World Wide Tax News Issue 53 - December 2019

Implementation of multi-lateral instrument

The so-called multi-lateral instrument (MLI) is action number 15 of the BEPS (Base Erosion and Profit Shifting) action plan of the OECD. To transpose the BEPS recommendations, every party to the treaty must, in principle, give its approval in a double taxation treaty, which is, of course, an impossible task. Countries that signed the MLI agree simultaneously to implement the new rules in the indicated bilateral treaties without re-negotiation. The MLI took effect in Belgium on 1 October 2019.


The MLI is action number 15 of the OECD’s BEPS action plan. The purpose of this action plan is to have companies pay taxes in the country in which profits are made. It imposes specific rules against the erosion of the taxable base (Base Erosion) and against moving profits elsewhere (Profit Shifting). These actions have an impact on national legislation, but also on the double taxation treaties (DTTs). The MLI was created to implement the BEPS action plan quickly and efficiently, with the intention of clarifying the scope of the DTTs and limit their abuse. For example, the MLI is intended to avoid ‘treaty shopping’ – whereby, for example, letterbox companies are used to benefit from conventional tax exemptions in some countries.

On 26 June 2019, Belgium ratified its MLI with the OECD. In concrete terms, this means that the MLI came into effect in Belgium on 1 October 2019, with legal consequences starting at the earliest on 1 January 2020. However, the MLI allows for a great deal of flexibility, which means that its application is not always straightforward.

The MLI in 3 steps

A number of steps must be taken to effectively apply the MLI in a specific treaty situation between two countries:

Step 1 - Ratification

First, whether a DTT exists, and whether both countries have signed the MLI, must be verified. To be able to apply the MLI, both countries must have actually ratified it. As of 30 October 2019, 90 countries have signed the MLI, and the ratification process has been completed for 37 countries, including Belgium.

Step 2 - Covered Tax Agreements (CTA)

A country can decide for itself to which of its DTTs the MLI will apply. These treaties are called CTAs. Both parties must have designated each other as a CTA. Belgium currently labels 99 of its treaties as a CTA.

Step 3 - Examining the positions taken

A number of provisions included in the MLI must comply with the BEPS minimum standards, and countries cannot derogate from this rule (mandatory provisions). This includes the preamble to the treaties, the introduction of a Principal Purpose Test (PPT), and the provision of an arbitration method. The PPT allows the authorities to refuse treaty benefits when obtaining a benefit is one of the main purposes of an action/transaction.

Other provisions (optional provisions), are formulated by the MLI as recommendations. A country can choose from different options or, in many cases, even make a reservation about a whole provision (opt-out). The optional provisions apply only if both countries have made the same choice. If that is not the case, then the existing provision of the DTT remains applicable for that point. The optional provisions cover the following areas: hybrid mismatches, double residency, dividend transactions, capital gains on shares of real estate companies, and the broader definition of ‘permanent establishment’ (PE). (See below the optional provisions that Belgium is introducing.)

Since both countries must go through the 3 steps and adopt the same position with regard to the optional provisions, the application of the MLI must therefore be considered on a case-by-case basis in a specific treaty situation. Moreover, Belgium or a treaty partner can always withdraw its reservation relating to an optional provision. Belgium did this, for example, in the application of the expanded definition of PE on so-called ‘commissionaire structures’. In short, the application of the MLI is something that evolves over time to a particularly large extent.

Which optional provisions did Belgium choose?

Belgium has chosen to introduce the following optional provisions:

  • A provision for the treatment of revenue received by, or through, a transparent entity;
  • A minimum holding period of 365 days to benefit from the reduced rate for dividends from subsidiaries;
  • A safeguarding clause to protect Belgium’s sovereignty to tax its own residents;
  • A more comprehensive definition of PE. Here, emphasis is placed on how the contract comes into being. For example, it is enough for a person to play a decisive role in concluding contracts for a personal PE to arise in Belgium. An independent agent may be a personal PE if he or she acts alone, or virtually alone, for a long time for one company or group of associated companies;
  • An anti-fragmentation rule – this means that activities of different related entities must be combined to verify whether there is a preparatory or ancillary activity in Belgium.

The MLI in practice

The MLI is a complex instrument that cannot be ignored in treaty situations. Therefore, it is important – especially for groups active in different countries – to verify the impact of the MLI on current activities, and it is no longer enough simply to consult the existing double taxation treaty.

In the Belgian context, the changes to the MLI can result in a permanent establishment arising more quickly in Belgium. Much depends, of course, on the positions taken by the other treaty country and how strictly the new provisions will be interpreted in practice.

In any case, the situation with the MLI shows that cross-border and international taxation is constantly changing.

Werner Lapage

Olivier Michiels