB) rule and the provisions introducing mandatory
binding arbitration to the covered tax agreements. Norway has declined to include these in
the MLI, as such provisions are considered more suited for bilateral negotiations.
For treaties not chosen for MLI coverage, Norway has indicated that it will pursue or
continue bilateral negotiations with the relevant parties in order to implement the BEPS
minimum standards. This process has already begun, as Norway recently signed amending
protocols to two treaties in order to meet these standards. Based on this, we expect that
Norway will not lift any of its reservations to the MLI in the near future, nor include any further
CTAs.
With regard to the practical implementation of the MLI, this has followed the same
procedures as any other tax treaty in Norway. While Norway generally adheres to the dualist
theory of international law, there is special domestic legislation in place that simplifies
1
Adviser, Norwegian Ministry of Finance, Tax Law Department.
2
Higher Executive Officer, Norwegian Ministry of Finance, Tax Law Department.
IFA © 2020 601

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the implementation of tax treaties, compared to other treaties. Consequently, a treaty is

automatically considered incorporated into Norwegian domestic law upon parliament’s
approval to the treaty entering into force.
Tax Treaty Network
1.1. Introduction
In this part, we will attempt to give an overview of the direct and indirect impact of the BEPS
Action Plan and the Multilateral Instrument (MLI) on the Norwegian tax treaty network. First,
we will look closer at the Norwegian treaty network before the MLI. Also, we will examine
existing domestic and treaty-based doctrines and provisions preventing misuse and anti-
avoidance etc. Then we will look closer at the direct and indirect impact of the BEPS Action
Plan and the MLI on the treaty network.
1.2.1. Tax treaties entered into before MLI
Norway has an extensive tax treaty network that covers 91 jurisdictions. Per 15 October 2019,
Norway has a treaty in force with the following jurisdictions: Albania, Argentina, Australia,
Austria, Azerbaijan, Bangladesh, Barbados, Belgium, Benin, the former Netherlands
Antilles (Bonaire, Curacao, St. Maarten, St. Eustatius and Saba), Bosnia and Herzegovina,
Brazil, Bulgaria, Canada, Chile, China, Croatia, Cyprus, the Czech Republic, Denmark,
Egypt, Ivory Coast, Estonia, the Faroe Islands, Finland, France, Gambia, Georgia, Germany,
Greece, Greenland, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan,
Kazakhstan, Kenya, Republic of Korea, Latvia, Lithuania, Luxembourg, Malawi, Malaysia,
Malta, Mexico, Montenegro, Morocco, Nepal, the Netherlands, New Zealand, North
Macedonia, Pakistan, the Philippines, Poland, Portugal, Qatar, Romania, Russia, Senegal,
Serbia, Sierra Leone, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden,
Switzerland, Tanzania, Thailand, Trinidad and Tobago, Tunisia, Turkey, Uganda, Ukraine, the
United Kingdom, the United States, Venezuela, Vietnam, Zambia and Zimbabwe.3
3
This is a comprehensive list of the jurisdictions covered (and not the number of treaties) based on the Norwegian
overview of tax treaties found on the websites of the Norwegian Ministry of Finance. It does not correspond with the
number of tax agreements reported by Norway (84 treaties, 88 jurisdictions) for the jurisdictional data in the OECD
Peer Review report on Treaty Shopping. This is probably a result of differences in the criteria applied when counting. It
may be worth to note that Norway has a multilateral convention concluded with Denmark, the Faroe Islands, Finland,
Iceland and Sweden (the Nordic Convention). Furthermore, Norway signed a tax treaty with the former Republic of
Yugoslavia in 1983, which has later been continued with Bosnia and Herzegovina, Croatia and Montenegro through
exchange of notes with the respective jurisdiction. The treaty with Sierra Leone was originally signed with the United
Kingdom in 1951, but continued between Norway and Sierra Leone through exchange of notes in 1955. Following the
dissolution of the Netherlands Antilles, the treaty originally signed between Norway and the Antilles was continued
with Bonaire, Curacao, St. Maarten, St. Eustatius and Saba.
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Norwegian tax treaties generally follow the OECD Model, with some divergences. In
treaties concluded with developing countries, Norway has traditionally been willing to accept
a greater degree of source state taxation in accordance with the UN Model.
Norway has large petroleum resources, which is a significant part of government
revenue as it is taxed at a rate of 78 per cent.4 In Norway, the policy has been that the value
creation from Norwegian petroleum resources should benefit the Norwegian society. Thus,
Norway has not been willing to significantly reduce the government take on petroleum-
related activities when such are carried on by non-residents. Furthermore, limitations in
Norwegian taxing rights for such income could create incentives for tax planning driven by
the high tax rate. Consequently, Norwegian tax treaties often contain a special provision on
offshore activities not found in the OECD Model, which ensures Norwegian taxation rights
on the continental shelf. Norway has also made a reservation to article 5 of the OECD Model,
reserving the right to include such a provision in its treaties.5
Such a provision will usually state that a resident of the other contracting state carrying
on offshore activities connected to exploration or exploitation of petroleum resources, shall
be deemed to be carrying on business through a permanent establishment.6 This PE deeming
rule will usually apply to activities carried on for an aggregate of 30 days within a twelve-
month period. The 30-day threshold gives the state of residence taxation rights for short or
sporadic activities, and simplifies tax assessment for both the taxpayer and the tax authorities.
Furthermore, the offshore provision in Norwegian treaties usually also regulates taxation of
salaries and similar remuneration, as well as gains from alienation of certain assets.
Many Norwegian treaties also include provisions regarding taxation of services under
article 5. Some Norwegian treaties include a deeming provision relating to services that is
equivalent to or somewhat similar to the provision listed in the OECD Commentaries,7 for
example the treaties with Belgium,8 the Netherlands,9 Malawi10 and the United Kingdom.11
Others are based on the services PE provision in article 5 of the UN Model Convention, for
example in the tax treaty with India.12
Furthermore, Norway has made a reservation to article 15 of the OECD Model Convention
on employment income, reserving the right to insert a clarification related to the application
of the exceptions on income earned by hired-out personnel.13
The preamble of nearly all Norwegian tax treaties define the purpose of the treaty as the
avoidance of double taxation and prevention of fiscal evasion. A few treaties include different
4
Parliament resolution regarding tax on income on capital for the income year 2019 ch. 4.
5
See OECD (2017), Model Tax Convention on Income and on Capital: Condensed Version 2017, OECD Publishing (hereafter
2017 OECD MTC), p. 167.
6
See for example Norway’s treaties with Spain (art. 23) and Japan (art. 21).
7
2017 OECD MTC p. 157.
8
Art. 5 (4).
9
Art. 5 (4).
10
Art. 5 (4).
11
Art. 5 (4).
12
Art. 5 (3)(b).
13
See 2017 OECD MTC p. 329.
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formulations that also express a desire to promote the economic relationship between
the parties.14 The preamble of some treaties also mention a desire to establish provisions
regarding mutual administrative assistance.15 A limited number of treaties have a preamble
that does not mention the prevention of fiscal evasion.16 None of the tax treaties prior to the
MLI explicitly state prevention of treaty shopping or tax avoidance as part of the general
purpose.
Norwegian domestic legislation contains both a non-statutory General Anti-Avoidance
Rule (GAAR) (expected to be codified shortly) and several Specific Anti-Avoidance Rules
(SAARs). None of these provisions specifically addresses treaty-shopping situations. The
rules are applicable in both domestic and cross border situations, and may therefore apply
to tax treaty situations within the scope of each individual tax treaty.
The Norwegian SAARs include an interest deduction limitation rule.17 This was first
introduced in 2014, and then applied to interest payments between closely related parties
(intra group loans).18 Its scope was widened in 2019 to include interest payments between
independent parties. This extension was heavily influenced by the OECD/G20 BEPS
recommendations.19
Furthermore, the Norwegian Tax Act contains a SAAR relating to the transfer of tax
positions, e.g. the carrying forward of losses,20 as well as CFC-rules.21
The Norwegian tax system also has a general non-statutory anti-avoidance rule (GAAR)
developed through case law, which applies in both domestic and cross-border situations. The
Ministry of Finance has recently presented a proposal intending to codify the non-statutory
GAAR with minor adjustments, effective from 1 January 2020, if adopted by parliament
(Stortinget).22
The non-statutory GAAR makes it possible to disregard a transaction/disposition for
tax purposes if the two following main requirements are met: i) the main purpose was to
obtain a reduction of taxes and, ii) based on an overall assessment, the result of respecting
the disposition would be contrary to the policy reasons behind the tax provision in question.
The use of the GAAR results in the elimination of tax benefits through recharacterization or
reclassification of the case facts or transactions in question.23
So far, the relationship between the Norwegian domestic GAAR and tax treaty provisions
has not been thoroughly discussed by the Norwegian Supreme Court. How these rules interact
with each other has therefore yet to be settled. However, the general principles of tax treaty
interpretation are reflected in several rulings by the Court. In general, such interpretation is
based on the principles of international law, as reflected in the Vienna Convention of 1969. In
several rulings, the Supreme Court has stated that the OECD Commentaries are a significant
14
See for example the treaties with Russia (signed in 1996), India (signed in 2011) and Uganda (signed in 1999).
15
See for example the treaties Morocco (signed in 1972) and Germany (signed in 1991).
16
See for example the treaties with Senegal (signed in 1994), Germany and France (signed in 1980).
17
The Norwegian Tax Act of 26 March 1999, no. 14 (Tax Act) § 6-41.
18
See Prop. 1 LS (2013-2014) s. 4 and Prop. 1 LS Tillegg 1 (2013-2014) s. 6.
19
Prop. 1 LS (2018-2019) s. 9.
20
Tax Act § 14-90.
21
Tax Act § 10-60 through 10-68.
22
See Prop. 98 L (2018-2019).
23
For a detailed analysis of the Norwegian GAAR and SAARs, see Skar (2018) Norway, with further references, in
Anti-avoidance measures of general nature and scope – GAAR and other rules, IFA Cahiers vol. 103A, Online Books IBFD.
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source when interpreting tax treaties based on the OECD Model.24 The Supreme Court has
taken a dynamic approach and used new commentaries in the interpretation of older treaties,
as long as the wording of the treaty provision is the same and the new commentaries express
a clarification or change of state practice.25 Thus, there is a general assumption in current
Norwegian legal literature that domestic anti-abuse rules are applicable to treaty abuses
within the scope of the principles and guidelines reflected in the OECD Commentaries to
article 1 since 2003.26 Yet some legal scholars have disputed the applicability of domestic
anti-abuse rules to treaties entered into prior to 2003.27
The concept of beneficial ownership is an autonomous concept that has its roots in
international law, i.e. through tax treaties and the interpretation of these in light of the OECD
Commentary. Norwegian domestic legislation has no beneficial ownership concept that
mirrors the treaty-based one, and the Norwegian Tax Act does not use the term “beneficial
owner”.
In Norwegian tax law, however, there is a general case law doctrine of attribution in
regard to which taxpayer an income or a deduction shall be attributed to, that to some extent
builds on substance over form-criteria. While the general rule of attribution holds that the
taxpayer who is legally entitled to an income is the right subject for allocation, there may be
cases where the entitlement does not correspond with the effort and contribution put in to
actually earning the income.28 Entitlement as a sole criterion could also lead to abuse, as a
taxpayer, and certainly among closely related taxpayers, could have incentives to influence
the attribution.
In Norwegian case law, there are examples of the attribution doctrine serving a function
that resembles, or at least overlaps with that of the beneficial ownership concept, without
being equal to it. The most recent, and perhaps clearest example of this, came in a ruling
by the Norwegian Supreme Court in 2015. One of the questions presented to the Court, was
which company a carried interest payment from a private equity fund should be attributed
to. The taxpayer argued that the attribution in the tax assessment process needed to respect
and be in accordance with the contractual agreement between the companies in question,
and consequently, the income should be attributed to the company that was contractually
entitled to it. This notion in itself was rejected by the Supreme Court, which stated that
the recipient of the income also needed to have made an actual contribution that justified
the income being attributed to it.29 The Court referred to existing case law supporting this
reasoning. However, this ruling went far in clearly and precisely denying contract-based
entitlement as a sole criterion for income attribution.
Based on existing Norwegian tax treaties, it appears as if including treaty based anti-
avoidance rules has not been a highly prioritized part of the Norwegian treaty policy. It is
24
For example, Alphawell Rt. 1994 p. 752, Sølvik Rt. 2008 p. 577 and Dell products Rt. 2011 p. 1581.
25
Cf. Zimmer (2017) International Income Tax Law (5th edition), pp. 84-86, Naas, Bruusgaard, Ilstad and Svensen (2011)
Norwegian International Tax Law, pp. 94-96, Skaar et al. (2006) Norwegian tax treaty law, Gyldendal Akademisk,
Oslo, pp. 58-64. See also the Supreme Court judgements Alaska Rt. 1984 p. 99, Alphawell Rt. 1994 p.752, PGS Rt.
2004 p. 957 and Dell products Rt. 2011 p. 1581.
26
Skar (2018) Norway, pp. 14-15, in Anti-avoidance measures of general nature and scope – GAAR and other rules, IFA
Cahiers vol. 103A, Online Books IBFD. Zimmer (2017) International Income Tax Law (5th edition), pp. 39-40.
27
Furuseth (2018) Ch. 8.1: Historical Overview of OECD Comm. art. 1 and UN Comm. art. 1 in: The Interpretation of
Tax Treaties in Relation to Domestic GAARs (IBFD 2018), Books IBFD.
28
Cf Zimmer (2018) Textbook in Taw Law (8th edition), pp. 122-123.
29
Herkules Rt. 2015 p. 1260, para. 64.
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Norway
reasonable to believe that from a Norwegian point of view, such provisions are perceived
as not strictly necessary in addition to the domestic GAAR and SAARs, due to the dynamic
nature of treaty interpretation and the importance of the OECD Commentaries. Only a
limited number of Norway’s tax treaties include anti-avoidance provisions or explicitly
regulate the use of domestic anti-avoidance rules.30 Examples of LOB-provisions based on
the look-through approach can be found in the treaties with Barbados31 and the former
Netherlands Antilles.32 The treaties with Luxembourg,33 Argentina,34 Canada35 and the United
States36 include provisions excluding certain companies enjoying tax privileges, while the
Nordic convention37 include a subject-to-tax clause, and the treaties with Malta, the United
Kingdom,38 Thailand39 and Singapore40 include remittance rules. In some treaties, Norway has
also included purposes tests denying benefits from specific provisions regarding dividends,
interests, royalties and/or other income.41 The recent treaty with India includes a more general
purposes test similar to the PPT. The provision denies treaty benefits where the main or one
of the main purposes of the creation or existence of a resident or a transaction was to obtain
a treaty benefit that would not otherwise be available. 42
The MLI also seeks to implement other anti-abuse measures developed in the OECD/G20
BEPS project. Norway has followed the BEPS project closely and has recently introduced some
of the BEPS recommendations in its domestic tax law.
In 2014, the government appointed a public commission to review corporate taxation
in Norway in light of the developments in the international economy. The tax commission
made a comprehensive Official Norwegian Report (NOU)43 identifying the main challenges
for the corporate tax system, while also considering the preliminary recommendations
of the BEPS project. Many of the proposals in the report were based on these preliminary
recommendations.
In the following, we will give a brief overview of Norway’s experience with some of the
potential treaty abuse situations addressed by the MLI provisions.
To our knowledge, Norway has not had specific concerns or cases related to tax treaty
abuses addressed by articles 8, 9 and 10 of the MLI. The domestic GAAR may, however, apply
to abusive cases within the scope of each treaty. Norway does not have specific domestic
legislation regarding taxation of gains from shares etc. where the value of the shares is
30
Art. 29 of the tax treaty with Germany explicitly states the tax treaty should not be interpreted in a way that
prevents the use of domestic anti-abuse rules. An overview of treaty based anti-avoidance rules prior to 2006 is
found in Skaar et al. (2006) Norwegian tax treaty law, Gyldendal Akademisk, Oslo, p. 844 et sec.
31
Art. 29.
32
See art. 28. This treaty has been continued with Bonaire, Curacao, Saba, St. Eustatius and St. Maarten.
33
Art. 29.
34
Art. 29.
35
Art. 29.
36
Art. 20.
37
Art. 26.
38
Art. 31.
39
Art. 23.
40
Art. 23.
41
See for example the tax treaties with Australia, Bulgaria, Chile, Georgia, Ireland, Malta, Mexico, Romania, Serbia
and the United Kingdom.
42
Art. 29.
43
NOU 2014:13 Capital Taxation in an International Economy. An English summary is available here: https://www.
regjeringen.no/contentassets/bbd29ff81485402681c6e6ea46655fae/nou201420140013000engpdfs.pdf.
606
Miljeteig & Solber
derived from ownership of immovable property, but has included such provisions in many
of its tax treaties. Many of these provisions are not identical to the OECD version prior to 2017.44
Furthermore, we are not aware of any tax treaties that include special provisions regarding
low-taxed PEs in third countries.
With regard to commissionaire arrangements, in 2011 the Norwegian Supreme Court
found that a Norwegian commissionaire did not constitute a PE for its Irish principal under
the tax treaty with Ireland article 5 (5), corresponding to the OECD Model as it read prior to
the 2017 edition.45 The main question was whether the Norwegian commissionaire had the
authority to conclude contracts in the name of the principal. The Supreme Court considered
that under domestic agent law, the commissionaire could not legally bind its principal, and
thus did not constitute an agent PE under the treaty. The ruling of the Supreme Court implies
that an inclusion of the amendments to the agent PE rule is necessary for a commissionaire
arrangement to constitute a PE.
As for the specific activity exceptions to the PE definition addressed by article 13 of the
MLI, Norway considers that the specific activity exemptions for PE status should only apply
when the activities are of a preparatory or an auxiliary character. This applies regardless of
whether the activity is performed as a stand-alone activity, or in combination with another
activity.46 Thus, Norway seems to follow the decisive criterion of the OECD Commentary to
article 5, where an activity that forms an essential or significant part of the enterprise as a
whole, does not qualify under the specific activity exceptions.
To our knowledge, Norway has no treaties that, prior to the MLI, included a specific
provision regarding splitting-up of contracts in connection with the general PE provisions.
However, Norway’s special offshore activities PE provision normally includes a provision on
splitting-up of contracts that resembles that of article 14 of the MLI, for example the treaty
with Poland.47 Thus, a concept of splitting-up of contracts exists in Norwegian tax treaty law.
Article 3 of the MLI addresses hybrid mismatch arrangements resulting from the use of
transparent entities. In general, Norway has not included provisions regarding transparent
entities in its tax treaties with other countries, nor has the Norwegian Supreme Court dealt
with the question of granting tax treaty benefits in cases concerning transparent entities.
However, the treaties with the United States and India deviate from this tendency, as they
include a special provision regarding the treatment of income derived through a partnership,
estate or trust.48 It can be assumed that Norway follows the principles set forth in the OECD
Partnership Report49 that have been incorporated into the OECD Commentary, where Norway
made no observations or reservations.
With effect from 2016, Norway introduced a linking rule to the domestic participation
exemption, excluding dividends from tax exemption if the payment is deductible in
44
See for example the Nordic tax treaty art. 13 (6), which has a higher threshold and only applies to shares or
other interests in real estate companies. The tax treaty with the United Kingdom art. 13 (2) applies to shares or
comparable interests, but has an exception for shares listed on stock exchanges.
45
Dell Products Rt. 2011 p. 1581.
46
Prop. 15 S (2018-2019) p. 13.
47
Art. 20 (4)(a) and (b).
48
See the US tax treaty art. 3 (1)(a)(ii) and (b)(ii) and the tax treaty with India art. 4 (1)(b). Also, the protocol to the
tax treaty with the Netherlands art. V includes a rule prescribing questions of double taxation or double non-
taxation in cases of transparent entities to be solved by mutual agreement.
49
OECD (1999) The Application of the OECD Model Tax Convention to Partnerships, Issues in International Taxation, No.
6, OECD Publishing, Paris.
607
Norway
the country of the distributing company.50 This linking rule is based on the preliminary
recommendations set out in the OECD report on hybrid mismatch arrangements,51 and
seeks to prevent the use of hybrid arrangements exploiting differences in the tax treatment
of financial instruments. According to the preparatory work, the Ministry of Finance will
consider the need for additional anti-hybrid rules addressing transparent entities or other
financial instruments.52
As for dual resident entities, the majority of Norway’s tax treaties prior to the MLI include
the original tie-breaker rule of the OECD Model based on the place of effective management.
However, many tax treaties have an alternative tie-breaker rule, prescribing cases of dual
residency to be solved by mutual agreement by the competent authorities.53
In 2019, Norway also amended its domestic rules regarding the determination of tax
residency of persons other than individuals.54 These amendments included a broader
assessment of the place of effective management, which is more in line with both the old
and new version of article 4 (3) of the OECD Model. In order to prevent the possibility for
companies not to be resident in any country, it also includes a deeming rule on tax residency
for entities incorporated under Norwegian corporate law. Finally, Norway introduced an
exception to this rule, according to which an entity that is considered a tax resident of another
state under a tax treaty, is deemed not to be tax resident under Norwegian domestic law.
This exception is based on the recommendations of the BEPS report on hybrid mismatch
arrangements,55 addressing BEPS concerns related to dual resident entities arising from
mismatches between the domestic and tax treaty concepts of residency.56
With regard to transfer pricing adjustments, the majority of Norwegian tax treaties
concluded after 200057 include a provision on corresponding adjustment in treaty provisions
regarding associated enterprises. Many of these provisions depart from the wording of the
OECD Model prior to 2017, mainly by making corresponding adjustment discretionary.58
According to the Norwegian preparatory work59 to some of these treaties, the aim is to
clarify that corresponding adjustment should be based on an overall assessment. 60 With
respect to the Norwegian tax treaties that do not include specific provisions on corresponding
50
Tax Act § 2-38 para. 3 subpara. h and Prop. LS (2015-2016) s. 7.3.
51
OECD (2014) Neutralizing the Effects of Hybrid Mismatch Arrangements, OECD/G20 Base Erosion and Profit Shifting
Project, OECD Publishing, Paris.
52
Prop. 1 LS (2015-2016) p. 166.
53
For example, the tax treaties with Azerbaijan, Bulgaria, Canada, Chile, Cyprus, Estonia, the Philippines, Japan,
Latvia, Lithuania, the United Kingdom, Serbia, South Africa, Thailand, Malawi, Russia and Zambia.
54
Tax Act § 2-2 paras 7 and 8. See also Prop. 1 LS (2018-2019) s. 8.
55
OECD (2015), Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 – 2015 Final Report, OECD/G20 Base
Erosion and Profit Shifting Project, OECD Publishing, Paris, p. 137 et sec.
56
Prop. 1 LS (2018-2019) s. 8.
57
See for example art. 9 (2) in the tax treaties with Australia, Belgium, Bulgaria, Chile, Cyprus, the Czech Republic,
India, Malta, Poland, the United Kingdom and Portugal. Prior to 2000, it seems that the Norwegian treaty policy
was not to include such a provision. Norway’s reservation to art. 9 (2) of the OECD Model was, however, first lifted
in the 2005 revision of the OECD Model.
58
For example, art. 9 (2) in the tax treaties with Chile, Portugal, Qatar, the Czech Republic and Thailand. The tax
treaty with Belgium art. 9 (3) includes an exception in the case of fraudulent transactions.
59
See the Ministry of Finance’s comments to art. 9 in the treaty with Thailand in St.prp. nr. 13 (2003-2004) p. 3 and
the treaty with Chile in St.prp. nr. 33 (2001-2002) p. 3.
60
For a general overview of discretionary provisions on corresponding adjustment in Norwegian tax treaties prior
to 2006, see Skaar et al. (2006) Norwegian Tax Treaty Law, Gyldendal Akademisk, Oslo, pp. 438-439.
608
Miljeteig & Solber
adjustment, such adjustments may be solved by mutual agreement.61

Furthermore, three of Norway’s tax treaties include arbitration provisions. The Norwegian
authorities have, however, expressed that they are in favour of including such provisions in
general, but are of the opinion arbitration provisions are best suited for bilateral negotiations.62
The recently amended treaties with the UK,63 the Netherlands64 and Switzerland65 provide for
mandatory binding arbitration, but with some exceptions that differs from the arbitration
clause suggested in the MLI. These provisions except certain types of issues from arbitration66
and allow the competent authorities to agree on a solution that differs from the arbitration
decision within a certain time limit. As far as we know, there has yet to be a case actually
presented to arbitration pursuant to these provisions.
The Norwegian Minister of Finance signed the MLI on behalf of Norway on 7 June 2017.67 The
rationale behind this is that the MLI offers a quick effectuation and implementation of the BEPS
minimum standards. The alternative to the MLI would most likely be bilateral negotiations
of amending protocols or new treaties. This would take several years to accomplish, and be
a resource demanding process. It is also worth to note that the Norwegian parliament early
called upon the government to ensure a swift and comprehensive implementation of the
BEPS recommendations.68
To our knowledge, the Norwegian tax authorities have not made specific assessments
of how the MLI will affect tax compliance, administration or economic activity. Furthermore,
there has been little focus on the budgetary and economic impact of the MLI in Norway as
specific predictions in this regard would be difficult to make with a reasonable degree of
certainty. However, since the purpose of the BEPS project and the MLI is to counter BEPS
behaviour, it is not unlikely that the MLI will have some positive effect on government
revenue.
The MLI was formally approved by the Norwegian parliament on 19 February 2019. It was
then deposited with the OECD on 17 July 2019 and will enter into force on 1 November 2019,
effective on 1 January 2020.
61
See Guide for the mutual agreement procedure pursuant to tax treaties (MAP), published by the Norwegian Ministry
of Finance 20 February 2019, p. 3. The Guide is available in English here: https://www.regjeringen.no/
contentassets/a91a5dd41bde46c88ed4dfc2bf724252/guide_for_the_mutual_agreementprocedure.pdf.
See also Naas, Bruusgaard, Ilstad and Svensen (2011) Norwegian International Tax Law, p. 1017 and Skaar et
al.(2006), Norwegian Tax Treaty Law, Gyldendal Akademisk, Oslo, pp. 439-440.
62
Prop. 15 S ((2018-2019) p. 15.
63
Art. 27.
64
Art. 26.
65
Art. 25.
66
The treaty with Switzerland excludes cases concerning denial of treaty benefits to which domestic anti-abuse
rules apply and other cases deemed not suitable by the competent authorities, while the treaty with the United
Kingdom excludes some issues of dual residency and certain petroleum tax issues.
67
Cf. the overview of the signatories and parties to the MLI on the OECD websites: http://www.oecd.org/tax/
treaties/beps-mli-signatories-and-parties.pdf.
68
Norwegian Parliament resolution 738 of 31 May 2016.
609
Norway
Norway has listed 28 treaties as covered tax agreements (CTAs) under the MLI. These are
the treaties with Argentina, Australia, Bulgaria, Chile, the People’s Republic of China,
Cyprus, the Czech Republic, Estonia, Georgia, Greece, India, Ireland, Japan, Latvia, Lithuania,
Luxembourg, Malta, Mexico, the Netherlands, Poland, Portugal, Romania, Russia, Serbia,
Slovenia, South Africa, Turkey and the United Kingdom.69
Thus, Norway has not listed all of its treaties under the MLI. Compared to the data
reported by Norway for the Peer Review Report on Treaty Shopping,70 Norway has listed 28
out 84 tax treaties in force. This equals approximately 33 per cent of Norway’s treaty network.
Compared to the overview given in part one of this report, Norway has chosen 28 out of 91
jurisdictions covered by a tax treaty; equivalent to 30,7 per cent.
Of the tax agreements listed as CTAs by Norway, all counterparts so far indicated that
they will list their treaty with Norway as a CTA, or have actually done so upon depositing their
final instrument of ratification. 71 It is therefore reasonable to expect that all CTAs listed by
Norway will be modified by the MLI.
When considering which treaties to list as CTAs under the MLI, Norway has especially
considered whether an existing treaty is suited for MLI coverage, or if the BEPS minimum
standards should rather be implemented through a general bilateral renegotiation.72
Furthermore, some treaties were already in the process of bilateral renegotiations at the
time when the MLI and the proposed Norwegian choices and reservations were presented to
parliament. For these treaties, the government considered that the BEPS minimum standards
should be implemented through the ongoing negotiations.73 This signal makes it reasonable
to expect that Norway will not list additional treaties as CTAs in the near future, but rather
pursue bilateral negotiations with the relevant parties.
In this section, we will examine which provisions of the MLI, other than the minimum
standards that Norway has opted into, apply. There is no official statement on the Norwegian
choices in the Peer Review Report on Treaty Shopping, but to some extent, the choices made
are explained in the draft resolution (proposition paper) regarding the MLI presented to
parliament by the government.
Norway has opted to include the preamble language in article 6 (3), in addition to the
minimum standard in article 6 (1). This combination was considered to clarify the purpose
of tax treaties further.74
69
See the Norwegian list of notifications and reservations upon deposit of the ratification instrument on the OECD
websites here: http://www.oecd.org/tax/treaties/beps-mli-position-norway-instrument-deposit.pdf.
70
BEPS: Action 6, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. https://doi.
org/10.1787/9789264312388-en (hereafter: The Peer Review Report).
71
See the overview of signatories and parties to the MLI on the OECD website: http://www.oecd.org/tax/treaties/
beps-mli-signatories-and-parties.pdf.
72
Prop. 15 S (2018-2019) p. 8.
73
Prop. 15 S (2018-2019) p. 8.
74
Ibid. p. 15.
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Miljeteig & Solber
With regard to the minimum standard on treaty abuse, Norway has opted to satisfy
this by applying the principal purpose test (PPT) in article 7 (1) of the MLI, and not include
the simplified limitation of benefits provision. In the Norwegian list of reservations and
notifications as deposited with the Depositary, Norway has stated that it accepts the PPT
alone as an interim measure pursuant to article 7 (17) (a), but intends to adopt an LOB
provision in addition to, or as a replacement of the PPT, through bilateral negotiations. In the
draft resolution presented to parliament, it is reasoned that the need for an LOB rule is best
considered by carefully comparing and considering how the internal legislation in Norway
and another contracting state interacts.75 However, pursuant to article 7 (7) (a), Norway also
accepts a symmetric application of a simplified LOB where the other party to a CTA has chosen
to apply such a provision.
Norway has opted out of the discretionary benefits rule in article 7 (4), as its prescribed
procedure would delay the tax assessment process. Furthermore, a taxpayer would also
normally be able to raise such questions by invoking the mutual agreement procedure.76
Moving on from the articles that address the BEPS minimum standards, Norway has
chosen most of the optional MLI provisions.
Pursuant to article 8 paragraph 3 b) i), Norway has chosen to apply the minimum holding
period to its CTAs that do not already include a minimum holding period.77
Norway has opted out of article 9 of the MLI. This choice reflects the current Norwegian
tax treaty policy, and is a consequence of Norway lacking domestic legislation for taxing non-
resident’s gains from the alienation of shares in limited liability companies.78 However, we
note that Norway has accepted similar provisions in a number of its existing bilateral treaties,
for example with Canada79 and Portugal.80
With regard to the anti-avoidance rule in article 10, Norway has opted out, considering
that this provision would have a limited practical importance.81 In this regard, we also note
that very few of Norway’s tax treaties use the exemption method to avoid double taxation.
Articles 12, 13 and 14 of the MLI are all designed to prevent avoidance of permanent
establishment status. Norway has chosen to include all of these.
Norway considers it positive that article 12 lowers the threshold for a PE status, as this will
give the state where the economic activity takes place a greater taxing right.82
Furthermore, the Norwegian tax treaty policy holds that activity exemptions for PE
status should only apply where the activities are of a preparatory or an auxiliary character.
This applies regardless of whether the activity is performed as a stand-alone activity, or in
combination with other activity. Norway has therefore chosen to apply option A, pursuant
to article 13 (1).83 Norway has not made any reservations to article 13 (4), and will thus include
the anti-fragmentation paragraph.
Pursuant to article 14 (3)(b), Norway has reserved the right for the entirety of article 14 not
to apply to specific provisions regarding exploration and exploitation of natural resources.
75
Ibid. p. 11.
76
Ibid. p. 10.
77
Ibid. p. 11.
78
Ibid. p. 11.
79
See art. 13 (5).
80
See art. 13 (4).
81
Prop. 15 S (2018-2019) p. 12.
82
Ibid. p. 12.
83
Ibid. p. 13.
611
Norway
Such provisions are included in all of Norway’s 28 CTAs.84 The reason for this reservation is
that Norwegian tax treaties often contain a special deeming rule regarding PE status on the
Norwegian continental shelf, which also includes a provision addressing the issue of splitting
up of contracts. Unlike article 14 in the MLI, the Norwegian provision is specifically designed
to address the type of business activity performed on the continental shelf.85
Norway has chosen to include both article 3 and 4 of the MLI in order to address hybrid
mismatch arrangements for treaties that do not have equivalent provisions already. No
particular reason has publicly been giving for choosing article 3. Norway made no reservation
or commentaries on the provision when it was adopted in the OECD Model, and it is therefore
no surprise that Norway included this in the MLI for CTAs not already containing such a
provision. As for article 4, this provision is in accordance with Norwegian tax treaty policy
as of late.86
Articles 18 to 26 in the MLI contain provisions for a mandatory arbitration process. Norway
has opted out of these provisions. In the draft resolution presented to parliament, however,
the government has expressed that Norway in general is positive to include an arbitration
provision in its tax treaties, but considers that the subject of mandatory arbitration is better
suited for bilateral negotiations, and therefore declined to include it in the MLI.87
It is difficult to make predictions on whether any of Norway’s reservations will be lifted in
the future. There are no current indications that this will happen any time soon. As Norway
deposited its MLI positions with the Depositary very recently (17 July 2019), and thus could
change its reservations and notifications up to this point, we find it unlikely. This especially
applies to the provisions related to the simplified LOB and arbitration, as Norway has
explicitly considered these issues to be better suited for bilateral negotiations. In addition,
Norway has already included most of the MLI provisions that are optional. It is therefore
worth to point out that there are not very many reservations that can be lifted in the future.
As Norway only listed about a third of its treaties as CTAs under the MLI, bilateral (or
multilateral) negotiations with other jurisdictions will be necessary to fully implement the
BEPS minimum standards in all Norwegian tax treaties. This process has already begun.
In its response to the questionnaire for the Peer Review Report on Treaty Abuse,88 Norway
indicated that the Nordic Convention would shortly be amended to implement the minimum
standards. Such an amending protocol to the Nordic Convention was signed in August 2018,
and a draft resolution was presented to the Norwegian parliament shortly thereafter.89
Parliament gave its consent to the protocol on 8 November 2018.90 It is still unclear when
the protocol will enter into force, but it is reasonable to expect this to happen within a short
timeframe. Norway will then have implemented the minimum standards with the five
jurisdictions that are parties to the Nordic Convention. In relation to the minimum standard
84
Ibid. pp. 14 and 100
85
Ibid. p. 14
86
Ibid. p. 9
87
Ibid. p. 15
88
The Peer Review Report p. 172.
89
See Prop. 114 S (2017-2018).
90
Parliament resolution 14 of 8 November 2018.
612
Miljeteig & Solber
on treaty abuse, the Protocol contains a PPT rule, but no LOB provision.
In the abovementioned Peer Review questionnaire, Norway also indicated that it would
pursue implementation of the minimum standards in bilateral negotiations with Belgium,
Brazil, Canada, France, Germany, Israel, Republic of Korea, New Zealand, Singapore, Slovakia,
Spain, Switzerland, Thailand and the United States.
As of October 2019, Norway has signed one amending protocol pursuant to these
jurisdictions. A protocol to the tax treaty with Switzerland was signed on 20 June 2019 and
presented to parliament on 13 September 2019.91 The protocol amends the existing treaty
between Norway and Switzerland in order to implement the BEPS minimum standards. To
fulfil the minimum standard on treaty abuse, a PPT has been adopted, without an additional
LOB provision. It is expected that parliament will give its consent to the protocol by the end
of 2019. We note that this protocol does not include the minimum standard established in
BEPS Action 14.92
All the provisions in the MLI could also be implemented through bilateral tax treaties. The
need to revise treaties will persist also after the MLI enters into force. This raises the question
of whether the current provisions of the MLI will remain as a third layer of international tax
law, or, whether it is expected that such provisions will gradually be incorporated into the
treaty network by bilateral agreements.
It follows from article 37 of the MLI that it is not possible to unilaterally withdraw from
the MLI for a CTA that has already been modified by the MLI. However, it is possible for
two contracting states to withdraw from the MLI, in practice, bilaterally. For example, the
parties could terminate an existing CTA and negotiate a new treaty. This new treaty will not
automatically be covered under the MLI, but is likely to include the minimum standards and,
perhaps, some of the BEPS related changes included in the OECD Model Convention as of
2017 (or, later editions to come). Thus, the need for the MLI would no longer exist for such a
treaty. This may very well result in the MLI slowly dying as states fulfil its purpose bilaterally
when renewing treaties. In our opinion, it is difficult to see why the MLI should be kept alive
for longer than necessary, due to the complexity of the instrument. However, should one
come to the point where the MLI is phased out through bilateral means, it will probably take
several decades. The latter years have shown that development of new technologies and an
increased globalisation give rise to international tax challenges not foreseen. While the need
for the current provisions of the MLI may be phased out bilaterally, new provisions may be
needed for new challenges that cannot be predicted at this point in time. This may result in
the MLI being updated through subsequent protocols pursuant to article 38 that can address
new challenges as swiftly as the MLI does today, rather than being phased out gradually.
The current discussions on taxation and the digitalization of the economy may already be a
relevant example to view in this light.
91
See Prop. 138 S (2018-2019).
92
OECD (2015), Making Dispute Resolution Mechanisms More Effective, Action 14 – 2015 Final Report, OECD/G20 Base
Erosion and Profit Shifting Project, OECD Publishing, Paris.
https://dx.doi.org/10.1787/9789264241633-en
613
Norway
Part Two: Practical implementation of the Provisions of the MLI
The Norwegian Constitution grants the authority to negotiate and conclude treaties to the
government, but demands consent from parliament where the treaty meets a threshold of
importance.93 This threshold is met for tax treaties, as they result in Norway relinquishing
taxation rights established in other (domestic) legislation passed by parliament. Within the
government, the Ministry of Finance is responsible for and has the authority to negotiate
tax treaties.
In Norway the MLI has been implemented in the same manner as any other tax treaty.
The implementation procedure started with the Norwegian Minister of Finance signing the
MLI on behalf of Norway on 7 June 2017. When a tax treaty is signed, the Norwegian Ministry
of Finance will prepare a draft resolution (proposition paper) for parliament. Such a draft
resolution will describe the background for negotiating and signing the treaty in the first
place, and also describe the treaty’s content and practical implications. To some extent, it also
explains the rationale behind the provisions of the treaty and Norwegian tax treaty policy.
Furthermore, it includes the actual text of the treaty.
When such a paper is drafted and complete, it will be presented to and sanctioned by the
Council of State. It is then presented to parliament for approval. When parliament approves
the proposal and gives its consent to the treaty entering into force, the treaty can finally be
ratified.
For the MLI, the draft resolution was presented to parliament 16 November 2018.
Parliament unanimously gave its consent to the MLI entering into force on 19 February 2019.94
Norway adheres to the principle of dualism, which means that a tax treaty would normally
need to be transformed or incorporated internally in order to be invoked. However, Norway
has special legislation95 (hereafter “the 1949 Act”) in place that introduces a monistic approach
for tax treaties specifically – when parliament has consented to the tax treaty entering into
force, it is automatically considered incorporated into the internal legal system.96
This procedure means that parliamentary approval is necessary for a tax treaty to enter
into force between Norway and another state. Thus, parliament did have the authority
to refuse approval of the MLI and instead ask the government to return with a different
proposition with regard to the notifications and reservations that were ultimately submitted
to the Depositary. This would, however, be unusual. It is not customary for parliament to
refuse to approve a treaty – to our knowledge, this has never happened.
In Norway, it is the signed, original treaty text, and only this, that formally has any legal
value. Such texts are kept in the Norwegian Treaty Register by the Ministry of Foreign Affairs.
The Ministry of Finance, however, ensures that Norwegian tax treaties are published and
available to the general population on the Ministry’s websites. For readability and accessibility,
93
The Norwegian Constititution (Grunnloven) § 26.
94
Parliament resolution 417 of 19 February 2019.
95
The Norwegian Act regarding Authorisation for the King to Conclude Treaties with Foreign States for the
Prevention of Double Taxation etc. of 28 July 1949, no. 15.
96
Cf. Zimmer (2017), International Income Tax Law (5th edition), pp. 64-65.
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some newer treaties with amending protocols are consolidated in informal versions. This is
not compulsory by law, but a policy choice. For the MLI, however, no consolidated versions
are produced as of yet. Norway does plan to publish synthesized texts for the covered
tax agreements under the MLI, but it is still uncertain if these will be based on the OECD
guidance tool.97 In production of such synthesized texts, Norway will consult with the relevant
contracting parties, as it is important that each jurisdiction does not publish divergent texts.
Because synthesized/consolidated versions of treaties and later amending instruments
(i.e. the MLI or a protocol) are only considered informal versions, they have no legal value.
For example, if an original tax treaty is amended by a following protocol, and the Ministry
of Finance produces and publishes a consolidated version of the two texts, and it later turns
out that there are mistakes in the consolidation, then the tax authorities are not considered
bound by the consolidation. One may argue that this is unreasonable for a taxpayer that has
used a consolidated version in good faith, and that the tax authorities are nearer to bear the
risk of such mistakes. On the other hand, such mistakes do not only have implications for
the taxpayer and the tax authorities. Consolidation mistakes in one of the contracting states
could alter the balance and content of the treaty as it was agreed upon by the parties, should
tax authorities in either state be considered bound by it. This could, in practice, open the door
for one-sided deviations from the treaty, and undermine parliament’s ultimate authority to
approve its content.
Also, in states where the publication of such consolidated versions is a policy option and
not a legal obligation, the risk of being bound by such mistakes could give the authorities an
incentive not to operate with such a policy.
To our knowledge, no (Norwegian) private publishers have published consolidated
versions of the treaties covered under the MLI.
The OECD MLI matching database does not have any legal value in Norway, and it is
difficult to see good reasons for why it should. Such a tool cannot guarantee that the
presented result is accurate, and to give it legal value considering that Norway has no control
over or responsibility for the database, seems odd.
In general, the Norwegian legal system adheres to the principle of dualism. Consequently, a
treaty with another state would need to be transformed or incorporated into national law in
order to be invoked internally. However, and as mentioned above, the 1949 Act simplifies this
procedure and provides for a more monistic approach to tax treaties. Upon parliamentary
approval, a tax treaty is automatically considered incorporated into the national legal system.
A treaty does not have primacy over other internal legislation, but holds the same status
and legal value as ordinary legislation given by parliament. Tax treaties, however, can only
relinquish taxation rights that would otherwise be warranted by domestic, Norwegian
legislation.98 Tax treaties themselves can therefore not establish tax liability.
This also means that it is possible for a tax treaty, in theory, to be overridden by subsequent
legislation. It is, however, highly unlikely that this would happen in practice. First, because
97
OECD (2018), Guidance for the development of synthesised texts, Multilateral Convention to Implement Tax Treaty
Measures to Prevent BEPS, OECD, Paris.
98
Cf. Naas, Bruusgaard, Ilstad and Svensen (2011) Norwegian International Tax Law, p. 80-81 and Zimmer (2017)
International Income Tax Law (5th edition), p. 65.
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a tax treaty would normally be considered lex specialis in relation to subsequent changes
in domestic legislation. Second, Norway adheres to a general principle of interpretation
that there is a presumption that domestic legislation is in accordance with international
obligations. In case of a conflict between a tax treaty provision and domestic tax provisions,
the conflict would normally be resolved by means of interpretation, where the treaty would
be given primacy. Should a tax treaty ever be overridden in Norway in a form that constitutes
treaty override, this would probably require that the government and parliament actively
and knowingly chose to do so.99
As the MLI will be effective from the income year 2020, it has yet to give rise to any specific
interpretations in Norway by the government, the Tax Administration or other administrative
organs. The same applies to Norwegian courts, as there have been no cases regarding the
interpretation of the MLI yet.
It seems unlikely that the explanatory memorandum of the MLI will be granted any legal
weight. In the draft resolution regarding the MLI presented to the Norwegian parliament, it
is expressly considered that the memorandum’s function “is to clarify how the MLI is meant
to work. The document gives no guidance regarding how the material provisions are to be
understood.”100
There is currently no indication of interpretation difficulties stemming from the fact that
the MLI is drafted in English and French, and not in Norwegian.
As the MLI has not entered into force yet in Norway, we cannot see that it has actually affected
the way tax treaties are interpreted. The potential effect of the MLI on treaty interpretation
in general in the future, is also difficult to predict.
One question is whether the connection between the MLI and the earlier OECD reports
produced during the BEPS project may indirectly give some legal value to these reports when
interpreting the MLI.
As indicated earlier in this report, the general principles of tax treaty interpretation are
reflected in several rulings by the Norwegian Supreme Court. The main tendency is that the
Court refers to the OECD Commentaries and not to other reports produced by the OECD.
However, in Rt. 2004 p. 957 PGS,101 the Court did refer to a discussion paper of Working Party
1 and the OECD report on tax treaty issues related to article 5 of the OECD Model,102 that
had led to changes to the OECD Commentaries to article 5 from 2003. On the basis of these
99
Cf. Zimmer (2017) International Income Tax Law (5th edition), p. 67-68 and Skaar et al. (2006) Norwegian Tax Treaty
Law, Gyldendal Akademisk, Oslo, pp. 43-44.
100
Prop. 15 S (2018-2019) p. 7.
101
See paras 50 to 56 of the ruling.
102
OECD (2003), 2002 Reports Related to the OECD Model Tax Convention, Issues in International Taxation, No. 8, OECD
Publishing, Paris, pp. 75 et sec.
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Miljeteig & Solber
reports, the Court found that the new Commentaries reflected a change of state practice,
which again was given legal weight in the case. This ruling implies that it is not inconceivable
that earlier OECD reports produced during the BEPS project may indirectly be given some
legal weight by the Norwegian Supreme Court in the future. Nevertheless, this may only
come into question insofar as the MLI provisions remain unclear through the regular means
of treaty interpretation.
Another question is whether the MLI may influence the interpretation of treaties that were
concluded before the MLI.
Since the MLI provisions reflect material changes to the provisions of the OECD Model
and its Commentaries, one may generally assume that the MLI would not influence the
interpretation of treaties that do not include these changes. However, as one main purpose
of the MLI is to prevent treaty abuse, one could imagine that the MLI may influence the
interpretation of older tax treaties in abusive cases. For example, the inclusion of the
prevention of tax avoidance and double non-taxation in the preamble through the MLI may
give additional support to the perception that the prevention of tax avoidance is a part of the
general purpose of all tax treaties. There is also reason to believe that the MLI and the BEPS
project may render the applicability of domestic GAARs to treaty abuse less controversial in
future cases, also with regard to tax treaties concluded prior to the MLI.
To our knowledge, there has not been much discussion on whether the Norwegian choices
in the MLI may lead to the MLI having a retrospective influence on tax treaty interpretation.
From the tax authorities’ perspective, it is difficult to try to analyse how tax advisers will
react and respond to the PPT with regard to tax planning. Contrary to an LOB-provision or
other more targeted anti-avoidance rules, the applicability of the PPT on a case-by-case basis
requires an analysis of the subjective motivation of a taxpayer. For the tax authorities, such
a discretionary analysis can be difficult to assess, let alone prove in a court of law. This is,
however, also an issue that arises for a tax adviser giving advice on tax planning matters.
The discretionary element of the PPT will make it harder to predict whether an arrangement
will be denied under the PPT. A tax adviser could choose to err on the side of caution, or, to
manoeuvre as close as possible to the PPT’s limits.
The main GAAR in Norway bears some resemblance to the PPT. The experience from
this tells us that invoking the GAAR in a specific case is a resource-intensive process. Yet
the discretionary element of the GAAR provides the tax authorities with a solid tool that is
difficult to stand clear of in aggressive tax planning schemes. It is possible to view the PPT in
the same manner – it strikes a balance between predictability for the taxpayer and flexibility
for the tax authorities, perhaps with an inclination toward the latter. The result of this may
very well be that the PPT will have a deterrent effect by its mere existence. It is more difficult
to plan around an LOB provision than the PPT.
It is still uncertain if the Norwegian tax authorities will adopt any special procedures to
assess taxpayers under the PPT, or to administer resolution of tax disputes under the mutual
agreement procedure or arbitration.
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Branch reporter
Juan Pablo Porto1

This report has been prepared taking into account the directives and guidelines provided by
the general reporters and by IFA.2 The purpose of this report is to review the impact of the
and Profit Shifting (“MLI”) on the structure and operation of the tax treaty network. The report
will assess the direct influence of the MLI on Covered Tax Agreements, its indirect influence
on the negotiation of bilateral tax treaties and issues relating to the practical implementation
of the MLI.
Peru wants to be an OECD member by 2021. In this light, Peru has adopted relevant BEPS
measures as the approval of a full flesh GAAR; and, it will replace interest deduction based
on a ratio of equity (3:1) to a percentage of tax EBITDA. Furthermore, transfer-pricing rules
are extensive and regularly subject to tax audit assessments. and procedures for exchange
of information and mutual assistance between Tax Administrations have been included.
Finally, rules on identification of beneficial owners will become effective and applicable for
Peruvian entities, trust, and funds, as of 2019.
Moving in the same direction, Peru has signed the MLI on 27 June2018. The internal
procedure requires it to be approved by Congress and ratified by the President. Congress
has been dissolved and it will be elected and subsequently reconvene after the elections in
March 2020. After the new Congress is installed, it will refer to the MLI and probably vote
on its approval so finally the President can ratify it and become a valid and binding part of
Peruvian law.
Tax treaties are rare in Peru. We only have seven bilateral treaties and a multilateral
instrument with the member of the Andean Community. From the countries with whom
we have tax treaties, under the OECD Model, only Brazil has not signed the MLI. Canada
and Switzerland have signed and ratified the MLI, and it is enforceable for both states as of
1 December 2019. However, neither has considered the treaty with Peru as a CTA that could
be affected by the MLI.
On a middle ground, Mexico, Portugal, Chile and the Republic of Korea, like Peru, all
signed but still not ratified the MLI. Taking into account that Brazil has not signed the MLI,
only six treaties could be considered as CTA by the other contracting states. In the case of
Peru only Chile, Mexico and Portugal have also deemed their treaty with Peru as a CTA.
Canada, the republic of Korea and Switzerland have not considered the tax treaty with Peru
as a CTA.
1
Tax partner at Cuatrecasas (Lima, Peru). LLM from Harvard Law School (2011). Lawyer from Pontificia Universidad
Católica del Peru (2005). Post-graduate studies on international taxation on the ITC Leiden (2016).
2
Many references and quotes are originally in Spanish. We have made free translations of such references and
resources for reading comprehension purposes.
IFA © 2020 619

Peru
We can sum up the information as follows:

(i) Peru has considered 100% of its tax treaties as CTA.
(ii) Brazil has not signed the MLI. Canada, Chile, Mexico, Portugal, the Republic of Korea and
Switzerland have signed the MLI and are at different stages in the ratification process.
(As of 1 December 2019, the MLI would be binding for Canada and Switzerland).
(iii) Peru has six tax treaties out of seven (86%) that could be subject to modification by the
MLI.
(iv) Of the six treaties mentioned in (iii) above, only three are qualified as CTA by our
contracting counterparty, so only three out of seven (43%) treaties would eventually be
affected by the MLI, after Peru, Chile, Mexico and Portugal finish with the internal process
for its validity and enforceability.
The MLI includes relevant provisions to avoid tax evasion and to reduce double taxation.
Peru has made relevant reservations to the MLI as it has not opted for the hybrid mismatch
provision to be included nor has it chosen exclusive arbitration. Worldwide the MLI will have
a dramatic effect on the treaty network. In Peru its effect will be diminished.
The Peruvian General Anti Avoidance Rule (PGAAR) is a strong and potent tool that could
be used unilaterally to combat aggressive tax planning and tax fraud. Together with new
LOB provisions and the elimination of conduit vehicles and pass thru entities, it will generate
an atmosphere were treaty shopping and abuse will be rare and it could be reviewed and
potently reassessed by the tax administration.
We are moving into a smaller world. Hiding assets, income and profits will be extremely
hard as governments will start to automatically exchange information and data.
We hope the MLI helps to reduce tax evasion which results in billions of lost revenue
that could be used to further develop economies, reduce the huge inequity and solve dire
problems faced by the collective humanity.
Part One: Impact of the BEPS Action Plan and the MLI on the
Tax Treaty Network
1.1. Introduction
The Base Erosion Profit Shifting (BEPS) Action Plan and the MLI are two important OECD3
projects, which will dramatically change the landscape of international taxation in the years
to come.
Peru is a country with around 31,000,000 inhabitants, located in the middle of South
America, with a long coastline washed by the Pacific Ocean. The country has seen economic
progress over the past couple of decades, but poverty, corruption, lack of adequate
infrastructure and public services still generate struggles.
As a developing country, Peru receives investment from abroad and adequate source
taxation is paramount to avoid abusive tax leakage. Peru is not active with the negotiation
of tax treaties, but such bilateral instruments are relevant on attracting foreign investment
in an efficient manner.
3
The OECD acronym stands for “Organisation for Economic Co-operation and Development”.
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Peru has implemented BEPS provisions and has signed the MLI, conscience of the
relevance of both measures to foster efficient and sensible taxation, reducing double taxation
and tax evasion alike.
Peru has a limited and poor tax treaty network. Peru only has seven bilateral tax treaties
(Canada, Chile, Brazil, Mexico, Portugal, the Republic of Korea and Switzerland) and a
multilateral tax agreement (Decision 578) with the members of the Andean Community
(Ecuador, Bolivia and Colombia).
The tax treaties signed by Peru follow the OECD Model, except for the multilateral
agreement in force with the Andean Community, which is a treaty that favors exclusive source
taxation.
In the region Peru has fallen far behind with the building of an efficient tax treaty
network. In comparison to our eight tax conventions, Mexico has 60 active tax treaties, Chile
39 tax treaties in force, Uruguay 22 active tax treaties, Argentina 20 active tax treaties, Ecuador
19 tax treaties in force and Colombia has executed 12 tax treaties. Only Bolivia falls behind
Peru with seven active tax treaties.
On September of 2019, after no relevant news on the tax treaty front for almost five years,
Peru agreed on the terms of a tax treaty with Japan.4 Prior to this, Peru had executed and
agreed on a set of tax treaties in 2014, all of which were effective as of 1 January 2015., These
where the tax treaties with Mexico, Portugal, the Republic of Korea and Switzerland.
Our limited tax treaty network includes the following treaties:
1. Canada; effective as of 1 January 2004
2. Chile; effective as of 1 January 2004
3. Members of the Andean Community (Ecuador, Colombia and Bolivia); effective as of 1
January 2005
4. Brazil; effective as of 1 January 2010
5. Mexico; effective as of 1 January 2015
6. Portugal; effective as of 1 January 2015
7. Republic of Korea; effective as of 1 January 2015
8. Switzerland; effective as of 1 January 2015
Peru also signed a tax treaty with Spain in April 2006. However, the Peruvian Congress never
ratified it, so it is not effective to date.5
All tax treaties executed by Peru are prior to the MLI (the last tax treaty to be ratified by
Congress was the tax treaty with Portugal on 6 March 2014) and none include specific
provisions.
4
The treaty will be effective and applicable after the domestic procedures of both countries are completed.
5
As detailed by Renée A. Villagra Cayama, for more than 30 years, Peru only had one bilateral tax treaty which was
executed with Sweden on September 1966 and was effective as of 18 June1968. Sweden denounced the treaty,
making it ineffective as of 1 January 2006.
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Peru
Peru generally follows the OECD Model Convention on its tax treaties, except for Decision
578 with the Andean Community member countries. Peru as a country that receives or
imports capital, tends to favor source taxation.
Nevertheless, in some specific cases we have departed from the relevant Model
Convention.6 For example, it is worth mentioning that taxation of royalties in ALL the bilateral
tax treaties executed by Peru and in force (Canada, Chile, Brazil, Mexico, Portugal, Republic
of Korea and Switzerland) allows for shared residence and source taxation.
The rule included in article 12 (1) of the OECD Model Convention states that “royalties
arising in a Contracting State and beneficially owned by a resident of the other Contracting
State shall be taxable only in that other State.” The rule requires a bilateral reach for its
application, but limits taxation exclusively to the state of residence of the royalty provider.
On the other hand, article 12 (1) of the tax treaties executed by Peru mentions that
“royalties arising in a Contracting State and paid to a resident of the Other Contracting State
may be subject to taxation on such Other State”. The rule allows for taxation of the state of
residence, but it does not ban taxation elsewhere.
Following this, article 12 (2) of the treaties signed by Peru will describe that:
However, such royalties may also be taxed in the Contracting State in which they arise
and according to the laws of that State, but if the beneficial owner of the royalties is a
resident of the Other Contracting State, the tax so charged shall not exceed 15% of the
gross amount of the royalties.7
The treaty network executed by Peru allows for source withholding on payment of royalties,
with a capped withholding between 10% and 15%. In order, to apply such a provision article
12 (2) will require a bilateral reach, just as article 12 (1) of the OECD Model Convention does.
A second case were some distance is taken from the OECD Model Convention, is the scope
or definition of the term “royalties”.
For example, under the tax treaty with Brazil royalty payments will also include the
retribution for technical assistance, digital services and even business consulting services.
In the case of the tax treaty signed with Switzerland payment for technical assistance and
digital services will be characterized as a royalty and it will be subject to a reduced source
withholding of only 10% instead of the standard 15% mentioned in the treaty.
On a similar stand, in the tax treaty with the Republic of Korea payment for technical
assistance will qualify as a royalty, meanwhile, in the tax treaty with Portugal certain specific
technical assistance payments will also be qualified as a royalty. In both cases, provided the
beneficial owner is a resident of the other contracting state (fulfilling the bilateral reach
demanded by article 12) then the maximum source withholding cannot exceed 10%, leaving
the regular 15% cap for other royalty payments.
The OECD Model Convention is not followed in certain provisions of the Mexico – Peru tax
treaty. According to the aforementioned treaty, the provision of technical assistance services
for more than 90 days on a 12-month period on a contracting state will generate a permanent
establishment (“PE”) for treaty purposes. This provision on top of the fixed place of business
6
Due to space constraints, we will only list some examples and not provide a detailed list of all the situations in
which we do not adhere to the OECD Model Convention.
7
Under the treaty with Switzerland, the payment of some forms of royalties will be subject to a cap of only 10%
at the source state.
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PE, the service PE, the construction or related activities PE and the dependent agent PE,
creates a unique provision in our tax treaty ecosystem.8
A fourth “singular” provision within our treaty network can be found in the Peru –
Switzerland tax treaty where it has a special provision on capital gains generated on the
transfer of shares, whose value does not derive from immovable property. The provision
applies exclusively to Swiss residents, allowing Peru to tax gains made on the transfer of
shares issued by a Peruvian company subject to the following maximum rates:
a) 2.5% when the operation is performed through the Lima Stock Exchange of registered
securities;
b) 8% when the operation is performed in Peru: or,
c) 15% on other cases.
In the tax treaty with Brazil we have a peculiar provision on the capital gains treatment on
article 13. Article 13, after assigning taxing rights on the transfer of immovable property, fixed
assets of a PE and planes and vessels, allows for shared taxation on the transfer of any other
assets generating a capital gain.
The standard OECD Model provision mentions that “Gains from the alienation of any
property, other than that referred to in paragraphs 1, 2, 3 and 4, shall be taxable only in the
Contracting State of which the alienator is a resident”.
The OECD Model Provision favours exclusive residence taxation, denying source taxation.
Meanwhile, the Peru – Brazil tax treaty would allow residence and source taxation on any
topic not effectively detailed.
Finally, the tax treaty with Chile assigns exclusive taxation rights to the source state in the
case of income arising from immovable property. The OECD Model Convention would allow
both countries to tax, and the residence state must grant relief for any income tax burden
from the source state.
The purpose of the tax treaties executed by Peru is to reduce, avoid or diminish the negative
effects of international double taxation. Furthermore, the treaties also emphasize the need
to prevent tax evasion. Tax evasion can be a result of double non-taxation or by assigning
taxing rights to a jurisdiction where taxation is null or reduced.
All the tax treaties executed by Peru expressly mention the avoidance of tax evasion as a
fundamental pillar, except for the treaty with Switzerland were such condition has not been
effectively included within the scope and title of the treaty.
Treaty shopping is an abusive or inappropriate use of a tax treaty applying their benefits
by parties who, according to the terms of the treaty are not entitled to them. In its simplest
arrangement, it would mean the incorporation of a “middleman” who would channel typically
passive income under the benefit of a tax treaty between two jurisdictions (the investor and
the source country).
There has been no clear definition of treaty shopping in Peruvian tax legislation, nor
8
This special PE provision also surpasses the PE definition included in domestic legislation, which can generate a
PE for treaty purposes but not for domestic conditions. The Peruvian Tax Administration (“SUNAT”) has concluded
that in a similar case a PE would exist for domestic purposes, having the bilateral tax treaty affect domestic
legislation.
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Peru
have rulings from the Tax Court, of which we are aware, effectively applied such a criterium
to dismiss or disregard treaty benefits for conduit entities.
The treaties with Canada, Chile and Brazil (in force since 2004 and the latter since 2010)
include provisions regarding passive income (except for dividends in the case of Chile) where
it is stated that:
Such provisions will not apply if the purpose or one of the principal purposes of any party
related to the creation or allocation of the shares (article 10), credit (article 11) or rights
(article 12) in connection to which the dividends, interests or royalties are paid, was to
obtain a benefit from this provision by such a creation or allocation.
This is an anti-conduit provision. All the tax treaties that entered into effect in 2015 (Mexico,
Portugal, Rep. of Korea and Switzerland) lack such a provision. We have no knowledge of this
provision ever been used by SUNAT to deny treaty benefits.
From a domestic position, the Peruvian General Anti Avoidance Rule (“PGAAR”) can be a
tool to attack treaty shopping and its potential negative effects. The PGAAR was included in
Norm XVI of the Tax Code by Legislative Decree 1121, enacted on 18 July 2012.
The PGAAR grants a powerful tool to SUNAT to review operations and assess the tax
consequences actually desired by the parties and not the legal form or structure they adopted.
The PGAAR was included in domestic legislation after the Tax Court (on several relevant
tax appeals) ruled that the former PGAAR, which was included in Norm VIII of the Tax Code,
did not grant SUNAT the ability to prosecute cases of tax fraud, but was just a tool to combat
cases of simulation.
SUNAT could only use the original PGAAR to address cases of simulation, but it was an
ineffective tool against aggressive tax planning or tax fraud.
The relevant part of Norm VIII was repealed, and Norm XVI of the Tax Code replaced it.
To date, the PGAAR states the following (under the title of “qualification, elusion of tax rules
and simulation”):
To determine the true nature of the taxable event, SUNAT will take into account the acts,
situations and economic relations effectively performed, desired and established by the
taxpayers.9
If tax avoidance (or elusion of tax rules) is detected, then SUNAT is empowered to
request the tax debt or reduce the amount of balance dues or credits, NOLs, tax credits
or eliminate any tax advantage, without taking into account the reimbursement or
restitution of any amount that had been reimbursed.
When the tax event is avoided totally or partially, or the tax basis is reduced, or
balance due, or credits or NOLS or tax credits are obtained by means of acts on which
the following conditions are concurrently fulfilled, the following is duly documented
by SUNAT:
a) Which individual or together with other actions are artificial or improper to attain
the result wanted by the parties.
b) Their utilization generates economic or legal effects, different from tax savings or
tax advantages, which are equal or similar to those obtained in the performance of
regular or usual operations.
9
This para. was included in Norm VIII and its application by the Tax Court rulings was limited to cases of simulation.
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SUNAT will apply the provision that would have been applied to the usual or regular
businesses, applying what is set forth in the second paragraph above.
In the case of simulated operations detected by SUNAT, the relevant tax provision
taking into account the acts effectively executed, would be applied.
Norm XVI allows SUNAT to consider the acts, situations and economic activities performed,
established or desired by the taxpayers, in order to determine the real nature of the taxable
event. In this regard, Norm XVI establishes that when tax evasion is detected, SUNAT is
entitled to collect the tax debt and apply penalties, reduce the amount of balances due, NOLs,
tax credits, or eliminate any tax advantage, and recover any amount that was wrongfully
reimbursed to the taxpayer.10
In order for the PGAAR to be applicable two conditions must be fulfilled:
(i) The acts performed by the taxpayer must be deemed as artificial or improper, and;
(ii) The only purpose for executing such artificial or improper acts must be to obtain tax
benefits.
The benchmark established by Peruvian law was very rigid as even when a taxpayer could
prove that the act it had performed, even though artificial or improper to obtain the results it
desired, also had a commercial, economic or business purpose, despite it not being relevant
or material, still Norm XVI, as written, would not apply.
We could consider the PGAAR as approved by Legislative Decree 1121 as a rule that had
to fulfill a “sole purpose test standard”.
In July 2014, two years after it had been enacted and without it being used by SUNAT, Law
30230 suspended the application of the PGAAR.11 The suspension of the PGAAR to pursue
cases of tax fraud was subject to the further approval of regulations. Prior to the effective
approval of the regulations mandated by Law 30230, the Tax Code introduced detailed steps
in order to safeguard the rights of taxpayers during an audit procedure in which the PGAAR
was applied.
Finally, the suspension was kept until Supreme Decree 145-2019-EF was published on 6
May 2019. On that moment the condition to lift the suspension was fulfilled and the PGAAR
was again a valid and applicable provision. Nevertheless, it could only be applied to acts
executed after July 2012, the date on which Norm XVI was initially enacted. Despite the
extended suspension period, the PGAAR is enforceable and applicable since July 2012, and
not only from May of 2019 onwards.
A relevant issue included in Supreme Decree 145-2019-EF is the “flexibilization” of the
PGAAR. According to such provision, the PGAAR (which text on Norm XVI has not been
modified) could be applicable to the extent there is an artificial or improper act and one of
the purposes of such irregular act is to obtain a tax benefit. The law requires the tax benefit
obtained from the artificial or irregular act to be the sole motivation of such act; now the
10
When tax results that are more beneficial to taxpayers are obtained through acts considered as artificial or
improper to achieve those results and from their utilization legal or economic effects (different from tax savings)
are equal or similar to the ones that would have been obtained with usual acts, then SUNAT would apply the tax
rule that would have corresponded to such usual or regular acts, which would be disadvantageous from a tax
standpoint.
11
The suspension did not affect the first and fifth paras. of Norm XVI of the Tax Code, which copied from Norm
VIII, could still be used by SUNAT to re-characterize situations of simulation.
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Peru
regulation lowers the bar and the requirement is simply that one of the purposes, not even
the principal purpose, of the improper or artificial act is to obtain a tax benefit.12
Now, we have a PGAAR that could apply to the extent that a principal purpose test is not
observed by the taxpayer.
SUNAT could apply the PGAAR to disregard or disallow treaty benefits if the use of the
tax treaty is fraudulent or abusive. Our short-lived PGAAR has not been applied or tested on
international cases (in fact, it has not been applied at all).13
Now, as Peru is not an OECD member, comments to the Model Convention are not
applicable or enforceable, despite being useful tools to analyze and interpret the extent of
the treaty provisions. There is no general agreement on the standing of the comments on
Peruvian tax legislation from the courts (Tax Court and the judiciary) and SUNAT does not rely
officially on them to solve controversies. Disputes on the application of tax treaties are rare
in Peru. Neither the courts or SUNAT have reviewed (exhaustively) treaty abuse situations.
Despite not adhering specifically to the OECD comments on tax treaty provisions, all the tax
treaties executed by Peru include a beneficial ownership standard for the acknowledgement
of treaty benefits (reduced source withholding) in the case of passive income.
There is a general conception that the beneficial ownership test or condition is destined
to limit the abusive utilization of treaties via the incorporation or utilization of pass through
entities or vehicles. Those vehicles are not “entitled” to the dividends, interests or royalties
they charge, either because they have no economic disposition as amount just flow through
or because they only have a legal domain, but no effective benefit from such passive earnings.
All the tax treaties signed by Peru include the beneficial ownership standard. Therefore,
SUNAT could disregard the benefits of a tax treaty if they consider that the party incorporated
in a treaty jurisdiction has no business or economic purposes and is merely set up as a conduit
to benefit from treaty provisions that could not be applied if the party entitled to income is
included in a third state.
We have no knowledge of SUNAT applying the beneficial ownership standard on treaties
to attack treaty shopping, but it is a deterrent provision in our tax treaty environment. There
are no general or special provisions issued by SUNAT, the Tax Court or the government
regarding the scope or extent of the beneficial owner standard included in tax treaties.
Our internal legislation, despite the PGAAR, has no specific anti-avoidance rules or
provisions applicable on treaty scenarios.
There are no look-through provisions denying treaty benefits to a company resident
in a contracting state to the extent that it is not owned (directly or indirectly) by residents
of that same jurisdiction. Furthermore, there are no exclusion or subject-to-tax provisions
conditioning tax treaty benefits to effective and relevant taxation in the state of residence.
Typically, being a source state, Peru could apply such provision to deny limited source
withholding in the absence of residence taxation.
On a similar note, there are no “channel provisions” in our internal legislation, but the
PGAAR can disregard such structures if they qualify as artificial and are destined primarily
to generate tax benefits.
12
It seems clear that the regulation has surpassed the text of the law, and according to our legislation that is not
admissible and the regulation, in that extend, should be void and inapplicable. SUNAT would apply the PGAAR
with the conditions set forth by Supreme Decree 145-2019-SUNAT, until the Tax Court or the judiciary rules it
inapplicable due to a breach in law.
13
Our Income Tax Act does not include subject-to tax clauses, as it does not recognize an exemption regime, but
a credit system in order to avoid double international taxation.
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Finally, we do not have specific Limitation of Benefits (“LOB”) provisions in treaty

application for specific kinds of income and entities.
Outbound dividends in Peru are subject to a 5% withholding, this being a reduced rate
as no specific provision has been included in our legislation in order to avoid treaty benefit
on dividend distribution paid to a principal or parent company. None of the caps included in
our treaty network would affect our 5% withholding tax on dividends.
We have not incorporated provisions in our law to cover the situations specifically
addressed by articles 9, 10, 12, 13 and 14 of the MLI.
Domestic legislation has not addressed the issue of hybrid mismatches. Neither hybrid
entities nor dual resident entities have been a source of specific provisions.
All of the tax treaties signed by Peru have a mutual agreement procedure (in the case of
Portugal it is named the “friendly procedure”). Such a procedure does not specifically address
the possibility of bilateral transfer pricing adjustments.
Peru has a lengthy transfer pricing legislation and adjustments are common. SUNAT will
review transfer pricing methods and study and disregard them, applying their own technical
criteria, if they consider it relevant. Adjustments are bilateral by reach and could affect local
and foreign parties. In this regard, article 9 (2) of the tax treaties executed by Peru allow for
a transfer pricing bilateral adjustment.
Finally, arbitration is not binding on tax treaty controversies or disagreements. To date we
have no experience with international arbitration with a contracting state on the application
of a treaty provision.
As it has been evidenced, domestic Peruvian legislation has not included the MLI
recommendations, nor has its limited tax treaty network included such best practices in order
to fight international tax evasion or treaty shopping. The effective application of the MLI
would have a major effect on the relevant tax treaties, especially on international tax evasion.
1.3. Direct impact of BEPS Action Plan and the MLI
Peru is a signatory to the MLI, and it has taken relevant steps to include BEPS provisions in
domestic legislation.
Transfer pricing rules are strong and regularly audited by SUNAT. SUNAT and other tax
administrations can apply the PGAAR to remedy tax fraud and aggressive tax planning. Also,
additional Specific Anti Avoidance Rules have been included (regarding wash sales, corporate
reorganization, capital reductions disguising distributions and other issues) and rules on
exchange of information and administrative tax assistance with other tax administrations
have been enacted.
Applicable thin cap rules will change into a formula of interest deduction based on a
portion (30%) of the tax EBITDA as of 2021, and rules on identification of beneficial owners
are in force following OECD protocols.
There is still a long way ahead, but Peru is taking steps in the right direction.
Peru signed the MLI on 27 June 2018 being the 80th jurisdiction to do so. Peru signed the
MLI because there was a firm belief in the importance of being a part of the OECD by the
bicentennial in 2021. Signing the MLI was an important stepping-stone in that direction.
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Furthermore, despite having a PGAAR, the MLI would introduce further anti avoidance
and treaty abuse measures, which are convenient for a jurisdiction that usually receives
capital and has source taxation limited by tax treaties. It is a delicate balance; tax treaties
make the jurisdiction more attractive from a tax standpoint in order to avoid or reduce double
taxation, but an unlimited and unchecked treaty network can foster tax evasion and generate
further tax leakage for the source state. The MLI would also bring forth arbitration procedures
on international controversies between contracting states as a rule, but Peru has opted out
of this possibility.
The constitutional procedure requires the MLI, in order to be a valid part of our supra
national legislation, to be approved by Congress after which it has to be ratified by the
President. There is no date on which Congress will eventually address the MLI approval.
Congress was constitutionally dissolved by the President, Mr. Martin Vizcarra (following
a procedure included in our Constitution), on 30 September 2019 and elections for congress
have been called for in January 2020. The new Congress will take a seat in March or April 2020.
The approval of the MLI was on the agenda of Congress prior to its dissolution. Congress
did not debate or discuss the issue of its approval openly. After the dissolution of Congress,
only the Permanent Commission of Congress remains, which includes a reduced number
of congresspersons (only 28) who cannot act as Congress. The Permanent Commission of
Congress cannot legislate and does not have the powers or authority to approve a multilateral
treaty like the MLI.
We have no knowledge of public reports issued by SUNAT or any other body of government
effectively assessing or weighing the impact of executing and ratifying the MLI. SUNAT and
the Ministry of Finance will review (in depth) the effects of the MLI before its approval by
Congress.
The MLI could be approved by Congress in 2020 (last quarter), if things progress swiftly
after it reconvenes, and then the President could ratify it before July of 2021 (the term when
he leaves office).Political instability can further defer the approval of the MLI and its effective
implementation in Peru.
Peru has listed as CTA the tax treaties with Brazil, Canada, Chile, Mexico, Portugal, The
Republic of Korea and Switzerland. All our tax treaties qualify as CTA for MLI purposes from
a Peruvian standpoint.
Decision 578 with the Andean Community member countries is not included, provided it
is not a treaty under the OECD Model Convention and the MLI will not affect it.
From the countries with whom we have tax treaties, under the OECD Model, only Brazil
has not signed the MLI. On the other hand, Canada and Switzerland have signed and ratified
the MLI, and it is enforceable for both states as of 1 December 2019. On a middle ground
Mexico, Portugal, Chile and the Rep. of Korea, like Peru, have all signed but still not ratified
the MLI.
Taking into account that Brazil has not signed the MLI, only six treaties could be
considered as CTA by the other contracting states. In the case of Peru 50% of our treaties are
CTA by our counterparties, those being the treaties with Chile, Mexico and Portugal. On the
other hand, Canada, the Rep. Of Korea and Switzerland have not considered the tax treaty
with Peru as a CTA.
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For statistical purposes, we can provide the following information:

(i) Peru has considered 100% of its tax treaties as CTA.
(ii) From seven contracting counterparties, only one, namely Brazil, has not signed the MLI.
Canada, Chile, Mexico, Portugal, the Rep. of Korea and Switzerland have signed the MLI
and are at different stages of the ratification process. (As of 1 December 2019, the MLI
would be binding for Canada and Switzerland).
(iii) Peru has six out of seven tax treaties (86%) that could be subject to modification by the
MLI.
(iv) Of the six treaties -mentioned on (iii) above- only three are qualified as CTA by our
contracting counterparty. So only three out of seven (43%) treaties would eventually be
affected by the MLI, after Peru and Chile, Mexico and Portugal finish with the internal
process for its validity and enforceability.
Being a party to the MLI Peru will be required to adopt the OECD minimum standards on
treaty abuse and dispute resolution, but other conditions of the MLI are not compulsory to
apply.14
Peru has opted to include the preamble mentioned in article 6 (3) of the MLI to all its CTAs.
The aforementioned preamble mentions as an intention of the parties to “… further develop
their economic relationship and to enhance their co-operation in tax matters.” None of the
CTAs included a similar provision and in the case of Chile, Mexico and Portugal it would be
included provided those countries also approved its inclusion once the MLI is in full effect.
In the case of Peru, the minimum standard on treaty abuse will be satisfied through an
interim adoption of article 7 (1) of the MLI. Therefore, regardless of any provision on a CTA:
(…) a benefit (…) shall not be granted in respect of an item of income or capital if it is
reasonable to conclude, having regard to all relevant facts and circumstances, that
obtaining that benefit was one of the principal purposes of any arrangement or
transaction that resulted directly or indirectly in that benefit, unless it is established
that granting that benefit in these circumstances would be in accordance with the object
and purpose of the relevant provisions of the CTA.
It is important to mention that Peru has agreed to apply the standard Principal Purposes Test
of the MLI (“PPT”), but it has included an intention, where possible, to adopt a limitation on
benefits provision, in addition to or in replacement of the provision set forth in article 7 (1),
through bilateral negotiation.
The minimum OECD standard is ensured by the incorporation of the PPT, but it could be
enhanced through bilateral negotiations with all eligible counterparties.
Bilateral negotiations on the three tax treaties that would effectively be impacted by the
MLI PPT provision could ensure that besides conforming to OECD standards, tailor made
provisions could reduce tax leakage through tax planning or treaty abuse, which would not
be effectively limited by the PPT. Furthermore, the “intention” expressed by Peru grants a
right, but it does not set an obligation or liability for further implementation.
14
http://www.oecd.org/tax/treaties/beps-mli-position-peru.pdf.
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Peru has not opted for the discretionary benefits rules included in article 7 (4) of the MLI.
Nor has it decided to apply the simplified limitation on benefits (“SLOB”) included in the MLI.
Peru has made no remark regarding the possibility of allowing the SLOB application by other
contracting jurisdictions pursuant to article 7 (7) (b) of the MLI.
On top of the PPT, Peru has decided to adopt other treaty abuse provisions included in
the MLI.
For example, it has opted to include the 365-days minimum holding period mentioned in
article 8 (1) of the MLI in order to limit the benefit under the provision of article 10 (2) of the
tax treaties. None of the tax treaties signed by Peru has a minimum holding period in order
to activate reduced or limited source withholding on dividends.
Taking into account that in Peru withholding on dividend distribution for the benefit
of foreign parties is 5%, then the minimum holding period would have no effect on further
limiting dividend withholding as in no treaty is such an amount less than 5%.
This provision is reported in connection with the following parties: Brazil (who has not
signed the MLI), Canada (who has not considered the treaty with Peru as a CTA), Chile,
Portugal and Switzerland (who have not considered the treaty with Peru as a CTA).
Most of our treaties include a provision to affect the sale of shares whose value arises
principally from immovable property located in the other contracting state, but no such
provision incorporates a term to compute such valuation. Under the MLI, Peru has opted to
adopt the provision included in article 9 (4) which states the following:
(…) gains derived by a resident of a Contracting Jurisdiction from the alienation of shares
or comparable interests, such as interests in a partnership or trust, may be taxed in the
other Contracting Jurisdiction if, at any time during the 365 days preceding the alienation,
these shares or comparable interests derived more than 50% of their value directly or
indirectly from real property situated in that other Contracting Jurisdiction.
This provision does not only include a term to verify the relation between the value of the real
property and that of the shares or interests, but it also expressly mentions that the provision
would only be activated to the extent that more than 50% of the value is derived from such
real property. This provision mitigates the effect of a vague provision that only refers to terms
as “principally”, without effectively setting forth a percentage or ratio.
Such a provision would potentially have an effect on the treaties with Canada, the Rep.
of Korea, Mexico, Portugal and Switzerland. As long as only the tax treaties with Mexico and
Portugal also qualify as CTA for those jurisdictions then the effect of this rule would be limited
thereto.
Finally, Peru has also accepted the provision to avoid or prevent PE status through
commissionaires and similar arrangements. All treaties are eligible to modifications in
accordance with the rules set forth in article 12 (3) (a) and 12 (3) (b) of the MLI. Likewise, in
order to tackle the artificial avoidance of PE status through the “Specific Activity Exemptions”
Peru has decided for Option A as detailed in article 13 of the MLI.15
15
(…) the term PE shall be deemed not to include: a) the activities specifically listed in the CTA (prior to modification
by this Convention) as activities deemed not to constitute a PE, whether or not that exception from PE status is
contingent on the activity being of a preparatory or auxiliary character; b) the maintenance of a fixed place of
business solely for the purpose of carrying on, for the enterprise, any activity not described in subpara. a); c) the
maintenance of a fixed place of business solely for any combination of activities mentioned in subparas a) and
b).
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On the case of mismatches attributable to dual resident entities (mentioned in article 4

of the MLI) Peru has decided to apply such a provision to the tax treaty with the Rep. of Korea,
who has not considered our treaty as a CTA.
Peru has presented significant reservations to the MLI.
For instance, Peru has not agreed to adopt arbitration procedures in order to solve
conflicts on the application of relevant treaty provisions by taxpayers. It has also reserved
the right for the entirety of article 3 of the MLI (regarding hybrid mismatch arrangements)
not to apply to its CTA.
Peru has also reserved article 14 of the MLI on the splitting-up of contracts and article 10
on the provision denying treaty benefits for income paid to low-taxed PE in third jurisdictions
that are subject to little or no tax and exempt from tax in the residence jurisdiction. There
is no official statement regarding the significant reservations to the MLI executed by Peru.
Today we do not have a clear view of whether the provisions for which reservations to the
MLI were made, will be reversed in the near future.
Peru only has three CTAs, taking into account the position of other jurisdictions (Chile,
Mexico and Portugal), adding up to 87 provisions. When the MLI becomes effective for all
four states, some 20 provisions -in the three tax treaties- would be affected, representing a
change in 23% of all relevant provisions.
Despite some relevant changes being included on treaty abuse provisions, including the
adoption of the standard PPT, some important issues were dismissed and not elected by Peru.
The MLI does not apply to treaties entered into with jurisdictions that have not signed the MLI
(being Brazil the only relevant case for Peru) or that have signed the MLI but have not listed
the tax treaty with Peru as a CTA (like the cases of Canada, the Rep. of Korea and Switzerland).
No further negotiations have taken place on any of these treaties in order to adopt
any of the MLI recommendations, which have also been included in the 2017 OECD Model
Convention, bilaterally.
Furthermore, Peru has not entered into any new bilateral or regional tax treaty after
signing the MLI in June 2018.
Peru has only agreed in principal to a tax convention with Japan in September 2019. Japan
ratified the MLI and it is applicable since 1 January2019. Japan recognized 39 CTA from its
broad treaty network.
We have not had access to the draft treaty between Peru and Japan, but we expect it to
follow the 2017 OECD Model, including relevant BEPS provisions. We do not expect the treaty
to address issues that were reserved in the MLI by both Japan and Peru like specific criteria
on hybrid mismatches.
The Peruvian government has announced that negotiations are underway for tax treaties
with Singapore and Spain. Any resulting treaty with Singapore would be the first of their
kind with Peru. Any resulting treaty with Spain would replace the 2006 tax treaty that is still
awaiting ratification.
The negotiations are “reserved” (not accessible to public domain) but we expect the
treaties to be based on the 2017 OECD Model, as long as both Singapore and Spain are parties
to the MLI, the MLI being effective for the former since 1 April 2019.
Due to the lack of accessible information, we cannot assure the effective impact the
MLI provisions have on the treaty negotiations or even on the treaty concluded with Japan.
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Likewise, we cannot determine if any rejected MLI provision is being included in new bilateral
agreements or negotiations.
It is still unclear if, when the MLI is effectively approved and the same happens in the
jurisdictions of the relevant CTA, the provisions of the corresponding tax treaties will be
effectively modified or if the MLI will remain as a third layer of international tax law. It would
be more convenient to have effective changes into bilateral treaties as a result of the MLI,
as it reflects a desire of both parties to effectively change the provisions which govern their
interaction from a tax standpoint. The MLI should not be granted a higher or lower status.
Finally, Peru has signed the MLI and made certain reservations. As Peru is not an OECD
member, it has not made “public” reservations to the 2017 OECD Model Convention. Therefore,
we cannot compare the nature of both treaties and assess if the reservations made by Peru
are consistent in both cases.
Despite signing the MLI (27 June2018), it still has not been approved by Congress nor ratified
by the President. The MLI has no legal binding value in our legislative framework.
Congress has to approve the MLI, prior to its ratification by the President and notice to the
OECD.16 Congress must be involved on the review and approval of the MLI as the Constitution
mandates it. The approval by Congress is not a simple procedure or a formality; after debate
Congress could observe the multilateral instrument, approve or discard it.
We have no guidelines nor policy regarding changes to tax treaties by the MLI. According
to our law, it is not compulsory to “update” treaties, nor to provide consolidated versions.
For example, protocols to treaties can generate relevant changes, but the text of the treaty
is not updated or modified. Instead, the treaty and protocol must be read together for clarity
and consistency.
On 27 October2017 SUNAT (Report 036-2017-SUNAT/7T0000), due to the application of the
Most Favored Nation Clause in the treaty with Mexico, concluded that:
(i) General withholding on dividends should be reduced from 15% to 10%; and,
(ii) Interests paid to a bank or on the purchase or industrial, commercial or scientific
equipment (in accordance with the Peru – Switzerland treaty) should be subject to 10%
withholding, instead of the general rate of 15%.
The withholding rates on the tax treaty with Mexico (dividends and interests) have been
modified but such change is not included on the web page of the Ministry of Economy and
16
Art. 56 of the Political Constitution (1993) establishes that Congress must approve treaties prior to their ratification
by the President.
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Finance, where the “original” treaty can still be found, reviewed and downloaded, with not
even a single reference to the report issued by SUNAT.17
In Peru if a piece of legislation has undergone many changes and it has been heavily
amended over time, sometimes a “Texto Unico Ordenado” or “TUO” is published, which is an
official version of the piece of legislation will all changes included. It is a binding piece of
legislation, but there is no obligation to issue it.
For example, the Income Tax Act enacted on 1993 (Legislative decree 774), suffered
many changes and a TUO was approved on 2004, as a single piece of legislation including all
relevant modifications. On a similar note, Legislative Decree 816 (published on 21 April1996)
approved the Tax Code that was subject to several changes and a TUO was published on 22
June2013, by means of Supreme Decree 133-2013-EF.
We would not expect the tax authorities to publish consolidated tax treaties taking the
MLI into account. There is no precedent of anything similar to a TUO on tax treaties.
Despite no consolidation of the MLI and the relevant tax treaties, the OECD “MLI matching
Database” (which makes projections on how the MLI modifies a specific tax treaty covered by
the MLI) will be given no legal value in Peru. The MLI matching Database would simply be a
reference tool under Peruvian legislation.
Treaties entered into by the state are part of Peruvian legislation as mentioned in article 55
of the Political Constitution in force since 1993.
After Congress approves and the President ratifies the MLI, it would rank next to laws
issued by Congress, in the Kelsen Pyramid structure. International treaties have the same
strength as laws enacted by Congress.
The previous Constitution of Peru (1979) was clearly monist in its approach, stating
that in the case of conflict between a treaty and domestic law, the first would prevail. So,
domestic legislation in contradiction with a treaty, seized to apply, and on the other hand,
laws approved after a treaty was effective could not limit the application of such international
instrument.18
The law and the treaty had the same rank. Treaties are “laws”, but in the case of collision,
treaties should prevail. Treaties do not repeal domestic provisions that oppose them; they
simply render them inapplicable or in suspense while the treaty is in effect for Peru. It is a
horizontal relation and vertical as hierarchy, meaning that opposition did not result in repeal
but lack of application.19
Unlike, the Constitution of 1979, the Constitution of 1993 did not have a specific provision
referring to the way on which a conflict between an international treaty and domestic
legislation should be addressed, generating uncertainty.
In 1995, the Ministry of Foreign Affairs affirmed, before Congress, the monist position of
Peru. Domestic legislation cannot affect, modify or alter the provisions of an international
17
https://www.mef.gob.pe/contenidos/tributos/cv_dbl_imp/Convenio_Peru_Mexico_DT.pdf.
18
(https://dialnet.uniroja.es/descarga/articulo/6302394.pdf) Fabián Novak Talavera. Los tratados y la
Constitución Peruana de 1993. P. 76.
19
Fabián Novak Talavera. Op. Cit. P. 77.
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treaty.20 So, the MLI when approved and binding in our legal system, could not be affected
by further domestic provisions
The MLI is still not applicable in Peru so it has not been subject to interpretation by SUNAT,
the Tax Court or the Judiciary in any form. Furthermore, to our knowledge no academic papers
have addressed the issue to date.
We have not seen any relevant change on the way tax treaties are interpreted or reviewed in
Peru because of the signature of the MLI.
Generally, Peru follows the OECD Model Convention for its tax treaties, but it includes
certain provisions based on its standing as a developing country. Peru is not a member of
the OECD.
The OECD Commentaries are a helpful tool for the interpretation of the scope of
tax treaties, but they are not binding for SUNAT when applying the provisions of such a
treaty. Furthermore, the Tax Court does not acknowledge binding effect to the applicable
Commentaries drafted by the OECD.
Treaty interpretation is based on the Vienna Convention provisions and context can be
provided by the Commentaries made by the OECD. Hence, to the extent they reflect the
intention of the parties to the agreement, they could be a useful tool and should not be
disregarded.
There is no indication that the preamble of tax treaties amended of the MLI, could be
used in a retrospective manner for interpreting tax treaties.
Moreover, retrospective application of law is prohibited in Peru. The Constitution upholds

that as sacred provision, and the second paragraph of article 103 states that: “No law has
retroactive effects, except on criminal case, when it favors the accused.”
Under this scenario, it seems difficult to have previous treaties interpreted under the
provisions of the MLI. Treaties are agreements or conventions between two or more states
governed by the facts and circumstances at that time and bound by the text of the treaty.
In the case of CTAs it is the intention of the parties to have those treaties amended by the
MLI, not only in their text but also in their scope and spirit. Therefore, in those cases, after the
20
Fabián Novak Talavera. La regulación de los tratados en la Constitución Peruana de 1993. Ius et Veritas LJ 17. P.
257 – 258.
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effective date of the MLI, the provisions set forth there, must apply to operations with parties
resident in such contracting state.
The “new treaties” (subject to the changes included by the MLI, both “soft” provisions and
hard text modifications) must apply to all new cases with relevant parties.
The Peruvian Constitution upholds the immediate application of the law principle (“teoría
de los hechos cumplidos”), meaning that any changes into law must apply to all situations
occurring after the approval of the relevant provision. The possible application of laws after
they have been changed or repealed, in order to grant certainty to parties and avoid changes
in their expected situation, is residual in our legal system. Such a system of application of
law over time would emphasize rights acquired by parties (“teoría de los derechos adquiridos”).
The discussion on the application of law over time, also apply -in this context- to tax
treaties, as law within our legal system.
As a rule, any CTA (effectively modified by the MLI) should apply to any situations arising
prior to the change performed by the MLI, taking into account the original provisions of the
treaty, without the effect of the MLI.
On the other hand, the new provisions of the amended treaty (post MLI) would apply to
any situations presented after the effective change in the treaty by the MLI.
For example, a company resident of Country A enters into a commissionaire arrangement
with a company resident of Country B, and the question will be whether the first company has
a PE in Country B. The case law and legislation in Country B is silent and the tax authorities
of this Country have never made explicit statements on this situation.
So, domestic law will not provide for a PE in Country B for the resident from Country A
under the commissionaire arrangement.
In this scenario, Country B executes the MLI and agrees to a specific treatment on such
kind of commissionaire agreements, generating PE exposure.
Our understanding in this case would be that after the MLI is ratified and it is binding (not
merely with its signature), to the extent that A and B are both parties to the MLI, there would
be a PE in Country B for the resident of Country A. If the commissionaire arrangement were
prior to the effective date of the MLI then there would be no PE exposure, as the intent of the
state when signing the MLI, would have no effect on domestic provisions.
The MLI would have no effect on domestic legislation but it would create, after its effective
implementation, a PE exposure for treaty purposes, in order to allocate income and allow
further source taxation of income assigned to such PE.
Moreover, if State A does not approve the MLI then Country B would not be able to require
taxation on the PE exposure (generated on the commissionaire arrangement), as the MLI
would not have any effect on domestic legislation, and it would not apply to parties that did
not subscribe to it.
The standpoint taken on the approval of the MLI by Peru, taking into account reservations,
should not construe or affect the manner on which other tax treaties are interpreted.
Furthermore, the provision of the MLI can only affect CTAs, and only after the MLI is applicable
in Peru, which is after approval and ratification.
The main goal pursued by the BEPS project is to fight aggressive tax planning, and the MLI
moves in the same direction.
Peru has adopted several BEPS initiatives and is in the process of incorporating the MLI;
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both decisions are strong evidence of a shift towards aggressive anti-avoidance practices.
Furthermore, the PGAAR is now in full effect and it has relevant impact on tax planning,
both domestically and internationally.
We can affirm that tax practitioners and taxpayers in Peru are much more cautious on tax
planning structures, due to domestic provisions (PGAAR) and the international environment
of anti-abuse provisions, LOBs and full disclosure and exchange of information between
jurisdictions.
In March 2019, Boards of Peruvian companies were obliged to convene and discuss about
all tax planning structures that were performed since 2012 and were still having effects. The
Board had to refer to tax planning and define if they comply with the standard set forth in
the PGAAR. This obligation created a lot of concern between taxpayers and put tax planning
in the spotlight.
The provision that developed the detailed procedure in order to apply Norm XVI of the
Tax Code (which included the PGAAR) mentioned that any representative of the company
that was involved in the design, approval and execution of any aggressive tax planning
could be jointly held liable with the company for any owed taxes generated because of such
structure. The members of the Board were subject to a similar liability and appointed, by law,
as the sole and final one responsible for any tax planning executed by the company.
Together with the PGAAR, the inclusion of a PPT into the treaty atmosphere has resulted
in the dire need to develop strong, robust and sensible economic and business purposes to
coexist with treaty benefits.
The sole utilization of tax treaties for tax benefits without business substance is falling
behind rapidly.
Still, in Peru assessment or audits have not applied the reinstated PGAAR nor the MLI
provisions. Moreover, no specific LOB has been included into our domestic regulation nor
have specific rules in order to deny treaty benefits, been approved.
The domestic provision in order to apply the PGAAR prevents the auditor from SUNAT
to do it under its sole discretion. The auditor must present the case before a panel of experts
within the SUNAT, who will review the case, grant the taxpayer the opportunity to file its
comments and with all relevant information rule on the application of the PGAAR. The panel
should also refer to the manner in which the PGAAR must be applied considering the tax
consequences arising from the operation effectively desired and executed by the parties.
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Branch reporters
Krzysztof Lasiński-Sulecki1
Wojciech Morawski2

Quite numerous and varied legislative measures aimed at eliminating tax avoidance have
recently been introduced in Poland. One can certainly identify a significant number of
legislative changes connected with the Base Erosion Profit Shifting project (BEPS) carried
out by the OECD/G20. Some conceptual and legislative works took place simultaneously with
the developments of the BEPS project but most of the anti-avoidance rules were introduced
after the release of the BEPS Final Reports.
The adoption of the BEPS Final Reports coincided with certain changes in the interpretation
of tax law by the tax authorities. The tax authorities initiated numerous proceedings aimed
at counteracting tax avoidance or aggressive tax planning and relied on provisions that had
been in force for long before the entry into force of the afore-mentioned legislative changes.
In mid-2016 the general anti-avoidance rule entered into force. Numerous specific
anti-avoidance measures have been introduced since that time. Before the MLI, anti-treaty
shopping provisions in the DTCs concluded by Poland were rather rare. The beneficial
ownership clause was the most widely used. Immovable property clauses as well as limitation
of benefits clauses were also used in a number of DTCs. Anti-treaty shopping or anti-avoidance
provisions were also rare in domestic legislation.
Eliminating double taxation was considered to be the purpose of the DTCs that should be
taken into account in the process of their interpretation. In the course of the interpretation of
the DTCs – as compared to the interpretation of domestic legislation – courts tended to rely
more on teleological interpretation.
Poland signed the MLI as one of the first countries as early as on 7 June 2017. The MLI
came into force with regard to Poland on 1 July 2018. Poland treated 78 agreements as being
CTAs. Potentially, Poland has expressed its willingness to modify 274 provisions of these
agreements. Poland has not submitted two important double taxation treaties as CTAs. These
are the agreements with the US (which turned out to be irrelevant) and Germany.
The legal value of the MLI is determined by constitutional rules that apply to all
international agreements and govern laws of taxation. Ratified international agreements
(such as the MLI) are – under article 87(1) of the Constitution of the Republic of Poland of
2 April 19973 among the sources of universally binding law of the Republic of Poland. After
promulgation thereof in the Journal of Laws of the Republic of Poland (Dziennik Ustaw), a
ratified international agreement shall constitute part of the domestic legal order and shall
be applied directly, unless its application depends on the enactment of a statute (article 91(1)
1
Prof Dr, Head of the Centre of Fiscal Studies at Nicolaus Copernicus University in Torun and associate professor
at the Department of Public Financial Law of this university, tax advisor.
2
Prof Dr, Head of the Department of Public Financial Law at Nicolaus Copernicus University in Toruń, legal
counsel.
3
Dz. U. No. 78, item 483, as amended.
IFA © 2020 637

