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What you need to know about the Multilateral Instrument

20 February 2020

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On 24 November 2016, a group of over 100 jurisdictions decided on a Multilateral Instrument (MLI) that will modify the application of existing bilateral tax treaties to implement the tax treaty measures developed through the OECD/G20 BEPS project. Depending on the ratification process, the potential impact on over 2,000 existing bilateral tax treaties will be substantial. Jan Hein Geertsma, Senior Tax Counsel, and Steffan Galesloot, Head of Services Innovation, share all you need to know about the MLI.


The MLI will modify existing bilateral tax treaties through the following provisions:

Hybrid mismatches

The MLI introduces optional treaty provisions to address hybrid mismatches arising from differences in the tax classification of an entity or an arrangement under the laws of two or more countries. According to these provisions, no tax treaty benefits shall be granted in case income isn’t considered to be income of a resident of one of the countries.

Preventing treaty abuse

To counter treaty shopping, the MLI introduces a principal purpose test (PPT), optionally supplemented with a simplified limitation on benefits (LOB) provision. Countries can opt out of this rule, as long as they agree on an alternative provision that meets the minimum Base Erosion and Profit Shifting (BEPS) standards on anti-treaty abuse, such as a detailed LOB provision together with other measures. In addition, the MLI implements several specific anti-abuse provisions to target forms of treaty abuse, such as the exclusion of treaty benefits for income attributable to low taxed Permanent Establishments in third states.

Preventing the artificial avoidance of Permanent Establishment status

The MLI provides optional provisions to lower the Permanent Establishment threshold in tax treaties and the bar for establishing taxable presence of non-resident enterprises in the source country.

Improving dispute resolution

The MLI intends to strengthen the effectiveness and efficiency of the mutual agreement procedure (MAP) in accordance with a minimum standard. In addition, the MLI provides an optional provision on mandatory binding MAP arbitration as a way of guaranteeing that treaty-related disputes will be resolved within a specified time frame.


The MLI provisions won’t be included in specific bilateral treaties through an amendment of the texts of those treaties. Instead, the MLI provisions need to be read and applied with these treaties. It’s noted that the individual countries should decide for themselves whether they want to prepare for internal purposes consolidated versions of their treaties that are subject to the changes and additions based on the MLI.



The MLI came into force for the Netherlands and certain treaty partners on 1 July 2019, where the Netherlands’ treaty partner has already deposited their instrument of ratification and both countries agreed for the MLI to apply to their tax treaty. In this case, the MLI will then apply for withholding tax purposes (e.g. interest, dividends) beginning 1 January 2020. The Netherlands has opted for the PPT.


The MLI came into force for Luxembourg and certain treaty partners on 1 August 2019, where Luxembourg’s treaty partner has already deposited its instrument of ratification and both countries agreed for the MLI to apply to their tax treaty. In this case, the MLI will apply for withholding tax (e.g. interest, dividends) purposes beginning 1 January 2020. Luxembourg has also opted for the PPT.

If you’d like to know more about the Multilateral Instrument and how we can help, please get in touch.