Multilateral Instrument

What it means

The MLI, or Multilateral Instrument, is an OECD convention that amends hundreds of existing double tax treaties at once. Instead of renegotiating each treaty separately, countries add anti-abuse rules to them through a single document.

The convention was developed as part of the BEPS project against base erosion and profit shifting. It entered into force for Slovakia in 2019 and applies progressively to treaties with countries that have also ratified it and listed the treaty in question as covered.

The key rule is the principal purpose test. Treaty benefits, such as a reduced withholding tax rate, are denied if obtaining that benefit was one of the principal purposes of the transaction or structure. The aim is to stop treaty shopping through shell companies.

How it works in practice

For each treaty, check whether and how the MLI modifies it. Countries could choose which provisions to adopt and where to enter reservations, so two treaties of the same country may be changed differently. The OECD publishes matching tools, and many countries publish consolidated treaty texts.

For payments abroad, such as dividends, interest or royalties, the Slovak payer assesses whether the recipient is entitled to the treaty rate. Besides a certificate of tax residence, consider whether the recipient is the beneficial owner of the income and whether the structure has economic substance.

The MLI also changes the permanent establishment rules, for example for commissionaire structures or artificial fragmentation of activities, where both treaty partners have adopted them. A company with activities abroad should check whether the amended treaty creates a permanent establishment that did not arise before.

What to watch out for

Reading the treaty alone is not enough. The original treaty text, the MLI and both countries' reservations must be read together, which is complex and easy to get wrong. For significant cross-border payments, consult a tax adviser or use a consolidated text if the country has published one.

The principal purpose test gives the tax authority room for judgement that is hard to predict. Companies should document the business reasons for their structure, maintain genuine substance in foreign entities and not rely on structures whose only purpose is saving tax.