The MLI is an instrument created by the OECD. Almost half of the countries in the world use it. The objective of the MLI is simple: in cases where a tax treaty is in use but where it is now believed that it is no longer fair, the application of the treaty must be refused or amended. The multilateral instrument (MLI) entered into force in the Netherlands on January 1, 2020. For many treaties this means that the application of such a treaty is not as self-evident as before.
In times like these – COVID-19 – many businesses are busy with other matters. Many organizations are facing unexpected circumstances and tax treaties are no longer an immediate priority. Numerous businesses are currently giving priority to optimizing their liquidity. Cash must be moved quickly to places in the organization where it is needed most. Withholding taxes are then an unwelcome negative cash flow, certainly when there appear to no longer be any opportunities for reductions under a particular tax treaty.
You should therefore ask yourself: Does your organization make use of a tax treaty and are you sure you can still do this?
It is understandable that other matters are currently being prioritized over the MLI. Do you want to avoid unpleasant surprises, also once the COVID 19 storm has died down? Then ask your tax advisor to prepare a preliminary overview of the extent to which the MLI impacts your situation.
We had already briefly explained the first noticeable effects of the MLI. What should you pay attention to and how can your organization safeguard itself against this legislation? To help you find your way through this maze of new regulations, we have summarized the most important points of the MLI for you and have also prepared a list of useful tools that you can use in practice.
1. Where and as of when does the MLI apply?
The MLI is now part of tax treaties with the following countries: Australia, Canada, Finland, France, Georgia, India, Iceland, Israel, Japan, Latvia, Lithuania, Luxembourg, Malta, New Zealand, Austria, Norway, Russia, Serbia, Singapore, Slovakia, Slovenia, the United Arab Emirates, the United Kingdom and Sweden.
The date it enters into force may differ per country and per tax. Here you can find a list of all the dates. The Ministry of Finance has published a similar list. As a rule of thumb we know that with regard to withholding taxes, the MLI now applies to all the above countries with the exception of Latvia (January 1, 2021), Sweden and Russia.
It is important to remember that a large number of treaties do not come into consideration for the MLI because these are still being renegotiated. It is expected that they will contain the same provisions as in the MLI. Important examples are Belgium and Poland.
2. The Principal Purpose Test (“PPT”)
The Principal Purpose Test is the general anti-abuse provision in the MLI and is also the provision that will have the most impact: if obtaining treaty benefits is one of the main reasons for an arrangement or transaction, then treaty benefits will not be granted, unless the granting of these treaty benefits is in line with the spirit and intent of the relevant treaty provision. There is still a lot of uncertainty about the explanation and interpretation of the PPT in the various countries. The relatively superficial, subjective test (“one of the main reasons”) makes the PPT an easy argument for tax authorities to use to combat (alleged) treaty abuse. However, the OECD has provided several examples that can be used as guidance for interpreting the PPT.
3. Dual residency determined on the basis of a Mutual Agreement Procedure (MAP)
The tax residence of a dual resident will in future be determined on the basis of a mutual agreement procedure. As long as this procedure has not been completed, treaty benefits cannot in principle be applied. The Netherlands has recently taken the sharp edges off this provision by, for example, stipulating that if the state of residence has already been determined on the basis of a current treaty, it is not necessary to submit a new request for a MAP. However, this is subject to conditions.
4. Amending the definition of permanent establishment
The MLI applies the permanent establishment concept in accordance with definitions arising from BEPS Action 7. The Netherlands has made an important reservation with regard to the provisions combating the artificial avoidance of a permanent establishment by means of commissionaire arrangements. The Netherlands will only apply this provision once there are clear rules about the profit attribution to Agency PEs or if there is effective conflict resolution with sufficient MLI partners. The reservation does not apply to other MLI provisions relating to permanent establishments. For example, the provisions covering the splitting of contracts, the permanent establishment in a third country and the distinctions concerning preparatory and support activities and the anti-fragmentation provisions.
5. 12-month holding period for reduced withholding tax on dividends
The Netherlands has opted to apply Article 8 of the MLI. Consequently, a reduced withholding tax rate is only allowed under matching treaties if a holding period of 365 days has been met. If the Netherlands is the distributing entity, this provision will have little relevance in light of the broad national dividend withholding tax exemption that has no holding period. However, the holding period may be important if the Netherlands is the recipient country. The 365-day period does not necessarily have to be completed before the dividend is distributed; it can also be met after the participation has distributed the dividend. It is however still unclear how the withholding or refund in the source country will be dealt with in practice.
6. Tax on capital gains on real estate companies
The Netherlands has opted to have the capital gain realized on the sale of shares in real estate companies take place in the country where the real estate is located. The right to tax can thus change dramatically in respect of real estate arrangements set up for the purpose of selling property via (untaxed) share transactions. The question is, of course, whether arrangements that were set up for the purpose of having the right to tax such capital gains untaxed fall in the Netherlands are not already affected by the PPT.
If you have any questions about developments in the field of MLI and what these may mean for your company, please feel free to contact our advisors.