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The MLI Convention: selected aspects two years from the signing

The MLI Convention: aspects two years from the signing

The MLI Convention is a milestone in the process of implementing international measures aimed at preventing harmful tax practices. As the convention has been in force for more than two years, it is worth looking into some of its implications for taxpayers, especially because it has only recently become effective for cross-border tax settlements with certain countries.


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General provisions

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("MLI" or "Convention") was signed in Paris on 7 June 2017.

It is an important document for Polish taxpayers earning foreign sourced income (as well as for non-residents earning Polish sourced income), as it significantly affects the scope of application of Polish DTTs concluded with other countries. On the practical side, MLI amends the rules set out in DTTs without technical modification of their provisions (meaning that the rules contained in MLI may be considered as so called ”meta-rules”, which must be applied to the provisions of specific DTTs to ”decode” the actual meaning of rules provided therein and at the same time take precedence over the DTT provisions).

There are two types of provisions in the Convention. The obligatory provisions, which constitute the so called minimal-standard, and the optional provisions. An example of the former are provisions aimed at preventing the abuse of DTTs by depriving the entities whose principal purpose was to obtain benefits stemming from the DTTs from an access to such benefits. The optional provisions of the Convention will amend only those DTTs where both contracting parties have mutually notified applicability of given provisions to the DTT.

Applicability of MLI to its parties

In order to apply MLI’s provisions to given DTT, the parties to the DTT must:

  • sign the Convention and
  • deposit the instrument of ratification containing list of reservations and notifications ("Notification" or "Ratification") regarding given DTT. In other words, each state in its Notification should specify which provisions of the Convention should be applicable in relation to the other party to MLI (at the same time, being the other party to given DTT).

It is worth mentioning that the effective date of entry into force of the Convention's provisions on withholding tax, e.g. on dividend payments, is different from such date applicable to other types of taxes. In practice, such other taxes are primarily corporate income tax or personal income tax on income (revenue) not being taxed at source. Currently, in the case of withholding tax, the Convention already applies to Poland's DTTs, i.a., with Australia, Austria, France, Israel, Japan, Slovakia, Slovenia and the UK, whereas with respect to other taxes with Austria and Slovenia.

On the practical side, Poland's tax treaties concluded with some economically significant countries will not be modified by MLI at all. This refers to e.g. DTTs with the Netherlands, Germany or the United States.

Practical implications of certain provisions of the Convention for taxpayers

a. Dual resident taxpayers

If an entrepreneur may be regarded as tax resident by more than one country, both countries will need to reach an agreement on the entrepreneur’s tax residency. Previously, in case of disagreement over the tax residency, the rule was that the resident’s place of effective management or the place of registered seat in particular state was decisive (so called “tie-breaker” rule). Under the MLI provisions, during the process of reaching of an agreement, the parties must take into account, among other things, the place of effective management and / or the place of registered seat. If there is no agreement, the taxpayer will not be able to benefit from the given DTT.

b. Change of the method of elimination of double taxation

As rule, there are two methods of elimination of double taxation in the Poland's DTTs, namely the exemption with progression method and the tax credit method. Poland has opted for so called ‘option C’ provided for in the Convention which assumes replacing the exemption with progression method with the tax credit method.

c. Withholding tax on dividend payments

To benefit from the reduced withholding tax rate or WHT exemption provided for in DTT, taxpayer must have held shares, voting rights or similar interests in dividend-paying company for at least 365 days. In its Notification, Poland provided list of the DTTs in which these provisions will be incorporated. For example, as of 1 January 2020, this principle will apply to Poland's relations with France. The list does not include DTTs which already provide for different holding period as requirement for preferential tax treatment.

d. Real estate clause

The real estate clause in DTT serves to modify the rules for taxing the alienation of shares in company whose assets consist mainly of real estate. This clause is departure from the general rule contained in the OECD Model Convention which states that the sale of shares is subject to tax in the seller's country of residence. In the case of DTTs containing this clause, MLI states that for real estate clause to apply it will be sufficient if - within 365-day period before the transaction - given company qualifies as real estate company even once (under the Polish domestic provisions the general rule was to test the real estate company status on the last day of the month preceding the transaction). Additionally, MLI has expanded the meaning of the term "income from alienation of shares" so as now it should include also income earned from alienation of other similar rights in companies or other entities (e.g. interests in partnerships). 

It is important to add at this point that regardless of the above, bilateral negotiations between Poland and the Netherlands are underway to renegotiate the respective DTT in order to include the real estate clause (as stipulated above, for now DTT between Poland and the Netherlands is not covered by the provisions of MLI).

e. Permanent establishment

Although one of the objectives of the Convention is to prevent application of artificial measures leading to nonrecognition of permanent establishment in given state, Poland did not decide to adopt the MLI provisions governing this matter. At the same time, Polish government expressed its intent to cover this issue in bilateral negotiations of particular DTTs.


Following the adoption of the Convention, the provisions of Poland's DTTs have been (and will continue to be) modified. The Convention is being notified by an increasing number of states, which means that the scope of its applicability is growing.

Given the above, each transaction that may have certain cross-border tax implications should be examined carefully in the light of potential impact of MLI on its classification and treatment under tax law.

Mariusz Kułagowski, Manager in the International Tax Team at KPMG in Poland

Piotr Prandecki, Consultant in the International Tax Team at KPMG in Poland

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