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The MLI’s impact on alternative investment funds


On June 7 2017, more than 70 governments participated in the signing ceremony of the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). Andrew Quinn, David Burke, Peter Stapleton and William Fogarty of Maples and Calder discuss how the convention will affect alternative investment funds.


The MLI was an initiative of the OECD and is the first international legal agreement of its kind that has the effect of amending a series of bilateral treaties between countries.

The effect of the MLI is that countries including Ireland will transpose certain provisions relating to the OECD's base erosion and profit shifting (BEPS) project into their existing networks of bilateral tax treaties without the requirement to renegotiate each treaty individually. This is a hugely significant development in the approach to international tax. More than 100 countries participated in drafting and negotiating the MLI, including Ireland, the US, UK and most EU countries. To combat tax avoidance, BEPS proposed certain minimum standards that countries must include in their double tax treaties as well as a number of optional provisions which countries may choose to include. The MLI is the mechanism by which this will be achieved, with a view to minimising time-consuming and complex bilateral negotiations.

How it works

Participating countries have or will furnish the OECD, as depositary of the MLI, with a list of the treaties they want to amend, in accordance with the MLI. A treaty will be modified only if all parties to it agree (covered tax agreement, or CTA). A country does not need to list all its treaties and is free to pursue bilateral negotiations with a treaty partner instead. The MLI will ensure that all CTAs will comply with the BEPS minimum standards. Countries will also provide a list of the optional provisions of the MLI, known as technical reservations, which they want to apply to their treaties. The OECD will then publish online the list of both the treaties and the options chosen for each treaty.

The MLI does not directly amend the underlying text of a treaty but will instead be applied alongside the existing treaty, modifying its application. Countries may prepare consolidated versions of treaties, but there is no requirement to do so. For example, the Irish government has confirmed that 71 of Ireland's 73 double tax treaties will be treated as covered by the MLI and that, in the context of the BEPS treaty abuse action point discussed further below, they will adopt the principal purpose test (PPT) in those treaties. Accordingly, where a treaty partner country agrees to treat its double tax treaty with Ireland as a CTA, that treaty will be amended by the MLI once it has entered into force.

Treaty abuse

A key aim of the MLI is to implement the recommendations of Action 6 of the BEPS action plan on treaty abuse that introduced minimum standards to prevent the granting of tax treaty benefits in unintended circumstances. In all cases, countries must include in their tax treaties an express statement that their common intention is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements.

The Action 6 report also states that tax treaties should, at a minimum, include:

  • A PPT only;

  • A PPT and either a simplified or detailed limitation on benefits test (LoB); or

  • A detailed LoB provision, supplemented by a mechanism that would deal with conduit arrangements.

For the reason that a PPT is the only approach that can satisfy the minimum standard on its own, it is presented as the default option in the MLI. Parties are then permitted to supplement the PPT by choosing to apply a simplified LoB provision that is set out in the MLI. Given that a detailed LoB provision would require substantial bilateral customisation, which would be challenging in the context of a multilateral instrument, the MLI does not include text for a detailed LoB provision. Instead, parties that prefer to address treaty abuse by adopting a detailed LoB provision are permitted to opt out of the PPT and agree instead to endeavour to reach a bilateral agreement that satisfies the minimum standard. Indeed, countries must confirm that their treaties will comply with the minimum standard requirements if this approach is taken. This is expected to cover Japan and the US.

The simplified LoB would limit the benefits of treaties to certain qualified persons. The list of qualified persons includes companies owned as to at least 75%, directly or indirectly, by equivalent beneficiaries. It is under this limb that the OECD expects most non-collective investment vehicle (non-CIV) funds to qualify, though it should be noted that many alternative investment funds would not qualify. It also raises compliance and administrative issues related to the determination of the identity and treaty entitlement of investors (i.e. the determination of investors' status as equivalent beneficiaries. The OECD suggests that countries enter into an agreement to deal with this issue similar to the model agreements drafted as part of the Treaty Relief and Compliance Enhancement (TRACE) project.