Poland
of the Constitution). Article 91(2) of the Constitution states that an international agreement
ratified upon prior consent granted by statute, shall have precedence over statutes if such an
agreement cannot be reconciled with the provisions of such statutes.
The position of ratified international agreements – perceived through constitutional
rules – is very strong. One should, however, also pay attention to legislative standards
applicable in the sphere of taxation. Article 84 of the Constitution states that everyone
shall comply with his responsibilities and public duties, including the payment of taxes, as
specified by statute. This rule is further developed, with regard to taxes, in article 217 of the
Constitution stipulating that the imposition of taxes, as well as other public imposts, the
specification of those subject to the tax and the rates of taxation, as well as the principles for
granting tax reliefs and remissions, along with categories of taxpayers exempt from taxation,
shall be by means of statute.
Tax Treaty Network
1.1. Introduction
Quite numerous and varied legislative measures aimed at eliminating tax avoidance have
recently been introduced in Poland. They range from changes in the personal scope of taxation
through the introduction of a controlled foreign company (CFC) regime, to changing certain
provisions often relied on in tax planning.4 One can certainly identify a significant number
of legislative changes connected with the Base Erosion Profit Shifting project (BEPS) carried
out by the OECD/G20. Some conceptual and legislative works took place simultaneously with
the developments of the BEPS project but most of the anti-avoidance rules were introduced
after the release of the BEPS Final Reports.
It should also be emphasized that the adoption of the BEPS Final Reports coincided
with certain changes in interpretation of tax law by the tax authorities.5 The tax authorities
initiated numerous proceedings aimed at counteracting tax avoidance or aggressive tax
planning and relied on provisions that had been in force long before the entry into force of
the afore-mentioned legislative changes.
Poland has signed double taxation conventions with the following countries and territories
before signing the MLI: Albania, Algeria (not in force), Armenia, Australia, Austria, Azerbaijan,
Bangladesh, Belgium (the protocol to this DTC envisaging inter alia limitation of benefits in
the case of artificial arrangements was signed in 2014), Belarus, Bosnia and Herzegovina,
Bulgaria, Canada, Chile, People´s Republic of China, Croatia, Cyprus (the protocol affecting
4
K. Lasiński-Sulecki, E. Prejs, Poland, [in:] Implementing Key BEPS Actions, ed. by M. Lang et al., IBFD (in print).
5
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Lasiński-Sulecki & Morawski
mainly treatment of passive income and directors’ income was signed in 2012), Czech
Republic, Denmark, Egypt, Estonia, Ethiopia (signed in 2015 but entered into force in 2019),
Finland, France, Georgia, Germany, Greece, Guernsey (limited scope of the agreement),
Hungary, Iceland, India (the protocol affecting inter alia the concept of permanent
establishment, rules on the associated enterprises and passive income was signed in 2013),
Indonesia, Iran, Ireland, Isle of Man (limited scope of the agreement), Israel, Italy, Japan,
Jersey (limited scope of the agreement), Jordan, Kazakhstan, Kirgizstan, Republic of Korea
, Kuwait, Latvia, Lebanon, Lithuania, Luxembourg (the protocol regarding passive income,
eliminating double taxation and exchange of information was signed in 2012), Macedonia,
Malaysia, Malta, Mexico, Moldova, Morocco, Netherlands, New Zealand, Nigeria, Norway,
Pakistan, Philippines, Portugal, Qatar, Russia, Romania, Saudi Arabia, Serbia, Singapore,
Slovakia (the protocol affecting mainly the associated enterprises clause, passive income
rules and exchange of information was signed in 2013), Slovenia, Spain, Sri Lanka (signed in
2015, applicable partly from 1999 and partly from 2020), South Africa, Sweden, Switzerland,
Syria, Chinese Taipei, Tajikistan, Thailand, Turkey, Ukraine, United Arab Emirates, United
Kingdom, United States, Uruguay (not in force), Uzbekistan, Vietnam, Yugoslavia (currently
binding: Montenegro), Zambia (not in force) and Zimbabwe.
Poland is a state-party to nearly 90 double taxation conventions.
Double taxation conventions concluded by Poland generally follow the OECD Model and
do not depart from it significantly. There are no typical patterns, in which the DTCs concluded
by Poland would depart from the OECD Model. Older ones typically reflect older versions of
the OECD Model, whereas later ones tend to follow the latest version of the Model. This can
be easily noticed by the lack of provisions based on later versions of the Model (for instance,
Polish DTCs generally lack article 25(5), some of them still miss article 9(2)) or provisions that
were eliminated from the Model after conclusion of a given DTC are still present (article 14 can
serve as a good example). Some DTCs specifically regulate taxation of scientists (academics).
Under a few DTCs leasing payments are still considered to be licence fees.
It was quite often assumed in literature – before the entry into force of the MLI – that double
taxation agreements aimed at eliminating double taxation.6
Identification of the aim that negotiators of an international agreement had in mind,
is rather intricate as preambles to the DTCs are scarce and, even if they exist, do not refer to
any issues in particular. They usually stress a common desire of its state-parties to conclude
the agreement as well as the need to enhance economic cooperation through elimination
of double taxation.
Sometimes the preambles of the DTCs also mention the need to prevent fiscal evasion
(Armenia 1999, Australia 1991, Azerbaijan 1997, Bangladesh 1997, Belgium 2001, Canada 2012,
Chile 2000, Czech Republic 2011, Denmark 2001, Egypt 1996, Estonia 1994, Ethiopia 2015,
Finland 2009, Georgia 1999, India 1989, Indonesia 1992, Iceland 1998, Ireland 1995, Israel 1991,
Italy 1985, Kazakhstan 1995, Republic of Korea 1991, Latvia 1993, Lebanon 1999, Lithuania 1994,
Malaysia 1977, Malta 1994, Mexico 1998, Moldova 1994, Morocco 1994, Netherlands 2002,
6
See, for instance, T. Kardach, Wykładnia umów w sprawie unikania podwójnego opodatkowania –wybrane zagadnienia,
Kwartalnik Prawa Podatkowego 2004, No. 4, p. 106.
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Poland
New Zealand 2005, Nigeria 1999, Philippines 1992, Portugal 1995, Qatar 2008, Singapore
2012, Sri Lanka 2015, Sweden 2004, Syria 2001, Ukraine 1993, United Arab Emirates 1993,
United Kingdom 2006, United States 1974, United States 2013 (not in force), Uzbekistan 1995,
Vietnam 1994). The titles of certain DTCs explicitly refer to tax evasion. Parts of their titles are
repeated in their preambles. This seems to be the main reason for mentioning tax evasion
in the above-mentioned preambles. Not a single preamble to any DTC concluded by Poland
refers to the elimination of tax avoidance.
The number and scope of anti-avoidance rules in force in Poland used to be rather limited
but a few such measures have been introduced in recent years.
The general anti-avoidance rule (GAAR) was introduced with effect from 15 July 2016
and is regulated in articles 119a et seq. of the Tax Ordinance of 29 August 1997.7 The GAAR is
intended to prevent the creation and use of artificial legal arrangements to avoid payment
of tax in Poland, and represents a very significant change in Polish tax law. The GAAR gives
the tax authorities the opportunity to deny companies a tax benefit that would arise from a
structure the main purpose of which was to produce a tax benefit8.
Under article 119a(1) of the Tax Ordinance, an act shall not result in deriving a tax benefit
if deriving the tax benefit being at variance, in given circumstances, with the object or goal of
a tax act or provision thereof, was the main or one of the main objectives of performing it, and
the mode of action was artificial (tax avoidance). When tax avoidance occurs, the tax effects
of an act are to be determined based on such state of facts that could occur if the appropriate
act were performed (article 119a(2) of the Tax Ordinance).
An act shall be deemed appropriate when a subject could perform it in given
circumstances, if it acts reasonably and is guided by lawful objectives other than deriving a
tax benefit being at variance with the object or goal of a tax act or a provision thereof, and the
mode of action is not artificial. The appropriate act may also consist in a failure to act (article
119a(3) of the Tax Ordinance). Where, in the course of proceedings, a party thereto indicates
an appropriate act, the tax effects are to be determined based on such state of facts that would
occur if the act were performed (article 119a(4) of the Tax Ordinance).
A mode of action is not artificial when, based on existing circumstances, one should
assume that a subject acting reasonably and being guided by lawful objectives would apply
this mode of action predominantly due to justified economic reasons. The reasons referred to
in the first sentence shall not include the purpose of deriving a tax benefit being at variance
with the object or goal of a tax act (article 119c(1) of the Tax Ordinance). An assessment being
to the effect that a given mode of action was artificial, may be indicated in particular by the
occurrence of:
1) unjustified division of transactions; or
2) engaging of intermediary subjects despite there being neither economical nor economic
grounds; or
3) elements leading to attainment of a condition identical or similar to the condition
existing before performing a given act; or
4) elements mutually ineffective or compensating each other; or
7
Dz. U. (Journal of Laws) 2019, item 900, as amended. Translations of provisions of this act are based on Legalis
by C.H. Beck.
8
640
5) economic risk exceeding the expected benefits other than the tax benefits to such a
degree that it shall be deemed that a subject acting reasonably would not choose this
mode of action; or
6) a situation in which the derived tax benefit does not reflect the economic risk borne by
a subject or its cash flows; or
7) profit before tax, which is small compared to a tax benefit that does not result directly
from the actually incurred economical loss; or
8) engaging of a subject that does not pursue an actual economic activity or does not
perform a significant economical function, or that has its seat or place of residence in a
country or territory specified by the provisions as engaged in harmful tax competition
(article 119c(2) of the Tax Ordinance).
Under article 119d of the Tax Ordinance, when assessing whether deriving a tax benefit was
the main or one of the main purposes of carrying out operations, one should take into account
the economic purposes of the operations as specified by a party. A tax benefit is defined in
article 119e as:
1) a tax obligation not having arisen, postponement of arising of a tax obligation, or
reduction of the amount thereof or a tax loss occurring, or it being overstated;
2) occurrence of an overpayment or a right to tax refund or increase in the amount of the
tax overpayment or refund.
With regard to tax periods prior to the entry into force of the GAAR tax authorities attempted
to use article 199a of the Tax Ordinance to counteract tax avoidance. Article 199a of the Tax
Ordinance states that:
1. While establishing contents of the act in law, the tax authority shall take into account
both the congruent intention of the parties and purpose of such act and not only the
literal wording of declarations of intent filed by the parties to such acts.
2. If, while disguised as one legal act, another legal act was performed, tax consequences
shall be a result from the disguised legal act.
3. If the evidence collected in the course of proceedings and, in particular, depositions of
a party, unless the party refuses to make depositions, cast doubts on the existence or
non-existence of a legal relationship or right having tax consequences, the tax authority
shall apply to a common court for ascertaining the existence or non-existence of such
legal relationship or right.
In the authors’ view this provision clearly cannot be viewed as an anti-avoidance measure,9
Similarly, the tax authorities have undertaken legally unfounded attempts to use too broadly
understood transfer pricing provisions as anti-abusive clauses.10 Prior to the introduction of
article 199a of the Tax Ordinance – on the turn of millennia –attempts were made by the tax
administration (up to a certain point in time sometimes successfully) to rely on private law
doctrines to combat tax abuse.
The concept of “beneficial ownership” has the been the most widely used anti-treaty
shopping clause in the DTCs concluded by Poland. Currently, “beneficial owner” (rzeczywisty
9
B. Brzeziński, K. Lasiński-Sulecki, Poland, [in:] A Comparative Look at Regulation of Corporate Tax Avoidance, ed. K.B.
Brown, Springer 2012, p. 274.
10
K. Lasiński-Sulecki, Changes in Transfer Pricing Legislation and Practice, International Transfer Pricing Journal 2017,
No. 3.
641
Poland
właściciel) is defined for the purposes of income taxation as a subject that jointly meets the
following conditions:
a) it obtains an amount due for its own benefit, including deciding on its own on allocation
thereof, and bears an economic risk related to the loss of this amount due or of its part;
b) it is neither an intermediary, nor a representative, trustee, nor another subject obliged
to transfer the given amount due to another subject in whole or in part;
c) it carries out actual economic activity in the state of its place of residence – in the case of
the amounts due gained in connection with the economic activity carried out.
Other than the beneficial ownership clause, treaty based anti-avoidance provisions were
rather rare in the era preceding the MLI. It has been assessed in literature that Poland
attempted to ensure a minimum level of protection against the granting of treaty benefits
in inappropriate circumstances even before the BEPS Project was launched but the scale of
this phenomenon was small.11
Poland adopted the DTC with the United States (2013 – not yet in force) that includes a
rule on fiscally transparent entities. Changes to treaty provisions referring to hybrid mismatch
arrangements were introduced to the DTC with Canada (2012).12
A targeted anti-abuse rule referring to dividend transfer transactions described in Action
6, was introduced in a number of DTCs concluded by Poland. A minimum shares holding
period allows for qualification of a reduced withholding tax rate (Belgium 2001, introduced
by the Protocol of 2014, Cyprus 1992, introduced by the Protocol of 2012, Luxembourg 1995,
introduced by the Protocol of 2012, Singapore 2012, Slovakia 1994, introduced by the Protocol
of 2013, United States 2013 – not yet in force).13
A limitation of benefits clause is present in a few treaties (Israel, Sweden, United States
– not yet in force). A limitation of benefits clause was added to the DTCs with India (1989,
introduction by the protocol of 2013), Luxembourg (1995, introduction by the protocol of
2012). Limitation of benefits provisions relating to the source taxation of passive income are
also contained in the DTC with Canada (2012). This clause is in certain cases accompanied by
a principal purpose test.14
Two Polish treaties have included a provision to confirm Poland’s right to tax its residents
without regard to the provisions of any tax treaty, other than those provisions that are
intended to apply to residents. This is the case of treaties concluded with Canada (2012) and
the United States (2013 – not yet in force).15
Immovable property clauses were present in some DTCs allowing the country in which
immovable property is situated to tax capital gains realized by a resident of the other country
on shares of companies that derive more than 50% of their value from such immovable
property (Bosnia and Herzegovina 2014, Republic of Korea 1991, introduced by the protocol
of 2013, Luxembourg 1995, introduced by the protocol of 2012, Slovakia 1994, introduced by
the protocol of 2013, Sweden 2004, United Arab Emirates 1993, introduced by the protocol
of 2013).16
In the DTC with Sri Lanka (2015) the issue of avoiding permanent establishment status
11
12
13
14
15
16
642
was partially addressed by providing that an enterprise will be deemed to have a permanent
establishment in Poland in respect of any activities which that person undertakes for the
enterprise, if a person – other than an agent of an independent status to whom article 5(7)
applies – is acting in a contracting state on behalf of an enterprise of the other contracting
state, and if such a person habitually maintains in the state a stock of goods or merchandise
from which he regularly delivers goods or merchandise on behalf of the enterprise, even if
that person has no authority to conclude contracts in the name of the enterprise. In the DTC
with India (1989, the protocol of 2013) Poland reformulated various paragraphs of article 5.17
Mutual agreement procedure rules are – as a matter of principle – included in DTCs
concluded by Poland. Corresponding adjustments rules are included in most DTCs.
Tax treaties entered into by Poland do not provide for mandatory arbitration.
Poland signed the MLI as one of the first countries as early as on 7 June 2017. Before his departure
for the MLI signing ceremony, Prime Minister Mateusz Morawiecki expressed favourable
opinions about signing the agreement. He pointed out that it was part of the government’s
policy aimed at combating tax avoidance. At a meeting with journalists he indicated that
it would help “clamp down on tax havens”.18 The statements of the representatives of the
authorities were clearly enthusiastic – the signing of the MLI was presented as a success of the
Polish government, which was involved in combating tax avoidance. It should be emphasized
that, when referring to the issue of tax avoidance by using DTCs, very often Polish politicians
treat such activities as tax evasion. In the language of Polish politicians these issues (tax
avoidance and tax evasion) are often treated as synonyms.
The attitude of the Polish government to the MLI comes as no surprise. A radical
clampdown on all tax avoidance and the enhancement of the efficiency of the Polish tax
system is a characteristic feature of the current conservative Polish government. In the opinion
of some practitioners and academics, the measures taken by the Polish authorities are too
far-reaching. Poland consistently implements the entire BEPS Action Plan and sometimes in
an even more radical way than the OECD position would suggest. In addition, the practice of
Polish tax authorities is currently very unfriendly to taxpayers. Tax authorities are all too eager
to find tax abuse in situations where the taxpayers’ activities are normal from an economic
point of view.
The authors of the report are not familiar with any studies as to the legitimacy of adopting
the MLI and its financial consequences. The Ministry of Finance did not present any such
calculations publicly. In the course of the procedure of the MLI ratification by parliament,
which is required by Polish law, no such analyses were mentioned. According to Polish law,
the government should present the financial implications of the regulation adopted by
parliament.
When providing justification to the draft law on the approval of the ratification of the MLI,
17
18
https://www.pap.pl/aktualnosci/news%2C965546%2Cmorawiecki-zabralismy-sie-za-raje-podatkowe.
html.
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Poland
the President of the Republic of Poland added an obligatory item: The government stated in
‘1. Financial implications’: “The entry into force of the MLI Convention will not have a negative
effect on the revenue of the public financial sector. With regard to the main objective of
the Convention, i.e. tightening of the tax system, its implementation should have a positive
impact on the level of Treasury budget revenues. However, this effect is difficult to estimate
at present.”
The document also identifies social and economic effects of the MLI: ‘2. Social and
economic implications. The entry into force of the Convention will make the tax system tighter
and make it more difficult to transfer profits earned in Poland to other countries with lower
taxation. In addition, the introduction of anti-abuse regulations will be preventive in nature
and will positively affect the behaviour and attitude of taxpayers to so-called aggressive tax
planning.’
The ratification of the MLI was also treated as a clear political signal, indicating political
consequences in the justification of the amendment: ‘3. Political implications. Becoming
bound by the MLI will be a significant political signal that Poland is engaged in the fight
against tax avoidance and strives to tighten its tax system.’
During the parliamentary work, the discussion over the law that gave consent to the
ratification was also quite brief. No estimates of financial implications were provided at
the meeting of the parliamentary Public Finance and Foreign Affairs Committees on 13
September 2017. Marek Magierowski, Deputy Minister of Foreign Affairs, stated:
The entry into force of the MLI Convention should result in tightening the tax system
and making it more difficult to transfer profits earned in Poland to other countries with
lower taxation. In addition, the introduction of the provisions of the Convention will be
preventive in nature and will positively affect the behaviour and attitude of taxpayers to
so-called aggressive tax planning. The ratification of the Convention will be a political
signal that Poland is committed to fighting the phenomenon of tax evasion and strives
to tighten both its tax system and the tax system in the international dimension.
The Undersecretary of State in the Ministry of Finance, Paweł Gruza, when answering the
question with regard to the financial consequences of the MLI, stated: “As far as the tightening
of the system as a result of the ratification of the Convention is concerned, I would like to
remind everyone that it is in a sense a prelude to the actual modification of the agreements.
It depends on the pace and scale at which our partners will ratify the changes. Today, we are
not in a position to predict the final scale of changes and the extent to which the bilateral
agreements will be modified. Therefore, it is not possible to estimate the extent to which
the tightening will be possible.”
The Director of the Tax System Department of the Ministry of Finance, Filip Świtała,
explained to the MPs that:
The primary objective of the Convention and the most important accomplishment and
benefit for us is the procedure called the principal purpose test. This is an equivalent of
a general anti-avoidance rule, but this time at an international level. Having such a tool
at our disposal in the double taxation treaty, we can question the phony transactions
concluded between a Polish entity and an artificially created entity abroad only to obtain
tax reduction benefits. I of course share the Minister’s view that it is currently difficult to
assess the effects of introducing this clause, as it is a general anti-avoidance clause. It is
the most significant element of the Convention.”
644
He clearly indicated that the purpose of adopting the MLI is to shorten the lengthy
process of negotiating numerous double taxation conventions.
If any doubts were raised in Poland, these concerned the transition from the exemption with
progression method to the tax credit method. It concerned a problem of taxpayers who were
Polish residents who earned their income in countries with higher tax-free amounts. In the
case of a transition to the method of crediting tax paid abroad, they could be obliged to bear
additional tax burdens in Poland as a country of residence.19
As a result, the draft law approving the ratification of the MLI by the President of the
Republic of Poland was voted through without any major problems. Out of 438 voting MPs,
402 voted in favour (both from the government and the opposition, despite the rather acute
political conflict at that time), and only 36 MPs voted against (mainly members of the anti-
system party KUKIZ15 and individual MPs from various factions). The Act of 29 September
2017 on the ratification of the Multilateral Convention implementing measures of the Treaty
tax law aimed at preventing erosion of the tax base and transfer of profit, drafted in Paris on
24 November 2016, was published in the Journal of Laws of 15 November 2017. As early as
23 January 2018 Poland submitted documents on the ratification of the MLI and it came into
force, with regard to Poland, on 1 July 2018.
It should be emphasized that the whole process of MLI adoption into the Polish legal
system did not raise major political emotions. There were no votes calling for resignation
from participation in the MLI either.
As it was indicated above, the MLI came into force with regard to Poland on 1 July 2018.
Poland appointed the agreements with the following countries as covered tax agreements
(CTAs): Albania, Saudi Arabia, Armenia, Australia, Austria, Azerbaijan, Bangladesh, Belgium,
Belarus, Bosnia and Herzegovina, Bulgaria, Chile, People’s Republic of China, Croatia, Cyprus,
the Czech Republic, Denmark, Egypt, Estonia, Ethiopia, Philippines, Finland, France, Greece,
Spain, Netherlands, India, Indonesia, Iran, Ireland, Iceland, Israel, Japan, Jordan, Canada,
Qatar, Kazakhstan, Kyrgyzstan, Republic of Korea, Kuwait, Lebanon, Lithuania, Luxembourg,
Latvia, Macedonia, Malaysia, Malta, Morocco, Mexico, Moldova, Mongolia, Norway, New
Zealand, Pakistan, Portugal, South Africa, Russia, Romania, Serbia, Singapore, Slovakia,
Slovenia, Sri Lanka, Syria, Switzerland, Sweden, Tajikistan, Thailand, Tunisia, Turkey, Ukraine,
Uzbekistan, Hungary, UK, Vietnam, Italy, Zimbabwe and United Arab Emirates. Hence,
Poland appointed 78 agreements as CTAs. These sometimes even included agreements that
were only about to enter into force, such as the agreement with Ethiopia, which entered into
force on 1 January 2019, or would enter into force in the near future (the agreement with Sri
Lanka as a whole entered into force on 1 January 2020), or in the case when it was still unclear
when it would enter into force (the agreement with Malaysia). It is worth noting that the
Report on Prevention of Treaty Abuse – Peer Review Report on Treaty Shopping published in
February 2019 (OECD (2019), Prevention of Treaty Abuse – Peer Review Report on Treaty Shopping:
19
https://podatki.gazetaprawna.pl/artykuly/1405158,zmiana-metody-unikania-podwojnego-opodatkowania-
szkodliwa.html.
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Poland
Inclusive Framework on BEPS: Action 6, OECD/G20 Base Erosion and Profit Shifting Project,
OECD Publishing, Paris,20 is partially out of date.
However, the agreements with 11 countries were omitted: Algeria, Montenegro, Georgia,
Guernsey, Jersey, Germany, Nigeria, Uruguay, the USA, Isle of Man and Zambia.
This means that Poland was ready to apply the MLI to over 87% of all its double taxation
treaties in the area of income taxes.
Out of 78 agreements that Poland declared as covered by the MLI at the time of the
ratification procedure in the Polish parliament on the basis of the declarations made by
the states back then, only 46 agreements could potentially be applied, given the position
of the other country on treating the agreement with Poland as a CTA. In the documents
presented to parliament,21 the government indicated the agreements concluded with
the following countries: Armenia, Australia, Austria, Belgium, Bulgaria, Chile, People’s
Republic of China, Croatia, Cyprus, the Czech Republic, Denmark, Egypt, Finland, France,
Greece, Spain, India, Ireland, Iceland, Indonesia, Israel, Japan, Canada, Republic of Korea,
Lithuania, Luxembourg, Latvia, Malta, Mexico, Norway, New Zealand, Pakistan, Portugal,
South Africa, Russia, Romania, Serbia, Singapore, Slovakia, Slovenia, Switzerland, Sweden,
Turkey, Hungary, United Kingdom and Italy. Based on the data available at the website of
the OECD,22 it appears that the current number of contracts to which the MLI can be applied,
is greater. Although Switzerland should be excluded from the list presented to parliament,
Albania, Saudi Arabia, Estonia, Qatar, Kazakhstan, Malaysia, Morocco, Tunisia, Ukraine and
the United Arab Emirates should be added to it. This means that the MLI could potentially
be applied to agreements between Poland and 55 countries.
It follows that although Poland was ready to apply the MLI to more than 87% of all its
double taxation treaties with respect to income taxes, as a result of the decisions of the other
state, which is a party to the agreement, there is a potential possibility to apply the MLI only
to about 62% of the agreements concluded by Poland, but at the same time it is about 70%
of the agreements to which Poland was ready to apply the MLI.
The Polish government has not officially indicated the reasons that justified its position
on the omission of certain agreements. The justification for the draft law on the approval of
the ratification of the MLI indicated only such agreements.23
According to the information received from the Ministry of Finance staff, the reasons for
not submitting the agreements as CTAs were different. Sometimes these were just atypical
agreements which did not even come into force (e.g. the agreement with Algeria). In the case
of serious economic partners, the Polish agreement with the US was not submitted as a CTA,
but this was due to the fact that a new agreement with the US was being negotiated at the
time, and the US itself did not express any interest in the MLI. In the case of an agreement
with Germany, both countries agreed that the changes would be made bilaterally. A
similar informal agreement on bilateral works was also concluded with the Netherlands.
Ultimately, however, Poland submitted the agreement with the Netherlands as a CTA, but
the Netherlands did not do so.
20
https://doi.org/10.1787/9789264312388-en.
21
Sejm paper no. VIII.1776.
22
https://www.oecd.org/tax/treaties/mli-database-matrix-options-and-reservations.htm.
23
http://www.sejm.gov.pl/Sejm8.nsf/druk.xsp?nr=1776.
646
Poland did not decide to regulate its CTAs under article 6(3) of the MLI. The branch reporters
do not know the reasons for such a decision. It is worth noting, however, that in Polish
legislative practice there is no tradition of applying extensive preambles to legal acts. It is
possible that this circumstance brought about reluctance to use extended preambles.
Poland, like most of the countries acceding to the MLI, has chosen to apply the PPT clause,
while at the same time not excluding the adoption of the extended options provided for in
article 7 of the MLI through bilateral negotiations.
In the explanatory memorandum to the draft law on the approval of the ratification of
the MLI, this is justified by the fact that “There is every likelihood that states will agree to a
symmetrical application of the MLI provisions, which means that, after a preliminary analysis
of the preferences of states acceding to the MLI, in most cases only the PPT clause will be
used in bilateral relations. However, this approach does not preclude the application of this
provision to a broader scope as described above.”
In the case of Poland, 11 agreements already contain the provisions referred to in article
8(1) of the MLI. They often provide for a holding period of 24 months. Poland considered it
justified to maintain this condition (see the justification for the draft law on the approval of
the ratification of the MLI).
Article 8(1) of the MLI will apply to 40 CTAs, as they provide for the differentiation of the
WHT.
Article 9 of the MLI is consistent with the current Polish policy on double taxation treaties.
In the course of the negotiations, the Polish Ministry of Finance usually proposes that the
negotiating partners include an anti-abuse provision concerning the real estate clause in the
agreement. However, the universality of the real estate clause in the agreements to which
Poland is a party, is still far from being universal. Still, only about half of the agreements
concluded by Poland contain such a clause in various forms.
The Ministry of Finance, justifying its accession to the MLI, pointed to the underlying
purpose of standardising the clauses contained in tax agreements in relation to what was
provided for in the MLI. In the course of parliamentary work, it was also stressed that article
9 of the MLI, in order to counteract phony transactions aimed primarily at tax avoidance
even more effectively, also provides for its application to the sale of shares in partnerships
and trusts.
In view of the above, Poland considered it justified to adopt:
–– Article 9(1) of the MLI – to tighten then existing real estate clauses; and
–– Article 9(4) of the MLI – to introduce such regulations into CTAs that do not contain real
estate clauses (or tighten the existing clauses – in situations where the other party to the
CTA makes a reservation that article 9(1) of the MLI does not apply).
Poland has not adopted the solutions found in article 10 of the MLI for all CTAs. This is a
consequence of Poland’s position that all provisions concerning permanent establishment
taxation will be subject to bilateral negotiations.
Poland has not adopted the MLI provisions on the prevention of artificial avoidance of
the status of establishment, making the following reservations about the non-application
of the MLI provisions in this respect in full. This does not mean that Poland does not intend
to amend the agreements. In the course of the ratification procedure, renegotiations of
agreements in relation to which it was possible to apply the solutions contained in the MLI,
were carried out.
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Poland
The Ministry of Finance did not officially explain this solution, which at first glance
seems to be inconsistent with the objective of combating tax avoidance. The information
obtained from the Ministry of Finance employees shows that such solutions were favourable
for pragmatic reasons and were in the interest of Polish taxpayers. Combating the avoidance
of forming a permanent establishment could be unfavourable to Polish taxpayers operating
outside Poland. It was considered safer to amend specific bilateral agreements.
Poland adopted the solutions under article 3 of the MLI. The government, justifying such
a solution in parliament, pointed out that “Due to the fact that Poland aims at preventing
situations that make double non-taxation possible at the international level, it is Poland’s
intention to introduce article 3 of the MLI into all tax agreements covered by Poland’s
application of the MLI.” Poland also adopted article 4 of the MLI for all CTAs. Although the
government did not include any justification for its choice in the explanatory memorandum
to the draft law on the approval of the ratification of the MLI, it seems to be in line with the
policy of the fight against tax avoidance.
Poland took part in the work on regulations concerning arbitration in the MLI, but
ultimately decided that it would not adopt all the regulations concerning arbitration.
In the justification of the draft law on the parliamentary approval of the ratification of
the MLI, the advantages and disadvantages of this solution were pointed out.
The advantage was the fact that the adoption of regulations concerning arbitration
could bring some positive effects, such as the possibility of final settlement of the dispute
by independent arbitrators, improvement of the MAP procedure, and achievement of
the standards developed within BEPS. However, it was assessed that at this stage the
disadvantages of the arbitration procedure under the MLI seem to outweigh the advantages.
The following disadvantages were identified:
–– the risk that the state budget will incur significant costs,
–– costs were not always commensurate with the benefits (the costs of arbitration are
incurred regardless of whether the case has been resolved in Poland’s favour);
–– in addition, the provisions of the arbitration procedure provide for the possibility for a
taxpayer to withdraw from a solution developed under the procedure despite incurring
significant costs related to its servicing by the state budget;
–– the provisions of the arbitration procedure are, in certain issues, of a general nature and
refer to the need for the competent authorities to conclude bilateral agreements which
will clarify the provisions of the MLI in a given respect.
In talks with the employees of the Ministry of Finance an argument appeared that the EU
regulations on arbitration, which will apply to most of Poland’s main economic partners, were
an alternative to the MLI. Therefore, it is not necessary to resort to arbitration according to
the MLI. There could be problems with choosing the right procedure.
When the Polish government submitted a bill on the parliamentary approval of the
ratification of the MLI in a situation where it did not adopt any solutions, it indicated in
principle that it would either introduce similar solutions through bilateral negotiations or
would not exclude future changes. Interviews with staff of the Ministry of Finance often
include an argument that the Polish authorities originally intended to adopt the MLI to a
much wider extent, but were prompted to be cautious by the rather prudent stance of other
countries.
The position of the Polish authorities is that of a hesitation between the declared policy of
vigorously combating any tax avoidance, and concerns about the risk that any changes would
hit Polish entrepreneurs operating outside Poland. The observation of the practices of other
648
countries was also an important factor. As already indicated above, Poland has gradually
reduced its intentions in relation to the scope of adopting the MLI, following suit the
scepticism of other countries. The arguments in favour of adopting the MLI are often raised
in official documents (see the justification of the draft law on the parliamentary approval of
the MLI ratification quoted above) and public statements of senior government officials. The
arguments against the broad adoption of the MLI are most often raised in informal talks with
employees of the Ministry of Finance. They point to the cautious practice of other countries,
fears related to the complicated structure of the MLI and the risk of problems arising for Polish
taxpayers operating abroad.
Poland treated 78 agreements as being the CTAs. Potentially, Poland has expressed its
willingness to modify 274 provisions of these agreements. The refusal to apply the provisions
concerning the permanent establishment and the arbitration procedure causes the number
of provisions that will not be applied, to be several times higher. However, this does not
correctly reflect the degree of Poland’s acceptance of the MLI.
Poland has signed the MLI but has not submitted two important double taxation treaties as
CTAs. These are the agreements with the US and with Germany. In the case of Germany, the
effects of the MLI were to be achieved as a result of bilateral negotiations.
In the case of the US, a new double taxation agreement was signed on 13 February 2013
which included anti-abuse solutions (article 22 of the agreement). However, the agreement
has not yet entered into force.
As a result, it should be assumed that the MLI strengthens the efforts to introduce anti-
abuse measures to the agreements which are also modelled on the MLI.
In relation to the provision of the LOB clause which is crucial for the MLI in Prevention of
Treaty Abuse – Peer Review Report on Treaty Shopping: Inclusive Framework on BEPS: Action 6, OECD/
G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris,24 ”Poland expressed a
statement that while it accepts the application of the PPT under the MLI, it intends where
possible to adopt an LOB provision through bilateral negotiation. The agreements that will
be modified by the MLI will come into compliance with the minimum standard once the
provisions of the MLI take effect.” (p. 183).
The President of the Republic of Poland was given consent to ratify the MLI in the Act of
Parliament of 29 September 2017. The President ratified it on 4 January 2018. The MLI was
published in Poland in the Journal of Laws on 17 July 2018.
24
https://doi.org/10.1787/9789264312388-en.
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Poland
The Ministry of Finance consolidates DTCs and publishes their versions incorporating
the MLI on its website. The following consolidated treaties have so far been published:
Australia, Austria, Finland, France, Ireland, Israel, Japan, Lithuania, Malta, New Zealand,
Serbia, Singapore, Slovakia, Slovenia and United Kingdom. Consolidated versions do not have
legal force of their own. They should rather be viewed as practical tools.
The legal value of the MLI is determined by constitutional rules that apply to all international
agreements and govern laws of taxation.
Ratified international agreements are – under article 87(1) of the Constitution of the
Republic of Poland of 2 April 199725 – among the sources of universally binding law of the
Republic of Poland. Article 88(3) of the Constitution states that international agreements
ratified with prior consent granted by statute, shall be promulgated in accordance with the
procedures required for statutes.
After promulgation thereof in the Journal of Laws of the Republic of Poland (Dziennik
Ustaw), a ratified international agreement shall constitute part of the domestic legal order
and shall be applied directly, unless its application depends on the enactment of a statute
(article 91(1) of the Constitution). Article 91(2) of the Constitution states that an international
agreement ratified upon prior consent granted by statute shall have precedence over statutes
if such an agreement cannot be reconciled with the provisions of such statutes. Due to article
241 (1) of the Constitution, an international agreement ratified by the President empowered
be the Sejm (Lower House of Parliament) in course of enacting an act of consent for the
ratification which are promulgated in journal of laws, shall have the power equal to acts of
parliament.
The position of ratified international agreements – perceived through constitutional rules
– is very strong. Given the aims of the MLI – in a sense leading to limit the rights of taxpayers in
comparison to the world before BEPS – one should also pay attention to legislative standards
applicable in the sphere of taxation.
Article 84 of the Constitution states that everyone shall comply with his responsibilities
and public duties, including the payment of taxes, as specified by statute. This rule is
further developed, with regard to taxes, in article 217 of the Constitution stipulating that the
imposition of taxes, as well as other public imposts, the specification of those subject to tax
and the rates of taxation, as well as the principles for granting tax reliefs and remissions, along
with categories of taxpayers exempt from taxation, shall be by means of statute.
Articles 84 and 217 of the Constitution should be understood in such a way that taxes can
only be imposed by acts of parliament. The scope of taxation cannot be broadened by any
other legal acts. Similarly, the rights of taxpayers stemming from acts of parliament cannot
be limited by any other act – even by ratified international agreements. This means that all
measures included in the MLI need to be properly implemented in Polish legislation, unless:
–– they only create rights for taxpayers,
–– they only limit rights envisaged solely for taxpayers (the right is not reproduced in
domestic legislation) by the DTC that is altered by the MLI.
25
Dz. U. No. 78, item 483, as amended.
650
There are no specific rules of Polish law regarding the interpretation of the MLI. It should
be interpreted in the light of its wording and purpose. There have been no court judgments
regarding the MLI yet.
There are no specific rules of interpretation of tax treaties. Interpretation of treaties is

regulated by Vienna Convention on the Law of Treaties of 23 May 1969 (VCLT).26 Even if courts
do not mention the VCLT in their case-law, they still apply reasoning consistent with the VCLT.
The Polish government published a notice on the accession to the VCLT in the Journal of Laws
of 2 November 1990. Many DTCs binding Poland were concluded before that date and the
VCLT, under its article 4, is applied to the treaties, which were concluded after their state-
parties acceded to the VCLT. However, the provisions of the VCLT regarding the interpretation
of treaties are mere codifications of customary international law.27
Courts sometimes emphasize the necessity to interpret the DTCs within the context of
their aim – the avoidance of double taxation.28 They also refer to the result of consultations
held by the Ministry of Finance’s representatives.29
Peculiarities of application of the DTCs are connected with the role of the Commentary
to the OECD Model Convention which is discussed worldwide, and similar discussions are
held in Poland. Relatively, Polish courts rarely refer to the Commentary in the grounds for
its judgments. It also happens that the Supreme Administrative Court quoting the opinions
expressed in the Commentary reserves the possibility of other interpretation of the double
tax treaties. In certain cases, courts interpret the Commentary in the judgments presented
above. There are also cases in which the courts interpreted (usually implicitly) double tax
conventions contrary to the Commentary.30
The interpretation of double tax conventions by Polish courts differed from the
interpretation of domestic tax legislation. As it was mentioned above, the use of teleological
26
Journal of Laws of 1990, No. 74, item. 439.
27
W. Morawski, A. Zalasiński, Tax Treaty Interpretation in the Case Law of Polish Courts, European Taxation 2006, No.
11, p. 534 et seq.
28
See, for instance, the judgment of the Supreme Administrative Court of 14 April 1994 (SA/Wr 1789/93), Przegląd
Orzecznictwa Podatkowego 1995, No. 6, item 114.
29
See, for instance, the resolution of the Seven Judges Chamber of the SN of 13 October 1994 in case AZP 2/94,
OSNAP 1994, No. 4, item 42, W. Morawski, A. Zalasiński, Tax Treaty Interpretation in the Case Law of Polish Courts,
European Taxation 2006, No. 11, p. 534 et seq.
30
11, p. 534 et seq.
651
Poland
interpretation in cases regarding DTCs was more extensive than in purely domestic cases.31
Courts referred neither to international tax law literature nor to case -aw of foreign courts.
Polish courts, especially on the turn of the millennium, did not verify their views with
the OECD Commentary.32
It is difficult to separate the effects of introducing the PPT from the overall changes in Polish
tax law in recent years. In 2016, the GAAR was introduced into Polish law, only to be gradually
followed by specific anti-abuse clauses (SAARs). Tax authorities make numerous attempts
at a pro-fiscal interpretation of the regulations in force prior to the entry into force of the
GAAR in relation to factual situations occurring prior to the entry into force of this clause
in order to combat the effects of aggressive tax planning. Sometimes tax authorities make
radically profound interpretations of tax law even when the taxpayer has taken actions
that cannot be treated as aggressive tax planning. In the context of these activities of the
tax authorities, the PPT is only a small addition. Even if the PPT was not introduced, many
taxpayers’ activities to which the double taxation treaties would apply, would be subject to
‘attack’ by the tax authorities under domestic law. The introduction of anti-abuse instruments
to double taxation agreements solves the problem of whether the abuse of double taxation
agreements can be combated under domestic law.
One should not lose sight of the fact that the MLI already applies to agreements that
connect Poland with 17 countries, but this only happened last year. Therefore, not much
experience has been gained. The PPT is usually treated as a part of deeper changes in Polish
tax law. At the same time, it is not treated as a priority change. However, tax authorities seem
to apply the previously existing instrument of limiting tax planning, i.e. a beneficial owner
clause, much more often. An increasingly thorough analysis of the taxpayer’s legal situation
from the point of view of the correct application of double taxation treaties is, however, a
permanent process, and it is difficult to assume that it was influenced by the adoption of
the MLI.
It is difficult to assess whether there has been a change in the practices of tax authorities.
This practice is consistently and aggressively pro-fiscal.
No special procedures have been introduced in connection with the PPT.
Poland – as one of the member states of the European Union – was obliged to implement
the Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms
in the European Union (O.J. 2017, L 265/1). Poland did this after the deadline specified in the
directive, pursuant to the Act of 16 October 2019 on the settlement of disputes regarding
double taxation and the conclusion of advance pricing agreements (Journal of Laws of 2019,
item 2200). In addition to the dispute resolution mechanism provided for under EU law, the
aforementioned act also regulates (for the first time in the Polish legal system), although
rather briefly, the mode of operation under MAP.
31
11, p. 534 et seq.
32
11, p. 534 et seq.
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Portugal
Branch reporters
Cíntia Ribeiro de Melo1
Tomás Costa Ramos2

At the moment of drafting the present report, the Portuguese instrument of adherence to
the MLI awaits final Presidential ratification and deposit with the OECD, to enter into force.
Portugal adopts a monist system regarding international law and therefore the MLI and
tax treaties are automatically applicable in Portuguese territory, after their entry into force,
with no need to be incorporated into national law. Therefore, international law prevails over
national law which may not override tax treaties.
Generally, the Portuguese double tax treaty network follows the OECD Model Tax
Convention (hereinafter OECD MTC), but for instance in case of royalty taxation it adopts
the United Nations Model Tax Convention (hereinafter UN MTC).
Although there are disparities among Portuguese tax treaties in relation to the provisions
chosen to counter tax avoidance, as a whole, the pre-MLI Portuguese tax treaty network which
foresees the fight against tax evasion, is well furnished with specific anti-avoidance rules.
Apart from that, the Portuguese domestic GAAR, recently revamped by EU ATAD Directive,
is also adequate to counter tax avoidance in cross-border situations. Although debatable,
the application of the domestic anti-avoidance rules in a tax treaty situation is expressly
permitted by some tax treaties entered into by Portugal.
Portugal indicated all of its 79 double tax treaties as covered tax agreements. However
only 57 of the current double tax treaties in force became effectively covered tax agreements,
considering the MLI positions of the treaties’ counterparties, as analysed by the authors at
26 September 2019.
As regards the fight against tax evasion and treaty shopping, Portugal opted to include
a PPT clause without a SLOB clause. This option is aligned with the previous treaty policy
to counter tax avoidance as 28 double tax treaties already entailed a PPT provision and the
recently revamped domestic GAAR is also a PPT provision.
Additionally, the option for a PPT at the same time does not conflict with the EU-
freedoms, which could happen in a situation with an objective test like an LOB clause, that
could more easily generate situations of discrimination contrary to European law.
In addition to the new wording of the preamble (including the prevention of situations
of non-taxation), this option implies a significant change in its double tax treaty network,
with a potential positive effect in the fight against tax evasion, as 74% of the Portuguese DTT
network now have a PPT clause in line with the one proposed by the MLI.
1
Head of Tax in Energias de Portugal (EDP).
2
Tax Department at Energias de Portugal (EDP).
The authors have held two informal meetings to generally discuss the Portuguese MLI position with the
Portuguese tax authorities’ representatives, namely Mr João Pedro Santos and Mr Miguel Marques Serrão from
Centro de Estudos Fiscais – CEF, whom they would like to thank.
IFA © 2020 653

Portugal
Hence, it is crucial to design a procedure to deal with cases of treaty abuse under the
application of the PPT clause, like the procedure already foreseen for the domestic GAAR, to
ensure taxpayer’s rights and promote legal certainty.
Portugal also opted to introduce holding periods both for situations of dividend transfer
transactions and capital-gains taxation related with entities deriving its value principally
from immovable property.
As regards the artificial avoidance of a permanent establishment status, Portugal opted
for the rule on the anti-fragmentation of specific activity exemptions subduing the analysis
on the preparatory/auxiliary activities to the cohesive business operation test.
In light of the strengthening of the fight against treaty shopping and the potential
increase of litigation arising thereof, Portugal also decided to reinforce mechanisms for
resolving disputes giving rise to taxation not in accordance with the provision of the DTT.
As a result of Portugal’s options, access to MAP was reinforced.
Amongst others, Portugal opted to extend the possibility of consultation in case of a
situation of elimination of double taxation not foreseen in the treaty and further 29 CTAs
will foresee this. In terms of MAP this was the option that will potentially have the greatest
impact in Portuguese bilateral relationships.
Given the numerous internal anti-abuse rules introduced under the BEPS terms
worldwide (and also under the ATAD Directives), the possibility of resolving economic double
taxation in situations not foreseen in the tax treaties, becomes increasingly more relevant
for non-EU counterparties in this new international tax framework.
Portugal also opted for mandatory arbitration, though with some scope limitations.
However, the majority of the covered tax agreements that accepted arbitration were EU
members, which already have mandatory arbitration procedures under EU instruments.
Towards non-EU states, the option for arbitration was not fully corresponded by its treaty
counterparties, as it will only produce effects regarding four non-EU states.
As the Portuguese tax policy on the treaty-related BEPS changes introduced in the
updated 2017 OECD MTC was more flexible than the policy formalized in its MLI position,
it is expected that in the future, in its treaty bilateral negotiations, Portugal will introduce
some of the anti-avoidance measures which have been subject to reserve in the MLI, such as
in the case of the recent DTT with Angola.
Finally, the authors concluded that the Portuguese options towards the MLI are very
much aligned with the previous tax treaty and domestic policy to counter international tax
avoidance. Although Portugal went beyond the minimum standards set by OECD, there is still
room to improve in the fight against treaty shopping and tax avoidance and it is expected that
more advances may be reached in future bilateral treaty negotiations by Portugal.
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Ribeiro de Melo & Costa Ramos
1. Part One: Impact of the MLI and the BEPS Action Plan on the
Tax treaty network
1.1. Introduction
On 21 June 2019, the Portuguese parliament approved the proposal of resolution of the MLI,34
which is still pending for the ratification by the President of the Republic. In this proposal,
the government has disclosed the final Portuguese MLI position,5 in line with the position
expressed in the Signatory Position deposited with the OECD previously.
Portugal has been actively involved in the implementation of the BEPS project, with some
of the measures entailed in the BEPS – 15 Action Plan, already foreseen in the domestic
legislation prior to 2015, e.g. CFC regulation, interest limitation rule, tax planning mandatory
communication to the PTA (Portuguese Tax Authorities) – and also takes part in the inclusive
framework for the global implementation of the BEPS project.6
This report starts by analyzing the current DTT network of Portugal, the OECD MLI
match database,7 and both the Portuguese signatory instrument to the MLI and the final
MLI position of the government presented to parliament for approval. 8
In addition, it also takes into consideration the identified counterparties’ signatory
instruments to the MLI (which became CTAs), as reflected in the OECD MLI database, to
present its analysis. The authors analyzed these documents to verify and reconcile any
divergent information at 26 September 2019.
Portugal has an extensive tax treaty network with 79 DTTs 9 in force on 26 September 2019. The
3
On 7 June 2017 Portugal signed the MLI and put forward a provisional list of expected reservations and
notifications to be made pursuant to art. 28(7) and 29 (4) of the Convention – http://www.oecd.org/tax/treaties/
4
Copy of the Proposal of the MLI presented to parliament in Appendix: http://debates.parlamento.pt/catalogo/
r3/dar/s2a/13/04/084/2019-04-05/183?pgs=183-291&org=PLC.
5
The difference between the final MLI’s position and the provisional one relates to the additional reserve made
by Portugal excluding access to arbitration whenever disputes may be resolved through EU Directives 90/436/
CEE and 2017/1852 from the European Council, dated 10 October 2017.
6
Under the Inclusive Framework Portugal has committed to the implementation of four minimum standards,
including those developed under Action 5 (Countering Harmful Tax Practices), Action 6 (Preventing Treaty Abuse)
and Action 14 (Dispute Resolution), as well as Country-by-Country (CbC) reporting under Action 13 (Transfer
Pricing Documentation).
7
https://www.oecd.org/tax/treaties/mli-matching-database.htm – 26.09.2019.
8
http://debates.parlamento.pt/catalogo/r3/dar/s2a/13/04/084/2019-04-05/183?pgs=183-291&org=PLC.
9
info.portaldasfinancas.gov.pt/pt/apoio_contribuinte/modelos_formularios/double_tax_conventions/pages/
double-taxation-celebrated-by-portugal.aspx.
http://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/convencoes_evitar_dupla_tributacao/
convencoes_tabelas_doclib/pages/english-version.aspx.
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Portugal
DTT network of Portugal covers its main economic partners, G-20 economies, EU-members,
members of the CPLP,10 amongst others.
The Portuguese DTT network mostly evolves from 1990 to 2010, with 11 DTTs from 1990-
2000; 34 DTTs from 2000-2010 and 28 DTTs from 2010 onwards.
In general terms, Portugal follows the OECD MTC when negotiating its DTTs. However,
the general approach in relation to the tax policy on international tax treaties has evolved
over time, shifting from a capital import country to a capital export country, and bilateral
negotiations play an increasingly role in the state’s policy choices.
Some reserves made by Portugal to the OECD Commentaries, namely towards broadening
the concept of permanent establishment and claiming to tax royalties as a source state,11 take
the position of a “capital import” state and are closer to the UN MTC.
In fact, some DTTs entered into by Portugal reduce the period, from 12 to 6 months, for a
building site, construction or installation project to qualify as a permanent establishment.12 A
few DTTs consider that the provision of services, such as consultancy services, by an enterprise
through employees or other personnel engaged by the enterprise, may trigger a permanent
establishment, if activities are carried out during a certain period of time.13
Exceptionally, some DTTs foresee the taxation of technical services at the source state14
or include technical services within the concept of royalties,15 since Portugal as a rule, as far
as the taxation of royalties is concerned, applies in its DTTs the limited taxation at the source
state16 inspired in the UN MTC.
Out of 79 DTTs, 7117 of them expressly state in their preamble that apart from avoiding double
taxation they seek to prevent tax evasion.
It is the authors understanding that there are no specific domestic provisions targeted
to counteract treaty shopping, apart from the beneficial ownership requirement applicable
to dividend, interest and royalty payments,18 as commented further.
Therefore, the Portuguese GAAR should address tax treaty situations.
10
Refers to the Community of Portuguese Language Countries, an international organization and political
association of Lusophone nations, founded in 1996.
11
Reserves 201 and 208 to OECD commentaries on art. 5 and reserve 36 to commentary on art. 12.
12
It is the case, for instance, with DTTs with Saudi Arabia (art. 5/3/a) , Argelia (art.5/3) and Cape Verde (art.5/3/a).
13
Such as the DTT with Kuwait (art. 5/4), DTT with Canada (art. 5/6) and DTT with Republic of Korea (art. 5/6).
14
Such as, DTT with Ethiopia (art. 13), DTT with S. Tomé and Princípe (art.13) and DTT with Vietnam (art.12).
15
DTT with Brazil, nr 5 to the Protocol in relation to the interpretation of art.12/3.
16
Art.12 of UN MTC.
17
Only Austria, Belgium, Cape Verde, Germany, Morocco, Switzerland, Tunisia and the old DTT with Finland do
not mention in the preamble that they seek to prevent tax evasion. Reference: Portuguese signatory position to
the MLI: http://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf.
18
The domestic concept of beneficial ownership stems from the EU PSD and EU IRD and from the application of
the DTTs entered by Portugal. Additionally the Beneficial Ownership register was introduced by the Anti laundry
Directive ( Directive 2015/849), albeit being a different concept, a more legal one, as stated in FATF Guidance
on “transparency and beneficial ownership” and OECD Model Convention 2017 Commentary 12.6 to art. 10 and
OECD toolkit : https://www.oecd.org/tax/transparency/beneficial-ownership-toolkit.pdf
RCBE- Law 89/2017 – https://www.irn.mj.pt/IRN/sections/irn/bc-ft/rcbe-registo-central-do/.
656
Nonetheless, Portuguese domestic legislation does in fact entail specific domestic anti-
avoidance provisions that may affect cross-border situations, covered by a DTT, as exemplified
below.
(1) Specific domestic anti-avoidance provisions applicable to cross-border situations
Controlled Foreign Company (CFC) rules
The CFC rules were introduced in Portugal in 1995,19 with the aim of preventing profit shifting
to low-taxed controlled foreign entities. This regime has recently been amended as a result
of the implementation of EU Directive ATAD 1. 20
According to the Portuguese CFC rule21 any income obtained by foreign entities, subject
to no or low taxation,22 will be attributable to its Portuguese shareholders, holding directly
or indirectly more than 25% of its share capital, voting rights or profits of that entity or
10% when the non-resident company is owned, directly or indirectly, by more than 50% by
members resident in Portuguese territory.
For the PTA, DTTs should not prevent the application of domestic CFC rules.23 This position
is in line with the OECD Commentaries.24
However, there is Portuguese doctrine that follows the opposite understanding arguing
that article 7 of the DTT’s should not allow the application of CFC regimes.25
Specific anti-abuse rules applicable to capital gains obtained by non-resident entities
Under the rules defining the territorial scope of application of Portuguese corporate tax,
non-resident entities may be subject to tax on any capital gain obtained on the sale of shares
in Portuguese companies. However, under the Portuguese Tax Incentives Statute,26 non-
resident entities, with no domicile or permanent establishment in Portugal, are exempt
from individual or corporate income tax on any capital gains obtained from the sale of shares
and other securities issued by Portuguese entities.
The above regime entails a look-through provision that denies its application in case the
19
Decree-Law 37/95, 14 February.
20
Law 32/2019, 3 May 2019 implemented Council Directive EU 2016/1164, of 12 July, laying down rules against tax
avoidance practices that directly affect the functioning of the internal market.
21
Art. 66 of the PITC.
22
CFC’s will qualify whenever located in territories or tax havens included in the Portuguese black list (Portaria
150/2004, 13 February, as subsequently amended) or the corporate income tax effectively paid by them is lower
than 50% of the Portuguese corporate tax due.
23
For example, the DTT with Andorra expressly allows the application of CFC domestic rules (art. 28/2).
24
Para. 81 of the Commentary on art. 1, para. 14 of the Commentary to art. 7 and para. 37 of the Commentary to art.
10 OECD MTC, 2017.
25
Xavier, Alberto, in Direito Tributário Internacional, pp 419 to 430, Almedina, September 2017.
26
Art.27 of Portuguese Tax Incentives Statute.
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Portugal
non-resident entity is held, directly or indirectly, by more than 25% by resident entities. The
provision may be rebuked if certain conditions are met.27
Notably, the regime also looks at the underlying motivation, limiting its application in
case the entity takes part of an arrangement or series of arrangements not genuine whose
main purpose or one of the main purposes is obtaining a tax advantage.
Considering that most of DTT’s entered into by Portugal grant the exclusive right to
tax capital gains in the state of residence of the beneficiary of income (seller),28 the above
domestic “look-through” provision would not be applicable in such situations.
Capital gains in companies owning property located in Portugal
The above exemption regime will not be applicable to any capital gains arising from the sale
of entities whose assets are composed by more than 50% of immovable property located in
Portuguese territory.
Additionally, the Budget Law for 201829 introduced a new provision30 extending the
application of corporate tax to capital gains on the sale of shares or similar rights in companies
not resident in Portugal, whenever during the previous 365 days, the value of those shares
or rights derives, directly or indirectly, from more than 50% of immovable roperty located
in Portuguese territory.31
The above domestic provisions are in line with DTT’s provisions on capital gains32 which
grant taxing rights in this situation to the source state, i.e., where the immovable property
is located. In addition, the introduction of a holding period of 365 days in the domestic law
is in line with BEPS recommendations and Portugal’s option to apply article 9 of the MLI, as
commented further.
To conclude, there are anti-avoidance rules which are primarily addressed to domestic
companies in the context of cross-border situations, such as, CFC, interest limitation rule in
relation to cross-border loans, transfer pricing and exit tax. It is the authors opinion that the
application of these rules is within the scope of the exclusive competence of the Portuguese
state to tax its own residents and should not, in principle, be limited by DTTs.
However, these anti-avoidance provisions may create situations of economic double
taxation which may be addressed by article 9 of the OECD MTC, in case of transfer pricing
adjustments within associated companies, or under MAP whenever DTTs provide for the
possibility of consultation for the purposes of eliminating other situations of double taxation
not foreseen in the treaty (integrative MAP).33
On the other hand, some domestic anti-avoidance rules may directly hit income paid
27
Namely if the selling entity is an EU-member (or EEA obliged to administrative cooperation) or in a state with
which a DTT has been entered into providing for exchange of information. The regime also foresees, in addition
to a minimum participation and holding period, that the entity must be subject and not exempt to an equivalent
CIT not lower than 60% of the Portuguese statutory corporate income tax rate. The exemption regime will also not
be applicable if the non-resident entities are domiciled in a country or territory listed in the Portuguese black list.
28
There are some exceptions, such as the DTT with Spain, which foresees taxation of capital gains for the sale of
qualified participations in the source state (art.13/3).
29
Law 114/2017, of 29 December.
30
Art. 4/3/f of Portuguese CITC.
31
Except in case of acquisition of property for resale.
32
Usually art.13 of Portuguese DTT’s.
33
Though in case of an EU situation, double taxation cases will be addressed under Directive 2017/1852
658
to non-residents in Portugal, such as those applicable to capital gains sourced in Portugal

but also to dividend, interest and royalty payments. The application of this domestic anti-
avoidance rules may create situations of juridical double taxation which are directly covered
by DTTs. In this situation, it is important to analyse whether domestic anti-avoidance rules
conflict with DTTs and if, ultimately, they may be set aside by tax treaties, under the “pacta
sunt servanda” principle.
(2) Domestic general anti- avoidance rule (GAAR)
The circa 18-year-old Portuguese GAAR, was modified as a result of the implementation of
the ATAD 1 Directive.34 The revamped GAAR came into force on 4 May 2019.
As stated in the ATAD 1 Directive, the GAAR is meant to be applied in “(…) domestic
situations, within the Union and vis-à-vis third countries in a uniform manner, so that their
scope and results of application in domestic and cross-border situations do not differ (…)”.
The new Portuguese GAAR states that “(…) an arrangement35 or series of arrangements
which, having put into place for the main purpose or one of the main purposes of obtaining
a tax advantage that defeats the object or purpose of the applicable tax law, are realized with
abuse of legal forms or are not genuine, having regard to all relevant facts and circumstances,
should be disregarded for tax purposes. Taxation must be made in accordance with the rules
that would be applicable to the substance or economic reality of operations and advantages
should not be granted (…)”. If the arrangement or the series of arrangements resulted in the
non-application or reduction of final withholding tax, it should be considered that the tax
advantage occurs at the level of the beneficiary of the income, considering the substance and
economic reality of operations.
The application of the GAAR depends on a specific procedure including a prior hearing
of the tax payer and a tax audit, in order to reinforce taxpayer’s rights.36
The new domestic GAAR is essentially a PPT, which may be applicable either to domestic
or to cross-border situations. In the absence of specific domestic anti-avoidance provisions
to tackle treaty-shopping, the Portuguese domestic GAAR may address treaty abuse and/or
treaty shopping.37
Being introduced within the transposition of an EU Directive, ECJ jurisprudence will play
an important role in the interpretation and application of the GAAR, also with possible effects
to non-EU residents.
So far, there is no domestic doctrine or jurisprudence to report on the application of the
new GAAR to cross-border situations.38
In relation to the inter-play between domestic anti-avoidance provisions and treaty
provisions, it is the Portuguese tax authorities understanding that DTTs should not prevent
the application of domestic anti-abuse rules. Out of 79 DTT’s, 21 have saving clauses regarding
34
Portuguese Law 32/2019, please refer to footnote 20.
35
“(…) an arrangement or series of thereof shall be regarded as non-genuine to the extent that they are not put
into place for valid commercial reasons which reflect economic reality (…)”.
36
Art.63 of the Portuguese Tax Procedures Code.
37
Some doctrine understands, however, that in principle domestic GAARs should not be applicable in tax treaty
situations for the sake of a uniform interpretation and application of treaty provisions. Gustavo Courinha in “A
Cláusula Geral Anti-Abuso no Direito Tributário”, 2004, p.23, 205.
38
However, the “old GAAR” coupled with an interpretative approach based on economic substance was applicable
to a tax treaty situation in a Portuguese case law in: CAAD Proc. 219/2016-T: https://caad.org.pt/tributario/
decisoes/decisao.php?listPageSize=100&listPage=23&id=2838.
659
Portugal
the application of domestic anti-abuse provisions.39 In the opinion of the Portuguese tax
authorities the objective of these rules is just to reinforce the underlying principle that
domestic anti-abuse rules may be applied to cross-border situations, whenever the
application of Portuguese domestic rules is at stake.
The authors understand, however, that if domestic anti-avoidance rules conflict with
DTT’s, the latter should prevail. This is a consequence of the principle of “pacta sunt servanda”40
as outlined by the OECD in its Commentaries to the Model Convention.41
(3) General principles of treaty interpretation: the guiding principle
Portugal adheres to the general principles of treaty interpretation of the Vienna Convention
on the Law of Treaties and to the “guiding principle” adopted in the 2003 OECD Commentary42
tackling abusive arrangements: “ A guiding principle is that the benefits of a double
taxation convention should not be available where a main purpose for entering into certain
transactions or arrangements was to secure a more favourable tax position and obtaining
that more favourable treatment in these circumstances would be contrary to the object and
purpose of the relevant provisions.” In fact, considering that several Portuguese DTTs prior to
2003 already included in their title 43 the aim of avoiding tax evasion, the guiding principle
would already be applicable as an interpretative tool in those situations.
(4) Interpretation and application of beneficial ownership
“Beneficial ownership” as a requirement to access to reduced withholding taxes on dividends,

interest and royalty payments44, is common to all 79 DTT’s entered into by Portugal.
Additionally, a “beneficial ownership” requirement is also applicable to other types of income
as foreseen in 21 DTTs.45
In the interpretation of the beneficial ownership concept under Portuguese DTTs, the
Portuguese tax authorities follow the interpretative guidelines in the OECD Commentaries.46
From a practical point of view, the demonstration of the status of beneficial owner lies
with the beneficiary of dividend, interest and royalty payments, that presents a specific
declaration,47 accompanied by a tax residence certificate issued by the tax authorities of the
state of residence of the beneficiary, to the Portuguese paying agent in order to benefit from
withholding tax exemption.
The domestic case law on the interpretation of the concept of “beneficial ownership” is
39
A list can be found in appendix.
40
Incorporated in art. 26 of the VCLT.
41
Para. 70 to the Commentaries on art. 1 of OECD MTC, 2017, p.75.
42
Para. 60 to Commentary on art. 1 of OECD MTC, 2017.
43
The title and preamble form part of the context of the Convention, under art. 31 (2) VCLT, and constitute a general
statement of the object and purpose of the convention, as stated in the introduction to the OECD MTC 2007.
44
Arts.10,11 and 12 of Portuguese DTTs.
45
A list can be found in Appendix.
46
Para. 12 of art. 10, para. 9 of art. 11, para. 4 of art. 12 OECD, 2017.
47
Mod. 21RFI: info.portaldasfinancas.gov.pt/pt/apoio_contribuinte/modelos_formularios/double_tax_conventions/
pages/double-taxation-celebrated-by-portugal.aspx.
660
scarce,48 though the recent decision by the ECJ on the “Danish cases”, where the concept of
beneficial owner and the constituent elements of an abuse of rights have been clarified, may
produce a significant impact on the tax authorities’ approach.49
(5) Treaty-based anti-avoidance provisions before the MLI
In addition to the “beneficial ownership” requirement applicable to dividend, interest and

royalty payments and to other types of income, the Portuguese pre-MLI tax treaty network
is well supplied with anti-avoidance provisions as follows.
(a) Look-through provisions

Portugal has look-through provisions in relation to the application of treaty benefits to
dividend, interest, royalties and capital gains set out, for example, in DTT’s with Spain,
México and Ukraine.50
In the DTT with Spain51 the benefits provided for in relation to dividend, interest, royalty
and capital gains will not be applicable if the income is obtained in a contracting state by
a company of the other contracting state in which capital is held directly or indirectly by
more than 50% shareholders not resident in this other contracting state. This provision
may however not be applied if the company resident in the other contracting state carries
out an active business activity.
(b) Exclusion provisions

Exclusion provisions denying treaty benefits to non-resident owned companies enjoying
special privileges in the state of residence may be found in DTTs with Brazil, Sweden and
the Netherlands.52
In the DTT with Brazil 53 entities benefiting from corporate income tax benefits under
Madeira and Santa Maria Free Zones, Manaus, Sudam and Sudene are excluded from
the benefits provided for in the treaty.
(c) Subject to tax provisions

Subject to tax provisions granting source state treaty benefits only for income that is
subject to tax in the residence state may be found, for example, in the DTTs with Andorra
and the UK.54
(d) Channel provisions

No channel provisions were found in DTTs entered into by Portugal.
48
Processo n.º: 763/2015-T – https://caad.org.pt/tributario/decisoes/decisao.php?listPageSize=100&listPage
=20&id=1975; STA 2ª Secção: 0418/16 http://www.dgsi.pt/jsta.nsf/35fbbbf22e1bb1e680256f8e003ea931/
a37cf6c050071610802581370039a788?OpenDocument&ExpandSection=1.
49
Case C‑118/16 http://curia.europa.eu/juris/documents.jsf?num=C-118/16
50
DTT with Spain (Protocol, 3); DTT with México (Protocol ad art. 4); Ukraine (Protocol, 5, ad arts. 10,11,12,13).
51
DTT Spain, Protocol, 3.
52
DTT with Brazil (Protocol,9), DTT with Sweden (art.27) and DTT with The Netherlands (Protocol, II, Ad art. 4, n 3,
4).
53
Protocol n. 9 to the DTT with Brazil.
54
Art. 28/6 of DTT with Andorra and art. 10/ 4 of DTT with the UK.
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Portugal
(e) Purpose tests

A purpose test provision (treaty GAAR) is set out in 2855 DTTs entered into by Portugal, as
notified in the Signatory Position to the MLI by Portugal in June 2017.56
(f) Limitation on benefits (LOB)

The only DTT that entails an LOB is the DTT with the USA.57
(g) Other Tax Treaty Abuses:
1) Dividend transfer transactions (article 8 of the MLI)
About 24 DTTs entered into by Portugal58 already include a minimum holding period to be
met for purposes of applying an exemption or reduced withholding tax rate to payment of
dividend income.
2) Capital Gains from Alienation of Shares or Interests of Entities Deriving their Value
Principally from Immovable Property (article 9 of the MLI)
DTTs entered into by Portugal differ in relation to taxation of capital gains from alienation of
shares deriving their value from immovable property.
Some DTTs59 do not provide for taxation of capital gains from alienation of shares deriving
their value from immovable property in the state where the property is located and therefore
the principle of taxation of capital gains in the state of residence of the seller applies.
The majority of DTTs,60 however, provide for taxation of capital gains from alienation
of shares deriving their value from immovable property in the state where the property
is located (subject to the threshold of 50%), but with no minimum time requirement,
maintaining the source state approach.
3) Anti-abuse Rule for Permanent Establishments Situated in Third Jurisdictions (article 10

of the MLI), through commissionaire and similar arrangements (article 12 of the MLI),
specific activity exemptions (article 13 of the MLI) or splitting -up of contracts (article 14
of the MLI)
DTT’s entered into by Portugal do not foresee an anti-abuse rule for permanent establishments
situated in third jurisdictions similar to that provided for in article 10 of the MLI, nor foresee
anti-avoidance provisions similar to those provided for in articles 12,13 and 14 of the MLI.
However, the DTT celebrated with Angola, after Portugal signed the MLI, effectively
contains an anti-avoidance provision regarding artificial avoidance of permanent
establishment status similar to the one provided for in article 13 (4) of the MLI.
55
Portuguese position to the MLI on art 7, p. 22, http://www.oecd.org/tax/treaties/beps-mli-signatories-and-
parties.pdf.
56
Portuguese signatory position on art 7 of the MLI, p. 22, http://www.oecd.org/tax/treaties/beps-mli-signatories-
and-parties.pdf.
57
Art. 17 of DTT with USA.
58
Portuguese signatory position to MLI on art 8, p. 23, http://www.oecd.org/tax/treaties/beps-mli-signatories-
and-parties.pdf.
59
It is the case, for example, of the DTT with Germany (art.13/4), Argelia (art.13/4), Austria (art.13/3).
60
It is the case of DTT with Uruguay (art. 13/4), with Vietnam (art. 13/4), and Bahrain (art. 13/4).
662
4) Mismatch Arrangements, in particular those resulting from the use of transparent

companies (article 3 of the MLI) and those attributable to dual resident entities (article
4 of the MLI)
DTT’s entered into by Portugal do not foresee anti-avoidance provisions similar to the one
provided for in article 3 of the MLI.
However, the DTT celebrated with Angola, after Portugal signed the MLI, effectively
contains a dual resident provision in line with article 4 of the MLI.
(6) Dispute Resolution Mechanisms before the MLI:
i) Mutual agreement procedure (MAP) and corresponding adjustments within transfer

pricing adjustments between associated enterprises (article 16 of the MLI)
All of Portugal’s DTTs provide for a mutual agreement procedure. Generally, these DTT’s
follow paragraphs 1 to 3 of article 25 of the OECD MC in its 2014 version.
Portugal has set up a MAP Program61 and has experience in dealing with MAP cases.
As recognized in the MAP Peer Review Report, Portugal62, the Portuguese “(…) treaty
network is largely consistent with the requirements of the Action 14 Minimum Standard
(…)”. Transfer pricing cases account for more than a half of MAP cases.
About 59 DTT’s provide for a period of three years to present a MAP case before the tax
authorities, but in 19 DTT’s that period is smaller.63
In most of its DTT’s, the agreement reached under MAP shall be implemented
notwithstanding any time limits provided in the domestic law. However, 24 DTT’s64 do
not contain such a provision.
Another feature of the Portuguese DTTs regarding MAP is that it addresses doubts
regarding the interpretation and application of the DTT (interpretative MAP).65
The possibility of consultation for the purposes of eliminating other situations of double
taxation not foreseen in the treaty (integrative MAP) is also included in 36 DTT66 MAP
provisions.
For DTTs not compliant with Action 14 minimum standards, it is expected that they may
be modified as a result of the Portuguese “MLI’s position”.
Some of the areas which have been identified as needing further improvement by
Portugal relate to the prevention of disputes as Portugal, although it has set up a bilateral
61
http://info.portaldasfinancas.gov.pt/pt/docs/Conteudos_1pagina/Documents/Mutual_Agreement_Procedure.
pdf.
62
OECD (2018), Making Dispute Resolution More Effective- MAP Peer Review Report, Portugal (Stage 1), executive
summary, p. 9.
63
Portuguese signatory position MLI, p. 31, art 16, http://www.oecd.org/tax/treaties/beps-mli-signatories-and-
parties.pdf.
64
Portuguese signatory position MLI, p. 32, art 16, http://www.oecd.org/tax/treaties/beps-mli-signatories-and-
parties.pdf.
65
Except for the DTT with Belgium and France.
66
That conclusion may be inferred from the Portuguese MLI position, art. 16(6), p. 34, as out of 79 DTTs, 43 of them
do not provide for a consultation for the purposes of eliminating other situations of double taxation not foreseen
in the treaty. Therefore, the remaining 36 DTTs provide for such a possibility.http://www.oecd.org/tax/treaties/
663
Portugal
APA program, does not allow roll-backs of bilateral APA’s.67 In addition, Portugal must
make an effort to close MAP cases within a time frame of 24 months, in order to meet the
minimum standard for a timely resolution of MAP cases.
As far as adjustments between associated companies is concerned, a vast majority of
the DTT’s entered into by Portugal, about 7268, provide for the primary adjustment and
the corresponding adjustment. However, earlier DTT’s (a small minority) provide only
for the possibility of a primary adjustment under transfer pricing rules of one of the
contracting states as up to the 2000 OECD MTC Portugal reserved the right not to include
corresponding adjustments in its DTTs.6970
ii) Mandatory arbitration (article 16-26 of the MLI)
The DTT entered into by Portugal and Japan is the only one that provides for arbitration
of unresolved issues arising from mutual agreement procedure. There is no public
information available on any case of arbitration under this DTT.
However, Portugal has signed and ratified the EU Arbitration Convention in addition to
having transposed EU Directive 2017/1852 of 10 October 2017.71 Therefore, cases involving
EU resident companies already have a dispute resolution mechanism available.72
Portugal signed the MLI in June 2017, as part of its policy to improve its current treaty network
within the BEPS framework.
According to our understanding, the PTA have undertaken a qualitative analysis to assess
potential impact arising from the adherence to the MLI, considering Portugal’s choices with
respect to the several options provided for in the MLI, where it was concluded that the fight
against tax evasion and abuse would have a positive impact and potential increase on tax
revenue.
Following the adherence to the MLI, the government presented the Proposal n. 90/XIII
to Parliament for its approval last April.73
Upon approval by parliament 21 June 2019, said Bill is to be ratified and published by
the President of the Republic. The expectation is that this procedure may be completed by
December 2019. Upon deposit of the ratification instrument with the OECD, it can then enter
into force producing full legal effects on the first day of the month following the expiration
of a period of three months from the deposit with the OECD.
67
Under BEPS Action 14: the “roll-back” of the APA to previous years, not included within the original scope of the
APA, may be helpful to prevent or resolve potential transfer pricing disputes.
68
Portuguese signatory position to MLI – p. 36 , http://www.oecd.org/tax/treaties/beps-mli-signatories-and-
parties.pdf.
69
Such as, the DTT with France (art.9), DTT with Korea (art.9) and DTT with Italy (art.9).
70
Portuguese reserve 1998 OECD MTC, para. 16.
71
Law nº 120/2019, 19.09.2019, which entered into force on 20 September 2019.
72
https://eur-lex.europa.eu/eli/dir/2017/1852/oj; https://ec.europa.eu/taxation_customs/business/company-tax/
resolution-double-taxation-disputes_en_de.
73
The following motives to adhere to the MLI: “A comprehensive application of the measures provided for in this
Convention is hereby adopted with the aim of strengthening the mechanisms for preventing and combating
international tax evasion and fraud in the Portuguese tax convention network.”
664
1.3.2. Covered tax agreements (CTA’s)
The present section reflects the analysis undertaken with regard to the Portuguese signatory
instrument to the MLI and the government’s final position expressed in the Proposal n.º 90/
XIII, as well as the identified counterparties’ signatory instruments to the MLI which became
CTAs, as reflected in the OECD MLI database. The authors analysed these documents to verify
and reconcile any divergent information at 26 September 2019.
From the current 79 DTTs that Portugal has celebrated in September 2019, all of them
where listed. However only 57, namely 72% of the current DTTs in force, became CTA’s.
From the 22 non-CTA’s, 19 correspond to states which have at the present date not adhered
to the MLI and most of them are non-OECD member states. From the remaining three, only
two have not listed Portugal, namely Germany and Indonesia, and one DTT, with Finland, will
become a CTA after this new DTT enters into force.
On 26 September 2019, 23 CTA counterparties had already submitted their ratification
instrument, whilst 35 had only presented the respective signatory positions.74 Consequently,
regarding the mentioned 35 there is a possibility that some changes may occur up to the
ratification of the respective MLIs, namely some reserves made can be withdrawn.
The analysis presented further, refers only to the Portuguese CTAs and the effect the MLI
will have on them.
Portugal decided not to adopt the provisions of the MLI addressing hybrid mismatch,
namely article 3 – transparent entities and article 4 – dual resident entities, given the
underlying complexity to deal with these cases.
In relation to transparent entities, this option was followed also in the 2017 OECD MTC as
Portugal made a reservation not to apply paragraph 2 of article 1 of the 2017 updated OECD
MTC.75
Mandatory MLI rules
Mandatory MLI rules reflect the minimum standards to be adopted by the members of
the Inclusive framework on BEPS, and therefore these states cannot choose not to apply or
introduce them in the DTTs.
From the current Portuguese CTA’s, 88% of the respective DTT’s contained a preamble
language that stated the purpose of fighting against tax evasion in line with the wording
described in article 6(1) of the MLI.
However, the minimum standard on treaty shopping required jurisdictions to include two
components in their tax agreements, in addition to the fight against tax evasion, namely an
express statement on non-taxation. Regarding the latter, 100%76 of the Portuguese 57 CTAs
will now include the text of article 6 (1) of the MLI in addition to the existing language in the
preamble.
74
http://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf.
75
OECD Model Tax Convention, 2017, condensed version, commentary on Art. 1, paragraph 115.
76
As per the authors analysis at 26.09.2019.
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Portugal
As to what regards the second part of the objective on the fight against treaty shopping,
the BEPS report on Action 6 77 proposed including one of three methods of addressing treaty
shopping. The first, a principal purpose test (PPT) which is a general anti-abuse rule based
on the principal purpose of transactions or arrangements. The second is a PPT together
with either a simplified or a detailed version of the limitation on benefits (LOB); and a third
method, a detailed version of the LOB rule together with a mechanism that would deal with
conduit arrangements not already dealt with in tax treaties.
Portugal opted to apply a general anti-abuse rule based on the principal purpose of
transactions or arrangements, set forth in article 7 (1) of the MLI. This option is in line with
its previous policy, since 28 DTTs already contained anti-abuse purpose test provisions that
will now be replaced by the PPT clause.
The remaining pre-MLI SAAR’s under the existing treaties, referred above, will not be
affected.
As shown in the graphic below, which refers to Portugal’s CTA’s only, the PPT will apply
to 99% of its CTA’s (only leaving out the CTA with Andorra as the latter made a reservation
under 7(15) (b), since it considered that the PPT entailed in the existing DTT, article 28 (4) was
already in line with the purpose of article 7):
MLI - Portugal CTA's impact
0% 20% 40% 60% 80% 100% 120%
Article 8 - Dividend transfer

transactions
Article 9 - Capital Gains from
Alienation of Shares or Interests of
Entities Deriving their value…
Article 11 - Application of Tax
Agreements to restrict a party's
right to tax its own Residents
Article 13 - Artificial Avoidance of
PE Status through the Specific
Activity Exemptions
Change No Change
The authors further note that, Portugal has not opted to supplement the PPT by choosing to
apply a SLOB provision, nor accepted the optional provision of article 7, paragraph 4, under
which the application of the PPT clause would be “blocked” should the competent authority
determine that such benefits would have been granted to that person in the absence of the
transaction or arrangement deemed abusive.78
The choice of a PPT instead of an LOB clause is justified since, said purpose test provision,
in addition of already being foreseen in 28 DTTs of the Portuguese DTT network, is in line
77
http://dx.doi.org/10.1787/9789264241695-en
78
In line with the reserve on para. 190 on Commentaries of Article 29 of the 2017 OCDE
666
with the domestic GAAR, which also comprehends a purpose test. Additionally, it also takes
into consideration the fact that Portugal is bound to the EU Treaty and to its fundamental
freedoms. In fact, an LOB clause that automatically excludes persons that meet certain
conditions from treaty protection, may prove to generate situations of discrimination
contrary to the EU Treaty, by violating the fundamental freedom of establishment or the
free movement of capital.
Another minimum standard of the MLI, in addition to the one on treaty abuse as discussed
above, was to improve the dispute resolution mechanism via MAP, according to article 16 of
the MLI.
The MAP allows states to resolve disputes of potential inconsistent taxation to the treaty
cases, i.e., disputes related to the interpretation and application of tax treaties. The minimum
standard also requires that countries publish clear rules, guidelines, and procedures on access
to and use of the MAP. In fact, a MAP case can bring pressures from other tax authorities and
assist a taxpayer in attaining a proper resolution to a dispute.
In this context, as referred above, Portugal has been increasing its experience with MAP.
Although Action 14 minimum standard was to allow a taxpayer to present a case to the
competent authority of either contracting jurisdiction, Portugal made a reservation with
regard to MAP, opting that the case must be presented before the competent authority where
the person is resident (or, in case of non-discrimination based on nationality, in the state of
which the person is a national).
In addition, Portugal opted that the competent authority will implement bilateral
notification/consultation in case the competent authority does not consider the taxpayer’s
objection to be justified.
Portugal also opted to extend to a three-year period for resorting to MAP, which is in line
with the period set forth in the EU Convention to resort to Arbitration79 and the Directive (EU)
2017/1852 on tax dispute resolution mechanisms in the European Union.80 This option will
produce effect regarding 11 “EU-CTAs” and eight “non-EU CTAs”.81
Taking into consideration the possibility for an agreement reached to be implemented,
notwithstanding any time limits in the domestic law of the contracting states, Portugal
indicated 24 DTTs, but only produces effect regarding nine CTAs.82
As the DTT with Belgium did not comply with the MAP Action 14 BEPS minimum
standards (as it only dealt with cases of double taxation), it is expected that the respective
MAP provision will be updated.
With regard to the possibility of consultation for the purposes of eliminating other
situations of double taxation not foreseen in the treaty, from the 43 DTTs that Portugal
indicated that already needed such provision, in the future further 29 CTAs will also foresee
it. In terms of MAP this was the option that will potentially have the greatest impact on
the Portuguese bilateral relationships. In fact, given the numerous internal anti-abuse
rules introduced under the BEPS terms worldwide, and moreover in Europe under the
ATAD Directives, the possibility of resolving economic double taxation on situations not
foreseen in the DTT, increasingly becomes more relevant in this new international tax
79
Refª : https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:52016SC0343.
80
https://eur-lex.europa.eu/eli/dir/2017/1852/oj.
81
According to the OECD matching MLI database: EU-CTA- Austria, Belgium, Greece, Hungary, Ireland, Italy, France,
Luxembourg, Spain, United Kingdom, Ukraine and non EU-CTA: Canada, Mexico, Norway, Republic of Korea,
Peru, Switzerland, Tunisia and Uruguay.
82
CTA: France, Greece, Hungary, Ireland, Iceland, Italy, United Kingdom, Singapore and Tunisia.
667
Portugal
framework.
As the vast majority of the DTTs already foresees the corresponding adjustment when the
changes brought with the MLI become effective regarding article 17, Portugal will be able to
update the wording of article 9 of its DTTs and further include in five DTTs a corresponding
adjustment, namely Austria, Belgium, France, Italy and Korea.
Optional rules
Although 24 DTTs already contained a minimum holding period to be satisfied in order for a
company to be entitled to a reduced rate on dividends from a subsidiary, in line with article
8 of the MLI, Portugal indicated 30 additional DTTs in which a minimum shareholding period
needs to be introduced. However, this option only leads to a change in nine of its CTAs.
MLI - Portugal CTA's impact
0% 20% 40% 60% 80% 100% 120%
Article 18 - Apply Part VI
Article 19 - Mandatory
Binding Arbitration
Article 24 - Agreement on a
Change No Change
Portugal also opted for the introduction of a holding period, in case of gains deriving their
value principally from immovable property under article 9(4), in order to prevent granting
treaty benefits to situations where assets are contributed to an entity shortly before the
sale of shares in that entity, so as to dilute the proportion of the value of the entity that is
derived from immovable property. With this option Portugal was able to cover 50% of its
CTAs impacting 26 DTTs. 83
Under article 11 of the MLI, which provides a so-called “saving clause” preserving the
right of a contracting jurisdiction to tax its own residents, Portugal only reserved the right
83
Regarding options under arts. 8 and 9 of the MLI, the TA are still examining whether additional control measures
need to be introduced to verify the additional holding requirements now introduced. However, in principle the
internal control mechanisms already in place in the internal law for controlling holding periods under other
mechanisms should suffice.
668
not to apply this provision to the DTT entered into with the US (which already contained a
“saving clause”). However, with regard to 14 other CTAs, is it expected that the wording may
be changed, e.g., Article 11(1) would apply and supersede the provisions of the agreement to
the extent of incompatibility.
With regard to the anti-abuse provisions aimed at preventing the avoidance of permanent
establishments, Portugal has reserved the right not to apply articles 10 (PE situation in third
states), 12 (avoidance of pe status through commissionaire arrangements) and 14 (splitting-
up of contracts) of the MLI. The reason behind the reservations made in this context, is that
it is first necessary to change the concept of permanent establishment in national law, as the
latter follows the Model Convention version of 2010.84
Consequently, upon review of the domestic legislation in this context, it would make
sense to adhere to the normative solutions proposed by the MLI for the avoidance of pe
status,85 in order to ensure full alignment, although in the meantime, these situations could
be addressed on a bilateral basis.
Nonetheless, Portugal accepted the anti-fragmentation rule set forth in article 13, as some
activities of a preparatory or auxiliary nature, when taken a global approach, should trigger
a permanent establishment. This option impacted 31 CTAs.
Portugal opted for the mandatory binding arbitration, Part VI and does not accept the
“best offer”, but rather the “independent opinion”/ “comprehensive review” where each
competent authority must provide any information to the arbitration panel that the panel
may consider necessary to reach its decision. In addition, we note that Portugal also opted
that information must be kept confidential.
In this context, 38% of the CTA’s will foresee mandatory arbitration in the future, in addition
to the DTT with Japan, which was the only one that already foresaw arbitration.
The authors note that the majority of the 38% corresponding CTAs, are with EU members,
which already had mandatory arbitration procedure via the European Convention for
Arbitration, which was reinforced with the Directive86 in 2017, covering the interpretation
and application of treaties that eliminate double taxation of income and capital, in addition
to transfer pricing adjustments between associated companies and profit allocations to
permanent establishments.
Since the Directive (EU) 2017/1852 of 10 October 2017 offers a uniform mechanism
to address tax treaty disputes among EU member states that meets the BEPS Action 14
minimum standard, some EU states opted to exclude treaty arbitration in case the issue is
covered by the aforementioned Directive, as France, Spain and Portugal.
In this context, with regard to other EU CTAs, in addition to reserving the right to exclude
cases concerning items of income or capital that are not taxed because they are not included
in the taxable base or because they are subject to an exemption or zero tax rate provided
under the domestic tax law, the vast majority excluded cases concerning the application
of anti-abuse domestic provision.87 It should also be stated that Portugal has made some
reservation regarding the scope of arbitration under the treaty, limiting the issues that are
84
Portuguese CITC – art 3, para. 3. In addition, the Portuguese tax system, still has the principle of the attraction of
the permanent establishment.
85
In line with the reservation Portugal has made to art 7 in para. 97 to the OECD MTC 2017.
86
Directive (EU) 2017/1852 of 10 October 2017.
87
Please refer to the individual signatory positions as applicable: http://www.oecd.org/tax/treaties/beps-mli-
signatories-and-parties.pdf.
669
Portugal
eligible to arbitration, namely issues related with: Permanent Establishment; Business

Profits; Associated enterprises, excluding: cases on income/capital not taxed in the other
state; conduct directly affected by final ruling from legal or admin proceedings subject to a
penalty for fraud, gross negligence or wilful default; and application of domestic GAAR or
anti-abuse measures contained in the DTT.
However, with regard to third states, although Portugal wished to apply arbitration
to all of its DTTs, so far only with Barbados, Canada, Switzerland and Singapore, will this
mechanism apply and may assist in resolving disputes with Portugal.
Lastly, Portugal also reserved the right in case the competent authorities wish to depart
from the arbitration decision, to agree on a different resolution within three calendar months
after the decision has been delivered to them, impacting 16 CTAs in this context.
With regard to the elimination of double taxation, article 5 of the MLI, Portugal
maintained the credit method (Option C) as its method to eliminate double taxation with
regard to its own residents and indicated the DTT with Austria, allowing Austria to maintain
the exemption method (Option A).
Considering that Portugal has 58 covered tax agreements from its DTT network, which
amount to 1722 provisions, the changes brought forward with the adherence to the MLI imply
a change of 18%88 of the current provisions.
The BEPS Action Plan and the MLI also have an indirect impact on the Portuguese treaty
network through negotiation of bilateral treaties.
Both the OECD and the UN MTC have been updated in 2017 to incorporate the treaty-
related BEPS measures and since then treaty negotiations have been following the new
versions of the Model Tax Convention.
Some recent DTT’s signed by Portugal, already incorporate some of the treaty-related
BEPS measures.
For example, the DTT with Angola,89 is in line with the 2017 version of UN MTC and
incorporates some of the BEPS measures, such as, an anti-tax avoidance preamble, an anti-
avoidance provision of pe status through the specific activity exemptions90 a dual resident
provision 91a saving clause 92and a simplified PPT.93
There is no public information on the current DTT’s that are being renegotiated by the
PTA.
A significant number of reserves made by Portugal in its MLI’ position, such as those
relating to dual resident entities, anti-abuse rules for permanent establishments situated in
88
The quantitative analysis expressed herein, has expressively left out the notification mismatches arising from
art. 2 of the MLI, as upon detailed examination it has proven to be only citation differences and not effective
mismatches. Also, it doesn’t consider changes regarding art. 5 of the MLI, as the relevant change is that Portugal
maintained the credit method (Option C) regarding its method to eliminate double taxation with Austria, whilst
accepting that the counter-party may change its own method.
89
signed on 18 September 2018.
90
DTT with Angola, art. 5/5
91
DTT with Angola, art. 4/3.
92
DTT with Angola, art.1/2: a saving clause according to which the Convention shall not affect the taxation, by a
Contracting State, of its residents (except with respect to the benefits granted under specified provisions).
93
DTT with Angola: art.28/2.
670
third jurisdictions and artificial avoidance of pe status through commissionaire arrangements

and similar strategies, were not transposed to the OECD MTC in its 2017 version.
Apparently, in relation to treaty-related BEPS measures introduced in the updated
version of the OECD MTC, Portugal reserved the right not to apply its DTT to transparent
entities,94 and not to grant the benefits provided in subparagraph c) of paragraph 8 of article
29, in relation to the application of the PPT rule.95
Portuguese tax policy on treaty-related BEPS changes introduced in the 2017 OECD MTC
was therefore more flexible than that formalized in its MLI position.
Consequently, it is possible that in future bilateral negotiations Portugal introduces some
of the anti-avoidance measures which have been subject to reserve in the MLI, as in the case
of the DTT with Angola in which a dual resident provision was introduced.
According to the informal information obtained by the authors, the PTA worked with the
Secretary of Finance, analysing the details and the final position expressed by Portugal in
the instrument of signatory of the MLI. The economic impact on the tax revenue arising from
the MLI and on the Portuguese DTT network was also analysed (but not from a compliance
standpoint). This lead to the approval by the government96 of a proposal sent to parliament,
though the first did not provide for any autonomous document stating the policy motivations
behind the Portuguese position, as expressed in the signature of the MLI.
The approved bill is currently waiting for the ratification by the President of the Portuguese
Republic which, in case of agreement, should publish the bill and deposit the instrument with
the OECD, in order for the MLI to enter into force on the first day of the month following the
expiration of a period of three months from the deposit with the OECD.
The PTA are evaluating the possibility of issuing a single text, a synthesized version, but
only for policy reasons, as it would not have a legal effect. In those synthesized versions,
references to amended articles and to new wording introduced by the MLI would be included.
However, the synthesized version does not replace nor should it have legal value on its own,
namely: in case of error, the superseding version will always be the MLI which will co-exist in
parallel with the tax treaty in force.
The PTA have also confirmed that they do not attribute any legal value to the OECD “MLI
matching Database”.
94
Reserve to para. 2 of art.1 of the 2017 OECD MTC, para. 115.
95
Reserve subpara. c) of para. 8 to art.29 of the 2017 OECD MTC, para. 190.
96
On April 2019 of the Bill Proposal nº 90/XII, presented to parliament for its approval.
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Portugal
Under article 8 of the Portuguese Constitution, the norms contained in international

conventions that are regularly ratified or approved, shall be valid after their official publication
and as long as they bind the Portuguese state internationally.
Portugal adopts a monist system regarding international law and therefore the MLI and
tax treaties are automatically applicable in Portuguese territory, after their entry into force,
with no need to be incorporated or transformed into national law, prevailing over the latter.
Therefore, domestic legislation will not be able to override the provisions brought forward
by the MLI.
Consequently, upon entry into force of the MLI, it will be automatically applicable
alongside existing tax treaties and therefore changes in the application of CTAs will take full
effect, in accordance to the provisions of article 30(3) of the VCLT (application of successive
treaties relating to the same subject matter).
Since the MLI has not come into force in Portugal yet, there is no practical experience in
relation to the application and interpretation of it.
However, in Portugal the rules of treaty interpretation set out in articles 31 to 33 of the
VCLT should be applied in the interpretation of the provisions of the MLI, particularly the
ordinary principle of treaty interpretation stating that “A treaty shall be interpreted in good
faith in accordance with the ordinary meaning to be given to the terms of the treaty in their
context and in the light of its object and purpose”.97 98
The object and purpose of the MLI is to implement BEPS measures.
The “explanatory statement” to the MLI reflects the understanding of the negotiators and
is intended to clarify and provide context to the ways the changes to the covered tax treaties
will operate. It is not intended to address the interpretation of the BEPS measures, except
with respect to the mandatory binding arbitration99 substantive rules.
In addition, the OECD note “Multilateral Convention to Implement Tax Treaty
Related Measures to Prevent Base Erosion and Profit Shifting,100 functioning under public
international law” should be read in conjunction with the “explanatory statement” as it sets
out the background and legal concepts behind the MLI in order to explain the way it operates
under public international law to modify existing tax treaties.
The new Commentaries introduced in the 2017 updated version of the OECD MTC in
relation to treaty-related BEPS provisions, will be an important source of interpretation of
the provisions introduced by the MLI in the tax treaty network.
97
Art. 31/1 of the Vienna Convention.
98
According to para. 12 of the “explanatory statement” the provisions of the MLI contained in arts. 3 to 17 should
be interpreted in accordance with the Vienna convention rules.
99
As mentioned in para. 12 and 19 of the explanatory statement to the MLI. – https://www.oecd.org/tax/treaties/
explanatory-statement-multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-
BEPS.pdf.
100
www.oecd.org/tax/treaties/legal-note-on-the-functioning-of-the-MLI-under-public-international-law.
672
Finally, the authors note that the BEPS reports should be considered as a supplementary
means of interpretation but without legal binding value.101
Interpretation of tax treaties is made according to the general rule of treaty interpretation
contained in the VCLT referred above.
In the interpretation of tax treaties, the PTA follow the Commentaries to the OECD MTC
and an ambulatory or dynamic interpretation of tax treaties is adopted as long as it is mirrored
in the text of the treaty provisions, though this position has divided both the Portuguese and
international doctrine and is not exempt from discussions yet.
There is Portuguese case law on the interpretation of tax treaties.102
According to the Portuguese legal principles,103 laws should not be applied retroactively to
facts occurred before their entry into force.
The MLI will only impact Portuguese DTT’s after its entry into force. Therefore, the
amended preamble should not be used in a retrospective manner to interpret situations
before the MLI enters into force.
Also from the PTA’s perspective, choices made by Portugal upon the adoption of the MLI,
such as reserves made to its provisions, should not influence the interpretation of situations
occurred in the past.
Considering that the MLI has not come into force in Portugal yet, it is difficult to anticipate
what will be the response from the tax professionals and the tax administration as there is
no practical experience with the application of its provisions.
The PPT will give broad powers to the PTA to investigate the facts and circumstances of
cross-border transactions or arrangements in search of evidence of the real motivation behind
them, whilst also leading to a necessary effort to harmonise the practice and application of
the anti-abuse mechanism.
Future tax planning will have to be better aligned with the economic substance of
business operations, since, if it is “reasonable to consider” that obtaining the benefit under
the tax treaty was “one of the principal purposes of any arrangement or transaction”, the tax
authorities may refuse it, unless it is established that granting that benefit is in accordance
with the object and purpose of the relevant provisions.
101
www.oecd.org/tax/treaties/legal-note-on-the-functioning-of-the-MLI-under-public-international-law.
102
Acordão STA de 2011-02-02 (Processo n.º 0621/09) – https://dre.pt/pesquisa/-/search/83777375/details/
maximized; CAAD Processo n.º: 369/2015-T – https://caad.org.pt/tributario/decisoes/decisao.php?list
PageSize=100&listPage=17&id=1675; CAAD – Processo n.º: 597/2017-T – https://caad.org.pt/tributario/
decisoes/decisao.php?listOrder=Sorter_data&listDir=ASC&listPage=334&id=3469.
103
Art. 12 of the Portuguese Civil Code.
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Portugal
As such, more transparency is required and taxpayers should prepare in advance any
evidence, demonstrating the economic motivations underlying a certain arrangement or
transaction, as the tax administration may require a more robust file in tax audits.
This paradigm shift also implies that deeper knowledge of the clients’ business will be
required of tax professionals as well.
Moreover, tax professionals should be prepared to help taxpayers to demonstrate that,
notwithstanding any tax motivation, either obtaining the benefit was not the principal
motivation or that granting the treaty benefit in those circumstances was in accordance
with the object and purpose of the treaty provisions at stake.
A more responsible approach is therefore expected towards tax planning and the use of
artificial structures or arrangements should no longer be encouraged.
So far there is no official guidance on what procedures will be to be adopted by the tax
authorities on tax assessments under the PPT.
There is a convergence between the domestic GAAR currently in force and the new PPT
provision to be introduced in the tax treaty network insofar as both are principal purpose test
provisions and are sourced in the BEPS recommendations to tackle tax avoidance.
This situation may facilitate the tax authorities’ approach in addressing tax avoidance
and it may well be possible that the same criteria and approaches are adopted by the PTA in
future tax assessments challenging abusive arrangements, both under domestic and cross-
border situations, levelling their playing field.
The use of the domestic GAAR to deal with treaty abuse may prove to be advantageous
both to the PTA and to the taxpayer. The interpretation and the application of the domestic
GAAR will also be under the scrutiny of the ECJ. Moreover, the special procedure already in
force in Portuguese law for tax assessments under the domestic GAAR could also be applied
to situations of tax assessments for treaty abuse. 104
However, the application of domestic GAARs in a tax treaty situation may be controversial105
and should be considered carefully as it may give rise to situations of double taxation. In the
existence of a treaty GAAR, this should be the norm to resort to in order to avoid interpretive
differences and ensure a more harmonised application of said norm between treaty
counterparties.
For the prevention of future disputes, it would be recommendable for the tax authorities
to proactively use the interpretive MAP to clarify any doubts regarding the interpretation
and application of treaty provisions, namely anti-avoidance provisions and the application
of domestic anti-avoidance rules in tax treaty situations.
However, also domestic anti-avoidance provisions primarily addressed to residents, some
of them introduced or reviewed within the BEPS framework, whenever applicable to cross-
border situations may give rise to situations of economic double taxation which may also be
addressed under the integrative MAP, i.e. under the provision providing for consultation for
the elimination of situations of double taxation not foreseen in the treaties, which has been
enlarged in the Portuguese tax treaty network as a result of the MLI.
Consequently, the authors consider it to be in the best interest of the PTA to accept and
take advantage of the MAP to come to a solution of a taxpayer’s claim, so as to ensure this is
an effective mechanism.
104
Art. 63 of the Portuguese tax procedures code.
105
As emphasised by Furuseth, Eivind in The Interpretation of Tax treaties in Relation to Domestic GAARs, IBFD
Doctoral Series, Part V, Ch. 20.
674
Addendum
The authors of the report became aware that on 14 November 2019 the President of the
Republic ratified via Decreto Presidencial n.70/2019, Governments Proposal no. 90/XIII.106
Although this fact occurred after the writing of this report, the authors compared both
documents and concluded that there were no differences in the Portuguese position to the
MLI, as analyzed in the report.
This document still has to be deposited with the OECD in order for, three months after,
the Portuguese MLI position to enter into force.
Abbreviations and acronyms
BEPS – Base Erosion Profit-shifting

CTA – Covered tax agreement
CFC – Controlled foreign companies
CITC – Corporate Income Tax Code
DTT – Double Tax Treaty
ECJ – European Court of Justice
GAAR – General anti-abuse regulation
IRD – Interest and Royalty EU Directive
LOB – Limitation on benefits
MLI – Multilateral Instrument: formally the Multilateral Convention to Implement Tax
Treaty Measures to Prevent Base Erosion and Profit Shifting
MTC – Model Tax Convention
OECD – Organisation for Economic Co-operation and Development
UN – United Nations
PE – Permanent Establishment
PPT – Principal purpose test
PTA – Portuguese Tax authorities
PSD – Parent Subsidiary Eu Directive
MTC – Model Tax Convention
VCLT – Vienna Convention on the Law of Treaties
106
Analyzed 6 February 2020.
675
Portugal
Appendix:
Double Tax Treaty Network - Portugal

Beneficial ownership other types of income
Andorra Art 28/3 Ethiopia Prot. §1/b Peru Prot. §11/b Uruguay Prot. §7/b
Bahrain Art 27/2 Georgia Prot. §1/b São Tomé and Príncipe Art 29/2 United Arab Emirates Art 27/2
Barbados Art 27/2 Moldova Prot. §2/b Saudi Arabia Art 27/2 Vietnam Prot. §1/b
Colombia Art 26/2 Montenegro Art 27/2 Senegal Art 30/2
Côte d'Ivoire Art 30/2 Qatar Prot. §1/b Swizerland Art 27/2
Croatia Prot. §2 Oman Prot. §1/b Timor-Leste Art 29/2
Double Tax Treaty Network - Portugal

