MLI

In plain words

The MLI is a multilateral convention that makes it possible to amend a large number of bilateral tax treaties at once. Without it, each treaty would have had to be renegotiated separately, which would have taken decades. On joining the convention, a country specifies which of its treaties are affected and which provisions it adopts.

The main practical innovation is the principal purpose test. In essence: if obtaining a benefit under a tax treaty was one of the principal purposes of a transaction or structure, and there is no business purpose behind it, the benefit may be denied. Formal compliance with the letter of the treaty is no longer sufficient.

For clients the conclusion is concrete. Schemes in which a company in a particular country was set up solely for a reduced withholding rate have become noticeably more vulnerable. A structure must have a clear business rationale: real activity, presence, economic sense beyond the tax saving. This is the substantive shift that the MLI has consolidated.

When it comes up

What the convention changes

How to check your structure

1. 01Identify the applicable treaties
2. 02Check whether they are affected by the MLI
3. 03Assess the structure’s business purpose
4. 04Remove the weak points
5. 05Document the rationale

What you need to know

• The convention amends many treaties at once
• Countries choose which provisions to adopt
• The principal purpose test is the key innovation
• Formal compliance with the treaty is not enough
• The structure’s business purpose must be documentable

Common mistakes

• ✕Relying on the treaty text without taking the changes into account
• ✕Building a structure solely for a preferential rate
• ✕Having no documented rationale for the business purpose
• ✕Using companies without real presence
• ✕Relying on schemes that worked before these changes

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