The MLI is an international multilateral agreement between countries designed to standardise the provisions in existing double tax treaties (hereinafter, “DTT”) without the need for individual bilateral revision/re-approval of those treaties by member states.
On 24 December 2019 the Russian Ministry of Finance posted a notice on its official website that the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (known as the Multilateral Instrument, hereinafter the “MLI”) will start to apply on 1 January 2021, and not before (until recently, MLI was expected to be applicable to withholding tax from 1 January 2020).
As you will know, the MLI is an international multilateral agreement between countries designed to standardise the provisions in existing double tax treaties (hereinafter, “DTT”) without the need for individual bilateral revision/re-approval of those treaties by member states.
Why postponement? When will things be resolved?
The MLI was ratified by the Russian Federation and took effect in Russia on 1 October 2019. However, since the Russian Federation has negotiated a reservation regarding application of MLI (paragraph “a” of Clause 7 of Article 35), it will start applying only after the Russian Federation and certain other DTT countries (that have a similar reservation paragraph1) have met special conditions.
These special conditions involve the Russian Federation delivering to the OECD and other DTT countries notification that internal procedures have been completed concerning the application of MLI provisions in respect of each particular DTT covered by the MLI (paragraph “b” of Clause 7 of Article 35).
As of now, neither the Russian Federation nor its DTT parties (that have made a similar reservation) have delivered any such notice, a fact confirmed by the Russian Ministry of Finance and information posted on the official OECD website.
Accordingly, application of MLI for Russia will start no earlier than 1 January 2021, on the condition that both the Russian Federation and the relevant DTT country (that has a similar reservation) have delivered a notice to the OECD that they have completed their national procedures and exchanged these notices with each other before the end of November 2020.
As regards other taxes, if the relevant notices are obtained by the OECD / DTT country before the end of May 2020, then the MLI will start applying from 1 January 2021; otherwise, it will be applicable from 1 January 2022.
That said, the national procedures are not expected to take long. Thus, for MLI purposes, member states that have a reservation postponing the start date for MLI application are supposed to complete their national procedures ASAP2.
What should be done?
Since MLI provisions will not start applying to DTTs to which Russia is a party from 1 January 2020, international groups have at least one more year to get ready for the upcoming changes, by:
— performing diagnostics of structures to check for compliance with MLI provisions; and
— taking the required steps to adapt, including preparation of explanations showing the business purpose behind the payment of passive income to foreign jurisdictions.
For more details on MLI provisions, see our publication.
We additionally recommend monitoring to see when notices are exchanged between Russian and the other DTT member states with similar reservations in order to assess the final deadlines for when MLI will apply.
1Andorra, Cyprus, Estonia, Germany, Hong Kong, Indonesia, Italy, Kenya, Romania, Spain, Sweden, Switzerland
2Para. 242 to the Explanatory Statement to the Multilateral Convention on Implementing Tax Treaty related measures to prevent Base Erosion and Profit Shifting