Safeguard application of domestic anti-avoidance regulation
Andorra Art 28/1 Ethiopia Prot. §1/a Peru Prot. §11/a Uruguay Prot. §7/a
Bahrain Art 27/1 Georgia Prot. §1/a São Tomé and Príncipe Art 29/1 United Arab Emirates Art 27/1
Barbados Art 27/1 Moldova Prot. §2/a Saudi Arabia Art 27/1 Vietnam Prot. §1/a
Colombia Art 26/1 Montenegro Art 27/1 Senegal Art 30/1
Côte d'Ivoire Art 30/1 Qatar Prot. §1/a Swizerland Art 27/1
Croatia Prot. §1 Oman Prot. §1/a Timor-Leste Art 29/1
Bibliography
BLUM, D.W., The Relationship between the OECD Multilateral Instrument and Covered Tax
Agreements: Multilateralism and the interpretation of the MLI, 12 February 2018, Bulletin
for International Taxation IBFD 2018 (Vol 72), No. 3
COURINHA, Gustavo Lopes, A Cláusula Geral Anti-Abuso no Direito Tributário, Almedina,
2004
DOUMA, Sjoerd and ENGLEN, Frank, The Legal Status of the OECD Commentaries, IBFD
online – The Conflict of Norms in International Tax Law Series, last reviewed 1 September
2006
DOURADO, Ana Paula, Governação Fiscal Global, Almedina, 2018
FURUSETH, Eivind, The Interpretation of Tax treaties in Relation to Domestic GAARs, IBFD
Doctoral Series
LANG, Michael, RUST, Alexander, SCHUCH Josef, STARINGER, Claus, OWENS, Jeffery and
PISTONE, Pasquale, GAARs – A Key Element of Tax Systems in the Post-BEPS Tax World,
WU – Tax Law and Policy Series, Vol 3.
MALHERBE, Jacques, A New Tax Treaty for a new world: The Multilateral Convention to
Implement tax treaty-related measures to prevent base erosion and profit shifting,
Revista de Finanças Públicas e Direito Fiscal, Ano 11, Nrs. 1 e 2, Primavera/Verão, 2018
MESQUITA, Maria Margarida Cordeiro, As Convenções sobre Dupla Tributação, Centro de
Estudos Fiscais, 1998
PIRES, Manuel, Da Dupla Tributação Jurídica Internacional sobre o Rendimento, Centro de
Estudos Fiscais, 1984
XAVIER, Alberto, Direito Tributário Internacional, Almedina, 2017
676
Russia
Branch reporter
Boris Bruk1

The Mutual Convention to Implement Tax Treaty Measures to Prevent Base Erosion and
Profit Shifting (MLI) is a new instrument in the Russian tax environment (it was adopted in
May 2019 and is still not fully operational at the moment) and therefore there is not much
guidance on how this instrument will apply in practice. The execution and ratification of the
MLI complemented the following domestic trends affecting international taxation in Russia:
–– Codification of the domestic general anti-abuse rules and rapid development of special
anti-abuse rules (CFC, thin capitalization, place of management-based tax residence for
foreign companies etc.);
–– Extensive application of the beneficial ownership concept by the Russian tax authorities
and Russian courts;
–– Negotiation of the new tax treaties and amending the old ones to comply with the OECD
standards arising from the BEPS Action Plan.
The MLI is supposed to apply to the vast majority of the existing Russian tax treaties in
respect of withholding taxes applied starting from 1 January 2020 and in respect of other
taxes applied starting from 1 January 2021. It is expected that the MLI provisions will not
apply retroactively.
The MLI Explanatory Statement and the 2017 amendments to the Commentaries on the
OECD Model Tax Convention, although not being formally binding in Russia, will likely be
utilized by the Russian tax authorities and by Russian courts as the supplementary means
of interpretation of the MLI and the amended bilateral tax treaties under article 32 of the
Vienna Convention on the Law of Treaties.
There are different views regarding the anticipated effect of the MLI on the Russian tax
system. The proponents emphasize the strong potential that the instrument vests in the
hands of the tax authorities to combat all types of tax fraud. The opponents express the fear
that enforcement of the MLI could increase the ambiguity within the Russian tax system
as some of the concepts employed by the MLI overlap with those developed under Russian
domestic tax law which might blur the borderline between tax avoidance and legitimate
(permissible) tax planning.
1
Of Counsel, Dentons Moscow, LLM. (Leiden University).
IFA © 2020 677

Russia
Tax Treaty Network
1.1. Introduction
The Mutual Convention to Implement Tax Treaty Measures to Prevent Base Erosion and
Profit Shifting (MLI) was ratified by Federal Law No.79-FZ of 1 May 2019 (the “Ratification
Law”). The Ratification Law became effective on 12 May 2019, the instrument of ratification
was deposited with the OECD Secretariat on 18 June 20192 and, therefore, the MLI became
operational for Russia (based on the provision of its article 34 (2)) on 1 October 2019.
The instrument will apply to the withholding taxes due starting from 1 January 2020 and
to other taxes starting from 1 January 2021.
As of the date of the MLI’s entry into force Russia concluded more than 80 tax treaties3 with
a wide range of jurisdictions in Europe, Asia, Africa, North America, South America and
Australia.
The Russian treaty network includes both treaties influenced by the OECD Model Tax
Convention (these are mostly the treaties with developed countries) and the UN Model Tax
Convention (primarily the treaties with the USSR republics (now most of them are the CIS
member states) and the developing nations. Although some minor deviations from the OECD
Model Tax Convention / UN Model Tax Convention could be identified in many Russian tax
treaties, these treaties generally follow the respective model tax conventions.
The preambles of some Russian tax treaties refer to the two main purposes of tax
treaties, which are (i) avoidance of double taxation and/or (ii) prevention of tax avoidance,4
although some treaties may provide for other purposes (e.g. economic, scientific and / or
technical cooperation,5 international trade and investment development,6 prevention of
discrimination7, etcetera). It should be noted though that, until now, the preambles play no
significant role in the interpretation of the tax treaties. Although the Russian tax authorities
sometimes refer to this part of the treaty to support their anti-abuse arguments, currently
such reference is relatively rare and purely auxiliary to the main arguments sourced in other
provisions of the treaties or from the provisions of Russian domestic tax law.
Russian domestic tax law and jurisprudence have developed a wide range of anti-
abuse provisions. In addition to special anti-abuse rules (transfer pricing legislation, thin
capitalization rules, beneficial ownership rules, CFC rules, management based tax residence
2
https://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf.
3
https://www.nalog.ru/rn77/about_fts/inttax/mpa/dn/. For some reasons the official treaty list does not include
tax treaties with Brazil (dated 22 November 2014), Ecuador (dated 14 November 2016), Hong Kong (dated 18
January 2016) and UAE (dated 7 December 2011).
4
See, for example, Armenia-Russia DTT, Italy-Russia DTT, the new Japan-Russia DTT of 7 September2017, Sweden-
Russia DTT (as amended by Protocol of 24 May 2018).
5
See, for example, Turkey-Russia DTT, Mexico –Russia DTT, US-Russia DTT.
6
See, for example, Israel-Russia DTT, UAE-Russia DTT.
7
See, for example, Armenia-Russia DTT.
678
Bruk
rules for foreign legal entities), the Russian courts developed a GAAR concept of “unjustified
tax benefit” comprising four elements: (i) the business purpose test, (ii) the reality of
transaction test, (iii) the substance over form test and (iv) the taxpayer due diligence test.8
The “unjustified tax benefit” concept is widely applied to cross-border transactions including
those involving tax treaty benefits. For example, this concept is often used as a supplementary
tool in the beneficial ownership cases to support the beneficial ownership arguments of
the tax authorities.9 In some cases (i.e. where reclassification of income is involved) the
“unjustified tax benefit” applies on its own.10
In August 2017 the “unjustified tax benefit” concept was substituted by the set of new
general anti-abuse rules incorporated in article 54.1 of the RF Tax Code.
Article 54.1 (1) provides that reduction by a taxpayer of the tax base and / or the amount
of tax due may be disallowed if such reduction is based on misstatement of facts concerning
the taxpayer’s economic life or taxable objects which should be disclosed in tax or statutory
accounting or tax returns of the taxpayer.
Furthermore, even where there is no identified misstatement of facts concerning the
taxpayer’s economic life, reduction of the tax base and / or the amount of tax due may still
be challenged under article 54.1 (2) if:
(i) The main purpose of a transaction (or a series of transactions) is non-payment (or
underpayment) of tax or a tax refund; or
(ii) The obligations arising from a transaction (or a series of transactions) is not performed
by a person who (which) is a party to a contract underlying the transaction or a series of
transactions (the original contract) or a person to whom (which) these obligations were
assigned under the law or under a contract by the person who (which) was the party to
the original contract.
At the moment there is no developed court practice showing how the new article 54.1 rules
would apply to the cross-border transactions in general and to combatting improper use of
treaty benefits in particular. The clarifications issued by the Russian tax authorities as of now11
provide no more than general guidelines for application of the article 54.1 rules:
–– They clearly distinguish between the article 54.1 rules and the “unjustified tax benefit”
concept that was utilized as the GAAR before August 2017 and opine that article 54.1
should not be treated as mere codification of the “unjustified tax benefit” concept;
8
The taxpayer due diligence test implies that a taxpayer claiming tax benefits should meet a certain level of
prudence when choosing a contract partner. If the taxpayer fails to demonstrate such level of prudence, the
tax benefit (e.g. deduction of expenses for profit tax purposes, recovery of input VAT etc.) could be denied or
challenged by the tax authorities, where the contract partner of the taxpayer fails to fulfil its tax obligations. In
certain circumstances (i.e. where the taxpayer is affiliated with the contract partner) the taxpayer is deemed to
be knowledgeable of misbehavior of its contract partner.
9
See, for example, the Zenith Bank case (No.A40-193386/17), the ForteInvest case (No.A40-185141/2018), the
Soyuzpushnina case (No.А40-73573/2017).
10
See, for example, the GaloPolimer case (No.А50-16961/2017) where the courts applied the reality of transaction
test to prove that the services allegedly rendered by a Canadian company to a Russian customer were no more
than on paper services (i.e. there was no proof that the services were supplied in reality). Thus, payments of the
corresponding service fees were first reclassified into gratuitous transfers of money (i.e. the gifts) and then, based
on the new classification attributed to such payments, the “other income” article of the Canada-Russia treaty
was applied.
11
See letters of the RF Federal Tax Service No.ЕД-4-2/9521@ of 18.05.2018, No.ЕД-4-2/889 of 19.01.2018 and
No.ЕД-4-9/22123@ of 31.10.2017, No.СА-4-7/15895@.
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Russia
–– Article 54.1 (1) should only apply in cases of willful misstatements of the facts of economic
life by the taxpayer. Methodological errors (including errors in legal qualification of the
facts of economic life) should not be subject to article 54.1 (1). The clarifications issued
by the tax authorities indicate the following examples of willful misstatement of the
facts of economic life by the taxpayer: (i) use of “fragmentation of business” schemes
(i.e. the situations where the integral business is intentionally split into several parts to
make them qualify for tax incentives provided available to the small and medium size
businesses); (ii) making artificial arrangements aimed at getting access to the reduced
tax rates or tax incentives (including the reduced tax rates and tax incentives provided
under the tax treaties); (iii) entering into “on-paper” transactions (i.e. the transactions
which are not performed in reality); (iv) willful understatements of income (revenue);
(v) willful misstatements regarding the taxable objects in the statutory and / or tax
accounting registers. The tax authorities are required to specify particular actions of the
taxpayer which clearly indicate intention of the taxpayer to cause damage for the state.
–– Article 54.1 (2) applies when the taxpayer does not pursue any sound business reason
when performing a transaction or a series of transactions. If the principal purpose of
the transaction (a series of transactions) is a mere tax saving, then the pursued tax
benefits could be denied. The tax authorities mention (i) the unusual transactions (i.e.
the transactions which are uncommon in the business environment, such as takeover
of a company with no assets and significant amounts of accumulated losses) and (ii)
the transactions performed by the taxpayers having no interest in them and rather
benefitting the third parties (e.g. hidden financing by a taxpayer of a third party) as the
particular examples of “no business purpose” transactions.
Also, article 54.1 (2) may be invoked when the documents a taxpayer provides to the tax
authorities, show the details of the transaction but there are no other pieces of evidence
which could prove that the transaction was performed in reality.
In other words, the scope of article 54.1 (2) covers artificial transactions.
As to the treaty based anti-avoidance provisions, the beneficial ownership concept is the
undisputed leader among them. The beneficial ownership jurisprudence of Russian courts
includes dozens of cases, most of which are ruled in favor of the tax authorities.
Based on clarification letters issued by the Russian tax authorities and existing beneficial
ownership case law, a foreign company receiving any kind of Russian source income may
qualify for treaty benefits as the beneficial owner of the income if:
–– The company has no legal or actual obligation to transfer the income to any other person
(especially to persons which would not have been entitled to similar tax treaty benefits
if they had received such income directly from Russia);
–– The company has wide discretion in respect of utilization and disposal of the income
(the company’s officers are independent in taking decisions concerning utilization and
disposal of the income) and the assets it owns;
–– The company actually (economically) benefits from utilization or disposal of the income;
–– The company has adequate level of substance (e.g., office, staff), carries out business
activities and incurs business related expenses in its residence state;
–– The company bears commercial risks in connection with its assets and activities.
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The above criteria have been elaborated in case law as follows:

No legal or actual obligations to transfer the income to any other person:
–– No transition of the income either as a same type of income (back-to-back payments to
third parties (interest-interest, dividend- dividend, etc.) or by changing the legal nature
of income (interest – dividend, dividend – interest, interest-service fee, etc.); normally
the tax authorities look at transition of the income from the company not only within the
same tax period (i.e. calendar year) when the company receives the income from Russia,
but also within one or two tax periods following the one when the company receives the
income from the Russian payer;
–– The tax authorities analyze whether in case of direct payment of the income to a person
to which the income was ultimately transferred by the company the applicable tax regime
would have been less favorable than the one claimed by the company;
Wide discretion of the company in respect of utilization and disposal of the income and its assets:
–– The company has no “mass” (professional) directors or nominal directors (they should
not be employed by secretary companies or law / accounting firms);
–– The company’s directors should not also be directors or employees of other groups of
companies;
–– The company’s directors should not be directors or employees of any other company
which is direct or indirect shareholder of the company (otherwise the company will be
deemed under operational control of its shareholders);
–– No limitations on discretion of the company in respect of utilization or disposal of its
income or assets should be stipulated in the company’s corporate documents (articles
of association, charter, memorandum of association, shareholders agreement, etc.) or
in any contracts concluded by the company with third parties;
–– The company should have qualified staff and the number of such qualified staff should
be commensurate with the company’s business functions and enough for taking
independent business decisions regarding utilization and disposal of its income;
–– If the company is part of a group of companies, the group does not treat the company’s
assets as assets of the shareholders of the group’s ultimate holding company (such
treatment should not be implied from the financial statements of the group, SEC reports,
press releases and other mass media);
Attribution of actual (economic) benefits from utilization or disposal of the income to the company:
–– The company should additionally carry out income generating commercial activities
other than the activities from which the Russian source income arises;
–– The company has adequate level of substance (e.g. office, staff), carries out business
activities and incurs business related expenses in its residence state;
–– The company should have adequate office space (whether owned or rented) available
to it in its residence state;
–– The company should bear business related costs (e.g. electricity, Internet, telephone, legal
and / or consulting expenses, appraisal costs etc.);
–– The company should have assets (securities, movable or immovable property, intangibles,
etc.) other than the assets from which the Russia source income arises, and such assets
should be utilized in the course of its commercial activities;
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–– Where holding of shares in Russian subsidiaries is concerned, the company’s directors or

employees should represent the company at the shareholders meetings of the Russian
subsidiaries;
–– The company should ideally pay tax in respect of the income in its residence state;
Bearing commercial risks in connection with the company’s assets and activities:
–– The company should bear financial and other ordinary commercial risks arising from
its activities;
–– The company should not be indemnified from these risks by its shareholders or other
persons (pledges and other measures of security from debtors which are in line with the
normal business practice are allowed);
–– The company’s audited financial statements should not contain “no going concern”
qualification (i.e., that the auditors have doubts whether the company will continue
operations as the going concern or whether the external financial support from the
shareholders / other persons is required).
In April 2018 the RF Federal Tax Service issued explanatory letter No.СА-4-9/8285 stating, inter
alia, that companies pursuing pure holding or intra-group activities (e.g. entirely involved in
provision of intra-group financing, rendering intra-group services, etc.) will unlikely qualify
for treaty benefits under the beneficial ownership concept. That drastic position though,
was mitigated in August 2019 when the RF Federal Tax Service issued another explanatory
letter No.ЕД-4-13/15696@. That letter admitted that pure holding companies may still qualify
as the beneficial owners of their income and thus remain eligible for tax treaty benefits if
the set-up of these holding companies is not artificial (it has a valid business purpose) and
the holding company is an independent decision maker in respect of its assets and income.
As one could derive from the above, the beneficial ownership concept, which was
supposed to expressly deal with some forms of tax avoidance only (as paragraph 63 of
the Commentaries on article 1 of the OECD Model Tax Convention12 and paragraph 12.5 of
the Commentaries on article 10 of the OECD Model Tax Convention put it), was effectively
expanded in Russia in a kind of general treaty anti-abuse rule. The position papers of the
Russian tax authorities in the beneficial ownership cases sometimes refer to the general
anti-abuse approaches discussed in the OECD Report “Double Taxation Conventions and
the Use of Conduit Companies” and fixed in the paragraphs of the Commentaries included
in the “Improper use of the Convention” and the “Conduit company cases” sections of the
Commentaries on article 1 of the OECD Model Tax Convention,13 irrespective of whether
the special wording implementing such approaches (as suggested in the Report and the
respective sections of the Commentaries) was incorporated in particular Russian tax treaties
applicable in those cases. This demonstrates, in the view of the author, that the Russian tax
authorities consider the treaty-based anti-avoidance provisions as part of the scope of the
beneficial ownership concept.
LOB provisions are currently included in some of the Russian tax treaties only14 (the most
extensive LOB provisions being included in the US-Russia DTT). Surprisingly, these provisions
12
Here reference is made to the 2017 version of the Commentaries.
13
Here reference is made to the 2014 version of the Commentaries.
14
Australia-Russia DTT, Chile-Russia DTT, Cyprus-Russia DTT, Israel-Russia DTT, Lithuania-Russia DTT, Mexico-
Russia DTT, Norway-Russia DTT, Singapore-Russia DTT, Spain-Russia DTT, Swiss-Russia DTT, UK-Russia DTT could
be mentioned as the examples of the tax treaties containing LOB provisions.
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currently do not trigger any disputes, which could be explained by the fact that (i) many of
the Russian treaties containing LOB provisions are the treaties with the high tax jurisdictions
or jurisdictions remote from Russia (e.g. Australia, Chile, Mexico, Spain, the UK and the US)
which makes these treaties unpopular for treaty shopping, (ii) the LOB provisions contained
in some of the treaties (e.g. the one with Cyprus) are fairly limited in scope (which makes
them difficult to apply in practice) and (iii) the local tax authorities do not pay much attention
to these rules focusing on Russian domestic anti-abuse concepts and the concept of beneficial
ownership instead.
Further analysis of the existing domestic tax law, as well as administrative and court
practice reveals that:
–– The abuses involving the transactions or arrangements undertaken to access the reduced
treaty rates on dividends paid to parent companies are mostly dealt with through
the combination of the beneficial ownership concept and the “substance over form”
element of the “unjustified tax benefit” doctrine (in respect of the tax periods preceding
incorporation of article 54.1 into the RF Tax Code15).
–– The transactions or arrangements undertaken to avoid taxation of the Russian situs
immovable property were primarily dealt with by extension of the scope of the Russian
withholding tax rules (article 309 (1) (6) of the RF Tax Code) to the alienation of shares of or
interest in the foreign companies which are rich of Russian immovable property. However,
it should be mentioned that the Russian government took considerable and consistent
efforts to close the respective loopholes in most of the Russian tax treaties by amending
those (in particular we should mention amendments to Cyprus-Russia DTT, Luxembourg
– Russia DTT, Switzerland-Russia DTT and conclusion of the new Belgium-Russia DTT).
–– The above said, it should be admitted that there is still some room for improvement of
taxation of the transactions involving direct or indirect alienation of the Russian situs
immovable property by foreign companies, as the tax administration of such transactions
is sometimes inefficient.16
–– Not much attention is currently paid by the tax authorities to abuses involving permanent
establishments. Although disputes between the tax authorities and the foreign
companies doing business in Russia on whether the in-Russia activities of the foreign
companies constitute a permanent establishment and regarding attribution of profits
to the Russian permanent establishments of foreign companies are not uncommon, the
complicated arrangements involving permanent establishments of foreign companies
in third jurisdictions seem currently outside the scope of control of the Russian tax
authorities. Disputes concerning application of the PE provisions of Russian domestic tax
15
Since most disputes currently arise from the tax audits covering the fiscal year of 2017 and the preceding fiscal
years, there is no much practice available at the moment to conclude on how the Article 54.1 rules would apply
to dividend distributions and other transactions.
16
Where, for instance, the transaction involving alienation of shares of a Russian or foreign Russian situs immovable
property rich subsidiary is arranged between the two foreign companies having this transaction, is subject to
Russian withholding tax but there may ultimately be no effective mechanism to enforce the tax liability arising
from this transaction. To the extent that the foreign seller does not carry out any activities in Russia through a
permanent establishment, this seller is not liable to file a tax return and pay the tax on a self-assessment basis.
At the same time the foreign purchaser, again to the extent the purchase does not carry out activities in Russia
constituting a permanent establishment there, is not liable to act as a withholding tax agent and remit the
Russian tax due to the state. As the outcome of this legislative flaw, the tax liability remains unsettled. It seems
clear that this issue is more the issue of tax administration (thus, the matter of Russian domestic tax law) rather
than the treaty abuse matter.
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law and Russian tax treaties (including the disputes dealing with the scope of preparatory
and auxiliary activities, dependent agency, applicability of special rules regarding
construction and installation sites etc.) are normally approached as interpretative cases
(i.e. the courts decide such cases based on their interpretation of the respective provisions
of Russian domestic tax law and the provisions of applicable tax treaties) and do not
involve anti-abuse arguments.
–– Applicability of tax treaties to foreign transparent entities was the point for consideration
in a couple of courts cases and also a subject matter of some clarification letters issued
by the tax authorities,17 but is not considered a major treaty abuse issue at the moment.
–– Mutual agreement procedures (MAP) are relatively rare these days. The provisions
authorizing MAPs were incorporated in the RF Tax Code by Federal Law No.325-FZ of 29
September 2019 and will become effective starting from 1 January 2020 (the detailed
procedure to be developed by the RF Ministry of Finance).
–– As to the corresponding transfer pricing adjustments, it should be noted that until now
Russian domestic tax law did not provide for corresponding adjustments in respect of
the cross-border related party transactions (in particular where the initial transfer pricing
adjustments are initiated by the foreign tax authorities). Although the RF Ministry of
Finance admitted the possibility of the cross-border corresponding adjustments in case
an applicable tax treaty provides for such adjustments18, no cases of the cross-border
transfer pricing adjustments have been reported so far.19 It should be noted though
that the new article 105.18-1 (in effect starting from 1 January 2020) was adopted by
Federal Law No.325-FZ of 29 September2019 authorizing cross-border transfer pricing
adjustments which may arise as the result of MAP.
As the final remark on the background to the MLI, it is important to mention that most of
the existing Russian tax treaties do not mention mandatory binding arbitration, with the
exceptions being the newest ones (Belgium-Russia DTT20 and Japan-Russia DTT21).
17
See the Freshfields case (No.A40-3279/2014) and the Victoria case (No.A32-5847/2019); although applicability of the
tax treaties to fiscally transparent entities (in particular, to foreign partnerships) was addressed in a number of
clarifications issued by the RF Ministry of Finance (letters No.03-04-05/52129 of 15 July 2019, No. 03-08-05/43406
of 10 July2017, No.03-08-рз/38351 of 4 August2014) and the RF Federal Tax Services (letters No.СД-4-3/10142@
of 28 May 2019, No. СД-4-3/24561@ of 21 December 2016).
18
Letter of the RF Ministry of Finance No.03-01-18/28673 of 10 May 2016.
19
This could probably be the outcome of the fact that there are only a few Russian tax treaties, which provide
for corresponding cross-border adjustments (Cyprus-Russia DTT and US-Russia DTT to be mentioned as
such exceptional examples). It should be noted that Russia’s general position not to provide cross–border
corresponding transfer pricing adjustments was clear in the country’s reservation to article 9 of the OECD Model
Tax Convention.
20
Applicability of the respective provision of the Belgium-Russia DTT is conditional on execution by Russia of a
similar provision under a tax treaty with any other state.
21
The treaty currently does not provide for the arbitration procedure but the Protocol to the treaty stipulates
that the contracting states should launch negotiations regarding arbitration after Russia agrees to include the
arbitration clause in the tax treaty with any other state.
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As mentioned above, Russia ratified the MLI in May 2019 and the instrument became effective
for Russia on 1 October 2019.
Currently the MLI covers 71 Russian tax treaties, which amounts to approximately 85
percent of the total treaty network of the country. Among the jurisdictions of the tax treaties
named by Russia as the Covered Agreements 16 jurisdictions have not yet signed the MLI.
Of those jurisdictions which signed the MLI only one state (Indonesia) does not mention
the Russian treaty in its list of Covered Agreements, which means that the MLI should apply
to all other 70 treaties.
Some of the Russian treaties have recently been negotiated (e.g. the treaty with Ecuador)
or renegotiated (e.g. the new treaty with Japan) and, therefore, reflect the BEPS tax policy
trends which could explain the reason for not designating them Covered Agreements, but
others are rather old and it is not clear why they are not within the scope of the MLI.
In respect of the particular MLI provisions it should be noted that:
–– Russia has opted to apply the preamble language of article 6 (3) of the MLI to the Covered
Agreements;
–– Russia has opted to apply the principal purpose test to the Covered Agreements and made
notification pursuant to article 7 (17) of the MLI that those Covered Agreements which
contain provisions similar to that of article 7 (2) of the MLI will not be subject to article 7
(15) (b) reservation, which means that the provision of article 7 (1) of the MLI will equally
apply to those Covered Agreements which contain and do not contain the PPT test;
–– Russia has opted to satisfy the OECD minimum treaty abuse standard by applying the
Simplified Limitation on Benefits Provision to the Covered Agreements, except to the
ones with the People’s Republic of China, Ecuador and the US;
–– Russia has opted to apply the minimum holding period provided for under article 8 (1) of
the MLI to most of the Covered Agreements, except for the new DTT with Belgium and
the Portugal – Russia DTT;
–– Russian has opted to apply the substituted property rule for gains from alienation of
shares or compatible interests deriving their value primarily from immovable property
under article 9 (4) of the MLI;
–– Russia has not made any reservations or notifications in respect of article 10 of the MLI;
–– Russia has opted to apply the provisions of article 12 (1) and (2) of the MLI to all its Covered
Agreements;
–– Russia has opted to apply the provisions of article 13 (Option A) to all its Covered
Agreements;
–– Russia has opted to apply the provisions of article 14 to its Covered Agreements, except
that such provisions will not apply to the specific provisions of the tax treaties with
Iceland, Latvia, Lithuania, the Netherlands, New Zealand and Norway governing taxation
of the activities relating to the exploration for or exploitation of natural resources;
–– Russia has adopted application of the provisions of article 3 of the MLI addressing hybrid
mismatch arrangements by using the transparent entities to its Covered Agreements;
–– Russia has adopted the dual resident entities rules of Article 4 of the MLI to apply to most
of its Covered Agreements (although 22 Covered Agreements, which already contain the
provisions requiring the competent authorities to attempt to reach mutual agreement
on a single tax residence jurisdiction where the person has dual tax residence under
the provision of domestic tax laws of the Contracting States, were exempted from those
rules);
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–– Russia has not opted to apply the “Arbitration” part of the MLI to its Covered Agree
ments.
The Russian government made no public announcements explaining the reasons for making
particular reservations or notifications under the MLI. Neither the available parliamentary
materials (i.e. the documents accompanying adoption of the Ratification Law by the State
Duma and the Federal Council) shed any light on the reasoning behind the choices made by
the Russian Federation when ratifying the MLI.
Since Russia signed the MLI in June 2017 a number of new tax treaties were negotiated (e.g.
the new DTTs with Belgium and Japan) and a number of existing tax treaties were amended
(e.g. the DTTs with Austria and Sweden).
The analysis of the new treaties and the amendments to the existing ones, evidence that
the amendments were to some extent influenced by the 2017 revisions of the OECD Model
Tax Convention and the MLI:
–– Introduction of the “purpose of the convention” wording in the preamble (Japan, Sweden);
–– Incorporation of the “Transparent Entities” provisions (Japan, Sweden);
–– Incorporation of the “Dual Resident Entities” provisions (Japan, Sweden);
–– Incorporation of the corresponding adjustment wording (Belgium, Japan, Sweden);
–– Expansion of the “Exchange of information” provisions (Austria, Belgium, Japan, Sweden);
–– Introduction of the “Assistance in the collection of taxes” provisions (Austria, Japan);
–– Introduction of the PPT test (Austria, Sweden);
–– Introduction of the LOB provisions (Belgium, Japan, Sweden).
Thus, even where the Russian treaties are not formally covered by the MLI (e.g. the new
treaty with Japan and the treaty with Sweden), they are still indirectly influenced by BEPS
and by the MLI.
The MLI has been ratified using the ordinary ratification procedure employed by the Russian
Federation for ratification of all of its international treaties.22 The internal parliamentary
procedure included a discussion of the Ratification Law in a number of committees as well
as passing the plenary hearings at the State Duma (the final draft was released on 17 April
2019). The draft law released by the State Duma (the lower house of the Russian parliament)
was then approved by the Federal Council (the upper house of the Russian parliament) to be
finally signed by the RF President on 1 May 2019.
22
The legislative process concerning ratification of the MLI can be found here: https://sozd.duma.gov.ru/
bill/643148-7.
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The same day the Ratification Law was released at the official legislative website of the
government (http://www.pravo.gov.ru) and later published in the two official printed media:
the Legislative Reports of the Russian Federation (Собрание законодательства РФ) and the
Russian Gazette (Российская газета).
The Ratification Law contains both the ratification clause, as well as lists of all reservations
and notifications to be made by Russia in respect of the MLI.
Although the MLI is ratified by an ordinary enactment of federal law (the same level
of authority as the one attached to the RF Tax Code and to any of the Russian bilateral tax
treaties), there should be no treaty override issue, as the RF Federal Constitution (article 15)
provides for the ultimate supremacy of any international treaties (including the tax treaties)
over any pieces of domestic tax legislation.
Although, strictly speaking, the MLI should not formally have any supremacy over
the bilateral Russian tax treaties, the general principle “Lex posterior derogat legi priori”
(as upheld by article 30 of the 1969 Vienna Convention on the Law of Treaties) should give
supremacy to the MLI. However, the same principle makes the MLI vulnerable to subsequent
changes to the Covered Agreements.
As to the new bilateral tax treaties which may be concluded by Russia after the MLI
becomes operational, such agreements may become subject to the MLI if Russia and another
contracting state extend the scope of the MLI under article 29 (5) by notification of the OECD
Secretary General. This would probably require amendments to the Ratification Law on the
Russian side.
The Russian tax authorities have not published consolidated or synthesized texts of the
tax treaties affected by the MLI, and it is not clear whether such consolidated or synthesized
texts will ever be made available to the public. Although the OECD “MLI matching Database”
could be of some help for the taxpayers and the tax practitioners to identify amendments the
MLI made to the bilateral tax treaties, it is unlikely that such a compilation will be given any
legal value (so that the tax practitioners, the tax officials and courts will ultimately have to
verify applicability of the MLI to a particular bilateral tax treaty as well as the amendments
the MLI makes to that treaty themselves based on the provisions of the Ratification Law).
Since the MLI is a pretty new instrument and has not been tested in practice, as of the day of
this report there are no interpretational guidelines developed by the RF government or by
the Russian courts in respect of application and interpretation of the MLI and the effect of
the MLI on the bilateral Russian tax treaties.
It is also unclear what weight (if any) will be given by the guidelines regarding
interpretation of the MLI issued by the OECD. Given the fact that the OECD documents (in
particular, the Commentaries on the OECD Model Tax Convention) are generally treated by
Russian courts as authoritative supplementary means of interpretation of the tax treaties,23
it could be expected that the OECD Explanatory Statement on the MLI will also at least have
the same treatment.
23
See, for example, the RF Supreme Court rulings in the SUEK-Kuzbass case (No. А27-25564/2015) and the Kashirky
Dvor case (No.А40-176513/2016).
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The practice of application of the Commentaries on the OECD Model Tax Convention
shows that the lack of official translation of the Commentaries into the Russian language
does not preclude the tax authorities and courts from using them. Thus, lack of the official
translation of the Explanatory Statement into the official language of the Russian Federation
would unlikely affect use of this document for interpretation of the MLI.
The BEPS reports may not become as influential in interpreting the MLI as the Explanatory
Statement, as the OECD Fiscal Committee reports have never been put on the same level of
authority as the Commentaries. This said, references to the BEPS reports cannot be entirely
excluded, especially where the Explanatory Statement is silent or ambiguous on the issue
in question.
Notwithstanding the fact that the scope of the Commentaries on the OECD Model Tax
Convention overlaps with the MLI, it seems that the Explanatory Statements should have some
priority in interpretation of the MLI, as this document has been specifically tailored to be the
source of interpretation of the MLI. Thus, should there appear to be any discrepancy between
the Explanatory Statement and the Commentaries, the former should probably prevail.
As to the effect of the MLI on the existing Russian tax treaties, it should be noted that
Russia has opted to apply the provisions of the MLI to withholding taxes arising on or after
1 January of the calendar year beginning on or after the latest of the dates on which the
MLI enters into force in respect of each Covered Agreement and also opted to apply the
provisions of the MLI to other taxes levied in respect of the taxable periods beginning on or
after expiration of the six calendar months period from the latest of the dates on which the
MLI enters into force in respect of each Covered Agreement. In respect of most of the existing
Covered Agreements the MLI would apply to withholding taxes to be withheld starting from
1 January 2020 and to other taxes starting from a January 2021. Since the amendments made
by the MLI to the bilateral tax treaties are not given any retroactive effect, there should also
be no room for giving the same to the treaty interpretation inspired by these amendments.
Notwithstanding the fact that the MLI is still not fully operational in Russia, the taxpayers
and the tax practitioners should obviously take its provisions into account when performing
long and medium-term tax planning.
There are different views on the potential effect of the MLI on legitimate tax planning but
some of the tax practitioners express their concern that this effect could overall be negative
due to the following:
–– Firstly, most of the MLI provisions are purely judgmental and do not, therefore, provide
any reasonable level of certainty for the taxpayers, thus opening the door for errors,
misinterpretations and even abusive tax administration practices. As the outcome of
that uncertainty, one could expect the increase of tensions between the taxpayers and
the tax authorities and additional caseload on the national judicial systems (unless the
judicial system proves to be inefficient in finding the balanced approach to application
and interpretation of the MLI);
–– Some of the concepts employed by the MLI (especially the anti-abuse provisions contained
therein) overlap with the similar concepts developed under domestic tax laws as well
as under the local administrative and court practices, which could add more confusion
to the application of the domestic anti-abuse rules which is not always consistent and
coherent even now.
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–– The principal purpose test (PPT) could be a good example to illustrate the above
statement. Article 7 (1) of the MLI provides that no tax benefit shall be granted under
a tax treaty if it is reasonable to conclude that obtaining that benefit was one of the
principal purposes of any arrangement or transaction that resulted directly or indirectly
in that benefit. At the same time the Russian PPT rule under article 54.1 (2) of the RF Tax
Code provides that the tax benefits (reduction of the tax base or the amount of tax due)
may only be denied if the non-payment (underpayment) of tax and / or a tax refund is
the principal purpose of the underlying transaction. A comparative analysis of the two
PPT provisions demonstrates that the scope of the MLI PPT is wider than the scope of
the same under Russian domestic tax law. Fulfilling the PPT requirements under the MLI
implies that a taxpayer needs to exclude any tax motivation. At the same time the RF Tax
Code admits that the tax saving could be among the key drivers of the activities of the
taxpayer but should not be the only one. Thus, in a bona fide case, where a taxpayer has
a solid business reason to be engaged in a particular arrangement (transaction), it may
still be unable to pass the MLI PPT test. The question will then arise which of the PPT tests
should prevail and become a landmark for the taxpayers.
Some draw attention to the fact that the MLI facilitates the “cherry picking” approach for the
member states. The states are allowed to pick up the tools (provisions) which they consider
helpful in pursuing their fiscal interests but may escape simultaneously from assuming
any obligations to the taxpayers and the other states to resolve the double taxation issues
efficiently through the mutual agreement and the arbitration procedures. Such an approach
could compromise the declared efforts of the OECD to develop a balanced and flexible system
of international taxation.
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Branch reporters
Dejan Popović1
Gordana Ilić-Popov2
Lidija Živković3

The Republic of Serbia participated in the work of the ad hoc Working Group for the
and Profit Shifting (hereinafter: MLI or the Convention) and was one of the 68 jurisdictions
to have signed the ensuing Convention on 7 June 2017. Serbia deposited the instrument of
ratification on 5 June 2018 leading to the entering into force of the Convention on 1 October
2018.
Although not a member of the OECD, nor a member of the European Union, Serbia
enthusiastically embraced various modifications introduced by the Convention. Despite
the substantial flexibility the MLI granted to its signatories, Serbia decided to designate all
of its double tax treaties (64 in total) as Covered Tax Agreements (hereinafter: CTAs) – not
only treaties in force, but also those which have been signed but were not yet in force at the
moment of the signing ceremony. Taking into account Serbia’s limited treaty negotiating
capacity, the Convention was thought to guarantee far less costly and less time-consuming
solutions with regard to the revision of the existing tax treaty network in comparison to
the usual renegotiation thereof. Moreover, as Serbia usually assumes the role of a capital
importing country, certain provisions of the MLI were welcomed as a means to strengthening
source taxation, e.g. provisions addressing treaty abuse, as well as those preventing the
artificial avoidance of the permanent establishment (hereinafter: PE) status. Unfortunately,
no assessment has been made with respect to the projected impact of MLI provisions on the
tax administration or bilateral trade and investment flows. As it is generally the case with
policy choices in the field of double taxation treaties, decisions vis-à-vis choices offered by
the MLI were reached exclusively within the Ministry of Finance, without any precursory
public debate.
The only provisions of the Convention for which Serbia reserved the right not to apply in
their entirety to its CTAs are: article 3 – Transparent Entities, article 5 – Application of Methods
for Elimination of Double Taxation, article 10 – Anti-abuse Rule for PEs Situated in Third
Jurisdictions and article 11 – Application of Tax Agreements to Restrict a Party’s Right to Tax
its own Residents. Additionally, reservation was placed on the first sentence of article 16 –
Mutual Agreement Procedure, as well as on article 17 – Corresponding Adjustments with
regards to the majority of CTAs, since they already include the latter provision. Pursuant to the
long-standing opposition of Serbian policy makers towards mandatory binding arbitration,
Serbia refused to opt-in part VI of the Convention.
1
Full professor at the University of Belgrade Faculty of Law.
2
Full professor at the University of Belgrade Faculty of Law and Vice-Rector of the University of Belgrade.
3
LLM. Teaching Assistant at the University of Belgrade Faculty of Law.
IFA © 2020 691

Serbia
Serbia opted to modify the existing tie-breaker rule for situations of dual residence in the
case of persons other than individuals in all its CTAs by introducing the Mutual Agreement
Procedure approach contained in article 4 of the MLI. Regarding modifications of the
preamble of double tax treaties, Serbia opted to include in all its CTAs not only the statement
emphasizing that the prevention of tax evasion and tax avoidance is one of the purposes of
double tax treaties, but also the sentence contained in article 6(3) of the MLI which clarifies
that the contracting jurisdictions desire to further develop economic relationships and
enhance their cooperation in tax matters. With respect to the prevention of treaty abuse,
Serbia opted for the inclusion of the principal purpose test contained in article 7(1) of the MLI
but refrained from including the so-called discretionary relief clause contained in article 7(4).
Moreover, Serbia agreed to apply article 8(1), as well as to include article 9(4) to all its CTAs.
Serbia was rather accepting of the modifications targeted at the avoidance of PE status. It
agreed to modify all its CTAs in line with article 12 – Artificial Avoidance of PE Status through
Commissionaire Agreements and Similar Strategies, thereby expanding the standard of
dependent agent. It opted for Option A under article 13 – Artificial Avoidance of PE Status
through the Specific Activity Exemptions, resulting in the addition of the “preparatory or
auxiliary” test to all the subparagraphs of article 5(4) of its listed CTAs. Serbia has not exercised
its right to place a reservation with respect to paragraph 4 of article 13 dealing with the
fragmentation of business activities with the goal of avoiding PE status.
With respect to double tax treaties negotiated after the signing ceremony, Serbia has
endeavoured to incorporate the same modifications it has accepted by signing the MLI,
subject to the position of the other contracting state.
In order to facilitate interpretation and application of modified double tax treaties, the
Serbian Ministry of Finance published synthesized texts of double tax treaties modified by the
provisions of the MLI, conforming to the OECD Guidance for the development of synthesised
texts. Consolidation of MLI provisions with the texts of CTAs was not legally required for
the transposition of the accepted modifications into national law and was therefore not
conducted.
Regarding the future application of modified double tax treaty provisions, the most
problematic will be the application of the principal purpose test. It is difficult to predict
correctly how the Serbian Tax Authorities (hereinafter TAs) will utilise the discretionary power
granted thereby. It is to be hoped that the inclusion of the preambular language contained in
article 6(3) of the MLI will guide the Serbian TAs towards adopting a less aggressive approach
in assessing taxpayers’ arrangements and transactions. In any case, the principal purpose test
could potentially generate constitutional concerns from the point of view of the principle of
legal certainty and horizontal equity.
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Popović, Ilić-Popov & Živković
Tax Treaty Network
Introduction
The Republic of Serbia was one of the non-OECD countries that have taken the opportunity to
participate “on an equal footing”4 in the work of the ad hoc Working Group for the Multilateral
Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit
Shifting and was one of the 68 jurisdictions to have signed the MLI on 7 June 2017. Serbia
deposited the instrument of ratification on 5 June 2018, becoming the sixth jurisdiction to
ratify the Convention. As a result, the MLI has been in force for Serbia as of 1 October 2018.
The decision to sign the MLI was, above all, of a political nature. Generally speaking, it
was intended to send a message of Serbia’s willingness to co-operate on a global level in
the fight against tax avoidance and aggressive tax planning. More specifically, on its way to
becoming a member of the European Union (hereinafter: EU),5 Serbia signed the Stabilization
and Association Agreement thereby accepting the obligation to complete its double tax
treaty network with all EU member states on the basis of the latest version of the OECD
Model Convention (hereinafter: OECD MC), to the extent that the contracting member state
adheres thereto.6 As yet, there is a double tax treaty in force between Serbia and each of the
EU member states with the exception of Portugal. However, since the EU was at the forefront
of the work on the BEPS Project, it was reasonable to expect that some of Serbia’s EU treaty
partners would wish to re-negotiate their respective treaties on the basis of the 2017 OECD
MC in order to incorporate the BEPS recommendations.7 Considering Serbia’s limited treaty
negotiating capacity vis-a-vis most of the EU member states, the MLI appeared to guarantee
far less costly and less time-consuming revisions of the existing treaties.
Additionally, from the point of view of a capital importing country, a position in which
Serbia usually finds itself, provisions of the MLI were expected to strengthen the source
taxation to a certain extent. This was particularly the case with regard to provisions addressing
treaty abuse, as well as those preventing the artificial avoidance of the PE status.8
4
OECD, Developing a Multilateral Instrument to Modify Bilateral Tax Treaties, Action 15 – 2015 Final Report, Paris, 2015,
p. 10.
5
Serbia applied for EU membership in 2009 and it became a full candidate in 2012. Negotiations for Serbia’s
accession to the EU are in progress since 2014.
6
Art. 100(3) of the Stabilization and Association Agreement between the European Communities and their
Member States and the Republic of Serbia.
7
OECD, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 – 2015 Final Report, Paris,
2015.
8
Annet Wanyana Oguttu, “Should Developing Countries Sign the OECD Multilateral Instrument to Address Treaty-
Related Base Erosion and Profit Shifting Measures?”, CGD Policy Paper 132, November 2018, p. 4.
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Serbia
Treaties listed as Covered Tax Agreements
The list of CTAs notified to the depositary consists of all double tax treaties concluded by
Serbia9 prior to the signing ceremony in Paris. The list includes 58 treaties which were in force
at that moment,10 as well as six treaties that have been signed but were not yet in force.11 The
reason for including, from the start, the entire double tax treaty network within the list of
CTAs was of a practical nature. Namely, it has been regarded as far more convenient from a
procedural point of view to ratify the MLI before the Serbia’s National Assembly for all double
tax treaties in one batch, instead of conducting the ratification procedure partially through
several steps (e.g. if and when the signed treaties enter into force).
With respect to double tax treaties negotiated after the signing ceremony, Serbia has
endeavoured to incorporate the same modifications it has accepted by signing the MLI,
subject to the position of the other contracting state. So far, the treaty with San Marino has
been signed and is effective as of 1 January 2019, whereas the treaty with Israel has been
signed but the exchange of ratification instruments is yet to take place.12 Therefore, it is not
expected that new treaties will be listed as CTAs over time, but the modifications accepted
through the MLI will be incorporated through forthcoming bilateral negotiations.
By analysing the officially published positions of other MLI signatories which are Serbia’s
treaty partners, we can conclude that four of them did not include the double tax treaty
with Serbia within their list of CTAs: Germany,13 Indonesia,14 Switzerland15 and Sweden.16 It is
notable that the first three enumerated jurisdictions have been identified in the literature
as signatories that have chosen the largest number of treaties to keep out of their lists of
CTAs.17 Germany and Sweden excluded their treaties with Serbia from the group of treaties
to be modified by the MLI most likely because they belong to the group of the oldest treaties
applied by Serbia, concluded during the 1980s by the former Socialist Federal Republic of
Yugoslavia (hereinafter: SFRY). As such, these treaties contain terms which are a relic of
the former socialist economic system and occasionally caused interpretative issues in the
9
The Republic of Serbia is a universal successor of the Socialist Federal Republic of Yugoslavia, the Federal Republic
of Yugoslavia and the State Union of Serbia and Montenegro and as such applies double tax treaties signed in
the past by the respective countries.
10
Double tax treaties with the following jurisdictions: Albania, Armenia, Austria, Azerbaijan, Belgium, Belorussia,
Bosnia & Herzegovina, Bulgaria, Canada, People’s Rep. of China, Croatia, Cyprus, Czech Republic, Denmark, Egypt,
Estonia, Finland, France, Georgia, Germany, Greece, Hungary, India, Iran, Ireland, Italy, Kazakhstan, Rep. of Korea,
(DPR) Korea, Kuwait, Latvia, Libya, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Moldova, Montenegro,
Netherlands, Norway, Pakistan, Poland, Qatar, Romania, Russia, Slovakia, Slovenia, Spain, Sri Lanka, Sweden,
Switzerland, Tunisia, Turkey, United Arab Emirates (UAE), United Kingdom (UK), Ukraine and Vietnam. As of 1
January 2019, the treaty with Malaysia has been terminated.
11
Double tax treaties with the following jurisdictions: Ghana, Guinea, Indonesia, Morocco, Palestine, Zimbabwe.
Please note that the treaty with Indonesia has, in the meantime, entered into force.
12
Additionally, negotiations with Hong Kong, Japan, Singapore and Algeria are under way. According to unofficial
information, only the latter treaty will not incorporate any of the modifications prescribed by the MLI, due to the
unpreparedness of Algeria.
13
Federal Republic of Germany, Status of List of Reservations and Notifications at the Time of Signature, pp. 1-10.
14
The Republic of Indonesia, Status of List of Reservations and Notifications at the Time of Signature, pp. 2-7.
15
Confédération Suisse, Statut de la liste de réserves et des notifications au moment de la signature, pp. 2-5.
16
The Kingdom of Sweden, Status of List of Reservations and Notifications at the Time of Signature, pp. 2-11.
17
Suranjali Tandon, “The Multilateral Legal Instrument: A developing country perspective”, WP No. 220, National
Institute of Public Finance and Policy, New Delhi 2018, p. 8, http://nipfp.org.in/publications/working-papers/1813/,
accessed: 6 June 2019.
694
past. Consequently, it makes sense to renegotiate them bilaterally, concurrently introducing

BEPS measures and amending controversial provisions.18 Switzerland, on the other hand,
expressed a general preference towards bilateral renegotiations of its double tax treaties.19
Therefore, it is no surprise that Switzerland refrained from including the treaty with Serbia
on its rather short list of (in total 14) CTAs. The authors assume that in the case of Indonesia,
the treaty with Serbia was not designated to be modified by the MLI because it was not in
force at the moment of the signing ceremony.
Provisions subject to reservations
Despite the considerable flexibility granted by the MLI to its signatories, Serbia has
optimistically embraced numerous modifications introduced thereby, which – considering
the fact that Serbia is not an OECD member, nor a member of the EU – is quite surprising.
The only provisions of the MLI for which Serbia has reserved the right not to apply in their
entirety to its CTAs are the following: article 3 – Transparent Entities, article 5 – Application of
Methods for Elimination of Double Taxation, article 10 – Anti-abuse Rule for PEs Situated in
Third Jurisdictions and article 11 – Application of Tax Agreements to Restrict a Party’s Right to
Tax its own Residents. Regarding article 16(1), Serbia placed a reservation to the first sentence
only. Additionally, reservation was placed on article 17 – Corresponding Adjustments with
regards to the majority of CTAs, since they already contain the prescribed provision. Finally,
Serbia refused to opt-in the part VI of the MLI (articles 18-26).
With respect to the provision intended to tackle the (ab)use of transparent entities,
Serbia was reluctant to introduce it in its double tax treaties since there has never been much
need for it. Namely, Serbia’s Company Law provides for the following forms of legal entities:
general partnership (ortačko društvo), limited partnership (komanditno društvo), limited
liability company (društvo sa ograničenom odgovornošću) and joint stock company (akcionarsko
društvo).20 For tax purposes, all of the cited legal forms are recognized as taxpayers in their
own capacity, i.e. they are characterized as non-transparent. The same is the case with respect
to any other legal person established for the purpose of carrying on a business with the aim
of generating profit, as well as cooperatives or other legal persons generating income by
18
For example, the treaty between Germany and Serbia contains a separate provision (art. 8) which deals with the
taxation of income realized by a German resident as a return on investment in the Yugoslavian organization of
associated labor (organizacija udruženog rada), an obsolete notion indicating socially-owned enterprise that
used to exist in SFRY. This provision limits the taxation of such income to a maximum rate of 15%. The described
treatment is equivalent to the treatment of dividends realized by a Serbia’s resident from a German source, which
is dealt with in art. 11. The fact that art. 11 deals only with dividends sourced in Germany, while art. 8 refers to
income from investment in the Yugoslavian organization of associated labor, in practice resulted in questioning
whether German residents have the right to limited taxation on dividends sourced in Serbia. The first round of
new treaty negotiations with Germany is scheduled for October 2019.
19
E & Y, Switzerland signs Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, p. 2,
https://www.ey.com/Publication/vwLUAssets/Switzerland_signs_Multilateral_Convention_to_Implement_
Tax_ Treaty_Related_Measures_to_Prevent_BEPS/$FILE/2017G_04136-171Gbl_Switzerland%20signs%20MC%20
to%20 Implement%20Tax%20Treaty%20Related%20Measures%20to%20Prevent%20BEPS.pdf, accessed: 6 June
2019.
20
Art. 8 of the Company Law (Zakon o privrednim društvima), Official Gazette of the Republic of Serbia, no. 36/2011,
99/2011, 83/2014 – as amended, 5/2015, 44/2018 and 95/2018.
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Serbia
selling goods or services on the market.21 Consequently, income in question is automatically

considered to be derived at the level of the entity and not by the persons who have organized
or who own, operate or control such entity.22 Serbia’s tax law does not prescribe any rules for
classifying entities created under foreign law. Additionally, there is no possibility to elect
the treatment of a foreign entity to be taxable or transparent. In practice, for the purpose of
domestic tax law application, Serbia’s TAs will treat a foreign entity as taxable, regardless of
the fact that the said entity is being regarded as fiscally transparent in its home country.23 The
described classification of the foreign entity as non-resident taxpayer allows the application
of withholding tax at a rate of 20% on certain items of income24 earned from a resident legal
entity.25,26 Consequently, base erosion and profit shifting through the use of hybrid entities is
being tackled by applying the aforementioned mechanism for which reason the acceptance
of article 3 of the MLI was not regarded as crucial.
Serbia has chosen not to modify the existing provisions concerning the elimination of
double taxation by accepting article 5 of the MLI as this was considered to be unnecessary.
Similarly, Serbia’s tax treaty negotiators regarded the anti-abuse rule contained in article
10 of the MLI superfluous. Namely, situations in which Serbia is the source state of income
attributable to a PE in a third state where it is subject to low or no taxation and which is
exempt from tax in the residence state, are seldomly encountered in practice. However, if a
potential treaty partner would insist on introducing this anti-abuse provision, Serbia’s treaty
negotiators would be willing to accept it.27
The reason for opting out of the so-called Saving Clause contained in article 11 of the MLI
is based on its fairly limited practical relevance and scope of application. The fact that a group
of more than 50 MLI signatories (among which are both developed and developing countries)
reserved the right for the entirety of article 11 not to apply to their CTAs testifies to this fact.
Namely, unlike the Saving Clause contained in the US Model Convention28 which limits the
personal scope of the respective treaty by providing that the treaty shall not affect the taxation
by a contracting state of both its residents and citizens, the Saving Clause contained in the MLI
refers only to the residents of a contracting jurisdiction. Considering the fact that worldwide
taxation of income in Serbia is based exclusively on the criterion of residence (as is the case
21
Art. 1(1) of the Corporate Income Tax Law (Zakon o porezu na dobit pravnih lica), Official Gazette of the Republic
of Serbia, no. 25/2001, 80/2002, 80/2002 – as amended, 43/2003, 84/2004, 18/2010, 101/2011, 119/2012, 47/2013,
108/2013, 68/2014 – as amended, 142/2014, 91/2015 – authentic interpretation, 112/2015, 113/2017, 95/2018.
22
Kees van Raad, “General Report” in Recognition of Foreign Enterprises as Taxable Entities, IFA Cahier Vol. 73a, Sdu
Uitgevers, the Hague 1988, p. 25.
23
Tomislav Popović, “National Report for Serbia“ in Qualification of taxable entities and treaty protection, IFA Cahier
Vol. 99b, Sdu Uitgevers, the Hague 2014, p. 685.
24
Dividend, interest, royalty, lease and service payments. See art. 40(1) of the Corporate Income Tax Law.
25
In the case of a recipient that is a legal entity (regardless of the fact whether it is transparent or non-transparent)
in one of the 50 listed jurisdictions with preferential tax systems, a rate of 25% applies. The only exception is
dividend income to which a regular rate of 20% applies.
26
Of course, the applicable double tax treaty could provide for a more beneficial treatment of such income,
provided certain conditions are met.
27
The described approach is in accordance with Serbia’s general openness to meeting the requests of its treaty
partners with respect to the inclusion of various anti-avoidance rules in their double tax treaties. See: Dejan
Dabetić, Republika Srbija i izbegavanje dvostrukog oporezivanja, Računovodstvo, Beograd 2008, p. 46, n. 43 and p.
48.
28
Paras 4 and 5 of art. 1 of the US Model Convention 2016, https://www.treasury.gov/resource-center/tax-policy/treaties/
Documents/Treaty-US%20Model-2016.pdf, 6 June 2019.
696
in the vast majority of other jurisdictions) there would hardly be any room for applying the
provision in question.29 Besides, having in mind that the OECD MC Commentary already
stated that certain provisions of the treaty cannot be interpreted as limiting a contracting
state’s right to tax its own residents (in the context of partnerships and with respect to the
application of domestic anti-abuse rules), the Saving Clause merely enhances this principle to
the level of a general rule contained in the Convention itself.30 Consequently, it can be argued
to have only clarifying significance31 and it was, therefore, considered to be redundant from
the point of view of Serbia’s treaty negotiators.
Serbia reserved the right for the first sentence of article 16(1) of the MLI not to apply to
its CTAs, hence dismissing the possibility for taxpayers to present their requests for MAP
to the competent authorities of either contracting jurisdiction. The described approach
is a measure of caution intended to prevent the piling up of MAP requests before Serbia’s
competent authorities.32 At the same time, however, Serbia obliged itself to conduct a
bilateral notification or initiate a consultation process with the competent authority of the
other contracting jurisdiction in cases when it considers the taxpayer’s request for MAP not
to be justified. In this way, competent authorities of both contracting jurisdictions will be
made aware of the number and substance of filed MAP requests and will be granted the
opportunity to present their opinion on whether the taxpayer’s request in question was
indeed unjustified.33 It has been identified that one of the main deficiencies of the MAP
mechanism in Serbia is its complete lack of transparency.34 However, thanks to Serbia’s
commitment to implement the BEPS minimum standard enshrined in Action 14, several
steps have been taken recently with the aim of improving the dispute resolution mechanism
in Serbia. This will be further elaborated upon in part two of this report.
It is not surprising that Serbia has refrained from opting in part VI of the MLI which
introduces mandatory binding arbitration. This is in line with Serbia’s long-standing position
towards tax treaty arbitration. Since the footnote previously contained in article 25 was
deleted from the 2017 OECD MC in line with the transparency requirements of the BEPS
minimum standard contained in Action 14, countries are now compelled to disclose their
official attitude towards mandatory binding arbitration. Therefore, Serbia finally stated its
position on article 25(5) officially, by explicitly reserving the right not to include this provision
in its double tax treaties.35 It is important to note that it has been ascertained by Serbia’s
29
Josef Schuch & Nikolaus Neubauer, “The Saving Clause: Article 1(3) of the OECD Model” in Base Erosion and Profit
Shifting (BEPS), The Proposals to Revise the OECD Model Convention (eds. M. Lang et al.), Linde, Vienna 2016, p. 49.
30
Georg Kofler, “Some Reflections on the Saving Clause”, Intertax, Vol. 44, Issue 8&9, p. 574.
31
David Kleist, “The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS – Some
Thoughts on Complexity and Uncertainty”, Nordic Tax Journal, 2018/1, p. 38.
32
Just like in the case of many other developing countries, Serbia’s administrative authorities (including the
Ministry of Finance) are chronically understaffed. In such circumstances, handling of MAP requests and
subsequent resolution of MAP cases with competent authorities of other contracting states is in the hands of
one single official of the Ministry of Finance (Head of the working group for tax treaties).
33
OECD, Making Dispute Resolution Mechanisms More Effective, Action 14 – 2015 Final Report, Paris 2015, p. 22.
34
Dejan Popović, Gordana Ilić-Popov & Lidija Živković, “National Report for Serbia“ in Tax Treaty Arbitration (eds.
M. Lang et al.) IBFD, Amsterdam 2020 (forthcoming).
35
OECD Model Tax Convention on Income and Capital 2017 (Full Version), OECD Publishing, P(25)-1.
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Serbia
leading scholars36 (and officially stated by the Head of the working group for tax treaties)37
that there are no legal (e.g. constitutional) limitations in domestic law which would prevent
the inclusion of an arbitration clause into Serbia’s tax treaties. Nevertheless, the reason
for Serbia’s opposition towards tax treaty arbitration lays, as it is the case with many other
developing countries, in the fear that enabling foreign bodies to decide on tax matters would
put restraints on its exercise of fiscal sovereignty.38 It is expected, however, that the described
attitude towards tax arbitration will inevitably change in the future as Serbia advances on its
way towards EU membership, having in mind its obligation to harmonize national legislation
with the acquis, most importantly in this respect – EU Arbitration Convention and Directive
on tax dispute resolution mechanisms in the EU. In this context, we may expect as well that
in the years to come Serbia would consider opting in part VI of the MLI in order to swiftly
modify its double tax treaties by adding arbitration to them.
Options selected
Serbia accepted to modify the existing tie-breaker rule for situations of dual residence in
the case of persons other than individuals in all its CTAs by introducing the MAP approach
contained in article 4 of the MLI. Although the substitution of the place of effective
management (PoEM) test with MAP has been criticized in the literature for granting the
TAs excessive discretionary powers, hence contributing to an increase in legal uncertainty
for taxpayers,39 it is reasonable to assume that the introduced change will not worsen
substantially the existing level of unpredictability to which taxpayers are exposed in Serbia.
Namely, Serbia’s Law on CIT prescribes two alternative criteria for the determination of
taxpayers’ residence for the purpose of domestic tax law application – place of incorporation
and place of effective management and control. Curiously enough, Serbia’s TAs have never
even attempted to apply the latter criterion so as to be able to tax on a worldwide basis a
legal entity established abroad but effectively managed or controlled from Serbia. The same
is true with respect to the tie-breaker rule present in Serbia’s tax treaties. The reason Serbia’s
TAs refrained from challenging the residence of legal entities, is their general reluctance
to apply criteria which are of a factual nature (such is the case with PoEM).40 Since they are
understaffed and undertrained, the tax officials limit their analysis to the examination of
residence certificates issued by foreign TAs. Moreover, as early as in 2005 Serbia reserved
the right to replace the PoEM test prescribed by article 4(3) of the OECD MC with a provision
referring to MAP.41 Consequently, it was expected and understandable that Serbia will be
36
Dejan Popović & Gordana Ilić-Popov, “Arbitraža u međunarodnom poreskom pravu: dodatak postupku
zajedničkog dogovaranja i pravne prepreke za ugovaranje”, Anali Pravnog fakulteta u Beogradu, 2/2018, pp. 47-69.
37
See: Serbia Dispute Resolution Profile, p. 8, https://www.oecd.org/tax/dispute/Serbia-Dispute-Resolution-Profile.pdf,
accessed: 11 June 2019.
38
Dejan Popović & Gordana Ilić-Popov, supra 36, p. 59.
39
Peter Bräumann & Michael Tumpel, “Dual Resident Companies, Intercompany Dividends, Real Estate Companies”
in Base Erosion and Profit Shifting (BEPS), The Proposals to Revise the OECD Model Convention (eds. M. Lang et al.), Linde,
Vienna 2016, pp. 311-316.
40
Svetislav V. Kostić, “National Report for Serbia“, Corporate Tax Residence and Mobility, IBFD, Amsterdam 2018, p.
537.
41
OECD Model Tax Convention on Income and Capital 2017 (Full Version), OECD Publishing, P(4)-7.
698
accepting this BEPS measure. Nevertheless, the fact that only 13 MLI signatories42 which
designated their double tax treaty with Serbia to be a CTA, have opted for the MAP approach
implies that the reach of this modification will be rather limited.
Regarding modifications to the preamble of double tax treaties, Serbia opted to include
in all of its CTAs not only the statement emphasizing that the prevention of tax evasion and
tax avoidance is one of the purposes of double tax treaties, but also the sentence contained
in article 6(3) of the MLI which clarifies that the contracting jurisdictions desire to further
develop economic relationships and enhance their cooperation in tax matters.
Concerning the prevention of treaty abuse, Serbia opted for the inclusion in all of its CTAs
of the principle purpose test (hereinafter: PPT) contained in article 7(1) of the MLI. Serbia
chose not to apply the so-called discretionary relief clause contained in article 7(4) of the
MLI. If we take into account that Serbia’s TAs have no experience in applying treaty general
anti-avoidance rules (hereinafter: GAARs), whereas their application of the domestic GAAR
– the so-called principle of facticity43 – has been plagued with deficiencies,44 the outlined
choice seems highly unfortunate, as it leaves the taxpayer without the possibility to initiate
a correction mechanism. The decision to abstain from the introduction of the LOB is rooted
in the fact that this specific anti-avoidance rule is overly complex and would therefore pose
an insuperable obstacle to the resources deprived of Serbia’s TAs.45 Obtaining information
necessary to verify whether numerous requirements for qualifying for treaty benefits are
fulfilled, would be seriously undermined by weak administrative capacities.46
Serbia opted for applying article 8(1) of the MLI to its CTAs. The minimum shareholding
period requirement has been present in Serbia’s domestic tax law for a long time, with the goal
of preventing abuse.47 The modification contained in the MLI was, in this context, considered
to be straightforward enough and well-known from the point of view of application to the
domestic TAs.
Considering capital gains from the alienation of shares or interests in entities deriving
their value principally from immovable property, Serbia opted to include article 9(4) of the
42
Armenia, People’s Rep. of China, Egypt, India, Ireland, Kazakhstan, Netherlands, Poland, Romania, Russia, Slovak
Republic, Slovenia and UK.
43
The so-called principle of facticity is actually comprised of three paras containing three different rules. The first
one represents the codification of the substance over form doctrine, requiring that the facts relevant for taxation
are to be established based on their economic substance. The second para contains the rule on simulated and
dissimulated acts targeting fictitious transactions, whereas the third para stipulates the rule authorizing the TAs
to tax income acquired through illegal acts. Art. 9 of the Law on Tax Procedure and Tax Administration (Zakon o
poreskom postupku i poreskoj administraciji), Official Gazette of the Republic of Serbia no. 80/2002, 84/2002 – corr.,
23/2003 – corr., 70/2003, 55/2004, 61/2005, 85/2005 – as amended, 62/2006 – as amended, 63/2006 – corr. as
amended, 61/2007, 20/2009, 72/2009 – as amended, 53/2010, 101/2011, 2/2012 – corr., 93/2012, 47/2013, 108/2013,
68/2014, 105/2014, 91/2015 – authentic interpretation, 112/2015, 15/2016 and 108/2016, 30/2018 and 95/2018.
44
For a detailed analysis of the principle of facticity and critique of its application see: Svetislav V. Kostić, “National
Report for Serbia” in GAARs – A Key Element of Tax Systems in the Post-BEPS Tax World (eds. M. Lang et al.) IBFD,
Amsterdam 2016, pp. 569-582; Dejan Popović, Gordana Ilić-Popov & Lidija Živković, “Branch report for Serbia” in
Anti-avoidance Measures of General Nature and Scope – GAAR and Other Rules, IFA Cahier de Droit Fiscal International,
2018.
45
Within the whole of Serbia’s double tax treaty network only the treaty with Canada contains a provision which
shares some features of the LOB contained in the MLI, but which is considerably less elaborated. It is contained
in art. 28 – Miscellaneous Rules.
46
International Monetary Fund, Spillovers in International Corporate Taxation, IMF Policy Paper, 9 May 2014, p. 27,
https://www.imf.org/external/np/pp/eng/2014/050914.pdf, accessed: 30 June 2019.
47
Art. 53(1) of the Corporate Income Tax Law.
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MLI. The described choice alleviates the considerable level of legal uncertainty previously
caused by the inadequate interpretation and application of article 13(4) of the OECD MC
(hereinafter: the real estate proviso) by Serbia’s TAs and is as such very welcome. Namely, the
official interpretation of the said provision limited its application exclusively to the alienation
of shares in a joint stock company, leaving shares in a limited liability company outside of its
scope.48 It is expected that the explicit reference in article 9(4) to the alienation of comparable
interests (and citation of examples thereof) will finally end the unjustified narrowing of the
scope of this specific anti-avoidance rule.49
Unlike a number of jurisdictions which upfront announced that they will not be adopting
the modifications relating to the definition of the PE recommended in BEPS Action 7,50 Serbia
has been rather accommodating. Regarding article 12 – Artificial Avoidance of PE Status
through Commissionaire Agreements and Similar Strategies, Serbia accepted to modify
all its CTAs thereby expanding the standard of dependent agent. With regard to article 13
– Artificial Avoidance of PE Status through the Specific Activity Exemptions, Serbia chose
to apply Option A which adds a “preparatory or auxiliary” test to all the subparagraphs of
article 5(4) of a listed CTA. It ensures that activities specified within article 5(4) of a listed
CTA must be of preparatory or auxiliary nature in order to be qualified as an exemption to
the establishment of a PE. This is in line with the interpretation of article 5(4) of the OECD
MC previously advocated by Serbia’s treaty negotiators. They emphasized that the listed
activities are not in themselves intrinsically of preparatory or auxiliary nature. Consequently,
the accepted modification represents a codified confirmation of such an approach and as
such increases legal certainty for taxpayers. Additionally, Serbia has not exercised its right to
place a reservation with respect to paragraph 4 of article 13 dealing with the fragmentation
of business activities with the goal of avoiding PE status. Therefore, in several instances
where the option under article 13(1) of the MLI chosen by the other contracting jurisdiction
does not match the option chosen by Serbia, article 13(4) remains applicable in relation
to the respective CTA, unless the other contracting jurisdiction explicitly opted out of it.
Furthermore, Serbia opted for applying article 14 – Splitting-up of Contracts to its CTAs, with
the exception of provisions which deal with the exploration for or exploitation of natural
resources.51 Considering the fact that articles 12, 13 and 14 of the MLI rely on the definition
of a person closely related to an enterprise contained in article 15 of the MLI, Serbia was not
permitted to opt out of it.
48
For a criticism of such interpretation see: Dejan Popović & Svetislav V. Kostić, Ugovori Srbije o izbegavanju dvostrukog
oporezivanja – pravni okvir i tumačenje, Cekos-in, Beograd 2009, pp. 160-162; Svetislav Kostić, „National Report for
Serbia”, in The Impact of the OECD and UN Model Conventions on Bilateral Tax Treaties (eds. M. Lang et al.), Cambridge
University Press, Cambridge 2012, pp. 965-966.
49
The importance of the described change in interpretation of the said rule lays in the fact that the preferred vehicle
for conducting foreign investment into Serbia is a limited liability company.
50
Allison Christians & Stephen Shay, “General Report” in Assessing BEPS: origins, standards and responses, IFA Cahier
de Droit Fiscal International, 2017, pp. 45-46.
51
Serbia has notified only one provision within its treaty network that deals with the existence of a PE relating
to the exploration for or exploitation of natural resources (art. 21(3) of the treaty with Norway), although some
other treaties also contain the provision in question (e.g. tax treaty with Lithuania).
700
Overview of CTAs modifications
After conducting a comparison between the official position of Serbia and the published
positions of its treaty partners,52 the authors were able to provide a high-level assessment of
the MLI’s impact on Serbia’s treaty network, first with respect to provisions which represent
minimum standards and, second with regard to the rest of the MLI provisions.
With respect to the preamble, double tax treaties with Belgium, Croatia, Egypt, France,
Georgia, Greece, Hungary, Ireland, Luxemburg, Malta, Netherlands, Norway, Pakistan, Qatar,
Romania, Russia, Slovak Republic, Slovenia, Spain, Tunisia, Turkey, UAE, Ukraine and the UK
will be modified by including not only the statement contained in article 6(1) of the MLI, but
also by adding the clarification that the contracting jurisdictions intend to further develop
economic relationships and enhance their cooperation in tax matters, which is stipulated by
article 6(3) of the MLI. The preamble of the rest of the CTAs will be modified with respect to
the minimum standard only.53 All Serbia’s CTAs which at the same time have been designated
as CTAs by Serbia’s treaty partners, will be modified by including the PPT.54 Whereas most of
Serbia’s treaty partners opted exclusively for the PPT in order to fight treaty abuse, several
of them opted for a parallel application of the simplified LOB: Armenia, Bulgaria, Denmark,
India, Kazakhstan, Russia and Slovak Republic. However, considering that Serbia did not
agree to the asymmetric application of the two mentioned rules directed against treaty
abuse, only the PPT will be applicable in those treaties. Additionally, a handful of contracting
jurisdictions decided to apply the PPT just as an interim measure, intending to adopt other
measures through bilateral negotiations in order to meet the minimum standard:55 Canada,
Czech Republic, Kuwait, Norway and Poland.
Due to the aforementioned reservation Serbia placed on the first sentence of article
16(1), none of the CTAs will be amended so as to allow taxpayers to initiate a MAP before the
contracting state of which he/she is not a resident. Since the majority of Serbia’s double tax
treaties already incorporate the rest of the BEPS recommendations relating to article 25, only
a handful of CTAs will undergo modifications in that respect. Most of them are the oldest
52
Please note that a definitive position with respect to the MLI was published only by 16 of Serbia’s treaty partners
(Austria, Finland, France, Georgia, Ireland, Italy, Lithuania, Luxembourg, Malta, Netherlands, Poland, Slovak
Republic, Slovenia, Sweden, UAE and UK), whereas 26 treaty partners published only a provisional position
(Albania, Bulgaria, Canada, People’s Rep. of China, Croatia, Cyprus, Czech Republic, Egypt, Estonia, Germany,
Greece, Hungary, India, Indonesia, Kazakhstan, Rep. of Korea, Kuwait, Latvia, Morocco, Norway, Romania, Russia,
Spain, Tunisia, Turkey and Ukraine). Positions of six remaining treaty partners (Armenia, Belgium, Denmark,
Pakistan, Qatar and Switzerland) are yet to be confirmed. Therefore, the results of the conducted analysis may
change in the future with respect to the majority of Serbia’s treaty partners. The described status of positions is
as of 29 May 2019.
53
These are the treaties with: Albania, Armenia, Austria, Bulgaria, Canada, Czech Republic, Denmark, Finland,
India, Italy, Kazakhstan, Latvia, Lithuania, Poland and the Rep. ofKorea.
54
Treaties with Indonesia, Kazakhstan, Rep. of Korea, Norway and Palestine already contain a provision that may
be regarded as a partial PPT. The scope of the said provision is limited to certain types of income (depending
on the treaty it may cover dividends, interest, royalties, other income or capital gains). Since Palestine is not a
signatory to the MLI and Indonesia did not list its treaty with Serbia as a CTA, the rest of the enumerated treaties
will be modified in line with article 7(2) of the MLI, which will apply the PPT in place of such provisions.
55
Para 115 of the Explanatory Statement to the Multilateral Convention to Implement Tax Treaty Related Measures
to Prevent Base Erosion and Profit Shifting.
701
Serbia
treaties concluded by SFRY (of which Serbia is a successor) during the 1970s and 1980s.56 A
provision setting time limits for initiating the MAP by a taxpayer, will be added to double
tax treaties with France and the UK, whereas the existing time limit in the treaty with Italy
will be extended from two to three years. A provision providing that the agreement reached
through MAP shall be implemented notwithstanding any time limits in the domestic law of
the contracting jurisdictions, will be included in double tax treaties with Belgium, France,
Italy, Netherlands, Slovak Republic and the UK. Interpretative MAP57 will be added to the
double tax treaties with Belgium and France, while the legislative MAP58 will be included in
double tax treaties with Belgium, Italy and the UK.
Since Serbia exercised its right to place a reservation on article 17 of the MLI to the extent
a CTA already contains the provision which requires a contracting jurisdiction to make a
corresponding adjustment, only the double tax treaties with Belgium, Cyprus, Czech Republic,
Finland, France, Hungary, Italy, Lithuania, Netherlands, Slovak Republic and the UK shall be
subject to the modification envisaged by article 17(1).
Instead of the PoEM as a tie-breaker rule, MAP will be introduced as a means to solve
dual residence of persons other than individuals in double tax treaties with the following
jurisdictions: Armenia, People’s Rep. of China, Egypt, India, Ireland, Kazakhstan, Netherlands,
Poland, Romania, Russia, Slovak Republic and Slovenia. The minimum shareholding period
as a precondition for a treaty relief to apply with respect to dividends in the country of source
will be included in double tax treaties with the following jurisdictions: Albania, Belgium,
Egypt, France, India, Ireland, Kazakhstan, Netherlands, Norway, Poland, Russia, Slovak
Republic, Slovenia and Spain. Whereas numerous signatories accepted modifications with
respect to the real estate proviso in their double tax treaties, only the following opted for the
same provision as Serbia (article 9(4) of the MLI): Armenia, Croatia, Egypt, Estonia, France,
India, Ireland, Italy, Kazakhstan, Malta, Poland, Russia, Slovak Republic, Slovenia, Spain,
Tunisia, Turkey and Ukraine.
Double tax agreements with the following jurisdictions will be modified by tightening the
dependent agent PE standard: Albania, Croatia, Egypt, France, India, Armenia, Kazakhstan,
Lithuania, Netherlands, Norway, Romania, Russia, Slovak Republic, Slovenia, Tunisia, Turkey,
Ukraine and Spain. Countries that have chosen the same option with regards to specific
activity exemptions are: Armenia, Austria, Croatia, Egypt, India, Italy, Kazakhstan, Kuwait,
Netherlands, Norway, Romania, Russia, Slovak Republic, Slovenia, Spain, Tunisia, Turkey and
Ukraine. Double tax treaties with all these jurisdictions, with the exception of Austria, will
also be modified by including article 13(4) of the MLI, since none of them opted out of it. On
the other hand, due to the mismatch in options between the contracting jurisdictions, double
tax treaties with Belgium, UK, Ireland, Lithuania and France will be modified exclusively
by including article 13(4). Provision preventing the avoidance of construction PE through
the splitting-up of contracts will be included in double tax treaties with Armenia, Egypt,
India, Kazakhstan, Kuwait, Lithuania, Netherlands, Norway, Romania, Russia and Slovak
Republic. Having in mind the relationship between article 15 of the MLI on the one hand
56
As such, they did not incorporate the changes which were introduced to the OECD MC in 1977. See: Lidija Živković,
„Postupak zajedničkog dogovaranja u svetlu BEPS akcionog plana“, Harmonius 2017, p. 295.
57
Provision allowing that difficulties or doubts arising from the interpretation or application of a CTA may be
resolved through a MAP.
58
Provision providing for the elimination of double taxation in cases not provided for in the tax treaty by way of
MAP.
702
and articles 12(1), 13(4) and 14(1) of the MLI on the other, all previously enumerated treaties
will be modified in order to include a definition of person “closely related” to an enterprise.
Time-frame of CTAs modifications
For Serbia, which conducted the ratification procedure on 20 April 201859 and, let us reiterate,
deposited the instrument of ratification on 5 June 2018, the MLI entered into force on 1
October 2018, in accordance with article 34(2) of the MLI. Among MLI signatories that have
designated their treaty with Serbia as a CTAs, 22 have already deposited their ratification
instrument as well.60
In line with article 35(1)(a), the provisions of the MLI have entered into effect in the case
of taxes withheld at source on 1 January 2019 with respect to double tax treaties with Austria,
France, Lithuania, Poland, Slovak Republic, Slovenia and the UK. However, pursuant to article
34(1)(b), in the case of all other taxes the provisions of the MLI will come into effect on 1
January 2020 with respect to the same double tax treaties, provided that the taxpayer’s fiscal
year corresponds to a calendar year. If, however, the taxpayer’s fiscal year does not correspond
with a calendar year, the provisions of the MLI may be applicable in 2019, provided that the
fiscal year does not commence prior to 1 April 2019 in the case of double tax treaties with
Austria, Poland, Slovenia and the UK, and prior to 1 July 2019 in the cases of double tax treaties
with France, Lithuania and Slovak Republic.
Assessments regarding the impact of the MLI
No assessment with regard to the projected impact of MLI provisions on the tax administration
or bilateral trade and investment flows has been conducted in Serbia. As it is generally the
case with policy choices in the field of double taxation treaties, decisions to opt in or out of MLI
provisions were again reached solely within the Ministry of Finance without any precursory
debate which would include tax practitioners, academics or business representatives.
59
The Law on Confirmation of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent
Base Erosion and Profit Shifting (Zakon o potvrđivanju Multilateralne konvencije za primenu mera koje se u
cilju sprečavanja erozije poreske osnovice i premeštanja dobiti odnose na poreske ugovore), Official Gazette of
the Republic of Serbia – International treaties, no 3/2018.
60
Austria, Belgium, Canada, Denmark, Finland, France, Georgia, India, Ireland, Lithuania, Luxembourg, Malta,
Netherlands, Poland, Russia, Slovak Republic, Slovenia, Sweden, Switzerland, UAE, Ukraine and the UK. Status
as oft 30 September 2019.
703
Serbia
Part Two: Practical Implementation of the MLI
Communication of the modifications to CTAs
Serbia’s Ministry of Finance has already prepared and published several synthetized texts of
double tax treaties modified by the provisions of the MLI,61 in line with the OECD Guidance
for the development of synthesized texts.62 Consequently, each of them reproduces a) the
text of a specific CTA, b) the provisions of the MLI modifying the said CTA in accordance
with the interaction of the positions of contracting parties to the CTA in question, as well
as c) certain explanatory information.63 As such, synthetized texts do not have legal value
but are only intended to facilitate interpretation and application of modified double tax
treaties by taxpayers and domestic TAs. They are seen as an adequate tool for increasing
the level of legal certainty and transparency surrounding the application of the MLI. On the
other hand, consolidation of MLI provisions with the text of CTAs will not be conducted since
this is not legally required for the transposition of the modifications made by the MLI into
national law.64 Finally, the content published by the OECD, such as the matching database,
is not legally binding and may only serve as a practical tool as to better understanding the
interplay between the flexibility mechanisms of the MLI and existing double tax treaties.
The authors are supportive of the administrative authorities’ decision to publish
synthetized (instead of consolidated) texts of modified double tax treaties since, from a legal
standpoint, the MLI does not actually amend the text of CTAs but modifies them by being
applied alongside with them. Synthetized texts are preferable from a practical point of view
as well, since it is sensible to expect the effect of the MLI on CTAs to change over time, as the
contracting jurisdictions are free to alter their initial positions in the future.
PPT
Serbia’s TAs did not adopt any procedural framework for the application of the PPT, nor is
the adoption thereof contemplated for the near future. This is no surprise having in mind
the application of the long-standing domestic GAAR, devoid of any procedural rules which
would guarantee correct and predictable assessment by the TAs, as well as the protection of
taxpayers’ rights in the course of it. The authors are supportive of the idea that only the most
experienced tax officials should be able to apply the PPT and that a special advisory panel
should be established in order to review their assessment. However, the lack of resources is
likely to delay any development in that respect.
It remains to be seen how tax professionals will take the PPT into account in tax planning.
61
So far, the Ministry of Finance has published synthetized texts of double tax treaties with respect to which the
MLI has entered into effect on 1 January 2019. Synthetized versions are available only in Serbian, at the official
website of Serbia’s Ministry of Finance: https://www.mfin.gov.rs/pages/issue.php?id=7063, accessed 22 June 2019.
62
OECD, Guidance for the development of synthesised texts, Multilateral Convention to Implement Tax Treaty Measures
to Prevent BEPS, OECD, Paris 2018, https://www.oecd.org/tax/treaties/beps-mli-guidance-for-the-development-of-
synthesised-texts.pdf, accessed 22 June 2019.
63
Ibid., p. 9.
64
Serbia ratified the MLI itself, making the ratification of individual CTAs as modified by the MLI and, consequently,
formulation of consolidated texts thereof, redundant.
704
The first cases of PPT application are eagerly being awaited. Only then will we gain an
understanding of how the Serbia’s TAs might utilize the discretionary power granted thereby.
The main concern at this moment is how the TAs will draw the line between “one of the
principal purposes” and secondary purposes of an arrangement or transaction.
Moreover, PPT could generate considerable constitutional concerns in Serbia. First, from
the point of view of legal certainty in general65 it is problematic that, being a GAAR with
limited effect, PPT does not stipulate actual legal consequences of its application other than
that treaty benefits shall not be granted.66 It is therefore uncertain whether the TAs should
replace the abusive fact pattern chosen by the taxpayer by another non-abusive fact pattern
and if so – how should the TAs choose between possibly several different substituting fact
patterns in a specific case.67 Second, the PPT might be problematic from the point of view
of legal certainty in penal law specifically. Namely, article 34 of the Serbian Constitution
presupposes that no person may be held guilty for an act which did not constitute a criminal
offence under law, or any other regulation based on the law at the time when it was
committed, nor shall a penalty be imposed which was not prescribed for such act. The so-called
penalizing effect of the PPT,68 which would occur if the residence state refuses to apply
the method article after the Serbia’s TAs disallowed the treaty benefit thereby leading to
double taxation,69 could be regarded as violating this principle.70 Finally, by treating identical
arrangements or transactions differently as a consequence of the manner in which the line
between the principal purpose and secondary purpose thereof is drawn, the application of
PPT could go against the principle of horizontal equity, which is explicitly stipulated in article
91(2) of the Serbian Constitution.71
Serbia is a civil law country and its courts generally have a significantly less creative role
within the legal system than is the case in common law countries. Additionally, the absence
of a specialized tax judiciary, as well as the lack of specialization of judges for tax related cases
within the Administrative Court prevented the development of domestic anti-avoidance
doctrines. Nevertheless, Serbian tax law contains what is usually referred to as a GAAR – the
previously mentioned principle of facticity. This provision, however, has never been applied in
an international context, neither by TAs nor the Administrative court (hereinafter: the Court).
Consequently, the Court has never had the opportunity to rule on the matter of interplay
between the domestic GAAR and treaty anti-avoidance rules.72
However, the answer to the question on the relationship between the PPT and the
domestic GAAR can be based on the constitutional principle of supremacy of international
treaties over national law. Namely, the Constitution of the Republic of Serbia stipulates that
65
The Serbian Constitution does not contain explicit reference to legal certainty as a general concept. However, the
Serbian Constitutional Court has regarded legal certainty as one of the fundamental constitutional principles.
See e.g. Judgement of Serbia’s Constitutional Court IUz-138/2016, dated 26 April 2018.
66
Andrés Báez Moreno, “GAARs and Treaties: From the Guiding Principle to the Principal Purpose Test. What Have
We Gained from BEPS Action 6?”, Intertax, Vol. 45, Issue 6&7, 2017, p. 441.
67
Ibid.
68
Michael Lang, “BEPS Action 6: Introducing an Anti-abuse Rule in Tax Treaties”, Tax Notes International, Vol. 74,
2014, p. 662.
69
Since none of Serbia’s CTAs will include mandatory binding arbitration, the likelihood that double taxation will
remain even after the MAP is far from negligible.
70
Dejan Popović & Gordana Ilić-Popov, “(Ne)ustavnost odredbe o testu glavnog cilja transakcije ili aranžmana iz
poreskih ugovora“, Anali Pravnog fakulteta u Beogradu, 2/2019, pp. 26-27.
71
Ibid., p. 26.
72
D. Popović, G. Ilić-Popov & L. Živković, supra 44, p. 12.
705
Serbia
ratified international agreements are an integral part of the Serbian legal system and are,
consequently, applied directly.73 An international treaty may be ratified before the Serbian
parliament only if it is in line with the Constitution.74 Finally, laws and other legal acts of
general nature enacted in Serbia shall not be in noncompliance with the ratified international
treaties and generally accepted rules of international law.75 Therefore, with respect to a case to
which both the PPT and the principle of facticity would be applicable, the PPT as a provision
of an international treaty would supersede the domestic GAAR.
Being in essence a GAAR, the PPT is intended to supplement the existing specific
anti-avoidance rules (hereinafter: SAARs) by closing the loopholes that remain after their
application. Therefore, with respect to the relationship between the PPT and domestic and
treaty SAARs, the Serbian TAs are expected to follow the lex specialis derogat legi generali
maxim. Considering first the application of a domestic SAAR, where a specific transaction
or arrangement is subject to it, the PPT is likely to be redundant. However, to the extent
that a certain tax avoidance structure could not be tackled by any of the existing domestic
SAARs or the application thereof was eventually insufficient to counter it, the PPT would be
applicable. Regarding the application of treaty SAARs, two different situations could occur. If
the transaction or arrangement falls within the scope of the treaty SAAR, the PPT should not
apply. If the PPT were to be applied by the TAs in such case, crucial features of SAARs – their
specific formal requirements – would be rendered meaningless. If, however, the taxpayer’s
transaction or arrangement fulfils the formal requirements of the SAAR, thus preventing
its application, the PPT could be applicable, provided that the transaction or arrangement
contradicts the object and purpose of the SAAR in question.
It is apparent from the systemic interpretation of the provisions of the MLI, as well as from
the Commentary to the 2017 OECD MC, that the modified preamble contained in article 6(1)
of the MLI is intended to affect the interpretation of the PPT.76 Pursuant to the 2017 OECD
MC Commentary, reading the PPT in the context of the preamble of the Convention is of
particular importance for the determination of object and purpose of relevant provisions
of the Convention.77 Additionally, it could be expected that the inclusion of the optional
preambular language contained in article 6(3) of the MLI, which underlines the contracting
states’ desire to further develop their economic relationship and enhance co-operation in tax
matters, will guide the Serbian TAs towards adopting a less aggressive approach in assessing
taxpayers’ arrangements and transactions. This would provide a welcome counterbalance to
the absence of the discretionary relief clause in Serbia’s CTAs. Unfortunately, a large number
of Serbia’s tax treaty partners who are signatories to the MLI abstained from opting for the
preambular language contained in article 6(3), which will inevitably limit its potentially
soothing effect to the application of the PPT.78
It should, however, be kept in mind that correctly predicting the manner in which
Serbian TAs will apply a certain provision is a very challenging endeavour. Based on previous
experience, there are reasons to fear that the Serbian TAs might apply interpretation which
73
Art. 16(2) of the Constitution of the Republic of Serbia, Official Gazette of the Republic of Serbia, no. 98/2006
(hereinafter: the Serbian Constitution).
74
Art. 194(4) of the Serbian Constitution.
75
Art. 194(5) of the Serbian Constitution.
76
See also: David Duff, “Tax Treaty Abuse and the Principal Purpose Test – Part I“, Canadian Tax Journal/Revue Fiscale
Canadienne, Vol. 66, No. 3, 2018, n. 91, p. 637.
77
Para. 173 of the Commentary on art. 29 of the 2017 OECD MC.
78
So far, only 24 out of 64 CTAs will be modified so as to include the optional preambular language.
706
differs from the globally established practice. It is thus important that the warnings from
academia have been conveyed timely.79
Resolution of tax disputes
As previously explained, by signing the MLI Serbia agreed to update the MAP article in all
its CTAs in line with the BEPS Action 14 minimum standard but it refused to opt in for the
mandatory binding arbitration. Acting in line with the BEPS recommendations, Serbia’s
Ministry of Finance published the official guidance on MAP (hereinafter: MF Guidelines on
MAP) in April 2019 so as to provide taxpayers with clear rules and necessary information
regarding the initiation and conduct of MAP.80 The MF Guidelines on MAP specify formal
requirements which have to be fulfilled for the taxpayer’s request to be considered by the
competent authorities, provide examples of cases in which MAP may be initiated,81 define
deadlines for competent authorities’ actions (which are not prescriptive and, therefore,
not enforceable by the taxpayer) and contain other relevant information. Additionally, the
Ministry of Finance finally published Serbia’s official MAP profile on the OECD website.82
With respect to the MAP peer review and monitoring process, the launch of the first stage
peer review has been scheduled for April 2019, but the report on it has not yet been adopted
by the Inclusive Framework.83
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No. 220, National Institute of Public Finance and Policy, New Delhi 2018, http://nipfp.org.
in/publications/working-papers/1813/, accessed: 6 June 2019.
US Model Convention 2016, https://www.treasury.gov/resource-center/tax-policy/treaties/
Documents/Treaty-US%20Model-2016.pdf, 6 June 2019.
Van Raad, Kees: “General Report” in Recognition of Foreign Enterprises as Taxable Entities, IFA
Cahier Vol. 73a, Sdu Uitgevers, The Hague 1988.
Živković, Lidija: „Postupak zajedničkog dogovaranja u svetlu BEPS akcionog plana“, Harmonius
2017.
Legislative acts
Constitution of the Republic of Serbia, Official Gazette of the Republic of Serbia, no. 98/2006.
Company Law (Zakon o privrednim društvima), Official Gazette of the Republic of Serbia, no.
36/2011, 99/2011, 83/2014 – as amended, 5/2015, 44/2018 and 95/2018.
Corporate Income Tax Law (Zakon o porezu na dobit pravnih lica), Official Gazette of the
Republic of Serbia, no. 25/2001, 80/2002, 80/2002 – as amended, 43/2003, 84/2004,
18/2010, 101/2011, 119/2012, 47/2013, 108/2013, 68/2014 – as amended, 142/2014, 91/2015
– authentic interpretation, 112/2015, 113/2017, 95/2018.
Law on Tax Procedure and Tax Administration (Zakon o poreskom postupku i poreskoj
administraciji), Official Gazette of the Republic of Serbia no. 80/2002, 84/2002 – corr.,
23/2003 – corr., 70/2003, 55/2004, 61/2005, 85/2005 – as amended, 62/2006 – as
amended, 63/2006 – corr. as amended, 61/2007, 20/2009, 72/2009 – as amended, 53/2010,
101/2011, 2/2012 – corr., 93/2012, 47/2013, 108/2013, 68/2014, 105/2014, 91/2015 – authentic
interpretation, 112/2015, 15/2016 and 108/2016, 30/2018 and 95/2018.
The Law on Confirmation of the Multilateral Convention to Implement Tax Treaty Related
Measures to Prevent Base Erosion and Profit Shifting (Zakon o potvrđivanju Multilateralne
konvencije za primenu mera koje se u cilju sprečavanja erozije poreske osnovice i
premeštanja dobiti odnose na poreske ugovore), Official Gazette of the Republic of Serbia –
International treaties, no 3/2018.
The Stabilization and Association Agreement between the European Communities and their
member states and the Republic of Serbia.
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Singapore
Branch reporters
Robin NG1
Yves Van Brussel2

One key tenet that guides Singapore’s comprehensive avoidance of double taxation
agreement policy is the belief that trade and investment are important for the growth of
the global economy and that tax treaties promote international trade and investment by
increasing legal certainty. In line with these beliefs, Singapore has concluded a wide network
of bilateral tax treaties (91 signed tax treaties of which 86 are in force, at 30 June 2019).
The text of older tax treaties may differ from the current OECD MTC in some aspects.
Singapore is a member of the Inclusive Framework on BEPS but is not a member country of
the OECD. However, the tax treaties concluded by Singapore in recent years are largely based
on the OECD MTC, with some modifications. Singapore has provided its position on the main
areas of differences in the OECD Commentary since the 2014 edition of the OECD MTC.
Prior to signing the MLI, Singapore already avails for various domestic and treaty-based
doctrines, provisions and practices. Some tax treaties contain a preamble that meets the BEPS
minimum standard. The Singapore Income Tax Act provides for specific and general anti-
avoidance rules. While there is Singapore case law in relation to the domestic application of
the GAAR, there is no Singapore case law that deals specifically with the interaction between
domestic anti-abuse provisions and abusive use of tax treaties. One key feature in some of
Singapore’s older tax treaties is the inclusion of a limitation of relief article which is part of
Singapore’s older tax treaty policy and now considered obsolete by Singapore. Another fairly
common anti-abuse provision found in Singapore’s tax treaties is the inclusion of a main
purpose test. Singapore has in place a stringent administrative procedure and backend checks
with respect to issuing a certificate of residence to Singapore tax residents. All of Singapore’s
tax treaties provide for the possibility for taxpayers to access the MAP.
Singapore signed and ratified the MLI on 7 June 2017 and 21 December 2018, respectively.
The MLI entered into force for Singapore on 1 April 2019. In Singapore’s instrument of
ratification for the MLI deposited on 21 December 2018, Singapore has listed 86 tax treaties
that it intends to cover under the MLI. This is approximately 94.5% of all the signed tax
treaties. The five tax treaties that were excluded by Singapore are the DTAs entered into
with Brazil, Gabon, Greece, the Republic of Korea and Chinese Taipei. Out of the 86 tax treaties
listed by Singapore, only 61 are expected to be modified by the MLI when both parties to the
tax treaty ratify the MLI. This is approximately 70.9% of the tax treaties listed by Singapore
or 67% of all the tax treaties entered into by Singapore. Singapore has opted to apply the
BEPS minimum standards (i.e. articles 6, 7 and 16), option B of article 13, allows jurisdictions
to make corresponding adjustments and consult with one another in the event of a transfer
1
Robin NG, LLM (Hons) International Tax Law Vienna, Director at the Inland Revenue Authority of Singapore..
2
Yves Van Brussel, LLM (Hons) International Tax Law Vienna, Attorney-at-Law (Belgium).
The reporters are grateful to Nico Derksen, Chew Wee Ling and Doris Pok for their support in writing this report.
The views expressed are those of the reporters only.
IFA © 2020 711

Singapore
pricing adjustment (i.e. article 17), and has also opted for mandatory binding arbitration (i.e.
articles 18-26). As at 30 June 2019, the MLI provisions, with an exception for the MAP and
arbitration provisions, have not entered into effect for any of Singapore’s tax treaties. It is
therefore premature to assess the impact of the MLI on tax compliance, administration and
economic activities. The actual impact of the MLI on Singapore’s tax treaties depends on the
final choices made or to be made by the other treaty partners, thus currently leaving some
uncertainty for taxpayers and tax administrations. Singapore has generally opted out of all
the other optional provisions. As providing tax certainty and reducing business compliance
costs are key tenets of Singapore’s tax treaty policy, Singapore’s MLI position should not be
viewed as a surprise as the other optional provisions are anti-abuse provisions which may
inevitably introduce ambiguity to the ability of legitimate businesses to rely on the provisions
of the tax treaties. Singapore’s position on the MLI is also aligned with the positions and
reservations expressed in the 2017 edition of the OECD MTC. It is the view of the reporters
that the provisions of the MLI will likely be weaved into new bilateral tax treaties by the
government and it is unlikely that Singapore will rely on the MLI to amend the terms of new
tax treaties negotiated and concluded after the signature of the MLI.
Singapore’s legal system is based on English common law. Singapore adopted a dualist
view with respect to international and domestic law. A treaty concluded by the government
on behalf of Singapore does not impose duties or create rights that are enforceable in a court
unless that treaty is transposed into primary or subsidiary domestic legislation. As regards tax
treaties and the MLI, parliament has delegated the authority to conclude tax treaties and the
MLI as well as to implement tax treaties and the MLI into domestic law, to the government.
The website of the Singapore tax authorities contains a separate section dedicated to the
MLI and Singapore’s position. The Singapore tax authorities provide a detailed overview of
the tax treaties that are impacted by the MLI, the date of entry into force and effect of the MLI
for each tax treaty, Singapore’s position under the MLI as well as answers to frequently asked
questions. The MLI binds Singapore with respect to the impact of the MLI provisions on a tax
treaty (provided that there is a match and that the MLI has entered into force for both treaty
partners). The text of the MLI itself is not a legal basis from which rights and obligations can
be derived because the MLI itself was not implemented into domestic law. The text of the MLI
as well as the explanatory statement to the MLI can however be consulted for interpretation
purposes. A court can consider the OECD MTC, OECD Commentary and BEPS action reports
during its decision making process. On multiple occasions courts have referred to and cited
OECD publications in their decisions. It follows that the OECD publications can be considered
to be relevant and to have a high persuasive value.
Tax professionals generally consider the MLI as one of the most remarkable, broadly
supported and tangible outcomes of the OECD BEPS project. It is however still too early to
fully evaluate the impact of the MLI on taxpayers’ behaviours with respect to cross-border
transactions that involve the application of tax treaties. The PPT will make it increasingly
relevant in the future to demonstrate business purposes of an arrangement or transaction,
and to ensure that there is adequate substance to achieve these purposes. Investors carrying
out cross-border transactions and claiming benefits provided for in a tax treaty should review
whether their set-up meets the requirements of the post-MLI era. The broad consensus
between countries to improve the MAP (whether or not reinforced with mandatory binding
arbitration) and the related provisions with respect to a downward corresponding adjustment
appear to be beneficial for the Singapore taxpayer
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Tax Treaty Network
1.1. Introduction
1.2. Background to MLI
One key tenet that guides Singapore’s comprehensive avoidance of double taxation
agreement (DTA) policy is the belief that trade and investment are important for the growth
of the global economy. DTAs are important for promoting international trade and investment
as they improve certainty of tax positions. DTAs also eliminate double taxation that can arise
from cross-border transactions, thereby reducing costs of doing business. Finally, a DTA
also provides an effective platform for dialogue and co-operation between tax authorities,
especially in the area of resolving cross-border tax disputes through the mutual agreement
procedure (MAP).
In line with these beliefs, Singapore has concluded a wide network of bilateral DTAs. As
at 30 June 2019, Singapore has signed a total of 91 DTAs, of which 86 are in force. The details
of the 91 signed DTAs are presented in the table below.3
45
No. Jurisdiction Date signed4 Date entered into force5

1 Albania#+ 23 November 2010 19 July 2011
2 Australia #+
11 February 1969 11 February 1969
3 Austria #+
30 November 2001 22 October 2002
4 Bahrain #^
18 February 2004 31 December 2004
5 Bangladesh #^
19 December 1980 22 December 1981
6 Barbados #+
15 July 2013 25 April 2014
7 Belarus #^
22 March 2013 27 December 2013
8 Belgium #+
06 November 2006 27 November 2008
9 Brazil^
07 May 2018 Not in force
10 Brunei #^
19 August 2005 14 December 2006
11 Bulgaria #+
13 December 1996 26 December 1997
3
The list excludes eight limited treaties dealing with income derived from air and shipping transport and two tax
information exchange agreements.
4
This date refers to the date of signing the original DTA. Subsequent protocol(s) may have been signed since the
first date of signing the original DTA. Please refer to the official list of DTAs on IRAS’ website at for the date of
signing for any subsequent protocol(s).
5
See footnote 4.
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Singapore

12 Cambodia#^ 20 May 2016 29 December 2017
13 Canada #+
6 March 1976 23 September 1977
14 People’s Rep. of China #+
11 July 2007 18 September 2007
15 Cyprus #+
24 November 2000 8 February 2001
16 Czech Republic #+
21 November 1997 21 August 1998
17 Denmark #+
3 July 2000 22 December 2000
18 Ecuador#^ 27 June 2013 18 December 2015
19 Egypt#+ 22 May 1996 27 January 2004
20 Estonia#+ 18 September 2006 27 December 2007
21 Ethiopia#^ 24 August 2016 08 December 2017
22 Fiji#+ 20 December 2005 28 November 2006
23 Finland #+
7 June 2002 27 December 2002
24 France #+
15 January 2015 1 June 2016
25 Gabon 28 August 2018 Not in force
26 Georgia #+
17 November 2009 28 July 2010
27 Germany #
28 June 2004 12 December 2006
28 Ghana #^
31 March 2017 12 April 2019
29 Greece 30 May 2019 Not in force
30 Guernsey #+
6 February 2013 26 November 2013
31 Hungary #+
17 April 1997 18 December 1998
32 India #+
24 January 1994 27 May 1994
33 Indonesia #+
8 May 1990 25 January 1991
34 Ireland #+
28 October 2010 8 April 2011
35 Isle of Man #+
21 September 2012 2 May 2013
36 Israel #+
19 May 2005 6 December 2005
37 Italy#+
29 January 1977 12 January 1979
38 Japan #+
9 April 1994 28 April 1995
39 Jersey #+
17 October 2012 2 May 2013
40 Kazakhstan #+
19 September 2006 14 August 2007
41 Kenya #^
12 June 2018 Not in force
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42 Rep. of Korea@ 6 November 1979 13 February 1981
43 Kuwait #+
21 February 2002 2 July 2003
44 Laos#^
45 Latvia #+
6 October 1999 18 February 2000
46 Libya #^
8 April 2009 23 December 2010
47 Liechtenstein #+
27 June 2013 25 July 2014
48 Lithuania#+ 18 November 2003 28 June 2004
49 Luxembourg#+ 9 October 2013 28 December 2015
50 Malaysia#+ 5 October 2004 13 February 2006
51 Malta#+ 21 March 2006 29 February 2008
52 Mauritius#+ 19 August 1995 7 June 1996
53 Mexico #+
9 November 1994 8 September 1995
54 Mongolia #^
10 October 2002 22 October 2004
55 Morocco #+
9 January 2007 15 January 2014
56 Myanmar #^
23 February 1999 26 June 2009
57 Netherlands #+
19 February 1971 3 September 1971
58 New Zealand #+
21 August 2009 12 August 2010
59 Nigeria #+
2 August 2017 3 August 2018
60 Norway #
19 December 1997 17 April 1998
61 Oman #^
6 October 2003 7 April 2006
62 Pakistan #+
13 April 1993 6 August 1993
63 Panama #+
18 October 2010 19 December 2011
64 Papua New Guinea #+
19 October 1991 20 November 1992
65 Philippines #^
1 August 1977 18 November 1977
66 Poland #+
4 November 2012 6 February 2014
67 Portugal #+
7 September 1999 16 March 2001
68 Qatar #+
28 November 2006 5 October 2007
69 Romania #+
70 Russian Federation #+
9 September 2002 16 January 2009
71 Rwanda #^
26 August 2014 15 February 2016
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Singapore

72 San Marino#+ 11 December 2013 18 December 2015
73 Saudi Arabia #+
3 May 2010 1 July 2011
74 Seychelles #+
9 July 2014 18 December 2015
75 Slovak Republic #+
9 May 2005 12 June 2006
76 Slovenia #+
8 January 2010 25 December 2010
77 South Africa #+
30 November 2015 16 December 2016
78 Spain#+ 13 April 2011 2 February 2012
79 Sri Lanka#^ 3 April 2014 31 December 2017
80 Sweden# 17 June 1968 14 February 1969
81 Switzerland# 24 February 2011 1 August 2012
82 Taiwan (Chinese Taipei)^ 30 December 1981 14 May 1982
83 Thailand #^
11 June 2015 15 February 2016
84 Tunisia #
27 February 2018 Not in force
85 Turkey #+
9 July 1999 27 August 2001
86 Ukraine #+
26 January 2007 18 December 2009
87 United Arab Emirates #+
1 December 1995 30 August 1996
88 United Kingdom #+
12 February 1997 26 December 1997
89 Uruguay #+
15 January 2015 14 March 2017
90 Uzbekistan #^
24 July 2008 28 November 2008
91 Vietnam #^
2 March 1994 9 September 1994
#
Listed by Singapore as DTAs intended to be covered by the MLI at the point of ratifying the MLI
^
Not a signatory to the MLI as at 30 June 2019
+
DTAs that are expected to be modified by the MLI when both parties to the DTA ratify the MLI
@ A revised DTA was signed and pending ratification
These 91 DTAs were signed by Singapore over the last 50 years. The two oldest DTAs being
the DTAs with Sweden and Australia were concluded during the early years of Singapore’s
independence.6 The text of these two DTAs, and also some other older DTAs, may differ from
the current OECD Model Tax Convention (MTC) in some aspects. Singapore is a member of
the Inclusive Framework on BEPS but is not a member country of the OECD. However, the
DTAs concluded by Singapore in recent years are largely based on the OECD MTC, with some
modifications. There are some differences between Singapore’s DTAs and the OECD MTC, and
Singapore has provided its position on the main areas of differences in the OECD Commentary
6
Protocols were also concluded to amend and update these two DTAs over the years.
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NG & Van Brussel
since the 2014 edition of the OECD MTC. The Inland Revenue Authority of Singapore (IRAS)
has also published an e-Tax Guide on DTAs aimed at providing taxpayers with an overview of
its policy on DTAs, and with the interpretation and application of Singapore’s DTAs.7
The key differences between Singapore’s DTA policy position and the 2017 edition of the
OECD MTC are summarised in the table below.
OECD MTC articles Singapore’s positions on the text of the 2017 edition of the OECD
MTC (excluding Singapore’s position on the OECD Commentary)
Article 1 – Singapore reserves its position on paragraphs 2 and 3.
Persons covered
Article 2 – Since Singapore does not impose tax on capital, Singapore
Taxes covered reserves its right not to include any reference to such tax in
paragraph 1.
Article 3 – Singapore reserves the right not to include the definitions of
General definitions “enterprise” and “business” in paragraph 1 because Singapore
reserves the right to include an article concerning the taxation of
independent personal services.
Article 4 – Singapore reserves the right not to include the second sentence of
Resident paragraph 1 in its agreements.
Singapore reserves the right to replace subparagraph (d) of

paragraph 2 by: “d) in any other case, the competent authorities
of the Contracting States shall settle the question by mutual
agreement.”
To determine the residence of a dual resident person, other than

an individual, Singapore reserves the right to include a provision
that will refer to the person’s place of effective management
and, if that cannot be determined, the provision will require the
matter to be determined by mutual agreement.
7
IRAS e-Tax Guide – Avoidance of Double Taxation Agreements (Second Edition), published on 15 June 2018 and
available at: .
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Singapore
Article 5 – With regard to paragraph 3, Singapore reserves the right to
Permanent treat an enterprise as having a permanent establishment if the
establishment enterprise:
–– carries on supervisory activities in connection with a building
site or a construction, assembly, or installation project that
constitute a permanent establishment under paragraph 3;
–– furnishes services through employees or other personnel
engaged by the enterprise for such purpose but only where
the employees or other personnel are present in the state for
the same project or a connected project for a period or periods
aggregating more than a period to be negotiated.
With regard to paragraph 5, Singapore reserves the right to use

the version of paragraph 5 included in the MTC immediately
before the 2017 update of the MTC.
With regard to paragraph 6, Singapore reserves the right to use

the version of paragraph 6 included in the MTC immediately
before the 2017 update of the MTC.
Article 7 – Singapore reserves the right to use the previous version of article
Business profits 7, i.e. the version that was included in the MTC immediately
before the 2010 update, subject to its positions on the previous
version.
Singapore reserves the right to maintain in its DTAs a specific

article dealing with the taxation of “independent personal
services”. Accordingly, a reservation is also made with respect
to all the corresponding modifications in other articles and the
OECD Commentary, which have been modified as a result of the
elimination of article 14.
Singapore reserves the right to add a paragraph to clarify that

expenses that will be allowed as deductions by a contracting
state shall include only expenses that would be deductible if the
permanent establishment were a separate enterprise of that
contracting state.
Article 10 – With regard to paragraph 2, Singapore reserves:
Dividends –– its position on the period test included in subparagraph (a) of
paragraph 2;
–– the right not to include the requirement for the competent
authorities to settle by mutual agreement the mode of
application of paragraph 2.
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Article 11 – Singapore reserves the right not to include the requirement for
Interest the competent authorities to settle by mutual agreement the
mode of application of paragraph 2.
Article 12 – With regard to paragraph 1, Singapore reserves the right to tax
Royalties royalties at source.
With regard to paragraph 2, Singapore reserves the right, in order
to fill what it considers as a gap in the article, to add a provision
defining the source of royalties by analogy with the provisions of
paragraph 5 of article 11, which deals with the same issue in the
case of interest.
Article 13 – Singapore reserves its position on the period test included in
Capital gains paragraph 4.
Article 21 – Singapore reserves its position on this article as it wishes
Other income to maintain the right to tax income arising from sources in
Singapore.
Article 22 – Singapore reserves its position on the article if and when it
Capital imposes taxes on capital.
Article 24 – With regard to paragraph 1, Singapore reserves:
Non-discrimination –– its position on the second sentence;
–– the right to add a provision to state that the granting of tax
incentives to its nationals designed to promote economic or
social developments shall not be construed as discriminatory.
Singapore reserves the right not to insert paragraph 2 in its DTAs.
Singapore reserves its position on paragraph 4, in the case of
interest paid to non-residents where withholding tax has not
been deducted.
With regard to paragraph 6, Singapore reserves the right to
restrict the scope of the article to the taxes covered by a DTA.
Article 25 – With regard to paragraph 4, Singapore reserves the right to omit
Mutual agreement the words “including through a joint commission consisting of
procedure themselves or their representatives”.
Singapore reserves the right to modify paragraph 5 in its DTAs.

