The Multilateral Instrument (MLI) is the latest development in International taxation which would modify the existing bilateral treaties (DTAAs) and implement measures to prevent Base Erosion Profit Shifting (BEPS) strategies. In this Webinar we shall analyse the provisions of Part III of the MLI relating to 'Treaty Abuse'. Articles 6 to 11 are covered under this Part and provide important concepts like Principle Purpose Test (PPT), Limitation on Benefits (LOB) and anti-abuse measures addressing 'Triangular PE' and other treaty-related measures.

1. Multilateral Instrument (MLI) – Treaty Abuse
[Articles 6-11]
CA. Divakar Vijayasarathy

2. Credits and Acknowledgments
V Thirumal
Jugal Gala

3. Legends used in the Presentation
CTA Covered Tax Agreement
DDT Dividend Distribution Tax
PE Permanent Establishment
MHP Minimum Holding Period
SLOB Simplified Limitation On Benefits
PPT Principal Purpose Test

4. Presentation Schema
Overview Part III – Treaty Abuse
Article 6 - Purpose of a
CTA
Article 7 - Prevention of
Treaty Abuse
Article 8 - Dividend
Transfer Transactions
Article 9 - Capital Gains
Article 10 – PE Situated
in Third Jurisdictions
Article 11 –Restricting
Party’s Right to Tax its
Own Residents

5. Overview of MLI
The MLI consists of 39 articles categorized into 7 major parts namely :
Articles 1-2
Articles 6-11
Articles 12-15
Articles 16-17
Articles 18-25
Articles 3-5
Articles 27-39

6. Part III – Treaty Abuse
Bilateral treaties are
entered into by most
jurisdictions in the
world
To prevent harmful
double taxation and
to promote trade,
movement of capital
and persons
However, this has also
given rise to treaty
abuse to obtain unfair
tax advantage
Treaty abuse refers to
‘Treaty shopping’ and
other arrangements
which exploit treaty
benefits

7. Article 6
Purpose of Covered Tax Agreement
Article
6
Preamble to be included in CTAs
“Intending to eliminate double taxation with respect to the taxes covered by this agreement without
creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including
through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the
indirect benefit of residents of third jurisdictions)”
Minimum Standard
Applies in place of or in the absence of existing preamble language referring to elimination of double taxation
Optional additional Preamble text
“Desiring to further develop their economic relationship and to enhance their co-operation in tax matters”
Both parties need to notify the preamble of CTA which would get replaced.
In case notification is not made, the preamble would be added to the CTA
Would be included in CTA only where both parties have opted to apply

8. Choices Available and India’s Position
Choices Available
Apply MLI preamble and notify the preambles in CTAs that would be replaced
Not to apply preamble to CTAs that already contain such preamble language
Apply preamble plus optional additional text
India has not made any reservation for Article 6
• Therefore, due to non-notification of preambles, the MLI preamble
would be added to all CTAs
• The additional text will not apply

9. Article 7 Prevention of Treaty Abuse
Article
7
Principal Purpose Test (PPT)
Minimum Standard
Notwithstanding any provisions of
a CTA, a benefit under the CTA
shall not be granted in respect of
an item of income or capital
unless it is established that granting
that benefit would be in accordance
with the object and purpose of the
relevant provisions of the CTA
if it is reasonable to conclude that
obtaining such benefit was one of the
principal purposes of any arrangement or
transaction that resulted directly or
indirectly in that benefit
Shall apply in place of or in the absence of provisions of a CTA
 The competent authority of the jurisdiction that would otherwise have granted this benefit shall
nevertheless treat that person as being entitled to the benefits upon request from that person and
after consideration of the relevant facts and circumstances and determining that such benefits
would have been granted to that person in the absence of the transaction or arrangement
 The competent authority of the jurisdiction to which a request has been made shall consult with
the competent authority of the other jurisdiction before rejecting the request
Optional
Provision
If opted, shall apply where PPT applies