Application of the PPT to alternative investment funds

The PPT could deny a treaty benefit (such as a reduced rate of withholding tax) if it is reasonable to conclude, having regard to all facts and circumstances, that obtaining that benefit was one of the "principal purposes" of any arrangement or transaction that resulted directly or indirectly in that benefit.

On January 6 2017, the OECD published a consultation document on non-CIV funds that includes three case studies setting out fact patterns where the OECD would regard the PPT as having been met. This will be an extremely important document once finalised and we expect it will be used in official commentary and in the interpretation of the PPT test by revenue authorities and courts. This should assist in achieving a consistent interpretation and application of the PPT in the context of alternative investment funds and investment vehicles held by such funds.

One of the non-CIV examples deals with a regional investment platform. In that example, investors have established a subsidiary as a regional investment platform, investing throughout an economic grouping area, such as the EU, and the subsidiary invests and earns dividends. The example concludes that the subsidiary is entitled to treaty access at lower rates than the investors would have been entitled to because it was set up for non-tax reasons and carries out material investment functions and other activities in the subsidiary's country of establishment. This is only applicable by analogy to multi-investor funds, but it represents a useful example and guidance in this situation.

The OECD guidance does not generally refer to any regulated functions. The positive factors cited in the OECD guidance include the following functions being carried out in the subsidiary's jurisdiction:

  • An experienced local management team to review investment recommendations;

  • Approval and monitoring investments;

  • Treasury functions;

  • Maintaining books and records, and ensuring compliance with regulatory requirements in states where it invests;

  • A board of directors composed of a majority of locally resident directors with expertise in investment management; and

  • Paying tax and files tax returns locally.

We expect the OECD guidance to continue to evolve over several years.

Permanent establishments

Article 12 of the MLI provides that the threshold at which a permanent establishment (PE) (taxable presence) arises will be lowered in different ways including through:

  • Broadening the scope of dependent agent PEs (preventing the use of commissionaire arrangements and other matters);

  • Narrowing exemptions for fixed place of business PEs by requiring activities to be "preparatory or auxiliary" in character; and/or

  • By introducing an anti-fragmentation rule.

A country may reserve the right for the entirety of Article 12 not to apply to its CTAs. For alternative funds resident in a country which adopts Article 12, and which engages in activity in other countries that adopt Article 12, the MLI provisions on taxable presence will need to be carefully considered.

This will be relevant to an alternative investment fund which has employees or agents located in countries where it is investing, e.g. a deal team negotiating a contract with a business partner.

Dispute resolution

All CTAs will now include mutual agreement procedures (MAPs). If a tax treaty-related case qualifies to be considered under the MAP, upon the request of a taxpayer, the competent authorities should endeavour to agree between themselves how double tax agreements should apply, and implement any agreement.

Other provisions

The MLI also includes, among other things, a number of optional provisions to deal with:

  • Tax treaty treatment of transparent entities;

  • Tiebreaking procedures to determine the residence of otherwise dual resident entities; and

  • Minimum shareholding periods to apply reduced rates on both dividends and capital gains derived from immovable property.

When will MLI take effect?

If a country has signed up to the MLI, it will need to ratify the MLI in line with its domestic constitutional arrangements. The MLI will be finalised and enter into force once it has been ratified by five countries. Following a period of three months after the date of ratification by the fifth state, the MLI will enter into force for those five countries at the start of the subsequent calendar month. The same three-month period will apply for all other countries that subsequently ratify the MLI. The MLI can take effect for a specific treaty only after the three-month period has expired for both countries. Provisions related to withholding tax provisions have effect for payments made after the first day of the following calendar year and provisions relating to all other taxes will have effect for taxable periods beginning on or after a period of six calendar months has elapsed, or less if both parties agree. The first amendments made by the MLI are likely to have effect from January 1 2018.