Article 29 – Singapore reserves its position on paragraph 8.
Entitlement to
benefits
Article 30 – Singapore reserves its position on this article.
Territorial extension
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Preamble
Three recently signed DTAs (i.e. the DTAs with Brazil, Gabon and Greece) contain a preamble
that meets the BEPS minimum standard provided for in article 6(1) MLI. However, the
preambles found in other DTAs generally only provide for two objectives – (i) avoidance of
double taxation, and (ii) prevention of fiscal evasion with respect to taxes on income. There
are a few exceptions which are set out below.
No. Jurisdiction Remarks

1 Germany Excludes (ii), but includes an additional point on promoting
mutual economic relations.
2 Libya Includes an additional point on promoting and developing
economic relations and cooperation.
3 Russia Includes an additional point on promoting economic
cooperation.
4 Rwanda Includes an additional point on promoting and strengthening
economic relations and greater cooperation.
5 Switzerland Excludes (ii).
6 Chinese Taipei No preamble.
Domestic anti-avoidance provisions to deal with abuse of tax treaties
The Singapore Income Tax Act8 (SITA) provides for specific and general anti-avoidance rules.9
The general anti-avoidance provisions (GAAR) is provided for in section 33 SITA and it applies
to all arrangements which directly or indirectly:
–– alter the incidence of any tax which is payable by or which would otherwise have been
payable by any person;
–– relieve any person from any liability to pay tax or to file a Singapore tax return; or
–– reduce or avoid any liability imposed or which would otherwise have been imposed on
any person.
To counteract any tax advantage obtained or obtainable by a person from or under the
arrangement, the IRAS is empowered to make whatever adjustments it considers appropriate
in the circumstances. For example, the IRAS may:
–– disregard the arrangement; or
–– vary the arrangement; and
–– make adjustments which he considers appropriate, including the computation or re-
computation of gains or profits, or the imposition of liability to tax.
8
Income Tax Act (ch. 134), revised edition 2014.
9
Some examples of the specific anti-abuse provisions provided for in the SITA are ss. 14(2), 20(1A), 23(4), 24, 30,
31, 32, 34D, 37(12), 37A and 53.
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While there is Singapore case law in relation to the domestic application of the GAAR, there
is no Singapore case law that deals specifically with the interaction between domestic
anti-abuse provisions and abusive use of DTAs.10 Nevertheless, Singapore did not make any
reservation to the OECD Commentary to article 1 of the 2017 edition of the OECD MTC which
includes a part discussing “Improper use of the Convention”.11 Singapore has also published
an IRAS e-Tax Guide on the GAAR aimed at providing taxpayers with an overview of what
Singapore considers as abusive and tax avoidance cases.12
Treaty-based anti-avoidance provisions to deal with abuse of tax treaties
One key feature in some of Singapore’s older DTAs is the inclusion of a limitation of relief
article.13 Put in the Singapore context, the article states that, where Singapore laws provide
that only the foreign-sourced income that is remitted to or received in Singapore is subject
to tax in Singapore, the benefits of the DTA for a Singapore resident shall apply only to the
amount of foreign-sourced income that is received in or remitted to Singapore. The intention
of such provision is to require Singapore investors to repatriate profits and returns from their
foreign investments, so as to enjoy the tax treaty benefits (e.g. reduced tax rate or exclusive
residence state taxation). In DTAs where this article exists, Singapore has clarified in its e-Tax
guide on DTAs that this provision only applies to income that is regarded as foreign-sourced
under Singapore law.14 Based on case law, income derived from a business carried on in
Singapore is regarded as Singapore-sourced, even if the income may be paid by a person
outside Singapore or is paid in respect of work done outside Singapore. The taxation of such
business income in Singapore is not dependent on the receipt of the income in Singapore
(i.e. tax on accrual and arising basis and not upon remittance) and the article does not apply
to such income.
Singapore has however, indicated in the e-Tax guide that its tax policies have changed,
and it considers the limitation of relief article to be obsolete and counter-productive for
cross-border investment. This is because in 2004, Singapore introduced the Foreign Sourced
Income Exemption (“FSIE”) scheme to simplify its tax system and to encourage foreign
income repatriation. Before the introduction of the scheme, all foreign sourced income
received in Singapore is liable to tax and foreign tax credit is available where the income
suffered foreign tax. However, under the FSIE scheme, certain types of the more commonly
received foreign income (e.g. dividends) are exempt from tax upon remittance, subject to the
recipient meeting specified conditions. The policy intent of the FSIE was to mirror the effect
of a foreign tax credit system and to relieve double taxation. This is so that the administrative
and compliance burden imposed on both taxpayers and IRAS on tracking and computing the
applicable foreign tax credit could be relieved. If the operation of the FSIE regime causes the
application of limitation of relief article to apply, it triggers an unintended consequence. In
10
See for example, the landmark case CIT v AQQ and another appeal [2014] SGCA 15.
11
For a more in depth discussion on the topic, the reader can consult for example: V. Rajah, Anti-avoidance
measures of general nature and scope – GAAR and other rules – Singapore branch report, IFA Cahiers 2018 –
Volume 103A, p. 12.
12
IRAS e-Tax Guide – Income Tax: The General Anti-Avoidance Provision and its Application (First Edition),
published on 11 July 2016 and available at: .
13
See for example art. 22 in the DTA with Denmark and art. 24 in the DTA with India.
14
See footnote 7.
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Singapore
this regard, the presence of the limitation of relief article becomes counter-productive, as
the system to relieving double taxation should not result in the taxpayer being denied a
more favourable treaty benefit in the source state where the income is earned. The e-Tax
guide also explains that Singapore considers the effects of this article to be undesirable for
both Singapore and its DTA partners (being the investment destination), and it is Singapore’s
position to seek the removal of such provisions during the renegotiation of a DTA.
Another fairly common anti-abuse provisions found in Singapore’s DTA network is the
inclusion of a main purpose test. This test could be inserted to apply to some specific articles
of the DTA only, and/or as a general provision applicable to the entire DTA. This test generally
applies to the articles on dividends, interest, royalties, and capital gains. Some examples
(not exhaustive) of DTAs containing a main purpose test are the DTAs entered into with the
People’s Rep. of China, Ecuador, Estonia, Kazakhstan, Latvia, Mexico, New Zealand, Oman,
Poland, Romania, Russian Federation, United Kingdom and Ukraine.
In the DTA concluded with Brazil on 7 May 2018, Singapore has agreed to incorporate an
entitlement to benefits article that is modelled after article 29 OECD MTC. It is also in line
with the simplified limitation on benefits (SLOB) provision provided for under article 7(8)
MLI. This is the only DTA in Singapore’s DTA network that provides for a SLOB provision and
it appears that this is a deviation from Singapore’s DTA policy of only adopting the PPT. This
can be inferred from Singapore’s MLI position on the anti-treaty abuse provision chosen and
also the IRAS e-Tax Guide on DTAs which only provided an explanation on the PPT and how
Singapore would seek to apply the PPT provisions under its DTA network.
As regards the interpretation and application of the beneficial ownership concept usually
found in DTAs concluded by Singapore, there is no known Singapore case law that deals
specifically with the interpretation of the concept. In this regard, the guidance provided in
the OECD Commentary would be a useful reference that may be relied upon.
Administrative processes to deal with abuse of tax treaties
It is also noteworthy to mention that IRAS has in place a stringent administrative procedure
with respect to issuing a certificate of residence (COR) to Singapore tax residents.15 While
the application for a COR can be submitted electronically, IRAS has put in place stringent
backend checks that match and corroborate the information provided in the application for
a COR with information derived from various data sources in order to assess the eligibility
of the application for a COR. In many cases, the applicants will be required to explain and
provide further documentary evidence to support their application. Without a COR issued
by IRAS, a taxpayer would generally not be entitled to the benefits provided by Singapore’s
wide network of DTAs.
Hybrid Mismatch Arrangements
Singapore has reserved its position on article 1(2), (3) and article 4(3) OECD MTC, suggesting
that abuses relating to hybrid mismatches (i.e. mismatches resulting from use of transparent
entities and mismatches attributable to dual resident entities) have not been a concern
for Singapore. Notwithstanding that, Singapore has issued a IRAS e-Tax Guide on the tax
15
For a more detailed understanding of the conditions for issuing a COR, please consult https://www.iras.gov.sg.
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treatment of hybrid instruments in 2014, setting out the factors that will be considered by the
IRAS for determining the nature of a hybrid instrument and the corresponding tax treatment
for hybrid instruments that are characterised as debt or equity.16
Mutual Agreement Procedure, Corresponding Adjustments to Transfer Pricing Adjustments and

Arbitration
All of Singapore’s 91 DTAs provide for the possibility for taxpayers to access MAP. Only the DTA
with Mexico and Greece provide the possibility for issues that could not be resolved by MAP
to be submitted for arbitration. Out of the 91 signed DTAs, 13 DTAs do not contain a provision
according to which the contracting state is required to make a downward corresponding
adjustment following a transfer pricing adjustment in the other contracting state (i.e. a
provision similar to article 9(2) OECD MTC and article 17 MLI). These 13 DTAs are entered
into with Bangladesh, Brazil, Canada, Egypt, Hungary, Indonesia, Italy, Mexico, Mongolia,
Netherlands, Norway, Pakistan and Chinese Taipei.
Singapore has provided clear guidance on its website as well as in the IRAS e-Tax Guide
on DTAs on how its tax residents can gain access to MAP. There have been no known issues
or problems with regard to the Singapore competent authority denying MAP access for
justified cases and the peer review report on Singapore also did not flag any issues requiring
improvement.17 The IRAS does inform taxpayers of their point of view during a pre-filing
meeting. As regards the arbitration provision in the DTA with Mexico signed in 1994, the
scope of arbitration in this DTA differs from the new arbitration provisions provided for
under the MLI. The procedure for conducting arbitration has not been established by the
competent authorities and this provision is not operational in practice.18 As regards making
corresponding adjustments, there were also no known issues with regard to IRAS’ ability in
issuing amended assessments (i.e. downward adjustments) as there is no domestic time-
bar for the IRAS to discharging existing assessments. Section 74 SITA was also amended
in October 2017 to provide that additional assessments (i.e. upward adjustments) may be
made beyond the time-barred period in order to implement the outcomes reached in a MAP
agreement.
Singapore signed and ratified the MLI on 7 June 2017 and 21 December 2018, respectively.
The MLI entered into force for Singapore on 1 April 2019. Since the signing of the MLI in June
2017, Singapore has concluded seven new DTAs (status as at 30 June 2019). These are the
DTAs entered into with Brazil, Gabon, Greece, Kenya, Nigeria, Tunisia and the revised DTA
with the Republic of Korea.
16
IRAS e-Tax Guide – Income Tax Treatment of Hybrid Instruments, published on 19 May 2014 and available at: .
17
OECD (2018), Making Dispute Resolution More Effective – MAP Peer Review Report, Singapore (Stage 1): Inclusive
Framework on BEPS: Action 14.
18
For a more in depth discussion on the topic, the reader can consult for example: S. Phua, Dispute resolution
procedures in international tax matters – Singapore branch report, IFA Cahiers 2016 – Volume 101A, p. 620.
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Singapore
On 7 June 2017, the Ministry of Finance issued a press statement to announce the signing.19
The statement sets out Singapore’s commitment to the principle that profits should be
attributable to the jurisdiction where the substantial economic activities giving rise to the
profits are conducted. It also makes clear that Singapore does not condone the abuse of DTAs,
and will adopt the following provisions under the MLI:
–– BEPS minimum standard for preventing treaty abuse (articles 6(1) and 7(1) MLI): This consists
of (i) a statement of intent that a DTA is to eliminate double taxation without creating
opportunities for non-taxation or reduced taxation through tax evasion or avoidance, and
(ii) the adoption of a general anti-abuse rule, commonly known as the PPT.
–– BEPS minimum standard for enhancing dispute resolution (article 16 MLI): When a Singapore
resident taxpayer encounters taxation which is not in accordance with the intended
application of the DTA provisions, the taxpayer can seek assistance from IRAS to contact
the treaty partner and to resolve the dispute.
–– Providing more certainty and timeliness to taxpayers for cross-border disputes (articles 18-
26 MLI): Singapore has opted for the mandatory binding arbitration provisions to be
included in its DTAs as they provide certainty to taxpayers that treaty-related disputes
will be resolved within a specified timeframe.
On 1 April 2019, the MLI entered into force for the DTAs entered into with Australia, Austria,
France, Isle of Man, Israel, Japan, Jersey, Lithuania, Malta, New Zealand, Poland, Slovak
Republic, Slovenia and the United Kingdom. The MLI provisions will be applicable as from 1
January 2020 with respect to taxes withheld at source, and with respect to other taxes than
those withheld at source, for income derived or received in a basis period beginning on or
after 1 October 2019. For a Singapore company with a financial year that ends per 31 December
(calendar year), the MLI will have broad effect as from 1 January 2020. The MLI provision
dealing with MAP and mandatory arbitration will in some cases already be applicable as
from 1 April 2019.
As at 30 June 2019, the MLI provisions, with an exception for the MAP and arbitration
provisions, have not entered into effect for any of Singapore’s covered DTAs (i.e. CTAs). As
the MLI does not have broad effect on covered DTAs yet, it is premature to assess the impact
of the MLI on tax compliance, administration and economic activities. There were also no
publicly known economic and budgetary impact analyses performed with respect to the
impact of the MLI on Singapore.
1.3.2. Covered Tax Agreements
As at 30 June 2019, Singapore has 91 signed DTAs. At the time of replying to the BEPS Action 6
peer review questionnaire, Singapore had provisionally listed 73 DTAs as CTAs.20 In Singapore’s
instrument of ratification for the MLI deposited on 21 December 2018, Singapore has listed
86 DTAs that it intends to cover under the MLI. This is approximately 94.5% of all the signed
DTAs. The five DTAs that were excluded by Singapore are the DTAs entered into with Brazil,
Gabon, Greece, Republic of Korea and Chinese Taipei. The excluded DTAs are generally newly
concluded DTAs where the terms of the new or revised DTAs already meet the required BEPS
19
Press statement accessed on 30 June 2019: .
20
BEPS: Action 6, p. 209.
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minimum standards and/or Singapore’s preferred position under the MLI (Brazil, Gabon,
Greece, and Rep. of Korea) or DTAs for which the contracting jurisdictions are likely to be
engaged in bilateral negotiations (Chinese Taipei).
As regards whether Singapore’s DTA partners have listed their DTA with Singapore to
be covered by the MLI, 22 of Singapore’s DTA partners are not signatories to the MLI as at
30 June 2019. Five DTA partners who are signatories to the MLI (Germany, Norway, Sweden,
Switzerland and Tunisia) have also excluded the DTA with Singapore from the scope of the
MLI. In this regard, out of the 86 DTAs listed by Singapore, only 61 of DTAs are expected to be
modified by the MLI when both parties to the DTA ratify the MLI (see table in section 1.2.1).
This is approximately 70.9% of the DTAs listed by Singapore or 67% of all the DTAs entered
into by Singapore.
Other than opting to implement the BEPS minimum standards that are part of the MLI (i.e.
BEPS actions 6 and 14 which are translated into articles 6, 7 and 16 MLI), Singapore’s position
on the other MLI provisions is summarised in the table below.
Selected MLI provisions Singapore’s position and reservations

Article 3 – Transparent Singapore reserves the right for the entirety of article 3 MLI
Entities not to apply to its CTAs.
Article 4 – Dual Resident Singapore reserves the right for the entirety of article MLI
Entities not to apply to its CTAs.
Article 5 – Application of Singapore has not chosen one of the options provided for
Methods for Elimination of in article 5 MLI and also reserves the right for the entirety of
Double Taxation article 5 MLI not to apply to its CTAs.
Article 6 – Purpose of a Singapore opted to include a statement in the preamble to
Covered Tax Agreement reflect a desire to further develop economic relationship or
enhance cooperation in tax matters provided for in article
6(3) MLI.
Article 7 – Prevention of Singapore has also opted for the discretionary relief
Treaty Abuse provision of article 7(4) MLI.
Singapore however has neither opted in for the SLOB

provisions in articles 7(8) to (11) MLI nor agrees for its treaty
partners to apply the SLOB in article 7(7)(b) MLI. Singapore
has also not opted for the option that PPT will serve as an
interim measure while intending to adopt a LOB provision
in article 7(17)(a) MLI.
Article 8 – Dividend Transfer Singapore reserves the right for the entirety of article 8 MLI
Transactions not to apply to its CTAs.
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Singapore

Article 9 – Capital gains Singapore reserves the right for article 9(1) MLI not to apply
from Alienation of Shares or to its CTAs.
Interests of Entities Deriving
their Value Principally from
Immovable Property
Article 10 – Anti-abuse Singapore reserves the right for the entirety of article 10
Rule for Permanent MLI not to apply to its CTAs.
Establishments Situated in
Third Jurisdiction
Article 11 – Application of Singapore reserves the right for the entirety of article 11 MLI
Tax Agreements to Restrict a not to apply to its CTAs.
Party’s Right to Tax its Own
Residents
Article 12 – Artificial Singapore reserves the right for the entirety of article 12 MLI
Avoidance of Permanent not to apply to its CTAs.
Establishment Status
through Commissionaire
Arrangements and Similar
Strategies
Article 13 – Artificial Singapore reserves the right for the anti-fragmentation
Avoidance of Permanent rule of article 13(4) MLI not to apply to its CTAs and chooses
Establishment Status to apply option B under article 13(1) MLI.
through the Specific Activity
Exemptions
Article 14 – Splitting-up of Singapore reserves the right for the entirety of article 14 not
Contracts to apply to its CTAs.
Article 15 – Definition of a Singapore reserves the right for the entirety of article 15 not
Person Closely Related to an to apply to its CTAs to which the reservations described in
Enterprise article 12(4), article 13(6)(a) or (c), and article 14(3)(a) MLI
apply.
Article 16 – Mutual Singapore reserves the right for the first sentence of article
Agreement Procedure 16(1) MLI not to apply to its CTAs on the basis that it intends
to meet the minimum standard by ensuring that under
each of its CTAs (other than a CTAs that permits a person
to present a case to the competent authority of either
contracting states), the person may present the case to the
competent authority of the contracting state of which the
person is resident, and the competent authority of that
contracting state will implement a bilateral notification or
consultation process with the competent authority of the
other contracting state for cases in which the competent
authority to which the mutual agreement procedure
case was presented does not consider the objection to be
justified.
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NG & Van Brussel

Article 17 – Corresponding Singapore opted to include the provision in article 17(1) MLI
Adjustments to allow jurisdictions to make corresponding adjustments
and consult with one another in the event of a transfer
pricing adjustment.
Articles 18 to 26 – Mandatory Singapore opted to apply Part VI of the MLI, which provides
Binding Arbitration and its for the application of mandatory binding arbitration
related provisions provisions to its CTAs.
Singapore made a reservation under articles 19(12)(a)

and (b) MLI, meaning that it will not allow arbitration for
cases (or will terminate arbitration if already accepted
for arbitration) where a decision on the issue has been
rendered (or is rendered during the arbitration process) by
a court or administrative tribunal of either jurisdiction.
Singapore applies the final offer or baseball arbitration

as the default mode of arbitration as provided for in
article 23(1) MLI. Singapore will also enter into discussion
with its treaty partner to reach an agreement on the
type of arbitration process to apply if the treaty partner
has reserved its right to apply the independent opinion
arbitration instead. Singapore has also opted to apply the
confidentiality provisions provided for in article 23(5) MLI.
Singapore opted to apply article 24(2) MLI according to

which jurisdictions are allowed to agree on a different
resolution within three calendar months after the
arbitration decision has been delivered.
Singapore has opted to apply the BEPS minimum standards (i.e. articles 6, 7 and 16), option
B of article 13, allows jurisdictions to make corresponding adjustments and consult with one
another in the event of a transfer pricing adjustment (i.e. article 17), and has also opted for
mandatory binding arbitration (i.e. articles 18-26).
Singapore has generally opted out of all the other optional provisions. As providing
tax certainty and reducing business compliance costs are key tenets of Singapore’s DTA
policy, Singapore’s MLI position should not be viewed as a surprise as the other optional
provisions are anti-abuse provisions which may inevitably introduce ambiguity to the ability
of legitimate businesses to rely on the provisions of the DTAs. This could potentially result
in uncertainty of tax positions and increased business compliance costs. In this regard, the
inclusion of such optional provisions are best left to bilateral negotiations, which will enable
Singapore to discuss with its DTA partners the intricacies of how these provisions are intended
to work and how they will interact with other domestic law provisions in practice. In this
regard, it is unlikely that the choices made by Singapore under the MLI will be reversed in
the near future.
As regards Singapore’s policy choice on the type and process for mandatory binding
arbitration, again, the policy choice can largely be inferred from its DTA policy. The inclusion
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Singapore
of arbitration provides an incentive for the competent authorities involved to resolve the case
in a pragmatic and reasonable manner before ceding control of the case to the appointed
arbitrators. The final offer arbitration provides more certainty compared to the independent
opinion arbitration as the arbitrators only have to choose from the two options proposed by
the two competent authorities. The cost involved for the arbitrators to decide on one of the
two options is likely to be lower compared to an independent opinion arbitration. As regards
the decision to exclude cases that have been decided by a court from arbitration, other than to
provide certainty and finality to position taken by the Court, it is for the purpose of preserving
the integrity of the Judiciary and to avoid having an executive branch of the government
overturning or setting aside the decisions of a court.
As at 30 June 2019, the MLI has been ratified by 29 jurisdictions, including Singapore.
Based on the final positions deposited by these 28 jurisdictions, a total of 25 of Singapore’s
DTAs will be amended by the MLI and a total of 83 provisions in these 25 DTAs will be modified
by the MLI.21 The provisions that will be modified for the other MLI signatories are largely
dependent on the signatories’ final positions deposited following their ratification of the
MLI and hence, other than those jurisdictions that have already ratified the MLI, the precise
number of provisions that may be modified by the MLI cannot be reliably determined at the
time of writing this report.
As Singapore does not publish its DTA negotiation programme or the DTAs under discussion
or negotiation, the number of DTAs that are currently under discussion or negotiation are
not known. However, seven new or revised DTAs were signed after Singapore signed the MLI
on 7 June 2017 (status as at 30 June 2019). These are the new DTAs entered into with Brazil,
Gabon, Greece, Kenya, Nigeria and Tunisia and the revised DTA with the Republic of Korea.
For the DTAs entered into with Kenya, Nigeria and Tunisia, while these DTAs were signed
after Singapore signed the MLI, Singapore has listed these DTAs as CTAs. This probably
means that the terms of the DTAs were negotiated and decided before the MLI was signed
by Singapore and that the DTAs need to be updated in order to meet the BEPS minimum
standards. As regards the new DTAs entered into with Brazil, Gabon, Greece, and the revised
DTA with the Republic of Korea, the key provisions of these DTAs are in line with the BEPS
minimum standards. In this regard, Singapore has not listed those DTAs as CTAs. With the
exception of the DTA entered into with Greece, the new DTAs entered into with Brazil, Gabon,
Kenya, Nigeria and the revised DTA with the Republic of Korea do not provide for mandatory
binding arbitration.
Based on the observed actions taken on the seven DTAs concluded after the signing of
the MLI, it appears that Singapore did not always incorporate the provisions of the MLI in
its bilateral DTAs when they were negotiated or renegotiated. The reporters believe that
the most probable reason is that the text of the bilateral DTAs were negotiated before the
MLI was agreed and finalised by the OECD. In this regard, Singapore will likely weave the
terms of the MLI into new bilateral DTAs that they may be negotiating, and it is unlikely that
21
Amendments resulting from one article of the MLI are counted as one provision, with the exception of Part VI
(Arbitration) which consists of eight articles but is considered as one provision.
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NG & Van Brussel
Singapore will rely on the MLI to amend the terms of new DTAs that are under negotiation
as the default policy.
Singapore’s position on the MLI is also aligned with the positions and reservations
expressed in the 2017 edition of the OECD MTC.
Singapore’s legal system is based on English common law. Singapore adopted a dualist view
with respect to international and domestic law. A treaty concluded by the government on
behalf of Singapore does not impose duties or create rights that are enforceable in a court
unless that treaty is transposed into primary or subsidiary domestic legislation.22 As long
as a treaty is not transposed into domestic law, it does not give rise to individual rights and
obligations in the domestic context.23 The legislative power rests with parliament.24 Only
parliament can transpose a treaty into domestic law and parliament in principle has the
power to debate or even refuse the implementation of a treaty into domestic law.
As regards DTAs, parliament has enacted section 49(1) SITA which provides that: “If the
Minister by order declares that arrangements specified in the order have been made with
the government of any country outside Singapore with a view to affording relief from double
taxation in relation to tax under [the SITA] and any tax of a similar character imposed by the
laws of that country, and that it is expedient that those arrangements should have effect, the
arrangements shall have effect notwithstanding anything in any written law.” Parliament
has thus clearly delegated the authority to conclude DTAs as well as to implement DTAs into
domestic law to the government. Arrangements made by the government in DTAs “shall have
effect notwithstanding anything in any written law”.
Following the conclusion of a DTA or a protocol to a DTA and upon receiving confirmation
that the other jurisdiction has completed its ratification process, the government enacts
an order declaring that the DTA or protocol, which is joined as a schedule to that order, has
effect.25 Following the publication of such an order in the Government Gazette, the DTA or
protocol has been transposed into domestic law.26 As from that moment, the DTA or protocol
becomes binding for the IRAS and its provisions can be invoked in a court.
As regards respecting Singapore’s obligations under the MLI with respect to each CTA,
section 49 SITA was amended by parliament in October 2017 to enable the government to
amend any DTA adopted in an earlier order by issuing another order.27 Hence, it is also clear
22
Singapore’s legislation can be consulted at Singapore Statutes Online: .
23
Public Prosecutor v Tan Cheng Yew and another appeal [2013] 1 SLR 1095 at 1107 and 1116.
24
S. 38 of the Constitution of the Republic of Singapore.
25
An Order is subsidiary legislation and the SITA is primary legislation according to s. 2 of the Interpretation Act
(ch. 1), revised edition 2002.
26
S. Phua, Dispute resolution procedures in international tax matters – Singapore branch report, IFA Cahiers 2016
– Volume 101A, p. 615.
27
Ss. 49(7) and (8) SITA.
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Singapore
that parliament has delegated its authority to amend the DTAs in accordance with the MLI
to the government.
The MLI was signed by Ms Sim Ann, the Senior Minister of State, Ministry of Culture,
Community and Youth, and Trade and Industry on 7 June 2017 on behalf of the government.
The position of Singapore under the MLI has been determined by the government and the
IRAS. The ratification of the MLI took place upon depositing the instrument of ratification with
the OECD on 21 December 2018. The ratification of the MLI, i.e. Singapore becoming a party
to the MLI and accepting to be bound by it as part of international law, does not require any
domestic procedure before the moment that the MLI enters into force for both parties to a CTA.
When both parties to a CTA ratify the MLI, Singapore’s domestic procedures involve the
government enacting and publishing an amending order in the Government Gazette. A DTA
will be amended in accordance with sections 49(7) and (8) SITA from the date stipulated in
the amending order (i.e. in accordance with the MLI provisions that are applicable to that
DTA following the choices made by both treaty partners) for domestic law purposes only.
The order is not a protocol to a DTA. Prior to issuing an amending order in which effect is
given to the MLI provisions on a DTA, Singapore consults with the competent authorities of
its treaty partner in order to agree on how the MLI will impact and modify the provisions of
that DTA. Due to the above approach, Singapore does not have to transpose the entire MLI
and its position thereon into domestic law.
The website of the IRAS contains a separate section dedicated to the MLI and Singapore’s
position.28 The IRAS provides a detailed overview of the DTAs that are impacted by the MLI,
the date of entry into force and effect of the MLI for each DTA, Singapore’s position under the
MLI as well as answers to frequently asked questions. Further, the DTAs that are impacted
by the MLI are marked with an asterisk in the list of DTAs concluded by Singapore provided
for on IRAS’ website.29
Singapore has taken into consideration the recommendations provided for in the
OECD “Guidance for the development of synthesised texts” but has not opted to follow the
recommendation to publish consolidated or synthesized texts of DTAs. This is because this
is not required from a legal point of view and the recommendation in the guidance is not
consistent with the longstanding administrative approach taken by the IRAS in explaining
changes to a DTA. In order to provide clarity and transparency to taxpayers and after an
amending order is gazetted, the IRAS inserts a note on the first page of a DTA published on
its website. In this note it is clarified that (i) both treaty partners have signed and ratified
the MLI on the relevant dates and (ii) that DTA has been modified by an amending order
entering into force on the relevant date and implementing the applicable provisions of the
MLI with respect to that DTA of which the details are provided in a new annex joined to the
DTA. This annex clarifies in great detail which provisions of a DTA are amended or replaced
and also contains provisions that are considered to be added to the DTA. As such, taxpayers
and tax professionals that consult a DTA, which is also a CTA, are immediately informed of
the effect of the MLI on that DTA.
The note and the annex have no legal value and are only made available for administrative
and clarifying purposes. An annex to a DTA is not a protocol to that DTA. While the OECD MLI
matching Database provides great value and clear information for tax professionals, it has
no legal value in Singapore.
28
https://www.iras.gov.sg/irashome/Quick-Links/International-Tax/Multilateral-Instrument/.
29
https://www.iras.gov.sg/irashome/Quick-Links/International-Tax/List-of-DTAs--limited-treaties-and-EOI-
arrangements/..
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NG & Van Brussel
As mentioned earlier, Singapore follows a dualist theory with respect to the interaction
between international and domestic law. Treaties entered into by the government have
however limited legal effect in a domestic context as long as they are not transposed into
domestic law. While the MLI obviously binds Singapore with respect to the impact of the MLI
provisions on a CTA (provided that there is a match and that the MLI has entered into force
for both treaty partners), the text of the MLI itself is not a legal basis from which rights and
obligations can be derived because the MLI itself was not implemented into domestic law.
The text of the MLI as well as the explanatory statement to the MLI can however be consulted
for interpretation purposes.
According to the knowledge of the reporters, the MLI has not given rise to interpretation
issues or publicly available interpretations made by the government or the judiciary. The
current practice with respect to the interpretation of DTAs arguably also applies to the MLI.
The reporters do not expect that interpretation issues with respect to the language of the MLI
will arise because English is one of the official languages in Singapore.30
The courts have presumed that it is parliament’s intention to respect international law which
includes Singapore’s treaty obligations.31 A court will generally seek to interpret a domestic
law provision in line with the treaty obligations accepted by Singapore, unless clear wording
in a domestic law provision requires otherwise (i.e. domestic law will prevail in such case).32
Singapore law prescribes a purposive interpretation of law and allows a court to make
recourse to “any material not forming part of the written law” as well as “any treaty or other
international agreement that is referred to in the written law” when interpreting a domestic
law provision.33 Section 9A(1) of the Interpretation Act provides that “an interpretation that
would promote the purpose or object underlying the written law (whether that purpose or
object is expressly stated in the written law or not) shall be preferred to an interpretation
that would not promote that purpose or object.”
Singapore has not signed the Vienna Convention on the Law of Treaties (VCLT). However,
it can be argued that Singapore’s approach to interpretation is consistent with the VCLT.
Singapore courts have also relied upon the VCLT to interpret treaties.34
As mentioned earlier, Singapore is not a member country of the OECD but has in recent
30
S. 153A of the Constitution of the Republic of Singapore.
31
See for example Tan Ah Yeo v Seow Teck Ming [1989] 1 SLR(R) 134 at 140.
32
The Sahand and other applications [2011] 2 SLR 1093 at 1107.
33
Ss. 9A(1), (2) and (3) of the Interpretation Act.
34
For an in depth discussion, see S. Phua, Dispute resolution procedures in international tax matters – Singapore
branch report, IFA Cahiers 2016 – Volume 101A, p. 615.
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years relied upon parts of the OECD MTC for its DTA policy except for some modifications.35
A court can consider the OECD MTC, OECD Commentary and BEPS Action Reports during
its decision-making process. Courts have on multiple occasions referred to and cited OECD
publications in their decisions.36 It follows that the OECD publications can be considered
relevant and to have a high persuasive value.
The e-Tax Guide on DTAs provides guidance on the interpretation and application of DTA
provisions and MLI provisions that are relevant for Singapore’s DTAs. The IRAS generally
refers to the OECD Commentary to the OECD MTC as a guide to the interpretation of DTA
provisions. From this guidance, it can be understood that Singapore already adopted the
position that a DTA must not be abused in ways that were never intended by the parties
prior to signing the MLI. The new preamble provided for in article 6 MLI and added to several
DTAs, further emphasises that parties to a DTA do not intend to create opportunities for non-
taxation or reduced taxation through tax evasion or avoidance. It is understood that adding
this preamble to a DTA only results in a clarification of IRAS’ existing understanding of a
DTA’s purpose. It is considered that the IRAS generally follows the method of ambulatory
DTA interpretation. This approach has however not been tested in a court.
The amendments required to give effect to the MLI provisions with respect to a DTA apply
as from the date specified in the relevant order. It follows that the effects of the MLI, and the
related interpretation questions, are only relevant as from the date the MLI has effect on a
DTA and that the MLI will not have retrospective effect.
Tax professionals generally consider the MLI as one of the most remarkable, broadly
supported and tangible outcomes of the OECD BEPS project. It is however still too early to
fully evaluate the impact of the MLI on taxpayers’ behaviours with respect to cross-border
transactions that involve the application of DTAs.
As mentioned earlier, Singapore is committed to the principle that profits should be
attributable to the jurisdiction where the substantial economic activities giving rise to the
profits are conducted and does not condone the abuse of DTAs. The MLI neatly fits into
Singapore’s position. This becomes apparent from the fact that 86 out of 91 DTAs were
notified as CTA by Singapore as well as from the strong and public commitment to adopt
the BEPS minimum standards. As underlined in the e-Tax Guide on DTAs, Singapore had
already taken the position prior to the MLI that DTAs should not be used in ways that were
not intended by the parties.
The actual impact of the MLI on Singapore’s DTAs depends on the final choices made or
to be made by the other treaty partners. The provision that is expected to have the biggest
impact is without a doubt the PPT. As from now, a subjective test applies. There exists limited
35
See 1.2.1 for Singapore’s position on the OECD MTC.
36
See for example, AXY and others v Comptroller of Income Tax (Attorney-General, intervener) [2017] SGHC 42. See
also S. Phua, Dispute resolution procedures in international tax matters – Singapore branch report, IFA Cahiers
2016 – Volume 101A, p. 616.
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guidance with respect to the interpretation of the PPT. Each country that applies a PPT can
give its own interpretation to this test. The final BEPS Action 6 report does provide for several
examples but those examples present rather clear-cut situations. The application of the PPT
in less clear cut situations will present a more concrete challenge for tax authorities. The PPT
in principle applies to all types of income but it can be expected that it will be predominately
used upon assessing whether a reduced withholding tax rate can be granted with respect
to dividend, interest and royalty payments as well as whether the article on the taxation
of capital gains can be relied upon. The PPT will make it increasingly relevant in the future
to demonstrate business purposes of an arrangement or transaction, and to ensure that
there is adequate substance to achieve these purposes. Investors carrying out cross-border
transactions and claiming benefits provided for in a DTA should review whether their set-up
meets the requirements of the post-MLI era.
The above should obviously not mean that structures involving holding and financing
companies will automatically be targeted by the PPT. The application of the PPT requires
a case-by-case assessment. It will, among others, be relevant to determine to what extent
the use of a special purpose vehicle results in a better position under a DTA as compared to
a structure that does not use such a vehicle. The level of economic activity and substance
required to fall out of the scope of the PPT can also differ between countries (e.g. a typical
source country may have stricter requirements as compared to a typical residence country).
The actual application of MLI provisions by the IRAS still remains uncertain and could lead
to potential discussions between the tax authorities and the taxpayer (e.g. the application of
the PPT in specific cases as well as the scope of discretionary relief). Specific guidelines issued
by the IRAS and international guidance could resolve part of this uncertainty.
The IRAS will in any case avail of a potentially strong provision to challenge the abuse
of DTAs. According to the IRAS, the principal purpose of an arrangement or transaction is a
question of fact and has to be determined by carrying out an objective analysis of the aims
and objects of all persons involved in the arrangement or transaction, taking into account
all facts and circumstances surrounding the arrangement or transaction. Based on such
objective analysis, it must be reasonable to conclude that one of the principal purposes was
to obtain the benefits of a DTA in an improper and abusive manner before the PPT may be
invoked to deny DTA benefits. Determining the principal purposes of an arrangement or
transaction requires that one should not only take into account the effects of an arrangement
or transaction but also all relevant facts and circumstances.
Tax professionals and multinationals in Singapore are concerned with the uncertainty
with respect to the application of the PPT in a specific case and have asked the IRAS to
provide additional guidance. Some authors have stressed that taxpayers may face increased
compliance costs while others have argued that the PPT will likely have a limited negative
impact on Singapore’s position in international structures.37 The PPT will have an impact
on both inbound and outbound payments. As regards inbound payments, the taxpayers
could benefit from additional guidance on how the IRAS will defend them against foreign
tax authorities invoking the PPT without good reasons. As regards outbound payments,
the IRAS clarified that the PPT merely seeks to deny DTA benefits in cases where one of
37
B. Kuźniacki, Introduction of the Principal Purpose Test and Discretionary Benefits Provisions into Singapore’s Tax
Treaties: Not as Black as It Is Painted: Part 1 – Reasons, 24 Asia-Pac. Tax Bull. 2 (2018), Journals IBFD; B. Kuźniacki,
Introduction of the Principal Purpose Test and Discretionary Benefits Provisions into Singapore’s Tax Treaties: Not
as Black as It Is Painted: Part 2 – Consequences, 24 Asia-Pac. Tax Bull. 3 (2018), Journals IBFD; C.H. Lim, Assessing
BEPS: origins, standards, and responses – Singapore branch report, IFA Cahiers 2017 – Volume 102A, p. 669.
733
Singapore
the principal purposes of the arrangements or transactions is to secure a benefit under the
DTA in a manner that is contrary to the object and purpose of that tax treaty, i.e. abusive
arrangements. Moreover, the PPT is not a novel provision because it is already present in
Singapore’s domestic legislation in the form of the GAAR. Guidance with respect to this
provision as well as examples of cases where it could apply can be derived from the e-Tax
Guide and case law on the topic.38 Singapore has also publicly indicated that issues relating
to the application of treaty anti-abuse provisions fall within the scope of MAP and IRAS will
consider taxpayers’ request for MAP to resolve bilateral tax disputes based on the merits of
individual cases.39
While further formal guidance in this respect is at this time not expected, it is also
possible for taxpayers to request an advance ruling from IRAS on the application of the
GAAR. With respect to the PPT provision of a DTA, taxpayers are allowed to approach the
IRAS and request a clarification as to whether the PPT would apply to a specific arrangement
or transaction. The position taken by the IRAS is in principle binding for the IRAS and the
taxpayer. Several taxpayers have in any case not waited for the (expected) entry into effect
of the MLI provisions and have proactively made modifications to structures in which certain
measures identified during the BEPS project were present. As such, the anti-BEPS measures
also reach their objective by way of their dissuasive effect.
The broad consensus between countries to improve MAP (whether or not reinforced
with mandatory binding arbitration) and the related provisions with respect to a downward
corresponding adjustment appear to be beneficial for the Singapore taxpayer. It is however
still uncertain to what extent a taxpayer will effectively benefit from those provisions as such
downward corresponding adjustments are dependent on the competent authority making
such adjustments being satisfied that the underlying adjustments are justified. A small
number of DTAs will be complemented with arbitration provisions given the reservations
made by Singapore’s treaty partners. As a result, the desired effect of the arbitration
provisions will in many cases not be present. The IRAS has issued clear guidance on MAP
which is made available in the e-Tax Guide on DTAs.
38
See footnote 12.
39
See Singapore Dispute Resolution Profile (updated 27 June 2019) available on http://www.oecd.org/tax/dispute/
Singapore-Dispute-Resolution -Profile.pdf.
734
South Africa
Branch reporters
Johann Hattingh1
Craig West2

As a member of the G20 and observer to the OECD, South Africa has played a role in the
development of the various initiatives that led to both the BEPS Action Plan and the MLI to
implement some of those recommendations.
South Africa further accepted the BEPS Action Plan as set out in the final reports and
recognizes the MLI as the implementation tool for that purpose. The broad range of options
contained in the MLI has yielded a number of mismatches.
Little has happened subsequent to South Africa signing the MLI on 7 June 2017. The MLI
appears to be in limbo. The MLI was discussed by the responsible parliamentary committee
and organs. The Ministry of Finance (MoF) anticipated ratification by the end of 2017 or early
2018. Many questions about the operation, the complexity and broader policy context were
raised by members of parliament and the Parliamentary Budget Office (acting in an advisory
capacity). The outcome was that the Ministry of Finance had to liaise with the Parliamentary
Budget Office about the impact of the MLI and its operation. Whether these investigations
will result in any changes to South Africa’s notifications or reservations remains to be seen.
The political prospect for and timing of ratification remains unclear at the date of this report
(October 2019).
Despite several preliminary mismatches, on ratification the MLI is likely to have a
significant effect on the South African treaty network. The lasting impact is more likely to
be through future bilateral negotiations.
South Africa’s preliminary positions on the MLI as regards Permanent Establishments has
been cited as a reason in February 2019 to launch a review of the continued use in domestic
tax law of the OECD Model’s PE definition.
Many of the measures to be adopted, even where no mismatch occurs, are yet to be tested.
That said, interpretation and application questions are anticipated. These include transitional
questions, such as the loss of treaty access for dual resident companies where material facts
remain unchanged and pending competent authority decision. The future operation of the
Principle Purpose Test (PPT) in practice remains unclear. Key questions concern whether
specific domesticating legislation is constitutionally required to give effect to the PPT and
provide taxpayers with a substantive remedy that will not restrict them to judicial review
under administrative law. In practice, it remains unclear whether the tax administration will
be authorized and required to follow the same procedures and safeguards as apply to the
domestic general anti-avoidance rule.
1
Associate Professor, Faculty of Law, University of Cape Town; Advocate of the High Court of South Africa; Chief
Editor, Bulletin for International Taxation (IBFD).
2
Associate Professor, Faculty of Commerce, University of Cape Town; Chartered Accountant (SA) and (ANZ);
Managing Editor for IBFDs World Tax Journal and Doctoral Series.
IFA © 2020 735

South Africa
There has not been evidence to date of the MLI impacting current treaty negotiations as
the text of treaties under negotiation immediately before and currently underway is not yet
available. Such evidence may reveal much about the impact of the MLI in future.
The application of MAP may be one of the earliest indicators of impact. The OECD has
issued the South African Peer Review Report indicating where the MLI may impact the
process. However, even here, relative to other countries, South Africa has a small but growing
number of MAP cases. The success of failure of the MAP process is also not clear due to the
secrecy of the process. What is known from OECD information is that between 2017 and 2018
access for taxpayers to MAP has improved. Under the MLI South Africa reserved to only allow
submission of a case to the competent authorities in the residence state of a taxpayer, and
not in either contracting state. The trade-off is that South Africa must commit to meet the
minimum standard for improving dispute resolution under the OECD/G20 BEPS Package by
implementing a bilateral notification or consultation process with the competent authority
of the other contracting state for cases in which the South African competent authority
“does not consider the taxpayer’s objection to be justified”. As a result, the South African
Revenue Service reformed its MAP practice and published extensive guidance in 2018. The
improvement to the MAP statistics and SARS practices were not tied to whether a tax treaty
is an MLI covered agreement or not, but applies across the spectrum. It is an example where
a preliminary position on the MLI correlates to a corresponding impact on the administration
of all South Africa’s tax treaties.
The South African fiscal authorities have been taking a stronger stance on avoidance and
abuse and is an active participant in the various information exchange initiatives.
The Ministry of Finance will still have to take care to ensure that its tax treaty and domestic
policies are consistent, as the experience with the MLI has revealed that policy coordination
was not always carefully considered. Further and more fundamentally, the experience with
the MLI illustrates that there is a need to review the domestication processes for tax treaties
in South Africa, given heightened political awareness. It is advisable that a cost/benefit
analysis be performed for consideration by the responsible parliamentary organs who vet
these treaties prior to ratification.
Tax Treaty Network
1.1. Introduction
The BEPS Action Plan can be said to have some direct impacts for South Africa in terms of its
domestic legislation. Further, the continued discussions, both at the OECD and G20 meetings,
continue to influence its treaties and domestic law.
736
Hattingh & West
South Africa’s tax treaty network expanded rapidly in the 1990s following the end of apartheid
and its first democratic elections in 1994. At the time of signing the MLI, South Africa had 79
comprehensive double tax treaties in force,3 of which only five pre-date 1990 and of those
three pre-date South Africa’s independence as a Republic in 1962.4
It has been South Africa’s general tax treaty negotiating position to follow the OECD
Model Convention, subject to its recorded positions against that Model. Prior to being able to
record positions against the OECD Model, South Africa maintained its own model reflecting
the above position.5
Since signing the MLI only one new comprehensive double tax treaty has entered into
force (with Cameroon) as well as two protocols (with Turkey and Brazil), but both, having been
previously negotiated, were included in the Covered Tax Agreements for the MLI.
While South Africa’s treaties generally follow the OECD Model Convention, there are
natural deviations.6 Some deviations reflect taxing right allocations from the time that South
Africa operated a source basis of tax (up to 2000). Some treaties reflect other domestic law
positions of the time, for example some treaties provide for the exclusive taxing rights over
interest to the residence state, reflecting the (then) unilateral exemption for taxation on
interest earned by non-residents; others include “annuities” in the pensions article. Others
reflect key positions of the other contracting states and are not tax treaty positions of South
Africa.7
With respect to residence, the tiebreaker based on mutual agreement for non-natural
persons appears in twenty of South Africa’s treaties (either in the original treaty or by
amending protocol). Some influence from the UN Model is notable as regards the permanent
establishment article (i.e. expansion of the scope). Other variations include: the business
profits article follows the OECD Model prior to the 2010 update; most of South Africa’s
treaties do not refer to place of effective management with respect to the shipping and
inland waterways article (and similarly article 15(3) carries a similar variation); corresponding
adjustments in article 9 are usually left to the discretion of the other contracting state. For
royalties, the position taken by much of the world is adopted, facilitating some source
3
A full list of South Africa’s treaties may be found at South African Revenue Service, “Summary of all Agreements
for the Avoidance of Double Taxation” (14 October 2019), last accessed 23 October 2018, available at: https://www.
sars.gov.za/AllDocs/LegalDoclib/Agreements/LAPD-IntA-DTA-2013-01%20-%20Status%20Overview%20
of%20All%20DTAs%20and%20Protocols.pdf.
4
C. West, From colonialism to apartheid: International influence on tax treaties in South Africa (1932-1990), in
Income Tax in South Africa: The First 100 Years (1914-2014) (J. Hattingh, J. Roeleveld & C. West eds., Juta and
Company 2016).
5
C. West, Status Quo of South African Tax Treaty Policy (5 August 2016). Status Quo of South African Tax Treaty
Policy (南非现行税收协定政策考察), International Taxation in China, Issue 11 (ISSN: 2095 6126), 2016.
Available at SSRN: https://ssrn.com/abstract=2882413.
6
See a summary in C. West, Status Quo of South African Tax Treaty Policy, above n. 5, and also Hattingh, P.J.,
Brauner, Y. & Pistone, P. 2015. Ch. 8: South Africa in BRICS and the Emergence of International Tax Coordination.
Online Books IBFD. More can also be found in an unpublished student paper which examined the South African
tax treaty network for deviations from the OECD and UN Models to derive South Africa treaty policy.
7
An example being the exclusive taxing rights for employees and nationals in air transportation companies with
respect to the treaties with Kuwait; United Arab Emirates and Saudi Arabia.
737
South Africa
taxation rights for royalties, with much variation in withholding rates. Several South African
treaties retain source taxing rights for other income.8
It should be noted that some treaties do also contain other articles, such as: limitation
of benefits, most favoured nation treatment, offshore activities clauses and tax sparing
provisions.
Almost all of South Africa’s tax treaties have in their title and preamble the consideration not
only of the avoidance of double taxation, but also the prevention of fiscal evasion. The most
recent and notable exception is the South Africa treaty with Switzerland concluded in 2007.
The other deviations from this South African norm arise from the 1990s.
The prevention of tax avoidance involving tax treaties can be addressed through several
domestic and treaty-based mechanisms. It is uncontroversial that the statutory general
anti-avoidance rule applies to tax treaties as do common law doctrines such as disregarding
of sham transactions, regarding the legal substance over its form and modern statutory
and treaty interpretation principles (which have been applied in a number of instances in
domestic matters). 9
South African courts apply the Vienna Convention on the Law of Treaties (1969) as regards
the interpretation of treaties on the basis that it reflects international custom. However, the
courts have indicated (in the absence of any wording in the treaty to the contrary) that double
non-taxation may have been contemplated by the contracting states at the time of entering
into the treaty.10 The “abuse of law” doctrine is not strongly developed in South African law
and the spectrum of applying a “fraus conventionis” doctrine to tax treaties has only been
raised in the literature.11
In tax treaties specifically, and as can be identified in the South African notifications with
respect to article 7 of the MLI, a few treaties include anti-abuse tests in specific treaty articles,
mainly with respect to dividends, interest and royalties. Further, a number of treaties have
also provided for a limitation of benefits article or provision in the treaty.12 The wording of
these provisions varies significantly from treaty to treaty.
As regards to dispute resolution, South Africa includes mutual agreement procedures
in almost all its treaties. Some particularly old treaties do not have such a provision. South
Africa has further not received any MAP applications as regards treaty abuse.13 Its limited
case law further has not specifically addressed issues concerning hybrid entities, but has
addressed instances of dual residence as regards the application of place of effective
8
See the treaties with Botswana, Cameroon, Democratic Republic of Congo (DRC), Ghana Greece, Kenya, Lesotho,
Mauritius, Mozambique, Oman, Portugal, Qatar, Rwanda, Saudi Arabia, Seychelles, Zimbabwe, United Kingdom,
and Ukraine.
9
See C. Cilliers, “Anti-avoidance” in Silke on International Tax (2018, LexisNexis On-line), at 46.31-46.42.
10
ZA: SCA, 19 August 1975, Downing v. Secretary for Inland Revenue, Tax Treaty Case Law, IBFD.
11
See Cilliers, Anti-avoidance, above n. 9, at 46.41.
12
See treaties with Denmark (1995), Ghana (2004), Mexico (2009), Norway (1996), Sweden (1995), Tunisia (1999),
the United States (1997), and the United Kingdom (2002).
13
OECD (2019), Making Dispute Resolution More Effective – MAP Peer Review Report, South Africa (Stage 1):
Inclusive Framework on BEPS: Action 14, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing,
Paris, https://doi-org.ezproxy.uct.ac.za/10.1787/3f820b8e-en.
738
Hattingh & West
management.14 There is no indication in the public domain of resolution of dual residence

through the MAP process (despite such a tiebreaker existing in 20 of South Africa’s treaties).
The treaties generally provide for corresponding adjustments to tax charged on the profits
of an enterprise after a transfer pricing adjustment, but in several treaties, the adjustment
is reflected as optional (through the use of “may” rather than “shall”).
Arbitration for failed MAP proceedings appears in only three of South Africa’s tax treaties
(Switzerland, Canada and the Netherlands). No information is available to indicate whether
these provisions have ever been invoked or whether they have been successfully applied.
South Africa signed the Multilateral Convention on 7 June 2017, but it has yet to deposit its
instrument of ratification.15 The MLI was last discussed in a parliamentary committee meeting
on 23 May 201716 in anticipation of the signing. In the presentation, the Ministry of Finance
indicated that the impending signing followed from the G20 approval of the BEPS Actions.
South Africa is a member of the G20, which implies that the direction to sign was driven
through participation in those processes.
It was further indicated in the parliamentary committee meeting that the MLI merely
represented the substance of the treaty related measures adopted in the acceptance of the
BEPS Action Plan. The Ministry of Finance indicated to the parliamentary committee that
they hoped to conclude ratification processes by the end of 2017 or early 2018. However,
the parliamentary committee decided that further input was required from the Ministry
of Finance working in conjunction with the Parliamentary Budget Office, particularly with
respect to the economic impact for South Africa. Since that meeting the process has stalled,
hampered by other national priorities and interrupted by a general election in May of 2019.
No further action has taken place that is visible or accessible in the public domain. No
ratification has taken place and there is no indication as to when it will take place. See for a
full discussion of these events below at 2.1.1.
Almost all (approximately 90%) of South Africa’s comprehensive income tax treaties and
protocols are included as covered tax agreements in the MLI. Included in the list17 are also
14
Oceanic Trust Co Ltd No v. Commissioner for South African Revenue Service 74 SATC 127; 15 ITLR 172.
15
OECD, “Signatories and Parties to the Multilateral Convention to Implement Tax Treaty Related Measures to
Prevent Base Erosion And Profit Shifting” (18 October 2019), last accessed 23 October 2019, available at: https://
www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf.
16
National Treasury of South Africa and South African Revenue Service, “BEPS Multilateral Instrument: briefing”
and presentations, National Assembly: Finance Standing Committee, 23 May 2017 (materials and oral recording
available at: https://pmg.org.za/committee-meeting/24430/).
17
South Africa, “Status of List of Reservations and Notifications at the Time of Signature”, (7 June 2017) available
at: https://www.oecd.org/tax/treaties/beps-mli-position-south-africa.pdf (last accessed 28 October 2019).
739
South Africa
some treaties and protocols not yet in force.18 However, some treaties are excluded19 (some
of which are under renegotiation) and protocols20 under negotiation. The treaties excluded
are mostly the treaties carried forward into independence and some from the 1970s. For
those excluded treaties with Germany, Malawi and Zambia and the included treaty with
Brazil, South Africa has indicated that it will pursue implementation through bilateral
negotiations.21
In the 53 instances out of the 76 covered tax agreements listed by South Africa where
54 of the counterparties have signed the MLI, South Africa has been listed as a covered
tax agreement. For 22 agreements listed by South Africa as covered tax agreements, the
counterparty has not signed the MLI and in one case has not listed South Africa as a CTA,
resulting in a current mismatch. Five more have indicated an intention to sign the MLI,22
leaving 18 with an overall mismatch that remains unclear as to whether it will be resolved.23
Outside of the application of the minimum standards in the MLI, South Africa has further
adopted a number of the optional provisions. A brief summary of South Africa’s positions is
provided below. These are the positions as were reflected in the notifications and reservations
submitted on signing the MLI on 7 June 2017. There is no indication yet whether South Africa is
specifically considering changing any of its choices before ratification. Very little information
exists in the public domain outlining the rationale for the choices made by the Ministry of
Finance with respect to the MLI positions.
Treaty preamble
With reference to the treaty preamble, South Africa has not only adopted the revised
preamble provided in article 6 of the MLI, but has also opted for the optional additional
text concerning development of economic relationships and cooperation in tax matters.
Preamble text supporting economic relationships already appears in 16 of South Africa’s
18
These include the treaties with Cameroon (which subsequent to signing was entered into force on 13 July 2017)
and Gabon and protocols with Turkey (subsequently entered into force on 15 July 2017); Brazil (subsequently
entered into force on 10 February 2018).
19
Treaties with Grenada (1960) and Sierra Leone (1960) both of which are extensions to South Africa’s 1946 treaty
with the United Kingdom; the 1956 treaty with Zambia (a treaty between two states carried over on achieving
independence); the 1971 treaty with Malawi and the 1973 treaty with Germany. It is understood that the treaties
with Zambia, Malawi and Germany are under negotiation (but have been for some time). Further, a new treaty
with Senegal under negotiation is also excluded.
20
There are protocols under negotiation with Botswana, Kuwait, Luxembourg; Mozambique; Eswatini (formerly
Swaziland).
21
OECD (2019), Prevention of Treaty Abuse – Peer Review Report on Treaty Shopping: Inclusive Framework on BEPS:
Action 6, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. Available at: https://doi.
org/10.1787/9789264312388-en. See p. 216.
22
These include Algeria; Eswatini (formerly Swaziland); Kenya; Oman and Thailand.
23
These are the treaties with Belarus; Botswana; Brazil; DRC; Ethiopia; Gabon (signed MLI but did not list South
Africa as a CTA); Ghana; Iran; Lesotho; Mozambique; Namibia; Rwanda; Sudan (Republic of Sudan); Chinese
Taipei; Tanzania; Uganda; United States; Zimbabwe.
740
Hattingh & West
tax treaties listed as CTAs, but does not extend to cooperation in tax matters explicitly. For
this reason, South Africa has listed all its CTAs in its notification document as submitted on
signing the MLI to include both development of economic relationships and cooperation
in tax matters. While such an inclusion has not been an overt policy position in the past, it
would appear that the position has changed. Almost all of South Africa’s treaties refer to the
prevention of fiscal evasion in the treaty title, but this consistency is not always found in the
preamble. It is submitted that the adoption of the MLI preamble aims to align all treaties to
this purpose, but no formal justification has been supplied for this election. Despite any aim
with respect to the preamble, there remains a significant number of mismatches within the
53 CTAs where South Africa and the other party have listed each other as a CTA. Three counter
states did not include South Africa in the optional additional text; two only included South
Africa in the election of the optional text and did not replace the initial text with that set
out in the minimum standard; four countries excluded South Africa altogether (and South
Africa did the same) and in six further instances, South Africa did not include countries in its
notification that were included in the other states notifications.
Principle purpose test
South Africa has elected to adopt the principal purpose test (PPT) as appearing in article 7(1)
of the MLI. The Ministry of Finance considers the PPT as being aligned with South Africa’s
domestic general anti-avoidance rule (see the text at footnote 63 for a contrary analysis)
and therefore seems to find this minimum standard more palatable than the inclusion of
an additional limitation of benefits (LOB) provision.24 Further, South Africa has elected to
override the provisions of those treaties of its CTAs already containing a form of limitation
of benefits with the PPT.25 The PPT application does not appear to have been tempered with
the inclusion of article 7(4), as no notification is made in this regard.
South Africa has not indicated that it would agree to allow the SLOB to be applied by
another contracting jurisdiction pursuant to article 7(7)(b) of the MLI.
Hybrid entities and dual resident entities
Hybrid entities have only been addressed in a few of South Africa’s tax treaties directly.
However, South Africa has adopted article 3 of the MLI. The intention is, according to the
presentation to the parliamentary committee, to address partnerships (treated as transparent
for South African tax purposes) and facilitate treaty benefits in appropriate cases.
South Africa has also adopted article 4 of the MLI leaving the resolution of dual resident
non-natural persons to the competent authorities. This form of tiebreaker has already made
its way into twenty of South Africa’s comprehensive tax treaties. Despite this introduction,
the MAP experience in South Africa remains fairly limited, but the inventory of MAP cases is
24
LOB provisions appear in very few of South Africa’s tax treaties.
25
South Africa, “Status of List of Reservations and Notifications at the Time of Signature”, (7 June 2017) available
at: https://www.oecd.org/tax/treaties/beps-mli-position-south-africa.pdf (last accessed 28 October 2019) at
p. 27.
741
South Africa
increasing (see further analysis at 2.2.1).26 Mismatches with respect to the resolution of dual
residence through MAP remains high (35 of 53 instances where both parties have signed
the MLI), with the most common mismatch as a result of the counterparty applying the
reservation under article 4(3)(a) of the MLI. However, in some of these mismatched cases,
the tiebreaker rule in the treaty already caters for the application of MAP.
Minimum holding periods to access dividend tax relief
South Africa opted to include the minimum withholding period of 365 days before an entity
can access the treaty preferential rate for qualifying interests.27 It supports the notion that
the absence of such a provision facilitates manipulation by entities and inappropriate access
to treaty benefits.
Capital gains pertaining to property-rich entities
In contrast to the addition of the time period to access dividend rate treaty benefits, South
Africa opted out of the inclusion of a time frame and the expansion of the scope under article 9
of the MLI. As a result, 29 mismatches will arise due to the notifications of the other contracting
state, however, 12 of those treaties already contain a provision similar to that proposed by the
MLI article. No justification for this position by South Africa has been presented.
South Africa did not register a position against the inclusion of the timeframe in article
13(4) of the 2017 OECD Model. It was further consistent with this position in the 2019 ATAF
Model. However, it did reserve its rights in the ATAF Model to not expand the scope of the
capital gains article to other shares based on the size of holding.28
Permanent establishments provisions (MLI articles 10, 12, 13 and 14)
South Africa opted out of article 10 of the MLI in its entirety. Similarly, South Africa opted
out of the application of article 12 of the MLI and out of the application of article 14 of the
MLI. For the purposes of article 13 of the MLI, South Africa elected Option A (without further
reservations).
In terms of mismatches with the 53 other states which have listed South Africa as a CTA,
26
Inclusive Framework on BEPS: Action 14, OECD/G20 Base Erosion and Profit Shifting Project, OECD.
Publishing, Paris, https://doi.org/10.1787/3f820b8e-en.
27
One oddity is the exclusion of New Zealand from the listing of the treaties considered to contain a provision
described in art. 8(1) that is not subject to a reservation described in art. 8(3)(b).
28
The 2019 ATAF Model provision states: “Gains, other than those to which paragraph 4 applies, derived by a
resident of a Contracting State from the alienation of shares of a company, or comparable interests, such as
interests in a partnership or trust, which is a resident of the other Contracting State, may be taxed in that other
Contracting State if the alienator, at any time during the 365 days preceding such alienation, held directly or
indirectly at least ….. per cent of the capital of that company”.
742
Hattingh & West
article 10 generates 14 mismatches, article 12 generates 23 mismatches, article 14 generates

19 mismatches of which three are only partial mismatches.29
Mandatory binding arbitration
From the presentation to the parliamentary committee, South Africa opted out of Part VI
of the MLI concerning arbitration. In tax treaties, South Africa has generally avoided the
inclusion of arbitration in the event of failed MAP proceedings. Such provisions appear in
only three of South Africa’s tax treaties.30 All three of those countries opted for the arbitration
provisions (as did a number of other treaty partners). At the regional level, South Africa has
removed its reservation against arbitration in both the SADC Model (2013)31 and the ATAF
Model32 (2019). This may indicate a conscious choice to first test arbitration at the regional
level before moving to the global stage.
Mutual agreement procedures
South Africa’s only reservation against article 16 of the MLI is with respect to the MAP being
initiated in either of the contracting states. Several mismatches were identified in the OECD
Peer Review Report.33 However, in most cases, the mismatches concerned the treaties not
identified as CTAs or pertained to improvement of documentation or intentions to resolve
the matter through bilateral negotiations. See further regarding the effect of South Africa’s
preliminary reservation in section 2.2.3.
Corresponding adjustments
South Africa has chosen to adopt the MLI position in article 17 requiring corresponding
adjustments. With respect to its CTAs, a large proportion does not contain the OECD Model
article 9(2) equivalent exactly. Some treaties allow the corresponding adjustment to be
optional (replacing the work “shall” with “may”) and others require that the granting of
corresponding adjustments can only be made after consultation or by involving the other
competent authority. Of those treaties not exactly modelling the OECD article 9, for 37 of
them, South Africa made a notification under the MLI article 17(4). However, for 15 of those
29
Art. 13 has not yet been mapped for mismatches at the time of writing.
30
See treaties with Canada (1997), Netherlands (2008) and Switzerland (2009). OECD (2019), Making Dispute
Resolution More Effective – MAP Peer Review Report, South Africa (Stage 1): Inclusive Framework on BEPS:
Action 14, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi-org.ezproxy.
uct.ac.za/10.1787/3f820b8e-en (Annex A).
31
SADC Model Tax Agreement (2013). Available at: http://www.sadc-fip.gov.na/documents/899832/1426693/
SADC+MODEL+DTAA+October+2013.doc/061ed236-3978-4450-8250-555591790941.
32
ATAF Model Tax Agreement (2019). Available at: https://events.ataftax.org/index.php?page=documents
&func=view&document_id=7.
33
Paris, https://doi.org/10.1787/3f820b8e-en.
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South Africa
CTAs, the other state has not yet signed the MLI; one has not listed South Africa as a CTA and
ten others consider the current treaty article 9(2) sufficient without adaption by the MLI. The
OECD Peer Review Report confirms that: “South Africa reported that it is in favour of including
Article 9(2) of the OECD Model Tax Convention in its tax treaties where possible and that it will
seek to include Article 9(2) of the OECD Model Tax Convention in all of its future tax treaties”.34
While some treaties have come into force subsequent to signing the MLI, these were
concluded many years before and do not carry the influences of the MLI discussions. Most
were concluded prior to the BEPS Action Plans.
However, it is understood that a number of treaties are being negotiated or renegotiated.
The extent to which MLI provisions have found their way into these negotiations is currently
unclear. ATAF has, in response to the 2017 OECD Model and its participation in BEPS and
other OECD discussions, released its updated Model reflecting most of the updates to the
2017 OECD Model. This may, subject to country reservations against that model, influence
future tax treaties.
In line with South Africa’s reservations against the MLI, South Africa has proposed an
amendment to the domestic permanent establishment definition. The current definition
follows the OECD Model definition of permanent establishment as amended from time to
time. The 2017 OECD Model does not reflect South Africa’s position after the change to article
5(5) of the OECD Model and therefore the proposal is to revert to the pre-2017 OECD Model
definition as regards the permanent establishment.35 This position has not, however, been
recorded in the positions of non-member countries in the 2017 OECD Model.36 See further
the text at footnote 90.
The Ministry of Finance and SARS seem to be highly engaged with the MLI and its contents.
At least in the OECD Peer Review Report on MAP, the intention to build MLI provisions into
future treaties and negotiations is apparent. The outcome remains, however, yet to be seen.
At least in the near future, should the MLI be ratified in South Africa, it would seem that it will
continue as a third layer alongside the bilateral treaty network. However, parliamentarians
have questioned whether consolidated treaty texts will need to be ratified once the matching
effects of the MLI are known (see the text at footnote 53).
34
Paris, https://doi.org/10.1787/3f820b8e-en at p. 30.
35
South African Revenue Service, “Explanatory Memorandum to the Draft Taxation Laws Amendment Bill, 2019
http://www.treasury.gov.za/public%20comments/2019BTDraftBills/2019%20Draft%20Explanatory%20
Memorandum%20to%20the%202019%20Draft%20TLAB%20-%2021%20July%202019.pdf .
36
OECD (2019), Model Tax Convention on Income and on Capital 2017 (Full Version), OECD Publishing. http://
dx.doi.org/10.1787/g2g972ee-en (see pp P5(5)-P5(6)).
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Hattingh & West
South Africa is considered a key signatory of the MLI in Africa, not least because it was one
of the non-OECD members who fully participated as a G20 member country in the process
of priority setting in the BEPS Project.37 It may therefore come as a surprise that, at the date
of this report (31 October 2019), the South African parliament has not yet ratified the MLI
almost 2 ½ years after signature on 7 June 2017.
The reasons for the delay are due to a complexity of factors that have combined to result in
stalling the ratification process: the requirements of the Constitutional domestication process
for tax treaties in South Africa and role of parliamentary organs therein, the impact of civil
society on awareness about the effect of tax treaties, especially on developing countries, and
the near impenetrable complexity of the content of the MLI for non-specialists lawmakers.
Constitutional processes for domesticating tax treaties
Under South Africa’s Constitution, the national executive branch of government is responsible
for the negotiation and conclusion of all treaties.38 The ratification procedure for treaties
commences after treaty conclusion and requires that they are tabled in Parliament for
approval after which they take effect in law when enacted by national legislation.39 Further,
under the Constitution only the Minister of Finance has the authorization to introduce so-
called Money Bills, which refers to any law that imposes tax or that “abolishes or reduces,
or grants exemptions from, any national taxes”.40 The significance of Money Bills are that
they are subject to a special constitutional procedure for enactment, which aims to heighten
democratic scrutiny.41 Ratified income tax treaties are enacted in law in South Africa under the
37
South Africa holds official observer status at the OECD, is on the shortlist of prospective member countries, and is
one of the OECD’s five Key Partner countries. It is an associate in six OECD bodies and projects, and a participant
in 15 (OECD website, “South Africa and the OECD”, available at: https://www.oecd.org/southafrica/south-africa-
and-oecd.htm). This includes membership of the Steering Group: Inclusive Framework for BEPS Implementation
(OECD website, “Composition of the 2019-2020 Steering Group of the Inclusive Framework on BEPS”, available at:
https://www.oecd.org/tax/beps/steering-group-of-the-inclusive-framework-on-beps.pdf).
38
Constitution, 1996, s. 231(1).
39
Constitution, 1996, s.c 231(2), (4).
40
Constitution, 1996, s. 73(2)(a) read with sec 77(1)(c).
41
Under the Constitution, 1996, s. 75, the special mandatory procedure requires that both Houses of Parliament
actually scrutinise Money Bills; the special procedure affords each member of both Houses of Parliament an
individual vote on Money Bills (generally members of the National Council of Provinces don’t enjoy individual
votes on any other legislation) and gives the National Council of Provinces the power to propose amendments
and to force a reconsideration by the National Assembly (a power that the National Council of Provinces does not
otherwise have). In scrutinising Money Bills, parliament and its committees are required, among others, to “take
into account the principles of equity, efficiency, certainty and ease of collection”, “consider […] international tax
trends”, “consider the impact on development, investment, employment and economic growth” and hold public
hearings, consult and report on these matters (Money Bills and Related Matters Act, 9 of 2009, s. 11(3)-(4)).
745
South Africa
Income Tax Act, 58 of 1962, through an official publication procedure where after they have
effect in domestic law as if being part of the domestic income tax legislation.42
Institutional support for parliament
In 2009, the Parliamentary Budget Office was created to provide independent, objective and
professional advice and analysis to parliament on matters related to the budget and Money
Bills.43 This institution is mandated to undertake research and analysis about policy proposals
with budgetary implications and any policy debates and developments in key areas.44 The
Parliamentary Budget Office has played an important role in the ratification process of the
MLI, as will be discussed later below.
A parallel process of review of the entire South African tax system was undertaken by
a ministerial committee during the period in which the MLI was negotiated. In an interim
report dedicated to the BEPS project, the committee recommended in 2014 that South Africa
should support the, then proposed, MLI subject to appropriate amendments. 45
Treaty ratification practice
In practice the Ministry of Finance negotiated and signed all South Africa’s bilateral income
tax treaties. The ratification process usually entailed that the Ministry of Finance would
inform the organ within parliament responsible for Money Bill matters, the Standing
Finance Committee,46 of its plans to negotiate a new tax treaty or an amendment. Generally,
tax treaties would then be submitted after signature to the Standing Finance Committee,
together with an Explanatory Memorandum, for approval. The Standing Finance Committee
without exception approved these treaties, where after they would be listed on the business
paper for both houses of parliament. Unless an objection was received, they would be
approved as a matter of course by both houses of parliament without any further discussion
by members of parliament. There is no record of any member of parliament ever objecting
to or raising fundamental concern about a specific income tax treaty until the process of
ratification of the MLI commenced.
Three aspects of the historical parliamentary practice to ratify income tax treaties in
South Africa are worth of emphasis:
–– Effectively, the members of the Standing Finance Committee, who are members of
parliament, were the only democratically elected representatives who ever actually
scrutinized South Africa’s income tax treaties until the creation of the Parliamentary
Budget Office in 2019, which supports them an advisory capacity.
–– It appears that no detailed financial impact studies about income tax treaties were ever
42
Income Tax Act, 58 of 1962, s. 108(1)-(2).
43
Money Bills and Related Matters Act, 9 of 2009, s. 15(1).
44
Money Bills and Related Matters Act, 9 of 2009, s. 15(2).
45
The Davis Tax Committee, Addressing Base Erosion and Profit Shitting in South Africa Davis Tax Committee Interim
Report: Action 15 Develop a Multilateral Instrument, 23 December 2014 (available at: https://www.taxcom.org.
za/docs/New_Folder/8%20DTC%20BEPS%20Interim%20Report%20on%20Action%20Plan%2015%20
-%20Mutinational%20Convention,%202014%20deliverable.pdf).
46
Money Bills and Related Matters Act, 9 of 2009, s. 4(2)(b).
746
Hattingh & West
reported by the Ministry of Finance to parliament (e.g. in the Explanatory Memoranda

that the Ministry prepared for South Africa’s income tax treaties).
–– The effect of income tax treaties enacted as domestic law is that their application may
result in reduction or exemption from South Africa income tax. However, it is not evident
that the special constitutional procedure for Money Bills has ever been followed, at least
not in spirit, when tax treaties were ratified. No express account was taken of international
policy debates about the effect of income tax treaties, nor their impact on development,
investment, employment and economic growth, as is constitutionally required for laws
that result in a reduction or exemption of taxes.47
Approach to the negotiation and ratification of the MLI
The Ministry of Finance approached the negotiation and ratification process of the MLI on
the same basis as the historical process outlined above for bilateral income tax treaties. This
approach appears to be one reason for the delay in ratification of the MLI.
Parliamentary organs question future ratification of the MLI
Shortly before signature of the MLI on 7 June 2017, the Ministry of Finance and the South
African Revenue Service briefed Parliament’s Standing Finance Committee on 23 May 2017.
During the briefing, the ministry indicated that it expected Parliament to ratify the MLI by the
end of 2017 or early 2018.48 This timeframe of about six-months from signature to ratification
was the usual period associated with the historical practice of ratifying income tax treaties.
The ministry’s presentation of the MLI was in the usual format followed for bilateral income
tax treaties: A presentation was made of a tax technical nature about the various clauses of the
MLI, South Africa’s position on the optional aspects and how the MLI will operate.49 Aspects
such as the broader policy for tax treaties or their budgetary and economic implications were
not included in the presentation.
The reactions to the MLI presentation by both members of parliament serving on the
Standing Finance Committee, as well as the Parliamentary Budget Office, were consistently
questioning and a whole range of broader issues were raised.
Parliament’s list of concerns
The details of the exchanges during the Standing Finance Committee briefing of 23 May 2017
indicate a level of dissonance between lawmakers and ministerial technocrats about the MLI,
South Africa’s tax treaties and the BEPS Project generally, which has not been seen before:
47
The relationship between the Constitutional procedures for Money Bills and the treaty making and ratification
process for income tax treaties has not received attention in South African literature or case law.
48
National Treasury of South Africa and South African Revenue Service, “BEPS Multilateral Instrument: briefing”
and presentations, National Assembly: Finance Standing Committee, 23 May 2017 (materials and oral recording
available at: https://pmg.org.za/committee-meeting/24430/).
49
Ibid., oral recording of proceedings.
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South Africa
–– The Ministry of Finance argued that the MLI would contain no new policy proposals
because it merely reflected the policy changes agreed in the BEPS Package in respect of
which South Africa fully contributed.50 This submission overlooked that Parliament never
ratified the BEPS Package, so indeed ratification of the MLI would be the first opportunity
for the Standing Finance Committee to consider the policy objectives of the project.
–– The Chair of the Standing Finance Committee expressed frustration about the role of
parliament in the ratification of tax treaties generally: legal advice received indicated
that because the Constitution requires ratification after signature of treaties by a minister,
parliamentary organs effectively had to “nominally” go through treaties, which was not
in his view a process of effective scrutiny because parliamentary organs did not have
the capacity to influence any unsatisfactory aspect of a signed treaty. He explained that
attention to tax treaties was heightened because of government and specifically the
Standing Finance Committee’s interest in the BEPS Project51 and illicit financial flows.52
–– Members of parliament questioned how the MLI would work as the proposal that the
MLI would operate “alongside” South Africa’s tax treaties was confusing. The ministry
was asked whether, for example, individual consolidated new tax treaties would need
to be considered by parliament for ratification after it became apparent how the MLI
matching exercise will affect any tax treaty to which South Africa was party? No direct
answer was provided. The SARS indicated that it had planned to prepare consolidated
treaty texts for convenience.53
–– The Parliamentary Budget Office raised a list of significant concerns:54
–– Income tax treaties were topical internationally because of their “regressive
redistributive” impact on the tax base of capital importing countries. The office
was of the view that the OECD Model has outlived its original context and it was
necessary to understand who the winners and losers were when concluding treaties
based on this model. The question was put whether the Ministry of Finance has
done any financial modelling in this regard for South Africa, to which there was no
answer. A related point was the impact of South Africa’s tax treaties on investment
as investment stimulation is the perceived goal of tax treaties. The further question
was put whether the MLI’s impact on investment was understood by the Ministry, to
which there was no answer.
–– Concern was raised about the legitimacy of the BEPS Project because only some
countries were involved while it had an impact on a much larger group of countries.
In this regard the question was if South Africa contributed anything specifically to
the MLI, and whether any such contribution took account of a developing country
50
51
On 20 May 2017 the Parliamentary Budget Office presented a report on BEPS to a joint sitting of several
committees (“Base Erosion and Profit Sharing (BEPS) Report: Parliamentary Budget Office briefing”, joint
meeting of Portfolio Committee on Trade and Industry, the Standing Committee on Finance and the Portfolio
Committee on Mineral Resources, 20 May 2017. Available at: https://pmg.org.za/committee-meeting/20914/).
52
South Africa’s former President, Thabo Mbeki, chaired a high-level panel of the African Union that published a
ground-breaking report in January 2015 (Illicit Financial Flow, Report of the High Level Panel on Illicit Financial
Flows from Africa, as adopted by the 24th Ordinary Session of the Assembly of African Union Heads of State
and Government. Available at: https://www.uneca.org/sites/default/files/PublicationFiles/iff_main_
report_26feb_en.pdf).
53
BEPS Multilateral Instrument: briefing, above n 46, oral recording of proceedings.
54
748
Hattingh & West
perspective. The Ministry answered that in some areas South Africa was concerned
about tax treaty abuse, for example in relation to its treaty with Mauritius, before
the OECD became concerned about the topic. Clauses such as the new article 4(3) of
the 2017 OECD Model regarding dual corporate residents became tax treaty policy in
South Africa long before inclusion in the BEPS Package.
–– It was pointed out that in the area of bilateral investment protection, the South African
government adopted a policy to move away from bilateral treaties to a system of
unilateral protection for foreign investors. Some of the BRICS countries also followed
unilateral approaches to international economic law. It was questioned whether,
given the regressive impact of tax treaties for developing countries, unilateral
measures to address double taxation were ever considered by the Ministry of Finance
as an alternative to bilateral income tax treaties? No answer was forthcoming.
–– It was proposed that the ratification of the MLI should be considered within the
framework of whether tax treaties are, as such, base eroding for South Africa. From
this perspective the question is whether the OECD had taken any steps in the MLI
to make tax treaties less regressive for developing countries? No answer was given.
–– Concern was raised that the MLI is complex and would certainly increase complexity
of tax administration, which is a worry for developing countries such as South Africa.
It was questioned whether the impact on capacity had been estimated, specifically
how many new staff would SARS require to effectively administer the MLI? In answer,
both the Ministry of Finance and SARS agreed that the MLI was a complex instrument.
The ministry found that in consultations with industry, even international tax experts
found the complexity challenging. SARS indicated that it will need more staff to deal
with a revised mutual agreement procedure and tax treaty audit capacity to meet the
BEPS minimum standards.
–– It was questioned whether the flexibility features of the MLI allowed South Africa
to override tax treaties in appropriate circumstances. The answer by the Ministry
of Finance was that the government’s policy is not to take unilateral retaliatory
measures when tax treaties are abused but rather to seek bilateral renegotiation
and, if this fails, to exercise its rights under treaties to terminate them.
Impact of parliamentary concerns
The outcome of the 23 May 2017 briefing to the Standing Finance Committee was an
agreement that the Ministry of Finance had to meet and consult the Parliamentary Budget
Office about the above list of concerns. It is evident that these concerns were fundamental.
If they were to be taken seriously, much work apparently not previously performed by the
Ministry of Finance would be needed (for example to estimate the budgetary and economic/
investment impact of South Africa’s entire tax treaty network and the MLI as well). Some
concerns relate to questions for which currently available empirical evidence is inconclusive,
such as the impact of tax treaties on investment.
Current status
The outcome of all the above is that the Ministry of Finance has not, since the May 2017
briefing, brought the MLI back to the Standing Finance Committee for ratification. Effectively
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South Africa
the MLI appears to be in limbo. The Standing Finance Committee in 2017 appears to have
renewed the seriousness by which it ought to scrutinize all tax legislation, including tax
treaties, based on the information it received from the Parliamentary Budget Office. What
is clear from the events of May 2017 is that the Standing Finance Committee did not appear
to be willing to only nominally consider the MLI when formally asked to ratify, given the
level of discord that existed between the government, on the one hand, and the members of
parliament and the Parliamentary Budget Office, on the other hand, about the impact and
effect of MLI and tax treaties more generally. The questioning by these organs of parliament
of the MLI within a broader tax policy context effectively delayed ratification of the MLI. The
delay continues. In May 2019 South Africa held its 6th national democratic election, resulting
in newly composed membership of parliamentary organs. It is understood that the newly
appointed Minister of Finance intends to present the MLI to the cabinet, possibly in 2020, in
preparation for the formal ratification request.55
The experience with the MLI in South Africa’s parliament illustrates some weaknesses
in the work of the OECD and the Inclusive Framework about implementation of the BEPS
project. It can be questioned if enough attention was given, during the design of the MLI, to
the difficulty that national parliaments may face in domesticating an extremely complex
legal instrument. The need to ensure legitimacy of the BEPS package in the eyes of lawmakers
beyond OECD member countries has been an Achilles heel of the implementation project,
since national lawmakers are beyond the reach of the peer review mechanism and it can’t be
expected that they only nominally consider proposals for hard-law implementation.
The legal value of the MLI will need to be assessed on the assumption that South Africa will
ratify the MLI like any other treaty.
Constitutional status of treaties
In terms of case law, the general legal status of treaties was explained by the Constitutional
Court to be that once treaties are ratified, and regardless of whether they have been given effect
in domestic law through separate enacting legislation, they delineate “the state’s obligations
in protecting and fulfilling” the obligations undertaken in those treaties.56 The Constitutional
Court therefore ruled that there is a positive obligation on the South African government to
fulfil treaty obligations once parliament ratifies, meaning that treaty obligations enjoy priority.
At the level of giving effect to treaty obligations in domestic law by separate enactment,
the Constitutional Court identified three possible methods. One of these methods is used for
income tax treaties, namely “enabling legislation may authorise the executive to bring the
agreement into effect as domestic law by way of a proclamation or notice in the Government
Gazette”.57 Regardless of the method chosen, the Constitutional Court argued that:
55
Cabinet approval was obtained in reparation for the ratification of the multilateral Africa Continental Free Trade
Agreement in February 2019. It is understood that the unusual nature of the MLI warrants a similar approach. It
is unclear how cabinet approval will overcome issues that independent parliamentarians may again raise.
56
Glenister v. President of the Republic of South Africa 2011 3 SA 347 (CC), para. 182.
57
Ibid. at para. 99.
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Hattingh & West
The consequence of incorporation of an international agreement into our domestic law

