Updated
GL-M-04
Glossary · Taxes and residency
MLI - the convention that changes hundreds of tax treaties at once
01 / In 30 seconds
The short answer
- What it is
- A multilateral convention that amends many tax treaties at once
- Why it was created
- To introduce measures against tax treaty abuse quickly
- The main mechanism
- The principal purpose test: benefits are denied if a transaction was designed mainly to obtain them
- What this means
- Formal compliance with a treaty is no longer enough
- The practical conclusion
- A structure must have a business purpose beyond the tax benefit
02 / In plain words
What MLI means
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.
A case from practice
A client’s structure included an intermediate company with no real activity, set up for a preferential rate. After the changes this arrangement became vulnerable, and the structure was simplified — with a clear economic rationale for the remaining elements.
When it comes up
- Claiming benefits under a tax treaty
- Paying dividends and interest abroad
- Planning a holding structure
- Reviewing old structures
- Choosing a country for an intermediate company
- Tax audits of cross-border payments
03 / What it covers
What the convention changes
Mechanism
- Amending many treaties at once
- Each country chooses the provisions
- Compatibility of the parties’ positions
Purpose test
- The principal purpose of the transaction
- Existence of a business purpose
- Denial of the benefit
Presence
- Genuine activity
- Staff and decisions
- Economic sense
Consequences
- Withholding rates
- Double taxation
- Reviewing the structure
04 / How it works
How to check your structure
Identify the applicable treaties
Which treaties apply to your flows.
Check whether they are affected by the MLI
Whether they are amended by the MLI.
Assess the structure’s business purpose
Whether there is a business reason beyond tax.
Remove the weak points
Presence, staff, decisions.
Document the rationale
The rationale is ready for the tax office.
05 / Key facts
What you need to know
01What it is
A multilateral convention
It amends many bilateral tax treaties at once.
02How it applies
Each country chooses
A country lists which of its treaties are covered and which provisions it accepts.
03The key point
Principal purpose test
If a treaty benefit was one of the main purposes of a deal without a business reason, it can be denied.
04For the client
A business purpose is needed
A company set up for a lower withholding rate without real activity has become vulnerable.
Common mistakes
Reading a treaty without the MLI
Check the consolidated treaty text with the MLI changes.
Building a structure for the rate
Justify the structure with activity and presence.
Not documenting the business purpose
Put the business rationale on file before the tax office asks.
06 / Expert advice
How to prepare in advance
Check whether the treaties applicable to you are affected by the convention and to what extent. Then assess the structure objectively: does it have a business purpose beyond the tax one, is there real activity and presence. The rationale is documented — in an audit you will need to explain why the structure exists.
What we do for you. We review clients’ existing structures for their sustainability: is there a business purpose, is there presence, will the arrangement withstand scrutiny. Schemes from the last decade often need to be revisited.
Dmitry NagyTax consultant, international taxation and compliance (ex-Big4)
07 / Questions
Frequently asked questions
A multilateral convention that makes it possible to amend many bilateral tax treaties at once and introduce measures against abuse.
A rule under which a benefit may be denied if obtaining it was one of the principal purposes of the transaction and there is no business purpose behind it.
Not any more. Beyond formal compliance, the substance is assessed: does the structure have a real business purpose.
No. Those that both parties have listed are affected, to the extent of the provisions adopted by both countries. This is checked for the particular pair of countries.
Assess the business purpose and presence, remove the weak points and prepare a documented rationale — or simplify the structure.
By real activity, staff, the place where decisions are taken, the economic sense of the transactions and documents confirming all of this.
INITIAL ASSESSMENT
Tell us what outcome your family needs
We will design a solution for your case, choose the country and the right status, and take the whole process through to the result.