10. SLOB
Simplified Limitation of Benefits (SLOB)
Optional Provision
A Resident of a contracting Jurisdiction to a CTA shall not be entitled to its benefits unless such resident is a ‘Qualified Person’
Following benefits of CTA are exceptions to above:
 Resolution of Dual residency of person other than individual
 Corresponding adjustments
 Request in cases of taxation not in accordance with CTA
A resident of jurisdiction shall be a Qualified Person if the resident is:
A person other than an individual,
 if on at least 50% of the days of the
12 month period during which the
benefits were sought, at least 50% of
the shares were owned, directly or
indirectly by Qualified Persons
A person, other than individual
 that is an NPO, agreed by Contracting
Jurisdictions through diplomatic notes
 Treated as separate person for purpose
of taxation, established exclusively to
provide retirement and ancillary
benefits or invest funds for that purpose
A company or other entity, if the
principal class of its shares is
regularly traded on one or more
recognised stock exchanges
The jurisdiction, or a political
subdivision or local authority or an
agent or instrumentality of such
An individual

11. Active Conduct of Business and Connected Person
A resident of a Contracting Jurisdiction to a CTA will be entitled to benefits regardless of whether the person is a
qualified person, if the resident is engaged in the active conduct of a business and income is derived therefrom
“active conduct of a business” shall not include the following activities or any combination thereof:
 Operating as a holding company;
 Providing overall supervision or administration of a group of companies;
 Providing group financing (including cash pooling); or
 Making or managing investments, unless these activities are carried on by a bank, insurance company
or registered securities dealer in the ordinary course of its business
If a resident derives
income from business
activity in other
jurisdiction or from a
connected person,
such item shall be
considered as active
conduct of business
only if
the business activity
carried on by the
resident in the country
of residence to which
the item is related
is substantial in relation
to the same activity or
a complementary
business activity carried
on in country of source
Whether a business activity is substantial for this purposes shall be determined based on all the facts and circumstances
Activities conducted by connected persons with respect to a resident shall be deemed to be conducted by such resident
Connected persons: Holding 50% beneficial interest or having control in another or under common control

12. Equivalent Beneficiaries and Residuary Clause
A resident that is not
a qualified person
shall also be entitled
to a benefits if,
on at least 50% of any
twelve-month period for
which the benefit would
be granted
persons that are
equivalent beneficiaries
Own directly or
indirectly, at least 75 per
cent of the beneficial
interests of the resident
 “Equivalent beneficiary” means persons who are otherwise entitled to benefits with respect to an item of income under the
domestic laws of the other Treaty Partner, the CTA, or under any other international instrument which are equivalent or more
favourable to the benefits accorded to that item of income under the CTA
 For the purposes of determining whether a person is an equivalent beneficiary with respect to dividends, the person shall be
deemed to hold the same capital of the company paying dividends as such capital the company claiming the benefit holds with
respect to that dividends
 If a resident is neither a qualified person nor entitled to benefits in the other provisions, the competent authority of the other
Jurisdiction may grant the benefits
 Only if such resident demonstrates to the satisfaction of such competent authority that neither its establishment, acquisition or
maintenance, nor the conduct of its operations, had as one of its principal purposes the obtaining of benefits under CTA
 Before either granting or denying a request, competent authority shall consult with the competent authority of the other jurisdiction

13. Application of SLOB
SLOB shall apply in place of or in the absence of provisions of a CTA
SLOB shall apply with respect to a CTA only where all Contracting Jurisdictions have chosen to apply it
In cases where some but not all of the Contracting Jurisdictions to a CTA choose to apply the SLOB, notwithstanding
the above condition, the SLOB Provision shall apply with respect to the granting of benefits under the CTA:
by all Contracting Jurisdictions, if
all of the Contracting Jurisdictions
that have not chosen SLOB
Provision agree to such application
only by the Contracting Jurisdictions that
have chosen SLOB, if all of the
Contracting Jurisdictions have not chosen
SLOB Provision agree to such application