under section 231(4) is that the agreement “becomes law in the Republic”. It is implicit, if not
explicit, from the scheme of section 231, that an international agreement that becomes law
in our country enjoys the same status as any other legislation. This is so because it is enacted
into law by national legislation, and can only be elevated to a status superior to that of other
national legislation if Parliament expressly indicates its intent that the enacting legislation
should have such status. On certain occasions, Parliament has done this by providing that,
in the event of a conflict between the international convention that has been incorporated
and ordinary domestic law, the international agreement would prevail.58
Constitutional status of income tax treaties in relation to domestic tax law.
The Supreme Court of Appeal, in its most recent decision concerning an income tax treaty,
developed the above general constitutional position in the context of the relieving nature
of these treaties. In the Tradehold case the court decided that: “A double tax agreement thus
modifies the domestic law and will apply in preference to the domestic law to the extent
that there is any conflict.”59
The Supreme Court came to this conclusion by interpreting the enabling legislation that
gives effect to income tax treaties in South African law. Under section 108 of the Income Tax
Act, 58 of 1962, the executive is authorised to conclude treaties for the purpose of “prevention,
mitigation or discontinuance” of double taxation. Income tax treaties are to be brought into
effect as domestic law, after their ratification, by way of a notice in the Government Gazette.
The court reasoned that the objective of section 108 is generally met by distributive rules in tax
treaties because they state “in which contracting state taxes of a particular kind may be levied
or that such taxes shall be taxable only in a particular contracting state or, in some cases, by
stating that a particular contracting state may not impose the tax in specified circumstances.”60
In other words, it was because of the relieving nature of income tax treaties that the Supreme
Court decided they will apply in preference to (charging) aspects of domestic tax legislation.
As far as the administrative aspects of income tax treaties are concerned, the High Court
has held that, in line with the reasoning of the Constitutional Court, exchange of information
provisions in South Africa’s tax treaties, as incorporated in domestic law, should be “reconciled
and read as one coherent whole” with domestic tax administrative law.61 The High Court
therefore followed the Constitutional Court’s approach of equality of status of administrative
aspects of domesticated tax treaties and domestic laws generally.
Potential status of the MLI in domestic law
Those provisions of the MLI that are aimed at the “prevention, mitigation or discontinuance”
of double taxation will, on the basis of the Supreme Court of Appeal’s decision in the Tradehold
case, apply in preference to any domestic tax law (which includes all previously domesticated
tax treaties), to the extent that there may be any conflict. In other words, where the MLI changes
58
Ibid., at para. 100 (footnotes supressed).
59
Commissioner for the South African Revenue Service v. Tradehold Ltd 2013 (4) SA 184 (SCA), at [17].
60
Ibid.
61
South African Revenue Service v. Werner van Kets 2012 3 SA 399 (WCC), para. [25].
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South Africa
distributive rules of South Africa’s income tax treaties, such changes can be expected to apply
in preference to any prior domestic tax law, including domesticated income tax treaties.
Administrative tax law provisions of the MLI will need to be assessed on a separate
footing, given that they will apply as law of equal status with prior domestic tax law (and
previously domesticated income tax treaties). This is particularly relevant for the relationship
between the domestic general anti-avoidance rule and the Principle Purpose Test, should the
latter be classified as being of an administrative tax law nature. These aspects of the MLI will
need to be reconciled with existing domestic tax law and, to the extent possible in logic, be
read as a “coherent” body of law.
Additional legislation desirable to domesticate the Principle Purpose Test?
Not all aspects of the MLI can be said to be aimed at the “prevention, mitigation or
discontinuance” of double taxation, as envisaged in the enabling legislation.62 In particular,
the anti-abuse provisions of the MLI, including the Principle Purpose Test, are not aimed to
prevent double tax. In terms of South African case law, general anti-avoidance tax rules are
administrative clauses aimed to protect the charge to income tax and are, in themselves, not
charging or relieving.63 On this basis, it cannot be merely assumed that the anti-abuse aspects
of the MLI such as the principle purpose test will apply in preference to South African domestic
tax law if the ordinary route to domesticate the MLI is followed. Based on the jurisprudence of
the Constitutional Court, a domesticated Principle Purpose Test will rank equally with domestic
law.64 In several respects South Africa’s domestic general anti-avoidance rule is either narrower65
and/or more advanced in its operational rules and procedures66 compared to the Principle
Purpose Test. Complex questions of relationship and hierarchy of norms will therefore arise,
which logically will not be possible to reconcile without supplementary legislation.
The question for South African lawmakers is whether, if they follow the ordinary process
for domestication of tax treaties in respect of the MLI, they risk making the Principle Purpose
62
Income Tax Act, 58 of 1962, s. 108(1).
63
The highest court held in Glen Anil Development Corporation Ltd v. Secretary for Inland Revenue 1975 (4) SA 715 (A),
727 that a general anti-avoidance rule was not there to “impose a tax, nor does it relate to the tax imposed by
the Act or to the liability therefor or to the incidence thereof, but rather to schemes designed for the avoidance
of liability therefor”.
64
Glenister, above n. 56.
65
The following jurisdictional requirements that enable the domestic GAAR are ostensibly narrower compared
to the requirements for tax administrators to invoke the PPT: “the sole or main purpose” of an avoidance
arrangement must be to enjoy a tax benefit (Income Tax Act, 58 of 1962, s. 80A) and the arrangement must
satisfy one of the following features: the “means and manner” of the avoidance arrangement should not be
“normally […] employed for bona fide business purposes” (ibid., s. 80A(a)(i)); or the avoidance arrangement must
lack commercial substance (ibid., s. 80A(a)(ii)); or the avoidance arrangement “created rights or obligations that
would not normally be created between persons dealing at arm’s length” (ibid., s. 80A(c)(i)); or the avoidance
arrangement results “directly or indirectly in the misuse or abuse of” tax legislation (ibid., s. 80A(c)(ii)).
66
The powers arising for the tax administration once the GAAR is invoked, are circumscribed based on the principle
of proportionality. This requires, for example, that so-called compensating adjustments must be made to ensure
consistency (Income Tax Act, 58 of 1962, s. 80B(2)). There are several procedural safeguards aimed at protecting
taxpayers, for example an early notification requirement (ibid. s. 80J), a practice of internal moderation by a
separate panel before proposed GAAR adjustments may be made, a reversal of onus of proof (ibid., s. 80G) and
specification of hierarchy of norms (ibid., s. 80I).
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Hattingh & West
Test compete with the general anti-avoidance rule, thereby creating an environment of
much uncertainty, especially for foreign investors. For example, the Principle Purpose Test,
as introduced by the MLI, is entirely silent on operational procedures and does not specify
any domestic law remedy for aggrieved taxpayers.67 The risk is that taxpayers may be locked
in administrative law remedies when they are aggrieved by an application of the Principle
Purpose Test.68 This will be unjustified as the policy in regard to the domestic general anti-
avoidance rule is to clearly allow taxpayers a remedy before the Tax Court on the substantive
aspects of the rule’s application.69 In all, separate and specific domesticating legislation for the
MLI would be a preferable pathway to align the MLI to existing domestic tax law, once ratified.
Potential for changes to the MLI post domestication
In theory, Parliament can enact legislation that alters earlier domestic legislation
incorporating tax treaties. However, South Africa has never exercised such an action in respect
of tax treaties. As was discussed earlier, the government’s policy is not to support unilateral
retaliatory actions, but rather to pursue bilateral renegotiation.
No actual disputes about the interpretation of the MLI has arisen in South Africa since it is
not operational as domesticated law. The evidentiary value of the Explanatory Statement and
other OECD materials about the provisions of the MLI is uncertain. Nor is it possible to say
whether South African courts will automatically view them in the same light as, for example,
the Commentaries on the OECD or UN Model.70
67
For example, in South African domestic tax administrative law, any decision-making powers of the South African
Revenue Service specified in legislation must be expressly made “subject to objection and appeal”, which enables
aggrieved taxpayers to avail of the tax disputes resolution remedies, including the right to have the merits of
a dispute adjudicated by the Tax Court (Income Tax Act, 58 of 1962, s. 3(4)). Without such express legislative
confirmation, remedies such as appeal to the Tax Court are not available. The residual remedy is for taxpayers
to approach the High Court for judicial review of the administrative decision, which precludes adjudication of
the merits of the dispute.
68
For an illustration of the constraints and limited nature of administrative law remedies, see Starr International Co.
Inc v. United States of America No 14-cv-01593 (CRC) (US District Court Columbia) (14 August 2017) 20 ITLR 94.
69
See Income Tax Act, 58 of 1962, s. 3(4)(b).
70
Despite not being a member of the OECD, the Commentaries on the OECD Model have been considered in a
number of South African cases, yet it would appear that there is no definitive answer to its legal status in South
Africa other than to say that courts use their discretion in referring to such extra-textual material as an aid to
interpretation (J Hattingh and M Eksteen, “South Africa”, in G Maisto (ed.), New Trends in the Definition of Permanent
Establishment, (2019, IBFD), at 22.1.2.1; EC Jansen van Rensburg, A South African perspective on the meaning of
“beneficial ownership” in Article 10 of the OECD Model Tax Convention on Income and Capital in the context of conduit
company treaty shopping (LLD Thesis, University of Pretoria, 2018), available at http://hdl.handle.net/2263/65660,
pp. 243-245; LA Steenkamp, “An analysis of the applicability of the OECD Model Tax Convention to non-OECD
member countries: The South African case”, (2017) 10 Journal of Economic and Financial Science 1, pp. 83-93). It is
worth noting that no South African court has to date referred to the UN Model or its Commentaries.
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South Africa
Anticipated issues
Several interpretational issues have arisen in anticipation of the MLI coming into effect in
South Africa.
Principle Purpose Test
Issues concerning the practical operation and interpretation of the Principle Purpose Test,
especially in relation to the domestic general anti-avoidance rule, were explained above at
section 2.1.2 Dual resident mutual agreement
The introduction by the MLI in covered tax agreements of the new mutual agreement
tie-break clause for corporate entities, is anticipated to cause transitional uncertainty. The
impact on, for example, the income tax treaty concluded in 2003 by South Africa and the
United Kingdom provides a good illustration. This may impact dual listed companies.71
The determination of residence under the domestic income tax laws of South Africa and
the UK does not require any proactive or discretionary assertion by the tax authorities of
either country. A typical fact pattern may be a company incorporated in South Africa (due
to regulatory requirements of the central bank) but with its place of effective management
in the UK (due to the location of its headquarters in London). Such a dual resident company
will be considered resident in the UK under the existing place of effective management tie-
break rule in the applicable tax treaty.72 Under the domestic tax law of South Africa, this
has the effect that the company is not resident in South Africa for all tax purposes, i.e. not
merely for purposes of the tax treaty.73 When the MLI comes into effect, the modified tie-
break rule requiring a determination by the competent authorities will forthwith apply to
the applicable fiscal year. For this transitional fiscal year, the company’s tax residence under
South African income tax law will automatically reinstate because of the absence of a positive
determination by the competent authorities about the country in which it should solely
reside for tax treaty purposes. The practical effect, among other, is that the company will
lose entitlement to treaty benefits until the competent authorities resolve the matter. It is
unclear whether the OECD realized that domestication of the MLI may cause the loss of treaty
benefits in situations where the underlying material facts have not changed. This aspect of
the MLI’s operation has been criticized, and a solution proposed, as follows:
[A] provision should be included in bilateral treaties or MoUs relying on the competent
authorities under the residuary power granted by the last sentence of article 4(1) of the MLI […]
to the effect that such dual-resident companies remain treaty resident in the state in which
they had PoEM if material facts have remained the same or until an agreement is reached
by the competent authorities (a recommendation that the authors would put forward
for all dual-resident situations and not only for transitional situations when the treaty
provision has changed). Such practice avoiding or limiting the effects of forced migration
had been adopted, for instance, by the United Kingdom with regard to its tax treaty with the
71
See G. Maisto, S. Austry, J.F. Avery Jones, P. Baker, P. Blessing, R. Danon, S. Goradia, J. Hattingh, K. Inoue, J. Lüdicke,
T. Miyatake, A. Nikolakakis, F. Pötgens, K. van Raad, R.J. Vann, B Wiman, “Dual Residence of Companies under
Tax Treaties”, International Tax Studies 1 (2018), Journals IBFD, at 25-26.
72
Convention between South African and the United Kingdom for the avoidance of double taxation and the prevention of
fiscal evasion with respect to taxes on income and capital gains, 2003, art. 4(3).
73
Income Tax Act, 58 of 1962, proviso to the definition of a “resident”, s. 1.
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Netherlands [fn 458: See HMRC, Explanatory Memorandum to the Double Taxation Relief
and International Tax Enforcement (Taxes on Income and Capital) (Netherlands) Order 2009,
no. 227, which, under art. 4(6), states as follows: “Where a company was resident in both the
Netherlands and the United Kingdom under the domestic law of those countries before the
entry into force of this Convention, and the status of that company was determined by the
residence ‘tie breaker’ in the 1980 Convention (Article 4(3), which uses the criterion of place
of effective management), the competent authorities of the Netherlands and the UK will not
seek to revisit that determination so long as all the material facts remain the same. Where the
material facts change after entry into force of this Convention, and the competent authorities
determine that for treaty purposes the company should be regarded as a resident of the
other country (or the competent authorities do not reach a mutual agreement), that new
determination (or the loss of treaty benefits pursuant to the absence of a mutual agreement)
will apply only to income or gains arising after the new determination (or notice to the
taxpayer of the absence of an agreement).]74
The above anticipated issues clearly have practical application. They illustrate the need
for a country such as South Africa to carefully assess the impact of domesticating the MLI.
As is apparent from the example of dual resident companies, additional steps to regulate
transitional implementation are required. Further, and perhaps more fundamentally,
additional implementation legislation may be required where the MLI falls short compared
to domestic policy and standards. As argued earlier,75 this is clearly the case where procedural
application of the Principle Purpose Test falls short of meeting domestic GAAR tax policy,
as well as potentially failing to adhere to South African constitutional standards of just
administrative action and fairness.
It is an arresting question to ask whether, in South Africa, the BEPS Reports may be given the
same legal weight as the OECD Commentaries in future tax treaty interpretation based on
the MLI. This is because, as a non-member of the OECD but as a G20 member, South Africa
fully participated in the crafting of the BEPS Reports and decisions about priority setting. As
a result, the BEPS Reports arguably have more political legitimacy compared to the OECD
Commentaries because the former can be said to reflect the policy of the government.
At general level, BEPS Reports, like the OECD Commentaries are extrinsic aids that
contribute to a reconstruction of the circumstances in which the MLI was concluded.76 As a
matter of international treaty law, the BEPS Reports therefore have legal value under article
32 of the Vienna Convention.
74
Maisto, et al., Dual Residence of Companies under Tax Treaties, n71, at 77.
75
See text at n. 64 to 69.
76
The BEPS Report are copiously relied on indirectly in the Explanatory Statement as the source to explain the
meaning of substantive clauses of the MLI. See for example para. 41 of the Explanatory Statement in regard to
the MLI’s anti-abuse measures.
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Unified approach to interpretation of legal texts
Since 2012, the highest courts of South Africa have reviewed the principles for interpretation
of all legal texts.77 Most recently, some of these revised principles were applied by the Tax
Court in a tax treaty case.78 What is evident from these recent decisions is that South African
courts now seem to readily agree on the following broad points of departure:
–– Interpretation of any legal text, including treaties, in a domestic court is based on South
African law;
–– South African law on treaty interpretation currently is no different from international law,
and international law must in any event be preferred when interpreting laws as required
by section 233 of the Constitution;
–– South African law on legal interpretation may in part be more specific than the rule for
treaty interpretation enumerated in article 31 of the Vienna Convention. This is particularly
evident in areas such as what may be allowed as evidence to establish the various limbs
in the interpretation process. In other words, what evidence (oral or documentary) may
be used to establish the ordinary meaning of treaty text, its purpose, aim and context,
and what can be included or not as supplementary means.
Conservative use of extrinsic aids for tax treaty interpretation
The above points were recently illustrated in a Tax Court case.79 The Tax Court followed the
Supreme Court’s decision that the parol evidence rule applies to all legal texts, including
tax treaties.80 Therefore, evidence by government officials about the government’s policy
intentions when negotiating or amending tax treaties were held to be inadmissible.81 The Tax
Court applied the approach of the Supreme Court to extrinsic evidence: this can only be used
to “contextualise the document (since “context is everything”) to establish its factual matrix
or purpose”, and when doing so, “one must use it as conservatively as possible”.82 Based on
this aforementioned approach to the use of extrinsic evidence, it can be expected that South
African courts may admit as evidence BEPS Reports when the impact of the MLI will need to
be interpreted. In terms of the leading cases, these reports may be useful aids to establish
either the purpose of a particular treaty provision, or may be used as supplementary means to
confirm (but not usually to derive) the ordinary meaning, contextually constructed. However,
one should also expect that BEPS Reports will be considered with circumspection in terms
of the conservative approach to the use of extrinsic materials. It is doubtful whether South
African courts will use the BEPS Reports to establish the ordinary meaning of treaty text as
77
The key cases are Glenister 2011 (CC), above n 56; Natal Joint Municipal Pension Fund v. Endumeni Municipality 2012 (4)
SA 593 (SCA), [17]-[26]; KPMG Chartered Accountants (SA) v. Securefin Ltd 2009 (4) SA 399 (SCA); The City of Tshwane
Metropolitan Municipality v. Blair Atholl Homeowners Association [2019] 1 All SA 291 (SCA).
78
ABC Pty Ltd v. Commissioner for the South African Revenue Service 2019 Tax Court Case 14287; 22 ITLR.
79
Ibid.
80
Ibid, [28], [29]. The parol evidence or integration rule holds that if a document was intended to provide a complete
memorial of a legal act, extrinsic evidence may not contradict, add to or modify its meaning.
81
Ibid, see at [29], [30].
82
KPMG 2009 (SCA), above n 75, at [65]; ABC Pty Ltd 2019 TC, above n 78, at [28].
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they view this limb as purely a legal and not a factual question in which the written text is
always the point of departure.83
Preliminary positions adopted by South Africa on the MLI have in fact already resulted in an
impact on the administration of all tax treaties. Whether any of these positions, when they
are finalized at the time of ratification, will affect the interpretation of earlier tax treaties is
not yet clear.
Mutual Agreement Practice Reviewed
South Africa indicated a preliminary reservation against adoption of the default measures to
improve the mutual agreement procedure under article 16(1) of the MLI. Under the applicable
reservation, South Africa will only allow submission of a case to the competent authorities
in the residence state of a taxpayer, and not in either contracting state.84 The trade-off is
that South Africa must commit to meet the minimum standard for improving dispute
resolution under the OECD/G20 BEPS package by implementing a bilateral notification or
consultation process with the competent authority of the other contracting state for cases
in which the South African competent authority “does not consider the taxpayer’s objection
to be justified”.85
The background to this reservation is that, according to official OECD statistics for MAPs
in 2017, South Africa’s competent authorities did not compare favourably to averages in key
areas such as denying access to MAP.86 South Africa was scheduled for an OECD peer review in
2018. As a result, the South African Revenue Service reformed its MAP practice and published
extensive guidance in July 2018, which was finalized in October 2018.87 In the official OECD
MAP statistics for 2018, an improvement in some areas of MAP performance could be
observed.88 These improvements were not tied to whether a tax treaty is a MLI covered
agreement or not, but applies across the spectrum. It is an example where a preliminary
position on the MLI correlates to a corresponding impact on the administration of all South
Africa’s tax treaties.
83
Endumeni 2012 (SCA), above n 77, at [18].
84
Republic of South Africa, Status of List of Reservations and Notifications at the Time of Signature, art. 16 (available at:
http://www.oecd.org/tax/treaties/beps-mli-position-south-africa.pdf).
85
BEPS Multilateral Instrument, art. 16(5)(a).
86
In 2017, South African competent authorities denied access to MAP in 37% of cases compared to the global average
of 6% (see OECD, “South Africa – 2017 MAP Statistics”. Available at: http://www.oecd.org/tax/dispute/2017-MAP-
Statistics-South-Africa.pdf).
87
South African Revenue Service, Guide on Mutual Agreement Procedures (Issue 2) (available at: https://www.sars.
gov.za/AllDocs/OpsDocs/Guides/LAPD-IT-G24%20-%20Guide%20on%20Mutual%20Agreement%20
Procedures.pdf).
88
In 2018, South African competent authorities, for example, denied 0% of cases for MAP access (see OECD, “MAP
Statistics 2018 South Africa”. Available at: http://www.oecd.org/tax/dispute/2018-map-statistics-south-africa.
pdf), compared to 37% of cases in 2017 (above at n 86).
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South Africa
Review of domestic PE definition as a result of MLI reservation
In 2017, South Africa provisionally reserved against application of article 12 of the MLI
concerning artificial avoidance of PE status through commissionaire arrangements and
similar strategies, as well as article 14 of the MLI that deals with splitting up of contracts.89
These reservations raised questions about the coherence of South Africa’s overall PE policy,
as both the expansion of the deemed agency PE provision and the anti-avoidance contract
splitting clauses encapsulated in articles 4(1) and 5(5) of the 2017 OECD Model automatically
apply to supply the PE definition in South Africa’s domestic income tax legislation.90 The
Minister of Finance announced in the 2019 Budget that the domestic definition of a PE will
be reviewed in light of the preliminary position on the MLI and the changes to the 2017 OECD
Model.91 These developments illustrate how a preliminary position on the MLI has led to a
review of the corresponding area of domestic tax law.
It is not possible to state as an empirical fact that tax professionals in South Africa as a general
cohort already take account of the Principle Purpose Test in tax planning. Yet, anecdotal
experience is that the Principle Purpose Test is among the most featured topics judged by
the scale of MLI related in-house training and general discussion, especially at leading firms.
However, it’s worth emphasizing that in this transitional period the extent of recognition is,
at best, inconsistent and erratic among the practitioner body. It is therefore reasonable to
assume that the PPT may already be considered for major transactions or existing structures
that might, in future, be subject to a covered tax agreement.
Assessment practices by the South African Revenue Service can be expected to officially
only change when the MLI becomes effective in domestic law. Yet, levels of awareness are
high and judged by the keen engagement with the OECD, it can be expected that specific tax
audit procedures will be forthcoming.
As was explained earlier at 2.2.3, South Africa’s choice of reservation to not allow taxpayers
to present a case to either contracting states under the mutual agreement procedure, but to
rather restrict submission to the state of residence and to implement a bilateral notification
procedure when a case is rejected, resulted in an overhaul of the entire mutual agreement
practice of the South African Revenue Service. This was because, in anticipation of an OECD
peer review, the South African Revenue Service published detailed guidance, for the first
time, explaining the approach and processes for mutual agreements in South Africa. In
practice it is understood that the idea of a well-resourced, professional, and experienced
competent authority function is a very recent development resulting in teething and
upskilling challenges.
A significant challenge in practice for South African taxpayers concerns not so much the
skill and procedures of the South African competent authority, but those of their counterparts,
often in other developing countries. MAPs with counterpart CAs who themselves are new to
the process, are often perceived to be ineffective and even unjust.
89
See n 84.
90
J Hattingh and M Eksteen, above n 70, at 22.1.3.
91
National Treasury Republic of South Africa, Budget Review 2019, p. 133 (available at: http://www.treasury.gov.
za/documents/national%20budget/2019/review/FullBR.pdf).
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Branch reporter
Aurora Ribes Ribes1

The MLI was signed by Spain on 7 June 2017. Once it comes into effect (it is expected that after
the Senate approval, the instrument of ratification will be deposited with the OECD) it will
modify the application of most of the Spanish double tax treaties currently in force. In this
respect, Spain has included 86 tax treaties that it wishes to be covered by the MLI.
As an active member of the OECD, Spain has strongly supported the usefulness of this
instrument in order to reduce the possibilities of international tax evasion/avoidance. In
this sense, it has adopted a proactive position by assuming most of the proposals of the MLI.
At the time of signature, the Spanish government released its provisional list of expected
reservations and notifications pursuant to articles 28(7) and 29(4) of the Convention, that
will be confirmed upon deposit of the instrument of ratification.
From a statistical perspective, it can be quoted that, out of 94 Spanish bilateral tax treaties
in force, 91% have been listed by Spain, although due to the other contracting states’ decisions
on their own CTAs, only 50% are actually matched/covered by the MLI.
Spain has addressed tax treaty shopping both at the domestic and treaty level. Concerning
the prevention of treaty abuse, the Spanish agreements that will be modified by the MLI will
come into compliance with the minimum standard once the provisions of the MLI take effect.
For 84 of its agreements listed under the MLI, Spain is implementing the preamble statement
(article 6 of the MLI). For 83 of its agreements listed under the MLI, Spain is implementing
the PPT (article 7 of the MLI).
As a member state of the EU, Spain already included in its tax treaties signed with other
EU members the minimum holding period for transactions or arrangements undertaken to
access the reduced treaty rate on dividends paid to a parent company in article 8 of the MLI.
With regard to the substituted property rule for gains from the alienation of shares or
comparable interests deriving their value primarily from immovable property at any time
during the 365-day period preceding the alienation of the property in article 9 of the MLI,
Spain has chosen to apply article 9(4) of the MLI. The content and purpose of article 10 of the
MLI has been positively assessed by Spain, by considering of interest that it be incorporated
into all the CTAs.
Regarding article 12 of the MLI, it should be noted that no reservation has been made
by Spain. Concerning article 13 of the MLI, Spain has chosen to apply Option A under article
13(1). With regard to the splitting-up of contracts, Spain reserves the right for the entirety of
article 14 of the MLI not to apply to its CTA, considering that the provision already contained
in this sense in the Spanish double tax treaties is sufficient.
As regards article 3 (Transparent Entities), Spain reserves the right for paragraph 1 not to
apply to its CTAs that already contain a provision described in article 3(4) of the MLI. Further,
it should be noted that Spain reserves the right for the entirety of article 4 (Dual Resident
Entities) not to apply to its CTAs.
1
Full Professor of Tax Law University of Alicante (Spain).
IFA © 2020 759

Spain
With regard to the impact the MLI is expected to have on the resolution of tax disputes
under the mutual agreement procedure and arbitration, the future results will depend on
the possible reservations and choices made by the other jurisdictions that opted for Part VI.
Up to now the MLI has not given rise to any specific interpretations in Spain, neither by
the government or by courts. In any case, the future interpretations of the MLI by the Spanish
authorities should observe the explanatory memorandum of this instrument, as it is intended
to clarify the operation of the MLI to modify CTAs.
Tax Treaty Network
1.1. Introduction
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS
was signed by 67 government ministers on 7 June 2017. The OECD Multilateral Instrument
(“MLI”) is intended to transpose results from the OECD BEPS Project into thousands of double
taxation conventions worldwide and is open for signature by any country. Signatories of the
MLI may choose which of the existing double tax treaties they would like to modify using
the MLI. Once a treaty has been listed by the two parties, it becomes an agreement to be
covered by the MLI.
By its legal nature, the MLI is a multilateral international agreement, that shall be applied
alongside existing bilateral double taxation conventions, modifying their application. In this
way, bilateral tax treaties can be modified in a synchronized and consistent way in order to
swiftly implement tax treaty related anti-BEPS measures. A full-scale implementation is
expected to be effectuated by the OECD during 2019.
From the Spanish view, the existence of agreements for the avoidance of double taxation
with respect to taxes on income and on capital is essential to promote foreign investment,
either foreign investment in Spain or Spanish capital investment abroad, as they provide
legal certainty to investors and reduce the taxation of such investments.
Under this premise, during the past decade Spain has rapidly expanded its tax treaty
network in a dual sense: first, to conclude new double tax treaties with countries not yet
involved within the geographical area covered by the existing Spanish network. In this
respect, Spain has expanded the international scope of its double tax conventions to areas
such as Africa and Asia. And, secondly, Spain has also renegotiated some earlier treaties,
which basically followed outdated versions of the OECD Model Convention (hereinafter OECD
MC). Most of those antiquated Spanish double tax treaties were drafted with EU partners and
there was a strong economic and legal need to adapt their contents, scope and rules to new
economic and social circumstances, and specifically to the new OECD MC and Commentaries.
Currently, 103 agreements have been concluded by Spain to avoid double taxation and to
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prevent fiscal evasion,2 even though there are 94 agreements in force. The other nine are in
different stages of processing (Azerbaijan, Bahrain, Belarus, Cape Verde, People’s Republic
of China, Montenegro, Namibia, Peru and Syria). In addition, the bilateral tax treaties signed
with Austria, Belgium, Canada, the United States, Finland, India, Mexico, the United Kingdom
and Romania have been renegotiated. In fact, it is expected that the modified tax treaties
with the United States and the Netherlands, together with the recent tax treaty signed with
Peru enter into effect shortly.
On 28 November 2018 Spain signed a new bilateral tax convention with the People’s
Republic of China. Once it comes into force, this tax treaty will replace the previous one,
which was concluded in 1990.
Double tax treaties signed by Spain before the MLI (with the exception of Mexico) do not
contain preamble language referring to a desire to develop an economic relationship or to
enhance co-operation, by describing the intent of the contracting jurisdictions to eliminate
double taxation without creating opportunities for non-taxation or reduced taxation.
Spain has addressed tax treaty shopping both at the domestic and treaty level. In this
regard, the domestic general anti-avoidance provisions set out in the Spanish General Tax
Act (articles 13, 15 and 16 -substance over form, artificial arrangements and sham-) can be
mentioned, as well as the specific anti-avoidance provisions established in the Income Tax
Act, Corporate Income Tax Act and Non-Residents Income Tax Act (look-through rules or
anti-conduit provisions).
Likewise, most of the Spanish agreements signed before the MLI include anti-avoidance
provisions, such as:
–– Look-trough provisions that deny treaty benefits to a company resident in a contracting
state to the extent that the company is not owned directly or indirectly by residents of
that state. This is the case, for example, with the Spanish tax treaties concluded with
United States, Malta, Portugal, Croatia, El Salvador, Ireland, Jamaica, Russia, Cuba, Israel,
Slovenia, Estonia, Lithuania, Latvia, Iceland, Bolivia, Belgium, Norway, Malaysia, Serbia,
Trinidad and Tobago, South Africa and Vietnam.
–– Exclusion provisions denying treaty benefits to non-resident-owned companies enjoying
special tax privileges in the state of residence. See, for instance, the Spanish tax treaties
signed with Malaysia, Macedonian, Jamaica, and the Protocols to the double taxation
conventions with Luxembourg and Malta.
–– Subject-to-tax provisions granting source-state treaty benefits only for income that is
subject to tax in the residence state, included, for example, in the Spanish tax treaties
with Canada, Ireland and Saudi Arabia.
–– Channel provisions denying treaty benefits for income received by a company resident
in the other contracting state that is used primarily to satisfy claims of one or more
persons not resident in that state who have substantial interest in the company and/or
exercise control over the company. One example of the so-called channel approach is the
2
The complete list of the Spanish tax treaties currently in force is available at the internet portal of the Spanish
Ministry of Finance. See:
http://www.hacienda.gob.es/es-ES/Normativa%20y%20doctrina/Normativa/CDI/Paginas/CDI_Alfa.aspx.
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clauseincluded in the tax treaty between Spain and the United States, intended to avoid
the “stepping stone strategy”.
–– Limitation of benefit (LOB) provisions that limit treaty benefits to specific persons or
categories of income are contained, for instance, in the Spanish tax treaties concluded
with the United States, El Salvador, Jamaica, Moldova, Serbia, Trinidad and Tobago.
Similarly, the beneficial ownership clause is taken into account concerning dividends in
the Spanish tax treaties signed, for example, with Germany, Austria, Brazil, Canada, Czech
Republic, Finland, Japan, Morocco, Poland, Sweden, Switzerland and Tunisia. With regard to
interests, this clause is also contained, for instance, in the Spanish tax treaties concluded with
Algeria, Argentina, Saudi Arabia, Australia, Colombia, Republic of Korea, People’s Republic of
China, Chile, New Zealand, Turkey, Israel, Norway, Thailand, Portugal, Macedonian, Morocco,
Moldova, South Africa, Egypt, Malta, Serbia, El Salvador and Vietnam. In the same line,
concerning royalties, the beneficial ownership clause is included in most of the Spanish tax
treaties concluded since 1977, such as the conventions signed with Japan, Morocco, Poland,
Sweden, Switzerland, Germany, Austria, Brazil, Canada, Czech Republic and Canada.
Spain has also responded to other tax treaty abuses, such as the transactions or
arrangements undertaken to avoid taxation of immovable property situated in a contracting
state, including transactions or arrangements intended to dilute the proportionate value
of shares or comparable interests deriving their value primarily from immovable property
situated in a contracting state. This rule shopping, based in the Commentaries to article 13 of
the OECD MC, is contained nowadays in the current version of the OECD MC and, for example,
in the Spanish tax treaties signed with Canada, Republic of Korea, People’s Republic of China,
United States, Philippines, France, Ireland, Luxembourg, Mexico, Poland, Portugal and Russia.
In this line, most Spanish tax treaties have also embodied the substantial participation clause,
provided in article 13(4)OECD MC and 13 (5) of the United Nations MC.
On the other hand, the treaty-based anti-avoidance provisions are sometimes completed
with another measure in order to mitigate their impact in the case that the bona fides prevails.
In this respect, a bona fides provision is included in the Spanish tax treaties signed with the
United States, the United Kingdom, Mexico, France and in the Protocol to the double tax
convention with Ireland.
Spanish tax treaties include a mutual agreement procedure provision inspired by article
25 of the OECD MC. For a detailed explanation of transfer pricing cases covered by MAP,
see the footnote below.3 Nevertheless, only three treaties concluded by Spain provide for
mandatory binding arbitration (United States, United Kingdom and Switzerland). There is
no experience with arbitration so far.
The “OECD Multilateral Convention to Implement Tax Treaty Related Measures and to Prevent
Base Erosion and Profit shifting”, which is derived from Action 15 of the OECD/G20 Base
Erosion and Profit Shifting (BEPS) initiative, was published on 24 November 2016.
3
See detailed explanation in “Spain dispute resolution profile”. Last updated: 22 February 2019. Available at:
https://www.oecd.org/tax/dispute/spain-dispute-resolution-profile.pdf.
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As an active member of the OECD, Spain has strongly supported the usefulness of this
instrument in order to reduce the possibilities of international tax evasion/avoidance.4 The
MLI was signed by Spain, together with many other countries and jurisdictions, at the plenary
session held at the OECD’s headquarters in Paris on 7 June 2017.5 The MLI entered into force
on 1 July 2018, following five countries having ratified the instrument. There are now 89
jurisdictions that are signatories to the treaty, but only in 29 has the MLI come into effect.
As well as signing the MLI, Spain submitted a document entitled “The Status of List of
Reservations and Notifications at the time of signature”,6 which includes a provisional list of
expected reservations and declarations to be made by Spain, pursuant to articles 28(7) and
29(4) of the Convention, concerning the provisions on the MLI.
In this respect, it should be noted that Spain’s positions, reserves and notifications will
be provided upon the deposit of Spain’s instrument of ratification, acceptance or approval
of the MLI. Consequently, this list of reservations and notifications at the time of signature
submitted by Spain, is provisional.7
Taking into account that the Spanish MLI signature was made “ad referendum”, Spain had
to ratify the instrument later by both by the Spanish Council of Ministers and by parliament.8
On 13 July 2018, the Spanish Council of Ministers approved the MLI. Subsequently, on 21
February 2019, the Spanish Congress formally approved the MLI. In spite of the fact that the
date to be revised and authorized by the Spanish Senate was 11 March 2019, the process was
suspended because of the call of general elections. The elections results did not allow to form
a government, so the new elections took place on 10 November. At present, the new Spanish
government has been designated so, once the Senate approves the Spanish consent, it is
expected that the MLI will enter into force, after the instrument of ratification is deposited
with the OECD.
For the time being, there has not been any preliminary assessment (by parliament, the
government or any other institution) of the economic and budgetary impact of the MLI in
Spain. Likewise, the Spanish tax authorities have not attempted to assess the impact of the
MLI on tax compliance and administration and economic activity.
Concerning the question of when covered tax agreements (CTAs) will become subject
to the MLI provisions, the following detailed notification (articles 35 and 36) made by Spain,
can be noted:
4
The Spanish literature also pointed out the relevance of this initiative in their preliminary approaches. See
Carmona Fernández N.: “El Convenio multilateral: un paso (complejo) adelante en el ámbito de la Fiscalidad
internacional”, in Carta Tributaria No. 31, 2017, p.7; Ribes Ribes, A.: “La posición española ante el Convenio
multilateral de la OCDE para prevenir la erosión de las bases imponibles y el traslado de beneficios”, in Quincena
Fiscal No. 6, 2018, p.83; Simón Acosta, E.: “El Convenio multilateral de la OCDE”, in Actualidad Jurídica Aranzadi
No. 940, 2018, p.6; Jiménez Vargas, P.J.: “El nuevo Convenio multilateral: un paso delante de la OCDE en la
armonización fiscal en contra de la evasión y la elusión fiscal”, in Quincena Fiscal No. 19, 2018 [BIB 2018\13418].
5
OECD: “Ground-breaking Multilateral BEPS Convention signed at OECD will close loopholes in thousands of tax
treaties worldwide”, 2017. Available at www.oecd.org/tax/ground-breaking-multilateral-beps-convention-
will-close-tax-treaty-loopholes.htm.
6
OECD: “Signatories and parties to the multilateral Convention to implement tax treaty related measures to
prevent base erosion and profit shifting”, Status as of 30 September 2019. This document can be found at http://
www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf.
7
See http://www.oecd.org/tax/treaties/beps-mli-position-spain.pdf.
8
The Spanish General Assembly is integrated by two Chambers (Congress and Senate).
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With regard to the entry into effect established in article 35, Spain reserves the right to
replace several date references to the general deadline of 30 days for articles 28(9)(a), 28(9)
(b), 29(6)(a), 29(6)(b), 35(1), 35(4), 35(5), 36(1), 36(2), 36(3), 36(4) and 36(5).
In particular, pursuant to article 35(7)(a) of the Convention, Spain reserves the right to
replace:
i) the references in article 35(1) and (4) to “the latest of the dates on which this Convention
enters into force for each of the Contracting Jurisdictions to the Covered Tax Agreement”;
and
ii) the references in article 35(5) to “the date of the communication by the Depositary of the
notification of the extension of the list of agreements”;
with references to “30 days after the date of receipt by the Depositary of the latest
notification by each Contracting Jurisdiction making the reservation described in
paragraph 7 of article 35 (Entry into effect) that it has completed its internal procedures
for the entry into effect of the provisions of this Convention with respect to that specific
Covered Tax Agreement”;
iii) the references in article 28(9)(a) to “on the date of the communication by the Depositary
of the notification of withdrawal or replacement of the reservation”; and
iv) the reference in article 28(9)(b) to “on the latest of the dates on which the Convention
enters into force for those Contracting Jurisdictions”;
for the entry into effect of the withdrawal or replacement of the reservation with respect
to that specific Covered Tax Agreement”;
v) the references in article 29(6)(a) to “on the date of the communication by the Depositary
of the additional notification”; and
vi) the reference in article 29(6)(b) to “on the latest of the dates on which the Convention
enters into force for those Contracting Jurisdictions”;
for the entry into effect of the additional notification with respect to that specific Covered
Tax Agreement”;
vii) the references in article 36(1) and (2) (Entry into effect of Part VI) to “the later of the dates
on which this Convention enters into force for each of the Contracting Jurisdictions to the
Covered Tax Agreement”;
for the entry into effect of the provisions of this Convention with respect to that specific
Covered Tax Agreement”; and
viii) the reference in article 36(3) (Entry into effect of Part VI) to “the date of the communication
by the Depositary of the notification of the extension of the list of agreements”;
ix) the references in article 36(4) (Entry into effect of Part VI) to “the date of the communication
by the Depositary of the notification of withdrawal of the reservation”, “the date of the
communication by the Depositary of the notification of replacement of the reservation”
and “the date of the communication by the Depositary of the notification of withdrawal
of the objection to the reservation”; and
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x) the reference in article 36(5) (Entry into effect of Part VI) to “the date of the communication
by the Depositary of the additional notification”;
paragraph 7 of article 35 (Entry into effect) that it has completed its internal procedures for
the entry into effect of the provisions of Part VI (Arbitration) with respect to that specific
Covered Tax Agreement”.
Finally, with regard to the entry into effect of Part VI of the MLI, pursuant to article 36(2),
Spain reserves the right for Part VI to apply to a case presented to the competent authority of
a contracting jurisdiction prior to the later of the dates on which the Convention enters into
force for each of the contracting jurisdictions to CTAs only to the extent that the competent
authorities of both contracting jurisdictions agree that it will apply to that specific case.
Spain submitted its MLI position at the time of signature, listing its reservations and
notifications and included 86 tax treaties that it wishes to be covered by the MLI. As it is
known, the MLI allows jurisdictions to update their existing double tax treaties and transpose
measures agreed in the BEPS project without further need for bilateral negotiations. This
means that, once the MLI has entered into force in Spain, it will modify all of Spain’s covered
tax agreements in accordance with the scope provided for in articles 1 and 2 of the MLI. This
will be subject to Spain’s and its tax treaty partners’ final list of positions, reservations and
notifications to be submitted when their instrument of ratification is deposited with the
OECD.
According to the Spanish position submitted at the time of signature (7 June 2017), Spain
wishes the following agreements to be covered by the MLI, pursuant to article 2(1) (a) (ii)
of the Convention: Albania, Germany, Andorra, Saudi Arabia, Algeria, Argentina, Armenia,
Australia, Austria, Azerbaijan, Barbados, Belgium, Bolivia, Bosnia and Herzegovina, Brazil,
Bulgaria, Canada, Qatar, Czech Republic (ex-Czechoslovakia), Chile, Cyprus, Colombia,
Republic of Korea, Costa Rica, Croatia, Cuba, Ecuador, Egypt, El Salvador, United Arab Emirates,
Slovak Republic (ex-Czechoslovakia), Slovenia, United States, Estonia, Philippines, Finland,
France, Georgia, Greece, Hong Kong (China), Hungary, Indonesia, Iran, Ireland, Iceland, Israel,
Italy, Jamaica, Kazakhstan, Kyrgyzstan (ex-URSS), Kuwait, Latvia, Lithuania, Luxembourg,
Macedonian, Malaysia, Malta, Morocco, Mexico, Moldova, Nigeria, New Zealand, Oman,
Pakistan, Panama, Poland, Portugal, United Kingdom, Dominican Republic, Russia, Senegal,
Serbia, Singapore, South Africa, Switzerland, Thailand, Tadzhikistan (ex-URSS), Trinidad and
Tobago, Tunisia, Turkmenistan (ex-URSS), Turkey, Uruguay, Uzbekistan, Venezuela, Vietnam
and India.
The list includes all of the tax treaties concluded by Spain that are currently in effect,
together with their amending protocols, except those which are in a re-negotiation process
(Netherlands, People’s Rep. of China, Japan, Sweden and Norway). In the latter case, once the
revised tax treaties come into effect, it is expected that Spain will negotiate bilaterally with
its tax treaty partners the necessary modifications as a result of the MLI.
Apart from the 86 tax treaties listed by Spain, it is expected that four additional tax treaties
are included in the short future, once they are published in the Spanish Official Gazette. This
is the case of Belarus and Cape Verde, which have been recently signed by Spain, and also
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Spain
of the tax treaties with India (in process of renegotiation) and Romania (recently signed a
bilateral complying instrument).
In this sense, once a treaty has been listed by the two parties, it becomes an agreement
to be covered by the MLI. Notwithstanding the fact that Spain included a great number of
bilateral tax treaties in its list of CTAs, it should be noted that -due to different reasons-
there are many jurisdictions that have still not signed the MLI. Some of these treaties have
been included by Spain because of the commercial or cultural relations with the jurisdictions
involved, such as: Bolivia, Brazil, Cuba, Ecuador, El Salvador, the United States, Morocco,
Dominican Republic and Venezuela. Additionally, the list also includes other Spanish tax
conventions, such as those signed with Albania, Algeria, Azerbaijan, Belarus, Bosnia and
Herzegovina, Cape Verde, Qatar, Philippines, Kyrgyzstan, Iran, Macedonian, Moldova, Oman,
Thailand, Tadzhikistan, Trinidad and Tobago, Turkmenistan, Uzbekistan and Vietnam. As a
result, the MLI will not have effect with regard to these bilateral tax treaties. Nevertheless,
it should be taken into account that the following jurisdictions have already expressed their
intent to sign the MLI: Algeria, Oman and Thailand.
There are also some jurisdictions that have not included Spain in its notification.
Consequently, the Spanish tax treaties with these jurisdictions are not considered CTAs,
although Spain has listed them in its position paper. This is the case with Indonesia or
Switzerland. The Spanish tax authorities have contacted these jurisdictions in order to be
included or, alternatively, in order to negotiate at a bilateral level to introduce the measures
of the MLI. On the contrary, the Spain-Indonesia tax treaty signed in 2000 and the Spain-
Switzerland tax treaty signed in 1967 (together with its Protocols) will be applicable without
modifications.
On balance, from a statistical perspective, it can be affirmed that, out of 94 Spanish
bilateral tax treaties, 91% has been listed by Spain, although due to the other contracting
states’ decisions on their own CTAs, only 50% is actually matched/covered by the MLI.
1.3.3.1. Purpose of a Covered Tax Agreement (Article 6) and prevention of Treaty Abuse (article 7)
Spain signed the MLI in 2017, listing 86 of its 92 tax agreements in force at that time. Moreover,
Spain also signed a bilateral complying instrument with Romania.
For 84 of its agreements listed under the MLI, Spain is implementing the preamble
statement (article 6 of the MLI). For 83 of its agreements listed under the MLI, Spain is
implementing the PPT (article 7 of the MLI). Three of Spain’s agreements, the agreements
with Andorra, Mexico9 and Romania, are within the scope of reservations made by Spain
pursuant to article 6(4) or article 7(15)(b) of the MLI.
In this sense, concerning article 6 of the MLI, Spain reserves the right for article 6(1) not
to apply to its CTAs that already contain preamble language describing the intent of the
contracting jurisdictions to eliminate double taxation without creating opportunities for
non-taxation or reduced taxation. Spain lists Mexico as an agreement that contains preamble
language that is within the scope of this reservation.
9
For its compliant agreement with Mexico, the minimum standard is implemented through the inclusion of the
preamble statement and the PPT.
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Besides, Spain has opted to include the preamble language in article 6(3) of the MLI.
Consequently, pursuant to article 6(6) of the MLI Spain has notified the CTAs that do not
contain preamble language referring to a desire to develop an economic relationship or to
enhance co-operation in tax matters:10 Albania, Germany, Saudi Arabia, Algeria, Argentina,
Armenia, Australia, Austria, Azerbaijan, Barbados, Belgium, Bolivia, Bosnia-Herzegovina,
Brazil, Bulgaria, Canada, Qatar, Chile, Cyprus, Colombia, Rep. of Korea, Costa Rica, Croatia,
Cuba, Ecuador, Egypt, El Salvador, United Arab Emirates, Slovenia, United States, Estonia,
Philippines, Finland, France, Greece, Hong Kong, Indonesia, Iran, Ireland, Iceland, Israel, Italy,
Jamaica, Kazakhstan, Latvia, Lithuania, Luxembourg, Malaysia, Malta, Morocco, Moldavia,
Nigeria, New Zealand, Oman, Panama, Portugal, United Kingdom, Dominican Republic,
Russia, Senegal, Serbia, Singapore, South Africa, Switzerland, Thailand, Trinidad and Tobago,
Tunisia, Turkey, Uruguay, Uzbekistan, Venezuela, Vietnam and India.
Regarding article 7 of the MLI, Spain reserves the right for article 7(1) not to apply to its
CTAs with provisions that deny all of the benefits that would otherwise be provided under the
CTA. Spain also lists the agreements it considers to containing provisions, within the scope
of this reservation (Andorra and Mexico).
Spain has not issued any notification under article 7(17)(a) of the MLI in the sense that it
accepts the PPT as an interim measure while intending where possible to adopt a limitation
on benefits provision in addition to or in replacement of the PPT through bilateral negotiation.
The agreements that will be modified by the MLI will come into compliance with the
minimum standard once the provisions of the MLI take effect.
For its agreement with Romania subject to a bilateral complying instrument, Spain is
implementing the preamble statement and the PPT. Bilateral negotiations would be used
for Spanish agreements with the People’s Rep. of China, Japan, the Netherlands, Norway,
Sweden and Ukraine.
With regard to the implementation issues, no jurisdiction has raised any concerns about
their agreements with Spain.
The Spanish position on the implementation of the minimum standard can be
summarized as follows, taking into consideration the 2019 OECD Report on Prevention of
Treaty Abuse – Peer Review Report on Treaty Shopping:11
10
See “The Status of List of Reservations and Notifications at the time of signature” submitted by Spain, pp.34-36,
http://www.oecd.org/tax/treaties/beps-mli-position-spain.pdf.
11
OECD (2019) Prevention of Treaty Abuse – Peer Review Report on Treaty Shopping: Inclusive Framework on
BEPS: Action 6, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://read.oecd-
ilibrary.org/taxation/prevention-of-treaty-abuse-peer-review-report-on-treaty-shopping_9789264312388-
en#page1.
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Spain
Treaty partners Compliance If compliant, Signature of The alternative

with the the alternative a complying implemented
standard implemented instrument through the
complying
instrument
(if not the MLI)
Albania No N/A Yes N/A
Algeria No N/A Yes N/A
Andorra No N/A Yes N/A
Argentina No N/A Yes N/A
Armenia No N/A Yes N/A
Australia No N/A Yes N/A
Austria No N/A Yes N/A
Barbados No N/A Yes N/A
Belgium No N/A Yes N/A
Bolivia No N/A Yes N/A
Bosnia and Herzegovina No N/A Yes N/A
Brazil No N/A Yes N/A
Bulgaria No N/A Yes N/A
Canada No N/A Yes N/A
Chile No N/A Yes N/A
People’s Rep. of China No N/A No N/A
Colombia No N/A Yes N/A
Costa Rica No N/A Yes N/A
Croatia No N/A Yes N/A
Cuba No N/A Yes N/A
Cyprus No N/A Yes N/A
Czech Republic No N/A Yes N/A
Dominican Republic No N/A Yes N/A
Ecuador No N/A Yes N/A
Egypt No N/A Yes N/A
El Salvador No N/A Yes N/A
Estonia No N/A Yes N/A
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complying
instrument
(if not the MLI)
Finland No N/A Yes N/A
France No N/A Yes N/A
Georgia No N/A Yes N/A
Germany No N/A Yes N/A
Greece No N/A Yes N/A
Hong Kong No N/A Yes N/A
Hungary No N/A Yes N/A
Iceland No N/A Yes N/A
India No N/A Yes N/A
Indonesia No N/A Yes N/A
Iran No N/A Yes N/A
Ireland No N/A Yes N/A
Israel No N/A Yes N/A
Italy No N/A Yes N/A
Jamaica No N/A Yes N/A
Japan No N/A No N/A
Kazakhstan No N/A Yes N/A
Rep. of Korea No N/A Yes N/A
Kuwait No N/A Yes N/A
Kyrgyzstan No N/A Yes N/A
Latvia No N/A Yes N/A
Lithuania No N/A Yes N/A
Luxembourg No N/A Yes N/A
Macedonia No N/A Yes N/A
Malaysia No N/A Yes N/A
Malta No N/A Yes N/A
Mexico Yes PPT alone N/A
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complying
instrument
(if not the MLI)
Moldova No N/A Yes N/A
Morocco No N/A Yes N/A
Netherlands No N/A No N/A
New Zealand No N/A Yes N/A
Nigeria No N/A Yes N/A
Norway No N/A No N/A
Oman No N/A Yes N/A
Pakistan No N/A Yes N/A
Panama No N/A Yes N/A
Philippines No N/A Yes N/A
Poland No N/A Yes N/A
Portugal No N/A Yes N/A
Qatar No N/A Yes N/A
Romania No N/A Yes PPT alone
Russia No N/A Yes N/A
Saudi Arabia No N/A Yes N/A
Senegal No N/A Yes N/A
Serbia No N/A Yes N/A
Singapore No N/A Yes N/A
Slovak Republic No N/A Yes N/A
Slovenia No N/A Yes N/A
South Africa No N/A Yes N/A
Sweden No N/A No N/A
Switzerland No N/A Yes N/A
Tajikistan No N/A Yes N/A
Thailand No N/A Yes N/A
Trinidad and Tobago No N/A Yes N/A
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complying
instrument
(if not the MLI)
Tunisia No N/A Yes N/A
Turkey No N/A Yes N/A
Turkmenistan No N/A No N/A
Ukraine No N/A Yes N/A
United Arab Emirates No N/A Yes N/A
United Kingdom No N/A Yes N/A
United States No N/A Yes N/A
Uruguay No N/A Yes N/A
Uzbekistan No N/A Yes N/A
Venezuela No N/A Yes N/A
Vietnam No N/A Yes N/A
1.3.3.2. Other provisions of the MLI addressing tax treaty abuse (articles 8, 9, 10, 12, 13 and 14)
As a member state of the EU, Spain already included (by virtue of the clause provided in
the EU Parent/Subsidiary Directive) in its tax treaties signed with other EU members the
minimum holding period for transactions or arrangements undertaken to access the reduced
treaty rate on dividends paid to a parent company in article 8 of the MLI.
Regarding the rest of Spain’s CTAs, we appreciate that all of them -except the Spanish-
Italian one12- refer to the extra-community framework: Australia, Qatar, Ecuador, Israel,
Kyrgyzstan, New Zealand, Senegal, Thailand, Tajikistan, Turkmenistan and India. In
conclusion, Spain does not make any reservation in this regard, so the measure will be
incorporated into all bilateral treaties that do not yet include it (provided that the other
jurisdiction has not reserved it). Of special interest is that according to the multilateral
instrument, the aforesaid minimum period must always be prior to the distribution of
dividends, not allowing it to be consolidated a posteriori, a possibility that, however, is
contemplated in some of the Spanish tax treaties currently in force and that, once the MLI
comes into effect, would be eliminated.
With regard to the substituted property rule for gains from the alienation of shares or
comparable interests deriving their value primarily from immovable property at any time
during the 365-day period preceding the alienation of the property in article 9 of the MLI,
Spain has chosen to apply article 9(4) of the MLI. According to article 9(7) of the MLI, Spain
has also listed the CTAs that already contain a provision as described in article 9(1).
12
The antiquity of this treaty, in force since 1980, may be the cause of the absence of such provision.
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Spain
Concerning the provision denying treaty benefits for income paid to low-taxed permanent
establishments in third jurisdictions that are subject to little or no tax and exempt from tax
in the residence jurisdiction in article 10 of the MLI, it should be noted that, from the Spanish
perspective, we are facing a clause of a novel nature, since with the exception of the Spanish
treaty signed with the US, it is a measure not contemplated to date in Spanish bilateral
treaties. Spain has positively assessed its content and purpose, by considering of interest
that it be incorporated into all the CTAs. Pursuant to article 10.6, Spain has also notified the
OECD of the treaty signed with the US, so that the corresponding substitution of the pre-
existing clause for the current one is operated.
Regarding Article 12 (Artificial Avoidance of Permanent Establishment Status through
Commissionaire Arrangements and Similar Strategies), it should be noted that no reservation
has been made by Spain. In this respect, Spain has listed the agreements it considers contain
a provision described in Article 12(3)(a) and 12(3)(b), in order to be replaced for those provided
in the present article. As a consequence of this action Spain qualitatively improves, in our
opinion, the existing regulation, given that it is a much more detailed definition, key in the
determination of the existence or not and, therefore, in the application or not of the status
of PE.
Concerning article 13 (Artificial Avoidance of Permanent Establishment Status through
the Specific Activity Exemptions), Spain has chosen to apply Option A under article 13(1).
Spain has also listed the agreements it considers to containing a provision described in article
13(5)(a) of the MLI.
With regard to the splitting-up of contracts, Spain reserves the right for the entirety of
article 14 of the MLI not to apply to its CTA, considering that the provision already contained
in this sense in the Spanish double tax treaties, is sufficient.
1.3.3.3. Hybrid Mismatches (articles 3 and 4)
As regards article 3 (Transparent Entities), Spain reserves the right for paragraph 1 not to apply
to its CTAs that already contain a provision as described in article 3(4) of the MLI. Spain also
lists the agreements it considers to containing provisions within the scope of this reservation
(USA, Finland and the United Kingdom). On balance, Spain does not reserve, except regarding
the three Spanish tax treaties that already contain the mentioned clause and wish to keep
it in the current terms. The absence of reservation with respect to the remaining double tax
treaties means, consequently, the wish that this clause be included in them, which will be
possible as long as the other jurisdiction has not reserved at this point.
Further, it should be noted that Spain reserves the right for the entirety of article 4 (Dual
Resident Entities) not to apply to its CTAs. In my opinion, the following reasons underlie the
Spanish position: a) The criterion of the place of effective management is foreseen in the
Spanish Corporation Tax Act; b) It is an objective criterion that, in general, does not cause
problems in Spain; c) More than half of the Spanish double tax treaties include the place
of effective management as tie breaker rule in its article 4.3;13 and, d) The use of the mutual
agreement procedure implies an added cost.
Additionally, the current ineffectiveness of the mutual agreement procedure as a
mechanism for the resolution of treaty conflicts and the fact that the complementary
13
The place of effective management criterion is absent exclusively in the oldest Spanish tax treaties.
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arbitration clause, aimed at guaranteeing the achievement of the agreement, has been
incorporated only into three Spanish double tax treaties, explain the afore mentioned
Spanish choice.
1.3.3.4. Mandatory binding arbitration (articles 18 to 26)
Concerning article 19 of the MLI, Spain reserves the right for the following rules to apply with
respect to its CTAs (notwithstanding the other provisions of article 19):
–– any unresolved issues arising from a mutual agreement procedure shall not be submitted
to arbitration, if a decision has already been rendered by a court or administrative tribunal
of either contracting jurisdiction;
–– if between a request for arbitration and the delivery of the decision a court or
administrative tribunal of one of the contracting jurisdictions renders a decision on the
issue, the arbitration process shall terminate.
Regarding the type of arbitration process, Spain has opted for the application of the so-called
“baseball clause”. Pursuant to article 24(1) of the MLI, Spain has chosen to apply article 24(2).
In this sense, Spain has listed the agreements (US, UK and Switzerland) it considers are
not within the scope of a reservation under article 26(4) and contain a provision that provides
for arbitration of unresolved issues arising from a mutual agreement procedure case.
As regards article 28 (Reservations), Spain reserves the right to exclude the following
from the scope of Part VI:
–– cases involving the application of anti-avoidance rules as modified by the Convention
or domestic law;
–– cases involving conducts for which a person has been subject to a penalty for tax fraud,
willful default and gross negligence;
–– transfer pricing cases involving items of income or capital that are not taxed in a
contracting state, either because they are not included in the taxable base in that
contracting state or because they are subject to a specific exemption or zero-tax rate;
–– cases eligible for arbitration under the Convention on the Elimination of Double Taxation
in Connection with the adjustment of Profits of Associated Enterprises (90/436/EEC); and
–– cases which the competent authorities of both contracting jurisdictions agree are not
suitable for resolution through arbitration.
However, it is important not to lose sight that the effectiveness of the arbitration clause on
the Spanish CTAs will depend on the possible reservations and choices made by the other 25
jurisdictions that opted for Part VI.
1.3.3.5. Reservations listed by Spain
Following Spain’s signing of the MLI on 7 June 2017, the government released its provisional
list of expected reservations and notifications pursuant to articles 28(7) and 29(4) of the
Convention. The reservations and notifications will be confirmed upon deposit of the
instrument of ratification subject to articles 28(6) and 29(3) of the MLI.
In general terms, it can be stated that Spain has adopted a proactive position, by assuming
most of the proposals of the MLI.
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Spain
The listed reservations are:

–– Article 3 (Transparent Entities): Spain reserves the right for paragraph 1 not to apply to
its Covered Tax Agreements that already contain a provision described in article 3(4).
Spain also lists the agreements it considers to containing provisions within the scope of
this reservation.
–– Article 4 (Dual Resident Entities): Spain reserves the right for the entirety of article 4 not
to apply to its Covered Tax Agreements.
–– Article 6 (Purpose of a Covered Tax Agreement): Spain reserves the right for article 6(1)
not to apply to its Covered Tax Agreements that already contain preamble language
describing the intent of the contracting jurisdictions to eliminate double taxation
without creating opportunities for non-taxation or reduced taxation. Spain lists Mexico
as an agreement that contains preamble language that is within the scope of this
reservation.
–– Article 7 (Prevention of Treaty Abuse): Spain reserves the right for article 7(1) not to apply
to its Covered Tax Agreements with provisions that deny all of the benefits that would
otherwise be provided under the Covered Tax Agreement. Spain also lists the agreements
it considers contain provisions within the scope of this reservation.
–– Article 11 (Application of Tax Agreements to Restrict a Party’s Right to Tax its Own
Residents): Spain reserves the right for the entirety of article 11 not to apply to its Covered
Tax Agreements.
–– Article 14 (Splitting-up of Contracts): Spain reserves the right for the entirety of article 14
not to apply to its Covered Tax Agreements.
–– Article 16 (Mutual Agreement Procedure): Spain reserves the right for the first sentence
of article 16(1) not to apply to its Covered Tax Agreements.
–– Article 17 (Artificial Avoidance of Permanent Establishment Status through
Commissionaire Arrangements and Similar Strategies): Spain reserves the right for the
entirety of article 17 not to apply to its Covered Tax Agreements that already contain
a provision described in article 17(2). Spain also lists the agreements it considers to
containing provisions within the scope of this reservation.
–– Article 19 (Mandatory Binding Arbitration): Spain reserves the right for the following
rules to apply with respect to its Covered Tax Agreements (notwithstanding the other
provisions of article 19):
–– any unresolved issues arising from a mutual agreement procedure shall not be
submitted to arbitration, if a decision has already been rendered by a court or
administrative tribunal of either contracting jurisdiction;
–– if between a request for arbitration and the delivery of the decision a court or
administrative tribunal of one of the contracting jurisdictions renders a decision on
the issue, the arbitration process shall terminate.
–– Article 28 (Reservations): Spain reserves the right to exclude the following from the scope
of Part VI:
–– cases involving the application of anti-avoidance rules as modified by the Convention
or domestic law;
–– cases involving conducts for which a person has been subject to a penalty for tax
fraud, willful default and gross negligence;
–– transfer pricing cases involving items of income or capital that are not taxed in a
contracting state, either because they are not included in the taxable base in that
contracting state or because they are subject to a specific exemption or zero-tax rate;
–– cases eligible for arbitration under the Convention on the Elimination of Double
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Taxation in Connection with the adjustment of Profits of Associated Enterprises

(90/436/EEC); and
–– cases which the competent authorities of both contracting jurisdictions agree are not
suitable for resolution through arbitration.
–– Article 35 (Entry into Effect): Spain reserves the right to replace several date references
to the general deadline of 30 days for articles 28(9)(a), 28(9)(b), 29(6)(a), 29(6)(b), 35(1),
35(4), 35(5), 36(1), 36(2), 36(3), 36(4) and 36(5).
–– Article 36 (Entry into Effect of Part VI): Spain reserves the right for Part VI to apply to a
case presented to the competent authority of a contracting jurisdiction prior to the entry
into force of the Convention only if both contracting jurisdictions agree that it will apply
to that specific case.
There is no Spanish official statement (neither in the 2019 OECD Peer Review Report on Action
6 nor in any other form) explaining the policy choices underlying such reservations.
Additionally, Spain issued a declaration14 regarding the application of the MLI to Gibraltar.
Although Spain included a great number of bilateral tax treaties in its list of CTAs, it should
be noted that there are many jurisdictions that have still not signed the MLI. Some of these
treaties have been included by Spain because of the commercial or cultural relations with the
jurisdictions involved, such as: Bolivia, Brazil, Cuba, Ecuador, El Salvador, the United States,
Dominican Republic and Venezuela. Additionally, the list also includes other Spanish tax
conventions, such as those signed with Albania (MLI already signed but not in force), Algeria,
Azerbaijan, Belarus, Bosnia and Herzegovina, Cape Verde, Qatar (MLI already signed but not
in force), Philippines, Kyrgyzstan, Iran, Macedonian, Moldova, Oman, Thailand, Tadzhikistan,
Trinidad and Tobago, Turkmenistan, Uzbekistan and Vietnam. As a result, the MLI will not
have effect with regard to these bilateral tax treaties. Nevertheless, it should be taken into
account that the following jurisdictions have already expressed their intent to sign the MLI:
Algeria, Oman and Thailand.
On the other hand, as stated previously, there are also some jurisdictions that have
not included Spain in its notification. Consequently, the Spanish tax treaties with these
jurisdictions are not considered CTAs, although Spain has listed them in its position paper.
This is the case of Indonesia or Switzerland. The Spanish tax authorities have contacted these
jurisdictions in order to be included or, alternatively, in order to negotiate at a bilateral level
to introduce the measures of the MLI. On the contrary, the Spain-Indonesia tax treaty signed
in 2000 and the Spain-Switzerland tax treaty signed in 1967 (together with its Protocols) will
be applicable without modifications.
As commented in section 1.3.2, the list includes all of the tax treaties concluded by Spain
that are currently in effect, together with their amending protocols, except those which are in a
re-negotiation process (Netherlands, People’s Rep. of China, Japan, Sweden and Norway). In the
latter case, once the revised tax treaties come into effect, it is expected that Spain will negotiate
bilaterally with its tax treaty partners the necessary modifications as a result of the MLI.
14
Spanish declaration concerning Gibraltar to be made on the occasion of the signing of the Multilateral Convention
to implement tax treaty-related measures to prevent base erosion and profit shifting (MLI). See http://www.
oecd.org/tax/treaties/beps-mli-declaration-spain.pdf.
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Spain
Apart from the 86 tax treaties listed by Spain, it is expected that four additional tax treaties
are included in the short future, once they are published in the Spanish Official Gazette. This
is the case of Belarus and Cape Verde, which have been recently signed by Spain, and also
of the tax treaties with India (in process of renegotiation) and Romania (recently signed a
bilateral complying instrument).
According to article 93 of the Spanish Constitution “by means of an organic law, the conclusion
of treaties by which the exercise of powers derived from the Constitution is attributed to an
international organization or institution may be authorized. It corresponds to the General
Assembly (Cortes Generales) or to the Government, according to the cases, the guarantee of
the fulfillment of these treaties and of the resolutions emanated of the international or
supranational organizations holders of the cession”.
Besides, article 94 of the Spanish Constitution establishes that the provision of the state’s
consent to be bound by treaties or agreements will require the prior authorization of the
General Assembly in the case of treaties or agreements that involve financial obligations for
the Public Treasury.
Pursuant to article 96 of the Spanish Constitution “validly concluded international
treaties, once officially published in Spain, will be part of the internal order. Its provisions
may only be repealed, modified or suspended in the manner provided for in the treaties
themselves or in accordance with the general norms of international law”; by adding that “for
the denunciation of the international treaties and conventions, the same procedure foreseen
for its approval in Article 94 will be used”.
As Grau Ruiz pointed out, “in the international context it is worth highlighting the valuable
and accurate constitutional provision of Articles 93 and 94 of the Spanish Constitution,
which provide for well-structured and adequate linkages to allow and accommodate the
extraordinary development of international tax law. It is no longer a matter of facing, as in
the past, a quantitative and sustained impulse of the number of normative instruments,
driven by a growing volume of international commercial relations (...), but the introduction of
changes of a qualitative nature in the form of creation and modification of the regulations in
force at the international level. Nevertheless, all of these changes must always be respectful
with the guarantees provided by the Spanish Constitution (...)”15.
As it was commented in section 1.3.1, the MLI was signed16 by Spain, together with many
other countries and jurisdictions, at the plenary session held at the OECD’s headquarters in
Paris on 7 June 2017. At that time, Spain submitted a document entitled “The Status of List of
Reservations and Notifications at the time of signature”, which includes a provisional list of
15
Grau Ruiz, Mª. A.: “El anclaje constitucional de la toma de decisiones fiscales en el ámbito internacional y
supranacional: las Cortes Generales ante las reservas en el Convenio multilateral BEPS y la cláusula pasarela
para el abandono de la unanimidad en la Unión Europea”, in Técnica Tributaria No. 124, 2019.
16
General Assembly Official Gazette, section General Assembly, Series A, No. 225, of 7 September 2018.
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Ribes Ribes
expected reservations and declarations to be made by Spain, pursuant to articles 28(7) and
29(4) of the Convention, concerning to the provisions on the MLI.
As the Spanish MLI signature was made “ad referendum”17, Spain had to ratify the
instrument both by the Spanish Council of Ministers and by the Spanish General Assembly
(Congress and Senate). On 13 July 2018, the Spanish Council of Ministers approved the MLI.
Subsequently, on 21 February 2019 the Spanish Congress formally approved the MLI.18
The last phase of the domestic procedure was the approval by the Senate, which received
the text on 27 February 2019. By virtue of article 144 of the Senate regulation (Reglamento del
Senado), the text of the international agreement cannot be modified at this stage, but it can
be presented with proposals of no ratification, postponement or reservation related to the
international conventions that need to be ratified by the Senate.
In spite of the fact that the date for the presentation of these proposals was 11 March
2019,19 the process was suspended because of the call for general elections on 5 March 2019.
The elections results did not allow to form a government, so the new elections took place on
10 November. At present, the new Spanish government has been designated so, once the
Senate approves the Spanish consent, it is expected that the MLI will enter into force, after
the instrument of ratification is deposited with the OECD.
On the other hand, as it is known, with regard to the tax treaties covered by the MLI,
there is not an automatic process of modification -apart from those where the coincidence
is complete-. For that reason, the Spanish Tax Administration has already announced its
intention to develop consolidated texts of Spanish agreements without legal effect. The
publication of these consolidated versions of the revised tax treaties is not compulsory
according to the Spanish legal system, but it seems advisable because of policy reasons in
order to ensure clarity, transparency and legal certainty.
In the absence of these consolidated versions or synthetized texts of the revised tax
treaties published by Spain, the OECD “MLI Matching Database” constitutes at present
the unique tool that reflects how the MLI modifies the Spanish CTAs. In fact, the OECD has
recently updated this database to include information concerning the date of entry into force
of the MLI in each jurisdiction. The “MLI Matching Database” is compiled from information
gathered during the process of countries becoming signatories to the MLI. This database,
however, does not have any kind of legal value as far as the Spanish jurisdiction is concerned.
As stated in section 1.1, the MLI is a multilateral international agreement that shall be applied
alongside existing bilateral double taxation conventions, modifying their application.
According to the Spanish Constitution (articles 93, 94.1 and 96) and the jurisprudence of
the Spanish Constitutional Court, any kind of international treaty duly ratified by Congress, is
considered legally superior to domestic law and must be implemented in accordance to this
superior value over domestic legislation. Therefore, the MLI, once it enters into force, would
17
The so-called “signature ad referéndum” is authorized by the Spanish Act 25/2014, of 27 November, on Conventions
and other International Agreements (published in the Spanish Official Gazette of 28 November 2014). See
https://boe.es/diario_boe/txt.php?id=BOE-A-2014-12326.
18
General Assembly Official Gazette, Congress, XII session, Series C: International Agreements and Conventions,
No. 104-3, of 28 February 2019.
19
General Assembly Official Gazette, Senate, section III, No. 348-2656, of 27 February 2019.
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overcome any domestic restrictions. Furthermore, article 7(b) and (c) of the Spanish General
Tax Act -the general framework of the Spanish taxation system and of all fiscal procedures-
clearly regulates that international agreements take precedence over domestic laws and
regulations on any tax issues.
The legal superiority and direct application of the international agreements have always
been recognized and applied both by the Spanish Tax Administration and by the Spanish
courts. In this way, it is worth noting that Spanish bilateral tax treaties can be modified by
virtue of the MLI in a synchronized and consistent way in order to swiftly implement tax treaty
related anti-BEPS measures.
As it was mentioned above, the MLI will implement minimum standards to counter treaty
abuse and to improve resolution mechanisms while providing flexibility to accommodate
specific tax treaty elements. In the opinion of various Spanish authors,20 the fiscal sovereignty
is thus respected as the MLI offers flexibility21 to signatories to opt out from provisions which
do not reflect BEPS minimum standard.
Up to now the MLI has not given rise to any specific interpretations in Spain, neither by the
government or by the courts. In any case, from my point of view, the future interpretations of
the MLI by the Spanish government or courts should observe the explanatory memorandum
of this instrument, as it is intended to clarify the operation of the MLI to modify CTAs. However,
it is important not to lose sight of the fact that, as it is highlighted in the MLI Explanatory
Statement, it is not aimed to address the interpretation of the underlying BEPS measures
(except with respect to the mandatory binding arbitration provision contained in articles
18 through 26).
Accordingly, as stated in paragraph 12 of the MLI Explanatory Statement, the provisions
contained in articles 3 through 17 should be interpreted by the contracting jurisdictions in
accordance with the ordinary principle of treaty interpretation, which means that a treaty
shall be interpreted in good faith in accordance with the ordinary meaning to be given to the
terms of the treaty in their context and in light of its object and purpose.
In conclusion, the interpretation of terms used in the MLI does not follow any other
rules than the interpretation of any other treaty. The interpretation rules codified in the
Vienna Convention on the law of treaties, adopted in 1969, must always be kept in mind.
The Explanatory Statement, which is to be regarded as the “Commentary” on the MLI, has
20
Zornoza Pérez, J.: “Acción 15. El instrumento multilateral y el Plan de Acción BEPS”, in: Ramos Prieto, J. (Coord.):
“Erosión de la base imponible y traslado de beneficios: estudios sobre el Plan BEPS de la OCDE: Comentarios a
las Acciones 1, 2, 5, 6, 8, 13 y 15”, Thomson Reuters – Aranzadi, 2016, p.458; Serrano Antón, F.: “La era post BEPS o
la ejecución de su plan de acción: Convenio multilateral vs. implementación unilateral”, in Quincena Fiscal No.
12, 2016, p.158; Ribes Ribes, A.: “La posición ( )”. op.cit. p.79; Calvo Vérgez, J.: “El Convenio multilateral derivado
de BEPS y su desarrollo: análisis de su estructura, contenido y efectos”, in Revista de Fiscalidad Internacional y
Negocios Transnacionales No. 10, 2019, p.21.
21
The MLI provides for a considerable amount of flexibility, by creating a system of opt-outs, opt-ins and choices.
This flexible approach is necessary in order to reflect variations in different tax treaties and country preferences.
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Ribes Ribes
legal relevance. In addition, the individual BEPS Actions will also play a significant role in
the interpretation of the MLI.
International public law doctrine in Spain argues that the Vienna Convention on the law of
treaties adopted in 1969 remains technically applicable to tax treaties.22 A good example is
its effective use by national courts in the interpretation of those treaties.
Furthermore, the identical wording of article 2.2 of the MLI and the wording of article 3.2
of the OECD MC is remarkable. Both of them contain a general clause of interpretation related
to the general terms and conditions not expressly defined in the agreement that, as is known,
has traditionally involved many controversies.23 Despite this, we note that its dictum has not
been improved, as would have been desirable, thus wasting a new opportunity in this area.
Once Spain’s CTAs are modified by the provisions of the MLI, all of these tax treaties
should be interpreted in accordance with the new context provided by the preamble to the
MLI. Consequently, the stated and adopted intentions provided for in article 6 of the MLI will
apply to the extent that a tax treaty partner had not reserved its position on this provision.
In this line, it is expected that BEPS reports may be given the same legal weight as the OECD
Commentaries.
Apart from the aspects previously indicated, the method of tax treaty interpretation
does not appear to change significantly. Nevertheless, in my view, many questions will arise
regarding the interpretation and application of the MLI to Spanish CTAs, which will have to
be addressed on a case-by-case basis.
Taking into account the detailed notification made by Spain with regard to the entry into
effect, no retrospective effect could exist regarding existing tax treaties. Up to now no debate
has arisen on whether the choices made by Spain upon the adoption of the MLI may exert a
retrospective influence on tax treaty interpretation.
Notwithstanding the Spanish signature of the MLI, this multilateral instrument has not yet
come into force for Spain. Due to this fact it is still uncertain what the attitude and practice
of both the Administration (in terms of procedures, special PPT committee, etc.) and
professionals (tax planning) will be in this ambit.
22
Del Arco Ruete, L.: “Doble imposición internacional y Derecho Tributario español”, Ministerio de Hacienda,
Madrid, 1977, p.35; Borrás Rodríguez, A.: “Los convenios para evitar la doble imposición desde el punto de vista
de la teoría general de los tratados internacionales”, en: VVAA: “Estudios de doble imposición internacional”,
Instituto de Estudios Fiscales, Madrid, 1980, pp.65 and 66.
23
Ribes Ribes, A.: “Convenios para evitar la doble imposición internacional: interpretación, procedimiento amistoso
y arbitraje”, EDERSA, 2003, pp.127-131 and 144-161.
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Concerning the impact the MLI is expected to have on the resolution of tax disputes under
the mutual agreement procedure and arbitration, the future results on the Spanish CTAs
will depend on the possible reservations and choices made by the other 25 jurisdictions that
opted for Part VI. In 2008 Spain adopted a domestic regulation in order to apply MAP in the
context of direct taxation (Royal Decree 1794/2008, of 3 November). Needless to say, it is
expected that once the MLI enters into effect a new domestic procedure to administer MAP
and arbitration is promulgated.
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Sweden
Branch reporter
Dunja Edvinsson1

Sweden is a small export-oriented economy, and that has an effect on the country’s tax treaty
policy. It has historically been important for Sweden to have a large tax treaty network in order
to inter alia reduce withholding taxes on dividends, interest and royalties and to eliminate
double taxation. It is also in the interest of Sweden that tax treaties provide a reasonable
threshold in regard to what activities create a permanent establishment. Different kinds of
anti-avoidance provisions have been introduced, both in tax treaties and in Swedish domestic
law, more often in the last couple of decades (and now even more rapidly because of the MLI
and EU’s anti-avoidance work).
Sweden’s tax treaties have generally been based on the OECD Model Tax Convention and
Sweden is a signatory to the MLI. Sweden has, however, made reservations to all provisions,
except those that constitute the minimum standard and article 17 regarding corresponding
adjustments (which is “best practice”). The OECD’s minimum standard on treaty abuse will
be satisfied by applying the PPT in article 7(1) of the MLI.
Sweden has chosen to not apply the provisions preventing the avoidance of permanent
establishment status trough commissionaire arrangements and similar strategies (article 12
of the MLI), specific activity exemptions (article 13 of the MLI), or the splitting-up of contracts
(article 14 of the MLI) as these changes lower the PE threshold. It is noteworthy that Sweden
has made corresponding reservations in relation to article 5 of the 2017 version of the OECD
Model Tax Convention.
Sweden has chosen to apply articles 18-26 of the MLI providing for mandatory binding
arbitration of disagreements between contracting states. It has reserved the right to replace
the two-year period set forth in article 19 with a three-year period and it has reserved the right
for article 23(1) (regarding the so-called “final offer” or “baseball” arbitration) not to apply to
its CTAs, which means that the “independent opinion” approach would apply. Sweden has
also formulated three reservations with respect to the scope of cases that shall be eligible
for arbitration.
Parliament has approved the MLI along with the government’s reservations and
notifications, including a list of CTAs, and the MLI entered into force for Sweden on 1 October
2018. However, in order for the provisions of the MLI to enter into effect for domestic law
purposes, each law which gives effect to a CTA in Swedish domestic law will also need to be
amended. The government will present proposals to amend these laws to parliament in due
course as the other jurisdictions ratify the MLI. Hence, it is not yet possible to provide the
exact dates for when the provisions of the MLI will enter into effect.
As the MLI provides for a third layer of law, the Administrative Court of Appeal in
Stockholm has expressed the view that it would be desirable to have consolidated versions
of each tax treaty. To my knowledge the legislator does not plan to develop consolidated
1
Head of Tax at BillerudKorsnäs.
IFA © 2020 781

Sweden
versions; it remains to be seen whether anyone else will do so.

It follows from the tax treaties that have been negotiated/renegotiated in the last few
years, that BEPS has had an impact on the bilateral negotiations. Some of the changes only
seek to implement the OECD’s minimum standard while other go further and implement
provisions of the MLI for which Sweden has reserved the right to not apply them to its CTAs.
The MLI provisions will be implemented by amending the existing tax treaty laws. It
is generally expected that the new rules will give rise to interpretation difficulties and an
increased workload for the tax authority, the administrative courts and the competent
authority. We have some interesting times ahead as the tax authorities, courts, competent
authorities and arbitration committees around the globe start interpreting the new provisions
introduced because of the BEPS project.
Tax Treaty Network
1.1. Introduction
This part of the report provides an overview of the direct and indirect impact of the MLI
and the BEPS Action Plan2 on the tax treaty network in Sweden. First, a general overview of
Sweden’s tax treaty network before and after the MLI is provided, as well as domestic and
treaty-based doctrines, provisions, and practices that may be relevant to the choices and
reservations that Sweden has made regarding the MLI.
Following this general overview, the direct impact of the BEPS Action Plan and the MLI
on Sweden’s tax treaty network is provided in chapter 1.3 and the indirect impact of the MLI
on the negotiation of bilateral tax treaties by Sweden in chapter 1.4.
Prior to the MLI, Sweden had tax treaties which were applicable with respect to 86
jurisdictions: Albania, Argentina, Armenia, Australia, Austria, Azerbaijan, Bangladesh,
Barbados, Belarus, Belgium, Bolivia, Bosnia and Herzegovina, Botswana, Brazil, Bulgaria,
Canada, Chile, People’s Republic of China, Chinese Taipei, Croatia, Cyprus, Czech Republic,
Denmark, Egypt, Estonia, Faroe Islands, Finland, France, Gambia, Georgia, Germany, Greece,
Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Kenya,
Republic of Korea, Kosovo, Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Malta,
Mauritius, Mexico, Montenegro, Namibia, Netherlands, New Zealand, Nigeria, Norway,
Pakistan, Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Serbia, Singapore,
Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Switzerland, Tanzania, Thailand,
2
OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing. http://dx.doi.org/10.1787/
9789264202719-en, accessed on 8 August 2019.
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Trinidad and Tobago, Tunisia, Turkey, Ukraine, United Kingdom, United States, Venezuela,
Vietnam, Zambia and Zimbabwe.
Sweden’s tax treaties generally follow the OECD Model Tax Convention. There are,
however, deviations in relation to jurisdictions that prefer the UN Model Double Taxation
Convention or parts thereof (or preferred such at the time the tax treaty was negotiated)
and some tax treaties contain provisions regarding matching credit and matching exempt.
According to my survey of Sweden’s tax treaties, other examples of recurring deviations are:
–– the inclusion of a provision that makes sure that the tax treaty may be applied to income
of fiscally transparent entities (lack thereof may lead to benefits being denied due to a
Swedish Supreme Administrative Court decision3);4
–– settlement of the question of residence of dual-resident companies by means of mutual
agreement procedure (MAP) instead of place of effective management (Sweden does
not apply the criterion of place of effective management to determine residence;
incorporation equals residence for Swedish tax purposes) and hence general exclusion
of reference to “place of effective management” in relevant articles; 5
–– in the construction PE provision: the inclusion of “assembly or installation project or
supervisory activities in connection therewith” and/or deviating time limits;6
–– the inclusion of installation projects in connection with delivery of machinery and
equipment in the list of PE exceptions for preparatory and auxiliary activities;7
–– the holding percentages and the withholding tax rates vary with respect to dividends;8
–– no withholding tax on interest;9
–– varying withholding taxes on royalties;10
–– Sweden reserves the right to tax gains from the alienation of property by an individual
who was a resident of Sweden during a specified time period (that can vary depending
on the applicable tax treaty) preceding such alienation;11
–– Sweden retains the right to tax pensions in consideration of past employment in Sweden;12
3
RÅ 2001 ref. 46.
4
For example, in the following tax treaties: Mauritius (2011) (art. 1(2); Russia (1993 as amended through 2018
protocol) (art. 1.2); US (1994 as amended through 2005 protocol) (art. 1(6)).
5
For example, in the following tax treaties: Canada (1996) (art. 4.3); Poland (2004) (art. 4.3); UK (2015) (art. 4.3). It
can be noted that this kind of provision has been included in the 2017 OECD Model Tax Convention.
6
For example, in the following tax treaties: Poland (2004) (art. 5(3), assembly or installation project and 12
months); Chinese Taipei (2001) (ar.t 5(3), assembly or installation project and 9 months); Turkey (1990) (art. 5(2)
(g) assembly or installation project).
7
For example, in the following tax treaties: Georgia (in 2013) (art. 5(4)(f); Mauritius (2011) (art 5(4)(f); Switzerland
(1965 as amended through 2011 protocol) (art. 5(2)(f)).
8
For example, the withholding tax is 20% on portfolio dividends in the tax treaty with Turkey (1988) (art. 10(2)(b))
and in the tax treaty with Egypt (1994) (art. 10(2)) and it is 5% in the tax treaty with the UK (2015) (art. 10(2)).
9
For example, there is no interest withholding tax in the tax treaty with Germany (1992) (art. 11), the UK (2015)
(art. 11) and the US (1994 as amended through 2005 protocol) (art. 11).
10
For example the tax treaty with India (1997 as amended through 2013 protocol) provides for a 10% WHT on
royalties; the tax treaty with Indonesia (1989) provides for 10% WHT on industrial royalties and 15% on all other
royalties; the tax treaty with Italy (1980) provides for a 5% WHT on royalties.
11
For example, in the following tax treaties: Germany (1992) (article 13(5), five years); Poland (2004) (article 13(5), ten
years); UK (2015) (art. 13(6), seven years). It can also be mentioned that Sweden made a corresponding reservation
(for a ten-year period) in the 2017 OECD Model Tax Convention.
12
For example, in the following tax treaties: Poland (2004) (art. 18); South Africa (1995 as amended through 2010
protocol) (art. 18); UK (2015) (art. 19).
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–– a limitation on benefits (LOB) provision and/or other anti-avoidance provisions (see more
below);
–– most favoured nation (MFN) clauses.13
The Nordic tax treaty, which is concluded with Denmark, the Faroe Islands, Finland, Iceland
and Norway, is also based on the OECD Model Tax Convention but there are several deviating
provisions regarding frontier workers etc.
It may be possible to deal with treaty shopping through a specific anti-abuse provision14 in
the Swedish Dividend Withholding Tax Law15 or by applying the Swedish Tax Avoidance Law,16
depending on which law is applicable in the given case. The legal situation is, however, not
fully clear, as to whether domestic anti-avoidance rules can override applicable tax treaty
provisions.17 A case from the Supreme Administrative Court18 and the Commentary to the
OECD Model Tax Convention imply, however, that tax treaties should generally not preclude
the use of domestic anti-avoidance rules.
The preambles of Sweden’s tax treaties have generally defined the purpose of tax treaties
as follows: “the avoidance of double taxation and the prevention of fiscal evasion with respect
to taxes on income”. With such a large number of applicable tax treaties, there are many
variations in the specific provisions which deal with treaty shopping or other types of tax
incentives. Sweden has mainly responded to treaty shopping by introducing LOB provisions
in most of the tax treaties that have been signed during the last three decades.19
The LOB that Sweden has sought to include in its tax treaties generally has the following
(or similar) wording:
13
For example, in the following tax treaties: Argentina (1995) (arts. 10, 11, 12); Bolivia (1994) (arts. 11, 12); Botswana
(1992 as amended through 2013 protocol) (arts. 10, 11, 12); Belarus (1994) (art. 12); Chile (2004) (arts. 11, 12); Estonia
(1993) (art. 12); Gambia (1993) (arts. 11, 12); India (1997 as amended through 2013 protocol) (Provision in protocol
regarding arts. 10, 11, 12); Kazakhstan (1997) (arts. 10, 11, 12); Latvia (1993) (art. 12); Lithuania (1993) (art. 12);
Namibia (1993) (arts. 10, 11, 12); Nigeria (2004) (arts. 5, 8, 10, 11, 12); Philippines (1998) (art. 10 regarding branch
profits tax); Switzerland (1965 as amended through 2011 protocol) (art. 26, MFN clause regarding arbitration
that was included through para 3 in the 2011 protocol); South Africa (1995 as amended through 2010 protocol)
(art. 10); Chinese Taipei (2001) (arts. 10, 12); Venezuela (1993) (arts. 10, 11, 12); Zimbabwe (1989) (art. 24 regarding
branch profits tax).
14
The anti-avoidance provision is usually referred to as “bulvanregeln” in Swedish and it is found in § 4(3) of the
Swedish Dividend Withholding Tax Law.
15
Kupongskattelag (1970:624).
16
Lag (1995:575) mot skatteflykt.
17
Prop. 2015/16:14, p. 39-40.
18
HFD 2012 ref. 20.
19
For example, the tax treaty with Mauritius (2011) contains an LOB in art. 26 whereas the former tax treaty with
Mauritius (1992) did not contain an LOB. There are LOB provisions in inter alia the following tax treaties: Belarus
(1994) (art. 22(3)); Botswana (1992 as amended through 2013 protocol) (art. 28); Georgia (2013) (art. 26); Latvia
(1993) (art. 28); Lithuania (1993) (art. 29); Ukraine (1995) (art. 22(3)).
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Edvinsson
“Limitations of benefits
Notwithstanding any other provisions of this Convention, where

a) a company that is a resident of a Contracting State derives its income primarily from other
States
(i) from activities such as banking, shipping, financing or insurance or
(ii) from being the headquarters, co-ordination centre or similar entity providing
administrative services or other support to a group of companies which carry on
business primarily in other States; and
b) such income would bear a significantly lower tax under the laws of that State than income
from similar activities carried out within that State or from being the headquarters, co-
ordination centre or similar entity providing administrative services or other support to
a group of companies which carry on business in that State, as the case may be,
any provisions of this Convention conferring an exemption, or a reduction of tax shall not
apply to the income of such company and to the dividends paid by such company.”20
According to my survey of Sweden’s tax treaties, there are, however, also other provisions
that have been included (in some cases in addition to the LOB provision) such as for example:
–– provisions denying treaty benefits to companies enjoying special tax privileges in the
state of residence;21
–– provisions which allow Sweden to tax income, which would otherwise not be taxed
because the other contracting state applies source taxation, based on Sweden’s domestic
law;22
–– main purpose tests;23
–– referral to MAP in case of introduction of offshore legislation;24 and
–– provisions denying treaty benefits in case of introduction of offshore legislation.25
The tax treaty with the US contains the LOB of the US Model Income Tax Convention.26
Aside the above, there is no domestic law or case law which refers to the “guiding
principle” 27 adopted in the 2003 OECD Commentary, nor is there a domestic definition of
the term “beneficial owner” or Swedish case law regarding the interpretation of beneficial
ownership under tax treaties.
20
This specific wording comes from the tax treaty with Georgia (2013) (art. 26).
21
For example, the tax treaty with Botswana (1992 as amended through 2013 protocol) (art. 28); Jamaica (1985) (art.
28), which has been replaced by an LOB trough the 2012 protocol; Mauritius (2011) (protocol).
22
For example, the tax treaty with Botswana (1992) (art. 28); Gambia (1993) (art. 23); UK (2015) (arts. 10, 11, 12, 20).
23
For example, the tax treaty with Argentina (1995) (art. 11(8) and Kazakhstan (art. 12(7).
24
For example, the tax treaties with Argentina (1995) (provision 1(b) of the protocol); Gambia (1993) (protocol) and
Russia (1993) (art. 27, renumbered to art 30 due to the 2018 protocol).
25
For example, the tax treaty with Macedonia (1998) (art. 27); South Africa (1995 as amended through 2010 protocol)
(art. 26).
26
Sweden-US tax treaty (1994 as amended through 2005 protocol), art. 17.
27
The principle is found in para. 9.5 of the Commentary to art. 1, which reads as follows: A guiding principle is
that the benefits of a double taxation convention should not be available where a main purpose for entering
into certain transactions or arrangements was to secure a more favourable tax position and obtaining that
more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant
provisions.
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Sweden has not responded to tax treaty abuses such as:

–– transactions or arrangements undertaken to access the reduced treaty rate on dividends
paid to a parent company (addressed by article 8 of the MLI);
–– transactions or arrangements undertaken to avoid taxation of immovable property,
including the dilution of the proportionate value of shares deriving their value primarily
from immovable property (addressed by article 9 of the MLI);
–– the granting of treaty benefits for income paid to low-taxed permanent establishments
(PEs) in third jurisdictions that are subject to little or no tax and exempt from tax in the
residence jurisdiction (addressed by article 10 of the MLI);
–– avoidance of PE status through commissionaire arrangements and similar strategies
(addressed by article 12 of the MLI), specific activity exemptions (addressed by article 13
of the MLI), or the splitting up of contracts (addressed by article 14 of the MLI).
Sweden has and is about to further neutralize the effects of hybrid mismatch arrangements28
and branch mismatch arrangements29 by implementing the EU Anti-Tax Avoidance Directives
2016/1164 and 2017/952 (referred to as ATAD1 and ATAD2). The new rules implementing
ATAD2 entered into force on 1 January 2020.30
Dual-resident entities have been addressed by Sweden preferring to refer such cases to
the competent authorities for settlement under MAP; in its tax treaties Sweden has tried
to avoid the use of “place of effective management” as criterion for determining residence.
Most of Sweden’s tax treaties include provisions for MAP and corresponding adjustments
to tax charged on the profits of an enterprise after a transfer pricing adjustment (addressed
by articles 16 and 17 of the MLI).
My impression is that the Swedish competent authority generally has a positive
experience with negotiating MAP cases. According to statistics for Sweden from the OECD
regarding 2017 and 2018, it can be seen that in a majority of cases agreement is reached,
thus fully eliminating double taxation/fully resolving taxation not in accordance with the
tax treaty. Unilateral relief is sometimes granted. In 2018 less than ten percent of the cases
ended with no agreement including agreement to disagree.31
Sweden’s tax treaties with Armenia, Germany, Japan, Switzerland and the UK contain
arbitration provisions. Moreover, the EU Arbitration Convention (90/436/EEC) applies within
the EU and it has, as to my knowledge, been invoked two times in relation to Sweden, with
the result that both double taxation cases have been solved. By the end of 2017, Sweden had
one case that was to be sent to arbitration.32
Sven-Olof Lodin has been a member of two advisory commissions under the Arbitration
Convention, to which Sweden has been a party. His conclusion is that even if relatively
few cases have been sent to arbitration (five to six cases as per the beginning of 2013), the
Arbitration Convention serves a useful purpose as it provides a strong incentive for the
member states to agree during the bilateral MAP, before the matter is sent to arbitration.
He is also overall more positive to the EU model of arbitration, i.e. the “independent opinion”
approach, as opposed to so-called “baseball arbitration”, inter alia because the EU model
allows the arbitration commission to make an independent analysis of the issues, and to try
28
Final report on action 2: Neutralising the Effects of Hybrid Mismatch Arrangements”.
29
OECD report: Neutralising the Effects of Branch Mismatch Arrangement”.
30
Prop. 2019/20:12 and Prop. 2019/20:13.
31
, accessed on 11 October 2019; , accessed on 11 October 2019.
32
accessed on 8 August 2019.
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to find a correct solution to the dispute. 33 The EU Joint Transfer Pricing Forum has published a
summary of the viewpoints presented by some of the members of the advisory commissions,
including the one of Sven-Olof Lodin.34
Finally, it can be mentioned that the EU Directive 2017/1852 of 10 October 2017 on tax
dispute resolution mechanisms in the European Union is also about to be implemented; a
proposal to implement it into Swedish law was presented to parliament in June 2019.35
Sweden signed the MLI on 7 June 2017. In the government’s proposal to parliament (the MLI
Proposal),36 where it sought approval to ratify the MLI, the government explained that it is
swifter and more efficient to implement the OECD’s minimum standards through the MLI
rather than concluding bilateral amending protocols, which would be impractical and time
consuming. The government also assessed that the MLI would not have any effect on the
public financials. From an administrative perspective, however, it was expected that it would
lead to an increased number of applications for MAP due to an initial uncertainty regarding
the interpretation of the rules. Also, the tax authority’s assessment was that its workload (as
well as the workload of the administrative courts) would increase due to the complexity that
the new rules would bring.37
Parliament approved the MLI Proposal on 16 May 2018. Accordingly, the MLI was approved
along with the government’s reservations and notifications, including a list of CTAs.
Sweden deposited its instrument of ratification of the MLI with the OECD Secretary
General on 22 June 2018 and the MLI entered into force for Sweden on 1 October 2018.
However, in order for the provisions of the MLI to enter into effect for domestic law purposes,
each law that implements a CTA into Swedish domestic law will also need to be amended.
The government will present proposals to parliament to amend these laws in due course as
the other jurisdictions ratify the MLI. Hence, it is not yet possible to provide the exact dates
when the provisions of the MLI will enter into effect for domestic law purposes.
1.3.2. Covered tax agreements 1.3.2)
Sweden has listed the following jurisdictions as CTAs:
Albania, Argentina, Armenia, Azerbaijan, Bangladesh, Barbados, Belarus, Belgium, Bolivia,

