04-05-2020

The multilateral instrument; does it affect you?

The multilateral instrument

For tax on cross-border activities, companies can often rely on tax treaties with attractive tax rules and also tax advantages, which facilitate international business. However, this has changed as of 1 January 2020, due to the introduction of the multilateral instrument. From 1 January 2020, it is no longer sufficient to determine the applicable tax treaty between the two countries to establish which country may levy which income components to tax, in a given situation. The multilateral instrument (MLI), which also includes a principal purpose test (PPT), must also be consulted.

MLI

The aim of these changes is to prevent abuse of the tax system that makes undue use of tax advantages.

How does it work?

In addition to the treaty, the MLI must now be consulted. The multilateral instrument can supplement or amend a tax treaty in the case of a so-called "covered tax treaty" (a "covered tax agreement" or CTA). A Covered Tax Agreement means that both Contracting States have indicated that they wish to amend an existing treaty, using the MLI. The MLI should therefore be seen as an addition to the already applicable tax treaty.

Introduction of MLI in the Netherlands

The Netherlands implements the MLI broadly, not only with regard to the number of treaties that are brought under the MLI, but also with regard to the inclusion of non-mandatory components. However, not every country has adopted the non-compulsory components as widely as the Netherlands, which affects the effectiveness of the MLI. If both states have opted for a certain measure, then that measure in the MLI prevails. Unless it is a minimum standard, which means that every Member State must include this measure.

PPT

The principal purpose test is a part of the MLI. In short, this is a test that is meant to check whether certain activities or certain constructions haven’t been created purely in order to obtain a tax benefit. If this is the case, the tax benefits are not granted. Obviously, this is different if the granting of its benefits is in line with the purpose and scope of the Treaty provision in question.

Does this affect you?

Whether the MLI has consequences for you, depends on the answers to the following questions:

  • Was the availability of a treaty benefit one of the reasons for setting up the entity?

  • Does this entity benefit financially from the treaty?

  • Does the entity share or pay the tax benefits to other entities in its group?

  • Are the economic and commercial reasons for the establishment of this entity not immediately clear?

Have you answered one or more of these questions positively, or are you unsure whether the MLI applies to you? Per January 1, 2020, tax benefits may change for you. Then it may be necessary to adjust the company structure in order not to be negatively affected by the MLI

Do you want to know if this is the case for you and call in our help? Or do you have other questions about this article? Please contact one of our tax-advisors.

Would you like more information? Please feel free to contact us.
More information? +31 (0)53 850 49 00
Contact us

In order to help you in a more personal manner, we use cookies. We make use of cookies to keep abreast of statistics but also for marketing purposes (for example to provide personal advertisements). By clicking on ‘personal settings’ it is possible to read more about our cookies and set your personal preference. By clicking on ‘Accept’ you agree to the use of cookies as stipulated in our cookie statement.