India has adopted the Multilateral Instrument (MLI) proposed by the OECD to implement tax treaty-related measures to prevent base erosion and profit shifting (BEPS). The MLI will amend India's tax treaties with various countries, including Sweden, to be effective from April 1, 2020. While India and Sweden have agreed to incorporate some MLI provisions like the preamble, others like principal purpose test and splitting of contracts may not apply because the countries' positions are not aligned or the tax treaty already has similar provisions. Taxpayers need to consider the impact of both the tax treaty and MLI when undertaking transactions with parties in Sweden to ensure proper withholding tax treatment.

1. NOTE ON IMPACT OF MULTILATERAL INSTRUMENT (MLI) ADOPTED BY INDIA FOR
DOUBLE TAX AVOIDANCE AGREEMENT BETWEEN INDIA AND SWEDEN
1. India is one the signatory countries to Organization of Economic Co-operation and
Development (OECD) initiative of Multilateral Instrument (MLI). The purpose of MLI is to
adopt changes suggested by OECD in relation to Base Erosion and Profit Shifting (BEPS)
in the double tax avoidance agreement between two countries.
2. Once a country notifies its tax treaties with other countries to OECD which are adopted for
MLI ratification, the articles of MLI which are agreed to be accepted by both the countries of
the tax treaty will become operational from the date in which such MLI comes into force.
3. India has deposited its document of adopted articles of MLI to OECD on 25th June 2019
and thus the MLI has entered into force in India with effect from 1st October 2019. India has
notified its tax treaties with 93 nations for MLI adoption. Similarly around 23 countries have
also notified to OECD their treaty with India to have effect of articles adopted from MLI.
Accordingly, the tax treaties of India with such countries will have effect of MLI provisions
from 1st day of next taxable period (as per tax treaty of India with such countries), i.e. 1st
April 2020.
4. A list of countries which have notified their treaties with India are as under:
Austria Russia Israel UAE
Finland Slovak Republic Luxembourg Georgia
Ireland United Kingdom New Zealand Japan
Lithuania Australia Serbia Malta
Netherlands France Slovenia Poland
Singapore Kingdom of Sweden
5. It may please be noted that these countries do not include the United States of America
(USA) as USA is not signatory country to MLI and countries such as China, Germany or
Mauritius as these countries or India have not notified OECD their bilateral tax treaties to be
amended by MLI.
6. MLI is an instrument that contains total 39 articles which are prepared keeping into
consideration BEPS Action Plan of OECD and to reduce instances of aggressive tax
planning through treaty shopping and by taking undue benefits of terms of tax treaties. Out
of 39 articles, Article 6 (Purpose of Covered Tax Agreement), Article 7 (Prevention of
Treaty Abuse) and Article 16 (Mutual Agreement Procedure) are minimum standards to be
adopted by any country to make MLI into force.
7. India and Kingdom of Sweden have notified each other as country where the adopted MLI
will apply as per the terms decided by each country. Therefore the tax treaty between India

2. and Kingdom of Sweden will be considered as Covered Tax Agreement (CTA) for adoption
of MLI. It is important to note that, only to the extent for those terms of MLI where both the
nations have similar adoption conditions, such terms then will be applicable to the tax treaty
between India and Kingdom of Sweden.
8. The purpose of this note is to reflect the treatments given by each nation (Kingdom of
Sweden and India) while ratifying MLI into the tax treaty. It may please be noted that the
Synthesized Text of the Tax Treaty incorporating provisions of MLI are awaited. However,
we have tried to demonstrate various provisions of MLI along with their impact on tax treaty
with India as per the following table:
Sr.
No.
Article of MLI Position adopted by India Position Adopted by
Kingdom of Sweden
Remarks
1 Article – 4 Dual
Resident Entities
India has notified
Sweden as one of the
countries to adopt the
text of MLI in place of
already existing Text of
Article 4(3) of the tax
treaty.
Kingdom of Sweden has
reserved its rights to not
adopt entire text of Article
4 of MLI for its Covered
Tax Agreements
Accordingly, the
adopted terms of
Article 4 will not
form part of the tax
treaty between both
the countries.
2 Article – 6 Purpose of
Covered Tax
Agreement
India has adopted the
preamble suggested by
MLI to form part of all the
CTAs including Kingdom
of Sweden
Kingdom of Sweden has
not reserved its position
for this Article in case of
India
Preamble as per
MLI will form part of
Tax Treaty
between both the
countries.
3 Article – 7 Prevention
of Treaty Abuse
(Principal Purpose
Test)
India has not included
Kingdom of Sweden in
the list of countries where
the article is already
present in the Tax Treaty
Kingdom of Sweden has
not included India in the
list of countries where the
article is already present
in the Tax Treaty
The Principal
Purpose Test
requirement will
arise only when the
provisions of
Existing Tax Treaty
are not in
accordance with
Article 7 of MLI.
Text of Article 7(1) of MLI : Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the
Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to
conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the
principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is
established that granting that benefit in these circumstances would be in accordance with the object and purpose
of the relevant provisions of the Covered Tax Agreement.
4 Article – 8 Dividend
Transfer Transactions
India has not included
Kingdom of Sweden in
the list of countries where
the article is already
present in the Tax Treaty
Kingdom of Sweden has
reserved its rights to not
adopt entire text of Article
8 of MLI for its Covered
Tax Agreements
Accordingly, the
adopted terms of
Article 8 will not
form part of the tax
treaty between both
the countries.

