The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “Convention”) was released by the Organisation for Economic Co-operation and Development (“OECD”) on November 24, 2016. The Convention is the latest in an ongoing series of releases related to the OECD/G20 Project addressing Base Erosion and Profit Shifting (the “BEPS Project”), which is a major and continuing effort described as “aiming to realign taxation with economic substance and value creation, while preventing double taxation.”[1]  The Convention is the result of multilateral negotiation by over 100 member states (including the United States and the United Kingdom) and observers. While the Convention will not come into force at all until five countries have formally ratified the Convention, once in force the Convention will come into effect for an existing income tax treaty after both contracting parties to that treaty have signed the Convention and any other required home-country ratification processes are completed. The Convention is accompanied by a detailed explanatory statement describing its provisions. The OECD announced that a signing ceremony for the Convention will be held in June of 2017, although a list of expected signatories has not yet been released.

Continue reading for further background on the Convention and a discussion of issues relating to the Convention’s interaction with existing tax treaties, substantive highlights and timetable for implementation. A complete version of the Convention, and the explanatory statement, are linked here and also can be found on the OECD website, If you would like to discuss any details of the Convention or its impact on multinational enterprises, please contact any of the authors listed here or any member of the Proskauer Tax Department whom you usually consult on these matters.


The Convention is the latest and possibly the most far-reaching multinational effort to combat transactions and structures that arguably exploit inconsistencies within the current “bilateral” double income tax treaty network – these bilateral treaties, each separately agreed between two countries, currently number over 3,000. This regime, which has been the international norm for decades, has led to non-uniform rules that may result in interpretative gaps or identity mismatches. Taxpayers and their advisors have used this non-uniformity in connection with a wide variety of transactions and structures, lowering or effectively eliminating taxation of certain income in an arguably inappropriate manner or without regard to the intent of the parties to the treaty. Previous efforts to eliminate these gaps have faced significant challenges owing in large part to the very nature of the bilateral treaty regime—specifically, the sheer number of treaties that would each need to be re-negotiated and revised in order to achieve system-wide consistency.

The 2015 Final BEPS Package, developed jointly by the OECD Committee on Fiscal Affairs and representatives of the G20 countries, addressed this difficulty in the Action 15 Report (referring to Action 15 of the 2013 BEPS Action Plan), which advocated the adoption of a “multilateral instrument” by member states to streamline treaty reform. The goal of a multilateral instrument is to allow participating jurisdictions to swiftly and efficiently adopt supplemental or substitute provisions without having to re-negotiate each bilateral treaty separately, and the Action 15 Report advocated for such an instrument specifically designed to address the goals of the BEPS Project. An ad hoc group, consisting of 99 national members and a variety of nonmember observers, was organized to develop the instrument. The Convention, and its accompanying explanatory statement, is the culmination of this ad hoc group’s efforts.

Interaction with Existing Tax Treaties

According to the drafters, the Convention is designed to provide “flexibility to accommodate specific tax treaty policies.”[2]  Rather than replace existing treaties in their entirety, or even replace wholesale certain provisions in their entirety, the Convention is designed to “apply alongside” existing tax treaties, “modifying their application” to incorporate the BEPS measures and superseding specific provisions only to the extent of incompatibility. To ensure this flexibility, the Convention offers a complex system of reservations and partial implementation options, which in some circumstances may continue to require bilateral agreement between the high contracting parties to an existing tax treaty. However, this very complexity will require, at a minimum, substantial and careful review of the application of the Convention in a specific transaction’s context to ensure that the correct provisions of the Convention are properly applied.