Botswana, Bulgaria, Canada, Chile, People’s Rep. of China, Cyprus, Czech Republic, Egypt,
Estonia, Gambia, Georgia, Greece, Hungary, India, Indonesia, Ireland, Israel, Italy, Jamaica,
Japan, Kazakhstan, Kenya, Rep. of Korea, Latvia, Lithuania, Luxembourg, Macedonia,
Malaysia, Malta, Mauritius, Mexico, Namibia, Netherlands, New Zealand, Nigeria, Pakistan,
33
Lodin, Praktiska erfarenheter av EU:s Arbitration Convention, Svensk Skattetidning nr 3/2013, p. 242.
34
35
Prop 2018/19:143.
36
Prop. 2017/18:61.
37
Prop. 2017/18:61, p. 8, 36-37.
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Philippines, Poland, Romania, Saudi Arabia, Slovak Republic, South Africa, Sri Lanka,
Tanzania, Thailand, Trinidad and Tobago, Tunisia, Turkey, Ukraine, United Kingdom, United
States, Venezuela, Vietnam, Zambia and Zimbabwe.
Accordingly, Sweden intended to cover 64 of 86 jurisdictions with which there is an
applicable tax treaty, i.e. 74 percent. As per information in the MLI Matching Database
(beta) per 8 August 2019, 38 of Sweden’s agreements would be CTAs.38 As per the same
source of information there are also some agreements for which there is a notification
mismatch and it needs to be checked whether both jurisdictions have identified the
same agreement.39 From a Swedish perspective, this means that above 40 percent of the
jurisdictions with which Sweden has a tax treaty will be subject to the MLI (and the number
can increase).
Sweden did not list the Nordic tax treaty and indicated in the OECD Report on Prevention
of Treaty Abuse that the agreement would shortly be subject to a complying instrument.40
In fact, a protocol that seeks to implement OECD’s minimum standards into the Nordic tax
treaty was already signed on 29 August 2018. The government has presented a proposal to
parliament to implement the changes.41
Sweden has also signed a bilateral protocol with Russia on 24 May 2018 and a bilateral
protocol with Portugal on 16 May 2019, both of which inter alia implement the preamble
statement (addressed by article 6 of the MLI) and the principal purpose test (PPT) (addressed
by article 7 of the MLI).
Moreover, Sweden has indicated in the response to its Peer Review questionnaire that
bilateral negotiations would be used for its agreements with Brazil, Germany, Poland,
Singapore, Slovenia and Switzerland. A bilateral protocol was signed with Brazil on 19 March
2019 and with Switzerland on 19 June 2019. More information regarding the content of these
protocols is found further below.
Although not specifically mentioned in the Report on Prevention of Treaty Abuse, I
assume that the remaining tax treaties are intended to be subject to bilateral negotiations.
Those would include Australia, Austria, Bosnia and Hercegovina, Chinese Taipei, Croatia,
France, Kosovo, Montenegro, Serbia and Spain.
Sweden has not opted to include the preamble language in article 6(3), which refers to a
desire to develop an economic relationship or to enhance co-operation in tax matters. In the
MLI Proposal, the government briefly says that it sees no reasons to include it in the Swedish
tax treaties.42
38
Albania, Armenia, Belgium, Bulgaria, Canada, Chile, Cyprus, Czech Republic, Estonia, Georgia, Greece, Hungary,
India, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea, Latvia, Lithuania, Luxembourg, Mauritius, Mexico,
Netherlands, New Zealand, Nigeria, Pakistan, Poland, Romania, Saudi Arabia, Slovak Republic, South Africa,
Tunisia, Turkey, Ukraine and UK.
39
Argentina, Barbados, China, Egypt, Malaysia and Malta.
40
OECD Report on Prevention of Treaty Abuse – Peer Review Report on Treaty Shopping, published in February
2019, p. 224.
41
Prop. 2018/19:126.
42
Prop. 2017/18:61, p. 13.
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The OECD’s minimum standard on treaty abuse will be satisfied by applying the PPT in
article 7(1) of the MLI. Sweden has not adopted the rule in article 7(4) of the MLI, which would
enable the competent authority to grant treaty benefits to a taxpayer on a discretionary basis.
The reason is that the government assessed that it would have limited effect in practice.
Sweden has chosen not to apply the simplified LOB provisions in articles 7(8)-(13) of
the MLI because the PPT should also cover the abusive situations that would otherwise be
covered by the simplified LOB.43 It can also be mentioned that Sweden has not agreed to allow
the simplified LOB to be applied by another contracting jurisdiction pursuant to article 7(7)
(b) of the MLI (as Sweden has not chosen to apply the mentioned paragraph).
The main reason stated for choosing the PPT (and not just as an interim measure while
intending, where possible, to adopt an LOB in addition to or in replacement of the PPT), is
that it enables a swift implementation of the minimum standard through the MLI, compared
to bilateral negotiations.44
Sweden has only chosen to adopt the OECD’s minimum standards on treaty abuse and
dispute resolution. The comprehensive reason stated for this approach is that it is not possible
to limit the scope after the ratification of the MLI. It is on the other hand possible to, at a later
stage, widen the scope by withdrawing reservations or adding more CTAs or more articles.45
There are, however, no official statements or expectations that Sweden will withdraw its
reservations or widen the scope of the MLI in the near future.
Accordingly, Sweden has reserved the right for the following provisions not to apply to
its CTAs:
–– the minimum holding period for transactions or arrangements undertaken to access
the reduced treaty rate on dividends paid to a parent company in article 8 of the MLI
(no specific reason is provided in the MLI Proposal in relation to this provision, but the
comprehensive reasons provided (and mentioned above) give some background to the
choice made);46
–– the substituted property rule for gains from the alienation of shares or comparable
interests deriving their value primarily from immovable property at any time during the
365-day period preceding the alienation of the property in article 9 of the MLI (according
to the MLI Proposal because it widens the scope of the article and because situations may
arise whereby the same income could be taxed twice by the situs state);47
–– the provision denying treaty benefits for income paid to low-taxed PEs in third jurisdictions
that are subject to little or no tax and exempt from tax in the residence jurisdiction in
article 10 of the MLI (according to the MLI Proposal, because the provision is complicated
and the government’s assessment is that it would need to be completed with additional
provisions, such as for example a definition of “active conduct of a business”, in order to
increase the foreseeability in its application);48
–– the provisions addressing hybrid mismatch arrangements, including in particular
mismatches resulting from the use of transparent entities in article 3 of the MLI and
mismatches attributable to dual resident entities, addressed by article 4 of the MLI (no
specific reason is provided in the MLI Proposal in relation to these provisions but the
43
Ibid., 15.
44
Ibid., 14.
45
Ibid., 9-10, 24.
46
Ibid., 26.
47
Ibid., 27.
48
Ibid., 27.
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comprehensive reasons provided (and mentioned above) give some background to the
choices made).49
Moreover, Sweden has reserved the right to not apply the provisions regarding the
prevention of the avoidance of permanent establishment status trough commissionaire
arrangements and similar strategies (article 12 of the MLI), specific activity exemptions (article
13 of the MLI), or the splitting-up of contracts (article 14 of the MLI).50 In the MLI Proposal, the
government has provided several reasons for this choice, inter alia the following:
–– the change of the definition of PE, as brought forward through BEPS Action 7, lowers the
PE threshold. For Sweden, which has many multinational companies and a relatively
small home market, it is important that the threshold is set at a reasonable level, in order
to not impede cross-border trade, movement and investments;
–– a low PE threshold gives rise to a higher compliance and administrative burden;
–– a low PE threshold also entails that Swedish companies would to a larger extent get PEs
in other countries, with the effect that taxes would also be payable there. As foreign
taxes are generally credited against the Swedish tax, the Swedish tax revenue would be
reduced;
–– the changes to the PE definition do not specifically target BEPS, but are rather of a generic
nature;
–– there are yet no guidelines from the OECD as to how income should be attributed to the
PEs that would arise;
–– some potential abuses (for example the splitting-up of contracts) will nevertheless be
dealt with through the PPT.
Sweden has chosen to apply articles 18-26 of the MLI providing for mandatory binding
arbitration of disagreements between contracting states. Sweden has reserved the right
to replace the two-year period set forth in article 19 with a three-year period. Moreover, it
has reserved the right for article 23(1) (regarding the so-called “final offer” or “baseball”
arbitration) not to apply to its CTAs, which means that the “independent opinion” approach
would apply. The reason for this choice is that the government is of the view that the
“independent opinion” approach increases the chances that the arbitration decision will be
in line with international principles.51
Also, Sweden has formulated three reservations whereby it wishes to exclude from
arbitration:
–– cases which concern “dual resident persons other than an individual”;
–– cases which the competent authorities agree are not suitable for arbitration (it can for
example concern a case where the cost of arbitration would exceed the disputed tax
amount); and
–– certain cases which concern so-called “hard-to-value intangibles.”
The reservations require acceptance from the other party to the agreement, but it can be
noted that the reservations will be considered to have been accepted by a party if it has not
notified the Depository that it objects to the reservation by the end of a period of twelve
months beginning at a certain date (as stipulated in article 28(2)(b)) of the MLI).
With respect to mandatory binding arbitration, Sweden had, at the time of the publishing
49
Ibid., 25.
50
Ibid., 28-30.
51
Ibid., 20.
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of the MLI Proposal, 13 agreements that would preliminarily be covered by the MLI, i.e. where
both jurisdictions have chosen the provisions on arbitration. Out of the 13 countries, two
had made a reservation regarding the “independent opinion” type of arbitration, which
means that arbitration provisions will not apply unless the parties bilaterally agree on the
arbitration method to be used. In addition, Sweden and Japan have chosen to apply the
current arbitration rules in the Sweden-Japan tax treaty instead of the arbitration provisions
of the MLI. This means that the arbitration provisions should eventually become applicable
in relation to the following ten countries: Barbados, Belgium, Greece, Ireland, Luxembourg,
Malta, Mauritius, Netherlands, New Zealand and UK.52
Since the MLI was signed on 7 June 2017, Sweden has negotiated changes to some of its tax
treaties. Specifically, amending protocols have been signed with the following jurisdictions:
–– Russia, on 24 May 2018;
–– Nordic countries, on 29 August 2018;
–– Brazil, on 19 March 2019;
–– Portugal, on 16 May 2019; and
–– Switzerland, on 19 June 2019.
At the time of the writing of this report (August 2019) Sweden’s tax treaties with Germany,
Spain, Singapore and Slovenia were subject to renegotiation.
As mentioned above, the changes to the Nordic tax treaty only implement the OECD’s
minimum standards. The same goes for the changes amending Sweden’s tax treaty with
Switzerland. Some of the other amending protocols go further, however, and implement
provisions of the MLI for which Sweden has reserved the right to not apply them to its CTAs.
For example, the amending protocols with Brazil and Russia, respectively, implement the
provisions addressing hybrid mismatch arrangements, including in particular mismatches
resulting from the use of transparent entities in article 3 of the MLI and mismatches
attributable to dual resident entities, addressed by article 4 of the MLI (in addition to
implementing the PPT provision found in article 7 of the MLI, which is part of the OECD’s
minimum standards).
In addition to the above, it may be noted that the protocol amending the Sweden-Brazil
tax treaty also includes: (i) a simplified limitation on benefits provision, which is basically in
line with article 7 of the MLI; (ii) a provision regarding a party’s right to tax its own residents;
(iii) a provision on dividends that introduces a minimum holding period for transactions or
arrangements undertaken to access the reduced treaty rate on dividends paid to a parent
company (article 8 of the MLI); and (iv) a provision denying treaty benefits for income paid
to low-taxed PEs in third jurisdictions that are subject to little or no tax and exempt from tax
in the residence jurisdiction (article 10 of the MLI).
The protocol amending the Sweden-Portugal tax treaty seeks to implement the following
(in addition to the minimum standards, including the PPT provision):53
–– provisions preventing the avoidance of permanent establishment status through
52
Ibid., 20-21.
53
Prop. 2019/20:5.
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Sweden
commissionaire arrangements and similar strategies (article 12 of the MLI) and specific
activity exemptions (article 13 of the MLI), including a definition of “a person closely
related to an enterprise” (article 15 of the MLI); and
–– the substituted property rule for gains from the alienation of shares or comparable
interests deriving their value primarily from immovable property at any time during the
365-day period preceding the alienation of the property (article 9 of the MLI).
It can also be mentioned that some provisions of the MLI, for which Sweden has reserved
the right to not apply them to its CTAs, have nonetheless been included in bilateral treaty
negotiations, even prior to the signing of the MLI.54
The policy adopted regarding the MLI is not entirely the same as the policy adopted
regarding the 2017 version of the OECD Model Tax Convention. As regards the MLI, Sweden
has made reservations to all provisions, except those that constitute the minimum standard
and article 17 regarding corresponding adjustments, which is “best practice”. As regards the
2017 version of the OECD Model Tax Convention, Sweden has only made a reservation in
relation to article 5. Specifically, Sweden has reserved the right not to include paragraphs 4.1
and 8 of article 5 and reserved the right to use the previous versions of paragraphs 5 and 6 of
article 5 (i.e. the versions included in the OECD Model Tax Convention immediately before
the 2017 update of the Model Tax Convention).
2.1. General overview
This part of the report describes the procedure required to implement the MLI and what legal
value the MLI will have after implementation. Thereafter, an overview is provided of Sweden’s
interpretation of tax treaties in general, followed by an analysis of whether the MLI may exert
a retrospective influence on pre-MLI tax treaties. Finally, there is a section which elaborates
on how the MLI might affect tax planning and tax professionals’ behaviour as well as how it
might affect tax administration.
2.1.1. Procedure required in order to implement the MLI
In order to implement the MLI, the government presented the MLI Proposal to parliament
for approval of the same. The MLI Proposal included the full text of the MLI, Sweden’s list of
reservations and notifications as well as a description of the reasons for the choices made.
Parliament approved the MLI Proposal on 16 May 2018. Accordingly, the MLI was approved
along with the government’s reservations and notifications, including a list of CTAs.
54
The 2013 protocol amending the Sweden-Japan tax treaty implements, for example, an LOB provision and a
provision regarding dual resident entities. The new tax treaty with the UK (which was signed on 26 March 2015)
implements inter alia provisions addressing hybrid mismatch arrangements such as those resulting from the
use of transparent entities and dual resident entities.
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Hence, the MLI has entered into force for Sweden. However, Sweden applies a “dualist”
system, which means that domestic legislation is required in order to transpose the rights
and obligations of the MLI into domestic law.55 As mentioned above, the government will in
due course present proposals to parliament to amend the laws through which tax treaties
have been implemented in Swedish domestic law, in order for the MLI provisions to come
into effect in Sweden. At the time of the writing of this report, no such amendments had yet
been made or proposed. There are no consolidated or synthesized texts available yet, nor is
there any information available as to whether the tax authority intends to provide such texts.
It can be noted that as the proposal to approve the MLI was circulated for comment,
the Administrative Court of Appeal in Stockholm commented that it would be desirable to
have consolidated versions of each tax treaty but that it is clear that it would be very time
consuming.56 As an alternative, the court expressed the wish to have at least amending
protocols.57 It should be noted, however, that the MLI does not function in the same way as an
amending protocol, which would directly amend the text of the CTA; instead, it will be applied
alongside existing tax treaties. Moreover, it can be noted that developing consolidated
versions of CTAs is not a prerequisite for the application of the MLI.58 As to my knowledge,
the Swedish legislator does not plan to develop consolidated versions.
Once the laws amending the tax treaties for MLI purposes have entered into force, they have,
in theory, the same legal value as other laws. This is a consequence of the dualist system,
which implies that parliament approves the tax treaty as well as the government’s proposal to
adopt a law regarding the relevant treaty, whereby it becomes Swedish law. The fact that the
law implements an international treaty is in principle irrelevant for purposes of determining
that law’s position (and hence the tax treaty’s positions) in the statutory hierarchy.
In practice, however, the laws implementing the tax treaties generally prevail over other
domestic law (to the extent that they limit or eliminate the tax liability that would otherwise
be at hand). In my view, this stems from the principle of “lex specialis”. There are situations,
however, when deviating interpretations may apply.59 According to Swedish case law, tax
treaties can be overridden by subsequent domestic legislation when the legislator has clearly
stated that the new domestic rule shall prevail over tax treaties. The reason is that there is
no formal or constitutional hindrance against introducing new rules, which are contrary to
already implemented tax treaty provisions.60
55
Fensby, Ingående och införlivande av dubbelbeskattningsavtal, Svensk Skattetidning nr 6-7/95, p. 414; SOU
1974:100 p. 44f, 47f, 65; Reuterswärd, Internationella överenskommelser och svensk rätt, SvJT 1975 p. 492
56
Prop. 2017/18:61, p. 8.
57
Ibid.
58
MLI Explanatory Statement, p. 13.
59
See for example the Supreme Administrative Court decisions RÅ 2008 ref. 24, RÅ 2008 not. 61 and RÅ 2010 ref.
112. In RÅ 2008 ref. 24, the Supreme Administrative Court concluded that the Sweden-Switzerland tax treaty did
not preclude the application of Swedish Controlled Foreign Company (CFC) rules that had been implemented
after the tax treaty in question. The court was of the view that the CFC rules should prevail with reference to “lex
posterior” and “lex specialis”.
60
RÅ 2010 ref. 112.
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Sweden
As the MLI provisions have not yet entered into effect in Sweden, they have not been subject
to interpretations by the tax authority or the courts. It remains to be seen what legal weight
would be granted to the explanatory memorandum of the MLI and other interpretation
guidelines provided by the OECD in this respect.
When it comes to tax treaty provisions, which are based on the OECD Model Tax Convention,
the Swedish tax authority and the Swedish courts generally turn to the OECD Commentaries
for interpretation guidance. In my opinion the OECD Commentaries have a rather high legal
weight while I would not expect the BEPS reports to be given the same weight. One major
difference is that the OECD Commentaries constitute a consensus-document while this is
not the case with respect to the OECD reports even if consensus has been reached on certain
points that are covered by the reports. On the other hand, many of the relevant points that
are addressed in the BEPS reports have been included in the 2017 Model Tax Convention.
As tax treaties should be interpreted in good faith in accordance with the ordinary
meaning to be given to the terms of the treaty in their context and in light of its object and
purpose, the BEPS reports that led to provisions that are meant to implement tax treaty-
related BEPS measures should be given some relevance.
When interpreting tax treaties, Swedish courts take a stance in the wording of the tax
treaty, but they also seek to take into account the object and purpose of the treaty. If the
provisions are based on the OECD Model Tax Convention, the OECD Commentaries are
used for interpretation purposes.61 Also other aspects are considered if needed; for example
different language versions may be examined and the statements in the government’s
proposals, which seek to implement the tax treaties into Swedish law and which are presented
to parliament for approval, may be used for interpretation guidance.62
It is stated in paragraph 35 of the Introduction to the 2017 OECD Commentaries
that amendments to the articles of the OECD Model Tax Convention and changes to the
Commentaries that are a direct result of these amendments, are not relevant to the
interpretation or application of previously concluded conventions where the provisions of
those conventions are different in substance from the amended articles (see, for instance,
paragraph 4 of the Commentary on article 5). However, other changes or additions to the
Commentaries are normally applicable to the interpretation and application of conventions
concluded before their adoption, because they reflect the consensus of the OECD member
countries as to the proper interpretation of existing provisions and their application to specific
situations.
In my experience, the Swedish tax authority generally, but not always, adheres to this
61
See for example the Supreme Administrative Court decisions RÅ 1987 ref. 158, RÅ 1996 ref. 84, RÅ 2001 ref. 38,
HFD 2012 ref. 18.
62
See for example the Supreme Administrative Court decisions RÅ 1987 ref. 162 and RÅ 2004 not 59. The Swedish
tax authority has summarized which sources the courts use for tax treaty interpretation purposes at the following
link. accessed on 8 August 2019.
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principle. An example of a situation where the Swedish tax authority deviates from this
principle is that it does not grant treaty benefits to the partners of a fiscally transparent
partnership unless there is a specific provision on the matter in the tax treaty.63 The tax
authority’s approach thus deviates from paragraphs 2-6.7 of the Commentary on article 1
and paragraph 8.8 of the Commentary on article 4 of the 2014 OECD Model Tax Convention,
which provides guidance regarding under which circumstances treaty benefits should be
granted to the partners (despite the lack of a specific provision in the matter in the tax treaty/
OECD Model Tax Convention).64
It can also be noted that the Swedish Supreme Administrative Court has deviated from
the OECD Commentaries where it has been of the view that additions to the Commentaries go
beyond mere clarifications but rather extend the scope. In a case65 that dealt with the Sweden-
Ireland tax treaty, which was concluded in 1986, the court disregarded the 1992 additions to
the Commentary on article 17(2) of the OECD Model Tax Convention. Instead, the tax treaty
was interpreted in line with the version of the OECD Commentary that applied when the
Sweden-Ireland tax treaty was concluded. Thus, where a provision corresponding to article
17(2) of the OECD Model Tax Convention has been included in Sweden’s tax treaties after 1992,
the 1992 additions to the Commentary are taken into account.
The Swedish tax authority has provided some guidance regarding the 2017 OECD Model Tax
Convention where it says the following:
“The 2017 OECD Model Tax Convention includes a new article 29, Entitlement to
benefits, and changes have been made to several articles. This has led to new and amended
commentaries. In addition, new commentaries have been added to some articles that have
not been subject to changes.
The new versions of the articles may already be included in some Swedish tax treaties
but the majority of them are not. The new wordings can become implemented into existing
Swedish tax treaties through the MLI. This can also happen when Sweden renegotiates
existing tax treaties or concludes new ones.
Before an article in a tax treaty is interpreted through the commentary to the
corresponding article in the 2017 OECD Model Tax Convention, it is of outmost importance
to make a comparison of the wording of the article and assess if the commentary is relevant
for the interpretation.”66
In my view, this will be a challenge as it will not always be easy to analyse whether certain
changes to the Commentary should apply in a given situation. Anyway, based on case law
and the tax authority’s practice so far, I am confident that the tax authority and the courts
will do their best to make sure that the MLI does not affect the interpretation of tax treaties
concluded before the MLI was signed or ratified. The reason is that the MLI does not stipulate
or provide guidance on how existing provisions should be interpreted; it introduces new
provisions (and changes to the wording of the preamble).
There has not been any significant debate on whether the choices made by Sweden upon
63
See the tax authority’s published standpoint with reference number 131 80188-15/111.
64
These paras have been subject to changes in the 2017 OECD Model Tax Convention.
65
HFD 2016 ref. 57.
66
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Sweden
the adoption of the MLI may exert a retrospective influence on tax treaty interpretation. In my
view, it is rather unlikely that this would be the case. Moreover, I would not expect the method
of tax treaty interpretation (as regards static or ambulatory interpretation or teleological
interpretation) to change in Sweden because of the MLI.
How tax professionals will take the PPT into account probably has as many answers as there
will be participants at the IFA Congress in Cancun. Broadly, it is reasonable to assume that
some will not take any specific actions but wait and see how things develop further in terms
of tax audits, case law, etc., partly because they might consider things to be in order. Some
will document better, prepare defence files etc. A third category will change, or has already
changed, some structures or will refrain from implementing structures that are clearly
aggressive or borderline.
As to my knowledge, the Swedish assessment practice regarding treaty shopping and
other treaty abuses has not changed since the MLI. It remains to be seen, after the provisions
of the MLI have entered into effect for Sweden, whether the tax authority will deny treaty
benefits more often than in the past. It has not been officially stated whether the Swedish tax
authority will adopt any specific procedures or whether a special PPT committee will review
potential assessments on this basis.
However, as pointed out in the MLI Proposal, it is expected that the MLI (and corresponding
bilateral changes, my remark) could lead to an increased number of applications for MAP
due to an initial uncertainty regarding the interpretation of the rules.67 In addition, the tax
authority’s workload, as well as the workload of the administrative courts, is expected to
increase due to the complexity that the new rules bring.68
This means that the number of MAPs is expected to increase while the arbitration
clauses of the MLI should have limited effect in practice as most of the countries in relation
to which the arbitration provisions would be introduced through the MLI are EU member
states (where there is already a mechanism for arbitration), and the cross-border activities
with the remaining three countries (i.e. Barbados, Mauritius and New Zealand) are limited.
Considering Brexit, it is positive that both Sweden and UK have chosen the arbitration
provisions.
Hopefully, the tax authority and the Competent Authority will get the additional
resources that will be needed in order to be able to administer the higher workload that the
new rules will bring.
67
This concern has also been raised by the Confederation of Swedish Enterprise, see Comments Received on Public
Discussion Draft regarding “BEPS Action 14: Make Dispute Resolution Mechanism More Effective”, 19 January
2015, p. 85.
68
Prop. 2017/18:61, p. 8, 36-37.
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Switzerland
Branch reporters
Stefano Bernasconi1
Basil Peyer2

Switzerland has a large tax treaty network. Its pre-MLI tax treaties generally follow the
OECD Model Tax Convention in the versions of 2014 or earlier and have as the main goal the
prevention of double taxation.
Switzerland has to date addressed the problem of treaty shopping in different ways. An
implicit treaty GAAR and a relatively strict application of the concept of beneficial ownership,
which are both based on a judicial doctrine and various anti-avoidance provisions in the
tax treaties, make sure that the tax administrations and the courts have the means to cope
with abusive situations. The possibility of the application of the domestic anti-avoidance
doctrine and anti-avoidance rules in treaty situations is in contrast disputed in Switzerland.
For the taxpayer, the fact that the implicit domestic and the treaty GAAR are both based
on jurisdiction of the Federal Supreme Court and are not codified, can provoke legal
uncertainties. Having various similar but nevertheless different anti-abuse provisions in
the DTC can additionally complicate the application. In this regard, it is to expect that the
PPT-rule will bring at least a certain uniformity to the tax treaties.
Switzerland signed and ratified the MLI but notified only very few of its treaties as
Covered Tax Agreements (CTA). The main reason for this is legal uncertainty regarding the
question whether the MLI “amends” the CTAs or whether it “coexists” with them. Therefore,
Switzerland saw itself in the position that it was only able to notify treaties as CTAs if the other
contracting state confirmed to share the “amending view” and was willing to mutually agree
on a document detailing the amendments caused to the CTA by the MLI. Additionally, the
MLI does not provide Switzerland with a tool to fully update its treaty network to the BEPS-
Action 14 minimum standards. It is therefore to expect that Switzerland will implement the
minimum standards through bilateral negotiations.
Switzerland applied a limited selection of provisions of the MLI. According to the options
and reservations made, the scope of the MLI is for Switzerland in principle restricted to the
BEPS minimum standards set forth in the 2015 Final Reports on Actions 6 and – as far as
possible – Action 14 and includes only very few further provisions.
Despite the relative few notified CTAs, the BEPS-Project respectively its implementation
in the MLI and the OECD Model Tax Convention of 2017 had a strong impact on new bilateral
treaties concluded by Switzerland since then. The new treaties adhere in principle all to
the BEPS minimum standards. Switzerland also agreed to several provisions in bilateral tax
treaties that it has not applied under the MLI. However, these clauses were implemented in
a customized respectively slightly amended manner.
1
Lic. iur, Attorney-at-law, Tax policy advisor, Federal Department of Finance.
2
MLaw, Attorney-at-law, Tax policy advisor, Federal Department of Finance.
The reporters would like to point out that they are expressing their personal views in this report.
IFA © 2020 797

Switzerland
According to Swiss domestic law, consolidated texts of all tax treaties must be gazetted
in the official collection of legal texts. Since Switzerland applies the MLI only to treaties with
states that share the “amending view” and that are willing to agree in a mutual agreement
on a text detailing the amendments made to the treaty by virtue of the MLI, the risk of a
divergence between the published consolidated text of a CTA and the text of the MLI should
be minimized. However, if such a divergence should nevertheless occur, the ratified texts of
the MLI as approved by the parliament should prevail over the consolidation of a CTA which
only has the legal value of a mutual agreement concluded by the administration. The same
holds true in cases where the authentic language of the tax treaty differs from the French
and English versions of the MLI since the Swiss law leaves it to a treaty (in this case the MLI)
to determine the prevailing wording.
According to the prevailing doctrine and judicature in Switzerland, an international treaty
has to be interpreted according to the rules of international law. The BEPS reports and the
explanations of the MLI by the OECD will have at least a similar value for the interpretation
of the respective provisions as the OECD Model Tax Convention and its Commentary. There
are good reasons for the view that the link between the explanatory statement and the MLI
is even closer than the one between the OECD Model Tax Convention and a tax treaty.
The main goal pursued by the BEPS-Project was to fight aggressive tax planning. The MLI’s
impact on the practical behavior in Switzerland is limited, as Switzerland could notify only
a very small part of its treaties as CTAs under the MLI and opted out of almost all of the MLI
dispositions not representing a minimum standard. Nevertheless, Switzerland implements
the respective standards regarding BEPS and is doing so through bilateral negotiations.
Regarding BEPS-Action 6 on treaty-abuse, it is worth mentioning that Switzerland already
had instruments in place to counter abusive tax planning schemes before the start of the
BEPS-Project. This is why, it can be assumed that BEPS-Action 6 – especially the PPT – will not
have a major impact on the assessment practice of the tax administrations and the situation
of the taxpayers in Switzerland.
In contrast, it is observed that the increased general awareness of the problem of BEPS
and also the BEPS-Actions 5 and 13 regarding transparency through e.g. country-by-country-
reporting or the exchange of rulings, has a significant impact in Switzerland. With regard
to BEPS-Action 14 in general, even though some positive impact on the duration of dispute
resolution and the diligence in the negotiation of mutual agreement procedures can be
observed, it remains to be seen if in the long-term the MAP process and the mandatory
binding arbitration can counterbalance the increased risks of international disputes caused
by the BEPS-Project.
Tax Treaty Network
1.1. Introduction
Before examining the direct and indirect impacts of the MLI on Switzerland’s tax treaty
network, the following chapter gives an overview of the situation in Switzerland prior to the
MLI with regard to Switzerland’s treaty network and the way in which Switzerland previously
has dealt with the situations that the BEPS Action Plan and the MLI address.
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Bernasconi & Peyer
Switzerland has a large tax treaty network. The first comprehensive income-tax treaty (also
DTC) was concluded in 1931 with Germany. Prior to Switzerland’s signing of the MLI on 7 June
2017, 92 DCTs with 105 jurisdictions3 were in force. Since the signing of the MLI, two more
treaties (with Kosovo and Zambia) have entered into force that are compliant with the BEPS
minimum standard.
Switzerland’s pre-MLI tax treaties generally follow the OECD Model Tax Convention
(OECD-MC) in the version of 2014 or earlier. The more recently concluded treaties have only
few exceptions to the OECD-MC. To foster its competitive standing, the main goal of a tax
treaty for Switzerland was and still is the prevention of double taxation. Switzerland uses
the exemption method of article 23A OECD-MC to achieve capital import neutrality for Swiss
companies combined with low residual tax rates.
Deviations from the OECD-MC in the Switzerland’s tax treaties are often the result of
negotiations with a treaty partner that has a different tax treaty policy (e.g. UN Model). In
this way, the treaty with the US rather follows the US treaty model than the OECD-MC.
1.2.2.1. Preambles of the Switzerland’s tax treaties
Switzerland’s tax treaties concluded prior to the MLI begin with the preamble “DESIRING to
conclude a Convention for the avoidance of double taxation with respect to taxes on income
and capital”.
According to Switzerland’s treaty preamble, the purpose of the treaty is the avoidance of
double taxation. Consequently, Switzerland made an observation in the OECD Commentary
(prior to the 2017 version) on article 1 (paragraph 27.9) that it does not share the view
expressed in paragraph 7 [of the commentary on article 1] according to which the purpose
of double taxation conventions is to prevent tax avoidance and evasion. Also, this view [of
paragraph 7] seems to contradict the footnote to the Title of the Model Tax Convention.
One exception to Switzerland’s position prior to the MLI regarding the purpose of a treaty,
3
Albania, Algeria, Argentina, Armenia, Australia, Austria, Azerbaijan, Bangladesh, Belarus, Belgium, Bulgaria,
Canada, Chile, People´s Rep. of China, Chinese Taipei/Taiwan (private DTA), Croatia, Cyprus, Czech Republic,
Denmark, Ecuador, Egypt, Estonia, Finland, France, Germany, Georgia, Ghana, Greece, Colombia, Hong Kong,
Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Ivory Coast, Jamaica, Japan, Kazakhstan, Kuwait,
Kyrgyzstan, Latvia, Liechtenstein, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Moldova,
Mongolia, Montenegro, Morocco, Netherlands, New Zealand, Norway, Oman, Pakistan, Peru, Philippines,
Poland, Portugal, Qatar, Romania, Russia, Serbia, Singapore, Slovakia, Slovenia, Spain, Sri Lanka, South Africa,
Rep. of Korea, Sweden, Tajikistan, Thailand, Trinidad + Tobago, Tunisia, Turkey, Turkmenistan, United Arab
Emirates ,Ukraine, United Kingdom, United States, Uruguay, Uzbekistan, Venezuela and Vietnam. The 1954
DTC with United Kingdom is still applicable for 11 States (Antigua and Barbuda, Barbados, Belize, Dominica,
Gambia, Grenada, Malawi, St. Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Zambia) and three
Territories (Anguilla, British Virgin Islands, Montserrat) but not for the United Kingdom as there is a new DTC
between Switzerland and the United Kingdom. See also OECD/G20, Peer Review Report on Treaty-shopping by
the Inclusive Framework on BEPS: Action 6, 2019, p. 227.
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Switzerland
was the DTC with France. Its title (not the preamble) stated that the purpose of the treaty is
to prevent double taxation but also tax fraud and tax evasion.
Regardless of this difference, as tax treaties contain not just provisions to prevent double
taxation but also – for example – to facilitate the exchange of information, it is obvious that
the prevention of double taxation is not the sole purpose of the treaty but rather the main
purpose. As far as it is known to the authors, the preamble has not played a decisive role in
the application of the treaties, even though it is part of the interpretation according to 31(1)
Vienna Convention on the law of treaties (“Vienna Convention”).
In the 2017 OECD Commentary, Switzerland has withdrawn its observation, as it would
no longer be compatible with the new preamble of the OECD minimum standard of BEPS-
Action 6. Switzerland will need to amend the preambles in all treaties in order to implement
the minimum standard.
1.2.2.2. Switzerland’s respond to tax treaty-shopping
Switzerland has addressed the problem of treaty-shopping in different ways. The following
chapter shall give an overview, first of the domestic rules and doctrines and then of the treaty
based provisions.4
a. Domestic anti-avoidance doctrines and anti-avoidance rules (general or specific)
Switzerland has no specific anti-avoidance tax act and only few statutory anti-avoidance
provisions (with an international impact). The most prominent of them in the domestic tax
law is not a written provision but a judicial doctrine.
Implicit domestic GAAR

Established for domestic cases, Switzerland has a long-standing implicit anti-avoidance doctrine
(Steuerumgehung, evasion fiscale, “implicit domestic GAAR”). It was developed by the Federal
Supreme Court to be applied in extraordinary circumstances5 to counter undesired aggressive
tax planning schemes. The Swiss courts and tax administrations apply this implicit domestic
GAAR across all Swiss taxes (including taxes on income, VAT, gift and inheritance taxes).
According to the Federal Supreme Court’s rulings, tax avoidance is presumed if (1.) a legal
structure chosen by the taxpayer is unusual (insolite), inappropriate or peculiar and, in any
case, completely inadequate to the economic circumstances (objective element); (2.) it can
be assumed that the legal structure was solely chosen to save taxes (subjective element);
and (3.) the chosen structure would actually result in considerable tax savings (factual
element). If the three conditions are met, taxation must be based on the legal structure that
would have been appropriate to achieve the desired economic purpose (fictitious fact pattern,
Sachverhaltsfiktion).
Even though the Federal Supreme Court used this concept for the first time in 1933 and
4
For a more in depth view on Switzerland’s anti-avoidance rules, please refer to Marcel R. Jung, Swiss Branch report,
Tax Treaties and Tax Avoidance: Application of Anti-avoidance Provisions, Cahiers de droit fiscal international
2010, p. 773 et seq.; Noëmi Kunz-Schenk, Swiss Branch report, Anti-Avoidance Measures of General Nature and
Scope – GAAR and other Rules, Cahiers de droit fiscal international 2018.
5
Decision of the Federal Supreme Court BGE 142 II 399.
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Bernasconi & Peyer
it has been applied ever since, the legal foundation is still controversial. According to the
doctrine, the legal basis is either the principle of prohibition of abuse of right (based on the
Swiss Civil Code) or the principle of prohibition of arbitrariness and bona-fide (enshrined in
the Federal Constitution).6
Article 21(2) Withholding Tax Act (WHTA)7

This article is part of the general requirements for the reimbursement of the Swiss
withholding tax. It contains a written version of the implicit domestic GAAR (with the same
requirements) and was added to the tax act long after that doctrine was established by the
Federal Supreme Court.
Federal Ordinance on Measures against the Improper Use of Tax Treaties concluded by the Swiss
Confederation (1962 Abuse Ordinance)
A rather unique domestic anti-abuse provision is the 1962 Abuse Ordinance. Switzerland
unilaterally protects treaty partners (as source states) against treaty-abuse involving
companies incorporated in Switzerland in inbound cases. The ordinance applies in cases,
where a Swiss resident received a foreign payment and claims relief for foreign withholding
taxes on the basis of a tax treaty that does not itself contain an anti-abuse provision. According
to article 2(1) 1962 Abuse Ordinance a claim for tax relief is abusive if the relief would directly
or indirectly substantially benefit persons not entitled to it. This is the case if the concerned
income is forwarded to non-residents or if the company is controlled by non-residents and
does not make appropriate distributions of profit. The 1962 Abuse Ordinance does not protect
Switzerland as source state in opposite situations.
According to prevailing doctrine, the assessment on the basis of 1962 Abuse Ordinance
is in general not binding for the treaty partner, except if there is a special reservation in the
tax treaty. As the ordinance protects foreign interests, the treaty partners seem not to oppose
the application in Switzerland. According to the competent authority in Switzerland, there
are hardly any mutual agreement procedures in connection with the application of the 1962
Abuse Ordinance.
Other domestic provisions and doctrines with an international scope

Various SAAR can be found in the domestic tax legislation. In the context of this report, the
following rules can be mentioned:
–– Thin capitalization rules and interest rate rules: Interest payments on the hidden equity
are part of the taxable corporate income and arm’s length rules apply to debt from related
parties.8 These rules apply in domestic and international situations. In an international
situation, they limit base erosion and profit shifting.
–– According to a specific rule in the domestic law,9 participation exemption is not granted
if the payment is deductible in the source state. This rule addresses hybrid mismatch
situations.
6
See for more information Peter Hongler/Maurus Winzap, The application of the Swiss GAAR in a treaty context
– the Pre- and Post-BEPS World, ASA 83 (2014/15), p. 839 et seq.
7
SR 642.21.
8
Art. 65 Federal Direct Tax Act (FDTA, SR 642.11). See for detailed review, Roland Böhi, Peter Hongler, Swiss Branch
report, Interest deductibility: the implementation of BEPS-Action 4, Cahier de droit fiscal international 2019, p.
675 et seq.
9
Art. 70(2) let. b FDTA.
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Switzerland
Application of the domestic provisions and rules in a tax treaty context

Regarding the relationship between the domestic and the treaty-based anti-abuse rules,
Switzerland made an observation in the Commentary to the OECD-MC 2003 regarding the
application of domestic provisions. It observed (in paragraph 27.9 of the Commentary on
article 1) that, with respect to paragraph 22.1 of the Commentary, domestic tax rules on abuse
of tax conventions must conform to the general provisions of tax conventions, especially where
the convention itself includes provisions intended to prevent its abuse. In the Commentary
to the OECD-MC 2017, Switzerland has withdrawn this observation.
In practice, the application of domestic provisions in a tax treaty context is however not
always consistent. The tax administration used to apply some specific domestic rules also
in treaty related cases, even though the scope of these rules is limited to domestic cases.10
However, courts are in general reluctant to apply domestic provisions as well as the implicit
domestic GAAR directly in treaty situations.
One exception is the 1962 Abuse Ordinance. If there is no anti-abuse provision in the
treaty, the Federal Tax Administration applies the ordinance irrespective of the fact that it
may not be in line with Switzerland’s treaty obligations.
b. Prohibition of abuse of tax treaties – general principles of treaty interpretation
Apart from the express anti-avoidance provisions in Switzerland’s tax treaties (see below),
all tax treaties are according to the Federal Supreme Court subject to an unwritten (implicit)
anti-abuse principle (“implicit treaty GAAR”).11 This doctrine was developed not by directly
applying the implicit domestic GAAR but by interpreting the tax treaty itself. The court stated
that according to article 26 and 31(1) Vienna Convention the prohibition of abuse of rights is
part of the principle of good faith, which must be taken into account in any application of
international treaties.
In its ruling, the Federal Supreme Court cited the 2003 OECD Commentary regarding
treaty-abuse. It stated that states do not have to grant the benefits of a DTC, where
arrangements that constitute an abuse of the provisions of the convention have been
entered into (paragraph 9.4 of the Commentary on article 1). In another citation, the court
mentioned paragraphs 9.2-9.5 of the Commentary on article 1. Therefore, it has to be assumed
that the “guiding principle” adopted in the 2003 OECD Commentary (article 1, para. 9.5) and
basis of the “principle purpose test” (“PPT” hereafter) was at least an element of the treaty
interpretation by the Federal Supreme Court.
As there is not a lot of case law regarding the implicit treaty GAAR,12 it will be interesting
to see, how, if at all, it will further develop in tax treaties that do not (yet) contain a PPT
provision.
10
Jung, op. cit., p. 776 and 778 et seq.
11
Decision of the Federal Supreme Court 2A.239/2005.
12
E.g. Decision of the Federal Administrative Court A-2744/2008, Decision of the Administrative Court of the Canton
Zurich SB.2012.00088.
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Bernasconi & Peyer
c. Application of the concept of beneficial ownership
In recent years Switzerland has seen a number of important court rulings regarding the
question of beneficial ownership in (fully hedged) financial transactions.13 The Federal
Supreme Court focused in these cases primarily on the concept of beneficial ownership and
not on treaty-abuse. Thereby, the Supreme Court established that beneficial ownership is
a necessary requirement for the application of the dividend-article of the DTC in question,
even though the DTC did not contain such a requirement. As a result, the concept of beneficial
ownership is regarded as an (unwritten) requirement in all tax treaties Switzerland has
concluded.
When interpreting the concept of beneficial ownership, the Federal Supreme Court
focused on an economic view (substance over form approach). The key element of the
concept of beneficial ownership is the power of disposal (Verfügungsberechtigung) of a
person. This power of disposal needs to be examined under economic aspects. A merely
formal right of use will not be sufficient. As a general rule, the beneficial owner is the person
who can dispose of the (tax) objects, i.e. can use and benefit from them without any legal,
contractual or factual limitation. Such a limitation of the power of disposal persists (concept
of interdependence) when the realization of the income depends on the duty to forward this
income (first dependency) and the duty to forward this income depends on the realization of
this income (second dependency). If these two conditions are fulfilled, a recipient of income
will not be the beneficial owner. For the assessment of these conditions, the distribution of
the risks of the transactions will play a crucial role. In the mentioned cases, the taxpayers did
not bear any (considerable) risk from the transactions and generated only a risk-free return.
The Federal Supreme Court separated the question of beneficial ownership from treaty-
abuse and did not examine a subjective element. Therefore, even if the areas of application
are overlapping, the concept of beneficial ownership is not part of the treaty-abuse doctrine
in Switzerland.
The Federal Supreme Courts’ decisions were widely discussed and partially criticized by
the doctrine for applying the beneficial ownership requirement too broadly (or at least in a
broader way than the 2014 OECD Commentary14) with its pure substance over form approach
and the fact that a mere factual limitation can suffice to deny the beneficial ownership.
d. Treaty based anti-avoidance provisions
Switzerland has long been reluctant to include special anti-abuse provisions in its tax
treaties. However, under the pressure of international discussions such provisions have been
included in recent years into the treaties, mostly on request by the treaty partners. The result
is therefore that a multitude of different provisions can be found in the current Swiss DTCs;
some are specifically targeted, while others are more general, as described in the following
non-comprehensive list:
–– Anti-abuse provisions with a purpose test: Some DTCs have anti-abuse provisions that take
the intention of the taxpayer into account. These provisions may differ from each other
13
Decisions of the Federal Supreme Court 141 II 447 and 2C_895/2012, see also Robert J. Danon and Hugues Salomé,
The BEPS Multilateral Instrument, IFF Forum für Steuerrecht, 2017, s. 3.3.1, p. 215 et. seq.
14
Para. 14 of the 2014 OECD commentary on art. 10.
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Switzerland
and from the PPT-rule of the MLI with regard to the definition of the subjective element
(purpose “mainly”, “principally” or “primarily” to enjoy the treaty benefits) and with regard
to the scope. Some of them apply only to dividends,15 others to dividends, interests,
royalties and sometimes also other income16 or to all treaty provisions,17 The number of
such provisions in Switzerland’s DTCs increased in recent years. This could be a result of
the bigger international focus on treaty-abuse.
Another variation of these provisions is that the purpose test is combined with an anti-
conduit rule.18
–– Anti-conduit provisions: The DTC with France (article 14) as well as the DTC with Columbia
(article 21(1)) have general anti-conduit measures and take in account bona fide situations.
–– Look-through provisions: Switzerland concluded special look-through provisions with only
a limited number of treaty partners. Examples are article 11(2)(b)(ii) and (iii) DTC with
France and paragraph II of the 1996 protocol to the DTC with Spain.
As an aside, one can mention that Switzerland has no specific CFC rules and does not
intend to introduce such rules.19 Switzerland is of the opinion that the profits of companies
cannot be subject to additional taxation abroad solely because a foreign person holds the
shares of the company.20
–– Provisions denying treaty benefits to specific companies or companies enjoying special tax
privileges: Only the DTC with Spain contains provisions (article 10(2)(b) and 12(7)) denying
treaty benefits for inter-company dividends and royalties if the company is not subject
to taxes or exempt from taxes. A few other DTCs have provisions excluding certain
companies from the scope of the treaty (e.g. para. 2 of the 2015 protocol to the DTC with
Liechtenstein, article 28 DTC with Luxemburg).
–– Subject-to-tax provisions: There are some subject-to-tax provisions in Switzerland’s DTCs.
Switzerland itself uses them only in constellations where the exemption method would
lead to a double non-taxation. Examples can be found in paragraph 5 of the 2003 protocol
to the DTC with Israel, article 23(1)(a) DTC with Venezuela and article 23(2) DTC with
Kuwait. In addition, some remittance-base-provisions can be found in Switzerland’s
treaties that have a similar effect (article 27(3) DTC with United Kingdom and article 22
DTC with Singapore).
–– Limitation of benefits provisions (LOB): LOB provisions are not part of the Swiss treaty policy.
Only the treaties with the United States (article 23) and Japan (article 22A) contain
extensive LOB clauses.
–– Economic substance/no artificial arrangements: The DTC with Malta contains in article 23 a
provision that denies treaty benefits if a purely artificial structure exists that does not
reflect the economic reality.
15
Para. VII of the 2010 protocol to the DTC with the Netherlands.
16
Arts. 10(7), 11(8), 12(7), 21(4) DTC with China; para. 4 of the 2015 protocol to the DTC with Liechtenstein; para. 1 of
the 2015 protocol to the DTC with Oman; para. 1 of the 2009 protocol to the DTC with Qatar.
17
Para. 1 of the 2013 protocol to the DTC with Australia.
18
Art. 10(8), 11(5), 12(7), 21(3) DTC with Hong Kong, arts. 3(1)(l), 10(6), 11(7), 12(5), 21(4) DTC with United Kingdom.
19
Robert Danon and Christoph Schelling, Switzerland in a Post-BEPS World, Bulletin for International Taxation,
April/May 2015, p. 201 et seq., with a more nuanced overview.
20
With respect to para. 23 of art. 1 OECD Commentary Switzerland observed that controlled foreign corporation
legislation may, depending on the relevant concept, be contrary to the spirit of art. 7. A specific treaty provision
allowing the application of Spanish CFC rules can be found in para. I(iii) of the 2006 protocol to the DTC with
Spain.
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–– Other older DTCs contain provisions similar to the 1962 Abuse Ordinance (article 23 DTC
with Italy), anti-abuse provisions with reservations of domestic anti-abuse clauses (article
27 DTC with Hong Kong, article 23 DTC with Germany including number 2 of the 2002
protocol and article 28(7) DTC with Austria) or provisions referring directly to the 1962
Abuse Ordinance (paragraph 2 of the 1987 protocol to the DTC with Norway).
1.2.2.3. Switzerland’s reaction to other forms of tax treaty-abuse
As mentioned above, Switzerland has, apart from some specific anti-abuse rules in its tax
treaties, no codified domestic tax act that specifically prevents tax treaty-abuse. However, the
tax administration and especially the courts found other means to prevent or solve abusive
tax treaty cases. For the purpose of this report and in relation to the MLI, the following can
be mentioned:
–– Transactions or arrangements undertaken to access the reduced treaty rate on dividends paid
to a parent company (addressed by article 8 MLI): Many Swiss tax treaties already contain
a minimum holding period, especially if the right to tax dividends from significant
participations is allocated exclusively to the state of residence.
If there is no such provision, the implicit treaty GAAR may apply in unusual cases. In this
context, the Federal Tax Administration has also developed the so-called “old reserve
doctrine”.21 According to this practice, accumulated, distributable earnings generated
while shares of a Swiss company are in foreign possession and not adequately distributed
are qualified as “old reserves”. The doctrine addresses situations, when after a transfer of
shares the new shareholder has a more favorable treaty relief from dividend withholding
tax. The Federal Tax Administration may invoke that the claim for withholding tax is
abusive to the extent it is made for old reserves. For these old reserves, the refund is
granted only to the extent permissible before the share transfer.
–– Transactions or arrangements undertaken to avoid taxation of immovable property situated in
a contracting state (addressed by article 9 MLI): Switzerland has in many of its treaties a
provision similar to article 13 (4) 2014 OECD-MC. To prevent the abuse of the treaty in
other exceptional circumstances (including the dilution of the proportion value), the
implicit treaty GAAR could be applied. In a decision from the administrative court of the
canton Zurich concerning the taxation of immovable property, it was decided that due to
the lack of substance of a company registered in Luxembourg and the fact that the owner
of this company was a resident of another state, the company cannot benefit from the
treaty and in particular not from the lack of a provision similar to article 13(4) OECD-MC
2014. The court thereby applied the implicit treaty GAAR.22
–– Granting of treaty benefits for income paid to low-taxed permanent establishments in third
jurisdictions (addressed by article 10 MLI): From Switzerland’s point of view, low taxation
alone does not justify refusing treaty benefits. Switzerland will apply the exemption
method, irrespective of the taxation of a permanent establishment in the foreign state.
Swiss domestic law also provides for an exemption of profits made by foreign enterprises,
permanent establishments and related to real estate located abroad. Low taxation is
21
See for more information Stefan Oesterhelt, Altreservenpraxis, internationale Transponierung und stellver
tretende Liquidation, IFF Forum für Steuerrecht, p. 99 et seq.
22
Decision of the Administrative Court of the Canton Zurich SB.2012.00088.
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therefore not a sufficient reason to deny treaty benefits.23 An exception can be found
in the DTC with the United States. As part of the LOB clause (article 22(4)) a sufficient
taxation of a permanent establishment is relevant for obtaining treaty benefits.
–– Avoidance of permanent establishment status (addressed by articles 12, 13 and 14 MLI):
Switzerland did not address these issues with special provisions. This is due to its policy
not to broaden the definition of the permanent establishment beyond its domestic
definition. A clear definition of the PE also provides legal certainty for the companies.
Situations addressed by article 14 MLI could until now be examined in the light of the
implicit treaty GAAR.
–– Addressing hybrid mismatch arrangements (articles 3 and 4 MLI): According to a specific rule
in the domestic law, the participation exemption is not available if revenue is deductible
in the source state.24 Otherwise, Switzerland has not specifically targeted the problem of
hybrid mismatch arrangement in its tax treaties prior to the BEPS-Project.
1.2.2.4. Provisions for a mutual agreement procedure (MAP) and corresponding adjustments

(addressed by articles 16 and 17 MLI)
Switzerland has an established MAP program. All of Switzerland’s tax treaties include a
provision relating to MAP, which generally follows paragraphs 1 through 3 of article 25 2014
OECD-MC. Its treaty network is largely consistent with the requirements of the Action 14
minimum standard, except mainly for the fact that more than half of Switzerland’s tax
treaties do not contain a provision to implement any mutual agreement reached through
MAP notwithstanding any time limits in the domestic law (instead Switzerland applies
the ten-year time limit to introduce the MAP according to domestic law) nor include the
alternative provision to set a time limit for transfer pricing adjustments according to articles
7 and 9 OECD-MC.
1.2.2.5. Mandatory binding arbitration (addressed by articles 18-26 MLI).
According to its treaty policy, Switzerland includes arbitration clauses in its treaties. It is also
one of the states that declared their commitment to provide for mandatory binding MAP
arbitration in their bilateral tax treaties as a mechanism to guarantee that treaty-related
disputes will be resolved within a specified timeframe.25 Prior to the MLI, nearly a third of
the tax treaties had an arbitration clause (sometimes with a limited scope of application).
Switzerland has already gained practical experience with arbitration in the course of a few
mutual agreement procedures.
As a non-member of the EU, Switzerland has not acceded the 90/436/EEC: Convention on
the elimination of double taxation in connection with the adjustment of profits of associated
enterprises.
23
See however also Danon/Schelling, op. cit., s. 3.5., p. 205 et. seq.
24
Art. 70 FDTA.
25
Final Report on BEPS-Action 14 of 2015, p. 41.
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Bernasconi & Peyer
1.2.2.6. Preliminary conclusion
Due to the competitiveness of its tax system in certain areas, Switzerland was and probably
still is less prone to abusive tax planning schemes than other states. This does however not
mean that such situations are unknown in Switzerland. Especially the high domestic source-
tax rate on passive income (35%) shed light on the question of treaty-abuse long before
the start of the BEPS-Project and led to the development of a comprehensive framework to
fight abuses. Therefore, despite having no specific anti-avoidance tax act but rather a range
of (domestic and treaty based) provisions and doctrines, the tax administrations and the
courts already had the means to cope with abusive situations pre-BEPS. However, the fact
that the implicit domestic and the treaty GAAR are both based on jurisdiction of the Federal
Supreme Court and are not codified, can provoke legal uncertainties for the taxpayer. Having
various similar but nevertheless different anti-abuse provisions in the DTCs can additionally
complicate the application of anti-abuse rules. In this regard, it is to be expected that the
PPT rule will bring at least a certain uniformity to the tax treaties. Furthermore, it will be
interesting to see if and how the application in Switzerland of the beneficial ownership
concept evolves in the light of the new PPT.26
Switzerland signed and ratified the MLI. However, Switzerland notified only few treaties as
Covered Tax Agreements (“CTAs”) due to legal uncertainty regarding the question whether
the MLI “amends” CTAs or whether it “coexists” with them and also because of shortcomings
of the MLI regarding the implementation of certain minimum standards concerning BEPS.
Furthermore, Switzerland restricts the material scope of the MLI in principle to the minimum
standards.
Switzerland has signed the MLI at the occasion of the signing ceremony on 7 June 2017.
Addressing the legal and constitutional difficulties of the MLI that had to be overcome
in Switzerland (see below 1.3.2), the Swiss government argued in the domestic legislative
process that the signature of the MLI provides a more efficient way to update its treaty
network to the minimum standard regarding BEPS compared to bilateral negotiations.
The government also assessed the impact of the MLI on the fiscal and economic situation
in Switzerland to be neutral since the MLI does not amend the attribution of taxing rights
according to the options and reservations made by Switzerland. Regarding the efforts of the
administration, the government concluded that the implementation of the MLI does not
require the recruitment of additional workforce. No statement was issued regarding the
impact on tax compliance.27
The Swiss parliament approved the MLI on 22 March 2019. The mandatory referendum
26
See also Danon/Salomé, op. cit, s. 3.7.4.2, p. 240.
27
Message submitted by the Swiss Federal Council to parliament for the approval of the MLI, p. 5426 s. (German
Version): https://www.admin.ch/opc/de/federal-gazette/2018/5389.pdf.
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period ended unused in June 2019.28 Subsequently, the instrument of ratification was
deposited on 29 August 2019 and the MLI entered into force for Switzerland on 1 December
2019. Due to a reservation according to article 35(7) MLI made by Switzerland, the MLI will
become applicable to a CTA 30 days after the last of the parties to a CTA that made this
reservation, will have notified the depositary that the procedure is completed.29 Presently,
no such notification was made by Switzerland.
Switzerland notified only few of its treaties as CTAs. Unlike the position held up in the 2015
Final Report on BEPS-Action 15 that the MLI coexists with the CTAs (“coexisting view”),30
Switzerland is of the opinion that the MLI changes the CTAs (“amending view”). Furthermore,
Switzerland must publish according to its domestic laws consolidated texts of its tax treaties.
Therefore, Switzerland saw itself in the position that it was only able to notify a treaty as
CTA if the other contracting state confirmed to share the “amending view” and mutually
agreed in terms of article 25(3) OECD-MC on a document detailing the amendments caused
to the CTA by the MLI similar to a bilateral amending protocol. Respective agreements were
concluded with Argentina, Austria, Chile, Iceland, Italy, Lithuania, Luxembourg, Mexico,
Portugal, South Africa, Czech Republic and Turkey. Accordingly, only the treaties with those
states were notified as CTAs, what represents 12 of 105 treaties in force as per 30 June 2018.31
Besides, it emerged that element 3.3 of the 2015 Final Report on BEPS-Action 14 asking
states to include sentence 2 of article 25(2) OECD-MC regarding the implementation of
mutual agreements notwithstanding any time limits in the domestic laws in their treaties
or to agree on time limits for primary adjustments under articles 7 (Business profits) and
9 (Associated enterprises) OECD-MC represents a minimum standard.32 Since Switzerland
cannot implement mutual agreements independently of the deadlines of domestic law as
proposed by article 25(2) OECD-MC and the second option regarding time limits for primary
adjustments is not available under the MLI, Switzerland cannot fully implement this BEPS
minimum standard through the MLI. The MLI does therefore not provide Switzerland with
a tool to fully update its treaty network to the minimum standards regarding BEPS. It is thus
to be expected that Switzerland will not notify any further treaties as CTAs and will instead
implement the BEPS minimum standards through bilateral negotiations.
All 12 partners to the treaties notified as CTA by Switzerland signed the MLI and notified
their treaties with Switzerland also as CTA. Due to the consequent handling of the “amending
view”, in depth communication with the partners to the treaties notified as CTA was necessary
and therefore an agreement with the concerned states on the application of the MLI to the
concerned treaties existed already prior to the entering into force of the MLI.
The authors consider the MLI to be a remarkable international treaty from a technical
point of view. However, they regret that basic and principal questions regarding the legal
and constitutional functioning of the MLI were not sufficiently addressed. The “coexisting
28
Parliamentary decree for the approval of the MLI: https://www.parlament.ch/centers/eparl/
curia/2018/20180063/Schlussabstimmungstext%201%20SN%20D.pdf.
29
Parliamentary decree, op. cit.
30
Final Report on BEPS-Action 15 of 2015, B 19.
31
See message, op. cit., p. 5404.
32
Final Report on BEPS-Action 14 of 2015, I. A 3.3.
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view” taken distinctly by the OECD at a very early stage in the working group on BEPS-Action
15 seems not always reflected in the texts of the MLI and the accompanying material and
is therefore not beyond all doubts.33 Concerns of states with the “amending view” were not
adequately taken into account, limiting or complicating the use of the MLI for those states. In
addition, the authors regret from a Swiss perspective that inconsistencies between the BEPS
minimum standards and the provided possibilities of the MLI further restrict the practical
value of the MLI.
Switzerland applied a limited selection of provisions of the MLI. According to the options
and reservations made, the scope of the MLI is in principle restricted to the BEPS minimum
standards set in the 2015 Final Reports on Actions 6 and (as far as possible) 14 and includes
only very few further provisions.34
a. Minimum standards regarding treaty-abuse and dispute resolution
Minimum standards were developed under BEPS-Action 6 regarding treaty-abuse and BEPS-
Action 14 concerning dispute resolution.
Switzerland decided to meet the minimum standard regarding treaty-abuse through the
PPT as provided for in article 7(1) MLI. Furthermore, Switzerland included the “discretionary
benefits” rule according to article 7(4) MLI, although this is only of declarative nature, as Swiss
domestic laws and the practice already allow for the granting of treaty benefits in similar
cases. Switzerland refuses to apply the “simplified LOB” rule provided for by paragraphs 7 to
13 of article 7 MLI and does also not consider the PPT to be an interim measure in the sense
of article 7(17) MLI. The PPT according to the MLI is in nature similar to Switzerland’s existing
implicit domestic and treaty GAAR, while the LOB rule has with only two exceptions no
tradition in Switzerland (cf. above 1.2.2.2). Additional reasons given by the Swiss government
for the choices made were that the LOB also requires interpretation and therefore provides
only at first sight more security regarding the application. Further, the government observed
that as a SAAR, the LOB rule does not avoid all possible cases of treaty-shopping and is
therefore as alone standing rule not sufficient to fulfill the minimum standard. In addition,
the LOB lacks flexibility and risks for that reason also to result in the refusal of treaty benefits
in non-abusive situations.
Apart from an “anti-abuse” provision, the minimum standard regarding treaty-abuse
requires also the inclusion of a statement in the preamble that a tax treaty does not intend to
create “opportunities for non-taxation or reduced taxation through tax evasion or avoidance
(including through treaty-shopping arrangements aimed at obtaining reliefs provided in
this agreement for the indirect benefit of residents of third jurisdictions)” as provided for by
article 6(1) MLI respectively the preamble of the OECD Model. This language is, thus, included
by Switzerland under the MLI.
33
E.g. the fact that a CTA remains according to art. 37(2) MLI modified in case that a party to the CTA resigns from
the MLI does not support the “coexisting view”.
34
Message, op. cit., p. 5400 and 5422.
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The minimum standard further requires, as set forth by the 2015 Final Report to BEPS-
Action 14, the provisions related to the mutual agreement procedure in the paragraphs 1 to
3 of article 25 OECD-MC. Since the standard allows a deviation from the implementation of
mutual agreements regardless of any time limits in the domestic law provided for by the
second sentence of article 25(2) OECD-MC (cf. above 1.3.2), Switzerland opted for the inclusion
of the paragraphs 1 to 3 of article 25 OECD-MC except the second sentence of paragraph 2.35
b. Applied provisions not representing a minimum standard
Apart from the minimum standards regarding treaty-abuse (BEPS-Action 6) and dispute
resolution (BEPS-Action 14), Switzerland has made the following choices regarding the
application of other rules of the MLI:
–– Switzerland opted to include the preamble language of article 6(3) MLI (“DESIRING to
further develop their economic relationship and to enhance their cooperation in tax
matters”), because economic cooperation is regarded as an important goal of treaties.
–– Although formally not a minimum standard but only a “best practice”, the Swiss
government included the provision for the corresponding adjustment in article 9(2) OECD-
MC respectively article 17 MLI.36
–– Switzerland opted for the rules for the avoidance of double non-taxation in option A of
article 5 MLI excluding the exemption method in case of a conflict of qualification.37
–– Switzerland has chosen to implement the mandatory binding arbitration procedure
provided for by part VI MLI. The standard method (“final offer” or “baseball arbitration”)
is preferred, while the alternative “independent opinion” procedure can be evaluated
if a partner state suggests this approach. In addition, Switzerland chose according to
article 19(11) MLI a period of three years after which an unsolved case must be submitted
to arbitration instead of two years as proposed by the OECD-MC. Switzerland also made
two reservations to article 28(2) MLI: The arbitration procedure applies only to tax years
beginning after the entry into effect of the MLI. In addition, arbitration is excluded in
cases involving “hard-to-value-intangibles” if the primary adjustment in the partner
state ignores the usually applicable statutes of limitation and is based on particular
prescription rules for “hard-to-value-intangibles” provided for by the domestic law of
the partner state.38 No reasoning was given by the Swiss government for the choices made
in that respect, but it can be observed that arbitration is part of the Swiss policy and that
“final offer” is already the agreed method in case of arbitration procedures under the
Swiss double tax treaties with Germany and Norway.39
35
Final Report on BEPS-Action 14 of 2015, I. A 3.3.
36
Message, op. cit., p. 5417; Final Report on BEPS-Action 14 of 2015, I B 1.
37
Message, op. cit., p. 5406.
38
Message, op. cit., p. 5422.
39
Mutual agreement with Germany of 21 December 2016 on the arbitration procedure, para. 13; Mutual agreement
with Norway of 10 October 2019 on the arbitration procedure, art. 5.
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c. Waived provisions
Switzerland also considered applying other provisions of the MLI, but refused to do so for
the following reasons:
–– The minimum holding period for transactions or arrangements undertaken to access the
reduced treaty rate on dividends paid to a parent company as proposed in article 8 of the MLI
was not adopted by Switzerland, because the inclusion of “corporate reorganizations”
for the calculation of the deadline provides for a non-exhaustive list of reorganizations.
Although a minimum holding period is generally part of the Swiss tax treaty policy (cf.
above 1.2.2.3), the modalities for the calculation of the deadline were considered to be too
extensive, in particular regarding asset-deals that would be, based on the understanding
according to Swiss domestic rules for tax neutral corporate restructurings, permitted
without interrupting the holding period. No reservation has been made by Switzerland on
the respective provision introduced into the OECD-MC 2017, but Switzerland implements
this provision bilaterally in a wording that excludes asset-deals for the calculation of the
minimum holding period.40
–– The substituted property rule for gains from the alienation of shares or other interests
deriving their value primarily from immovable property at any time during the 365-day
period preceding the alienation as proposed in article 9 MLI was not included. Since Swiss
domestic law allows taxation only if a controlling participation in a company is sold that
at the time of the sale meets certain criteria of a real estate company that are in addition
more restrictive than the definition of “land-richness” according to the proposed provision,
article 9 MLI would create a risk of double non-taxation. Consequently, Switzerland made
a reservation regarding this provision also in the OECD-MC 2017 (article 13(4)).
–– The provision denying treaty benefits for income paid to low-taxed permanent
establishments in third states that are subject to little or no tax and exempt from tax in the
residence jurisdiction in article 10 MLI was not opted in. The Swiss government stated that
no or low taxation itself is not necessarily a result of an abuse. Furthermore, it was held
that the rule would also refuse treaty benefits in a case where a treaty between the source
state and the third state would provide for equivalent treaty benefits for a company in
the third state. Switzerland has accordingly made a reservation on the corresponding
provision in article 29(8) OECD-MC 2017.
–– The clauses preventing the avoidance of permanent establishment status through
commissionaire and similar arrangements in article 12 MLI, the specific activity
exemptions in article 13 MLI or the splitting-up of contracts in terms of article 14 MLI
were waived because the PPT is considered to provide sufficient protection against the
mentioned abuses. Switzerland has raised reservations against the projection of these
provisions into the OECD-MC 2017 (article 5(4.1) and (5)).
–– Switzerland has not adopted the provision of the MLI addressing hybrid mismatch
arrangements according to article 3 MLI. Although considered to be in pursuit of a legitimate
goal, the Swiss government stated that the “hybrid entity” provision would result in an
unbalanced situation to the detriment of Swiss collective investment vehicles. Swiss
vehicles are in principle transparent, while foreign funds are often not, notwithstanding
40
E.g. DTC with Zambia: “… for the purpose of computing that period, no account shall be taken of changes of
ownership that would directly result from a merger or divisive reorganization, or from a change of legal form,
of the company that holds the shares or that pays the dividend …”
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Switzerland
the fact that in many cases no actual taxation occurs. Switzerland therefore chose to
implement the hybrid entity rule through bilateral negotiations in combination with
a protocol disposition clarifying the application to collective investment vehicles.
Switzerland has already implemented this approach in a few recent treaties (e.g. treaties
with Brazil and Zambia). Accordingly, no reservation was made on this provision in the
OECD-MC 2017.
–– The dual resident company rule in article 4 MLI was waived by Switzerland as it is feared
to increase the risk of unrelieved double taxation. No reservation is made on the
corresponding article 4(3) OECD-MC 2017, because the Commentary considers the
wording of the previous OECD-MC to be an alternative.
d. Further developments to expect
Based on the understanding of the Swiss government that the MLI represents an efficient
tool to update the treaty-network as far as possible to the minimum standards set in the
BEPS-Project, the reservations made are substantial. Given that the MLI is as described
above (cf. 1.3.2) not expected to be applied to further treaties by Switzerland, it seems
unlikely that Switzerland will reconsider its policy regarding the options and reservations
made.
The BEPS-Project respectively its implementation in the MLI and the OECD-MC 2017 has had a
strong impact on new bilateral treaties concluded by Switzerland since then. The new treaties
in principle all adhere to the BEPS minimum standards (examples: treaties with Brazil,
Saudi Arabia, Zambia, Kosovo). Furthermore, since the MLI does not enable Switzerland to
implement the minimum standard regarding dispute resolution set under BEPS-Action 14 (cf.
above 1.3.2), Switzerland entered into negotiations with many of its partner states in order
to update the existing bilateral treaties to the minimum standards (e.g. amending protocols
to treaties with Ireland, Netherlands, Iran, Rep. of Korea, UK or the new treaty with Pakistan
replacing the old treaty).
Switzerland agreed to several provisions in bilateral tax treaties that it has not applied
under the MLI. However, these clauses were implemented in a customized respectively
slightly amended manner. An example is the “hybrid entity” rule of article 1(2) OECD-MC
2017 respectively article 3 MLI. This provision was introduced in the Swiss treaties with Brazil
and Zambia, but complemented with a protocol disposition clarifying that income paid
to defined collective investment vehicles established in a state is treated as income of an
individual resident in this state as far as the collective investment vehicle is held by persons
resident in this state. Another example is the minimum holding period for dividends provided
for by article 10(2) OECD-MC 2017 respectively article 8 MLI that was implemented in the
treaties with Kosovo and Brazil without the general reference to “corporate restructurings”
(cf. also above 1.3.3 regarding the reasons for which the concerned provisions were excluded
from the scope of the MLI).
Since Switzerland has taken the “amending view” (cf. above 1.3.2), the MLI changes the
treaties and its applicable provisions are directly incorporated into the CTA. As a result,
treaties amended by an “ordinary” protocol or with the same amendments by the MLI will
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have the same form of appearance. It will in principle not be necessary to consult the MLI in
addition to the CTA (cf. however 2.1).
2. Part Two: Practical Implementation of Provisions of the MLI
The MLI, including details regarding reservations made and options chosen as well as the
list of the CTAs, was complimented with explications for the underlying reasons submitted
to and subsequently approved by parliament. According to the parliamentary decree, the
government has no discretion regarding further changes of the options and reservations
without the consent of parliament. However, the government may notify further treaties as
CTA, subject to consultation with the competent parliamentary commission.41
According to Swiss domestic law, consolidated texts of all tax treaties must be gazetted
in the official collection of legal texts. As a result of Switzerland’s amending view and for the
sake of clarity between contracting states and for the users, the amendments caused by the
MLI to a CTA are mutually agreed between the competent authorities of both contracting
states. The disposition of the other competent authority to conclude a respective mutual
agreement was – as explained (cf. 1.3.2 above) – a precondition for Switzerland to notify the
concerning treaty as a CTA. It can be assumed that the need to publish consolidated texts
on the Swiss side was communicated during the matching process to the authorities of the
partner states.
No consolidated texts have been published so far in Switzerland in the official gazette
or by private publishers. The influence of the “Guidance to the development of synthetized
text” published by the OECD in November 2018 can therefore not be assessed yet. Considering
Switzerland’s domestic law regarding the publication of legal texts, it can be assumed that the
texts of the CTA will be published in a similar manner to the synthesized text of the OECD-MC
2014 printed in the annex to the Guidance given by the OECD.
The question regarding the legal value of the consolidated texts respectively their binding
effect on tax authorities in the case of a mistake in the consolidation process, has not been
addressed by the government in official documents to the MLI. Since Switzerland applies the
MLI only to treaties with states that share the “amending view” and that are willing to agree
in a mutual agreement (article 25(3) OECD-MC) on a text detailing the amendments made to
the treaty by virtue of the MLI (cf. above 1.3.2), the risk of a divergence between the published
consolidated text of a CTA and the text of the MLI should be minimized. However, if such a
divergence should nevertheless occur, the Swiss law on the publication of legal texts leaves it
to a treaty to determine the prevailing wording.42 The “treaty” will in this case be the MLI and
not the CTA. This conforms also with the reasoning that the MLI as signed and approved by
parliament (legislative body) must have a higher legal value than a consolidated text, which
41
Parliamentary decree, op. cit., art. 2.
42
Federal law on the gazette of laws, ar. 15, SR 170. 512.
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Switzerland
is in Switzerland elaborated by the tax authorities based on a mutual agreement between

competent authorities according to article 25(3) OECD-MC.
From the moment Switzerland ratifies an international treaty such as the MLI, the treaty
becomes part of federal law (monistic approach; article 190 Federal Constitution). To be
directly applicable (self-executing), treaties or specific provisions must be sufficiently
clear and need to be officially published. In such a situation, no further act for the formal
incorporation into domestic law is required.43
In the case of a conflict between international law and domestic legislation, the
international law has in principle priority in Switzerland over diverging national law
(article 5(4) Federal Constitution). Switzerland has not made any reservation on the Vienna
Convention, which states in article 27 that no party to a treaty may invoke its internal law as
justification for the failure to perform a treaty. Therefore, Switzerland cannot override an
international treaty in its domestic law.
Effect of the MLI with regard to the covered tax agreements
As the provisions of the MLI are – at the time of writing – not yet in effect in Switzerland, the
tax administration and the courts have yet to decide on the interpretation of the (formal and
substantive provision) of the MLI in a specific case. Nevertheless, the interpretation and the
legal value of the MLI was an important issue for Switzerland during the decision-making
process before signing the MLI. This concerned principally the legal nature and the formal
interpretation of the MLI and resulted in Switzerland’s view that the MLI amends the CTAs.
Switzerland’s view is intended to ensure the clarity and legibility of the tax treaties and is
in line with the requirements of Swiss legislation on the publication of legal texts including
international treaties.
Since the OECD’s view is that the MLI is applied alongside the existing CTA, the explanatory
statement and the memorandum called “Multilateral Convention to Implement Tax Treaty
Related Measures to Prevent Base Erosion and Profit Shifting: Functioning under Public
International Law” could not solve Switzerland’s issues regarding the legal nature of the MLI.
It remains to be seen what legal value Swiss courts will grant to the explanatory statement
for other questions.
43
Decision of the Federal Supreme Court BGE 140 II 185, s. 4.2.
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Bernasconi & Peyer
Effect of the different languages of the MLI, the tax treaty and the domestic law
All legal texts, including international treaties, have to be gazetted in Switzerland in the
official languages French, German and Italian. All three versions are equal and binding. For
the interpretation of international treaties there is however a difference. Only the authentic
language (one or more) of the treaty is relevant for the interpretation. The translations into
Switzerland’s official languages are thus only unofficial translations.
With the MLI amending the CTA (Swiss view), language issues can arise, when the
language of the CTA and the MLI are not the same. If the authentic languages of a CTA are
not English and French then the MLI will in any case add another language to the treaty to
the extent that the MLI amends the CTA. If for example the CTA has a different authentic
language (e.g. German), then a translation of the text of the MLI will amend the CTA. However,
in the (unlikely) event of a material difference between the original wording of the MLI in
English and French and the German translation that amended the CTA, the original wording
of the MLI has to prevail. Since the treaty partners signed the MLI (in French and English) and
not their translation for the amendment of the CTA, Switzerland’s amending view does not
change this outcome. As the translation of the MLI will however be made jointly by the treaty
partners, the risk of a major discrepancy seems to be remote.
Regarding the question of the MLI’s impact on tax treaty interpretation in general, the
authors are of the opinion that the way in which DTCs are interpreted in Switzerland will not
change significantly.
According to the prevailing doctrine and judicature in Switzerland, an international treaty
has to be interpreted according to the rules of international law. Article 26 of the Vienna
Convention states that every treaty in force is binding upon the parties to it and must be
performed by them in good faith. Thus, the parties shall interpret a treaty “in good faith in
accordance with the ordinary meaning to be given to the terms of the treaty in their context
and in the light of its object and purpose” (article 31(1) Vienna Convention). The preparatory
work of the treaty and the circumstances of its conclusion are supplementary means of
interpretation (article 32 Vienna Convention).
The wording is therefore always the starting (and main) point of the interpretation.
Context, object and purpose shall thereby also be considered (article 31(1) Vienna
Convention). With regard to the OECD-MC and its official Commentary, it is undisputed in
Switzerland’s jurisprudence and doctrine that they are important for the interpretation of
the double taxation agreement if rules modelled on the OECD-MC exist in a double taxation
agreement. The legal classification that is given to these OECD documents is however not
always consistent. The Federal Administrative Court uses them in recent rulings (only) as
supplementary means within the meaning of article 32 Vienna Convention.44 As far as it is
known to the authors, the Federal Supreme Court has not yet analyzed if such documents
fall under article 32 or article 31(1) Vienna Convention.
Whether the amendments to the OECD Commentary can be applied retroactively is
another matter of controversial discussions in Switzerland’s doctrine. In Swiss case law, it was
44
See e.g. Decision of the Federal Administrative Court BVGE 2010/7, s. 3.6.2.
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Switzerland
stated that under certain circumstances the court could also use the Commentary in a version
which is younger than the applicable treaty, but only to the extent that the amendment
of the Commentary did not change the existing regulation but is a mere clarification and
explanation of the existing provisions.45 As it thus seems, the current practice therefore is
somewhere in between static and dynamic tax treaty interpretation.
BEPS Reports and the explanations of the MLI by the OECD will likely have at least a
similar value for the interpretation of the MLI-related provisions. There are however good
reasons to support the view that the explanatory statement is not just a supplementary
means of interpretation, but part of the context within the meaning of article 31(1) Vienna
Convention.46 The statement constitutes an essential part as it was written alongside the
specific treaty (and not just in relation to a treaty model), which makes the link to the MLI
closer than the one between the OECD-MC and a DTC.
Furthermore, and with regard to the mode of treaty interpretation, Switzerland’s treaty
interpretation was never strictly based only on the wording. The teleological interpretation
has consistently also been an important element of interpretation. The signing of the MLI
should not change this.
The question of the MLI’s impact on the interpretation of treaties concluded before the MLI
was signed or ratified, has not been broadly discussed to date. For this, it is worth to recall that
Switzerland has chosen to apply only the BEPS minimum standard and few other articles of
the MLI with currently 12 treaty partners. All other DTCs will not be amended by the MLI. If
there is therefore no new MLI provision in a treaty, then there is no impact of the MLI on that
treaty and conversely, the fact that Switzerland has not opted to apply certain MLI-provisions
has also no legal value for the interpretation of a tax treaty.
The only point where the authors have doubts is whether in practice it will be possible to
make a distinction, in the medium- and long-term, between the application of the provisions
of the PPT-rule in some treaties on the one hand, and the implicit treaty GAAR on the other.
The authors cannot exclude that with time the scope of the application of these measures
(if there is a difference at all) will converge irrespective of whether there is a PPT codified in
the treaty or not. This is due to the fact that the implicit treaty GAAR and the PPT have close
similarities. If this occurs, the MLI and the BEPS Reports would have an indirect effect even
on DTCs signed pre-MLI or even pre-BEPS.
The main goal pursued by the BEPS-Project was to fight aggressive tax planning. The MLI’s
impact on the practical behavior in Switzerland is limited in two ways. First, Switzerland
could – for the reasons explained above – notify only a very small part of its treaties as CTAs
under the MLI. All other tax treaties are not directly affected by the MLI. Second, Switzerland
had, even though it was and is probably less affected by tax planning schemes, instruments
45
Federal Administrative Court A-4693/2013, s. 4.2.
46
Danon/Salomé, op. cit, s. 2.3.2, p. 204.
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Bernasconi & Peyer
in place to counter abusive tax planning schemes already before the start of the BEPS-
Project. Therefore, it can be assumed that the provisions of the MLI regarding BEPS-Action
6 – especially the PPT – will not have a major impact on the situation of the taxpayers in
Switzerland. In particular, the assessment practice of the tax administrations regarding
treaty-abuse seems not to need an adjustment caused by the transition from the “old”
anti-abuse provisions to the MLI provisions. An advantage of the similarities of the existing
anti-abuse provisions and the PPT will in fact be that the tax administrations and the tax
professionals in the private sector are already familiar with anti-abuse rules focusing on the
purpose of an arrangement. For the administrations, no specific procedure to adapt to the
new provisions should thus be necessary (e.g. a special PPT-committee).
Apart from the fact that the assessment practice will probably not be significantly
impacted by the MLI and that the legal basis to counter abusive situations has been in place
for some time now, there is nevertheless the impression that the tax administrations got
more focused on the different questions regarding tax avoidance and tax abuse in recent
years. In certain cases, it got more difficult to receive certain treaty benefits. This might be an
indirect effect of the national and international discussions in the context of the BEPS-Project.
With regard to the effect of the MLI on the resolution of tax disputes under mutual
agreement procedure and arbitration, a limiting factor is again that Switzerland notified
only few CTAs. With regard of BEPS-Action 14 in general, the authors observe that on the one
hand the formalization of the MAP process (incl. Peer Reviews) increased the administrative
burden on the competent authorities. On the other hand, it had a positive impact on the
duration of the dispute resolution and the diligence in the negotiation of mutual agreement
procedures has been noted with certain partner states. However, whether the MAP process
and the mandatory binding arbitration can counterbalance the increased risks of double
taxation caused by the BEPS-Project in the long term, remains to be seen. The non MLI
related BEPS-Actions with measures increasing transparency (in particular BEPS-Action 13
regarding country-by-country reporting and also the exchange of rulings according to Action
5 on harmful tax practices) in particular affected tax professionals in Switzerland and added
to the risk of double taxation substantively. Some tax professionals seem to be of the opinion
that especially the arbitration process is not yet effective enough.
In summary, it can be said that for Switzerland the big impact came with the other BEPS-
Actions. The MLI (BEPS-Action 15) in contrast is only a more or less efficient way to implement
the BEPS-Action 6 and partially BEPS-Action 14 minimum standards.
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Turkey
Branch reporter
Abdulkadir Kahraman1

Before the MLI, the number of Turkey’s tax treaties reached 90 and contracting jurisdictions
are mostly OECD members. Turkey usually follows the OECD Model Tax Convention. The
purpose of these treaties is to eliminate “double taxation”, prevent “fiscal evasion”. Both
Turkey’s existing tax treaties and domestic provisions do not have specific anti-abuse or
anti-treaty shopping provisions i.e. existing treaties do not include “LOB rules” except a few
treaties. As a developing country, Turkey did not include the “minimum holding period for
dividend withholding taxation”.
Turkey is aware that existing international tax architecture has some deficiencies and
discrepancies to fight tax avoidance. Therefore, Turkey considers that the MLI’s tools are
in favour of governments against existing international tax rules allowing international
corporate entities’ profits to be artificially shifted to low or no tax jurisdictions in which they
have less or no economic activity.
As OECD / G20 member, Turkey signed the MLI on 7 June 2017 and declared that it will
implement it. It has not been deposited yet and has not yet entered into force. Turkish tax
authorities have not yet done any disclosure to assess the impact of the MLI on tax compliance
and administration & economic activity.
According to Turkey’s BEPS MLI position paper, Turkey’s choices seem to demonstrate
Turkey’s commitment to implement the “minimum standards”. Additionally, the MLI choices
may also show the fact that it is a member of the Inclusive Framework and because of that
Turkey is subject to the peer-to-peer review whether it is compliant with the BEPS minimum
standards.
Turkey has chosen the new treaty preamble text because it clarifies that tax treaties
are not intended to create opportunities for non-taxation or reduced taxation through tax
evasion or avoidance, including through treaty-shopping arrangements. Therefore, Turkey
committed to satisfy the OECD’s minimum standard on treaty abuse. Moreover, Turkey is
going to implement the Principle Purpose Test, which is enabling Turkey to satisfy the BEPS
minimum standards.
On the other hand, Turkey has not chosen to apply other “tax treaty abuse” provisions of
the MLI and opted out article 8. Moreover, Turkey’s tax treaties do not include a minimum
shareholding period for the reduced treaty withholding rate on dividend payments but a
minimum capital of the company paying the dividends. The minimum holding period of
365-day requirement is not included in Turkey’s tax treaties and having a minimum holding
period requirement in Turkey’s tax treaties may influence and affect “investment decisions
of foreign investors, especially short-term capital”. The main reason not to adopt a minimum
holding period is probably to “attract both more foreign direct investors and capital market
investors”. Additionally, capital market investors looking for a short-term investment to
1
Partner, Tax, EY Turkey.
IFA © 2020 819

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foreign markets may invest other contracting states that do not apply a minimum holding
period and it may lead to a treaty shopping arrangement”.
Turkey opted in article 9 with reservations and it reserves the right for article 9(1) not
to apply to its CTAs. Turkey opted in because of the purpose of this provision to introduce a
testing period and to ensure that the provision addresses interests comparable to shares,
the threshold provided in existing provisions would be preserved, and where CTAs include
exceptions to the application of the existing provisions those exceptions would continue to
apply.
Additionally, capital market investors looking for a short-term investment in foreign
markets may invest in other contracting states that do not apply a minimum holding period
and it may lead to a “treaty shopping arrangement”. On the other hand, Turkish investors
investing abroad might also have the same outcome. As Turkey opted for Option A, Turkey
prepared and included “each specific activity exemptions” of its Covered Tax Agreements
with regard to article 13 in Turkey’s BEPS MLI position paper.
Turkey chooses not to apply article 14 of the MLI to “address the artificial avoidance of PE
status” through the splitting-up of contracts even though there are big infrastructure projects.
However, the main reason would be the PPT provision that will address such BEPS concerns
related to the abusive splitting-up of contracts as mentioned in the BEPS Action 7 Report as it
has chosen to apply the PPT. Therefore, Turkey may consider that the PPT provision addresses
the “artificial avoidance of PE status” through the splitting-up of contracts. Moreover, the
provisions of splitting-up of contracts are not required to meet a minimum standard. Finally,
Turkey’s tax treaties include terms that deem a building site, a construction, assembly or
installation project or supervisory activities depending on the time period test i.e. six months
or 12 months, to constitute a permanent establishment.
There are 58 CTA’s signed by Turkey containing five provisions each (excluding the PPT),
bringing the total number of provisions to 286. However, it could have been much more than
that if Turkey would have a different strategy rather than meeting minimum standards where
its CTAs are considered.
Recently, Turkey entered into new bilateral tax treaty negotiations after signing the MLI.
Turkey positioned itself to meet “BEPS minimum standards”. After taking such a position,
it has been observed that the MLI has changed Turkey’s bilateral tax treaty approach /
strategy. On the other hand, Turkey’s choice for the CTAs regarding article 8 of the MLI
seemed contradictory because the new treaties’ 365-day period provisions may lead to “treaty
shopping” as Turkey reserved the right not to apply the same term for the CTAs. With regard
to article 8 of the MLI, Turkey adopted the provisions of the MLI on the draft law between
Turkey and Argentina treaty while Turkey did not adopt a 365-day period provisions of the
MLI on the draft law between the Turkey and Rwanda treaty. Therefore, it may also create
“treaty shopping”.
Finally, the MLI is also in the form of an international treaty and therefore, it should be
treated as part of the Public International Laws in Turkey.
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Tax Treaty Network
1.1. Introduction
Turkey signed the MLI on 7 June 20172 and declared that it will implement the provisions of
the MLI only to the state parties it has diplomatic relations with.3 Turkey has not yet deposited
its instrument of ratification of the MLI and has not yet entered into force.
Before going into further details, looking at Turkey’s taxation rank in “2018 International
Tax Competitiveness Index4”, Turkey’s rank is twelve. It considers more than 40 different
parameters to rank the tax systems of 35 members in the Organisation for Economic Co-
operation and Development (hereafter OECD). The details of the overall score are as follows:
Overall Overall Corporate Individual Consumption Property International

Rank Score Tax Rank Taxes Taxes Taxes Tax Rules
Rank Rank Rank Rank
12 68.8 17 5 24 17 10
Turkey’s “international tax provisions” rank is also qualified as #10 with the overall score of
80 based on “dividend / capital gains exemption”, “withholding taxes” and “international tax
regulations.”5 It seems that Turkey’s “international tax provisions” rank may be enhanced
after the MLI.
Prior to the MLI, the number of Turkey’s tax treaties reached 90 and most jurisdictions are
OECD members. In general, the tax treaties of Turkey generally follow the OECD Model Tax
Convention (“hereafter the Model”). The first treaty had been signed between Turkey and
Austria dated 3 November 1970.
Under the jurisprudence system, paragraph 5 of article 90 of the Turkish Constitution states
that “international treaties” are deemed as a law and duly put into effect. All “international
treaties” including “double tax treaties” should be subject to legislative procedures of the
Grand National Assembly of the Republic of Turkey (hereafter “GNART”) and the approval
of the President of Turkey to be effective. Therefore, “the treaties” cannot be appealed to the
Constitutional Court with the claim of being “unconstitutional”.
Turkey had put some reservations to the Model. Therefore, the treaties show material
2
A list of signatories and parties to the Multilateral Convention, https://www.oecd.org/tax/treaties/beps-mli-
signatories-and-parties.pdf.
3
Declaration made by Turkey: http://www.oecd.org/tax/treaties/beps-mli-declaration-turkey.pdf.
4
2018 International Tax Competitiveness Index, Tax Foundation, https://files.taxfoundation.org/20190213134207/
ITCI_2018.pdf, p. 3.
5
2018 International Tax Competitiveness Index, Tax Foundation, https://files.taxfoundation.org/20190213134207/
ITCI_2018.pdf, p. 28.
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deviations and they have been a synthesis of the Model and / or the United Nations Tax
Treaty Model. For instance, Turkey reserves the right to treat a person as having a permanent
establishment if the person performs professional services and other activities of independent
character, including planning, supervisory or consultancy activities, with a certain degree
of continuity either directly or through the employees of a separate enterprise. Moreover,
Turkey still keeps article 14 even if it was deleted from the Model on 29 April 2000. However,
Turkey’s reservation also evolved, and it no longer reserves article 14 for corporate entities
or enterprises.
Turkey had signed 90 tax treaties6 prior to the MLI.
1. The preambles of Turkey’s existing tax treaties
Turkey’s tax treaties have a preambular paragraph and the purpose of them has mainly been
defined as “the avoidance of double taxation and prevention of fiscal evasion”. In addition to
that, the purpose of the preamble text includes “further develop and facilitate their economic
relationship and promote economic cooperation between the two countries”.
The existing preambular paragraphs of Turkish tax treaties do not include “treaty –
shopping arrangements”, which is common prior to the OECD/G20 Base Erosion and Profit
Shifting Project. Therefore, Turkey hereby chooses to apply article 6(3) of the MLI because
the preambular paragraphs of Turkish tax treaties defined the purposes of these treaties.7
Turkey prefers to include the full preamble language of article 6(3) which is related
to the elimination of double taxation without creating opportunities for non-taxation or
reduced taxation through tax evasion or avoidance (including treaty shopping). Additionally,
it provides that this preamble language is only included with respect to Covered Tax
Agreements (hereafter “CTA”) that do not already contain preamble language referring to
a desire to develop an economic relationship or to enhance co-operation in tax matters.8
2. Turkey’s response to tax treaty shopping
There are no general anti-avoidance measures for “tax treaty shopping” except a “domestic
substance-over-form principle”, “transfer pricing”, “thin capitalization”, “30% withholding
taxation (“hereafter WHT”) on payments to tax haven jurisdictions defined by the Council of
Ministers” and “controlled foreign corporation (“CFC”) regimes”.
6
Turkish Revenue Administration, the list of the existing tax treaties entered into force as of 2 January 2019, https://
gib.gov.tr/sites/default/files/uluslararasi_mevzuat/VERGIANLASMALIST.htm.
7
The list of the preambles of Turkish tax treaties, https://online.ibfd.org/linkresolver/static/tt_az-tr_02_
tur_1994_tt__td1.
8
Explanatory Statement to MLI, art. 6.
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(1) Any domestic specific anti-avoidance provisions
There are no specific anti-avoidance provisions regarding treaty shopping. According to

the Corporate Tax Law9 (“CTL”), corporate entities whose legal seat is in Turkey are deemed
“resident corporate entities”, while corporate entities whose legal seat is outside of Turkey
are deemed “non-resident corporate entities.” This is the main criterion to determine the
residence.
The second criterion is the “business centre” concept and under which it is deemed the
centre where business activities are managed and organised. Hence, a company might be
deemed “resident” even if its legal seat is located abroad. It is an anti-avoidance rule if the
legal seat of a corporate entity is outside of Turkey or if the business centre of a corporate
entity is managed and organised from Turkey.
The third criterion is “payments to harmful tax jurisdictions.” According to paragraph
7 of article 30 of the CTL it is again an anti-avoidance provision defining measures against
the creation of harmful tax competition via tax havens. The provision defines a 30% WHT10
that is going to be applicable for all payments regardless of the nature of payments being
subject to tax even though paid or accrued to non-resident or domiciled corporate entities
being in the countries disclosed in the tax havens list announced by the Council of Ministers
of Turkey. However, there is no such list disclosed since the Law enacted in 2006. Therefore,
the WHT has yet to be applied.
(2) Any domestic anti-avoidance doctrines and/or general anti-avoidance rules
Moreover, a general substance-over-form provision arising from the Tax Procedure Law
(“TPL”) is commonly used by the tax inspectors to challenge both domestic and international
arrangements.11
The legal character of the arrangement is crucial, and the taxation approach would
usually follow that. Based on the substance-over-form principle, the real nature of the event
that gives rise to tax and the real nature of the transactions related to this event, are essential.
The event that gives rise to tax and the true nature of the transactions related to this event
can be proved by all kinds of evidence except oath. On the other hand, the testimony of the
witness who is unclear and unrelated to the event that caused the tax, cannot be used as
a proof of evidence. In practice, Turkey usually imposes the burden of proof on taxpayers.
Under the above explanations, the tax treatment of an arrangement may be challenged,
if it could be proven that the substance is not in line with the legal character because the
arrangement is designed mainly to benefit from the provisions of an article for tax avoidance
purposes.
“With respect to the treaties without provision on limitation on benefits, the question
of whether the implementation of the treaty could be rejected through the application of
article 3 of the Tax Procedure Law, which is a general anti-abuse provision contained in the
national law, should be answered. There has been no case where the implementation of the
treaty was suspended through the application of article 3/B of the TPL which states the real
9
The Corporate Tax Law (Kurumlar Vergisi Kanunu), art. 3, https://www.gib.gov.tr/gibmevzuat.
10
The Corporate Tax Law (Kurumlar Vergisi Kanunu), art. 30, https://www.gib.gov.tr/gibmevzuat.
11
Turkish Tax Procedure Law [Vergi Usul Kanunu], art. 3/B, https://www.gib.gov.tr/gibmevzuat.
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nature of the taxable event and the transactions relating to the taxable event is considered
as the basis in taxation; therefore, there has been no judicial ruling produced on this matter.”12
(3) General principles of treaty interpretation
In general, there is no consistent approach and the OECD Commentary is rarely considered
as a guiding principle, but the attitude towards the Commentary is evolving positively.
(4) The interpretation and application of the beneficial ownership concept
There is no definition of beneficial ownership in both the company law & tax legislation.
However, the Regulation on Measures Regarding Prevention of Laundering Proceeds of Crime
and Financing of Terrorism has a definition of a “beneficial owner (hereafter “BO”) concept”.13
The definition means a natural person(s) who controls the natural persons, legal persons
or unincorporated organizations on behalf of whom a transaction is conducted within an
obliged party or who is the ultimate owner of the transaction or the account belonging to
them.
However, although there is no “BO definition”, the tax treaties contain a BO concept in
articles 10,11 and 12.
Turkish tax treaties include the provisions of the BO being aimed at preventing treaty abuse.
The dividends, interest and royalties sourced from Turkey might also be taxable but if the BO
of the dividends, interest, royalties is a resident of the other contracting state, the reduced
WHT rates shall be applied. However, looking at these provisions, conduit companies could
not be eligible to benefit from the reduced WHT rates. The reduced rates shall be only applied
if the resident of the other contracting state is the BO of the payment.
Other than that, Turkish tax treaties do not include general anti-avoidance provisions
except some treaties. A number of treaties include different forms of anti-abuse clauses. For
instance, article 22/1-b of the “elimination of double taxation” section of the Turkey – Spain
treaty states where a company resident in Spain derives income which, in accordance with
relevant subparagraphs of article 10 may be taxed in Turkey, Spain shall exempt that income
from tax. In addition, article 8 of the Protocol section of the treaty states that such exemption
shall not apply if it was the main purpose of any person concerned with the creation or
assignment of the shares or other rights in respect of which the income is paid to benefit
of this provision by means of that creation or assignment. In that case, the higher WHT rate
stipulated in article 10 will apply.
In this context, the reduced dividend WHT rate can be enjoyed if the substance
requirements in Spain can be achieved and proven through obtaining a tax residency
certificate from the Spanish tax authorities.
12
Yaltı, Prof. Dr. Billur, Anti-Avoidance under the Tax Treaties: Turkish Practice in case of Treaty Shopping, p. 506,
preventing Tax Avoidance, International Tax Conference Series – 2.
13
The Regulation on Measures Regarding Prevention of Laundering Proceeds of Crime and Financing of Terrorism
https://en.hmb.gov.tr/legal-framework-of-str.
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(a) Look-through provisions

Turkey’s tax treaties do not include “look-through provisions” except the Turkey and United
States treaty. The term “pass-through entities” in article 4/1 of the Turkey and United States
treaty is used because the US reserves the right to provide that shareholders of certain
pass-through entities are liable to tax therein by reason of his domicile, residence, place of
management, place of incorporation, or any other criterion of a similar nature i.e. Regulated
Investment Companies and Real Estate Investment Trusts. The provisions of article 4/1 of the
treaty will not be granted the direct dividend investment rate, even if they would qualify
based on their percentage ownership.
Moreover, Turkish tax laws have provisions with regard to certain “collective investment
vehicles (CIV)” i.e. “real estate investment companies”, “real estate investment trusts” or
“mutual funds”. These CIVs are subject to the “Capital Markets Laws Regulations” and they
are considered to be simply a pass-through entity for tax purposes.
(b) Exclusion provisions

It is not common that Turkey’s tax treaties contain the exclusion provisions restricting
benefits to the other contracting states’ companies. However, the Turkey and Luxembourg
treaty includes “exclusion provisions” in article 29.
According to article 29, it shall not apply to holding companies (sociétés holdings) within
the meaning of special Luxembourg laws, currently Act (loi) of 31 July 1929 and the Decree
(arrêté grand-ducal) of 17 December 1938. Neither shall it apply to income derived from such
companies by a resident of Turkey nor to shares or other rights in such companies owned by
such a person.
(c) Subject-to-tax provisions

Turkey used a “different paragraph 1” of the article 4 of the Model14 in its treaties because of
the evolution of paragraph 1. “Liable to tax” is used instead of “subject to tax” in the treaties
of Turkey.
(d) Channel provisions

Turkey’s double tax treaties do not include “channel provisions”. Sheltering income in a
tax haven (low or no tax country) and then channelling it through a high-tax country to
the resident state is not a common practice in Turkey. However, even if this is the case, the
substance over form principle might be applied by the tax authorities.
(e) Purpose tests

There are no specific purpose tests in domestic law other than “the substance over form
principle”.
(f) LOB provisions

The LOB provisions are rarely observed in the treaties but some of them are, most likely
because of the priorities of other contracting states. In general, Turkey’s tax treaties do not
include “limitation of benefit (LOB)” provisions, except for the treaties with Malta, the US,
Israel, Lebanon, Singapore, Saudi Arabia and Kazakhstan. When assessing these treaties, the
LOB provisions have probably been included not because of Turkey’s preference but other
14
Model Tax Convention (Full Version), 2019, p. M-16.
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contracting states’ choices. Also, different terms were used for different countries i.e. Israel,
Malta, the US used the term “limitation on benefits”, Lebanon used “limitation on benefits”,
Singapore used “limitation of relief”, Saudi Arabia and Kazakhstan used the term “other
provisions”..
On the other hand, the LOB provisions of the aforementioned treaties are not consistent
with each other. The provisions in the US and Turkey treaty have been comprehensive whilst
the provisions of Israeli have totally been limited in scope in which the limitation benefits
depended upon the competent authorities of the contracting states’ mutual agreement in
case of any transaction, constituting an abuse of the Convention according to its purposes.
This explains the reservations of Turkey to not include LOB. It is known that the US is
sensitive to include “LOB rules” to specifically restrict access to treaty benefits.
3. Turkey’s response to other tax treaty abuses
Turkey incorporated “a special provision” into the treaties of Saudi Arabia and Lebanon, which
is called “domestic provisions (hereafter “DP”) against tax evasion”. The DP against tax evasion
has been incorporated into the LOB article in the treaty with Lebanon, whilst it is included
as “other provisions” in paragraph 1 of article 27 in the Turkey – Saudi Arabia treaty. The text
of the provision states that “nothing in this Convention shall affect the application of the
domestic provisions to prevent tax evasion.”
(1) Transactions or arrangements to access the reduced treaty rate on dividends
According to Turkish tax legislation, WHT practice for non-residents’ Turkish sourced income
are designed in article 30 of the CTL. Accordingly, the dividends qualifying under article 75
of the Turkish Income Tax Code and distributed by the Turkish residents to its non-resident
shareholders are subject to 15% WHT.
Moreover, branch profit taxation is also applicable. However, the local WHT rate may be
reduced if there is a double tax treaty. As a result, if the conditions of a treaty are fulfilled,
the treaty provisions require that Turkey has the right to tax Turkish sourced gains up to the
reduced rate. If treaty WHT is higher than the domestic WHT rate, the domestic rate will be
applicable. The BO of the gains should provide an original copy of a certificate of residence
drawn up and signed by the other contracting state’s competent authority.
For instance, the reduced rate of 5% WHT applies to the profits distributed by a Turkish
entity so long as the BO of the dividend is a Spanish shareholder holding directly more than
25% of the capital of the Turkish company paying the dividends (excluding partnership)
and only if the profits, out of which the dividends are paid, have been taxed at full Turkish
corporate taxation.
Moreover, the BO of the dividends subject to WHT being resident, should provide the
original copy of the certificate of residence drawn up and signed by the competent authority
of Spain which proves that the Spanish entity’s worldwide income is taxable in Spain and the
copy of it translated by the translation offices is required to be presented to the related tax
office to apply the treaty provisions.
On the other hand, the Turkey – Spain treaty has a specific provision in article 8 to the
protocol of the treaty with regard to “treaty abuse” in order not to benefit from the exemption
provided in sub-paragraph (b) of paragraph 1 of article 22. In case of abuse, the exemption
provided in sub-paragraph (b) of paragraph 1 of article 22 will not be applicable because the
main purpose of any person concerned with the creation or assignment of the shares or other
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rights in respect of which the income is paid, is to take advantage of this provision by means
of that creation or assignment. If this is the case, reduced WHT shall not apply.
5. Mutual agreement procedure (MAP) and corresponding adjustments
Turkey’s tax treaties include the provisions of Mutual Agreement Procedure (MAP). The
Turkish Revenue Administration presented the “Guide to the MAP Existing in the Double
Taxation Agreements” in 2009.15
If a taxpayer considers that the actions of Turkey ended up in double taxation, taxpayers
could apply to the competent authority of Turkey. The application should be sent to the
Revenue Administration in line with the term and procedures foreseen by the treaty. With
MAP, the period for filing against the imposed and notified tax, fines and the tax accrued on
a return with prejudice are stopped. In case the Revenue Administration does not consider
the demand as appropriate or a settlement is not ensured at the end of process, the taxpayer
will receive a written notification.
Turkey’s tax treaties include the provisions of corresponding arrangements (article 9/2 in
the treaties) providing access to MAP in transfer pricing cases.
The MAP statistics of Turkey16 by the OECD from 2006 to 2015 have been as follows:
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
# of 0 2 1 3 4 0 0 2 2 2
Cases
The MAP Statistics of Turkey for 201617 by the OECD are as follows:
Case Type 2016 Start Cases started Cases closed in 2016 End
inventory in 2016 2016 inventory
Transfer Pricing 1 2 0 3
Other 7 7 1 13
All cases 8 9 1 16
15
Guide to the Mutual Agreement Procedure Existing in the Double Taxation Agreements, https://www.gib.gov.
tr/sites/default/files/fileadmin/mevzuatek/uluslararasi_mevzuat/ciftever_karsilikli94.pdf.
16
Mutual Agreement Procedure Statistics 2006-2015, https://www.oecd.org/ctp/dispute/map-
statistics-2006-2015.htm.
17
Mutual Agreement Procedure Statistics for 2017, https://www.oecd.org/tax/dispute/mutual-agreement-
procedure-statistics-2016-per-jurisdiction-transfer-pricing.htm, https://www.oecd.org/tax/dispute/
mutual-agreement-procedure-statistics-2016-per-jurisdiction-other.htm.
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The MAP Statistics of Turkey for 2017 by the OECD are as follows:18
Case Type 2017 Start Cases started Cases closed 2017 End
inventory in 2017 in 2017 inventory
Transfer Pricing 5 2 4 3
Other 14 1 4 11
All cases 19 3 8 14
Turkey’s experience with the application of these provisions of MAP have not been well
developed.
6. Mandatory binding arbitration practice
According to the OECD, Turkey has not committed to adopt mandatory arbitration and
Turkey’s tax treaties do not include “mandatory binding arbitration provisions”.
1. Turkey signed the MLI on 7 June 2017. The lists of Turkey are provisional as of 28 June 2019
and they are a “draft”.19 The MLI has not been brought to the GNART.
The Turkish tax authorities have not yet done any disclosure to assess the impact of the
MLI on tax compliance and administration & economic activity. The Ministry of Finance
(“MoF”) may probably have done a preliminary assessment but this is not known to the
public.
According to Turkey’s BEPS MLI position paper, Turkey’s choices seem to demonstrate
Turkey’s commitment to implement the “minimum standards” as a member of the OECD
and G-20. Additionally, policy choices may also show the fact that Turkey is a member of
the Inclusive Framework and because of that Turkey is subject to the peer-to-peer review
whether it is compliant with the BEPS minimum standards.
Turkey is aware of that the existing international tax architecture has some deficiencies and
discrepancies to fight tax avoidance. Therefore, Turkey considers that the MLI’s tools are in
favour of governments to close the deficiencies and discrepancies in existing international
tax rules that allow international corporate entities’ profits to be artificially shifted or pass
away to low or no tax jurisdictions in which they have less or no economic activity.
2. The MLI has not been formally approved by the GNART. Therefore, the MLI has not already
entered into force in Turkey.
18
Mutual Agreement Procedure Statistics for 2017, https://www.oecd.org/tax/dispute/mutual-agreement-
procedure-statistics-2017-per-jurisdiction-transfer-pricing.htm, https://www.oecd.org/tax/dispute/
mutual-agreement-procedure-statistics-2017-per-jurisdiction-other.htm.
19
The Republic of Turkey’s Status of List of Reservations and Notifications at the Time of Signature, http://www.
oecd.org/tax/treaties/beps-mli-position-turkey.pdf.
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1. According to the list of reservations and notifications, Turkey notified that the CTAs
comprised all of Turkey’s tax treaties.
2. Fifty-eight of the other contracting states to these CTAs signed the MLI while thirty-two
of the other contracting states (including the US) did not sign the MLI. On the other hand,
Turkey did not sign “bilateral tax treaties” with 30 signatory states of the MLI. Namely,
64% of the other contracting states of Turkey (out of 90 bilateral tax treaties) signed the
MLI and 36% of the other contracting states of Turkey (out of 90 bilateral tax treaties) did
not sign the MLI.
The list of countries that have not yet signed the MLI.
2. Algeria
3. Azerbaijan
4. Bahrain
5. Bangladesh
6. Belarus
7. Bosnia and Herzegovina
8. Brazil
9. Ethiopia
10. Finland
11. Iran
12. Jordan
13. Kosovo
14. Kyrgyzstan
15. Lebanon
16. Macedonia
17. Moldova
18. Mongolia
19. Montenegro
20. Oman
21. Philippines
22. Somalia
23. Sudan
24. Syria
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25. Tajikistan
26. Thailand
27. Turkish Republic of Northern Cyprus
28. Turkmenistan
29. United States
30. Uzbekistan
31. Vietnam
32. Yemen
Turkey’s top 15 trading partner countries in 201820 are as follows and almost 60% of exports
have flowed to them. While EU countries receives 57% of Turkish exports by value, Asian
countries receive 24.9%. Except for the US, all of them signed the MLI.
Country (% of total Turkish exports)