3. 5 Article – 9 Capital
Gains from Transfer
of Shares deriving
value from Immovable
Property
India has included
Kingdom of Sweden in
the list of countries where
the article is already
present in the Tax Treaty
Kingdom of Sweden has
reserved its rights to not
adopt text of Article 9(1)
of MLI for its Covered Tax
Agreements
As Tax Treaty of
India and Sweden
already have the
provision alike MLI,
the text of MLI
need not be
referred to.
6 Article – 12 Avoidance
of Permanent
Establishment through
commissionaire
agreement and
Similar Strategies
India has included
Kingdom of Sweden in
the list of countries where
the article is already
present in the Tax Treaty
Kingdom of Sweden has
reserved its rights to not
adopt entire text of Article
12 of MLI for its Covered
Tax Agreements
As Tax Treaty of
India and Sweden
already have the
provision alike MLI,
the text of MLI
need not be
referred to.
7 Article – 13 Avoidance
of Permanent
Establishment through
specific activities
exemption
India has chosen Option
A of text of MLI
Kingdom of Sweden has
reserved its rights to not
adopt entire text of Article
13 of MLI for its Covered
Tax Agreements
Accordingly, the
adopted terms of
Article 13 will not
form part of the tax
treaty between both
the countries.
8 Article – 14 Splitting
up of Contract
India has adopted the
Text of Article 14 in its
ratified document
Kingdom of Sweden has
reserved its rights to not
adopt entire text of Article
14 of MLI for its Covered
Tax Agreements
Accordingly, the
adopted terms of
Article 14 will not
form part of the tax
treaty between both
the countries.
9 Article – 15 Definition
of Closely Related
Enterprise
India has adopted the
Text of Article 15 in its
ratified document
Kingdom of Sweden has
reserved its rights to not
adopt entire text of Article
15 of MLI for its Covered
Tax Agreements
Accordingly, the
adopted terms of
Article 15 will not
form part of the tax
treaty between both
the countries.
9. India has adopted in its MLI document Article 14 which deals with situations related to
artificial splitting up of the work contracts related to supervision activities by an enterprise in a
such a way so that total period does not exceed the time frame (6 months as per current tax
treaty) specified in the Tax Treaty for determining Permanent Establishment of Such
Enterprise.
9.1 However, as Kingdom of Sweden has reserved its right of adopting the text of Article 14,
the same is not forming part of the tax treaty between both the nations. Despite such non
presence, with MLI being operational from 1st April 2020 and Principal Purpose Test being
one of the minimum standards of MLI, it would be essential for every entity having
commercial transactions with entities of Kingdom of Sweden to keep more vigilance on the
work contracts of supervision activities that they enter for longer durations in a year as per
its commercial requirements.

4. 9.2 Now the taxability will not only be judged by its form but also from the substance of the
terms of the contract and as these contracts have substantial cost involved, the tax impact
would be large. As the concept of MLI is new for the tax authorities, chances of strict
interpretation may arise which may lead to longer litigation. Therefore, it would be
appropriate that the provisions of the treaty along with MLI and their impact must be
determined beforehand at the time of entering into a particular contract.
The above are the some of the key points applicable under the tax treaty with effect from 1st April
2020 for withholding tax. An entity having transactions with corporations situated in Kingdom of
Sweden will be required to take into consideration the above points before determining whether to
provide tax benefit to the service provider or not under the tax treaty from the appointed date.