  • Tax agreements modified by the Convention

The Convention will only apply to those treaties one or more Convention signatories (each a “Party”) if specifically listed by both Parties as “Covered Tax Agreements” in a notice to the OECD. Parties to a Covered Tax Agreement, referred to  as “Contracting Jurisdictions,”  are permitted to reserve application of certain Convention provisions in whole or in part to all (or in some cases a subset) of its Covered Tax Agreements. A Contracting Jurisdiction will be required to indicate the permitted reservations in each substantive article of the Convention with respect to the Contracting Jurisdiction’s universe of Covered Tax Agreements. A Party may reserve certain Convention provisions as to a subset of its Covered Tax Agreements only where existing provisions of the Covered Tax Agreement satisfy specific, enumerated criteria. In such instances, the existing treaty provisions would be unaltered by the Convention. The flexibility a Party has in deciding whether and how much to avail itself of these reservations and opt-out rights depends largely on whether the OECD has determined that a given Convention provision “relates to a minimum standard.”

  • Covered Tax Agreements must satisfy “minimum standards”

The concept of “minimum standards” were embodied in the 2013 BEPS Action Plan, and are those standards that were deemed essential to addressing BEPS concerns. The minimum standards established for the prevention of treaty abuse (Action 6) and for the improvement of dispute resolution (Action 14) are intended to be the substantive foundation of the Convention, and these minimum standards also set limits on a Party’s opt-out flexibility for certain Convention provisions. Generally, if a substantive Convention provision does not relate to a minimum standard, a Party can opt out in whole or in part through the reservations mechanism of that Convention article. In contrast, where a substantive Convention provision does relate to a minimum standard, the Contracting Jurisdictions can only opt out if an analogous provision of the Covered Tax Agreement otherwise satisfies the minimum standard. Put another way, a Covered Tax Agreement must satisfy the substantive minimum standards either by application of the Convention’s provisions or the existing treaty’s provisions.

  • Choice of alternatives for meeting “minimum standards” and optional provisions

For certain provisions, the Convention offers a choice among several options, each of which is considered to satisfy the applicable minimum standard. For example, in the provision addressing double non-taxation, different options are offered depending on whether the applicable minimum standard deficit in the existing treaty is a duplicate exemption in an exemption regime, a required exemption of a previously deducted payment, or an excessive tax credit in a foreign tax credit regime. The Convention’s explanatory statement generally instructs Contracting Jurisdictions that select different approaches to reconcile any resulting asymmetry in a manner that satisfies the applicable minimum standard.

While generally the Convention does not dictate a preference among alternative approaches to satisfy a minimum standard, tie-breakers are provided in some instances (for example, in the double taxation provision, the option chosen by a Contracting Jurisdiction will apply as to that jurisdiction’s residents). In other circumstances, the Convention provision will not apply to a Covered Tax Agreement unless both Contracting Jurisdictions select the same option. A Party may also, in some circumstances, reserve the right to prevent another Contracting Jurisdiction from applying a particular option to the applicable Covered Tax Agreement. How this will work out in practice remains to be seen.

In general, Convention provisions unrelated to minimum standards are optional and will only apply if affirmatively adopted by both Contracting Jurisdictions to a Covered Tax Agreement.

  • Conflicts between existing treaties and the Convention

Because the Convention is designed to apply alongside existing tax treaty provisions, where compatible, the Convention generally supplements rather than replaces the analogous provision of a given Covered Tax Agreement. Where a given Convention provision and its counterpart in a Covered Tax Agreement overlap or otherwise may be incompatible, one or more compatibility clauses contained in each substantive Convention article define, in what are intended to be objective terms, the relationship between such provisions. A Convention provision that applies “in place of or in the absence of” an existing provision in a Covered Tax Agreement will apply such agreements and will supersede to the extent of any inconsistency. In contrast, a Convention provision that “modifies” or applies “in place of” an existing provision of a Covered Tax Agreement will only apply if the applicable Covered Tax Agreement presently contains such a provision. In general, unless a Convention provision applies in all cases (i.e., “in place of or in the absence of”), additional notification requirements may be required for that provision to take effect.

Substantive Highlights

The Convention provisions cover a number of areas, many of which are the subject of other BEPS Project Actions.

