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Luxembourg: The latest weapon in the fight against BEPS: The MLI

The signing ceremony for the Multilateral Convention to implement tax treaty-related measures to prevent base erosion and profit shifting (MLI) is due to take place on June 7 2017. What will this treaty mean for you?

Julien LamotteVincent Reynvoet

The Multilateral Convention to implement tax treaty-related measures to prevent base erosion and profit shifting (MLI) was unveiled by the OECD on November 24 2016. The MLI was developed to swiftly amend existing bilateral tax treaties to transpose the recommendations under the OECD BEPS Project into more than 2,000 existing tax treaties worldwide.


The purpose of the MLI is to fundamentally revamp the international tax landscape. It includes a set of minimum standards that all participating countries have agreed to implement, i.e. rules regarding hybrid mismatches, treaty abuse, permanent establishments (PEs) and dispute resolution. Furthermore, it is important to note that the MLI will modify only treaties specifically identified by the participating jurisdictions in notifications to the OECD.

The MLI provides recommendations to address hybrid situations arising from differences in the tax classification of an entity under the laws of two or more jurisdictions that could result in tax benefits (e.g. double non-taxation).

Treaty abuse has also been identified as one of the most important sources of BEPS. The MLI provides different approaches to achieve the minimum standard. The use of the principal purpose test (PPT) to deny treaty benefits in situations where one of the main objectives of an arrangement is to obtain treaty benefits is recommended. Other options include the adoption of a simplified limitation on benefits (LOB) clause, or a combination of a detailed LOB clause and either specific rules to address conduit financing structures or a PPT.

The provisions of the MLI, such as the extension of the scope of the dependent agent test and the narrowing of the existing exemptions from PE status, will significantly lower the PE threshold. An anti-fragmentation rule aimed at preventing the split of activities across separate legal entities is also recommended.

Furthermore, all covered tax treaties will include a mutual agreement procedure.


The MLI will not operate in the same manner as an amending protocol to an existing treaty, nor will it directly amend the provisions of existing bilateral treaties. Instead, it will apply alongside the existing treaties. However, there is a possibility to opt out of provisions that do not reflect a minimum standard, as well as to apply optional or alternative provisions.

In terms of transparency, the OECD will act as a depositary, supporting governments in the process of the signature, ratification and implementation of the MLI, as well as providing tax administrations and the general public with information about the treaties covered and options implemented by the relevant jurisdictions.

Next steps

The MLI is already open for signature, and a signing ceremony is due to take place in June 2017. It will enter into force upon ratification by at least five jurisdictions.

Participating jurisdictions are compiling the lists of treaties to be covered by the MLI and are considering which provisions to implement. Monitoring the effects of the MLI on the international tax framework will be key to identifying and responding effectively to any uncertainties. For instance, following the implementation of the MLI, depending on the options selected, the tax residence of corporate entities may be determined by mutual agreement of the contracting states, rather than based on the place of effective management of the company.

Julien Lamotte ( and Vincent Reynvoet (
Deloitte Luxembourg

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