You are here:
25 November 2016 / news

Launch of multilateral treaty (MLI) to implement BEPS measures

On 24 November 2016, a group of more than 100 jurisdictions concluded negotiations on a multilateral instrument (MLI) that will modify the application of existing bilateral tax treaties to implement the tax treaty measures developed through the OECD/G20 BEPS project. The MLI already covers 87 jurisdictions and has entered into force for the first group of jurisdictions on 1 July 2018. In the meantime 20 jurisdictions in total have completed the ratification procedure of the MLI.


The MLI allows for the relatively rapid inclusion in existing bilateral tax treaties of measures against treaty shopping, artificial avoidance of the permanent establishment (PE) status and hybrid mismatches, as well as improvements of the dispute resolution mechanism. Optional provisions of the MLI (generally) will only apply between jurisdictions if the jurisdictions make matching choices. Currently around 1,500 treaties are to be modified by the MLI while around 500 tax treaties more are expected to be modified.

MLI will supplement existing tax treaties

The so-called Ad Hoc Group, currently consisting of more than 100 jurisdictions, developed the MLI (in full: the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting) based on the October 2015 final report on BEPS Action 15 and as per OECD/G20 mandate. The MLI will supplement existing tax treaties by adding new provisions or by modifying or replacing existing provisions. The MLI provides flexibility to countries through opt-in and opt-out mechanisms (except for certain mandatory minimum standards), as well as alternative provisions. Where treaties already contain provisions regarding such BEPS issues, the MLI uses “compatibility clauses” that describe in detail under which circumstances a new provision is intended to be added to or to replace a provision of an existing tax treaty. The MLI is accompanied by an Explanatory Statement which provides guidance on the MLI’s interaction with existing treaties and includes Commentary on its various provisions to ensure their consistent application.

Key measures of MLI

The MLI will modify existing bilateral tax treaties through, inter alia, the following provisions:

  • Hybrid mismatches
    The MLI introduces optional treaty provisions to address hybrid mismatches arising from differences in the tax classification of an entity or an arrangement under the laws of two or more countries. According to these provisions, no tax treaty benefits shall be granted in case income is not considered to be income of a resident of one of the countries. Other measures include an optional alternative tie-breaker rule disallowing tax treaty benefits for dual resident companies unless the competent authorities settle the residence by mutual agreement.

  • Preventing treaty abuse
    To counter treaty shopping, the MLI introduces a principal purpose test (“PPT”), optionally supplemented with a simplified limitation-on-benefits (“LOB”) provision. Countries are allowed to opt out of this rule, as long as they endeavour to agree on an alternative provision that meets the minimum BEPS standards on anti-treaty abuse, such as a detailed LOB provision in combination with other measures. In addition, the MLI implements a number of specific anti-abuse provisions to target particular forms of treaty abuse, such as the exclusion of treaty benefits for income attributable to low-taxed PEs in third states.

  • Preventing the artificial avoidance of PE status
    The MLI provides optional provisions to lower the PE threshold in tax treaties and, accordingly, the bar for establishing taxable presence of non-resident enterprises in the source country. The purpose of these modifications is to counter PE avoidance strategies involving (i) commissionaire arrangements, (ii) the utilization of specific activity exemptions, and (iii) the artificial fragmentation of business activities between related parties.

  • Improving dispute resolution
    The MLI intends to strengthen the effectiveness and efficiency of the mutual agreement procedure (“MAP”) in accordance with a minimum standard. In addition, the MLI provides an optional provision on mandatory binding MAP arbitration as a mechanism to guarantee that treaty-related disputes will be resolved within a specified time frame. The improvement of effective dispute resolution mechanisms is particularly important considering the likely increase of treaty-related disputes as a result of the implementation of BEPS actions through the MLI.

Timing and implementation process of MLI

The MLI will enter into force after ratification by at least five countries. It will impact existing bilateral treaties that are explicitly designated, provided both treaty partners have ratified the MLI, and subject to domestic ratification, acceptance or approval procedures. Governments have to prepare lists of treaties to be covered, consider which options to select and which reservations to make, and notify the OECD of their choices. The OECD, acting as depositary for the MLI, will keep a public record of the accession of countries to the MLI, their opt-in and opt-out choices and the effective date for two particular countries.

Legal effect of the MLI provisions 

The MLI provisions will not be included in specific bilateral treaties through an amendment of the texts of those treaties. Instead, the MLI provisions need to be read and applied alongside these treaties. It is noted that the individual countries should decide for themselves whether they want to prepare for internal purposes consolidated versions of their treaties that are subject to the changes and additions based on the MLI.

MLI: positions of the Netherlands, Belgium, Luxembourg and Switzerland

On 12 February 2019, the Lower House of Dutch Parliament approved the MLI ratification bill. The ratification bill is yet to be approved by the Upper House. The Netherlands intends to implement the MLI measures in its tax treaties as broadly as possible, with a preference for the inclusion of a PPT as anti-abuse provision, the amended PE definition, with a (temporary) reservation of the “anti-commissionaire provision” (article 12 of the MLI) until at least year-end 2020, and mandatory binding arbitration.

Luxembourg has adopted a MLI ratification bill of law on 14 February 2019, confirming the (few) opt-ins to optional provisions indicated upon signing (see above).

Belgium has unofficially indicated a preference for mandatory binding arbitration.

Switzerland has not yet announced their positions on the MLI.

Tax shelter for equity investments in starting companies indirect investment through starter funds finally possible

Brexit: What is the applicable VAT regime for supplies of goods between the EU and UK as from January 1st, 2021?

The UK’s new status as third country for VAT purposes - as a result of the Brexit - has entirely changed the applicable VAT regime for supplies of goods between... read more

Issuance of a circular on interest deduction limitation rule

The long-awaited guidance notably clarifies the notion of borrowing costs and the grandfathering rule for loans predating 17 June 2016. read more
Belgium introduces a wealth tax with new tax on securities accounts

Belgium introduces a wealth tax with new tax on securities accounts

As announced in a previous article, the Belgian government wants to introduce a new tax in succession to the annulled tax on securities accounts. The final draft... read more
Stay informed

Don't miss out. Stay up to date about our latest news and events.

Stay informed