  • Prevention of treaty abuse and limitation on benefits
  • Avoidance of permanent establishment status (agent arrangements, specific activity exemptions, and split contracts)
  • Hybrid mismatch arrangements and hybrid entities
  • Definition of “residence” and tie-breaker provisions
  • Adjustments to the application of double taxation to prevent double non-taxation
  • Related party dividend transactions
  • Capital gains related to real property
  • Improved dispute resolution, corresponding adjustments, and arbitration

The provisions addressing prevention of treaty abuse and the new rules for permanent establishments are briefly addressed below.

  • Prevention of treaty abuse and limitation on benefits

Article 7 of the Convention offers three alternative approaches to limit persons or transactions that are eligible for treaty benefits, and thus limit potential treaty abuse. The first option is a general anti-abuse rule (GAAR) that denies treaty benefits to a transaction where, based on all facts and circumstances, it is reasonable to conclude that obtaining a treaty benefit was one of the principal purposes of entering the transaction (the “principal purpose test,” or “PPT”). The GAAR is the default option under the Convention, and the application of this subjective test seems to leave significant discretion to the Contracting Jurisdiction’s tax authorities.

The second option is a PPT combined with a simplified “limitation on benefits” (“LOB”) provision (based on the OECD Model Tax Convention), which restricts most treaty benefits to “qualified persons.” While an individual need only be a resident of one of the Contracting Jurisdictions to qualify under its Covered Tax Agreements, entities are subject to additional requirements. For example, a corporation (other than one regularly traded on a recognized stock exchange) would only be a qualified person if, on at least 50% of the days of the 12-month period during which benefits were sought, at least 50% of its shares were owned, directly or indirectly, by other qualified persons. (Note that a corporate resident who is not a qualified person could still qualify for treaty benefits under the “active conduct” exception, where the income derived in the non-resident Contracting Jurisdiction emanates from the resident’s active conduct of a business in the Contracting Jurisdiction of residence.)

Flow-through entities are not included in the definition of “qualified persons”; they are nonetheless eligible for treaty benefits under Article 7 if, for at least 50% of the days in the relevant 12-month period, 75% or more of the beneficial interests are owned by “equivalent beneficiaries.” “Equivalent beneficiaries” are persons otherwise entitled, under domestic law or a relevant treaty (including the Covered Tax Agreement), to benefits either equivalent or more favorable than those accorded under the Covered Tax Agreement.

Although more recent treaties—and the current U.S. Model Income Tax Convention—generally include LOB provisions, the adoption of this second option with respect to older treaties could significantly reduce certain tax planning opportunities. Additionally, the combination of an objective LOB test with a subjective PPT test would effectively require taxpayers to ensure their transactions continuously satisfy the objective test, but in the absence of affirmative guidance from a Contracting Jurisdiction a taxpayer could nevertheless still be left uncertain as to whether the taxing authorities might still assert that the PPT applied to a tranaction.

The third option allows Contracting Jurisdictions to agree to a “detailed” LOB provision with the counterparty Contracting Jurisdiction in lieu of a PPT, provided that conduit arrangements are addressed in a supplemental provision (if not already addressed in the existing treaty). The Convention does not provide a sample detailed LOB provision, reasoning that a sufficiently detailed provision would be specific to the needs of the applicable treaty and hence would require substantial bilateral customization. While this option permits Contracting Jurisdictions to avoid adoption of a subjective PPT (or to adopt the PPT only during the pendency of negotiation of a detailed LOB provision), this option would require additional bilateral negotiation – which, unless an agreed LOB form (such as the OECD Model Tax Convention form), could be significant and lead to the same issues of inconsistency that the Convention was intended to avoid.