14. Choices Available and India’s Position
Choices Available
For PPT not to apply to CTAs on the basis that it intends to adopt a combination of a detailed limitation on benefits
provision (detailed LOB Provision) and rules for addressing conduit financing structures, reach a mutually
satisfactory solution which meets the minimum standard of prevention of treaty abuse as per OECD BEPS package
For PPT not to apply to CTAs that already contain such provision
For SLOB not to apply to CTAs that already contain such provision
India accepts the application of PPT as an interim measure, it intends where possible to adopt a
LOB provision, in addition to or in replacement of PPT through bilateral negotiation
 A party that has chosen SLOB may reserve the right for the entirety of Article 7 not to apply with
respect to its CTAs for which one or more of the other Jurisdictions have not chosen SLOB.
 In such cases, the Contracting Jurisdictions shall endeavour to reach a mutually satisfactory solution
which meets the minimum standard for preventing treaty abuse under the OECD BEPS package.
A party can accept PPT as an interim measure where it intends to adopt a detailed LOB
Provision, in addition to or in replacement of PPT, through bilateral negotiation
India has also chosen to apply SLOB provision

15. Article 8
Dividend Transfer Transactions
Article
8
Provisions of CTA that
exempt or limit the rate
of tax on dividends paid
by a resident company
to a company resident in the other
country on the basis that
ownership or control is more than
a prescribed amount of capital or
voting power or interest
Shall
apply only
when
the ownership criteria are
met throughout a 365-day
period including the date
of payment of dividend
For calculation of such period, corporate reorganisation of the subsidiary or the holding company would be ignored
Holding company Minimum holding period
Shall apply in place of or in the absence of a minimum holding period (MHP) in provisions of a CTA

16. Choices Available and India’s Position
Choices Available
Entire Article not to apply to CTAs
Article not to apply to CTAs that contain a MHP
Article not to apply to CTAs that contain a MHP longer than 365 days
Article not to apply to CTAs that contain a MHP shorter than 365 days
India has made reservation not to apply article to CTAs that contain a MHP longer than 365 days
No significant impact as India charges DDT on distribution of profits and no withholding tax on dividends paid

17. Article 9
Capital Gains
Article
9
Provisions of a CTA
providing that gains derived
from the alienation of
shares or other rights of
participation in an entity
may be taxed in jurisdiction in which
the immovable property is situated
provided the shares or right derive
more than certain amount of value
from such immovable property
Shall
apply
if the relevant value
threshold is met at any
time during the 365 days
preceding the alienation
and
to shares or comparable
interests, such as interests
in a partnership or trust
(in addition to shares or
rights already covered)
The above shall apply in place of or in the absence of provisions of a CTA
Optional Provision
Right of taxation of gains derived from alienation of shares or comparable interests which derive
more than 50 percent of their value from immovable property at anytime during the preceding
365 days shall fall to the jurisdiction in which the immovable property is situated
The above shall apply in place of or in the absence of provisions of a CTA
Para 1
Sub-para
(b)
Sub-para
(a)
Para 4

18. Choices Available and India’s Position
Choices Available
Not to apply entire Para 1 to CTAs
Not to apply Sub-para (a) to CTAs
Not to apply Sub-para (b) to CTAs
Not to apply Sub-para (a) to CTAs that already contain provisions of period for determining relevant threshold
Not to apply Sub-para (b) to CTAs that already contain provision of alienation of interests other than shares
Apply Para 1 and choose to apply Para 4
Para 4 not to apply to CTAs that already contain such provision
India has chosen to apply optional provision of para 4 of Article 9
This would ensure transfer of shares deriving their value from immovable property
situated in India would get taxed in India and the avoidance practice of reducing the
value below the threshold right before the alienation would be curbed

19. Illustration
T Ltd
Indian Company
as on 31st March, 2019
Total assets Rs. 1000 crores
Immovable properties Rs. 510 crores
Mr. V
Resident of Malaysia
Holds 500 shares of T Ltd
Purchased at Rs.40,000 each
Immovable properties worth Rs. 15 crores
were sold on 13th December, 2019
Sold 500 shares at Rs.80,000
each on 7th June 2020
Taxation of Capital Gains
Position without Article 9 of MLI Position with Article 9 of MLI
Gains derived by a resident of a
Contracting State from the alienation of
shares deriving more than 50 per cent of
their value directly or indirectly from
immovable property situated in the other
Contracting State or any other right
pertaining to such immovable property
may be taxed in that other State.
India-Malaysia DTAA
At the time of transfer, as Rs. 15 crores of immovable properties were
sold earlier, the immovable properties of T Ltd comprised of 49.50%
(495 crores/1,000 crores) of its total assets
(no change in the amount of total assets as on sale of immovable
properties, cash or bank balance would have increased).
Thus, as per India-Malaysia DTAA, capital gains would not be taxable
in India and Malaysia shall have the right to tax such capital gains
The value of immovable property was more than 50% of
the total assets until 12th December 2019 i.e. for a part of
the period during the 365 days prior to the date of transfer
Therefore, the right of taxation would be with the country
in which such immovable properties are situated i.e. India.
Thus, capital gains would be taxable in India

