The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (hereinafter – MLI Convention) is an effective tool for signatory countries to make amendments to some or all of their double taxation treaties (hereinafter – DTT) concurrently.

One of the characteristics of the MLI Convention is that possibilities exist to amend DTTs and their implementation, as well as the regulation of numerous issues in terms of the internal legislation of the country. Taking this into account, one should note that the ramifications for various signatory countries and each separate DTT can be different. It is also possible to distinguish the existence of mandatory and optional provisions in the MLI Convention. Mandatory provisions are compulsory, while optional ones can be applied if a signatory country makes a reservation in the Accession Protocol.


There are two crucial features of the application of the MLI Convention to each separate DTT, namely: 1) the list and content of amendments which were previously agreed by both treaty co-signatories, and countries included in the treaty in the list of those covered by the MLI Convention; 2) both treaty co-signatories signing and ratifying the MLI Convention.

Principal Purpose Test. Expectation and reality

In this regard, a person could be refused provision of tax relief if the supervisory authorities have a reasonable basis to conclude that the main purpose (or one of the main purposes) of the transaction was to obtain such relief. Counterparties that do not have an economic presence in the country of registration will be the primary suspects.

The MLI Convention states that:

any tax relief envisaged by the double tax treaties will not apply to any type of income or capital if, on the basis of an investigation of all available facts and circumstances, it might be considered that the obtaining of tax relief was one of the main objectives of the arrangement or transaction which caused the tax relief, with the exception of cases when the right for such relief is consistent with the objectives and purposes of the double tax treaties”.

Transfer pricing analysts have repeatedly pointed out that the Principal Purpose Test is rather subjective as it does not provide clear criteria for determining the primary purpose of the transaction. With this in mind, it is impossible to predict whether the test will work to the advantage of the taxpayer or the governing body, so the only right way to deal with this is to differentiate on a case-by-case basis.

With regard to case-law which confirms the subjectivity of the Principal Purpose Test and uniqueness of its approach, it is worth mentioning the decision of the European Court of Justice in the Halifax case on February 21, 2006, which was the first decision on the application of the Principal Purpose Test. In accordance with the circumstances of the case, Halifax, a large banking institution, used several subsidiaries to set up call centers for the purpose of fiscal optimization.

According to the decision of the European Court of Justice, the entire structure of transactions between the group of companies was created solely for the purpose of avoiding VAT. In further examination of cases regarding application of the Principal Purpose Test, the Court of Justice of the European Union referred to the legal position of the Halifax case.

Businesses should therefore note that the rules of the game have changed and the new regulation will greatly affect the approaches to doing business in signatory countries of the MLI Convention.