  • Avoidance of permanent establishment status

The new permanent establishment rules, also borrowed from the OECD Model Tax Convention, would make it harder for taxpayers with an agent or employee operating in a Contracting Jurisdiction to avoid permanent establishment status in that jurisdiction. Article 12 provides that where a person, acting on behalf of an enterprise, “habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise” (emphasis added), that enterprise will be deemed a permanent establishment (subject to certain limitations). The addition of the “principal role” language is a notable expansion of the current test in most treaties, which typically require both possession of legal authority to contract and habitual exercise of that actual authority for permanent establishment status to apply. The common exception for independent agents acting in the ordinary course of business is retained; however, Article 12 excludes agents acting exclusively or almost exclusively on behalf of one or more enterprises to which they are closely related.

Article 13 offers two alternative (and optional) provisions addressing the preparatory or auxiliary exemption for specific activities. In general, activities (other than those specifically listed in the relevant provision of a Covered Tax Agreement) which are of a preparatory or auxiliary nature, and carried on at a fixed place of business, will not be deemed a permanent establishment. An exception is made if, when otherwise exempt activities are considered as a whole, the “overall activity” of the enterprise (or a combination of enterprises operating at the same place, or related enterprises performing complementary functions) is not preparatory or auxiliary in nature.

Article 14 includes an optional provision aimed at contracts split up for the purpose of avoiding the durational threshold for permanent establishment status under some treaties. The Convention would aggregate such periods (each individually lasting 30 days or more) where related parties are performing connected activities at the same building, construction, or installment site.

Timing and Implementation

The Convention will be open for signature by any country (not limited to those countries who sent representatives to the ad hoc group or otherwise contributed to the drafting of the Convention) on December 31, 2016, and will enter into force once five countries have ratified the Convention. Governments are currently preparing lists of treaties to be covered and the first high-level signing ceremony is expected for June of 2017. The timetable for ratification by a sufficient number of states, for the Convention to come into force, however, is uncertain.

[1] See, e.g., Q&A 5 in “BEPS – Frequently Asked Questions,” located at (last visited December 5, 2016).

[2] OECD, Multilateral Instrument – Information Brochure (Nov. 2016), (last visited December 5, 2016).

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Photo of Kathleen R Semanski Kathleen R Semanski

Kathleen Semanski is an associate in the Tax Department. She counsels corporate, private equity, investment fund and REIT clients in connection with domestic and cross-border financings, debt restructurings, taxable and tax-free mergers and acquisitions (inbound and outbound), securities offerings, fund formations, joint ventures…

Kathleen Semanski is an associate in the Tax Department. She counsels corporate, private equity, investment fund and REIT clients in connection with domestic and cross-border financings, debt restructurings, taxable and tax-free mergers and acquisitions (inbound and outbound), securities offerings, fund formations, joint ventures and other transactions.  Katie also advises on structuring for inbound and outbound investments, tax treaties, anti-deferral regimes, and issues related to tax withholding and information reporting.  Katie is a regular contributor to the Proskauer Tax Talks blog where she has written about developments in the taxation of cryptocurrency transactions, among other topics.

Katie earned her L.L.M. in taxation from NYU School of Law and her J.D. from UCLA School of Law, where she completed a specialization in business law & taxation and was a recipient of the Bruce I. Hochman Award for Excellence in the Study of Tax Law.  Katie currently serves on the Pro Bono Initiatives Committee at Proskauer and has worked on a number of immigration, voting rights, and criminal justice-related projects.

Photo of Martin T. Hamilton Martin T. Hamilton

Martin T. Hamilton is a partner in the Tax Department. He primarily handles U.S. corporate, partnership and international tax matters.

Martin’s practice focuses on mergers and acquisitions, cross-border investments and structured financing arrangements, as well as tax-efficient corporate financing techniques and the tax…

Martin T. Hamilton is a partner in the Tax Department. He primarily handles U.S. corporate, partnership and international tax matters.

Martin’s practice focuses on mergers and acquisitions, cross-border investments and structured financing arrangements, as well as tax-efficient corporate financing techniques and the tax treatment of complex financial products. He has experience with public and private cross-border mergers, acquisitions, offerings and financings, and has advised both U.S. and international clients, including private equity funds, commercial and investment banks, insurance companies and multinational industrials, on the U.S. tax impact of these global transactions.

