OECD Model Tax Convention and the UN Model provide for taxation of capital gains under Article 13. Though it is an essential source of income, the DTAA does not define the term “capital gains.”.
Article 9 of the Multilateral Instruments seeks to amend Paragraph 4 of Article 13 of the OECD model tax convention, which deals with the taxation of capital gains of alienation of shares /other interests in an entity which is primarily into the ownership of immovable property.

Structure of Article 9
Paragraph 1 of Article 9
Text of Article 9(1) of MLI
“Provisions of a Covered Tax Agreement providing that gains derived by a resident of a Contracting Jurisdiction from the alienation of shares or other rights of participation in an entity may be taxed in the other Contracting Jurisdiction provided that these shares or rights derived more than a certain part of their value from immovable property (real property) situated in that other Contracting Jurisdiction (or provided that more than a certain part of the property of the entity consists of such immovable property (real property)):
a) shall apply if the relevant value threshold is met at any time during the 365 days preceding the alienation; and
b) shall apply to shares or comparable interests, such as interests in a partnership or trust (to the extent that such shares or interests are not already covered) in addition to any shares or rights already covered by the provisions.”
The text of Article 13(4) of the OECD Model Tax Convention 2014 was as follow:
“ Gains derived by a resident of a Contracting State from the alienation of shares deriving more than 50 percent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other state.”
Changes recommended under Article 9 of MLI are borne from the changes suggested in BEPS Action 6 Report. Paragraph 1 of Article 9 aims to :
- Introduce a testing period of 365 days for determining whether the condition on the value threshold is met – Article 9 (1)(a) of MLI
- To expand the scope of interests that are comparable to shares. – Article 9 (1)(b) of MLI
The other significant changes introduced in the wordings of Article 13(4) of the OECD Model Tax Convention vide Article 9 of the MLI are as follows:

- The term “other rights of participation in an entity” replaces “comparable interests” to ensure Paragraph 1 of Article 9 applies to existing provisions where ownership interests are more broadly described than “comparable interests.”
- The term “more than a certain part” replaces “more than 50 percent” to capture the existing provisions using thresholds not limited to percentage but to include the more generic terms “principal part,” “the greater part,” “mainly,” “wholly,” “principally” and “primarily.”
- The term “immovable property” now includes “real property,” and in addition, the phrase “as defined under Article 6” is removed to avoid cross-referencing with another Article.
- The phrase “more than a certain part of the property of the entity consists of such immovable property (real property)” has been added to address existing provisions based on Article 13(4) of the UN Model Tax Convention
The purpose of Paragraph 1 of Article 9 of MLI is solely to introduce a testing period and to ensure the provision address the interests comparable to shares. The threshold provided in existing provisions of the CTA would be preserved and continued.
Where the CTA contains exceptions to the application of the existing provisions, those exceptions would also continue to apply.
Some existing provisions of CTA might use the term “income” or “profits” in addition to or instead of “gains” in Article 13(4); such provisions would be within the scope of Paragraph 1 of Article 9 of MLI.
Paragraph 2 of Article 9
Text of Article 9(2) of MLI
“The period provided in subparagraph a) of paragraph 1 shall apply in place of or in the absence of a time period for determining whether the relevant value threshold in provisions of a Covered Tax Agreement described in paragraph 1 was met.”
Paragraph 2 of Article 9 is a compatibility clause describing the interaction between subparagraph a)of Article 9(1) of MLI with the Covered Tax Agreements. It clarifies that the 365 days testing period in Article 9(1)(a) of MLI replaces the testing period in the existing CTA. If the existing CTA does not have a testing period, the provisions of Article 9(1)(a) of MLI will be added.
IF the countries prefer to preserve the existing testing period reservation under paragraph 6(d) of Article 9 allows the possibility to opt-out of provisions of Article 9(1)(a) of MLI.
Since paragraph 1(b) already describes the relationship with shares or rights covered by existing provisions, paragraph 2 does not describe the compatibility of paragraph 1(b) with existing provisions.
Paragraph 3 of Article 9
Text of Article 9(3) of MLI
“A Party may also choose to apply paragraph 4 with respect to its Covered Tax Agreements.”
Paragraph 3 of Article 9 allows the countries to opt for Paragraph 4 of Article 9. Article 9(4) of MLI applies the version of Article 13(4) of the OECD Model Tax Convention, produced in the Action 6 Report, to their Covered Tax Agreements, rather than incorporating a testing period and expanding types of interest covered by existing capital gains provisions.
Paragraph 4 of Article 9
Text of Article 9(4) of MLI
“For purposes of a Covered Tax Agreement, gains derived by a resident of a Contracting Jurisdiction from the alienation of shares or comparable interests, such as interests in a partnership or trust, may be taxed in the other Contracting Jurisdiction if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property (real property) situated in that other Contracting Jurisdiction.”
Some countries prefer the version of Article 13(4) of the OECD model tax convention, provided in the BEPS Action 6 Report. It incorporates the 365 days testing period but prefers to continue with a 50 percent threshold limit and the phrase “comparable interests.”
Article 9(4) is an optional provision. Article 9(8) states that Article 9(4) of MLI will apply only if all the Contracting Jurisdictions have chosen to apply it by making a notification under Paragraph 8 of Article 9. As it is obvious, when Article 9(4) is chosen to apply, Article 9(1) will not stand in place.
To remember, if one Contracting Jurisdiction chooses to apply paragraph 4 and one or more of the other Contracting Jurisdictions do not (or neither Contracting Jurisdiction chooses to apply it), paragraph 4 would not apply to that Covered Tax Agreement, and paragraph 1 would apply.
