The MLI Convention is a new reality

On October 1, 2019, the Multilateral Convention on the Implementation of Measures Relating to Tax Treaties (Multilateral Instrument, MLI) will come into force in Russia in order to counteract the erosion of the tax base and the withdrawal of profits from taxation (Base Erosion and Profit Shifting – BEPS) The Convention will be applied starting January 1, 2020.

The adoption of the Convention combats tax evasion and abuse of double taxation treaties (DTT) and introduces restrictions on the abuse of tax benefits. The Convention was developed by the Organization for Economic Cooperation and Development (OECD).

The MLI Convention was signed back in June 2017 and Russia ratified it in May 2019. Among the countries that signed the convention are Cyprus, Luxembourg, Switzerland, Austria, the United Kingdom, the Netherlands, and other jurisdictions frequently used in tax planning.

What does this mean in practice?

Thanks to the MLI Convention, it has become possible to amend existing DTTs. The member countries of the convention choose the set of articles of the convention which will be applied to a certain relationship. However, there is also a mandatory standard to which all member countries must adhere. These are the provisions for which the convention was created, such as the abuse of DTTs and dispute settlement provisions. When signing the convention, Russia chose the widest standard and will use all the possibilities provided by the convention.

The Convention introduces a mandatory minimum standard, which must be applied by all countries-participants of the Convention. The mandatory minimum standard can be implemented in one of three ways.

  1. “Principle Purpose Test”. This is a ban on the use of a benefit if the primary purpose is to obtain such a benefit. Accordingly, in order to apply preferential rates, it is necessary to prove that the transaction had a real economic purpose other than tax evasion.
  2. “Principle Purpose Test ” and “simplified limitation of benefits test”. In order to apply the benefits for legal entities, it will be necessary to prove that the income arises in connection with the company’s entrepreneurial activities, which means that no benefits are applied to holding, financial, and investment companies.
  3. other methods, not established by MLI, aimed at not applying benefits to conduit companies, i.e. companies that do not conduct active business, and are created solely for the purpose of obtaining tax benefits provided by the DTT.

Previously, the principle of a “business purpose” in a transaction was not enshrined in national law, but it was formed at the level of judicial practice and was actually applied by tax authorities and courts. Thus, this concept is not new to the Russian law enforcement practice.

Optional provisions

The optional provisions apply if both countries, between which the company’s operations take place, decide to apply them to their DTT.

Application of preferential rates for dividends.

The national legislation of the countries establishes a certain tax rate. At the same time, the reduced tax rate is usually provided for by the DTT if the party to the transaction provides documents confirming that it is a tax resident of the DTT member-state.

The conditions for applying the reduced rate had to be met on the date of payment.

Now, in order to apply the reduced rates, in addition to the criteria already established by the DTT, it is necessary to meet the criteria for the period of ownership of the shares of the company paying the dividends. The shares ownership period shall be not less than 365 days, including the date of payment of dividends. Such a provision would apply, for example, to DTTs with Argentina, Armenia, Cyprus, the Netherlands, Hong Kong, Luxembourg and Singapore.

Restrictions on the alienation of shares or other similar participatory interests whose value exceeds 50 per cent directly or indirectly consists of immovable property located in the territory of the Contracting State

This restriction was established at the level of national legislation of Russia. Most DTTs did not have such a provision, and therefore this provision was rarely applied, mostly when there was no DTT between countries.

It is established that income from the sale of shares (stakes) in Russian companies, the assets of which are more than 50% represented by immovable property in Russia, should be taxed in Russia, regardless of the fact that DTTs may provide for exemption from taxation of this income in Russia. The share of real estate in the total assets of the company whose shares/shares were sold should be determined for each of the 365 days preceding the sale of shares.
The new provisions will apply to DTTs with the Netherlands, Singapore, Austria and other countries.

Permanent establishment and dependent agent

The provisions on the dependent agent have been applied in the past on the basis of both the national legislation of the Russian Federation and the majority of the DTTs.

The MLI Convention provides that if an agent systematically enters into contracts on behalf of a foreign company and, through its participation, usually enters into contracts, such activity is the activity of a dependent agent and results in the formation of a permanent establishment and the need to pay tax in the country where the agent with dependent status operates. This rule does not apply to agents with independent status who act in the ordinary course of their business, whether as a commission, brokerage, or agency. This provision will apply, in particular, to DTTs with France, Argentina and Armenia.

Avoidance of permanent establishment status through special activities

Previously, auxiliary and preparatory activities (the list of which was determined by the RF Tax Code and DTT) did not lead to permanent establishment.

The rule that preparatory and auxiliary activities do not lead to permanent establishment will be abolished.

The construction site’s activities led to permanent establishment if it continued for a certain period of time as specified in the DTT (usually 6 or 12 months).

Avoidance of permanent establishment status for construction sites by splitting the single activity into individual contracts that do not exceed the thresholds (usually 6 or 12 months) for recognition of permanent establishment status is now prohibited.

How will DTTs be applied now?

In order to determine whether the MLI Convention will apply in practice, it is necessary to determine whether both countries have opted for the same MLI regime. You can check the accession regime on the OECD website at
In addition to the analysis of domestic tax legislation in force in bilateral DTTs, further tax planning will also require analysing the provisions of the MLI Convention.
It should be noted that Russia has not included the DTTs with Switzerland, Germany, Sweden and some other countries in the list of countries to which Russia plans to apply the MLI.

Entry into force of the Convention

For Russia, the Convention will enter into force on January 1, 2020 and will apply to those DTTs whose members ratify the Convention by October 1, 2019 or December 1, 2019.


SCHNEIDER GROUP will be able to advise you on the application of the DTT after the entry into force of the MLI. If potential risks are identified through the analysis, we can offer options to address them.

List of countries to be covered by MLI from January 1, 2020:

  • Australia
  • Austria
  • Belgium
  • Finlan
  • France

  • India
  • Ireland
  • Israel
  • Lithuania
  • Luxembourg

  • Malta
  • Netherlands
  • New Zealand
  • Poland
  • Serbia

  • Singapore
  • Slovakia
  • Slovenia
  • UAE
  • United Kingdom

Contact us

Alex Stolarsky
Partner, Rechtsanwalt, Legal & Compliance, Moscow
+7 / 495 / 956 55 57
Ekaterina Lakatosh
Senior Tax Expert
+7 / 495 / 956 55 57

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