20. Article 10 Anti-abuse Rule for PEs Situated in Third Jurisdictions
Article
10
An enterprise of a Jurisdiction
(Country of Residence) derives
income from the other jurisdiction
(Country of Source) and
such income is treated as income
attributable to a PE in a Third State
(third jurisdiction) and the such
income is exempt from tax in the
Country of Residence
Treaty Relief shall not apply if the tax
payable on the Attributable Income in the
Third State is less than 60% of the tax that
would be imposed in the Country of
Residence if the PE were situated in the
Country of Residence
In such a case, any income to which this provision applies shall remain taxable according to
the domestic law of the Country of source, notwithstanding any other provisions of the CTA
This provision shall not apply if the income derived from the Country of source is derived in connection
with or is incidental to the active conduct of a business carried on through the third jurisdiction PE
other than the business of making, managing or simply holding investments for the enterprise’s own account, unless these activities
are banking, insurance or securities activities carried on by a bank, insurance enterprise or registered securities dealer respectively
 If benefits under CTA is denied due to this provision, the competent authority of Country of Source has the authority to
grant such benefits in response to a request by the person in the Country of Residence on the basis of justified reasons
for not meeting the specified criterion
 The competent authority of the Country of Source shall consult with the competent authority of the Country of
Residence before granting or denying the request

21. Choices Available and India’s Position
Choices Available
Not to apply the entire Article 10 to CTAs
Article not to apply to CTAs that already contain such provision
Article to apply only to CTAs that already contain such provision
India has not made any reservation for Article 10
This Article applies in place of or in the absence of an existing provision in CTAs
Therefore, Article 10 would apply to all CTAs where
the other party has not made any reservations
If applicable, would curbs the avoidance practice of
having ‘triangular PE’ to evade tax

22. Article 11
Restricting Party’s Right to Tax its Own Residents
Article
11
A Covered Tax Agreement shall not affect the taxation by a Contracting Jurisdiction of its residents
Following exceptions are provided with respect to benefits granted under provisions of CTA :
This is a ‘savings clause’ which preserves a jurisdiction’s right to tax its own residents
Which provide for Corresponding Adjustments to be made by a resident entity
Deriving income from providing service to other jurisdiction or local authority or similar body
In case of individual who is also a student, business apprentice or trainee, or a teacher, professor, lecturer,
instructor, researcher or research scholar who meets the conditions of CTA
That requires granting of tax credit or exemption for income taxed in other jurisdiction as per CTA
Which protects resident against certain discriminatory tax practices by that jurisdiction

23. Contd.
Allows resident to request competent authorities of other jurisdiction for cases of taxation not
covered in CTA
Regarding taxes for a resident individual who is a member of a diplomatic mission, government
mission or consular post of the other Contracting Jurisdiction
Pensions or other payments made under the social security legislation of the other Jurisdiction
being taxable only in that Jurisdiction
Pensions and similar payments, annuities, alimony payments or other maintenance payments
arising in the other Jurisdiction being taxable only in that Jurisdiction
Which expressly limit Contracting jurisdiction’s right to tax its residents or provide exclusive right
to tax certain income that arise in the other jurisdiction
Choices Available
Not to apply entire article
Article not to apply to CTAs that already contain such provision
India has not made any reservation for Article 11
Therefore, article 11 would apply to all CTAs where
the other party has not made any reservations
This Article applies in place of or in the absence of an existing provision in CTAs

24. Thank You
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