Paragraph 5 of Article 9
Text of Article 9(5) of MLI
“Paragraph 4 shall apply in place of or in the absence of provisions of a Covered Tax Agreement providing that gains derived by a resident of a Contracting Jurisdiction from the alienation of shares or other rights of participation in an entity may be taxed in the other Contracting Jurisdiction provided that these shares or rights derived more than a certain part of their value from immovable property (real property) situated in that other Contracting Jurisdiction, or provided that more than a certain part of the property of the entity consists of such immovable property (real property).”
Paragraph 5 of Article 9 is a compatibility clause for the interaction between Article 9(4) of MLI and the existing provisions of CTA. This paragraph clarifies that the provision in paragraph 4 replaces existing provisions of Covered Tax Agreements addressing capital gains from the alienation of shares or interests in entities deriving their value principally from immovable property. It will be added where such provisions do not exist in Covered Tax Agreements.
If Parties prefer to preserve existing provisions of their Covered Tax Agreements, paragraph 6(f) allows the possibility to opt-out of paragraph 4 concerning the Covered Tax Agreements.
Paragraph 6 of Article 9
Text of Article 9(6) of MLI
“A Party may reserve the right:
a) for paragraph 1 not to apply to its Covered Tax Agreements;
b) for subparagraph a) of paragraph 1 not to apply to its Covered Tax Agreements;
c) for subparagraph b) of paragraph 1 not to apply to its Covered Tax Agreements;
d) for subparagraph a) of paragraph 1 not to apply to its Covered Tax Agreements that already contain a provision of the type described in paragraph 1 that includes a period for determining whether the relevant value threshold was met;
e) for subparagraph b) of paragraph 1 not to apply to its Covered Tax Agreements that already contain a provision of the type described in paragraph 1 that applies to the alienation of interests other than shares;
f) for paragraph 4 not to apply to its Covered Tax Agreements that already contain the provisions described in paragraph 5.”
Countries party to the MLI have six options for reservations under Article 9(6) of MLI:
- Article 9(6)(a) – Not to apply provisions of Article 9(1) to the CTA.
- Article 9(6)(b) – Not to apply the provision of Article 9(1)(a) to the CTA
- Article 9(6)(c) – Not to apply provisions of Article 9(1)(b) to the CTA
- Article 9(6)(d) – Not to apply provisions of Article 9(1)(a) to the CTA as the said CTA already has provisions of the type described under Article 9(1)(a) that includes a period for determining whether the relevant value threshold are met.
- Article 9(6)(e) – Not to apply provisions of Article 9(1)(b) to the CTA as the said CTA already has provisions of the type described under Article 9(1)(a) that that applies to the alienation of interests other than shares
- Article 9(6)(f) – Not to apply Provisions of Article 9(4) to its CTA that already contain the provisions described under Paragraph 5.
Paragraph 7 of Article 9
Text of Article 9(7) of MLI
“Each Party that has not made the reservation described in subparagraph a) of paragraph 6 shall notify the Depositary of whether each of its Covered Tax Agreements contains a provision described in paragraph 1, and if so, the article and paragraph number of each such provision. Paragraph 1 shall apply with respect to a provision of a Covered Tax Agreement only where all Contracting Jurisdictions have made a notification with respect to that provision.”
Except for countries with a reservation under Article 9(6)(a), every other country shall notify whether each of its CTA contains an existing provision described under Article 9(1). Paragraph 1 would apply with respect to a provision of a Covered Tax Agreement only where all Contracting Jurisdictions have made such a notification with respect to the existing provision.
Paragraph 8 of Article 9
Text of Article 9(8) of MLI
“Each Party that chooses to apply paragraph 4 shall notify the Depositary of its choice. Paragraph 4 shall apply to a Covered Tax Agreement only where all Contracting Jurisdictions have made such a notification. In such case, paragraph 1 shall not apply with respect to that Covered Tax Agreement. In the case of a Party that has not made the reservation described in subparagraph f) of paragraph 6 and has made the reservation described in subparagraph a) of paragraph 6, such notification shall also include the list of its Covered Tax Agreements which contain a provision described in paragraph 5, as well as the article and paragraph number of each such provision. Where all Contracting Jurisdictions have made a notification with respect to a provision of a Covered Tax Agreement under this paragraph or paragraph 7, that provision shall be replaced by the provisions of paragraph 4. In other cases, paragraph 4 shall supersede the provisions of the Covered Tax Agreement only to the extent that those provisions are incompatible with paragraph 4.”
Article 9(8) requires each party choosing to apply Paragraph 4 to notify its choice.
A Party that has not reserved the right under paragraph 6(a) for paragraph 1 not to apply to its Covered Tax Agreements will have included in its notifications under paragraph 7 a list of Covered Tax Agreements containing a relevant existing provision. However, a Party that has made such a reservation will be required to include a list under paragraph 8, except where such Party has reserved the right under paragraph 6(f) to preserve existing provisions. It then describes the relationship between paragraph 4 and paragraph 1.
While all Contracting Jurisdictions have chosen to apply paragraph 4 by making a notification under this paragraph, paragraph 1 would not apply with respect to that Covered Tax Agreement. Instead, paragraph 4 would apply.
An existing provision of a Covered Tax Agreement would be replaced by paragraph 4, where all Contracting Jurisdictions have made a notification under paragraph 7 or 8 with respect to the existing provision.
In other cases, paragraph 4 would supersede the provisions of the Covered Tax Agreement only to the extent that those provisions are incompatible with paragraph 4.