OECD Convention on Taxation Treaties

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In April 2018 Malta introduced the OECD Multilateral Convention, regarding the implementation of double taxation treaties related measures to prevent base erosion and profit shifting (BEPS), into local law. The Multilateral Convention has been signed by around 100 countries. As of 11 March 2020 forty four jurisdictions have ratified, accepted or approved the convention. This convention is the implementation of Action 15 of the BEPS project.

The objective of the multilateral convention is to entrench certain rules and concepts in the double taxation treaties of countries without each country having to renegotiate and approve bilaterally each and every treaty signed with other countries.

The following is a summary of the salient features affecting Malta’s double taxation treaties.

Underlying Principles:

Recognising that governments lose substantial corporate tax revenue because of aggressive international tax planning that has the effect of artificially shifting profits to locations where they are subject to non-taxation or reduced taxation.

Recognising the importance of ensuring that profits are taxed where substantive economic activities generating the profits are carried out and where value is created.

Noting the need to ensure that existing agreements for the avoidance of double taxation on income are interpreted to eliminate double taxation with respect to the taxes covered by those agreements 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 those agreements for the indirect benefit of residents of third jurisdictions).

Scope of the Convention:

This Convention impacts all the double taxation treaties of a jurisdiction.

Hybrid Mismatches -Transparent Entities:

For the purposes of a Covered Tax Treaty, income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting Jurisdiction, shall be considered to be income of a resident of a Contracting Jurisdiction but only to the extent that the income is treated, for purposes of taxation by that Contracting Jurisdiction, as the income of a resident of that Contracting Jurisdiction.

Non-Taxation or Reduced Taxation:

A Covered Tax Treaty shall be modified to include the following preamble text:

“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).”

Artificial Avoidance of Permanent Establishment Status:

This relates to the artificial avoidance of permanent establishment status through Commissionnaire Arrangements and similar strategies.

Notwithstanding the provisions of a particular double taxation treaty that define the term “permanent establishment”, but subject to below proviso, where a person is acting in a Contracting Jurisdiction relevant to a particular Tax Treaty on behalf of an enterprise and, in doing so, 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, and these contracts are:

  • in the name of the enterprise; or
  • for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use; or
  • for the provision of services by that enterprise,

that enterprise shall be deemed to have a permanent establishment in that country in respect of any activities which that person undertakes for the enterprise unless these activities, if they were exercised by the enterprise through a fixed place of business of that enterprise situated in that Contracting Jurisdiction, would not cause that fixed place of business to be deemed to constitute a permanent establishment under the definition of permanent establishment included in the particular double taxation treaty (as it may be modified by this Convention).

These rules shall not apply where a person acting on behalf of an enterprise of another Jurisdiction carries on business as an independent agent and acts for the enterprise in the ordinary course of that business. Where, however, a person acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related, that person shall not be considered to be an independent agent.

General:

The convention also provides for improved dispute resolution and arbitration between countries.

The entry into force of the Multilateral Convention provisions in each of Malta’s double taxation treaties would need to be assessed on a case by case basis.

 

This article is only intended to give a general overview of the legislation. Professional advice should be separately sought on the applicability of these rules to any actual company structure or situation.

Please contact David Marinelli, DM Europe, should you wish to discuss any matter relating to Companies registered in Malta.

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