1. Germany: US$16.1 billion (9.6%)
2. United Kingdom: $11.1 billion (6.6%)
3. Italy: $9.6 billion (5.7%)
4. Iraq: $8.4 billion (5%)
5. United States: $8.3 billion (4.9%)
6. Spain: $7.7 billion (4.6%)
7. France: $7.3 billion (4.3%)
8. Netherlands: $4.8 billion (2.8%)
9. Belgium: $4 billion (2.4%)
10. Israel: $3.9 billion (2.3%)
11. Romania: $3.9 billion (2.3%)
12. Russia: $3.4 billion (2%)
13. Poland: $3.3 billion (2%)
14. United Arab Emirates: $3.1 billion (1.9%)
15. Egypt: $3.1 billion (1.8%)
20
Turkey’s Top Trading Partners, http://www.worldstopexports.com/turkeys-top-import-partners/.
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It might be said that the MLI strategy of Turkey has been to adapt mandatory articles or
minimum standards.
1. Turkey chooses to apply the preamble language in article 6(3) of the MLI pursuant to
article 6(6) of the MLI. Turkey has chosen so because the new treaty preamble text
clarifies that tax treaties are not intended to create opportunities for non-taxation or
reduced taxation through tax evasion or avoidance, including through treaty-shopping
arrangements.
Turkey also considers that existing tax treaties do not contain preamble language
referring to a desire to develop an economic relationship or to enhance co-operation in
tax matters, which is even optional. Therefore, Turkey adopted article 6 of the MLI.
2. There are 6 articles (article 6, 7, 8, 9, 10 and 11) reflecting the BEPS Action 6 Report to
prevent “treaty abuse” in Part III (treaty abuse) of the MLI. Turkey opted in articles of 6, 7
and 9 (with a reservation to 9), but opted out articles 8, 10 and 11.
Therefore, Turkey committed to satisfy the OECD’s minimum standard on treaty abuse in
addition to article 6 of the MLI. Article 7(1) would apply and supersede the provisions of
the tax treaties of Turkey to the extent of incompatibility.21 According to the Explanatory
Statement to the MLI, the PPT is the only approach that can satisfy the minimum
standard. In other words, Turkey is going to implement the Principle Purpose Test (“PPT”)
in accordance with article 7 of the MLI, which is the default option enabling Turkey to
satisfy the BEPS minimum standard. Therefore, Turkey has not adopted the Simplified
Limitation on Benefits Provision (“LOB”) or the detailed LOB.
In accordance with the Explanatory Statement, Turkey probably did not choose
the detailed LOB provision because the detailed LOB requires “substantial bilateral
customization”.
Although Turkey has chosen to apply the PPT, it has issued a notification under article
7(17) (a) of the MLI. According to the notification, Turkey considers that the CTAs of
Kazakhstan, Lebanon, Malta and Senegal are not subject to a reservation under article
7(15)(b).
Turkey reserved the right not to apply the provisions to these CTAs because
abovementioned CTAs include “LOB clauses”. On the other hand, although Lebanon is in
the above list, it has not yet signed the MLI.
3. Turkey has not chosen to apply other provisions of the MLI addressing “treaty abuse”.
Turkey opted out “article 8 (Dividend Transfer Transactions), article 10 (Anti-Abuse Rule
for Permanent Establishments Situated in Third Jurisdictions) and article 11 (Application
of Tax Agreements to Restrict a Party’s Right to Tax its Own Residents).
(1) Turkey opted out article 8 and it reserves the right for the entirety of article 8 not to
apply to its CTAs.22 First, article 8 of the MLI is optional. Second, the purpose of this is
not to change the substantive allocation of taxation rights between the contracting
states within the CTAs but the introduction of a minimum shareholding period.
Moreover, Turkey’s tax treaties do not include a minimum shareholding period for
the reduced WHT rate on dividends but a minimum capital of the company paying
21
22
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the dividends (excluding partnership). In addition to that, WHT rates on dividend

payments in Turkey’s tax treaties vary from 5% to 15%.
The minimum shareholding period 365-day requirement is not included in the
treaties and having a minimum holding period requirement in Turkey’s treaties may
influence and affect “investment decisions of foreign investors especially for short-
term capital”. The main reason not to adopt a minimum holding period is probably
to “attract both more foreign direct investors and capital market investors”.
Additionally, capital market investors looking for a short-term investment in foreign
markets may invest in other contracting states that do not apply a minimum holding
period and it may lead to a “treaty shopping arrangement”. On the other hand, Turkish
investors investing abroad might also have the same outcome.
(2) Turkey opted in article 9 with reservations and it reserves the right for article 9(1) not
to apply to its CTAs.23
Turkey opted in because of the purpose of this provision to introduce a testing period
and to ensure that the provision addresses interests comparable to shares, that the
threshold provided in existing provisions would be preserved, and where CTAs
include exceptions to the application of the existing provisions those exceptions
would continue to apply. By doing so, it is also consistent with domestic practice as
capital gains arising from the alienation of shares transfer who invests such assets.
However, Turkey chooses to apply paragraph 4 which is an optional provision, and,
as provided in paragraph 8, will apply to a CTA only when all contracting states have
chosen to apply it by making a notification under paragraph 8. Therefore, Turkey
chooses to apply paragraph 4 to the below CTA list and will notify the depositary of
its choice.
Turkey reserves the right for article 9(4) not to apply to its CTAs that already contain the
provisions described in article 9(5) because paragraph 1 addresses situations in which
assets are contributed to an entity shortly before the sale of shares or comparable
interests (such as interests in a partnership or trust) in that entity in order to dilute
the proportion of the value of the entity that is derived from immovable property.
According to the Explanatory Statement to the MLI, by doing so Turkey may prefer
to apply article 13(4) of the Model, as produced in the Action 6 Report, to their CTAs,
rather than incorporating a testing period and expanding types of interest covered
by existing capital gains provisions. Paragraph 3 allows such parties to do so. As noted
below in the explanation regarding paragraph 5, paragraph 3 also allows a party to
introduce a provision addressing gains derived from alienation of shares in entities
deriving their value principally from immovable property (real property), into a
Covered Tax Agreement that does not have such a rule.
On the other hand, although some of the abovementioned states are in the list, they
have not yet signed the MLI i.e. United States, Vietnam, Philippines and Finland.
(3) Turkey opted out of article 10 entirely and chose not to apply it to its CTAs because
this provision addressing permanent establishments (hereafter “PE”) situated in third
jurisdictions, is not required in order to meet a minimum standard and is an “optional
provision”. Other than that, there is no announcement shared by the MoF with the
public why Turkey opted out this article.
23
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Kahraman
(4) The artificial avoidance of PE status is arising from the BEPS Action 7 Report and article 12
of the MLI provides provisions to amend existing tax treaties to act against the artificial
avoidance of PE status through “commissionnaire arrangements” and similar strategies.
Turkey chooses to apply paragraph 3(a)” and paragraph 3(b) of article 12 of the MLI to
“address the issue” through commissionnaire arrangements and similar strategies
because existing tax treaties of Turkey may include a wide variety of such provisions.
Paragraph 3(a) of article 12 of the MLI provides that paragraph 1 would replace provisions
of a CTA to the extent that the provisions describe the conditions under which an
enterprise shall be deemed to have a dependent agent PE, but only to the extent that
such variations address the situation in which a person has, and habitually exercises, an
authority to conclude contracts in the name of an enterprise. Therefore, the reference
to contracts “in the name of” is intended to cover other common variations of language,
such as “on behalf of”, “that are binding on” or other variations that are commonly used.
Paragraph 3(b) of article 12 of the MLI provides that paragraph 2 would replace provisions
of a CTA that provide that an enterprise shall not be deemed to have a PE in a contracting
jurisdiction in respect of an activity which an agent of an independent status undertakes
for the enterprise. Paragraph 3(b) provides that paragraph 2 would replace provisions of a
CTA that provide that an enterprise shall not be deemed to have a PE in Turkey in respect
of an activity which an agent of an independent status undertakes for the enterprise. 24
The current provisions have been listed in the CTAs for “paragraph 3(a)” and paragraph
3(b) of article 12 of the MLI. The article and paragraph number of each such provision in
the CTAs has been identified in the notification with regard to article 12 in Turkey’s BEPS
MLI position paper.25
In addition to article 12 of the MLI, article 13 of the MLI provides provisions with regard
to the wording of article 5(4) of the Model to address situations of specific activity
exemptions.
Turkey chooses to apply “option A” with regard to article 13 of the MLI to “address the
artificial avoidance of permanent establishment status” through specific activity
exemptions. For that reason, the article and paragraph number of each such provision in
the CTAs has been identified in the notification with regard to article 13 in Turkey’s BEPS
MLI position paper.26
Turkey’s choice is based on the principles reflected in the text of article 5(4) of the 2014
version of the Model produced on pages 28 and 29 of the BEPS Action 7 Report to address
concerns of artificial avoidance of permanent establishment status through the specific
activity exemptions.
So, according to the text of article 5(4) of the 2014 version of the Model, the definition of
“PE” term shall not include below activities:
a) The use of facilities solely for the purpose of storage, display or delivery of goods or
merchandise belonging to the enterprise;
b) The maintenance of a stock of goods or merchandise belonging to the enterprise
solely for the purpose of storage, display or delivery;
c) The maintenance of a stock of goods or merchandise belonging to the enterprise
24
25
26
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Turkey
solely for the purpose of processing by another enterprise;

d) The maintenance of a fixed place of business solely for the purpose of purchasing
goods or merchandise or of collecting information, for the enterprise;
e) The maintenance of a fixed place of business solely for the purpose of carrying on, for
the enterprise, any other activity;
f) The maintenance of a fixed place of business solely for any combination of activities
mentioned in subparagraphs a) to e),
provided that such activity or, in the case of subparagraph f), the overall activity of the
fixed place of business, is of a preparatory or auxiliary character.
Moreover, paragraph 5 of article 13 in the MLI includes “compatibility clauses” that describe
the relationship between article 13(2) through (4) and provisions of CTAs. Paragraph 5(a)
provides that article 13(2) or (3) shall apply in place of the relevant parts of provisions
of a CTA that describe a list of specific activities deemed not to constitute a permanent
establishment even if the activity is carried on through a fixed place of business.27
As Turkey opted for Option A, Turkey prepared and included “each specific activity
exemptions” of its Covered Tax Agreements with regard to article 13 in Turkey’s BEPS
MLI position paper.
Turkey reserves the right for the entirety of article 14 not to apply to its Covered Tax
Agreements. Turkey chooses not to apply article 14 of the MLI to “address the artificial
avoidance of permanent establishment status” through the splitting-up of contracts.
There could be different reasons. However, the main reason would be the PPT provision
that will address such BEPS concerns related to the abusive splitting-up of contracts as
mentioned in the BEPS Action 7 Report. Turkey has chosen to apply the PPT. Therefore,
Turkey may consider that the PPT provision addresses the artificial avoidance of
permanent establishment status through the splitting-up of contracts. Moreover, the
provisions of splitting-up of contracts are not required to meet a minimum standard.
Finally, Turkey’s tax treaties include terms that deem a building site, a construction,
assembly or installation project or supervisory activities depending on a time period
test i.e. six months or 12 months, to constitute a permanent establishment.
4. Turkey’s BEPS MLI position paper states that Turkey reserves the right for the entirety of
article 4 not to apply to its Covered Tax Agreements. The reason may be because article
4 of the MLI is not a minimum standard. Therefore, Turkey did not adopt provisions of
the MLI addressing hybrid mismatch arrangements.
One reason may be related to provisions of the tie-breaker rule of Turkey’s tax treaties.
In some cases, the place of effective management (“POEM”) is defined as a tie-breaker
rule as long as a company is a resident in between two contracting states i.e. Belgium,
Denmark, Luxembourg, the Netherlands, Portugal, Spain, Switzerland and the United
Kingdom. Moreover, in some cases the competent authorities of contracting states are
authorized to define the residency by applying a mutual agreement procedure.
Therefore, the reason may be article 16 of the MLI which is a mandatory article and
new rules of mutual agreement procedure will ensure the consistent and proper
implementation of tax treaties, including the resolution of disputes regarding their
interpretation or application. This also includes that more effective tax treaty-based
dispute resolution procedures agree on a single jurisdiction of residence.
27
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Kahraman
5. Turkey has not chosen to apply articles 18-26 of the MLI providing for mandatory binding
arbitration of disagreements between contracting states.
6. To the best of our knowledge, Turkey evaluates its position and therefore these choices
may be changed, reversed, amended or remain the same. However, there is no public
disclosure with regard to Turkey’s choices of its BEPS MLI position. Turkey may change
its choices before the GNART’s approval.
7. Turkey made significant reservations on the content of the MLI. Turkey positioned itself
to meet “BEPS minimum standards”.
As there is no official statement, the reasons of the reservations introduced, are not
known. Turkey’s positions and reservations are set out in the table below:
MLI provisions Turkey Turkey Turkey

opted made did not
in reservation choose
Part II Article 3 – Transparent Entities x
Hybrid
Article 4 – Dual Resident Entities x (entirely)
Mismatches
Article 5 – Application of Methods for x (entirely)
Elimination of Double Taxation
Part III Article 6 – Purpose of a Covered Tax x
Treaty Abuse Agreement
Article 7 – Prevention of Treaty Abuse x
Article 8 – Dividend Transfer x (entirely)
Transactions
Article 9 – Capital Gains from x
Alienation of Shares or Interests
of Entities Deriving their Value
Principally from Immovable Property
Article 10 – Anti-Abuse Rule for x (entirely)
Permanent Establishments Situated
in Third Jurisdictions
Article 11 – Application of Tax x (entirely)
Agreements to Restrict a Party’s
Right to Tax its Own Residents
Part IV Article 12 – Artificial Avoidance x
Avoidance of of Permanent Establishment
Permanent Status through Commissionaire
Establish Arrangements and Similar Strategies
ment Status
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MLI provisions Turkey Turkey Turkey

opted made did not
in reservation choose
Part IV Article 13 – Artificial Avoidance of x
Avoidance of Permanent Establishment Status
Permanent through the Specific Activity
Establish Exemptions
ment Status
Article 14 – Splitting-Up of Contracts x (entirely)
Article 15 – Definition of a Person x
Closely Related to an Enterprise
Part V Article 16 – Mutual Agreement x x
Improving Procedure
Dispute
Article 17 – Corresponding x (entirely)
Resolution
Adjustments
Part VI Article 18 – Choice to Apply Part VI x
Arbitration
Article 19 – Mandatory Binding x
Arbitration
Article 20 – Appointment of x
Arbitrators
Article 21 – Confidentiality of x
Arbitration Proceedings
Article 22 – Resolution of a Case Prior x
to the Conclusion of the Arbitration
Article 23 – Type of Arbitration x
Process
Article 24 – Agreement on a x
Article 25 – Costs of Arbitration x
Proceedings
Article 26 – Compatibility x
Part VII. Final Article 35 – Entry into Effect x
Provisions
8. There are 58 CTA’s signed by Turkey containing five provisions each (excluding the PPT),
which renders the total number of provisions 286 (=290-4). However, it could have
been much more than that if Turkey would have chosen a different strategy rather than
meeting minimum standards.
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1. Turkey entered into new bilateral tax treaty negotiations since the MLI. As Turkey reserves
the right for the entirety of articles of “Dual Resident Entities”, “Application of Methods
for Elimination of Double Taxation”, “Dividend Transfer Transactions”, “Application of
Tax Agreements to Restrict a Party’s Right to Tax its Own Residents”, “Splitting-up of
Contracts” and “Corresponding Adjustments”, Turkey positioned itself to meet “BEPS
minimum standards”. After taking this position, it has been observed that the MLI has
changed Turkey’s bilateral tax treaty approach /strategy.
It has been obvious that the latest treaties of Turkey follow the recommendations of the
OECD in the BEPS Reports.
Turkey has signed new tax treaties with Argentina, Palestine and Rwanda in 2018 but
these treaties are not entered into force. Additionally, Turkey has negotiations with
Afghanistan, Iraq, Kenya, Paraguay, Cambodia, Venezuela, and the Republic of Congo.
Moreover, Turkey is also renegotiating its treaties, especially to renew their provisions
with regard to “tax transparency” related developments because Turkey has to implement
“tax transparency standards.”
2. To the best of our knowledge, the provisions of the MLI impacted the negotiations of
Turkey’s bilateral tax treaties because Turkey committed to adopt the BEPS minimum
standards. Both the MLI and the provisions of the associated revisions to the 2017 OECD
Model Convention has impacted on “brand-new” and revised treaty negotiations. To reach
that conclusion, the signed treaties in the GNART have been checked as there is no public
announcement provided by the MoF.
There are different outcomes for the revised treaties except for “the Automatic Exchange
of Information (AEOI)”. For instance, there is not much amendment except for “the AEOI”
on the draft law amending the Ratification of the Protocol between Turkey and Ukraine.28
On the other hand, Turkey included the provisions of the MLI that impacted the
negotiations of Turkey’s brand-new bilateral tax treaty. For instance, Turkey adopted the
provisions of the MLI on the draft law between the governments of Turkey and Argentina
for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect
to Taxes on Income and on Capital. The draft of the treaty between the governments of
Turkey and Argentina was signed on 1 December 2018.29 It is seen that Turkey adopted
almost all the provisions of the MLI in which Turkey opted in. For instance, it includes the
preamble language of article 6(3) of the MLI, which allows the possibility to include the
other part of the preamble of the Model because it contains preamble language referring
to a desire to develop an economic relationship or to enhance co-operation in tax matters
including “treaty shopping arrangements”.
Moreover, the draft law of the Turkey and Argentina treaty adopted article 8 of the MLI
and paragraph 2(a) of article 10 in the draft law (dividend transfer transactions) requires
that a minimum shareholding period is to be satisfied for a company to be entitled to a
reduced rate on dividends from a subsidiary resident in Turkey. It is a new provision in
28
The draft law amending the Ratification of the Protocol between the governments of Turkey and Ukraine for
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on
Capital, https://www.tbmm.gov.tr/sirasayi/donem27/yil01/ss77.pdf.
29
The draft law between the governments of Turkey and Argentina for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital, https://www2.tbmm.gov.tr/
d27/2/2-1804.pdf.
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Turkey’s tax treaties and a reduced WHT percentage of the gross amount of the dividends
is applicable as long as the beneficial owner is a company (other than a partnership)
which directly holds at least 25 per cent of the capital of the company paying the dividends
throughout a 365-day period that includes the day of the payment of the dividend.
Turkey did not adopt a 365-day period provisions of the MLI on the draft law between the
Turkey and Rwanda treaty. Therefore, it may also create “treaty shopping”. In conclusion,
Turkey’s position with regard to a 365-day period in the treaty with Argentina is not
Turkey’s choice but Argentina’s.
Turkey’s choice for the CTAs regarding article 8 of the MLI seemed contradictory because
new treaties’ 365-day period provisions may lead to “treaty shopping” as Turkey reserved
the right not to apply the same term for the CTAs.
Another example is the draft law of Turkey and Argentina that adopted article 9(4) of
the MLI. Therefore, article 13 in the draft law requires that gains derived by a resident of
a contracting state from the alienation of shares or comparable interests, such as interests
in a partnership or trust, may be taxed in the other contracting state if, at any time during
the 365 days preceding the alienation, these shares or comparable interests derived more
than 50% of their value directly or indirectly from immovable property (real property)
situated in that other contracting state. Moreover, the draft law of Turkey and Argentina
also includes that if the provision of paragraph 4 of article 13 is not applicable, capital
gains from the alienation of shares, other than beforementioned, that represent the
capital of a company that is a resident of the other state, cannot exceed:
–– 10%, if the alienator, at any time during the 365 days preceding such alienation, held
directly or indirectly at least 25% of the capital of the company;
–– Otherwise, 15%.
The draft law of Turkey and Argentina treaty adopted article 16 of the MLI as minimum
standard and used the model text of article 25(1) through (3). Therefore, any MAP case
must be presented within three years from the first notification of the action resulting
in taxation.
The draft law of the Turkey and Argentina treaty also includes the “LOB” provision in article
27 providing that benefits of the treaty will not be granted in respect of an item of in or
capital gains if it is reasonable to conclude that obtaining these benefits were one of the
main purpose of any arrangements or transactions that resulted directly or indirectly in
these benefits, unless it is established that granting the benefits would be in accordance
with the object and purpose of the relevant provisions of the treaty.
3. As a signatory of the MLI, Turkey will incorporate these provisions into its bilateral tax
treaties based on the MLI position of Turkey. Then, the authentic legal texts of the tax
treaties and the MLI take precedence and will be the legal texts. The provisions of the
MLI are applicable with respect to the provisions of the tax treaties of Turkey.
4. Based on the analysis above with regard to the draft law of the Turkey and Argentina
treaty, it could be said that the policy adopted regarding the MLI is to a great extend the
same as the policy adopted regarding the 2017 version of the Model. For instance, Turkey
has reservations for the provisions of paragraph 1 of article 4 and reserves the “registered
office” criterion as well as the “place of effective management” criterion in case of dual
residence. Therefore, in case of a dual residence dispute it would be solved by applying
the “mutual agreement procedure”.
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Kahraman
2.1. Applicable provisions of the MLI
The MLI is “an international treaty” modifying the application of treaties. According to the
Turkish Constitution, “international treaties” are deemed as law and to be duly implemented
the MLI will be subject to procedures of the GNART in order to be effective. The GNART has
not been involved yet. On the other hand, when it comes to ratify an “an international treaty”,
the GNART does not look at the details of an international treaty when it is a technical law.
The MLI is still at the hands of the MoF and therefore it has not been evaluated in the
GNART. It will be discussed at the sub-committees of the GNART before the approval. The
MoF is automatically responsible to make Turkey’s choices of the MLI.
It is not known publicly whether Turkey has been influenced by the “Guidance to the
development of synthetized text” published by the OECD. Neither public nor private
publication of consolidated tax treaties due to “proposed modifications” by the MLI, is
available.
The OECD “MLI Matching Database” does not carry any kind of legal value in Turkey unless
the MLI entered into force for Turkey. On the other hand, when looking at Turkey’s status as
of 28 June 2019 in the “MLI Matching Database”, the status of all articles is provisional, and
Turkey may change its position provided on the date of the signature.
Moreover, to which extent the MLI is going to modify Turkey’s tax treaties will rely on the
adopted positions chosen by other contracting states at ratification, acceptance or approval
of the MLI. Not only for Turkey but also Turkey’s treaty partners should identify their tax
treaty as a CTA in order for that treaty to be modified by the MLI. One party’s identification
is not enough for a tax treaty to be identified as a CTA, and the provisions of that treaty will
remain un-modified.
If the MLI is approved by the GNART and has completed all legislative procedures i.e. ratified
by the President of Turkey and published in the Official Gazette of Turkey, it will supersede
the existing tax treaties of Turkey and has primacy over existing domestic legislation unless
any treaty refers to the provisions of the domestic legislation. In other words, the legal value
of the MLI arises from the Turkish Constitution because the Turkish Constitution treats
“international treaties” as law: “Primarily in terms of constitutional law, on the superiority of
the tax treaties to the domestic law due to their quality of specific provision (lex specialis);
and the principle of pacta sunt servanda in the sense of international law.”30
30
Yaltı, Prof. Dr. Billur, Anti-Avoidance under the Tax Treaties: Turkish Practice in case of Treaty Shopping, p. 507,
preventing Tax Avoidance, International Tax Conference Series – 2.
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There is no debate with regard to the MLI giving rise to specific interpretations in Turkey both
at the level of the government or the courts. The explanatory memorandum of the MLI has
been granted some legal weight in this respect because it forms a guide how to understand
and interpret the provisions the MLI.
When looking at note 16.2 of the introduction of the Model, “according to the general
rule of treaty interpretation contained in article 31(1) of the Vienna Convention (1969) on the
Law of Treaties, “[a] treaty shall be interpreted in good faith in accordance with the ordinary
meaning to be given to the terms of the treaty in their context and in the light of its object
and purpose.”31
Moreover, note 70 of the introductions of the Model, “generally, where the application
of provisions of domestic law and of those of tax treaties produces conflicting results, the
provisions of tax treaties are intended to prevail. This is a logical consequence of the principle
of “pacta sunt servanda” which is incorporated in article 26 of the Vienna Convention on the
Law of Treaties.32 In accordance with the rules of Public International Law, the rule of “pacta
sunt servanda” means that “international treaties” must be protected by all the signatories.
It depends on the “principle of good faith”.
In addition to that, article 31(2) of the Vienna Convention on the Law of Treaties, provides
that “the context for the purpose of the interpretation of a treaty shall comprise, in addition
to the text, including its preamble and annexes.”
The MLI is also an international treaty and governed by international law. Therefore, it
should be treated as part of the public international laws in Turkey.
Turkish language may not be an issue because Turkey accepts either the Turkish or the
languages of the other contracting states, sometimes the texts have equal authenticity
sometimes other contracting states’ languages prevail. For instance, in the US and Turkey
treaty, both the texts have equal authenticity while the treaty between Germany and Turkey,
Turkish and English languages, all three texts are authentic but in case of any divergent
interpretations of the German and Turkish texts, the English text shall prevail.
However, the MLI is only signed in French and English, which may create problems
in practice. “MLI’s official language is in English and French in the Convention and both
languages are being authentic. Therefore, after the MLI, only English and French would be
binding for the CTAs.33
1. There is no announcement regarding the interpretation from the competent authority of

Turkey. However, there is no explicit connection, but tax laws are governed by letter and
spirit to interpret the provisions of legal text and therefore, to interpret the MLI’s purpose,
the BEPS reports may at least be used as a secondary source for interpretation.
31
Model Tax Convention (Full Version), 2019, p. I-8.
32
Model Tax Convention (Full Version), 2019, p. I-8.
33
Özgenç, Dr. Selçuk, the basic principles of the MLI, p. 263.
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Kahraman
2. There is no announcement from the competent authority of Turkey but the BEPS reports
may at least be used as a secondary source for interpretation.
3. We have not observed that the method of tax treaty interpretation has changed because
of the MLI.
1. According to article 2 of the constitution, the Republic of Turkey is a democratic, secular

and social state governed by rule of law, within the notions of public peace, national
solidarity and justice, respecting human rights, loyal to the nationalism of Ataturk, and
based on the fundamental tenets set forth in the preamble.
The rule of law principle is an indispensable element of the Republic and thus the laws
of Turkey shall provide legal security, and, in this direction, it must include predictable
rules for the future. Therefore, as a rule, laws are applied to the events after the date of
entry into force in order to maintain trust and stability in the rule of law. Pursuant to the
principle of irreversibility of laws, laws are issued in principle to be applied to events,
transactions and actions after their effective date, except in certain exceptional cases,
such as the protection of the rights gained in the public interest and public order, and the
improvement of financial rights. It is one of the general principles of law that the laws in
force are not effective in the past.
The amended preamble arising from the MLI can therefore not be used retrospectively
to interpret the tax treaties.
2. There is no such debate due to article 2 of the Constitution explained above. In other
words, the MLI cannot be used retrospectively because of the date of entry into effect.
Based on the above assumption, the case may be challenged not because of the signature
(or the ratification) of the MLI but because of vague “substance over form principle”.
1. For the purpose of combating anti abuse of tax treaties the PPT is not only included
in the OECD BEPS Action 6 Report, but also in the MLI. It is difficult to measure how tax
professionals’ behaviour will develop with respect to “aggressive tax planning”. However,
tax professionals’ behaviour will also change for different reasons. The main change will
come from “the mandatory disclosure rules” imposed by the EU Directive or DAC6, which is
a mandatory automatic exchange of information regime entered into force on 25 June 2018.
In addition to that, tax professionals are going to avoid any “aggressive tax behaviour due
to tax transparency regulations, local anti-abuse rules and reputation risk of their clients.
2. There is no concrete indication that tax authorities deny “tax treaty benefits” more often
than in the past following the signature of the MLI. For that, the MLI’s entry into force has
to be awaited in order to observe the behaviour of the and the tax authorities. .
3. There are no such definitive procedures available. On the other hand, the tax
administration could publish a general communique or circular regarding the PPT
application in order to regulate and unify potential assessments.
4. After the MLI, it is expected that the resolution of tax disputes under the mutual
agreement procedure will take less time. On the other hand, the tax treaties entered
into by Turkey do not regulate “mandatory binding arbitration”.
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United Kingdom
Branch reporter
Andrew Roycroft1

The UK government was an active participant in the BEPS process, implementing more than
the minimum standards and doing so earlier than many other jurisdictions. To implement the
changes required to its double tax treaties, the UK signed the Multilateral Instrument (MLI)
at the OECD’s 7 June 2017 signing ceremony in Paris, and a statutory instrument (SI 2018/630)
was made on 23 May 2018 that brought its provisions into force in the UK on 1 October 2018
(three months after the UK deposited its instrument of ratification with the OECD, on 29 June
2018), with effect from 2019.
The impact assessments that accompanied the draft legislation to implement the MLI
in the UK suggested that the changes made by the MLI were expected to have only limited
impact on businesses and HM Revenue and Customs (HMRC). The UK government’s approach
to what aspects of the MLI to adopt was published before, and with, the draft of what became
SI 2018/630, and although that legislation did not restrict the notifications and reservations
that the UK government could make, the notifications and reservations ultimately made by
the UK did reflect that published position.
The UK government listed 121, comprising over 90%, of its existing double tax treaties
as covered tax agreements (CTAs), excluding treaties that could not be CTAs because of the
status of the counterparty as a Crown Dependency or similar and treaties with countries
with which the UK government was in negotiations to conclude a new treaty, or protocol,
that would include the MLI measures that the UK planned to adopt. This reflects the UK’s
position that the MLI is a tool to update tax treaties to implement the BEPS recommendations
consistently, quickly and efficiently. Although the MLI is likely to be of reduced importance in
the UK over time as the UK renegotiates treaties that are CTAs, that process may take many
years. The MLI is not seen as a means of a wider reconstruction of the UK’s treaty network.
The UK government adopted those parts of the MLI that were the minimum standard,
reserving against most other provisions and those that it considered unnecessary because
of its adoption of the Principal Purpose Test (PPT) (including the discretionary benefits
rule). There is no indication that the UK will reverse any of its reservations (for example,
in relation to the changes to the definition of permanent establishment or the changes
made by articles 8, 9 and 10), as the UK government’s stated view was that the mechanical
tests introduced by those provisions could deny treaty benefits in circumstances that are
not abusive and those provisions would not target any genuine avoidance structures more
effectively than the PPT. Additionally, the UK chose to apply articles 18 to 26 providing for
mandatory binding arbitration of disagreements between contracting states, opting for
final offer (baseball) arbitration as its preferred method. New treaties and protocols signed
since the UK implemented the MLI are consistent with this approach, although the UK has
been less successful in persuading other countries to adopt, through the MLI or new bilateral
treaties, arbitration than the other MLI changes.
1
Senior editor, Practical Law Tax
IFA © 2020 843

United Kingdom
As the MLI only has effect in the UK from 2019, and only for a limited number of treaties
with counterparties who specified their treaty with UK as a CTA and brought the MLI into force
in time for their treaty with the UK to be amended with effect from 2019, it remains to be seen
what impact the MLI will have on tax planning or HMRC’s assessment practices. Prior to the
introduction of the MLI, there were several grounds on which HMRC could challenge treaty
relief in situations where it considered that such relief should not be available, including
PPTs in the interest and royalties articles of some of its double tax treaties, the Indofood
interpretation of “beneficial ownership”, recourse to the “purposive construction” principle
of statutory interpretation (referred to, in tax cases, as the “Ramsay principle”, or the “principle
in Furniss v. Dawson”), anti-arbitrage legislation and, since 2013, a general anti-abuse rule. In
recent years, pre-dating article 4, the UK’s treaty policy has been to replace place of effective
management tie-breakers for corporate tax residence with tie-breakers based on mutual
agreement. Also, the absence of an obligation to withhold tax from dividends, other than in
limited circumstances, and the absence (until recently) of domestic charging provisions for
gains made by non-UK residents on the disposal of UK land (or on the disposal of land-rich
entities) has limited the types of treaty-based tax planning that might be of concern to the
UK authorities. The implementation in the UK’s double tax treaties of the MLI’s PPT is an
additional basis on which HMRC may challenge the availability of treaty reliefs for some
cross-border transactions, and the broad wording of the PPT will increase the difficulty faced
by businesses seeking certainty as to, and for those advise on, the availability of such reliefs
for cross-border transactions. This comes on top of other developments, such as the cross-
border reporting requirements imposed by legislation implementing EU Directive 2018/822,
whose scope is also uncertain in some respects. In both areas, it is hoped that guidance will
provide businesses and advisers with the clarity required to be confident of the consequences
of cross-border transactions.
The ability to introduce arbitration provisions into the UK’s double tax treaties is an
aspect of the MLI that the UK government considers important. It is seen as a “guarantee” to
taxpayers that disputes will be resolved and double taxation avoided. If, as seems likely, fewer
of the UK’s treaty partners agree to implement arbitration in their treaties with the UK than
implement other MLI changes (such as PPT), there is likely to be a greater range of situations
in which there is uncertainty about the availability of treaty relief and consequent risk of tax
authorities taking different positions with resultant double taxation.
1. Position in the UK prior to the Multilateral Instrument (MLI).
1.1. The UK’s treaty network pre-MLI.
The UK has an extensive double tax treaty network. This report considers only the
comprehensive bilateral conventions entered into by the UK relating to income and capital
(DTAs), and not agreements to which the UK is a party covering more limited2 or other3 classes
2
For example, the shipping and/or air transport agreements with Brazil, Cameroon, Iran, Lebanon and Zaire.
3
For example, with the British Virgin Islands and the Cayman Islands.
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of income, tax information exchange agreements4 or agreements relating to estate duties

or social security.
Prior to entering into the MLI, the UK was a party to 1305 such D
TAs that were then in, or subsequently came into, force, covering a wide geographical range:
Jurisdiction Year signed In force Covered Tax

(most recent Agreement
(bold = MLI signatory) version) (specified by
UK) (Y/N)
North America
1 Canada 1978 21 December 2016 Y
(amended several
times, most
recently in 2015)
2 United States of 2001 31 March 2003 Y
America (amended 2002)
3 Mexico 1994 18 January 2011 Y
(amended 2009)
Caribbean islands
1 Antigua and Barbuda 1947 18 November 1968 Y
(amended 1968)
2 Barbados 2012 19 December 2012 Y
3 Grenada 1949 14 December 1968 Y
(amended 1968)
4 Jamaica 1973 31 December 1973 Y
5 Montserrat 1947 14 March 2012 N (N/A)
(amended several
times, most
recently in 2009)
6 St Kitts and Nevis 1947 28 January 1948 Y
7 Trinidad and Tobago 1982 22 December 1983 Y
4
For example, with Anguilla, Aruba, Bermuda, Gibraltar, Liberia, the Marshall Islands, Monaco, the Netherlands
Antilles, St Lucia, and the Turks and Caicos Islands.
5
The table also contains the DTA with Kyrgystan, which the UK signed shortly after the MLI and was specified as
a covered tax agreement. That DTA is not yet in force.
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UK) (Y/N)
Central and South America
1 Argentina 1996 1 August 1997 Y
2 Belize 1947 12 December 1973 Y
(amended several
times, most
recently in 1973)
3 Bolivia 1994 23 October 1995 Y
4 Chile 2003 21 December 2004 Y
5 Colombia 2016 13 December 2019 N
6 Falkland Islands 1997 18 December 1997 N (N/A)
7 Guyana 1992 18 December 1992 Y
8 Panama 2013 12 December 2013 Y
9 Uruguay 2016 14 November 2016 Y
10 Venezuela 1996 31 December 1996 Y
Europe
1 Albania 2013 30 December 2013 Y
2 Austria 2018 1 March 2019 N
3 Belarus 2017 27 July 2018 Y
4 Belgium 1987 24 December 2012 Y
(amended several (First amending
times, most protocol)
recently in 2014) (2014 amendments
not yet in force)
5 Bosnia and 1981 16 September 1982 Y
Herzegovina (DTA with
Yugoslavia)
6 Bulgaria 2015 15 December 2015 Y
7 Croatia 2015 19 November 2015 Y
8 Czech Republic 1990 20 December 1991 Y
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UK) (Y/N)
9 Denmark 1980 20 June 1997 Y
(amended several
times, most
recently in 1996)
10 Estonia 1994 19 December 1994 Y
11 Faroes 2007 3 June 2008 Y
12 Finland 1969 8 August 1997 Y
(amended several
times, most
recently in 1996)
13 France 2008 18 December 2009 Y
14 Germany 2010 29 December 2015 N
(amended 2014)
15 Greece 1953 15 January 1954 Y
16 Guernsey 2018 7 January 2019 N (N/A)
17 Hungary 2011 28 December 2011 Y
18 Iceland 2013 10 November 2014 Y
19 Ireland 1976 23 December 1998 Y
(amended several
times, most
recently in 1998)
20 Isle of Man 2018 19 December 2018 N (N/A)
21 Italy 1988 31 December 1990 Y
22 Jersey 2018 19 December 2018 N (N/A)
23 Kosovo 2015 16 December 2015 Y
24 Latvia 1996 30 December 1996 Y
25 Liechtenstein 2012 19 December 2012 Y
26 Lithuania 2001 28 November 2002 Y
(amended 2002)
27 Luxembourg 1967 28 April 2010 Y
(amended several
times, most
recently in 2009)
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UK) (Y/N)
28 Malta 1994 27 March 1995 Y
29 Moldova 2007 30 October 2008 Y
30 Montenegro 1981 16 September 1982 Y
(DTA with
Yugoslavia)
31 Netherlands 2008 31 January 2014 Y

(amended 2013)
32 North Macedonia 2006 8 August 2007 Y
33 Norway 2013 17 December 2013 Y
34 Poland 2006 27 December 2006 Y
35 Portugal 1968 17 January 1969 Y
36 Romania 1975 22 November 1976 Y
37 Serbia 1981 16 September 1982 Y
(DTA with
Yugoslavia)
38 Slovak Republic 1990 20 December 1991 Y
39 Slovenia 2007 11 September 2008 Y
40 Spain 2013 12 June 2014 Y
41 Sweden 2015 20 December 2015 Y
42 Switzerland 1978 19 July 2019 N
(amended several
times, most
recently in 2017)
43 Ukraine 1993 5 December 2019 Y
(amended 2017)
Africa
1 Algeria 2015 16 June 2016 Y
2 Botswana 2005 4 September 2006 Y
3 Egypt 1977 23 August 1980 Y
4 Ethiopia 2011 21 February 2013 Y
5 Gambia 1980 5 July 1982 Y
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UK) (Y/N)
6 Ghana 1993 10 August 1994 Y
7 Ivory Coast 1985 24 January 1987 Y
8 Kenya 1973 30 September 1977 Y
(amended 1976)
9 Lesotho 2016 18 September 2018 Y
10 Libya 2008 8 March 2010 Y
11 Malawi 1955 14 March 1979 Y
(amended several
times, most
recently in 1978)
12 Mauritius 1981 13 July 2018 Y
(amended several
times, most
recently in 2018)
13 Morocco 1981 29 November 1990 Y
14 Namibia 1962 27 November 1967 Y
(amended several
times, most
recently in 1967)
(DTA with South
Africa)
15 Nigeria 1987 27 December 1987 Y
16 Senegal 2015 30 March 2016 Y
17 Sierra Leone 1947 16 January 1969 Y
(amended 1968)
18 South Africa 2002 13 October 2011 Y
(amended 2010)
19 Sudan 1975 8 October 1977 Y
20 Swaziland 1968 18 March 1969 Y
21 Tunisia 1982 20 January 1984 Y
22 Uganda 1992 21 December 1993 Y
23 Zambia 2014 20 July 2015 Y
24 Zimbabwe 1982 11 February 1983 Y
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UK) (Y/N)
Middle East
1 Bahrain 2010 19 December 2012 Y
2 Cyprus 1974 15 December 1980 Y
(amended 1980)
Note: Replaced
by new DTA (see
paragraph 3.1)
3 Israel 1962 25 March 1971 Y
(amended several (First amending (but Israel
times, most protocol) has not
recently in 2019) 28 October 2019 specified
(2019 amendments ) this DTA as a
covered tax
agreement)
4 Jordan 2001 24 March 2002 Y
5 Kuwait 1999 1 July 2000 Y
6 Oman 1998 9 January 2011 Y
(amended 2009)
7 Qatar 2009 27 July 2011 Y
(amended 2010)
8 Saudi Arabia 2007 1 January 2009 Y
9 United Arab Emirates 2016 25 December 2016 Y
Russia, Turkey and Central Asia
1 Armenia 2011 21 February 2012 Y
2 Azerbaijan 1994 3 October 1995 Y
3 Georgia 2004 17 December 2010 Y
(amended 2010)
4 Kazakhstan 1994 2 November 1998 Y
(amended 1997)
5 Kyrgystan 2017 Not yet in force Y
6 Russia 1994 18 April 1997 Y
7 Tajikistan 2014 16 March 2015 Y
8 Turkey 1986 26 October 1988 Y
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UK) (Y/N)
9 Turkmenistan 2016 19 December 2016 Y
10 Uzbekistan 1993 1 June 2018 Y
(amended 2018)
South Asia
1 Bangladesh 1979 8 July 1980 Y
2 India 1993 27 December 2013 Y
(amended 2012)
3 Pakistan 1986 8 December 1987 Y
4 Sri Lanka 1979 21 May 1980 Y
East and South East Asia
1 Brunei 1950 19 December 2013 Y
(amended several
times, most
recently in 2012)
2 Burma (Myanmar) 1950 26 February 1952 Y
(amended 1951)
3 Chinese Taipei 2002 23 December 2002 N
4 Hong Kong 2010 20 December 2010 Y

5 Indonesia 1993 14 April 1994 Y
6 Japan 2006 12 December 2014 Y
(amended 2013)
7 Korea (Republic) 1996 30 December 1996 Y
8 Malaysia 1996 28 December 2010 Y
(amended 2009)
9 Mongolia 1996 4 December 1996 Y
10 People’s Rep. of China 2011 13 December 2013 Y
(not including Macau (amended 2013)
or Hong Kong)
11 Philippines 1976 22 January 1978 Y
12 Singapore 1997 (amended 27 December 2012 Y
several times, most
recently in 2012)
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UK) (Y/N)
13 Thailand 1981 20 November 1981 Y
14 Vietnam 1994 15 December 1994 Y
Oceania
1 Australia 2003 17 December 2003 Y
2 Fiji 1975 27 August 1976 Y
3 Kiribati 1950 25 July 1974 Y
(amended several
times, most
recently in 1974)
4 New Zealand 1983 28 August 2008 Y
(amended several
times, most
recently in 2007)
5 Papua New Guinea 1991 20 December 1991 Y
6 Solomon Islands 1950 25 July 1974 Y
(amended several
times, most
recently in 1974)
7 Tuvalu 1950 25 July 1974 Y
(amended several
times, most
recently in 1974)
The DTAs listed above follow the OECD Model Convention (OECD model) with only limited
departures, such as the use of principal purpose tests in some dividend, interest or royalties
articles, and a limitation on benefits provision and anti-conduit rules in the current DTA with
the United States.
1.2 Domestic and treaty-based doctrines, provisions and practices before the MLI.
1.2.1 Definition in treaty preambles of treaty purposes.
The UK’s DTAs follow the pre-2017 OECD model approach of defining the purpose of the DTA
as two-fold, namely the avoidance of double taxation and the prevention of fiscal evasion.
The preambles did not qualify this by reference to preventing opportunities for non-taxation
or reduced taxation through avoidance, such as treaty shopping.
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1.3.1. UK response to tax treaty shopping prior to BEPS.
1.3.1.1. Domestic anti-avoidance doctrines (substance over form, sham or business purpose).
English law has a concept of sham, although this requires that “The parties must have
intended to create different rights and obligations from those appearing from (say) the
relevant document, and in addition they must have intended to give a false impression of
those rights and obligations to third parties.”6. More commonly, the UK’s tax authority (HM
Revenue and Customs (HMRC)) will challenge arrangements that are perceived to be abusive
by means of a principle that is variously known as the Ramsay principle or the principle in
Furniss v. Dawson. Named after two of the early cases in which this principle appeared, it
has been refined by the higher courts (particularly, the House of Lords and its successor, the
Supreme Court) to the stage that, currently, the rule is not confined to tax law but rather
requires legislation to be given a “purposive interpretation” and applied to a realistic view of
the facts. In Bayfine v. HM Revenue and Customs [2011] EWCA Civ 304, the Court of Appeal
stated that a purposive approach must be given to interpreting the UK’s DTA with the US
that was in force prior to the current DTA and that in seeking a purposive interpretation the
principles of eliminating double taxation and preventing the avoidance of taxation have to
be borne in mind.
1.3.1.2. General anti-avoidance rules (GAARs).
The UK has a GAAR, but this is a general anti-abuse rule rather than a general anti-avoidance
rule. This reflects the high standard (the double reasonableness test) required for it to apply
to counteract a tax advantage. The GAAR guidance, at part B5, states that “where there are
abusive arrangements which try to exploit particular provisions in a double tax treaty, or the
way in which such provisions interact with other provisions of UK tax law, then the GAAR can
be applied to counteract the abusive arrangements”. Although the government indicated that
the GAAR will be applied “in a manner consistent with our international treaty obligations”
(HMRC: response document, paragraph 2.2.6), and the draft guidance on the GAAR included a
statement that the GAAR must be applied consistently with the commentary on the OECD
model tax convention (Draft guidance, Part A3.3), there is no such confirmation in the current
guidance. There have not been any decisions on the application of the GAAR to counter treaty
shopping.
On 1 August 2011 the UK government published a technical note (entitled Tax Treaties
Anti-avoidance) and draft legislation to counter tax avoidance using DTA. However, on 9
September 2011, a written ministerial statement confirmed that the then UK government
would not proceed with that change and it has not been reintroduced by any of the
subsequent UK governments.
6
Hitch v Stone (Inspector of Taxes) [2001] EWCA CIV 63.
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1.3.1.3. General principles of treaty interpretation, such as the “guiding principle” adopted in the 2003
OECD Commentary.
As discussed at paragraph 1.3.1.1 above, the approach of the UK courts is to adopt a purposive
interpretation of treaty provisions on the basis of a realistic view of the facts.
1.3.1.4. Interpretation and application of the beneficial ownership concept.
The beneficial ownership concept was the subject of a UK Court of Appeal decision in
Indofood International Finance Ltd v JP Morgan Chase Bank NA [2006] EWCA Civ 158.
That decision did not concern the provisions of any of the UK’s DTAs, but rather whether a
special purpose vehicle (SPV) in Mauritius that loaned the proceeds of a bond issue to its
parent company in Indonesia qualified as beneficial owner of interest paid on that loan (and
whether, if a Netherlands company were substituted as the SPV, it would also so qualify).
The Court of Appeal held that neither qualified as the beneficial owner of the interest,
reasoning that “the concept of beneficial ownership is incompatible with that of the formal
owner who does not have ‘the full privilege to directly benefit from the income’”. The scope of
the decision, and its implications, have been the subject of debate, including what is required
to have the full privilege to directly benefit from an item of income. HMRC’s view of the
decision, as expressed in HMRC’s International Manual, paragraph INTM332050 is that:
1. So far as it relates to double tax treaties, the decision is now part of UK law and likely to be
of persuasive force where related issues for UK double tax treaties are being considered.
2. The Court of Appeal decision is fully consistent with the UK’s pre-existing policy (and with
its view of all articles referring to beneficial ownership, specifically articles on interest,
royalties and if appropriate dividends), and so should not have a significant impact on
the practice HMRC previously applied.
3. In Indofood, the Court of Appeal confirmed that, in line with the OECD Commentary,
beneficial ownership “should be understood in its context and in light of the object and
purposes of the Convention, including avoiding double taxation and the prevention of
fiscal evasion and avoidance” and that tests of the legal structure, and of the commercial
and practical substance of the scheme, should be adopted to determine beneficial
ownership.
4. Where there is treaty abuse (such as “treaty shopping”), interpreting “beneficial
ownership” in what the Court of Appeal called its “narrow technical” UK domestic law
meaning would not give effect to the purpose and object of the double tax treaty of
preventing fiscal evasion, indeed it would be contrary to the object of the double tax
treaty to allow such treaty abuse. On the other hand, interpreting “beneficial ownership”
in what the Court of Appeal called its “international fiscal meaning” clearly gives effect to
the purpose and object of the double tax treaty by excluding abusive cases such as “treaty
shopping” from the benefits of a double tax treaty.
5. Although, in the context of double tax treaties, beneficial ownership will take what the
Court of Appeal decision accepted as an “international fiscal meaning” rather than a
UK domestic meaning, in HMRC’s view there are unlikely to be many cases where the
difference is material. The issue would only arise when the substance of an arrangement
amounts to an improper use of the relevant double tax treaty in the light of the double
tax treaty’s object of prevention of fiscal evasion and avoidance, for example “treaty
shopping”. Treaty shopping is only likely to take place where the “real” beneficial owner of
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the income, such as “the immediate underlying lender” in the case of interest, is resident
in a state with which the UK has either no double tax treaty or a double tax treaty less
favourable than the double tax treaty applicable to the intermediate lender, or if the
recipient of an income stream into which an intermediate lender has been interposed
is resident in such a state (regardless of whether they themselves are the beneficial
owner). These are the only situations where HMRC believe further consideration of the
“international fiscal meaning” will be needed.
6. Where both the intermediate and the underlying lender are resident in states with
which the UK has essentially similar double tax treaties, no issue is likely to arise, even
where the intermediate lender is not, under the so-called “international fiscal meaning”
of the phrase, the beneficial owner of the interest, as there would be no fiscal evasion
or avoidance. This is because in these circumstances it is unlikely that the effect of the
arrangement is the avoidance of UK withholding tax, since the level of UK withholding
tax would have been the same with or without the intermediate lending.
Guidance on HMRC’s views on the application of the concept of beneficial ownership to
capital markets transactions involving SPVs, quoted eurobonds, funds investing in CLOs
and CDOs and syndication and sub-participation can be found at HMRC’s International
Manual, paragraphs INTM332060 and INTM332080.
1.3.1.5. Treaty-based anti-avoidance provisions.
The UK does not make extensive, or in some cases any, use of the following types of treaty-
based anti-avoidance provisions:
(A) look-through provisions, denying treaty benefits to a company resident in a contracting
state to the extent that the company is not owned directly or indirectly by residents of
that state.
(B) Exclusion provisions, denying treaty benefits to non-resident owned companies enjoying
special tax privileges in the state of residence.
(C) Subject-to-tax provisions, restricting source-state treaty benefits to income that is subject
to tax in the residence state.
(D) Channel provisions, denying treaty benefits to income received by a company resident in
the other contracting state that is used primarily to satisfy claims of one or more persons
not resident in that state who have a substantial interest in the company and/or exercise
control over the company.
(E) Limitation (LOB) provisions, restricting treaty benefits to specific persons or categories
of income.
However, there are some exceptions, such as the LOB provision in the UK’s current DTA with
the US and subject to tax provisions in the interest and royalties articles in some of the UK’s
DTAs, such as those with Greece and (pre-2020) Israel.
The UK makes more use of purpose tests, denying some treaty benefits where the main
purpose or one of the main purposes of the transaction or arrangement that would otherwise
result in a treaty benefit was to obtain the treaty benefit. Many of the UK’s DTAs contain such
“main purpose” tests, but these are typically limited to the interest, royalties, other income
and, in some cases, dividend articles. As the UK does not, as a matter of domestic tax law,
impose withholding on dividends (except in limited circumstances, to dividends paid by types
of property investment vehicles), these provisions are of particular relevance to payments
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of interest and royalties. For example, the UK’s DTA with the Republic of Ireland (signed 7
June 1976) provides, in the interest and other income articles (12 and 20, respectively), that
“The provisions of this article shall not apply if it was the main purpose or one of the main
purposes of any person concerned with the creation or assignment of the [debt-claim/rights]
in respect of which the [interest/income] is paid to take advantage of this article by means of
that creation or assignment.”.
1.4.1. UK response to other tax treaty abuses.
1.4.1.2. Transactions or arrangements undertaken to access the reduced treaty rate on dividends paid
to a parent company (addressed by article 8 of the MLI).
This is of limited relevance to the UK as the UK only imposes withholding tax on dividends
in a few situations (see paragraph 1.3.1.5).
1.4.1.3. Transactions or arrangements undertaken to avoid taxation of immovable property situated

in a contracting state, including transactions or arrangements intended to dilute the
proportionate value of shares or comparable interests deriving their value primarily from
immovable property situated in a contracting state (addressed by article 9 of the MLI).
Historically, this was of limited relevance to the UK as until relatively recently the UK did not
impose tax on non-residents in respect of gains on either the disposal of real estate located in
the UK (except where that was held as part of a property development trade) or the disposal
of interests in property-rich vehicles.
1.4.1.4. The granting of treaty benefits for income paid to low-taxed permanent establishments
in third jurisdictions that are subject to little or no tax and tax-exempt in the residence
jurisdiction (addressed by article 10 of the MLI).
The UK has not made use of these provisions in its DTAs.
1.4.1.5. Avoidance of permanent establishment status through commissionaire and similar

arrangements (addressed by article 12 of the MLI).
The UK has not sought to address such arrangements through amended versions of the OECD
model’s definition of permanent establishment, instead challenging such arrangements
through transfer pricing. HMRC’s published guidance (International Manual, paragraph
INTM441070) confirms that such arrangements also may be challenged on other grounds,
specifically:
(A) Whether the principal is subject to UK taxation in respect of its profits on the basis that
it is tax resident in the UK or has permanent establishment in the UK by virtue of the
commissionaire being an undisclosed (dependent) agent.
(B) Whether there is tax to pay on conversion to a commissionaire structure, in respect of
gain on the disposal of intangible assets.
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1.4.1.6. Specific activity exemptions (addressed by article 13 of the MLI).
The UK’s approach has not been to limit the specific activity exemptions to only those that
are preparatory or auxiliary, in the manner proposed in article 13 of the MLI.
1.4.1.7. Splitting up contracts (addressed by article 14 of the MLI).
Historically, the UK has not included in its DTAs provisions such as article 14 of the MLI
that seek to aggregate activities for the purposes of determining whether a permanent
establishment exists.
1.4.1.8. Hybrid mismatch arrangements.
1.4.1.8.1. Mismatches resulting from the use of transparent entities (addressed by article 3 of the MLI).
The UK introduced anti-arbitrage legislation in the Finance (No2) Act 2005 (Part 2, Chapter
4), which was in effect from 16 March 2005 until 1 January 2017 (when it was replaced by
BEPS-compliant hybrid mismatch rules). It targeted two types of perceived abuse through
hybrid mismatch arrangements:
(i) Arrangements to secure tax deductions in the UK (deductions scheme).
(ii) Arrangements to secure tax-free receipts in the UK (receipts scheme).
The rules denied a deduction in the UK in the former case and taxed the (otherwise untaxed)
receipt in the latter case, and only applied where HMRC issued a notice to the effect that the
provisions applied. HMRC operated a non-statutory clearance procedure, despite the absence
of a statutory obligation to provide such a mechanism.
A deduction would only be denied under the deductions scheme rule if that transaction
formed part of a “qualifying scheme” and the main purpose, or one of the main purposes, of
the scheme was to obtain a UK tax advantage. (There were other conditions, including that
the tax advantage had to be more than minimal). A “qualifying scheme” included schemes
involving “hybrid entities” (treated as opaque in one jurisdiction but as transparent in
another) and those involving “hybrid effects” (instruments having a “hybrid effect” (hybrid
instruments) included shares and securities subject to conversion, debt instruments treated
as equity and instruments the relevant characteristic of which a party to a transaction could
elect to have altered) and “qualifying scheme” also included a scheme in which shares (other
than ordinary shares) were issued to a connected person or rights under a security were
transferred to a connected person. The rules would, generally, not apply if it could be shown
that there was a justifiable non-tax purpose for the way in which the financing was structured,
and the deduction that gave rise to the UK tax advantage was denied (only) to the extent that
the payee was not taxed on the receipt (other than for certain acceptable reasons).
The receipts scheme rules were more narrow, targeted at a particular avoidance scheme,
applying only where a company entered into a scheme under which it received a contribution
to the capital of the company that was not liable to tax in the UK and was deducted from,
or allowed against, taxable income of the person making the payment (in any jurisdiction),
and that mismatch in tax treatment had to be an expectation of the parties to the scheme.
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1.4.1.8.2. Mismatches attributable to dual resident entities (addressed by article 4 of the MLI).
The UK has long-standing dual resident investing company (DRIC) rules that deny certain UK
tax reliefs, specifically (i) the relief that allows transfers of capital assets to be made between
group members on a no gain/no loss basis (that is, at historic tax basis), and (ii) surrender of
losses to other UK resident companies by way of group relief.
The anti-arbitrage legislation that was in force from 16 March 2005 until 1 January 2017
(see paragraph 1.4.1.8.1) applied to counter the effects of hybrid entities, rather than dual
resident entities per se.
Additionally, prior to BEPS, the UK’s approach to the corporate residence tie-breaker
had evolved from solely using a place of effective management test to providing for dual
residence to be determined by mutual agreement (see, for example, article 4(4) of the UK’s
current DTA with The Netherlands).
1.5. UK approach to mutual agreement procedure (MAP) and corresponding

adjustments (addressed by articles 16 and 17 of the MLI).
The UK’s DTAs usually include provision for MAP, and many also contain provisions requiring
the UK to give relief from double taxation where the profits of an enterprise are the subject
of a transfer pricing adjustment. Such relief is either by a corresponding adjustment to the
UK enterprise’s taxable profits or credit, for the overseas tax, against the UK tax on the UK
enterprise’s profits.
1.6. UK approach to mandatory binding arbitration of disagreements between

contracting states, including the form that this arbitration takes and experience
with arbitration (addressed by articles 18-26 of the MLI).
Although the UK is in favour of mandatory binding arbitration, this was not previously a
common feature of many of UK’s DTAs (see paragraph 2.3.7).
2. Direct impact of the MLI.
2.1. Signature, ratification, entry into force, and entry into effect.
2.1.1. Signature of the MLI.
The UK signed the MLI at the OECD signing ceremony in Paris on 7 June 2017.
2.1.2. Reasons for signing the MLI.
There have been few formal publications by the UK government explaining why it signed
the MLI. These have focussed on the ability it provides to update double tax treaties to
implement the BEPS recommendations consistently, quickly and efficiently (for example,
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see Financial Secretary’s speech on the UK’s tax regime at EY’s 34th Annual International
Tax Conference and paragraphs 7.1 and 7.2 of the Explanatory Memorandum to the Double
Taxation Relief (Base Erosion and Profit Shifting) Order 2018 (SI 2018/630)). The UK’s decision
to sign the MLI is not surprising given the UK’s role in proposing and supporting the BEPS
project (see News story: UK leads international efforts to clampdown on tax avoidance).
2.1.3. Assessment of the impact of the MLI on tax compliance, administration and economic
activity.
No formal assessment has been published, other than:

(A) The summary of impacts in the TIIN, Double taxation: Powers to implement
Multilateral Instrument that accompanied the overview of tax legislation and rates
published at the Autumn 2017 Budget, relating to the legislation that was introduced to
provide an express power for the UK to implement the MLI.
(B) Paragraphs 10 and 11 of the Explanatory Memorandum to the Double Taxation Relief (Base
Erosion and Profit Shifting) Order 2018 (SI 2018/630), which brought the MLI into force in
the UK.
These expressed the UK government’s view of how limited the impact (if any) the MLI would
be on the economy, businesses, civil society and HMRC.
2.1.4. Preliminary assessment (by Parliament, the government or any other institution) of the
economic and budgetary impact of the MLI in the UK.
Other than as mentioned above, the UK government has not published formal assessments
relating to the MLI.
2.1.5. Ratification, acceptance or approval of the MLI by the UK.
On 23 May 2018, the UK made the Double Taxation Relief (Base Erosion and Profit Shifting) Order
2018 (SI 2018/630), which brought the MLI into force in the UK on the first day of the month
following the expiration of a period of three calendar months beginning on 29 June 2018
(the date on which the UK deposited with the OECD the UK’s instrument of ratification,
acceptance or approval).
2.1.6. Entry into force of the MLI in the UK.
The MLI entered into force in the UK on 1 October 2018 (the end of the period referred to
in paragraph 2.1.5). Apart from the MAP and arbitration provisions (which applied to cases
presented on or after 1 October 2018), the changes made by the MLI did not have effect until
2019:
(A) To withholding taxes, from 1 January 2019.
(B) For the purposes of UK income tax, from 6 April 2019.
(C) For the purposes of UK corporation tax, from 1 April 2019.
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However, the changes made by the MLI apply from later dates to those DTAs with jurisdictions
that had not deposited, with the OECD, their instrument of ratification in time for the MLI to
have effect (in relation to that jurisdiction’s DTA with the UK) from the above dates.
2.2. Covered tax agreements (CTAs).
2.2.1. Tax treaties the UK listed as CTAs.
The UK listed 121 of its DTAs as CTAs, as shown in the UK’s list of reservations and notifications
upon deposit of its instrument of ratification of the MLI (see HMRC: Guidance: Multilateral
convention to implement tax treaty related measures to prevent base erosion and profit
shifting).
2.2.2. Extent of the UK’s DTA that are CTAs.
The CTAs comprise the majority of the UK’s DTAs, with only 10 DTAs not listed as CTAs:
Austria, Chinese Taipei, Colombia, Falkland Islands, Germany, Guernsey, Isle of Man, Jersey,
Montserrat and Switzerland. Some of these are for reasons relating to the constitutional
status of the jurisdictions concerned, such as the Crown Dependencies, and others are due to
the advanced status of negotiations to conclude a new DTA, or protocol to the DTA, containing
the BEPS minimum standards (such as Austria and Switzerland). Although the UK’s DTA with
Israel was listed by the UK as a CTA, Israel did not list it as a CTA. Instead the UK and Israel
signed a new protocol to that DTA on 17 January 2019.
2.2.3. Percentage of the UK’s DTAs that are intended to be covered, in proportion to all of the UK’s
existing DTAs.
More than 90% of the UK’s DTAs have been specified by the UK as CTAs, although the
percentage of the UK’s DTAs that are CTAs is smaller due to counterparties either not signing
the MLI or, in one case (Israel, see paragraph 2.2.2 above), not specifying its DTA with the UK
as a CTA.
2.2.4. Extent to which the other contracting states to the UK’s CTAs have signed the MLI and listed
their DTAs with the UK.
83 of the jurisdictions with which the UK has a DTA are also signatories to the MLI, and of
these 75 (approximately 90%) have also listed its DTA with the UK as a CTA.
Accordingly, although only approximately 58% of the UK’s 130 DTAs are currently covered
by the MLI, this is mainly due to due to other contracting states not signing the MLI and, to a
lesser degree, their decisions as to which of their DTAs to specify as CTAs,
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2.2.5. Reasons given by the UK for not listing some of its DTAs as CTAs.
Three of the jurisdictions (Guernsey, Jersey and the Isle of Man) are Crown Dependencies, and
as such the MLI could not be used to amend the UK’s DTAs with those jurisdictions. Amended
bilateral agreements between the UK and each of these jurisdictions have been used instead
to implement the BEPS minimum standards (see Hansard, 13 November 2018). It is assumed
that this also explains why the UK’s DTAs with the Falkland Islands and Montserrat were not
specified by the UK as CTAs.
The UK has also negotiated (or, in the case of Germany, is negotiating) bilateral agreements
incorporating the BEPS minimum standards with other jurisdictions that are signatories to
the MLI and either their DTA with the UK was not listed by the UK as a CTA (Austria, Colombia,
Germany and Switzerland) or did not list as a CTA its DTA with the UK (Israel).
2.2.6. Expectation that additional DTAs will be listed as CTAs in the near future.
As the UK has listed 121 of its 130 DTAs as DTAs, has entered into bilateral agreements with
six of the others (plus Israel, which did not list its DTA with the UK as a CTA) and is currently
negotiating with a further jurisdiction, there is limited scope for the UK to list additional
DTAs as CTAs.
2.3. Applicable provisions of the MLI.
2.3.1. UK’s approach to, and reasons for, adoption of the preamble language in article 6(3) of the
MLI.
The UK has chosen to apply Article 6(3) of the MLI, in addition to the article 6(1) minimum
standard, although no statement has been published explaining this choice.
More generally, the UK government’s stated approach to articles 7 to 10 of the MLI is
set out in paragraph 7.7 of the Explanatory Memorandum to the statutory instrument that
implemented the MLI (Double Taxation Relief (Base Erosion and Profit Shifting) Order 2018 (SI
2018/630)):
“The Government intends only to reserve against those provisions in the Arrangements
which are not part of the minimum standard and that it considers unnecessary because of
its adoption of the Principal Purpose Test (“the PPT”) through paragraph 1 of article 7 of the
arrangements. The Government is of the view that the mechanical tests introduced by those
provisions could deny treaty benefits in circumstances that are not abusive and would not
target any genuine avoidance structures more effectively than the PPT.”
2.3.2. UK’s approach to satisfying the OECD’s minimum standard on treaty abuse (principal
purpose test (PPT) in Article 7(1) of the MLI), and discretionary benefits rule in article 7(4)
of the MLI.
The UK has chosen to apply the PPT and the article 7(4) discretionary benefits rule.
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2.3.3. UK’s approach to applying the simplified limitation on benefits (SLOB) provisions in Articles
7(8)-(13) of the MLI, and agreeing to allow the SLOB to be applied by another contracting
jurisdiction pursuant to paragraph 7(7)(b) of the MLI.
The UK has not made the notification pursuant to article 7(17)(c) to apply the SLOB. Nor has
the UK made any notification under either subparagraph (a) or (b) of paragraph 7 of article 7.
2.3.4. UK’s approach to notifications under article 7(17)(a) of the MLI that the PPT is an interim
measure, to be replaced (or supplemented), through bilateral negotiation, by a limitation
on benefits provision.
The UK has not notified that it accepts the PPT as an interim measure to be supplemented or
replaced by a limitation on benefits provision. Its notification under article 7(17)(a) is limited
to specifying the CTAs that are not subject to a reservation under article 7(15)(b) and contain
a provision described in article 7(2) (and, thus, will be replaced by articles 7(1) and (4) if the
other contracting jurisdiction makes such a notification).
2.3.5. UK’s approach to adopting other provisions addressing tax treaty abuse.
2.3.5.1. Dividend transfer transactions, land rich entities and third country permanent establishments
(articles 8, 9 and 10 of the MLI).
The UK has reserved, pursuant to article 8(3)(a), not to apply to its CTAs the minimum holding
period for transactions or arrangements undertaken to access the reduced treaty rate on
dividends paid to a parent company (article 8).
It has also reserved, pursuant to article 9(6)(a), not to apply to its CTAs the substituted
property rule for gains from the alienation of shares or comparable interests deriving their
value primarily from immovable property at any time during the 365-day period preceding
the alienation of the property (article 9) and, pursuant to article 10(5)(a), not to apply to
its CTAs the provision denying treaty benefits for income paid to low-taxed permanent
establishments in third jurisdictions that are subject to little or no tax and exempt from tax
in the residence jurisdiction (article 10).
Paragraph 7.7 of the Explanatory Memorandum to SI 2018/630 sets out the UK
government’s reason for reserving against articles 8, 9 and 10, namely that in its view
mechanical tests introduced by provisions such as these could deny treaty benefits in
circumstances that are not abusive and would not target any genuine avoidance structures
more effectively than the PPT.
2.3.5.2. Provisions preventing the avoidance of permanent establishment status through

commissionaire and similar arrangements (article 12 of the MLI), specific activity exemptions
(article 13 of the MLI), or the splitting-up of contracts (article 14 of the MLI).
Pursuant to articles 12(4) and 14(3)(a), the UK reserved for articles 12 and 14 not to apply to its
CTAs. Nor has the UK chosen to apply either paragraph 2 (Option A) or paragraph 3 (Option
B) of article 13. The only paragraph of article 13 that will apply to the UK’s CTAs is paragraph
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4 (the “anti-fragmentation” rule), and (pursuant to article 13(8)) the UK has notified the CTAs
that contain a provision described in article 13(5)(b).
Paragraph 7.9 of the Explanatory Memorandum to SI 2018/630 sets out the UK government’s
reasons for applying only the anti-fragmentation rule (and reserving against the rest of article
13 and all of articles 12 and 14), namely that: “None of these provisions is part of a minimum
standard. As is recognised in the BEPS report on Action 7, the anti-contract splitting rule in
article 14 is not necessary where a jurisdiction has adopted the PPT. Parallel work is being
undertaken by the OECD on the attribution of profits to PEs that would be found under the
provisions of article 12 and the changes to the specific activity exemptions in article 13. The
initial conclusion of this work is that little or no additional profit would be attributed to these
“new” PEs compared to that which jurisdictions can already tax under existing international
rules. The PE rules play an important role in providing certainty and cost savings for both
businesses and governments by setting a threshold below which a company’s activities in
another country are not taxable there. In the absence of any additional profits to attribute, the
Government does not believe that the case has been made to remove some of the certainty
provided by the current rules. The Government will, however, continue to monitor the work
of the OECD on profit attribution and will review its position should the conclusions change.”.
Similar comments appear in HMRC’s International Manual, at paragraph INTM264350:
“The UK is not adopting this change. Along with most other OECD member states, the UK
considers the provisions of subparagraphs a) to d) to be per se exemptions – consistent with
the history of the provision, its drafting and the longstanding traditional interpretation,
confirmed by the OECD in its 2011 Discussion Draft on article 5 – and therefore takes the
view that they should not be subject to the preparatory or auxiliary test. Taking away the
certainty of per se exemptions diminishes the utility of the provision, for both business
and tax administrations, of providing clear lines on what activities will not create a taxable
presence in a state. It represents a change in the permanent establishment threshold rather
than a measure targeted at BEPS. The more targeted anti-fragmentation rule, discussed
below, addresses attempts to abuse the exemptions.”.
2.3.6. UK’s approach to MLI provisions addressing hybrid mismatch arrangements, including

resulting from the use of transparent entities (article 3 of the MLI) and mismatches
attributable to dual resident entities (article 4 of the MLI), including reasons for these
choices.
The UK has adopted article 3, other than paragraph 2 (pursuant to article 3(5)(f), the UK
reserved the right for article 3(2) not to apply to its CTAs) and, pursuant to article 3(6), has listed
the CTAs that contain a provision described in article 13(4) that is not subject to a reservation
under article 3(5)(c) through (e) (and, thus, will be replaced by article 3(1), as modified by
article 3(3), to the extent provided in article 3(4) if the other contracting jurisdiction makes
such a notification).
Paragraph 7.5 of the Explanatory Memorandum to SI 2018/630 sets out the UK
government’s reason for reserving against paragraph 2, namely that although it agrees with
the policy underlying this provision, because this provision differs in terms from the provision
in the double tax agreements that it would apply to, adopting this provision might lead to
uncertainty.
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The UK has adopted article 4, which is consistent with its treaty policy prior to the MLI
(see paragraph 1.4.1.8.2 above) and, pursuant to article 4(4), has listed the CTAs that contain
a provision described in article 4(2) that is not subject to a reservation under article 4(3)(b)
and (d) (and, thus, will be replaced by article 4(1) if the other contracting jurisdiction makes
such a notification).
2.3.7. UK’s decision to apply articles 18-26 providing for mandatory binding arbitration of
disagreements between contracting states and type of arbitration process chosen to
implement under article 23 of the MLI, including reasons for these choices.
The UK has chosen, pursuant to article 18, to apply Part VI, opting for “final offer” (“baseball”)
method of arbitration method in article 23(1). Although the UK has not chosen reasoned (or
independent) opinion, by not reserving under article 23(3), arbitration is not disapplied with
states that have elected for reasoned opinion arbitration.
The UK has chosen to apply the confidentiality provisions in article 23(5) and has not
reserved (pursuant to article 24(7)) to disapply arbitration where the other state has chosen
not to apply those confidentiality provisions.
The UK has also chosen for the competent authorities to have three months in which
to agree on a different resolution of all unresolved issues (article 24(2)). It has not made
the reservations under article 24(3) to disapply this for countries that have chosen reasoned
opinion arbitration nor, pursuant to article 19(11) and (12), to replace the two-year period with
three years or to exclude (from arbitration) issues resolved by domestic courts.
The UK has reserved, pursuant to article 26(4), for Part VI not to apply to 21 of its CTAs, that
already provide for mandatory binding arbitration of unresolved issues resulting from a MAP
case. Three CTAs (Mexico, Spain and Sweden) are listed that contain arbitration provisions
for unresolved issues arising from a MAP case that will be replaced by Part VI (if the other
contracting jurisdiction makes such a notification).
Paragraph 7.11 of the Explanatory Memorandum to SI 2018/630 states the UK government’s
position that “These provisions provide a guarantee for taxpayers that disputes will be
resolved and double taxation avoided. This provision is welcomed by business.”.
2.3.8. Expectations that the UK may reverse, in the near future, decisions not to apply provisions
of the MLI.
There has not been any indication that the UK will, in the near future, reverse any of the
positions taken its list of reservations and notifications made by the UK upon deposit of its
instrument of ratification or approval of the MLI. However as noted above, Paragraph 7.9 of
the Explanatory Memorandum to SI 2018/630 states that the UK government will continue
to monitor the work of the OECD on profit attribution and will review its position should the
conclusions change, which raises the possibility that the UK government might, depending
on the outcome of further OECD work on profit attribution, result in the UK government
withdrawing some or all of its reservations against articles 12 to 14 (inclusive).
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2.3.9. Significance of reservations made by the UK.
2.3.9.1. Provisions that are subject to reservations.
In addition to the reservations mentioned above (see paragraphs 2.3.3 to 2.3.6), the UK has
(pursuant to article 6(4)), reserved for article 6(1) not to apply to three of its CTAs (namely,
those with Belarus, the Ukraine and Uzbekistan) that contain preamble language describing
the intent of the contracting jurisdictions to eliminate double taxation without creating
opportunities for non-taxation or reduced taxation, whether that language is limited
to cases of tax evasion or avoidance (including through treaty shopping arrangements
aimed at obtaining reliefs provided in the CTAs for the indirect benefit of residents of third
jurisdictions) or applies more broadly.
2.3.9.2. Reasons for such reservations.
The UK’s reservations reflect its position that it has adopted all of the minimum BEPS
standards from Actions 2, 6 and 7, and the mandatory arbitration provisions in Action 14,
adopting:
(A) Articles 16 (MAP) and 17 (corresponding adjustments) of the MLI, without reservations,
and opting into article 18 of the MLI.
(B) The anti-hybrid provisions in articles 3 and 4, but not article 5 of the MLI. Article 5 is not
considered necessary, because (as a credit country) the UK’s use of the exemption method
is not considered to pose a BEPS risk to the UK. However, the UK has not reserved under
paragraph 8 or 9 of article 5 to prevent unilateral application by the UK’s treaty partners
of their preferred option.
(C) Article 6 of the MLI and PPT, rather than LOB.
(D) Article 11 of the MLI (the savings clause).
The UK is not adopting articles 8, 9 and 10 of the MLI, because the UK considers that the PPT
adequately addresses these issues. Nor is it adopting articles 12, 13 or 14 of the MLI, apart
from the anti-fragmentations provision. This reflects the UK’s view that it is reserving from
those aspects of the MLI which it believes will have a disproportionate effect on commercial
transactions or which are unnecessary because of other provisions (for example, the changes
to the transfer-pricing guidelines).
2.3.10. Statistical data on the proportion of tax treaty provisions that are actually modified
following the MLI, taking into account the reservations made by the UK and the other
contracting States.
The extent to which the UK’s DTAs will be modified by the MLI will depend on the number
of other jurisdictions that implement the MLI, specify their DTA with the UK as a CTA and
what reservations they make.
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3. Indirect impact of the MLI.
3.1. New bilateral or regional tax treaties entered into by the UK since the MLI was
signed.
Since 7 June 2017, the UK entered into the following new full bilateral double taxation
conventions on the following dates:
–– Kyrgystan (13 June 2017). This DTA is also a CTA
–– Belarus (26 September 2017). This DTA is also a CTA
–– Cyprus (22 March 2018, and a protocol on 19 December 2018).
–– Guernsey (2 July 2018).
–– Isle of Man (2 July 2018).
–– Jersey (2 July 2018).
–– Austria (23 October 2018).
–– Gibraltar (15 October 2019).
The new DTAs with Belarus, Cyprus, Guernsey, Isle of Man, Jersey, Austria and Gibraltar
contain provisions corresponding to the minimum standards implemented by the MLI.
On the following dates, the UK entered into protocols to existing DTAs with the following
countries:
–– Ukraine (9 October 2017). The DTA with Ukraine is also a CTA.
–– Switzerland (30 November 2017).
–– Uzbekistan (24 January 2018). The DTA with Uzbekistan is also a CTA.
–– Mauritius (28 February 2018). The DTA with Mauritius is also a CTA.
–– Israel (17 January 2019).
The protocols to the DTAs with Switzerland and Israel contain provisions corresponding to
the minimum standards implemented by the MLI. With the exception of the protocol to the
DTA with Mauritius, most of the other protocols also contain at least some of the minimum
standards implemented by the MLI.
3.2. Other tax treaties currently being negotiated or renegotiated.
It is understood that the UK’s DTA with Germany is currently being renegotiated to
include a BEPS protocol and additionally negotiations have been opened with Costa Rica,
Ghana, Greece, Kazakhstan, Lebanon, Luxembourg, Malawi, Nepal, Portugal, Romania and
Russia.
3.3. Impact (if any) of the provisions of the MLI and associated revisions to the 2017
OECD Model Convention on the negotiations of bilateral or regional tax treaties
since the MLI.
The DTAs, and protocols to existing DTAs, that have been entered into by the UK since
the UK signed the MLI (see paragraph 3.1) suggest that the approach taken by the UK in
bilateral treaty negotiations is at least very similar to the position it has adopted in the MLI
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(see paragraph 2.3.9.2). As is the case with other signatories to the MLI, counterparties to
bilateral negotiations do not always accept all of the UK’s positions, such as on discretionary
relief from the PPT and arbitration.
3.4. Provisions of the MLI that were not adopted by the UK that have nonetheless been
included in bilateral or regional treaty negotiations.
The provisions of the MLI that the UK did not adopt have not been features of the DTAs
that the UK has entered into since it signed the MLI, particularly most of the changes to the
definition of permanent establishment, the SLOB and Articles 8, 9 and 10 of the MLI (see
paragraph 2.3.9.2).
3.5. Expectations that the MLI’s provisions will be incorporated into bilateral or regional
tax treaties, rather than remaining as a third layer of international tax law.
The DTAs entered into by the UK since it signed the MLI, particularly those with Austria and
Cyprus, and the protocols to the DTAs with Israel and Switzerland, and the public comments
mentioned in paragraph 2.1.2 above demonstrate that the UK sees the MLI as a means of
updating its existing double tax treaty network to implement the BEPS recommendations
consistently, quickly and efficiently. This is also supported by the decision of the UK to remove
its DTA with Germany from the list of CTAs from the UK’s provisional list of reservations and
notifications under the MLI. Although it is, therefore, to be expected that the MLI’s significance
will reduce over time as the UK renegotiates those existing DTAs that are CTAs and are modified
by the MLI, the history of negotiating DTAs suggests that process could take a long time.
3.6. Differences between policy adopted regarding the MLI and policy adopted
regarding the 2017 version of the OECD Model, including reservations that have
been made to the MLI but not to the 2017 OECD Model (or conversely, to reservations
made to the OECD Model but not to the MLI).
There is no indication that the UK’s approach to reserving from provisions in the MLI differs
from its approach to the 2017 OECD Model Convention.
4. Procedure for implementing the MLI and legal effect.
4.1. Procedure used to implement the MLI in the UK.
4.1.1. Extent of involvement by Parliament.
Primary legislation, in the form of a provision (section 32) of the Finance Act 2018, was passed
to extend the existing power (in section 2 of the Taxation (International and Other Provisions)
Act 2010) to enter into double taxation conventions, so that such arrangements include any
arrangements that modify the effect of double taxation conventions.
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Secondary legislation (a statutory instrument) was required to implement the MLI in the
UK. A draft of that statutory instrument (SI) was laid before the House of Commons on 29
March 2018, and although neither that draft order nor the SI that was made (SI 2018/630) on
23 May 2018, in identical terms to the draft, contained any restriction on the reservations or
notifications to be made by the UK, the Explanatory Memorandum to SI 2018/630 described,
at paragraphs 7.5 to 7.11, the reservations that the UK government intended to make and,
since, 16 April 2018, there was available at
HMRC: Guidance, Multilateral convention to implement tax treaty related measures
to prevent base erosion and profit shifting a provisional list of expected reservations and
notifications to be made by the UK. Some changes were made to that list, and the final version
(including a document showing the changes) was published on that webpage on 16 July 2018.
4.1.2. Extent of authority delegated by Parliament to the government concerning the choices to

be made on implementation of the MLI.
SI 2018/630 provided for the implementation of the MLI in the UK. Although that legislation
did not limit the UK government’s discretion as to what choices to make in implementing
the MLI, as noted above (paragraph 4.1.1), the Explanatory Memorandum to SI 2018/630
described the reservations that the UK government intended to make.
4.2. Publication of consolidated or synthesised texts of the revised tax treaties by

HMRC or others.
HMRC has published synthesised texts of the revised DTAs with Australia, Belgium, Canada,
Finland, France, Georgia, India, Ireland, Japan, Lithuania, Luxembourg, Malta, the
Netherlands, New Zealand, Poland, Serbia, Singapore, Slovak Republic, Slovenia and
United Arab Emirates.
4.2.1. Reasons for publication.
UK law does not require such texts to be produced, but they assist taxpayers and advisers in
determining the impact on particular existing DTAs of the UK’s ratification of the MLI and
paragraph 7.12 of the Explanatory Memorandum to SI 2018/630 stated that “HMRC will make
available consolidated texts of its bilateral DTAs which explain how the MLI will affect each one
in accordance with the positions taken by the Government and the other jurisdiction in the MLI.”.
4.2.2. Prior consultation with the other contracting party.
Most of the synthesised texts published contain a statement that it was prepared (by the
UK, except in the case of the synthesised text of the treaty with Belgium) in consultation
(or, in the cases of New Zealand, Serbia and Slovenia, “jointly”) with the other contracting
state and represents their shared understanding of the modifications made by the MLI to
the DTA between the two countries. The synthesised texts of the UK’s DTAs with France, the
Netherlands and Singapore do not contain such a statement.
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4.2.3. Influence of the “Guidance to the development of synthetized text” published by the OECD
(November 2018).
The synthesised texts published by HMRC closely follow the guidance published by the OECD,
in terms of the presentation (and content) of the general disclaimer and disclaimer on the
entry into effect of the MLI provisions and the use (and content) of text boxes inserted in
the text that identify the provisions of the MLI that apply to the DTA in question and how
it modifies (or replaces) that treaty provision, except that footnotes are not always used to
provide information on when specific provisions take effect.
4.3. Legal value (if any) of consolidated or synthesised tax treaties, and resolution
of divergence between the final text and the actual impact of the MLI on a tax
treaty (such as a mistake in the consolidation/synthesis process, or because of the
ambiguity of the impact of the MLI).
The synthesised texts do not bind HMRC. The statement in the general disclaimer that
the authentic legal texts of the Convention and the MLI take precedence and remain the
legal texts applicable reflect the position under English law and would present significant
difficulties to any attempt, through judicial review proceedings, to enforce the terms of the
synthesised text contrary to the terms of the authentic legal texts.
4.4. Legal value (if any) of the OECD “MLI matching Database”.
The MLI matching Database has not been incorporated into UK law and will not bind HMRC.
4.5. Legal value of the MLI.
The MLI has been implemented into domestic law. It does not have any special status beyond
that of other UK legislation, and can be overridden by subsequent domestic legislation
(expressly or by the doctrine of implied repeal).
5. Interpretation Issues.
5.1. Interpretation of the MLI.
5.1.1. Specific interpretations of the MLI by the government or courts.
There have been no decisions on the interpretation of the MLI by either the UK government
or the UK courts.
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5.1.2. Legal weight (if any) of the explanatory memorandum of the MLI and the interpretation
guidelines provided in the OECD memorandum called “Multilateral Convention to
Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting:
Functioning under Public International Law”
Although regard is likely to be had to these materials in interpreting, in accordance with the
approach laid down in Article 31(1) of the Vienna Convention on the Law of Treaties, the MLI, the
English courts are likely to attach limited weight to any publications that post-date the MLI7.
5.2. Interpretation of tax treaties generally.
5.2.1. Indirect legal value given to this OECD BEPS Reports for treaty interpretation purposes,
because of their connection with the MLI.
As noted at paragraph 5.1.2, regard may be had by the courts to interpreting the MLI.
5.2.2. Changes to the method of tax treaty interpretation because of the MLI.
There is no indication that the MLI will be interpreted in a different manner from other
treaties to which the UK is a party, or that it will result in a change in the manner in which
English courts will interpret DTAs, or treaties generally.
5.3. Interpretation of pre-MLI tax treaties.
At this stage, it would be speculative to suggest that the MLI provisions (including the choices
made by the UK upon the adoption of the MLI) might have any impact on the interpretation
of provisions of pre-MLI DTAs, and the decision mentioned in footnote 7 suggests that the
English courts will give limited weight (if any) to subsequent developments in interpreting
a pre-MLI DTA.
6. Tax planning and tax administration after the MLI.
6.1. How tax professionals will take the PPT into account in tax planning.
Prior to the implementation of the MLI, advisers and businesses had to consider various
provisions that could deny relief under the UK’s DTAs in certain situations (see paragraphs
1.3.1, 1.4.1.5 and 1.4.1.8), including principal purpose tests in the interest and royalty articles
in some of the UK’s DTAs. The PPT will undoubtedly add to uncertainty as to the availability
of such reliefs, and it is likely that advisers will rely on both guidance published by HMRC
7
See, albeit in a different context, Irish Bank Resolution Corporation Ltd and another v HMRC [2019] UKUT
277 (TCC).
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and the OECD as to the situations in which the PPT is likely to apply (for example, see HMRC’s
International Manual, paragraph INTM264800). The PPT is only one recent development to
be borne in mind by those advising on cross-border transactions involving the UK, as other
changes (such as additional disclosure obligations under measures implementing EU Directive
2018/822) have introduced additional complexity into the analysis of such transactions.
6.2. Changes (if any) to assessment practices regarding tax treaty shopping and other
tax treaty abuses, including procedures that tax administrations will adopt when
assessing taxpayers under the PPT (such as a special PPT committee to review
potential assessments).
As the MLI came into force earlier in 2019 (see paragraph 2.1.6), it is too early to tell how
HMRC assessment practices will change in response to the provisions introduced by the MLI.
6.3. Impact the MLI is expected to have on the resolution of tax disputes under the
MAP and arbitration, and procedures (if any) adopted to administer the MAP and
arbitration.
The Explanatory Memorandum to SI 2018/630 (see paragraph 2.1.2) stated, at paragraph

7.11, the UK government’s position that “These provisions provide a guarantee for taxpayers
that disputes will be resolved and double taxation avoided. This provision is welcomed by
business.”. Whether this is achieved will depend on several factors, including the extent
to which other jurisdictions opt for binding arbitration either through the MLI or in their
bilateral negotiations with the UK.
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Branch reporters
Robert Stack1
Daniel Shah2
David Lenter3

The United States (“U.S.”) is not a signatory to the Multilateral Convention to Implement
Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral
Convention” or “MLI”). The U.S. has in-force income tax treaties that apply in 66 countries –
all of which entered into force before the November 2016 conclusion of the negotiation of the
MLI. Several other treaties and protocols to which the U.S. Senate has recently consented, as
well as treaties still awaiting Senate consideration were negotiated and signed in advance of
the MLI, so that the U.S. does not have direct experience with the influence of either the G20/
OECD Base Erosion and Profit Shifting (BEPS) Project or the MLI on its treaty negotiations
around the world, at least with respect to negotiations that have been publicly announced
by the U.S. Treasury at the time of this writing. With respect to policing tax avoidance, the
principal difference between the U.S. Model, on the one hand, and, on the other hand, the
OECD Model Tax Convention on Income and Capital (“OECD Model”) and the United Nations
Model Double Taxation Convention Between Developed and Developing Countries (“UN
Model”) is the U.S. inclusion of a robust “limitations of benefits” (“LOB”) article as the principal
means to prevent treaty abuse.
U.S. tax treaty policy – whether expressed in U.S. model treaties or negotiating practice
– prior to the MLI was to include in its treaties a variety of provisions included in the MLI,
including those relating to: the just mentioned LOB; the taxation of its citizens around the
world (saving clause); fiscally transparent entities, dual resident entities, holding periods
for eligibility for reduced dividend withholding rates, and a so-called “triangular provision,”
pursuant to which treaty benefits are denied to permanent establishments of a treaty partner
when the permanent establishment is not sufficiently taxed. Therefore, the U.S. did not need
to sign and ratify the MLI in order to have such provisions apply throughout its network. In
contrast with MLI provisions that are already included broadly across the U.S. treaty network,
the U.S. has mandatory and binding arbitration provisions in only seven treaties in force.
1
Managing Director, International Tax Deloitte Tax LLP.
2
Senior Manager, International Tax Deloitte Tax LLP.
3
Managing Director – International Tax Deloitte Tax LLP.
This document contains general information only and Deloitte is not, by means of this document, rendering
accounting, business, financial, investment, legal, tax, or other professional advice or services. This document is
not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action
that may affect your business. Before making any decision or taking any action that may affect your business,
you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by
any person who relies on this document.
IFA © 2020 873