In addition, Martin has worked on transactions in the financial services, technology, insurance, real estate, health care, energy, natural resources and industrial sectors, and these transactions have involved inbound and outbound investment throughout Europe and North America, as well as major markets in East and South Asia, South America and Australia.

Photo of Robert E. Gaut Robert E. Gaut

Robert Gaut is a tax partner and head of our UK tax practice in London.

Robert provides advice on a full range of UK and international tax issues relating to fund formation, private equity deals, finance transactions and private equity real estate matters…

Robert Gaut is a tax partner and head of our UK tax practice in London.

Robert provides advice on a full range of UK and international tax issues relating to fund formation, private equity deals, finance transactions and private equity real estate matters, including experience with non-traditional equity transactions, such as debt-like preferred equity and co-investments for private credit investors.

Robert is highly-regarded for his ability to provide sophisticated tax advice to many of the world’s preeminent multinational companies, sovereign wealth funds, investment banks and private equity and credit funds. Clients have commented to legal directories that Robert is “really technical and knows his stuff,” and “has a very strong knowledge of the various tax laws, but also presents more innovative techniques and strategies.”

He is consistently recognized by Chambers UK and The Legal 500 United Kingdom, and has been recognized by Chambers Global as a leading individual in tax. The Legal 500 comments that Robert has “vast experience in a range of matters, including corporate tax structuring, real estate tax and fund formation.”

Photo of Stuart Rosow Stuart Rosow

Stuart Rosow is a partner in the Tax Department and a leader of the transactional tax team. He concentrates on the taxation of complex business and investment transactions. His practice includes representation of publicly traded and privately held corporations, financial institutions, operating international…

Stuart Rosow is a partner in the Tax Department and a leader of the transactional tax team. He concentrates on the taxation of complex business and investment transactions. His practice includes representation of publicly traded and privately held corporations, financial institutions, operating international and domestic joint ventures, and investment partnerships, health care providers, charities and other tax-exempt entities and individuals.

For corporations, Stuart has been involved in both taxable and tax-free mergers and acquisitions. His contributions to the projects include not only structuring the overall transaction to ensure the parties’ desired tax results, but also planning for the operation of the business before and after the transaction to maximize the tax savings available. For financial institutions, Stuart has participated in structuring and negotiating loans and equity investments in a wide variety of domestic and international businesses. Often organized as joint ventures, these transactions offer tax opportunities and present pitfalls involving issues related to the nature of the financing, the use of derivations and cross-border complications. In addition, he has advised clients on real estate financing vehicles, including REITs and REMICs, and other structured finance products, including conduits and securitizations.

Stuart’s work on joint ventures and partnerships has involved the structuring and negotiating of a wide range of transactions, including deals in the health care field involving both taxable and tax-exempt entities and business combinations between U.S. and foreign companies. He has also advised financial institutions and buyout funds on a variety of investments in partnerships, including operating businesses, as well as office buildings and other real estate. In addition, Stuart has represented large partnerships, including publicly traded entities, on a variety of income tax matters, including insuring retention of tax status as a partnership; structuring public offerings; and the tax aspects of mergers and acquisitions among partnership entities.

Also actively involved in the health care field, Stuart has structured mergers, acquisitions and joint ventures for business corporations, including publicly traded hospital corporations, as well as tax-exempt entities. This work has led to further involvement with tax-exempt entities, both publicly supported entities and private foundations. A significant portion of the representation of these entities has involved representation before the Internal Revenue Service on tax audits and requests for private letter rulings and technical advice.

Stuart also provides regular advice to corporations, a number of families and individuals. This advice consists of helping to structure private tax-advantaged investments; tax planning; and representation before the Internal Revenue Service and local tax authorities on tax examinations.

A frequent lecturer at CLE programs, Stuart is also an adjunct faculty member of the Columbia Law School where he currently teaches Partnership Taxation.