Article 10 of the OECD Model Tax Convention and United Nations Model Convention deals with the taxation of dividends. OECD and G20 in BEPS Action 6 report recommended the changes to be incorporated in dividend taxation provisions to remove the effects of tax abuse created by comprehensive tax planning.
Article 8 of Multilateral Instruments is an anti-avoidance provision that seeks to amend only Article 10(2) in those tax treaties based on the old Model Conventions.
Structure of Article 8 of MLI
Paragraph 1 of Article 8 of MLI
Text of Article 8(1) of MLI
“Provisions of a Covered Tax Agreement that exempt dividends paid by a company which is a resident of a Contracting Jurisdiction from tax or that limit the rate at which such dividends may be taxed, provided that the beneficial owner or the recipient is a company which is a resident of the other Contracting Jurisdiction and which owns, holds or controls more than a certain amount of the capital, shares, stock, voting power, voting rights or similar ownership interests of the company paying the dividends, shall apply only if the ownership conditions described in those provisions are met throughout a 365 day period that includes the day of the payment of the dividends (for the purpose of computing that period, no account shall be taken of changes of ownership that would directly result from a corporate reorganisation, such as a merger or divisive reorganisation, of the company that holds the shares or that pays the dividends).”
Article 10(2) of the OECD Model Tax Convention recommends a reduced rate of taxation by Source Country when the Subsidiary Company pays the dividend to the Holding company. Paragraph 1 of Article 8 of MLI requires a minimum shareholding period to satisfy the reduced rate of taxation on dividends by the subsidiary company.
The condition of the minimum shareholding period is added to provisions of a CTA that limit or exempt the taxation by the Source Country on dividends paid to a company that is resident of another country and holds a certain amount of capital or voting power of the dividend-paying company.
Therefore, this Article 8(1) of MLI does not affect the existing provisions of the CTA, which gives the preferential rate for dividends without the condition of holding a certain amount or voting powers of the dividend-paying company.
Paragraph 1 of Article 8 of MLI intends to add a minimum shareholding period to existing provisions of Covered Tax Agreements without modifying the other elements of such provisions, such as tax rates, ownership thresholds, and form of ownership (e.g., directly and/or indirectly).
Paragraph 2 of Article 8 of MLI
Text of Article 8(2) of MLI
“The minimum holding period provided in paragraph 1 shall apply in place of or in the absence of a minimum holding period in provisions of a Covered Tax Agreement described in paragraph 1.”
Paragraph 2 of Article 8 of MLI is a compatibility clause. It describes the interactions of Article 8(1) of MLI with the existing provisions of the Covered Tax agreements. It clarifies that the 365 days minimum shareholding period replaces the minimum shareholding periods existing in the provisions of Covered Tax Agreements. The 365 days test is to be added where such periods do not exist in the provisions of the CTA dealing with the taxation of dividends paid by the subsidiary company to the holding company, a resident of another country.
Paragraph 3 of Article 8 of MLI
Text of Article 8(3) of MLI
“A Party may reserve the right:
a) for the entirety of this Article not to apply to its Covered Tax Agreements;
b) for the entirety of this Article not to apply to its Covered Tax Agreements to the extent that the provisions described in paragraph 1 already include:
i) a minimum holding period;
ii) a minimum holding period shorter than a 365 day period; or
iii) a minimum holding period longer than a 365 day period”
Article 8 of MLI is not a minimum standard. Hence Paragraph 3 of Article 8 provides countries the option to opt-out of Article 8 in entirety vide Article 8(3)(a). The countries can choose to opt-out in other options as the existing CTA already covers the provisions guided under Article 8(1) of MLI or because they choose to have the minimum holding period of longer or shorter than 365 days.
Paragraph 4 of Article 8 of MLI
Text of Article 8(4) of MLI
“Each Party that has not made a reservation described in subparagraph a) of paragraph 3 shall notify the Depositary of whether each of its Covered Tax Agreements contains a provision described in paragraph 1 that is not subject to a reservation described in subparagraph b) of paragraph 3, 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 such a notification with respect to that provision.”
Paragraph 4 of Article 8 of MLI specifies the trigger point for notification is if no reservation is made under Paragraph 3(a) of Article 8 of MLI.
For CTA that does not contain an existing provision and hence not notified, the phrase “in absence of” would add provisions of Article 8(1) to the relevant CTA.
For CTA that contains an existing provision, the phrase “in place of” would replace the existing provisions by Article 8(1) provided both the countries to the CTA notify existing provisions.
Impact on CTA
The United Kingdom and Australia Tax Treaty
United Kingdom – Notified reservation under Article 8(3)(a) not to apply Article 8
Australia– Notified United Kingdom under Article 8(4), as agreement contains a provision described under Article 8(1)
Hence the United Kingdom and Australia Tax Treaty are not impacted by Article 8 of the MLI.
Canada- Netherlands Tax Treaty
Canada – Notified Netherlands under Article 8(4), as agreement contains a provision described under Article 8(1) and not subject to reservation under Article 8(3)(b)
Netherlands – Notified Canada under Article 8(4), as agreement contains a provision described under Article 8(1) and not subject to reservation under Article 8(3)(b)
Article 8(1) of MLI will impact the existing provisions of dividend taxation of Article 10(2) of Canada – Netherlands Tax Treaty.