Impact of the MLI

The MLI is a novel, ambitious and potentially revolutionary document. More than 2,000 treaties could be amended through the MLI – about two-thirds of the worldwide total – if all those participating ratify the MLI. Its framers hope that widespread adoption will contribute to a rapid and consistent implementation of the BEPS project.

It is, at present, unclear whether the US will be a signatory. This is further complicated by the change in administration in the US and the need for Senate approval. On the other hand, as recently noted by the OECD, the conditions do exist in the US for fundamental tax policy reform, and BEPS/MLI may well form part of that much broader debate.

The effect of the MLI on a particular double tax treaty can only be determined once notifications and reservations have been provided by both parties to the OECD as a depositary. Countries have started sharing their treaty choices with the OECD. Once the choices are published by the OECD and formalised by each country, it will be possible to properly measure the impact of the MLI on alternative investment funds. The general advice to date for alternative investment funds is to ensure there is sufficient functionality in the jurisdiction in which a fund or investment company is based to meet any challenge based on principal purpose, and this should become clearer as the MLI is implemented and the guidance on non-CIV funds is developed.

Andrew Quinn


Partner and head of tax

Maples and Calder Tel: +353 1 619 2038

Andrew Quinn is a partner and has been the head of tax at Maples and Calder since the group's formation in 2011. He was previously a senior partner at one of Ireland's largest law firms. He is an acknowledged leader in Irish and international tax and advises companies, investment funds, banks and family offices on Ireland's international tax offerings. Andrew is a founder and current chairman of the Irish Debt Securities Association, the representative body for Ireland's securitisation and SPV industry, and is the chairman of the International Fiscal Association, Ireland. He has been extremely active in the Irish Debt Securities Association, and has liaised with the Irish government and Irish Revenue on significant issues for the Irish securitisation industry and authored the submission to the Irish government on the OECD BEPS Project. Andrew is also a member of the tax committee of the Irish Law Society and the international tax committee of the Irish Funds Industry Association.


David Burke


Of counsel

Maples and Calder

Tel: +353 1 619 2779

David Burke, of counsel, was previously a partner in a large Irish corporate law firm and worked for 10 years in London at Denton Wilde Sapte and Cadwalader, Wickersham & Taft. David assists international investment firms and their advisers to structure and implement complex cross-border financial transactions in and through Ireland. Recently, he has been involved in setting up platforms for clients to invest in structured credit, drug royalties and aircraft assets and works closely with colleagues in Maples offices in the Cayman Islands, London and Hong Kong.


Peter Stapleton


Partner and head of investment funds

Maples and Calder

Tel: +353 1 619 2024

Peter Stapleton is a partner and heads the investment funds group in Maples and Calder's Dublin office. He was previously a partner with a leading Irish law firm where he also managed their North American legal representative office. Peter has also worked for a global investment bank and a law firm in Luxembourg. He regularly advises investors, promoters, fund managers and investment banks on the establishment, structuring, financing, public and private distribution and ongoing operation of UCITS and AIFs, including hedge funds, funds of funds, master-feeders, private equity funds, managed account platforms and bespoke structures. Peter also has significant expertise advising in the areas of derivatives, prime brokerage, investment services and securities law. His clients include a wide range of financial institutions carrying out business in Ireland or transacting with Irish-domiciled counterparties from other jurisdictions.


William Fogarty


Tax partner

Maples and Calder Tel: +353 1 619 2730

William Fogarty is a tax partner with extensive cross-border experience in corporate and finance transactions. William advises a range of international investors and corporates on the tax issues associated with Irish investments and Irish entities. His advice is typically sought on structuring and in relation to novel, complex and innovative tax issues. He has also represented several international banks, investment funds and individuals in Revenue enquiries and audits. He has significant expertise in Irish property transactions, advising some of the largest investors and financiers in the market. William joined Maples in 2011. Previously, he was a senior tax associate with Linklaters in their London office.


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