United States
In addition to these specific treaty provisions, it has long been U.S. policy to enter into tax
treaties only when the effect is to eliminate double taxation – thus precluding entering into
treaties with jurisdictions that impose little or no tax.4
The U.S. also has a variety of statutory provisions that intersect with treaty policy, and U.S.
courts have a variety of judicial doctrines at their disposal to curtail treaty abuse.
Building on this history of robust anti-tax avoidance measures in treaties, statutes
and implemented through case law, the 2016 U.S. Model Income Tax Convention (“2016
Model”) contains a variety of BEPS-type provisions, including preamble language reflecting
the international consensus that the purpose of an income tax treaty is the elimination of
double taxation without creating opportunities for double-non-taxation or reduced taxation
through tax evasion or avoidance. Also, of significance in the 2016 Model are provisions that
curtail treaty benefits when deductible payments are made to related parties that benefit
from low or no-tax “special tax regimes.”
Thus, while the U.S. is not a signatory to the MLI, it remains a jurisdiction with robust
anti-avoidance measures as reflected in the treaties themselves, principally (although not
exclusively) through LOB articles; statutory and regulatory constraints on the availability of
treaty benefits; and judicial doctrines that are aimed at preventing treaty abuse. The 2016
Model represented a further effort to take BEPS concerns into account in implementing U.S.
treaty policy.
Treaty Network
1.1. Introduction
The U.S. has a robust treaty network with a variety of anti-abuse rules, as well as a series of
statutory and regulatory rules aimed at the same purpose. U.S. courts also employ judicial
anti-abuse doctrines to limit the granting of treaty benefits in inappropriate circumstances.
The U.S. has in-force income tax treaties that apply in 66 countries.5 It also has an in-force
treaty with Bermuda related to the taxation of insurance enterprises and to mutual assistance
in tax matters. All these tax treaties entered into force before the November 2016 conclusion
of the Multilateral Convention.
Protocols to pre-MLI U.S. income tax treaties with Japan, Luxembourg, and Switzerland
entered into force on 30 August 2019 (Japan), 9 September 2019 (Luxembourg), and 20
4
As recommended in the BEPS Action 6 Report (Preventing the Granting of Treaty Benefits in Inappropriate
Circumstances), the Introduction of the OECD Model Tax Convention (2017) has been updated to reflect these
and similar concerns.
5
For a list of countries with which the United States has in-force income tax treaties, see Appendix A available at
www.ifa.nl/cahiers.
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Stack, Shah & Lenter
September 2019 (Switzerland), and a protocol to the pre-MLI U.S. income tax treaty with
Spain has a fixed entry-into-force date of 27 November 2019. These four protocols were,
however, negotiated and signed before the conclusion of the MLI and before the February
2013 publication of the OECD report that marked the beginning of the OECD/G20 Base
Erosion and Profit Shifting (“BEPS”) Program.6
The U.S. government has concluded income tax treaties with Chile (a new treaty
relationship), Hungary (a replacement of an existing treaty), Poland (a replacement of
an existing treaty), and Vietnam (a new treaty relationship), but the U.S. Senate has yet
to consent to these treaties and, as a consequence, these have not entered into force. The
treaties with Chile and Hungary were signed in 2010, before commencement of the BEPS
program and before conclusion of the MLI. The treaty with Poland was signed on 13 February
2013, one day after publication of the OECD Addressing Base Erosion and Profit Shifting report
but more than three years before conclusion of the MLI. The treaty with Vietnam was signed
in 2015, during the BEPS project but before conclusion of the MLI.
The U.S. has adopted neither the OECD Model nor the UN Model as its primary negotiating
document, although over time due in part to the U.S. active involvement at the OECD, the U.S.
and OECD Models have a high degree of linguistic and substantive overlap. Of course, there
have been a variety of model treaties by the United Nations and the OECD over the years,
and the U.S. has produced several model treaties since its first published model in 1977, such
that it is difficult at any one point in time to make a direct comparison among the models.
With respect to treaty shopping issues covered in the MLI and the BEPS project, the
biggest difference between the U.S. and OECD/UN Models has been the U.S. reliance on
a “limitation of benefits” provision, as opposed to more subjective treaty abuse provisions
to protect against treaty shopping. A limitation on benefits provision first appeared in the
1981 U.S. Model. Although this LOB article has evolved over time, its general approach to
preventing treaty shopping has been mechanical: It has focused, among other things, on the
country or countries of residence of the owners of an entity that is resident in one contracting
state; whether an entity is publicly traded; and whether an entity in one contracting state
conducts an active trade or business in the other contracting state.
Specifically, with respect to neutralizing the effects of hybrid mismatch arrangements,
U.S. treaty policy has for a long time required provisions on dual resident entities and fiscally
transparent entities. The U.S. 2006 Model provides that where, under the treaty rules for
residence, a company that is created or organized under the laws of one contracting state (or
a political subdivision of that contracting state) would otherwise be considered a resident of
both contracting states, the company is treated as a resident of the contracting state under
the laws of which it is created or organized.7 In any other case involving a dual resident
company, under the U.S. 2006 Model provision the competent authorities of the contracting
states would endeavor to determine the mode of the application of the treaty to the company,
but if the competent authorities were unable to reach agreement, the company would not
be treated as a resident of either contracting state for purposes of its claiming any benefits
provided by the treaty.8 In contrast, the 2005 OECD Model Convention looked to the “place
of effective management” as the tiebreaker, avoiding the possibility that the convention
would not apply.
6
See OECD (2013), Addressing Base Erosion and Profit Shifting, OECD Publishing. http://dx.doi.org/10.1787/
9789264192744-en.
7
Art. 4 (Resident), para. 4.
8
Ibid.
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United States
With respect to fiscally transparent entities, the 1977 U.S. Model provided that in the
case of “income derived or paid by a partnership, estate, or trust, this term [resident] applies
only to the extent that the income derived by such partnership, estate or trust is subject to
tax as the income of a resident of that State, either in its hands or in the hands of its partners
or beneficiaries.”9 The 2006 U.S. Model, provides, “An item of income, profit or gain derived
through an entity that is fiscally transparent under the laws of either contracting state shall
be considered to be derived by a resident of a State to the extent that the item is treated
for purposes of the taxation law of such contracting State as the income, profit or gain of a
resident.”10 No such provision was included in the OECD Model until the 2017 Model.
In order to ensure that treaty benefits do not accrue to U.S. citizens who are tax residents
in other countries a so-called “saving clause” has been a key feature of U.S. treaty policy.
Such a clause was included in U.S. treaties as early as the 1950 U.S. Greece treaty,11 and has
been included in the U.S. model since 1977.12 A saving clause provides that a contracting state
may tax its residents and citizens as if the treaty had not come into effect. The OECD Model
contained no similar saving clause until 2017.
While the 2006 U.S. Model did not contain a so-called “triangular provision” pursuant
to which treaty benefits were limited in the case of taxes on amounts paid to third country
permanent establishments, the income of which was not sufficiently taxed in the other
contracting state, the U.S. included such a provision for the first time in the 1993 protocol to
the 1992 treaty between the U.S. and the Netherlands,13 and by the time of the BEPS project,
such provisions in a variety of forms were routinely being incorporated into U.S. treaties where
relevant. The OECD Model contained no similar triangular provision until the 2017 Model.
Consistent with earlier OECD Models, all U.S. tax treaties contain provisions relating
to mutual agreement procedures (“MAP”). These provisions generally follow paragraphs
1 through 3 of article 25 of the OECD Model. Although arbitration was not included in the
U.S. Model until 2016 or in the OECD Model until 2017, the U.S. had previously negotiated
arbitration provisions in several treaties. A mandatory and binding arbitration procedure
to resolve disputes is provided in seven in-force U.S. income tax treaties. The first treaty to
include such a provision was the U.S.-Germany treaty. Mandatory and binding arbitration
provisions were subsequently adopted in U.S. treaties with France, Canada, Belgium, Japan,
Spain, and Switzerland. The 2016 Model includes a mandatory and binding arbitration
9
Art. 4 (Residence), para. 4. The 1999 OECD report on The Application of the OECD Model Tax Convention to
Partnerships (the Partnership Report) contains an extensive analysis of the application of treaty provisions
to partnerships, including in situations where one country treats the partnership as fiscally transparent and
the other country does not. The main conclusions of the Partnership Report, which have been included in the
Commentary of the OECD Model Tax Convention, seek to ensure that the provisions of tax treaties produce
appropriate results when applied to partnerships, in particular in the case of a partnership that constitutes a
hybrid entity. The Partnership Report, however, did not expressly address the application of tax treaties to entities
other than partnerships.
10
Art. 1 (General Scope).
11
Convention between the United States of America and the Kingdom of Greece for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, art. XIV (1950).
12
Art. 1, para. 3.
13
Protocol Amending the Convention between the Kingdom of the Netherlands and the United States of America
for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. Art.
1 (1993) (amending art. 12 of the 1992 U.S./Netherlands Treaty).
876
provision that is substantively the same as the arbitration provisions found in the above-
referenced U.S. treaties.14
Treaty-based doctrines
U.S. income tax treaties have contained anti-treaty shopping provisions for decades. Because
these provisions were cited by Treasury as one of the reasons why the U.S. did not adopt the
MLI, this section describes the provisions and their development over time.15
One of the most prominent anti-treaty shopping provisions of most U.S. income tax
treaties is the LOB article. As noted above, U.S. income tax treaties have contained LOB
provisions for decades. The only U.S. income tax treaties that do not contain any LOB rules are
rather outdated: Greece (protocol signed 1953), Hungary (1979), Pakistan (1957), Philippines
(1976), Poland (1974), and Romania (1973).16
The purpose of the LOB provisions is to ensure that the benefits of a tax treaty should be
granted to an income recipient in one contracting state only if that recipient has sufficient
“nexus” with the other contracting state. Many specific qualifications have been developed
to determine whether the recipient has sufficient “nexus”.
One approach is to ask whether the ultimate beneficial owners of an entity for which
treaty benefits are sought are residents of either contracting state and would themselves
qualify for treaty benefits. The 1981 U.S. Model added a “base erosion” test that must be met
to qualify for treaty benefits under this approach. The base erosion test is not satisfied if a
substantial part (50% in the 2016 Model) of the entity’s income is used to make deductible
payments to persons who are residents of neither contracting state.17
A second approach is to ask whether an entity for which treaty benefits are sought has
sufficient business activities with a contracting state such that treaty benefits should be
allowed.
Under a third approach, LOB provisions in U.S. income tax treaties generally allow treaty
benefits to entities the shares of which are regularly traded on a specified stock exchange
located in either of the contracting states (or, under some treaties, stock exchanges in certain
other designated countries). The rationale for this qualification is that, due to the entity’s
14
See art. 25 (Mutual Agreement Procedure).
15
Bell, K. A. (2017, June 09). Treasury Official Explains Why U.S. Didn’t Sign OECD Super-Treaty. Daily Tax Report:
International.
16
More recently signed treaties with Hungary (2010) and Poland (2013) include comprehensive LOB provisions.
The Senate has not yet consented to these treaties, so that they are not yet in force. Not all U.S. treaties have
the form of comprehensive LOB provision that reflects current U.S. policy. The U.S./Rep. of Korea treaty contains
an older form of limitation of benefits provision in art. 17 – “Investment or Holding Companies.” This provision
limits treaty benefits with respect to dividends, interest, royalties and capital gains in cases in which special
measures apply to reduce taxation to an amount that is “substantially less than the tax generally imposed by
such Contracting State on corporate profits,” and 25 percent or more of the capital of such corporation is owned
directly or indirectly by one or more persons who are not individual residents of the contracting state in which
these amounts are received (or in the case of a Korean corporation, by U.S. citizens).
17
The 2016 Model made significant changes to the U.S. LOB provisions, but no treaty has been negotiated to date
which includes an LOB that incorporates those changes.
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United States
obligations to its public shareholders, it would be difficult for such an entity to act as a conduit
and to divert funds to third-country residents.
Recent U.S. income tax treaties include several alternative objective tests intended to
prevent third-country residents from interposing intermediaries to qualify for treaty benefits.
These objective tests generally ask whether a resident of one treaty country is a “qualified
resident.” Qualified residents are generally: (1) individuals of either contracting state, (2) a
government of either contracting state, (3) public companies traded on certain recognized
stock exchanges, and their subsidiaries under certain conditions, (4) companies that satisfy
certain beneficial ownership and anti-base-erosion requirements, (5) pension funds that are
beneficially owned by individuals resident in a contracting state, and (6) organizations that
are tax exempt in either contracting state.
The LOB article in certain treaties provides a special rule for “triangular” situations. A
triangular situation is one in which a contracting state has a participation exemption system
and income derived through a permanent establishment located in a third country may
avoid taxation in that state. If the amount of tax imposed in the third country is substantially
below the amount of tax that would have been imposed had the income been earned by the
enterprise in such contracting state and not attributable to a permanent establishment in
the third jurisdiction, treaty benefits may be denied.18
In order for a recipient to qualify for treaty benefits under U.S. income tax treaties, it must
be a resident of one of the contracting states. A resident generally must be “liable to tax” or
“subject to tax” by reason of domicile, residence, citizenship, place of management, or place
of incorporation in that contracting state. This has the effect of generally excluding fiscally
transparent entities such as partnerships and disregarded entities from the definition of
resident and thus denying them treaty benefits. Treaty benefits are generally determined
by looking through to the owners of such fiscally transparent entities.
The 1981 U.S. Model provided that relief from tax allowed by the treaty would not be
available for income that bore “significantly lower tax than similar income arising within
that other State derived by residents of that other State.” This provision was dropped from
subsequent U.S. Models. As noted below, the 2016 Model re-introduces such a concept,
defined as a “special tax regime” (“STR”). The preamble to the 2016 Model states that the
purpose of the STR rules is to “mitigate instances of double non-taxation whereby a taxpayer
uses provisions in the tax treaty, combined with special tax regimes, to pay no or very low
tax in either treaty country.” The STR rules only apply to related-party interest, royalty, or
guarantee fee payments. No U.S. treaties include these STR rules; however, the U.S.-Barbados
treaty has included a variation of a special tax regime provision since the 2004 protocol.19
U.S. income tax treaties have generally treated dual resident corporations unfavorably. As
in a number of U.S. treaties, the 2016 Model provides that a company that is a resident of
both contracting states is not treated as a resident of either contracting state for purposes
of the treaty, thus denying it all treaty benefits.20 Certain treaties (like the 1996 U.S. model
treaty) instead provide “tie-breaker” rules which generally default to the company’s place of
18
See U.S. income tax treaties with Austria, Belgium (art. 21(6)); Bulgaria (art. 21(5), as amended by 2008 protocol);
Denmark (art. 22(6), as amended by 2006 protocol) Finland (art. 16(5), as amended by 2006 protocol);France
(art. 30(5), as amended by 2009 protocol); Germany (art. 28(5), as amended by 2006 protocol); Iceland (art.
21(5));Ireland (art. 23(7)); Luxembourg (art. 24(5)); Malta (art. 22(5)); New Zealand (art. 16(5), as amended by 2008
protocol); South Africa (art. 22(6)); Sweden (art. 17(5), as amended by 2005 protocol); Switzerland (art. 22(4)).
19
Art. 22 (Limitation on Benefits), para. 6.
20
See art. 4 (Resident), para. 4 of the 2016 Model.
878
incorporation. In other treaties, it is left up to the competent authorities to determine the

state of residence.
All U.S. treaties contain MAP provisions. The OECD MAP peer review report for the U.S.
notes that, with exceptions in certain circumstances, these provisions generally follow the
OECD Model and meet the requirements of the BEPS Action 14 Minimum Standard.21 Seven
U.S. treaties provide mandatory and binding arbitration as a final stage in MAP. The U.S. tax
treaties generally designate the Secretary of the Treasury (or a delegate) as the competent
authority. The Treasury Department typically delegates the competent authority function to
the Commissioner of Internal Revenue, and the Commissioner of Internal Revenue in turn
typically delegates the function to an official within the IRS (such as the Deputy Commissioner
(International), Large Business & International).
Domestic statutory and regulatory provisions
A wide variety of statutory and regulatory provisions governs the application of treaties in
the U.S.
Conduit rules – Treas. Reg. § 1.881-3 and section 7701(l). Section 7701(l) was enacted in 1993
and provides authority for Treasury to issue regulations “recharacterizing any multiple-
party financing transaction as a transaction directly among any 2 or more of such parties.”
The legislative history for section 7701(l) clearly describes Congress’s concern about treaty
shopping and using intermediary “conduit” entities in treaty-protected jurisdictions to obtain
benefits that would not otherwise be available if the conduit or third-party entity was not
interposed in the transaction.22
Treasury promulgated proposed regulations under section 881 in 1994 and finalized
these regulations in 1995. Section 881, in conjunction with sections 1441 and 1442, imposes
a 30-percent withholding tax on U.S.-source interest (among other amounts) received by a
foreign corporation. Treas. Reg. § 1.881-3 permits the IRS to disregard, for purposes of sections
881, 1441, and 1442, the participation of one or more intermediate entities in a financing
arrangement where such entities are acting as “conduit entities”. A conduit entity is generally
an intermediate entity in a financing arrangement that reduces the tax imposed by section
881, where the participation of the intermediate entity is pursuant to a tax avoidance plan and
the intermediate entity is either related to the other entities in the financing arrangement
or would not have participated in the financing arrangement on substantially the same
terms but for the fact that the financing entity engaged in the financing transaction with
the intermediate entity.23 The regulations also provide that the anti-conduit rules apply for
the purposes of applying any relevant income tax treaties: a conduit entity is not entitled to
the benefits of a tax treaty between its country of residence and the U.S. to reduce the amount
of tax under section 881.24
Income affected by treaty – section 894. Section 894(a) generally provides that the U.S.
Internal Revenue Code applies to taxpayers taking into consideration any treaty obligation
21
See OECD (2019), Making Dispute Resolution More Effective – MAP Peer Review Report, United States (Stage 2):
Inclusive Framework on BEPS: Action 14, OECD/G20 Base Erosion and Profit Shifting Project, OECD
Publishing, Paris, https://doi.org/10.1787/305147e9-en.
22
See H.R. Rep. No. 111, 103d Cong., 1st Sess. at 727-29 (1993).
23
Treas. Reg. § 1.881-3(a)(4).
24
Treas. Reg. § 1.881-3(a)(3)(ii)(C).
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United States
of the U.S. which applies to the taxpayer. Congress and Treasury were concerned regarding the
use of “hybrid entities” by taxpayers to inappropriately obtain treaty benefits. Section 894(c)
and the regulations thereunder generally deny treaty benefits for payments made to entities
that are treated as fiscally transparent for U.S. tax purposes and not fiscally transparent by the
treaty partner, and entities that are treated as not fiscally transparent for U.S. tax purposes
and fiscally transparent by the treaty partner.
Branch profits tax anti-treaty-shopping rule – section 884(e). In addition to a general income
tax, section 884 imposes a “branch profits tax” on foreign corporations that are engaged in
a U.S. trade or business. The branch profits tax applies to a foreign corporation’s “dividend
equivalent amount,” an amount that is generally equal to net withdrawals of equity from
the U.S. trade or business. The branch profits tax is meant to approximate the section 881
withholding tax that would be payable with respect to dividends from a U.S. corporation to
a foreign corporation shareholder. The branch profits tax is intended to create rough U.S. tax
parity between a foreign corporation operating in the United States through a subsidiary and
a foreign corporation operating in the United States through a branch.
Section 884(e) allows relief from the branch profits tax if, among other requirements, the
foreign corporation qualifies for treaty benefits under the relevant income tax treaty with
the U.S. In order to qualify for relief from the branch profits tax, the foreign corporation must
not only meet the treaty’s general requirements for treaty relief but must also satisfy the
anti-treaty shopping requirements of section 884(e). To qualify for treaty relief, the foreign
corporation must (i) be a “qualified resident” of the treaty country or (ii) claim relief under a
treaty which has LOB provisions (or amendments to the LOB provisions) which entered into
force after December 31, 1986.25 The requirements to be considered a “qualified resident” are
comparable to those required in order to meet the LOB provisions in U.S. treaties. See above
for a discussion of the LOB provisions.
Anti-treaty shopping rule for exclusion for international shipping and aircraft income – section
883. Section 883 generally provides that gross income derived by a corporation organized in
a foreign country from the international operation of ships and aircraft (and in certain cases,
railroad rolling stock) is not included in gross income of the foreign corporation and thus is
exempt from U.S. tax so long as the foreign country provides an equivalent exemption to
corporations organized in the U.S. Under a rule comparable to anti-treating-shopping rules,
the exemption does not apply to any foreign corporation if 50% or more of the value of the
stock of the foreign corporation is owned by individuals who are not residents of the country
of organization of the corporation or of another foreign country that meets the requirements
of the general rule.26 This exception does not apply to a corporation that is organized in an
equivalent exemption country and the stock of which is primarily and regularly traded on an
established securities market in that foreign country, another equivalent exemption country,
or the United States.27 This rule is similar to LOB provisions for publicly-traded companies.
Contingent interest – section 871(h)(4). Interest which would otherwise qualify for
exemption from source-country withholding tax under the U.S. Model does not qualify if it is
“interest arising in the United States that is contingent interest of a type that does not qualify
as portfolio interest under the law of the United States.”28 This interest is instead taxed at a
maximum rate of 15%. Section 871 imposes a 30% withholding tax on interest received from
25
Treas. Reg. § 1.884-1(g)(1).
26
S. 883(c)(1).
27
S. 883(c)(3).
28
2016 U.S. Model, art. 11, para. 2(b).
880
U.S. sources by a nonresident alien individual. Section 871(h) provides an exception to this
rule for “portfolio interest”. Portfolio interest is generally interest that is paid on an obligation
which is in “registered form” and with respect to which the beneficial owner of the obligation
is not a 10% U.S. shareholder of the debtor. Portfolio interest does not include interest which
is contingent interest, as defined in section 871(h)(4).
Judicial doctrines
In the U.S. the courts have played a key role in limiting treaty abuse by interpreting treaties
in light of the shared expectations of the contracting parties, by considering issues in light of
the purpose of treaties, and by applying traditional U.S. judicial doctrines to arrangements
seeking treaty benefits. The leadings cases discussed below illustrate this point.
In Johansson v. U.S., Ingemar Johansson, a Swedish boxer, set up a Swiss corporation to
receive fees from his U.S. boxing matches, of which he was the sole putative employee.29
Under the U.S.-Switzerland income tax treaty an individual resident of Switzerland was
exempt from tax on compensation for personal services performed in the U.S. if he was
temporarily present in the U.S. less than a total of 183 days during the taxable year and “his
compensation [was] received for such labor or personal services performed as an employee
of, or under contract with, a resident or corporation or other entity of Switzerland.”30 Absent
treaty protection, Johansson would have been taxed under U.S. domestic law because he
performed personal services within the U.S.
There were two conditions to Johansson qualifying for treaty benefits: first that he be a
“resident” of Switzerland under the treaty, and second that he receives the income in question
as an employee of or under contract with a Swiss entity.
While the appeals court agreed with the lower court that Johansson was not a resident of
Switzerland during the period in question for purposes of the treaty, it continued to examine
whether the second prong of the test was met – employment or contract with a Swiss entity.
Here the court explained that the record amply supported the lower court’s finding that
the Swiss entity “had no legitimate business purpose, but was a device which was used by
Ingemar Johansson as a controlled depositary and conduit by which he attempted to divert,
temporarily, his personal income, earned in the United States so as to escape taxation thereon
by the United States,”31 and upheld the lower court’s determination that Mr. Johansson was
not entitled to benefits under the U.S.-Swiss treaty and therefore was liable to U.S. tax on
his boxing income.
The court tethered its analysis to traditional modes of treaty interpretation, explaining
that it was required to look beyond abstract terms such as “resident” and “legitimate business
purpose.” It explained, “[t]o give the specific words of a treaty a meaning consistent with the
genuine shared expectations of the contracting parties, it is necessary to examine not only
the language, but the entire context of the agreement.”32
The appeals court observed that the primary objective of the U.S.-Swiss treaty is the
elimination of impediments to international commerce resulting from double taxation of
international transactions. In this regard, it noted that income from personal services in the
29
336 F.2d 809 (5th Cir. 1964).
30
Id., at 812.
31
Id., at 813.
32
Id., at 813.
881
United States
first instance have their taxing locus where the services are rendered because that is the place
of “economic impact.” It continued that treaties sometimes provide prudential exceptions
to this “economic impact” rule through so-called “commercial traveler” provisions in order
to permit enterprises to send their agents and employees abroad without subjecting them
to tax as a result of such travels. The U.S.-Swiss treaty contained such a provision. The court
continued that where the practical reasons for the exception do not apply, then the general
rule that services are taxed where performed should control.
According to the court, “while Johansson may have brought himself within the words of
the Swiss treaty by his ‘residence’ in Switzerland and his employment by a ‘Swiss corporation’,
he has failed to establish any substantial reasons for deviating from the treaty’s basic rule
that income from services is taxable where the services were rendered.”33
In reaching its conclusion, as is typical in U.S. tax cases, the court noted that the fact that
Johansson was motivated in his actions by the desire to minimize his tax burden did not
deprive him of an exemption to which the treaty entitled him.
Examining Johansson, it is difficult to escape the conclusion that the appeals court
concluded that Johansson should not benefit from the treaty based on facts that supported
its view that the Swiss entity constituted merely a “paper Swiss corporation.”34 The court
noted that while there was a contract of employment, Johansson was the sole employee and
source or revenue; Johansson conducted his affairs “largely independent of [the entity’s] sole
director or its stockholders.”35 As noted above, the district court concluded that the entity
“has no legitimate business purpose.”36 Thus, while the court explained that it was seeking to
determine the “genuine shared expectations of the contracting parties”37 and was examining
the “entire context of the agreement,”38 its determination that benefits were not available was
driven by the facts of the case that led it to conclude that the parties would not have intended
benefits in these circumstances.
Aiken Industries, Inc. v. Commissioner39 is the earliest case examining so-called “conduit
financing issues” that arise in connection with interpreting treaties. In Aiken, a U.S. company
borrowed money from a Bahamian affiliate and therefore owed interest to it. Interest
payments to the Bahamian affiliate would have been subject to U.S. withholding tax because
the U.S. had (and has) no income tax treaty with the Bahamas. In attempting to avoid this
result, the Bahamian affiliate assigned its notes to a Honduran affiliate in exchange for a
series of notes that in the aggregate had the same principal amount with the same interest
payments as the original note.
The U.S.-Honduras income tax treaty eliminated withholding tax on interest payments
“received” by a Honduran corporation. The court concluded that the Honduran entity “cannot
be said to have received the interest as its own.”40 The court ruled that the Honduran holder
of the notes from the U.S. company had no actual beneficial interest in the interest payments
it “received” in light of its back-to-back arrangement with the Bahamian entity.
33
Id., at 814.
34
Id., at 814.
35
Id., at 813.
36
Id., at 813.
37
Id., at 813.
38
Id., at 813.
39
56 T.C. 925 (1971).
40
Id., at 934.
882
While noting that the term “received” was not defined in the treaty and so under the
terms of the treaty could be defined under the local law of the country applying the treaty
(unless the context required otherwise), the court acknowledged nonetheless that, in
deciding whether a given taxpayer in a specific instance is protected by the terms of a treaty,
we must “give the specific words of a treaty a meaning consistent with the genuine shared
expectations of the contracting parties,”41 and in so doing, it is necessary to examine not only
the language, but the entire context of the agreement.42 And while the court appears to have
given only lip service to the “shared expectations,” it at least acknowledged this particular
characteristic of cases involving the interpretation of treaties – that their bilateral nature
makes the act of interpretation different from interpreting law in a purely domestic context.
In Northern Indiana Public Service Co v. Commissioner,43 the court similarly considered
whether to respect a corporate arrangement in a treaty jurisdiction that was put in place
to obtain a treaty benefit. The taxpayer, Northern Indiana Public Service Company, a U.S.
corporation, formed a Netherland-Antilles subsidiary (“Finance”) to obtain funds so that
the taxpayer could construct additions to its utility properties. Finance issued notes in the
Eurobond market and then lent the proceeds to taxpayer. The taxpayer sought to claim the
exemption for withholding on interest payments under article VIII of the U.S.-Netherlands
income tax treaty. The Tax Court concluded that Northern Indiana was entitled to treaty
benefits because Finance “engaged in the business activity of borrowing and lending money
at a profit,”44 so that the interest payments in question fell within the terms of the treaty’s
exemption for interest payments. The Court of Appeals affirmed the Tax Court’s judgment.
The court noted that “[a] tax avoidance motive is not inherently fatal to a transaction. A
taxpayer has a legal right to conduct his business so as to decrease (or altogether avoid) the
amount of what otherwise would be his taxes.”45
The appeals court relied on a line of U.S. cases that it explained “engender the principle
that a corporation and the form of its transactions are recognizable for tax purposes, despite
any tax-avoidance motive, so long as the corporation engages in bona fide economically-
based business transactions.”46 The lower court had determined that Northern Indiana met
the burden of showing bona fide business activity because Finance “engaged in the activity
of borrowing and lending money at a profit.”47 The court relied on three key facts: Finance
earned a spread on the amounts it paid as interest on the Eurobonds and the amounts it
received from the taxpayer, Finance was able to invest the profit it earned for its own account,
and Finance borrowed from unrelated bondholders.
Del Commercial Properties Inc. v. Commissioner,48 involved a taxpayer’s attempt to avoid the
withholding tax on interest paid to a Canadian bank by a U.S. borrower by routing a loan
from that bank through a series of entities, with the result that the nominal lender to Del
Commercial, a U.S. corporation, was a Netherlands corporation. Interest payments under the
U.S.-Netherlands income tax treaty were exempt from withholding, whereas there was a 15%
41
Id., at 933.
42
The court cited: Maximov v. United States (299 F.2d 565, 568 (C.A. 2, 1963), affd. 373 U.S. 49 (1963)) in support of this
proposition.
43
115 F.3d 506 (7th Cir. 1997).
44
Id., at 509,512.
45
Id., at 511.
46
Id., at 512.
47
Id., at 509,512.
48
78 T.C.M. (CCH) 1183 (T.C. 1999), aff ’d, 251 F.3d 210 (D.C. Cir. 2001).
883
United States
withholding tax rate under the U.S.-Canada income tax treaty for interest paid to Canadian
corporations.
The Tax Court began its analysis by noting the anti-avoidance tools at its disposal when it
explained that “U.S. tax laws and treaties, however, do not recognize as valid for tax purposes
sham transactions or transactions that have no economic substance.”49 The Tax Court also
noted that under the so-called “step transaction” doctrine a series of formally separate steps
may be collapsed and treated as a single transaction. As explained by the Tax Court, the step
transaction doctrine is applied under one of three tests that U.S. courts have developed:
[A] series of steps may be collapsed and treated as one if at the time the first step
was entered into there was a binding commitment to undertake the later step
(binding commitment test), if separate steps constitute prearranged parts of a single
transaction intended to reach an end result (end-result test), or if separate steps are so
interdependent that the legal relations created by one step would have been fruitless
without a completion of the series of steps (mutual-interdependence test).50
The Tax Court denied the benefits of the U.S.-Netherlands income tax treaty, explaining
that “[t]he facts reflect a step transaction created simply to bypass U.S. withholding tax.”51
The Tax Court was influenced by the lack of substance in Del Netherlands, the lender to Del
Commercial, pointing to the fact that Del Netherlands had minimal assets, had only transitory
possession and no control over the loan proceeds as they passed from Del Netherlands to
Del Commercial, engaged in minimal business activity (apart from the loan), and had no
corporate officer with any substantive duties or responsibilities. Further, the lending bank
required Del Commercial to provide a variety of guaranties and covenants, underscoring
that the relevant economic relationship was between the U.S. entity and the Canadian bank
(or the Canadian affiliate that originally borrowed from that bank). Finally, during the life
of the loan Del Commercial began making payments directly to its Canadian affiliate that
entered into the original loan, thereby bypassing Del Netherlands, which undermined the
claim that the true lender was Del Netherlands. Finally, the Tax Court distinguished Northern
Indiana on the basis that in Del’s case the sole purpose of the arrangement was the avoidance
of withholding tax.52 The U.S. Court of Appeals for the Second Circuit affirmed the Tax Court’s
ruling and generally adopted its analysis.53
49
Id., at 3.
50
Id., at 4.
51
Id., at 4.
52
For another decision in which a court considered economic substance and the so-called “sham transactions”
doctrine, see Bank of New York Mellon Corporation v. Commissioner, 140 T.C. 15, 48, supplemented, 106 T.C.M. (CCH)
367 (T.C. 2013), aff’d, 801 F.3d 104 (2d Cir. 2015), and aff’d, 801 F.3d 104 (2d Cir. 2015) (“U.S. tax laws and treaties do
not recognize sham transactions or transactions that have no economic substance as valid for tax purposes.”) See
also s. 7701(o), in which Congress codified the “economic substance doctrine.”
53
251 F.3d 210 (D.C. Cir. 200).
884
For a number of related reasons, the U.S. has not signed the Multilateral Convention.54
In general, the substance of the MLI is consistent with long-standing U.S. treaty policy as
embodied in the U.S. Model. Provisions in both pre-MLI U.S. tax treaties and the MLI are
(1) a provision relating to fiscally transparent entities (article 2 of the MLI); a provision on
dual resident entities (article 3 of the MLI); a limitation on benefits provision (article 7 of the
MLI)55; minimum holding periods to qualify for reduced dividend withholding (article 8 of
the MLI); a so-called “triangular provision” (article 10 of the MLI); a saving clause allowing
each treaty country generally to tax its own residents under its domestic law (article 11 of
the MLI); and mutual agreement procedures (article 16 of the MLI). In light of the multiple
provisions included in the MLI that were already included in most U.S. treaties, are a part
of U.S. treaty policy, or were included in models before the 2016 Model, U.S. tax treaties
have not been as susceptible to treaty shopping as the treaties of other jurisdictions. At the
time of the conclusion of the MLI, the U.S. Treasury Department also was concerned that
the MLI’s arbitration provision gave signatory countries excessive discretion to narrow the
scope of arbitration in contravention of U.S. treaty policy and in a manner inconsistent with
the arbitration provisions that the U.S. already has in effect with several jurisdictions.56
The United States also would not have been able to use the MLI as a mechanism to include
its preferred detailed LOB provision in treaties that currently do not have such a provision. As
set forth in the official explanation to the MLI:
Because a PPT is the only approach that can satisfy the minimum standard on its own,
it is presented as the default option in paragraph 1. Parties are then permitted pursuant
to paragraph 6 to supplement the PPT by choosing to apply a simplified LOB provision.
Given that the detailed LOB provision requires substantial bilateral customisation, which
would be challenging in the context of a multilateral instrument, the Convention does not
include a detailed LOB provision. Instead, Parties that prefer to address treaty abuse by
adopting a detailed LOB provision are permitted to opt out of the PPT and agree instead
to endeavor to reach a bilateral agreement that satisfies the minimum standard.57
One of the minimum standards in the BEPS project is intended to make dispute resolution
more effective. This minimum standard centers on the mutual agreement provisions in
54
For an explanation of the decision, see Bell, K. A. (2017, June 09). Treasury Official Explains Why U.S. Didn’t Sign
OECD Super-Treaty. Daily Tax Report: International.
55
The minimum standard for protection against the abuse of tax treaties under Action 6 (Preventing the Granting
of Treaty Benefits in Inappropriate Circumstances) requires countries to include in their tax treaties an express
statement that their common intention is to eliminate double taxation without creating opportunities for non-
taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements.
The United States does not currently include this language in the preamble to its treaties, and the MLI contained
sample language that could be used by jurisdictions to meet this minimum standard. The United States has
included such language in its 2016 Model, and it is therefore part of U.S. treaty policy going forward.
56
Ibid.
57
Explanatory Statement to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent
Base Erosion and Profit Shifting, para 90.
885
United States
treaties. The MAP-related minimum standard is subject to peer review, and in 2019 the OECD
issued its peer review of the U.S.58 The Executive Summary of the Peer Review Report explains
the U.S.’s compliance with the MAP minimum standard requirements set forth in Action 14
of BEPS:
The outcome of the stage 1 peer review process was that overall, the United States met
most of the elements of the Action 14 Minimum Standard. Where it has deficiencies,
the United States worked to address some of them, which has been monitored in stage
2 of the process. In this respect, the United States has solved some of the identified
deficiencies.
All of the United States’ tax treaties contain a provision relating to MAP. Those treaties
generally follow paragraphs 1 through 3 of Article 25 of the OECD Model Tax Convention
(OECD, 2017). Its treaty network is largely consistent with the requirements of the Action
14 Minimum Standard, whereby under 11 of these treaties taxpayers are already allowed
to submit a MAP request to the competent authorities of either state in line with the new
text of Article 25(1), first sentence, of the OECD Model Tax Convention, as amended by
the Action 14 Final Report (OECD, 2015). However, not all treaties are consistent with the
requirements of the Action 14 Minimum Standard, as:
Approximately 33% of its treaties neither contain a provision stating that mutual
agreements shall be implemented notwithstanding any time limits in domestic law
(which is required under Article 25(2), second sentence) nor the alternative provisions
for Article 9(1) and Article 7(2) to set a time limit for making transfer pricing adjustments.
Approximately 25% of its treaties do not contain the equivalent of [Article] 25(2), first
sentence, of the OECD Model Tax Convention, as, for example, the part of the sentence
relating to providing for unilateral relief prior to the referral of the case to the bilateral
phase of the MAP is missing.
Approximately 25% of its treaties do not contain the equivalent of Article 25(3), second
sentence, of the OECD Model Tax Convention stating that the competent authorities may
consult together for the elimination of double taxation for cases not provided for in the
tax treaty.
In order to be fully compliant with all four key areas of an effective dispute resolution
mechanism under the Action 14 Minimum Standard, the United States needs to amend and
update a certain number of its tax treaties. In this respect, the United States reported that it
intends to implement the required elements under this standard in all its tax treaties and
that it would conduct any ongoing or future negotiations with current or prospective treaty
partners with a view to be compliant with the Action 14 Minimum Standard. The United
States, however, has not put a plan in place to that effect and no actions were taken to bring,
where necessary, the relevant treaties in line with the requirements of this standard. Taking
this into account, negotiations need to be initiated without further delay for a considerable
number of treaties to ensure compliance with this part of the Action 14 Minimum Standard.
The United States meets the Action 14 Minimum Standard concerning the prevention
of disputes. It has in place a bilateral APA programme. This APA programme also enables
58
OECD (2019), Making Dispute Resolution More Effective – MAP Peer Review Report, United States (Stage 2): Inclusive
Framework on BEPS: Action 14, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://
doi.org/10.1787/305147e9-en.
886
taxpayers to request roll-back of bilateral APAs and such rollbacks are granted in practice.
The United States also meets the requirements regarding the availability and access to
MAP under the Action 14 Minimum Standard. It provides access to MAP in all eligible cases.
Furthermore, it has in place a documented notification and consultation process for those
situations in which its competent authority considers the objection raised by taxpayers in
a MAP request as not justified. It also has in place an internal statutory or administrative
dispute settlement/resolution process that is independent from the audit and examination
function and that can only be accessed through a request by the taxpayer. Where cases are
resolved through that process access to MAP may be limited in the United States. In addition,
the United States has extensive, clear and comprehensive guidance on the availability of MAP
and on how it applies this procedure in practice. This guidance also specifies the effects of the
internal statutory or administrative dispute settlement/resolution process on MAP, which is
also clarified in the public guidance on this process.
The U.S. has not signed the MLI; however, 41 signatories to the MLI listed their respective
agreement with the U.S. as potential covered agreements.59
The questions to be addressed by this section of the branch report do not apply to the
U.S. because the U.S. has not signed the MLI.
On 17 February 2016, the U.S. Treasury Department released the 2016 Model, which is the
baseline text the Treasury Department uses when it negotiates tax treaties. The U.S. Model
Income Tax Convention had previously been updated in 2006 (the 2006 Model).
As explained in the Preamble to the 2016 Model(the 2016 Preamble) released
simultaneously with the 2016 Model, “[t]he 2016 Model also includes a number of new
provisions intended to more clearly implement the Treasury Department’s longstanding
policy that tax treaties should eliminate double taxation without creating opportunities for
non-taxation or reduced taxation through tax evasion or avoidance.” Specifically, with respect
to BEPS, the 2016 Preamble notes, “A number of the key recommendations regarding bilateral
income tax treaties from the OECD-G20 BEPS initiative have been fundamental parts of U.S.
tax treaty policy for many years. For example, U.S. tax treaties have since the 1990s contained
robust LOB provisions and rules that determine when treaty benefits should be available for
payments through fiscally transparent entities.”
Building on Treasury’s longstanding policy of preventing treaties from being used to
create opportunities for non-taxation or reduced taxation, the 2016 Model contains so called
“special tax regime” rules, discussed below (and previously), that would deny treaty benefits
on deductible payments of highly mobile income that are made to related persons that enjoy
low or no taxation with respect to that income under a preferential tax regime. As explained
in the 2016 Preamble:
59
A list of these countries is included in Appendix B available at www.ifa.nl/cahiers.
887
United States
Some countries have implemented preferential regimes to attract highly mobile

income—income that taxpayers can easily shift around the globe through deductible
payments such as royalties and interest expense—by allowing resident companies to pay
no or very little tax on that income. Consistent with the G20-OECD Base Erosion and Profit
Shifting (BEPS) initiative, the STR provisions are intended to mitigate instances of double
non-taxation whereby a taxpayer uses provisions in the tax treaty, combined with special
tax regimes, to pay no or very low tax in either treaty country. However, the new provisions
also reflect the United States’ preference for addressing BEPS concerns through changes
to objective rules that apply on a prospective basis, rather than introducing subjective
standards that could call into question agreed treaty benefits or applying wholly new
concepts to prior years.
It is inappropriate for tax treaties to reduce U.S. statutory withholding rates on
deductible U.S. source payments when the related income is subject to no or very
little tax. The current ability of foreign-parented companies to engage in these types
of transactions creates strong incentives to erode the U.S. tax base and gives foreign-
parented companies an advantage over U.S.-parented companies, which cannot use these
regimes to avoid paying tax on their U.S. income. To address this unintended result, the
2016 Model would deny treaty benefits for payments of interest, royalties, and certain
guarantee fees between related parties if the beneficial owner of the payment benefits
from a special tax regime with respect to the payment.
The 2016 Model contains a definition of a special tax regime in article 3(l):
[T]he term “special tax regime” means any statute, regulation or administrative practice
in a Contracting State with respect to a tax described in Article 2 (Taxes Covered) that
meets all of the following conditions:
i) results in one or more of the following:

A) a preferential rate of taxation for interest, royalties, guarantee fees or any
combination thereof, as compared to income from sales of goods or services;
B) a permanent reduction in the tax base with respect to interest, royalties,
guarantee fees or any combination thereof, without a comparable reduction for
income from sales of goods or services, by allowing:
1) an exclusion from gross receipts;
2) a deduction without regard to any corresponding payment or obligation to
make a payment;
3) a deduction for dividends paid or accrued; or
4) taxation that is inconsistent with the principles of Article 7 (Business Profits)
or Article 9 (Associated Enterprises); or
C) a preferential rate of taxation or a permanent reduction in the tax base of the type
described in part (1), (2), (3) or (4) of subclause (B) of this clause with respect to
substantially all of a company’s income or substantially all of a company’s foreign
source income, for companies that do not engage in the active conduct of a trade
or business in that Contracting State;
ii) in the case of any preferential rate of taxation or permanent reduction in the tax
base for royalties, does not condition such benefits on the extent of research and
development activities that take place in the Contracting State;
888
iii) is generally expected to result in a rate of taxation that is less than the lesser of either:
A) 15 percent; or
B) 60 percent of the general statutory rate of company tax applicable in the other
Contracting State;
iv) does not apply principally to:
A) pension funds;
B) organizations that are established and maintained exclusively for religious,
charitable, scientific, artistic, cultural or educational purposes;
C) persons the taxation of which achieves a single level of taxation either in the hands
of the person or the person’s shareholders (with at most one year of deferral), that
hold a diversified portfolio of securities, that are subject to investor-protection
regulation in the Contracting State and the interests in which are marketed
primarily to retail investors; or
D) persons the taxation of which achieves a single level of taxation either in the hands
of the person or the person’s shareholders (with at most one year of deferral) and
that hold predominantly real estate assets; and
v) after consultation with the first-mentioned Contracting State, has been identified
by the other Contracting State through diplomatic channels to the first-mentioned
Contracting State as satisfying clauses (i) through (iv) of this subparagraph.
No statute, regulation or administrative practice shall be treated as a special tax

regime until 30 days after the date when the other Contracting State issues a written
public notification identifying the regime as satisfying clauses (i) through (v) of this
subparagraph.
The 2016 Model provides that the STR provisions will only apply when the payee is a
“connected person” with respect to the payor of the income, and it defines that term.
While the 2016 Model does not treat a notional interest deduction (“NID”) as an STR,
it does limit the application of article 11 (Interest) in the case of an interest payment being
made to a jurisdiction that allows an NID. Specifically, article 11 includes a new rule that would
allow a treaty partner to tax interest arising in that country in accordance with domestic law
if the interest is beneficially owned by a related person that benefits from a “notional interest
deduction” (“NID”). As explained in the 2016 Preamble this new rule was seen as justified
because “(i) a NID, in effect, allows for a deduction on equity with respect to the time value of
money, which is a very significant component of interest income, and (ii) in the related- party
context, the holder of the equity often benefits from a participation exemption with respect
to any returns on that equity.”
The 2016 Model also includes a rule (in new paragraph 8 of article 1 (General Scope)) that
is a revised version of the so-called “triangular permanent establishment” rule that has been
included in some of the U.S.’ income treaties since the 1990s. The new version of the rule
denies treaty benefits with respect to income treated by a residence country as attributable to
a permanent establishment and subject to little or no tax, as well as income that is excluded
from the tax base of the residence country and attributable to a permanent establishment
located in a third country that does not have a tax treaty with the source country.
The new article 28 (Subsequent Changes in Law) obligates the treaty partners to consult
with a view to amending the treaty as necessary when changes in the domestic law of a treaty
partner draw into question the treaty’s original balance of negotiated benefits and the need
for the treaty to reduce double taxation.
889
United States
The 2016 Model incorporates certain other BEPS recommendations for the first time:
–– A revised preamble for tax treaties that makes clear the intentions of the treaty partners
that the purpose of a tax treaty is the elimination of double taxation with respect to taxes
on income without creating opportunities for non-taxation or reduced taxation through
tax evasion or avoidance.
–– A rule intended to protect against contract-splitting abuses of the twelve-month
permanent establishment threshold for building sites or construction or installation
projects.
–– A twelve-month ownership requirement for the five-percent withholding rate for direct
dividends.
–– Improvements to the limitation on benefits provision to prevent inappropriate access to
treaty benefits by residents of third countries.
–– Rules to make more efficient and effective dispute resolution mechanisms between
tax authorities through the use of mandatory binding arbitration. Article 25 (Mutual
Agreement Procedure) of the 2016 Model contains rules requiring that certain disputes
between tax authorities be resolved through mandatory binding arbitration. The “last-
best offer” arbitration approach in the 2016 Model is substantively the same as the
arbitration provision that is found in several U.S. tax treaties currently in force.
The 2016 Model did not adopt the other BEPS recommendations regarding the permanent
establishment threshold, notably the revised rules related to dependent and independent
agents and the exemption for preparatory and auxiliary activities.
The questions to be addressed by section 2 of the branch report are not relevant to the
experience of the U.S. since their relevance largely hinges on a jurisdiction’s having signed
the MLI. The U.S. has not signed the MLI.
890
Uruguay
Branch reporter
Andrea Laura Riccardi Sacchi1

The present work has the character of being the Uruguayan branch report on Subject 1:
“Reconstructing the treaty network” of the 74th IFA Conference to be held in Cancun, Mexico,
from 4 to 8 October 2020.
In February 2013, the Organization for Economic Co-operation and Development
(hereinafter OECD), promoted by the G20, delivered the report “Addressing Base Erosion
and Profit Shifting”,2 immediate precedent of the “Action Plan on Base Erosion and Profit
Shifting” (hereinafter, BEPS Action Plan).3 The report concluded that rules in force at that time
enabled multinational enterprises to manipulate their benefits by transferring them to no or
low-tax jurisdictions and thereby preventing taxation “where economic activity takes place
and value is created”, and estimated annual tax losses between 100 and 240 billion dollars.
Thus, the BEPS Action Plan was aimed at promoting the adoption of anti-BEPS measures
not only at the level of countries’ domestic legislation but also at the level of agreed legislation,
i.e. with respect to double tax agreements (hereinafter DTAs). In the latter case, and in relation
to the global treaty network in force (more than 3.000 DTAs), Action 15, entitled “Developing
a Multilateral Instrument to Modify Bilateral Tax Treaties” and intended to “[a]nalyze the tax
and public international law issues related to the development of a multilateral instrument to
enable jurisdictions that wish to do so to implement measures developed in the course of the
work on BEPS and amend bilateral tax treaties” (our emphasis),4 was set forth.
Within this framework, the “Multilateral Convention to Implement Tax Treaty Related
Measures to Prevent Base Erosion and Profit Shifting” (hereinafter the multilateral instrument
or MLI), a direct consequence of the aforementioned Action 15, represents without doubt
a milestone in the history of international taxation. In effect, this instrument, without
precedents in the tax world, tried to facilitate the quick adoption of the anti-BEPS measures
through the amendment of the text of existing bilateral agreements.
The República Oriental del Uruguay (hereinafter Uruguay) is no stranger to this fight against
BEPS. Uruguay is a member of the Inclusive Framework (hereinafter, IF) on BEPS and is one
of the many countries that have chosen the path of trying to adapt their network of bilateral
agreements to the new anti-BEPS standard based on the signature of the MLI.5 Uruguay has
demonstrated a strong adherence to the international standard regarding cooperation in the
1
Tax advisor to the General Directorate of the Uruguayan Tax Administration Office, and PhD candidate at the
Faculty of Law of the University of Valencia, Spain.
The opinions expressed in this report are the sole responsibility of the author and do not necessarily reflect the
position of any of the organizations with which the author is affiliated. The report has been prepared in October
2019, and therefore it reflects the state of play at that time.
2
OCDE (2013), Addressing Base Erosion and Profit Shifting, OECD Publishing, pp. 87.
3
OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing, pp. 40
4
Ibid., p. 24.
5
As of 30 September 2019, 89 jurisdictions have signed this instrument.
IFA © 2020 891

Uruguay
fight against tax fraud and evasion, and even internally6 it is worth stressing the proliferation
during these last years of tax rules with a strong anti-elusive purpose. This commitment is
also evidenced by the large number of provisions to combat treaty abuse, incorporated in
the DTAs signed prior not only to the signature of the MLI, but even, to the publication of the
final reports (2015) of the BEPS Action Plan.
In general, it should be noted that the implementation of the multilateral instrument
has not been simple, and its effectiveness is not guaranteed. On the one hand, while the MLI
is positively characterized as a flexible instrument, its effective application depends on the
matches taking place between the choices made by the signatory countries based on their
notifications, reservations and options, and therefore, this characteristic may in fact result in
ineffectiveness.7 That is why it is of vital importance to analyze in depth, based on the choices
made by the counterparts, how the commitment assumed by our country at the level of its
treaty network, has been affected.
Following the guidelines set forth by the general reporters, the content of this report
focuses on sharing the Uruguayan experience regarding the adoption of the recommendations
derived from the BEPS Action Plan, especially those provisions incorporated into the MLI as
well as to the latest update of the “Model Tax Convention on Income and on Capital” proposed
by the OECD (hereinafter OECD MC). The ultimate goal of the branch report is to contribute
to the evaluation of the impact of the BEPS project not only on the structure and modus
operandi of the more than 3.000 existing DTAs at the global level in the pre-BEPS era, but
also on the negotiations of those to be concluded in the future.
The report which respects the structure proposed by the general reporters, presents and
analyzes the implementation of the MLI in Uruguay, what measures have been taken, the
existing problems, as well as those that are visualized in the future, and is divided in two parts.
The first part refers to the impact, both direct and indirect, of the BEPS Action Plan and the
MLI on the Uruguayan tax treaty network. The direct impact refers to the modification of the
agreements covered by the MLI while the indirect impact refers to the influence that the BEPS
project in general is considered to have on the Uruguayan tax treaty negotiation strategy.
Thus, the branch report analyzes the policy followed by the Uruguayan government regarding
reservations and notifications. The second part refers to the practical implementation of the
multilateral instrument in Uruguay
6
For a comprehensive detail of such legislation, Pérez Besio, I. y Galeazzi, A., “Anti-avoidance measures of general
nature and scope - GAAR and other rules - Uruguay Branch Report”, in IFA: Cahier de droit fiscal international,
Vol. 103A, 2018, pp. 851-876
7
For illustrative purposes, at the 13th GREIT Conference (“Multilateralism and International Tax Law”), Traversa
and Sanghavi, during their presentation “Permanent Establishment in a Multilateral World. BEPS changes,
issues… and the need for more change?”, highlighted that of 1.246 potentially covered tax agreements, 277 (22%)
have adopted art. 13 of the MLI (Art. 5(4), OECD MC) -further divided into Option A and Option B-, while 206
(17%) have adopted art. 12 of the MLI (art. 5(5) and art. 5(6), OECD MC). At the national level, this aspect has
been stressed by Mazz: “This circumstance [flexibility], together with the possible adoption of reservations,
has as a consequence that the MLI, which was postulated as very beneficial because bilateral treaties would be
quickly modified, without the need to negotiate new agreements, end precisely in what it aimed at avoiding, a
renegotiation of each DTA” (our translation; Mazz, A., “La adaptación de los tratados internacionales al marco
multilateral propuesto por el Plan de Acción 15 BEPS”, RT, No 266, 2018, p. 684).
892
Sacchi
Tax Treaty Network
1.1. Introduction
Uruguay’s adherence to the IF on BEPS and its commitment to implement BEPS minimum
standards, as well as the later signature of the MLI, impact on both the network of existing
bilateral tax agreements or DTAs (direct impact) and the tax policy guiding future negotiations
(indirect impact). In this part we focus on studying such impact, but previously, we describe
the state of play prior to signing the MLI, detailing the treaties already concluded and anti-
abuse clauses provided by them.
The network of DTAs concluded by Uruguay is relatively recent. Until 2009 it consisted of just
two agreements of this kind, signed with Germany and Hungary, ratified at the beginning of
the 90s and of very little application.8
t is only as of 2009 – the year in which Uruguay enters the OECD Global Forum on
Transparency and Exchange of Information for Tax Purposes-, and basically as part of its
commitment to adhere to the international tax standard,9 that Uruguay gradually begins,
little by little, to build its treaty network.
In this way, prior to the signature of the MLI on 7 June 2017, the total number of signed
DTAs, both with developed and developing countries, OECD members and no-OECD
members, members and non-members of the IF on BEPS, is 20 treaties; to the DTAs with
Germany and Hungary, the DTAs with Mexico, Spain, Portugal, Switzerland, Liechtenstein,
Malta, Ecuador, India, Republic of Korea, Finland, Romania, Belgium, Vietnam, United Arab
Emirates, Singapore, Luxembourg, United Kingdom, Chile -in chronological order according
to their date of signature- are added. At the time of signing the MLI all of them, except for the
DTAs with Belgium and Chile -the latter signed in April 2016 and ratified by the Uruguayan
parliament in October 2017-, are already in force.
8
A third DTA, signed in 1991 with Poland, however, never came into force (information obtained from Acosta,
N., Bruzzone, L. y Nieves, G., “El abuso de Convenios: modalidades y forma de evitarlo desde la perspectiva
uruguaya”, RT, No 245, 2015, p.198).
9
Uruguay has also concluded 16 tax information exchange agreements or TIEAs (France, Iceland, Denmark,
Greenland, Faroe Islands, Sweden, Norway, Argentina, Brazil, Netherlands, Australia, Canada, United Kingdom,
Guernsey, Chile, South Africa), of which all, except for the TIEA with Brazil -pending of ratification in that country-
are in force. Besides, Uruguay is signatory to the Convention on Mutual Assistance in Tax Matters (ratified by Law
N°19,428 of 29 August 2016 and in force as of 1 December 2016).
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1011
Country1 Date of signature Law approving the Entry in force

treaty
Belgium 23 August 2013 Law No 19,403 of 4 August 2017
24 June 2016
Chile 1 April 2016 Law No 19,548 of 5 September 2018
20 October 2017
Ecuador 26 May 2011 Law No 18,932 of 15 November 2012
20 July 2012
Finland 13 December 2011 Law No 19,035 of 6 February 2013
27 December 2012
Germany2 9 March 2010 Law No 18,844 of 28 December 2011
25 November 2011
Hungary 25 October 1988 Law No 16,366 of 13 August1993
19 May 1993
India 8 September 2011 Law No 18,972 of 21 June 2013
21 September 2012
Liechtenstein 18 October 2010 Law No 18,933 of 3 September 2012
20 July 2012
Luxembourg 10 March 2015 Law No 19,354 of 11 January 2017
18 December 2015
Malta 11 March 2011 Law No 19,010 of 13 December 2012
22 November 2012
Mexico 14 August 2009 Law No 18,645 of 29 December 2010
12 Febraury 2010
Portugal 30 November 2009 Law No 18,934 of 13 September 2012
20 July 2012
Romania 14 September 2012 Law No 19,257 of 22 October 2014
28 August 2014
Singapore 15 January 2015 Law No 19,457 of 14 March 2017
2 December 2016
Rep. of Korea 29 November 2011 Law No 19,033 of 22 January 2013
27 December 2012
Spain 9/10/2009 Law No 18,730 of 24 April 2011
7 January 2011
10
In alphabetical order.
11
This is the renegotiated treaty; previously the DTA signed on 5 May 1987 approved by Law N° 16,110 of 25 April
1990, was in force.
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Country1 Date of signature Law approving the Entry in force

treaty
Switzerland 18 October 2010 Law No 18,867 of 28 December 2011
23 December 2011
United Arab Emirates 10 October 2014 Law No 19,393 of 13 June 2016
(UAE) 20 May 2016
United Kigndom (UK) 24 February 2016 Law No 19,443 of 14 November 2016
27 October 2016
Vietnam 9 December 2013 Law No 19,404 of 26 July 2016
24 June 2016
On the other hand, it should be noted that the TIEA signed with Argentina on 23 April 2012,
has a chapter aimed at mitigating international double taxation.12
The DTAs signed by Uruguay in general follow the OECD MC, with some peculiarities from
the “United Nations Model Double Taxation Convention between Developed and Developing
Countries” (hereinafter UN MC), such as the adoption, among others, of measures regarding:
–– the definition of permanent establishment (hereinafter PE), the figure of the “service
PE”,13 shorter time periods for the “construction PE”, specific provisions for insurance
companies, or the exclusion of the delivery activity from the “negative list” or exceptions
to the configuration of a PE;
–– a limited “force of attraction” regarding the allocation of profits to a PE;
–– shared taxation (though limited at source) for royalties and fees for technical services;
–– broad definition of royalties, including income derived from the use or the right to use
industrial, commercial or scientific equipment.
Preamble. In general, the DTAs signed before the MLI, include in their preamble the purpose of
both elimination of double taxation and prevention of tax evasion (the DTAs with Switzerland
and Hungary include only the first-mentioned).
However, some of these agreements also make reference in their preamble to other
purposes: “… and with a view to promoting economic cooperation between the two
countries…” (DTA with India); “Desiring to promote their mutual economic relations
through the conclusion between them of a Convention…” (DTA with UAE); “… whereas the
Contracting States recognize that the well-developed economic ties between the Contracting
States call for further cooperation; whereas the Contracting States wish to develop their
relationship further by cooperating to their mutual benefits in the field of taxation; …” (DTA
with Liechtenstein).
The DTA signed with Chile (April 2016), already contains a preamble, which can be called
“post-BEPS”:
12
Art. 9 to 11 of Law N° 19,032 of 27 December 2012 (in force as of 7 February 2013).
13
This figure is found in the OECD MC but in the Commentaries to art. 5 (Permanent Establishment).
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Uruguay
“Desiring to further develop their economic relationship and to enhance their cooperation
in tax matters. Intending to conclude a Convention for the elimination of double taxation with
respect to taxes on income and on capital without creating opportunities for non-taxation
or reduced taxation through tax evasion or avoidance (including through treaty-shopping
arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit
of residents of third States),”.
It should be noted that the DTA with Chile (an OECD member country), which Uruguay
signed a couple of months before the signature of the MLI, can be said to be the first agreement
of the Uruguayan treaty network to adopt many of the recommendations proposed by the
BEPS Action Plan and contemplated in the MLI.14
Tax treaty shopping. In Uruguay most scholars understand that there is no general anti-
avoidance rule (hereinafter, GAAR).
The “reality principle” established by paragraph 2 of article 6 of the Uruguayan Tax
Code (hereinafter UTC), has been considered as “merely a qualification criterion for cases
of dissociation between substance and legal form”, i.e. “when the external image of the
transaction does not reflect its substance”,15 and therefore, the transaction must be requalified
and the facts reassessed from the tax law perspective. This principle may be applicable
whether the dissociation is involuntary (e.g. error or lack of knowledge) or voluntary and
regardless whether there has been a fraudulent action or intent.16 Moreover, its application
may benefit or harm either the tax authority or the taxpayer.17 In effect, in Faget’s opinion: “it
is a rule applicable exclusively when there is a mismatch between form and substance and it is
not a general anti-avoidance rule”.18 Fraschini and Sartori share this opinion by concluding “the
rule of article 6 of the Tax Code cannot be used by the Tax Office to recharacterize businesses
in which legal form and economic substance are in line (either national or international)
due to the fact that this is only a qualifying rule”.19 According to Ferrari and Sartori,20 when
it comes to a GAAR, it is not required to prove an inadequacy between the form and the
substance but merely the fact that the business under consideration was celebrated with the
only purpose of avoiding the occurrence of the taxable event, taking advantage of a loophole
that the legislator has not foreseen in advance. So, by applying the GAAR the legal taxable
premise is extended to those situations in which the only purpose is to circumvent the tax
law, avoiding therefore paying the tax. Based on this, these authors understand the above-
mentioned rule of article 6 of the UTC must not be considered a GAAR, at least in its strictest
14
In this regard see, Riccardi Sacchi, A.L., “Las recomendaciones del plan de acción contra la erosión de la base
imponible y el traslado de beneficios recogidas en el convenio para evitar la doble imposición suscrito entre
Uruguay y Chile”, Impuestos y Fiscalidad (CADE), Tomo X, 2016, pp. 61-76.
15
Pérez Besio, I. y Galeazzi, A., “Anti-avoidance measures…, ob. cit., pp. 851 y 854.
16
Birnbaum, F. y Hessdorfer, A., “The notion of tax and the elimination of international double taxation or double
non-taxation – Uruguay Branch Report”, in IFA: Cahier de droit fiscal international, Vol. 101 B, 2016, p. 912.
17
Sentence N°17/1977 of the High Administrative Court (TCA, as for the Spanish abbreviation, Tribunal de lo
Contencioso Admininistrativo), where jurisprudence expressed that art. 6 is an instrument for the correct
understanding of the tax law; in this case, its application benefited the taxpayer itself. See a brief description of
the case in Pérez Besio, I. y Galeazzi, A., Anti-avoidance measures…, ob.cit., p. 870.
18
Faget, A., Interpretación y calificación en materia tributaria. Las formas jurídicas inadecuadas y el fraude a la ley fiscal,
RT, No 181, 2004, pp. 431-440.
19
Fraschini, J.I. y Sartori, “Tax treaties and tax avoidance: application of anti-avoidance provisions – Uruguay
Branch Report”, in IFA: Cahier de droit international, Vol. 95 A, 2010, pp. 850-852.
20
Ferrari, M. y Sartori, E., “Las cláusulas antiabuso específicas y los Convenios de doble imposición – XXVII Jornadas
Instituto Latinoamericano de Derecho Tributario”, RT, No 240, 2014, pp. 515-519.
896
Sacchi
meaning. Notwithstanding, they believe that, in a wider sense, the rule of article 6 constitutes
a way of preventing the most serious hypothesis of abuse, i.e. those in which an artificial
business is created to benefit from a tax regime. In this regard the tax administration and
the jurisprudence based on this requalifying rule, have for example disregarded artificial
interposed companies or internally adjusted transactions between related enterprises but,
as the authors highlight, this has always been subject to rigorous proof of the existence of a
mismatch between form and substance.21
Regarding the interaction between domestic anti-avoidance legislation and the provisions
of the DTAs, it should first be noted that Uruguay has adhered to the Vienna Convention on
the Law of Treaties (hereinafter VCLT)22 and therefore general rules on the interpretation
of international treaties contained in the aforementioned convention23 apply to its DTAs;
between them we find the interpretation on good faith and taking in account the objective
and purpose of the treaty. As detailed below, in the vast majority of the treaties signed by our
country it appears as a purpose not only to avoid international double taxation but also the
prevention of tax evasion. In that sense, Acosta et al. understand that “an anti-abusive theory
can be admitted from the interpretation itself of the DTA, without considering internal rules”.24
Regarding this aspect, in some of the DTAs signed by Uruguay, the inclusion of a provision,
either in the articles or as part of the Protocol, expressly stating that states can apply their
national anti-avoidance legislation, has been negotiated -with general or specific character,
as the case may be-namely:
–– DTA with Mexico (article 24(6)), specifically with regard to thin capitalization provisions;25
–– Protocol of the DTA with Spain (IV.2.), including that the DTA will be interpreted in such a
way that in no case shall the contracting state be prevented from applying its internal
legislation on tax evasion and tax fraud; internal rules and procedures shall be applicable
to combat tax treaty abuse; and, stating a special reference to domestic controlled foreign
companies legislation26;
–– Protocol of the DTA with Portugal (7.a))
“It is understood that the provisions of the Convention shall not be construed as to prevent
the application by a Contracting State of the anti-avoidance provisions provided for in its
domestic law”;
–– DTA with Germany (article 28), including that the DTA will be interpreted in such a way that
the contracting state is not prevented from applying its internal legislation on tax evasion
and tax fraud and in case these provisions result in double taxation, the competent
authorities shall resort to a mutual agreement procedure;
21
In particular see Sentence N° 256/2013 of the High Administrative Court (TCA).
22
Law N° 16,173 of 30 March 1991, approves the accession of Uruguay to the VCLT of 21 March 1986.
23
Art. 31 to 33, VCLT.
24
Our translation; Acosta, N., Bruzzone, L. y Nieves, G., “El abuso de Convenios…, ob.cit., p. 217
25
“Las disposiciones del presente Convenio no impedirán que un Estado Contratante aplique sus disposiciones en
materia de capitalización delgada”.
26
“a) El presente Convenio se interpretará de forma que no impida a un Estado contratante aplicar su normativa
interna para evitar la evasión y fraude fiscal.
b) Los Estados contratantes declaran que sus normas y procedimientos de Derecho interno respecto a los abusos
de la norma (comprendidos los convenios fiscales) son aplicables para combatir tales abusos.
c) El presente Convenio no impedirá a los Estados contratantes la aplicación de sus normas internas relativas a
la transparencia fiscal internacional”.
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Uruguay
–– DTA with India (article 29(1)):

“The provisions of this Agreement shall in no case prevent a Contracting State from the
application of the provisions of its domestic laws and measures concerning tax avoidance
or evasion”.
In the absence of a specific provision in a DTA, and despite the Commentaries in the OECD MC,
a part of the scholars differentiates between rules against tax evasion aimed at protecting
and determining the tax base (e.g. a rule that limits deductible expenses) and rules that may
result in the deprivation of the benefits of the treaty, and understand that these latter, cannot
be applied. However, they recognize that the answer may change when the DTA expressly
refers to the Commentaries of OECD MC as an “authentic form of interpretation”, e.g. the case
of the DTA signed with Mexico and with Finland.27 For its part, Acosta et al., point out that “[a]
s long as the DTA recognizes a Contracting State the right to tax a particular manifestation
of an ability to pay (either the acquisition of an item of income or the possession of wealth),
it cannot be denied, the intention of that to apply the integrality of the tax system in the
exercise of that power to tax agreed under the framework of the DTA, including qualification
rules and the specific anti-avoidance legislation, if the case may be”28 and in this sense they
mention the favorable position of the OECD on the application of domestic anti-avoidance
legislation.
It should be noted that as of today, there are no national administrative or jurisprudential
pronouncements in relation to treaty abuse.
At the level of the DTAs signed by Uruguay, it is possible to identify various types of
provisions aimed at combating tax treaty shopping, included in the articles or eventually
in the Protocol.
To begin with, it is possible to identify subject-to-tax provisions and exclusion provisions. The
first-mentioned are found in the DTAs with Switzerland, India and Chile:
–– Protocol of the DTA with Switzerland (4.b)), establishing in regard with pensions that when
these are exempt in one of the contracting states and in accordance with the legislation
in force of the other contracting state, are not effectively taxed in that other contracting
state, the first-mentioned contracting state may subject to taxation such pensions at the
rate provided in its internal legislation;29
–– Protocol of the DTA with India (IV.):
“With reference to Article 8 (Shipping and Air Transport) and Article 13 (Capital gains), it
is understood that notwithstanding anything contained therein read with the domestic
law of the Contracting States leads to a situation where an income is not taxable in the
resident State, the source State shall retain the right to tax such income”;
–– DTA with Chile (article 28(8)), including a provision according to which -except for the
27
The DTA with Mexico establishes that the Contracting States “shall do all they can” to apply the DTA in conformity
with “the Commentaries on the Articles of the Model Tax Convention on Income and on Capital prepared by the
Committee of Fiscal Affairs of the OECD”, while, the DTA with Finland refers to “the Commentaries of the OECD
Model Tax Convention of July 2008” as “an authentic mean of interpretation”. In this regard, we may pose the
question on whether we should apply a static or dynamic interpretation.
28
Acosta, N., Bruzzone, L. y Nieves, G., “El abuso de Convenios…, ob.cit., p. 219.
29
“Si des pensions doivent être dégrevées de l’impôt dans un Etat contractant selon l’art. 18 de la Convention, et
que, selon la législation de l’autre Etat contractant, ces pensions ne sont pas effectivement imposées dans cet
autre Etat contractant, le premier Etat contractant mentionné peut imposer ces pensions conformément au taux
prévu par sa législation interne”.
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Sacchi
exceptions provided- an item of income derived from of a state and accrued by a resident
of the other contracting state may be subject to taxation by the source state when that
income is not effectively subject to tax in the other contracting state. In the Protocol (item
12.) it is established what is understood by “when that income is not effectively subject to
tax”, i.e. income totally released from the payment of taxes, and income subject to a level
of taxation substantially lower than the taxation that would be applicable according to
the general rules of the state of residence of the beneficiary of the income.30
As for the exclusion provisions, it is possible to identify them in the DTAs signed with Spain
and with Finland:
–– Protocol of the DTA with Spain (IV.1.), the DTA does not apply to entities under certain
privileged tax regimes, among which it is found the Uruguayan Free Zones regime
regarding the provision of financial services;
–– Protocol of the DTA with Finland (3.d)), neither this DTA applies in respect to financial
services in Uruguayan Free Zones.
Likewise, in all the DTAs -except for the DTA with Hungary- a beneficial owner provision can be
found in the articles referring to dividends, interests and royalties. Even the DTA with Chile
provides such a clause in article 14 bis of “fees for technical services”. In the DTA with Portugal
the clause not only appears in the articles of dividends, interests and royalties, but also in the
Protocol (item 7.b)) it is possible to find a beneficial owner provision of general application:
“It is understood that the benefits foreseen in the Convention shall not be granted to a
resident of a Contracting State who is not the beneficial owner of income derived in the
other Contracting State”.
In relation to interests, dividends, royalties, capital gains and “other income”, the DTA with
Republic of Korea contains a look-through provision, denying treaty benefits to resident entities
in one of the contracting states to the extent that said entity is directly or indirectly controlled
by one or more non-residents of that state (article 28 (a)). The DTA also contains with respect
to the aforementioned income categories, a provision according to which benefits are denied
if “the main purpose or one of the main purposes of any person concerned with the creation
or assignment of a share, a debt-claim, or a right in respect of which the income is paid is to
take advantage of these Articles by means of the creation or assignment”. This is a clause of
principle purpose test or PPT but limited to certain items of income.
The Protocol of the DTA with Spain (item IV.2.d)) also contains a provision of this type
limited to dividends, interests and royalties.31 According to the Protocol of the DTA with
Finland (items 3.a) to c)) the provisions of the articles referring to dividends, interests and
30
“[C]omprende tanto las rentas totalmente liberadas del pago de impuestos, como aquellas sujetas a una
tributación sustancialmente inferior a la tributación que sería aplicable de acuerdo a las normas generales
del Estado de residencia del beneficiario de la renta. En especial, se entenderá que son rentas sujetas a una
tributación sustancialmente inferior a la tributación generalmente aplicable, las rentas que, por aplicación de
disposiciones especiales que establezcan exenciones o reducciones de impuesto, reducción de la base imponible
o la tasa del impuesto, u otro beneficio fiscal, resulten gravadas con impuestos por un monto inferior al 60 por
ciento del monto que resultaría aplicable en ausencia de dichas normas”.
31
The provisions on these items of income are not applicable when “el fin primordial o uno de los fines primordiales
de cualquier persona relacionada con la creación o cesión de las acciones u otros derechos que generan los
dividendos, la creación o cesión del crédito que genera los intereses, la creación o cesión del derecho que genera
los cánones o regalías, sea el de conseguir el beneficio de dichos artículos mediante dicha creación o cesión”.
899
Uruguay
royalties “shall not apply if it was the main purpose or one of the main purposes of any person
concerned with the creation or assignment of the shares or other rights in respect of which the
dividends are paid… with the creation or assignment of the debt-claim in respect of which the
interest is paid… with the creation or assignment of the use, rights or information in respect
of which the royalties are paid to take advantage… by means of that creation or assignment”.
In the DTA with Ecuador, this type of clause is incorporated as part of the text itself of the
articles on interests and royalties (articles 11(7) y 12(7), respectively).
In some DTAs it is possible to identify already general limitation on benefits (LOB) provisions
and PPT clauses, of general character, specifically:
–– DTA with Ecuador contains a general LOB provision (article 25);
–– DTA with India, a general LOB provision (articles 29(2) to 29(6)) and a PPT clause (article
29(7));
–– DTA with Chile, contains both, a LOB clause (articles 28(1) to 28(5)) and a PPT rule (article
28(6));
–– DTA with UK, a PPT clause (article 23).
On the other hand, the Protocol of the DTA with Belgium (item 1.) states that,
“Notwithstanding the provisions of any Article of the Convention, no reduction in
or exemption from tax provided for in the Convention shall be applied to income paid in
connection with a wholly artificial arrangement. An arrangement shall not be considered as
wholly artificial where evidence is produced that the arrangement reflects economic reality”.
Other types of treaty abuse. In the case of dividends, in the vast majority of the DTAs signed
by Uruguay32 two limits applicable to the taxation at source are foreseen, one “general”33 and
another “reduced”34, this latter for cases of “substantive” participations. In general, a direct
participation of at least 10% or 25% of the capital is considered substantive participation.35
However, in none of the DTAs, a minimum holding period of substantive participation is
required as an anti-abuse measure -of the type proposed by article 8 of the MLI, to which we
refer below- to access to the reduced limit at source.
The anti-avoidance clause of immovable property companies (within article 13 of Capital
gains) is a provision of interest for Uruguay. Except for the agreements with Ecuador, Hungary
and Vietnam, the rest of the DTAs signed by Uruguay includes such a clause. However, only
the DTA with Chile foresees the testing period of 365 days in order to assess compliance with
the valuation threshold condition.36 In some of the DTAs signed, not only the disposals of
“shares” are mentioned, but also “other corporate rights in a company” (DTAs with Singapore
and Finland), “other social interests in a society” (DTA with Switzerland), “other corporate
rights” (DTAs with Spain, Chile and Germany), “comparable interests” (DTA with UK) and
“other corporate rights in a company or trust” (DTA with UAE).
32
Except for the DTAs with Hungary, India, Mexico and UAE.
33
In general, of ten or 15 per cent.
34
Five per cent, except for the ten per cent agreed with Ecuador.
35
20 per cent in the DTA with Rep. of Korea and 70 per cent in the DTA with Vietnam. In the DTA with Spain, no
taxing rights are assigned at source when the participation in the company distributing the dividends is of at
least 75 per cent.
36
The clause provides that when a resident of a contracting state alienates shares or other comparable interests
whose value derives more than 50 per cent from immovable property located in the other contracting state, the
latter shall be granted taxing rights over the capital gain of such alienation, taxing right that normally is granted
exclusively to the state of residence.
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It is also common to find in the DTAs signed by Uruguay, the anti-avoidance clause for
artists companies (within article 17 of entertainers and sportsperson).
The DTA signed with Chile provides an anti-abuse clause for cases of triangulations that
use a PE in a third jurisdiction (article 28 (7)).
Regarding the avoidance of the PE, only in the DTA with Chile -note that this treaty was
concluded just two months before the signature of the MLI- we identify provisions that clearly
reflect the recommendations resulting from BEPS Action 7. In effect, this DTA foresees in its
PE definition:
–– the requirement of the character of “preparatory or auxiliary” for the entire “negative
list” of activities or exclusions of article 5(4) of the OECD MC, i.e. activities that do not
result in the configuration of a PE, as well as an additional paragraph containing the so-
called “anti-fragmentation clause”, an anti-avoidance rule that seeks to prevent a cohesive
business from being fragmented into several operations to which the aforementioned
negative list would apply;
–– the recommendations regarding the circumvention of the agency PE (commissioner
agreements and similar strategies) and independent agent established by paragraphs 5
and 6, respectively, of article 5 of the OECD MC;
–– a definition of “person closely related to an enterprise”, for the purpose of the two
provisions above-mentioned;
–– the anti-fragmentation of contracts clause, in order to determine the duration of the
activities related to a work, or a construction or installation project and the supervisory
activities related to them, the operation of a large or valuable equipment, and the
provision of services, providing for this purpose a definition of “related enterprises”.
Hybrid mechanisms. Several of the DTAs signed by Uruguay contain provisions referred to the
so-called transparent entities37 and dual resident entities.
Regarding the first-mentioned entities, the DTAs with Chile and the UK, both signed in
the rise of the BEPS Action Plan are clear examples. The DTA with Chile (article 1(2), Persons
covered) provides such a clause following the recommendation of BEPS Action 2, including a
definition of the term “fiscally transparent”.38 The DTA with the UK foresees a similar clause,
but under article 4 (Resident):
“3. For the purposes of this Convention, income derived by or through an entity or
arrangement that is treated as wholly or partly fiscally transparent under the tax law of
37
On this topic with a focus on the Uruguayan perspective, see Riccardi Sacchi, A.L., “La aplicación de los Convenios
para Evitar la Doble Imposición a las entidades híbridas: Plan de acción BEPS y caso de las entidades en régimen
de atribución de rentas en Uruguay”, RT, No 260, 2017, pp. 719-754.
38
“Para fines de este Convenio, la renta obtenida por o a través de una entidad o acuerdo que es tratado de
forma total o parcial como fiscalmente transparente de acuerdo a la legislación de cualquier de los Estados
Contratantes, será considerada como obtenida por un residente de un Estado Contratante pero sólo en la medida
en que la renta sea tratada por la legislación tributaria de tal Estado Contratante como la renta de un residente.
En ningún caso las disposiciones de este Convenio se interpretarán en el sentido de restringir el derecho de un
Estado Contratante para someter a imposición a los residentes de ese Estado Contratante. Para los fines de este
párrafo el término “fiscalmente transparente” significa situaciones en la que, de conformidad con la legislación
de un Estado Contratante, la renta o parte de la renta de una entidad o acuerdo no está sometida a imposición
al nivel de la entidad o acuerdo, sino que al nivel de las personas que tienen un interés en esa entidad o acuerdo
como si la renta o parte de la renta fuese directamente obtenida por tales personas al momento de la realización
de esa renta o parte de esa renta, sea o no que la renta o parte de la renta se distribuya por la entidad o acuerdo
a tales personas”.
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either Contracting State shall be considered to be income of a resident of a Contracting State

but only to the extent that the income is treated, for purposes of taxation by that State, as
the income of a resident of that State. In no case shall the provisions of this paragraph be
construed so as to restrict in any way a Contracting State’s right to tax the residents of that
State”.
However, it should be noted that the issue had already been addressed within the
framework of other DTAs, either as part of the articles or the Protocol, signed prior to the
BEPS Action Plan or, in the case of Luxembourg, of the publication of the final reports of
BEPS (2015) -though not with respect to the general category “transparent entities”. Thus,
the following cases can be mentioned:
–– DTA with Mexico (article 4(4)), a provision referring specifically to a partnership or a trust
according to which these shall only be considered resident of a contracting state as long
as the income they earn is liable to tax in that state as income obtained by a resident of
that state, either by the partnership or trust, or its partners or beneficiaries;39
–– DTA with Germany (article 4(4)), referring to a partnership, it establishes that while the
partnership shall be resident of the contracting state in which the place of its effective
management is situated, the restrictions to the other contracting state taxing rights
foreseen in articles 6 to 21 shall only apply as long as the income obtained in this state
are liable to tax in the first-mentioned state;40
–– Protocol of the DTA with Liechtenstein: (1.c), article 4(1)):
–– “the entities included in Article 7 of Title 7 Texto Ordenado 1996 under the law of Uruguay, shall
be considered to be a resident of Uruguay” (our emphasis);
The referred entities -entidades en régimen de atribución de rentas o ERARs, as per the Spanish
abbreviation- are entities that under certain circumstances are considered “transparent”
by the Uruguayan internal legislation;
–– Protocol of the DTA with Malta (1.a) y 1.c), article 4(1)):
–– “Notwithstanding any other provision of the Convention: a) where a partnership which is
established in a Contracting State receives income arising in the other Contracting State
and the first-mentioned State does not subject the partnership as such to tax but subjects
the partners to tax on their share in the partnership’s income, such partnership shall be
treated as a company which is a resident of that Contracting State;… c) the entities included
in Article 7 of Title 7 Texto Ordenado 1996 under the law of Uruguay shall be considered to
be a resident of Uruguay” (our emphasis);
this is another case where there is a direct reference to the ERARs;
–– Protocol of the DTA with Luxembourg (1.b), article 4(1)):
“the entities included in Article 7 of Title 7 Texto Ordenado 1996 under the law of Uruguay, shall
be considered to be a resident of Uruguay” (our emphasis);
this is a third case where reference is specially made to the ERARs, considering them
residents to the effects of the DTA, in any case;
39
Regarding this clause, it should be noted the observation to the Commentaries to art. 1 of the OECD MC -present
until the 2014 version- as this country disagrees with the interpretation according to which, when denying the
treaty benefits to a partnership, the partners are entitled to the benefits of the treaties entered by their state of
residence; according to Mexico this result was only possible if a provision stating this had been included in the
treaty entered into with the state where the partnership was situated.
40
It should be noted that this provision was included based on the German reservation to art. 4 -this reservation
was eliminated as from the 2014 OECD MC review.
902
Sacchi
Regarding dual residence entities, in general the tie-breaker rule to define the residence of
a person other than an individual provided in the DTAs signed by Uruguay prior to the MLI
has been the effective place of management.41 However, in some DTAs reference is made to
the mutual agreement procedure (hereinafter, MAP), namely:
–– DTAs with Chile, Ecuador and India
The DTA with Chile (article 4(3)), although in the case of dual resident entities refers to
the MAP, it establishes as the first tie-breaker rule, the criterion of “nationality”.42
The DTA with Ecuador (article 4(3)) foresees the same provision43 while the DTA with India
(article 4(3)) establishes as first criterion, the effective place of management turning to
the MAP when this cannot be determined.
–– DTA with Mexico, UK and Finland
The DTA with Mexico (article 4(3)) resorts to the MAP as first option in light of the dual
residence of an entity other than an individual.44
In the case of the DTA with UK, the same provision is found -i.e. direct reference to the
MAP- (article 4(4)), though when no agreement is met, it is established that “the person
shall not be considered a resident of either Contracting State for the purposes of claiming
any benefits provided by the Convention, except those provided by Articles 22, 24 and 25”,
i.e. the elimination of double taxation, non-discrimination and MAP.
The DTA with Finland resorts to the MAP as the only option in light of an entity other than
an individual with dual residence establishing that “the competent authorities of the
Contracting States shall settle the question by mutual agreement and determine the mode
of application of the Agreement to such person” (our emphasis).
MAP and corresponding adjustment. All DTAs signed by Uruguay provide for a MAP, although
it does not conform exactly to the new BEPS standard (e.g. the initiation of the procedure
before the competent authority of any of the jurisdictions), and, with the exception of the
DTA with Hungary, the bilateral adjustment.
In relation to the MAP, the practical experience of Uruguay is very little since there are no
previous cases except for one which is still ongoing.
Regarding transfer pricing bilateral adjustments within the framework of a DTA, Uruguay
does not record any case. With regard to transfer pricing matters, Uruguay has opted for the
promotion of preventive measures such as Advance Pricing Agreements or APAs. In this sense,
it should be noted that Uruguay has been leader in Latin America in materializing a unilateral
41
The DTA with Vietnam provides the criterion of “registry or constitution”.
42
“Cuando en virtud de las disposiciones del párrafo 1, una persona, que no sea una persona natural o física, sea
residente de ambos Estados Contratantes, se considerará residente solo del Estado de la que sea nacional. Si fuere
nacional de ambos Estados Contratantes, o no lo fuere de ninguno de ellos, los Estados Contratantes harán lo
posible por resolver el caso mediante un procedimiento de acuerdo mutuo. En ausencia de acuerdo mutuo entre
las autoridades competentes de los Estados Contratantes, dicha persona no tendrá derecho a ninguno de los
beneficios o exenciones impositivas contempladas por este Convenio” (our emphasis).
43
It should be noted that the text skips the phrase “or it is of neither of them”.
44
“Cuando en virtud de las disposiciones del párrafo 1, una persona que no sea una persona física, sea residente
de ambos Estados Contratantes, las autoridades competentes de los Estados Contratantes harán lo posible por
resolver de común acuerdo la cuestión, y determinar la forma en que se aplicará el Convenio a dicha persona,
tomando en consideración su lugar de constitución, sede de dirección efectiva o cualquier otro criterio de
naturaleza similar. En ausencia del citado acuerdo, se considerará que dicha persona se encuentra fuera del
ámbito del presente Convenio, salvo por lo que se refiere al Artículo 26 denominado “Intercambio de Información”
(our emphasis).
903
Uruguay
APA,45 and in relation to bilateral APAs, it has introduced in its domestic legislation46 the
possibility to materialize such agreements with tax administrations of others jurisdictions,
within the framework of the DTAs in force. It should be noted that as of today there is a
negotiation of a bilateral APA in progress within the context of one of these treaties.
Arbitration. Finally, as a result of the negotiations, it is possible to identify arbitration
provisions in some of the DTAs signed by Uruguay prior to the signature of the MLI. In effect,
in six of its DTAs, an arbitration clause is identified within the article corresponding to MAP.
These are the DTAs with Switzerland, Liechtenstein, Belgium, Luxembourg, and more
recently (signed in 2016), the DTAs with UK and with Chile. The clauses agreed follow in
general the proposal of article 25 of the OECD MC. However, in the case of the DTA with Chile,
the submission to arbitration is driven by, besides the request of the taxpayer, the agreement
of the contracting states, being therefore of a voluntary nature.
Uruguay lacks practical experience in arbitration under the DTAs. As mentioned below,
Uruguay has not chosen to apply Part VI of the MLI, referring to the introduction of a mandatory
and binding arbitration procedure in case of disagreement between the contracting states.
Uruguay, although not a member of the OECD, is as of 30 June 2016, date of its adhesion to
the IF on BEPS, full member of it and, therefore, has committed to adopting the so-called
“minimum standard”, mandatory of the BEPS Action Plan. This standard consists in the
adoption of measures aimed at eliminating harmful tax practices (Action 5, “Countering
Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance”),
preventing the abusive use of DTAs (Action 6, “Preventing the Granting of Treaty Benefits
in Inappropriate Circumstances”), adopting the requirement for standardized country by
country reports regarding transfer pricing (Action 13, “Transfer Pricing Documentation and
Country-by-Country Reporting”), and ensuring dispute resolution mechanisms (Action 14,
“Making Dispute Resolution Mechanisms More Effective”).
For its part, the MLI arises as the result of Action 15 “Developing a Multilateral Instrument
to Modify Bilateral Tax Treaties”, and although it is not part of the aforementioned minimum
standard, it is presented as an agile means to align existing DTAs with the recommendations
-in terms of treaty provisions- that the above-mentioned standard imposes. So in the case
of Uruguay, in the text of the Bill of approval of the MLI sent by the Executive Power to the
General Assembly it is possible to read: “[the MLI] appears as a quick and efficient option to
adapt the entire network of double tax treaties… in force… as provided in the aforementioned
actions [the minimum standard on BEPS]”47. In effect, the individual renegotiation of each
45
“Primera en Sudamérica – DGI firma Acuerdo Anticipado de Precios” (available at: https://www.dgi.gub.uy/wdgi/
page?2,principal,ampliacion,O,es,0,PAG;CONC;44;15;D;primera-en-sudamerica-dgi-firma-acuerdo-anticipado-
de-precios;0;PAG;).
46
Decree Nº 160/017 of 20 June 2017, based on the authority given by the law.
47
Our translation; Bill of 4 June 2018 (available at www.presidencia.gub.uy).
904
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agreements of the treaty network would require much time and resources, and that is why
Uruguay opts for the path of the MLI.48
Also, the Bill states that the provisions adopted, have been subject to an “exhaustive
analysis by the professionals of the Ministry of Economy and Finance and the General Tax
Directorate, in order to choose the most convenient for a country like Uruguay, fundamentally
paying attention to the application of the principle of territorial taxation in relation to foreign
investment in our country”.49
Moreover, it should be kept in mind that Uruguay has participated in the ad hoc Group
-integrated by ninety-nine countries-, in charge of developing the MLI, although having
participated in said working group does not necessarily imply the commitment to the
signature of the convention.
Having said this, on 7 June 2017, Uruguay signed the MLI, making the corresponding
reservations and notifications. On 4 June 2018 the Executive Branch remitted the Bill of
approval of the MLl and the reservations and notifications made by Uruguay which are finally
approved by Law N° 19.814 of 18 September 2019.
When making its notifications, Uruguay included a total of 20 tax treaties, i.e. the entirety of
its network of treaties signed, up to that moment (Belgium, Chile, Ecuador, Finland, Germany,
Hungary, India, Rep. of Korea, Liechtenstein, Luxembourg, Malta, Mexico, Portugal, Romania,
Singapore, Spain, Switzerland, United Arab Emirates, United Kingdom and Vietnam).
Of that number, 80 per cent qualify as covered tax agreements under the MLI; in effect,
just four of the above-mentioned DTAs do not qualify as such because as of today, the
counterpart has not notified its inclusion, or the counterpart is not signatory of the MLI. In
the first group, we find the DTAs with Germany and Switzerland, while in the case of the DTAs
with Ecuador and Vietnam, these countries have not signed the MLI nor have expressed their
intention to do so.50 In this respect, it should be noted that Ecuador is not a member of the IF
on BEPS while Vietnam has adhered to it.
The MLI contains mandatory provisions, i.e. regarding these it is not possible to establish
reservations or when possible, in very specific cases. These are articles 6, 7 and 16 of the MLI,
namely, “Purpose of a Covered Tax Agreement”, “Prevention of Treaty Abuse” and “Mutual
Agreement Procedure”, respectively, and they conform the above-mentioned mandatory
minimum standard on BEPS in relation to treaty abuse and dispute resolution.
At the request of the general reporters, this section refers to the option made by Uruguay,
through the formulation of reservations and notifications on the provisions contained in the
MLI.
48
It should be noted that the countries of the IF on BEPS have the option not to subscribe to the MLI committing
to the renegotiation of those DTAs that do not comply with the mandatory minimum standard.
49
Our translation.
50
According to the detail of signatories and expressions of intent as of 30 September 2019 (www.oecd.org).
905
Uruguay
Uruguay did not reserve in respect to:

–– Article 6 (Purpose of a Covered Tax Agreement) of the MLI, notifying the option for
paragraph 3 (“Desiring to further develop their economic relationship and to enhance
their co-operation in tax matters,”), as well as the DTAs and corresponding texts -of the
preambles;
–– Article 7 (Prevention of Treaty Abuse) of the MLI, notifying the option to apply the
discretional rule for granting the benefits of the treaty contained in paragraph 4 as well
as the simplified limitation on benefits (SLOB) provision contained in paragraphs 8 to 13,
as a supplement to the PPT, the DTAs and corresponding provisions;
–– Article 8 (Dividend Transfer Transactions) of the MLI which foresees a minimum period
of possession of 365 days to access the reduce tax limit at source, notifying the DTAs that
count with a substantive participation clause;
–– Article 9 (Capital Gains from Alienation of Shares or Interests of Entities Deriving their
Value Principally from Immovable Property) of the MLI, notifying the option for paragraph
4, as well as the DTAs and corresponding provisions;
–– Article 10 (Anti-abuse Rule for Permanent Establishments Situated in Third Jurisdictions)
of the MLI, notifying the DTAs and corresponding provisions (in this case, just the DTA
with Chile contains such a provision);
–– Articles 12, 13, 14 and 15 of the MLI referred to the measures to combat the avoidance
of a PE, notifying option A of article 13 as the one chosen, as well as the DTAs and
corresponding provisions;
–– Article 3 (Transparent Entities) of the MLI, notifying the DTAs and corresponding
provisions;
–– Article 4 (Dual Resident Entities) of the MLI, notifying the DTAs and corresponding
provisions;
–– Article 5 (Application of Methods for Elimination of Double Taxation) of the MLI, notifying
option C (paragraphs 6 and 7) as the one chosen, as well as the DTAs and corresponding
provisions (in this case, the DTAs with Germany and Hungary);
–– Article 16 (Mutual Agreement Procedure) of the MLI, notifying the DTAs and corresponding
provisions.
–– Uruguay made some reservations, namely:
–– the right not to apply article 11 (Application of Tax Agreement to Restrict a Party’s Right
to Tax its Own Residents) of the MLI and
–– the right not to apply article 17 (Corresponding Adjustments) of the MLI to the DTAs
that contain such a provision -as mentioned above, all of them except for the DTA with
Hungary.
Finally, Uruguay has not opted for applying Part VI of the MLI, referred to the introduction
of a mandatory and binding arbitration procedure in case of disagreement between the
contracting states. In this regard, it should be noted that, as we mentioned above, Uruguay
does not have much practical experience, neither regarding MAP, as there is only one case
under MAP, which is currently in progress.
Since the signature of the MLI, Uruguay has added another four DTAs to its treaty network,
signed with a non-OECD country (but of the IF on BEPS), two OECD country members, and
906
Sacchi
a country in the process of becoming a member of that organization. They are, respectively,
the DTAs with Paraguay, signed in September 201751 and currently in force, and the DTAs
with Italy, Japan and Brazil (signed in March, September and June 2019, respectively). It
should be noted that Brazil has not subscribed to the MLI, announcing that it would adopt
the recommendations on BEPS through bilateral renegotiation of its DTAs.
Although Paraguay has not joined the MLI, it is a member of the IF on BEPS and therefore
committed, like Uruguay, to adopting the mandatory minimum standard. The agreement
signed thus incorporates several of the BEPS recommendations contained in the multilateral
instrument, namely:
–– the post-BEPS preamble (including the optional phrase on enhancing economic
relationship and co-operation);
–– all the anti-avoidance measures regarding the PE;52
–– the provision referring to the corresponding adjustment with regard to transfer pricing;
–– regarding capital gains and the anti-avoidance clause on immovable property companies,
it includes the testing period of 365 days prior to the alienation of shares or other
comparable rights such as rights in a company or a trust to the effects of evaluating the
value threshold;
–– the PPT and a LOB provision;
–– the anti-avoidance clause applicable when a PE in a third jurisdiction is used.
Moreover, this DTA also provides for a subject to tax clause and includes in its Protocol the
same explanation of the expression “when that income is not effectively subject to tax”,
as provided in the Uruguay-Chile DTA.53 The DTA does not adopt any clause regarding the
treatment of transparent entities, and in respect to dual resident entities, it provides for
the mutual agreement as a second option, after the criterion of nationality. As for dividend
income, the DTA has no substantive participation clause, and therefore does not apply the
provision of the minimum holding period in this matter. Finally, the DTA foresees a MAP, but
does not incorporate an arbitration clause.
In the text of the DTA signed with Italy54 and with Brazil55 we find the inclusion of the
following provisions, recommended by the BEPS Action Plan:
–– the post-BEPS preamble (including the optional phrase on enhancing economic
relationship and co-operation);
–– the dual resident entities clause, providing for the resort to a mutual agreement in those
cases;
–– only in the DTA with Brazil, the transparent entities provision plus the phrase of article
3(3) of the MLI (“In no case shall the provisions of this paragraph be construed to affect
a Contracting Jurisdiction’s right to tax the residents of that Contracting Jurisdiction”);
–– all the anti-avoidance measures regarding the PE (except for, as in the DTA with Italy, the
anti-fragmentation of contracts clause for the construction and services PEs);
–– only in the DTA with Italy, the provision referring to the corresponding adjustment with
regard to transfer pricing;
51
Ratified by Law No 19,697 of 20 October 2018.
52
Moreover, and following the modification introduced in the last update (2017) of the UN MC, it eliminates the
reference to “the same or connected projects” in the “services PE”.
53
See explanation supra.
54
Ratified by Law N° 19,819 of 18 September 2019.
55
Not yet ratified.
907
Uruguay
–– regarding capital gains and the anti-avoidance clause on immovable property companies,
it includes the testing period of 365 days prior to the alienation of shares or other
comparable rights such as rights in a company or a trust to the effects of evaluating the
value threshold;
–– in the DTA with Italy, the PPT and, in the DTA with Brazil, the PPT and a LOB provision;
–– the anti-avoidance clause applicable when a PE in a third jurisdiction is used.
–– Regarding dividends, both DTA include a substantive participation provision. However,
the DTA with Italy does not include the minimum holding period provision required in
this matter proposed by the recommendations on BEPS.
Both DTAs foresee a MAP; in the DTA with Italy, also, an arbitration clause. Nevertheless,
arbitration is not mandatory as it establishes that this would apply when the competent
authorities of the contracting states so agree.
On the other hand, it should be highlighted that the treaty with Italy provides for source
taxation in relation to the category “Other income”, when there is lack of taxation in the state
of residence (article 21(3)), understanding that the item of income is not taxed if it benefits
from a tax exemption.
The DTA with Brazil includes in its Protocol a subject to tax provision regarding article
7 (Business profits). This treaty also includes a provision regarding the interaction of the
domestic anti-avoidance legislation and the treaty, allowing the application of the first-
mentioned, including thin capitalization and foreign controlled companies’ legislation.
The MAP foreseen in the DTA with Paraguay and with Italy, does not contemplate the new
text that establishes the possibility of starting the procedure before any of the contracting
states, which is present in the DTA with Brazil.
Though, as for today, the text of the DTA with Japan has not been published, it is possible
to confirm it contemplates several of the anti-BEPS recommendations.
In our country, DTAs are incorporated with the rank of law into the national legal system
according to the procedure provided in the Constitution of the Republic.56 Thus article 168
of the Constitution establishes that it corresponds to the Executive Power “to conclude and
sign treaties, needing to ratify them, the approval of the Legislative Power”. On the other
hand, according article 85, it is the responsibility of the General Assembly (Legislative Power)
“to approve or fail to approve by absolute majority of votes of the total components of each
Chamber, peace, alliance, commerce treaties and the conventions or contracts of any nature
celebrated by the Executive Power with foreign jurisdictions”.57
As stated above, on 4 June 2018, the Executive Power remitted to the Uruguayan
56
Nieves, G., “Interpretación y aplicación de convenios de doble imposición internacional”, RT, No 232, 2013, p. 11.
57
Our translation.
908
Sacchi
parliament a Bill for the approval of the MLI and the reservations and notifications made by
the country, which was later ratified on 18 September 2019. As of the day of the preparation
of the present report, the instrument of ratification has not yet been deposited.
It should be noted that when the aforementioned bill was remitted, and as it is read
from the explanatory statements (under the heading “Consolidated texts”), “two comparative
tables with the texts of each of the DTAs and the texts of the DTAs modified by the application
of this instrument”58 were presented in Annexes (15 in total59), “[t]o the effects of a greater
understanding of the impact of MLI on the different DTAs signed by our country”.60
It is to be expected that the Uruguayan tax authority publishes each updated61
consolidated text once the MLI starts entering in force for each of the DTAs covered.62
As an international treaty, the MLI gets the normative hierarchy of a national law once it has
completed the procedure detailed above.
However, De León and Ferrari refer to treaty override and highlight that national scholars
specifically admit that a subsequent national domestic law would not repeal the provisions of
a tax treaty ratified by the Legislative Power.63 When a treaty is incorporated into the domestic
law Nieves points out that a normative conflict may arise, if the treaty contradicts another
rule, preceding or subsequent, in which case it distinguishes in the rules contradicted. If
the contradicted rule, either preceding or subsequent, has constitutional rank, it must be
given priority, (and the state shall assume the corresponding international responsibility for
breaching the international commitment). If the contradicted rule has legal status, and it is
a preceding rule, incorporation into the internal order of the treaty through a law produces
the repeal of the contradicted rule (lex posterior derogat lex anterior). If it were a subsequent
law that contradicts the treaty, he indicates that this case although “has not received a
monolithic position by neither the national doctrine nor the national jurisprudence”, the most
representative doctrine “has commented in favor of the primacy of the rule of International
Public Law, as this is a direct exercise of the sovereign, while the others are product of an
activity delegated by that”.64
58
These texts were prepared based on the position of each country at that moment.
59
Take into account that, at the time of remittance of the bill, the DTA with our country had not been notified by
neither Germany nor Switzerland -still the current situation-, and Ecuador, Vietnam and UAE had not signed the
MLI (UAE did on 27 June 2019).
60
Our translation.
61
Considering that the positions of each country may vary by the time the instrument of ratification, acceptance
or approval is deposited.
62
The OECD published a guide to this effect in November 2018 (OECD, Guidance for the development of synthesized
texts, Multilateral Convention to Implement Tax Treaty Measures to Prevent BEPS, OECD, Paris, 2018, pp. 99).
63
De León, P. y Ferrari, M., “Los retos de la fiscalidad internacional latinoamericana en el contexto actual ¿Hacia
la convivencia de un convenio multilateral BEPS con convenios bilaterales para evitar la doble imposición
internacional?”, RT, No 250, 2016, pp. 66, 91 y 92.
64
Our translation; Nieves, G., “Interpretación y aplicación de convenios…, ob.cit., p. 11, citando a Jiménez de
Aréchaga, E. Arbuet-Vignali, H. y Puceiro Ripoll, R., “Derecho Internacional Público”, Tomo I, El Derecho de
los Tratados, Sección IV “Interpretación de los Tratados”, 2005, FCU, p. 410.
909
Uruguay
As mentioned above, the MLI has just been ratified by the Uruguayan parliament.
In Part One of the present work we made reference to Uruguay’s accession to VCTL through
Law N° 16,173 of 30 March 1991. In this regard, it is understood that the interpretation of the
DTAs signed by our country is governed by the interpretative rules of articles 31 to 33 of the
aforementioned convention.
Nieves raises the question of “finding out if VCTL embraces as instruments of
interpretation the OECD MC and its Commentaries according to the concept of ‘context’ that
the convention gives us in its article 31(2)”. It states65 that scholars have understood that “the
Commentaries cannot be considered as binding in any case, notwithstanding the fact that
they provide a clear indication of the Contracting States, stronger if they are members of the
OECD and have representatives in its Committee of Fiscal Affairs”. Also, De León and Ferrari
point out that the Uruguayan doctrine coincides in rejecting the dynamic application of the
Commentaries, since it has been understood that “the country lacks all participation in the
elaboration process, and, consequently, the slightest possibility of influencing the result”;66
this would undermine the principles of legality and of legal certainty.67
t should be noted that although Uruguay participates in the Committee on Fiscal Affairs of
the OECD, it is not a member of it. Also, with respect to “democratization”68 of the BEPS project
that the IF on BEPS has meant, the IF has been conceived mostly for the implementation and
not for the discussion of the measures of the BEPS Action Plan, after the publication of the so-
called “final reports” of 2015. However, it should be recognized that it is the IF on BEPS that
is currently working on Action 1.
Regarding this point we refer to what has been indicated in previous sections.
65
Ibid, p., cita a Keel, C., “La interpretación y calificación en los Convenios para Evitar la Doble Imposición”, RT (IUET),
No 216, 2010, p. 423. Also, see De León, P. y Ferrari, M., “Los retos de la fiscalidad internacional latinoamericana…,
ob.cit, p. 66.
66
Our transaltion; De León, P. y Ferrari, M., “Los retos de la fiscalidad internacional latinoamericana…, ob.cit., p.
67.
67
Mazz, A., “La interpretación de los Convenios para evitar la doble imposición”, RT (IUET), 2013, p. 262.
68
It has been understood that the IF on BEPS is created at the heart of the OECD to the effects of democratizing and
in this way legitimizing at the level of non-member countries, the action of this organization. The IF established
“a broad multilateral governance forum that conferred a degree of ex post legitimacy on the BEPS Project”
(Christians, Allison, Schon, Wolfgang y Shay, Stephen E., “Foreword: International Tax Policy in a Disruptive
Environment”, Bulletin for International Taxation (IBFD), Vol. 72, No 4/5 (Special Issue), 2018, p. 192).
910
Sacchi
The Uruguayan tax authority has not made public statements regarding the measures which
are intended to be implemented for the effective and efficient application of the provisions
taken once the MLI starts to enter in force for each of the covered tax agreements.
In this regard, granting the existence of legal certainty and the protection of taxpayer
rights are desirable principles, in particular in relation to the application of the PPT clause,
since it has been understood it may represent a source of great discretion in favor of the tax
authority. In its implementation, the principle of legality must be observed, i.e. any anti-
avoidance measure requires “concrete rules in positive law, incorporated at the legal level,
that allow for its application”, since “the inclusion of precepts of such nature only corresponds
to the legislator and should not be considered released to the interpreter, not even when
this is a judge”.69
National bibliography
Acosta, N., Bruzzone, L. y Nieves, G., “El abuso de Convenios: modalidades y forma de
evitarlo desde la perspectiva uruguaya”, Revista Tributaria IUET, No 245, 2015, pp. 197-222.
Birnbaum, F. y Hessdorfer, A., “The notion of tax and the elimination of international
double taxation or double non-taxation – Uruguay Branch Report”, in IFA: Cahier de droit
fiscal international, Vol. 101 B, 2016, p. 893-914.
De León, P. y Ferrari, M., “Los retos de la fiscalidad internacional latinoamericana en el
contexto actual ¿Hacia la convivencia de un convenio multilateral BEPS con convenios
bilaterales para evitar la doble imposición internacional?”, RT, No 250, 2016, pp. 65-97.
Faget, A., “Interpretación y calificación en materia tributaria. Las formas jurídicas inadecuadas
y el fraude a la ley fiscal”, RT, No 181, 2004, pp. 431-440.
Ferrari, M. y Sartori, E., “Las cláusulas antiabuso específicas y los Convenios de doble imposición
– XXVII Jornadas Instituto Latinoamericano de Derecho Tributario”, RT, No 240, 2014,
pp. 509-532.
Fraschini, J.I. y Sartori, E., “Tax treaties and tax avoidance: application of anti-avoidance
provisions – Uruguay Branch Report”, in IFA: Cahier de droit international, Vol. 95 A, 2010,
pp. 847-863)
Mazz, A.,
“La adaptación de los tratados internacionales al marco multilateral propuesto por el Plan
de Acción 15 BEPS”, RT, No 266, 2018, pp. 673-710;
“La interpretación de los Convenios para evitar la doble imposición”, RT, No 233, 2013, pp.
227-262.
Nieves, G.,
“Interpretación y aplicación de convenios de doble imposición internacional”, RT, No 232,
2013, pp. 5-66.
“La interpretación de los convenios para evitar la doble imposición”, RT, No 217, 2010, pp.
591-630.
69
Our translation; Ferrari, M. y Sartori, E., “Las cláusulas antiabuso…, ob.cit, p. 517.
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Uruguay
Pérez Besio, I. y Galeazzi, A., “Anti-avoidance measures of general nature and scope – GAAR
and other rules – Uruguay Branch Report”, in IFA: Cahier de droit fiscal international, Vol.
103A, 2018, pp. 851-876.
Riccardi Sacchi, A.L.,
“Las recomendaciones del plan de acción contra la erosión de la base imponible y el traslado
de beneficios recogidas en el convenio para evitar la doble imposición suscrito entre
Uruguay y Chile”, Impuestos y Fiscalidad (CADE), Tomo X, 2016, pp. 61-76.
“La aplicación de los Convenios para Evitar la Doble Imposición a las entidades híbridas: Plan
de acción BEPS y caso de las entidades en régimen de atribución de rentas en Uruguay”,
RT, No 260, 2017, pp. 719-754.
Romano, A. y Serra, F., “Tratados internacionales de tributación suscritos por Uruguay.
Análisis de las diferentes categorías de rentas comprendidas (empresarias, regalías,
intereses, etc.), RT, No 223, 2011, pp. 561-582.
912

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CAHIERS DE DROIT FISCAL INTERNATIONAL

Studies on International Fiscal Law

by the International Fiscal Association

Reconstructing the treaty network

Summary and conclusions of all branch reports

List of Cahiers published since 1939

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The new Cahiers are made available annually in June.

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List of branch reports Subject 1 103

Branch reports Subject 1:

Reconstructing the treaty network

David G. Duff (Canada)

Reconstructing the treaty network

Summary and conclusions 15

Part Two: Practical Implementation of Provisions of the MLI 37

2.1.2. Publication of synthetized texts of covered tax agreements 38

David G. Duff (Canada)1

Summary and conclusions

1.1. Background to the BEPS Actions and the MLI

1.1.1. BEPS Actions and the MLI

–– a definition of closely-related enterprises for the purposes of these provisions.16

1.1.2. Pre-BEPS project responses to BEPS concerns

1.1.2.2. Treaty shopping

1.1.2.3. Hybrid mismatches

1.1.2.4. Specific treaty abuses

1.1.2.5. Avoidance of permanent establishment status

1.1.2.6. Dispute resolution

1.2. Direct impact of the BEPS Actions and the MLI

1.2.1. Contracting jurisdictions

1.2.2. Covered Tax Agreements

1.2.3. Provisions adopted

1.2.3.1. Minimum standard on treaty abuse

1.2.3.2. Hybrid mismatches

1.2.3.3. Specific treaty abuses

1.2.3.4. Permanent establishment status

1.2.3.5. Dispute resolution

1.3. Indirect impact of the BEPS Actions and the MLI

Part Two: Practical Implementation of Provisions of the MLI

2.1.1. Ratification process

2.1.2. Publication of synthetized texts of covered tax agreements

where questions of interpretation arise in relation to Covered Tax Agreements concluded in

2.2.2. The MLI as a hybrid instrument

2.2.3. The legal status of the Explanatory Statement

2.2.4. The legal status of BEPS reports

2.2.5. The “ex-post” interpretation of covered tax agreements

2.3. Interpretation issues relating to other tax treaties

depending whether the jurisdiction at stake accepts ambulatory interpretation or not.

2.4. Tax planning after the BEPS Action Plan

2.4.1. Impact of the new preamble to tax treaties

2.4.2. Impact of the general anti-avoidance rule (GAAR)

2.4.3. Impact of LOB provisions

Reconstructing the treaty network

Alfredo Garcia Prats

Alfredo Garcia Prats, Werner Haslehner, Volker Heydt, Eric Kemmeren,

Summary and conclusions

2. EU law, BEPS and “Treaty Overrides”

3. BEPS and EU Recommendations on Post-BEPS tax treaties

The European Commission 2016 Recommendation “on the implementation of measures

3.B. Recommendation on an EU-compliant Principal Purposes Test

3.C. Recommendation on the definition of “permanent establishment”

List of branch reports Subject 1 103

Summary and conclusions 15

4. Part II: The impact and implementation of the treaty-related

4.1.6. Implementation of Action 7 - Preventing the Artificial Avoidance of Permanent Establishment

4.2.6. Implementation of Action 7 - Preventing the Artificial Avoidance of Permanent