Multilateral Instrument Signed
By Bernhard Schwechel, FACT GmbH
On 7 June 2017, almost 70 countries including Germany signed the so-called ‘Multilateral Instrument’ (MLI) in Paris. This is a product of the OECD’s BEPS project and designed to dynamically adjust a multitude of existing bilateral double taxation treaties (BDTs) between member countries to internationally accepted standards - faster than would be possible using individual bilateral negotiating procedures.
What is at issue?
First, the MLI implements various minimum standards that were negotiated in the context of the BEPS project as BDTs between the member states. In addition to these minimum standards, the MLI also contains certain rules for the adjustment of BDTs that were also developed in the context of BEPS. However, member countries have certain freedom of choice in this regard as to whether they wish to implement these additional rules in their BDT.
The countries are also entitled to select at their own discretion the BDT that should be adjusted through the MLI (‘Covered Tax Agreements’). Thus, the MLI does not create a situation of complete harmony for the existing BDTs between member nations.
When the MLI was signed, Germany picked 35 of the currently existing 96 BDTs (such as the BDT with Austria and the UK). Conversely, 33 countries have selected their BDT with Germany in order to implement the MLI. The implementation of the MLI in general, and of individual additional rules in particular, requires that the other involved treaty nation has also selected to implement the MLI and/or the respective additional rules.
Rules that Germany intends to implement
Germany has announced that it intends to implement especially the following conventions:
'BDT intercompany tax concession’: A minimum holding period of 365 days is introduced as a prerequisite for withholding tax relief on dividends (Art. 8 of the MLI); this shall not affect minimum holding periods (e.g. BDT Italy) that are already in place.
‘Real estate companies’: Profits from the sale of corporate shares and partnership equity interests can be taxed in the country in which the relevant properties are located if the value of these shares or interests within the last 365 days prior to the sale was based directly or indirectly at more than 50% on real estate located in said treaty country (Art. 9 of the MLI).
‘Permanent establishments’: Regarding the list of exceptions, from now on only preparatory activities and auxiliary activities qualify as not creating a permanent establishment (Art. 13 MLI; they can be determined based on the business model of the respective total enterprise).
‘Mutual agreement procedure between the treaty countries to avoid double taxation’ (Art. 16 MLI). Currently, mutual agreement procedures are already conducted by the Federal Central Tax Office. At the EU level, on 23 May, 2017, finance ministers adopted a guideline for dispute resolution in double taxation cases. Pending its approval by the EU Council, this guideline will be applied to tax years beginning from 1 January, 2018.
‘Compulsory fiscal arbitration procedures’ (Art. 18 ff.; to be executed within a period of three years subsequent to unsuccessful mutual agreement procedures).
Rules that Germany does not intend to implement
Germany has announced that it intends to refrain from implementing especially the following conventions:
‘Transparent entities’ (hybrid entities, Art. 3 MLI); this has been addressed already by the so-called ATAD I and ATAD II directives at the EU level, and Germany intends to implement them in the context of a ‘complete solution’.
‘Entities with dual residency’ (Art. 4 MLI); thus, taxation rights remain with the country in which an entity’s executive board is located. An important exception to this rule is included in the BDT with the USA – it lends decisive power to agreements between countries, which are difficult to achieve at a practical level.
‘Expansion of the concept of establish ment to commissionaire models and similar entities’ (Art. 12 MLI); Germany has expressed reservations about this already prior to the signing due to anticipating that foreign countries may increase the number of resident establishments, thereby causing an outflow of taxation substrate from Germans to other countries.
‘Length of permanent establishments for construction and installation projects’ – Integration of various contractual agreements (Art. 14 MLI); there are already national regulations in the administrative principles for the apportionment of establishment profits (VWG BsGa).
The regulations, which expand the preamble of a BDT in that the latter not only is supposed to prevent double taxation but also double non-taxation due to tax evasion or tax avoidance (Art. 6 MLI), were met in part with reservations in Germany. The same goes for the implementation of the so-called ‘principal purpose test’, according to which prior to granting treaty benefits, it has to be ascertained whether the benefits were one of the main objectives of the taxpayer agreement (Art. 7 MLI).
Where do we go from here?
At the OECD level, at least five countries have to first deposit their instruments of ratification. Three months after the last instrument of ratification has been deposited, the MLI becomes effective for these first five countries. Additional countries may join.
For Germany, however, the MLI is implemented no sooner than three months after the deposit of its instrument of ratification, if Germany does not already belong to the first five countries. By all accounts, ratification takes place in Germany after the parliamentary elections, so that the selected BDT will be implemented from 2019.
The MLI has been issued in two mandatory languages (English and French) and was signed in that form by the federal ministry of finance as well. There is only a non-binding German translation. It remains to be seen how Germany will handle this in the context of the legislation procedures.
Bernhard SchwechelFACT GmbH - Steuerberatungsgesellschaft, Wirtschaftsprüfungsgesellschaft, Kassel, Germany
T: +49 561 316 686 0
FACT GmbH is a tax consultancy, public auditing company and law firm located in Kassel, known as the heart of Germany. FACT provides German and international accountancy and tax services to companies and individuals. The experienced team works on cross-border issues for German clients as well as for foreign clients. FACT works closely with its clients and responds rapidly to their needs.
Bernhard Schwechel is a Managing Partner of FACT. He is experienced in the field of International Taxation. His areas of expertise include Tax and Business Advice for large multinational corporations and mid-sized companies, as well as for internationally-oriented individual clients. He supports his clients in inbound and outbound M&A projects.
Published: January 2018 l Photo: Benjamin ['O°] Zweig - Fotolia.com