On 27 June 2018, the UAE signed the Multilateral Convention to Implement Tax Treaty Related Measures (MLI) to prevent Base Erosion and Profit Shifting (BEPS).
On 27 June 2018, the UAE signed the Multilateral Convention to Implement (MLI) Tax Treaty Related Measures to prevent Base Erosion and Profit Shifting (BEPS). This is the next step by the UAE towards local introduction and implementation of the BEPS Package (15 Actions) being rolled out globally since 2016. The UAE has joined the BEPS Inclusive Framework and has committed to implement four minimum standards (Action 5 “Harmful Tax Practices””, 6 “Treaty Abuse”, 13 “CBCR and TP Documentation”, 14 “Treaty Dispute Resolution”), and have been implementing the CRS (Common Reporting Standards for automatic exchange of certain financial information on foreign tax residents with the relevant foreign tax authorities) on the basis of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
MLI allows jurisdictions to swiftly integrate the BEPS inspired tax treaty changes into their existing networks of bilateral double taxation tax treaties. Such changes may cover a range of tax treaty matters, such as: treaty abuse, artificial avoidance of permanent establishment, hybrid mismatch arrangements, dispute resolution, dual residence, transparent entities, withholding taxes, capital gains tax. A special focus is on treaty abuse and treaty shopping, and MLI contains six articles to address this. In particular, the Principal Purpose Test (PPT) is an anti-abuse rule, based on the principal purposes of transactions or arrangements. The PPT provisions in MLI establish that a tax authority may deny the benefits of a tax treaty where it is reasonable to conclude, having considered all the relevant facts and circumstances, that one of the principal purposes of an arrangement or a transaction was to obtain a benefit under a tax treaty.
It should be noted that MLI provides for certain flexibility and, at the time of signature, the UAE provided a list of its positions with respect to specific amendments to its tax treaties (the “MLI Position”). These positions may be subject to change; the definitive position will be provided upon the ratification/acceptance/approval of the MLI by the UAE as a next step. The MLI already covers over 80 countries and more countries are expected to sign. The exact scope of change of a UAE tax treaty will depend on the counterparties’ MLI status and the outcome of bilateral positions on modifications.
The signing of MLI is an important development for the UAE’s extensive double tax treaty network. Existing holding, operational, financing structures in the UAE will need to be re-evaluated for the expected impact of this. New investments into or via the UAE will need to take into account the expected changes.
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