MLI and prevention of treaty abuse

26th of June 2019 | Door:  Barry Scheer

With respect to the multilateral instrument (MLI), individuals and companies must be alert when using treaty benefits. Individuals and companies must take into account the influence of the multilateral instrument and the principal purpose test on the effect of the tax treaty. Consulting only the tax treaty is no longer sufficient.

Source: Taxence, 12 June 2019

The multilateral instrument, or MLI, supplements a tax treaty or modifies a tax treaty only under a so-called "covered tax agreement" (CTA). This means that both contracting countries have indicated that they wish to amend an existing treaty using the MLI. The provisions of the MLI include treaty changes for the following subjects: hybrid mismatches (BEPS Action 2), prevention of treaty abuse (BEPS Action 6), permanent establishments (BEPS Action 7) and dispute resolution (BEPS Action 14). The MLI offers flexibility because some provisions are optional and thus enable countries to adjust their tax treaties based on policy preference. An MLI provision only applies in a CTA if both countries have made the same choice.


In practice, the effect of the MLI means that from now on two instruments must be consulted for the adoption of relevant treaty provisions between two countries: the applicable bilateral tax treaty and the MLI.

The principal purpose test (PPT) is used to prevent the granting of treaty benefits in certain situations. These are situations in which it can reasonably be concluded that obtaining the treaty benefits was one of the main objectives of the construction or transaction. As an exception to this rule, the treaty benefit is not withheld in situations where its grant would be in line with the purpose and scope of the relevant treaty provisions.