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The MLI: Minimum standards and Luxembourg’s choices

Tax functions in Luxembourg have begun to evolve

Christophe De Sutter and Giedre Tamai of Deloitte Tax & Consulting explain the minimum standards of the pioneering MLI and unravel what the changes mean for Luxembourg.

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI)—an outcome of the OECD’s Base Erosion and Profit Shifting (BEPS) project—is a convention that effectively allows BEPS tax treaty-related measures to be incorporated into existing treaties without the need for countries to renegotiate their entire treaty networks. The MLI does not replace existing tax treaties, but instead applies automatically alongside a treaty, replacing or modifying treaty provisions. For a particular MLI provision to apply to a specific treaty, both treaty partners must fulfill the following conditions:

  • Sign and ratify the MLI;

  • Select the relevant treaty as a covered tax agreement (CTA) and submit their final list of reservations and notifications to the OECD; and 

  • Adopt the same treaty provisions (although asymmetrical adoption is allowed in specific cases).


To date, 90 jurisdictions have signed and almost 40 jurisdictions have ratified the MLI. The MLI entered into force in Luxembourg on August 1 2019. It will apply as from January 1 2020 for withholding tax purposes. For all other taxes, the MLI generally will apply as from fiscal years beginning on or after February 1 2020. As such, for calendar-year taxpayers, the MLI will apply as from fiscal year 2021.




The MLI contains two types of provisions that will apply to the CTAs selected by each jurisdiction: mandatory BEPS minimum standards and optional clauses.



Under the minimum standard of Article 6 of the MLI, the wording of the preamble of the relevant treaty must be updated to expand its scope and address the elimination of opportunities for non-taxation or reduced taxation through tax evasion or avoidance. In light of the extended purpose of CTAs, it is likely that tax authorities will increasingly apply domestic anti-abuse provisions to prevent taxpayers from misusing tax treaties.



One of the key measures in the MLI is the principal purpose test (PPT) found in Article 7, which is another minimum standard. The PPT operates to deny a treaty benefit in respect of an item of income or capital if obtaining this benefit was one of the principal purposes of the arrangement, unless, under the circumstances of the case, the object and purpose of the relevant CTA’s provisions allow the benefit to be granted to the recipient. Luxembourg chose to apply the discretionary relief clause of Article 7(4) according to which the tax authorities may, at the request of the taxpayer, grant tax treaty benefits if those benefits would have been granted in the absence of the transaction or arrangement. 



Moreover, before denying the taxpayer’s request, the tax authorities of the jurisdiction granting the tax treaty benefits should consult with the tax authorities of the taxpayer’s jurisdiction. The application of the MLI, therefore, is expected to result in a case-by-case assessment of the PPT in Luxembourg. It should be noted that the PPT is similar to the general anti-abuse rule (GAAR) in the EU anti-tax avoidance directive, as both are inspired by BEPS action 6. Overlaps between the application of the PPT and GAAR are possible.



Since the introduction of new anti-abuse provisions has the potential to create uncertainty for taxpayers, the MLI aims to achieve a more efficient dispute resolution mechanism by implementing the final two minimum standards: a mutual agreement procedure (Article 16) and corresponding adjustments for transfer pricing cases (Article 17).



Among the optional provisions, Luxembourg chose to apply Article 3 of the MLI, targeting hybrid structures using fiscally transparent entities (Article 3). This provision aims to prevent double non-taxation by applying a look-through approach to income or gains received by or through transparent entities. Luxembourg also has chosen to replace the tax exemption method for the elimination of double taxation with the credit method where income is exempt in a source state (Article 5) and it selected Option B of Article 13 to prevent the artificial avoidance of permanent establishment status through the use of specific activity exemptions.



Because the MLI applies in parallel to existing tax treaties and functions as an addition to the treaties, the use of the MLI is complex. The difficulty is amplified as signatories may opt in or opt out of certain clauses. To make the application of the MLI easier, the OECD has created an online MLI Matching Database that enables interested parties to compare the choices made by signatories. Moreover, some countries have published synthesized versions of CTAs, which should further facilitate the application of the MLI.

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