As we all know, Spain took part in the signing ceremony of the Multilateral Instrument, in Paris, in June 2017. The Multilateral Instrument completes the work undertaken as a result of Action number 15 of the BEPS Action Plan, promoted by the OECD to counter tax evasion and aggressive tax planning.
However, entry into force of the Multilateral Instrument (“MLI”) and the effect of its various provisions do not depend solely on the signature date. These will also depend on the deposit of instruments of ratification or parliamentary approval prescribed by the different signatory States. Therefore, the MLI is not anticipated to enter into force before 2019.
From a Spanish tax perspective, it can be said that the signature of the MLI has initiated a process of reform of most of the treaties to prevent double taxation entered into by Spain. Such treaties will now include specific rules relating to treaty abuse and other measures designed to prevent aggressive tax planning opportunities.
The present article will focus on the specific MLI rules designed to prevent treaty abuse and on the options which Spain has elected with regard to such rules. Specifically, the MLI includes the following anti-abuse provisions:
(a) Amendments to the Preamble of double taxation treaties so as to include that the Contracting States intend to prevent double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion and avoidance (including treaty shopping).
This rule is one of the “minimum standards” of the MLI. Therefore, all signatory States have accepted to include it in the corresponding treaties. Additionally, this preamble will serve as useful guidance for the tax authorities of the different Member States on how to determine whether a situation can amount to treaty abuse.
(b) Specific anti-abuse rules, such as the inclusion of a minimum holding period for shareholdings to qualify for reduced treaty rates or exemptions to dividends; or the proportion of the value of real estate in relation to the other assets of a company in order to determine the taxation regime applicable to the transfer of shares.
(c) Anti-abuse rules applicable to permanent establishments located in third countries.
(d) The “saving clause” designed to preserve or “save” the right of each country to tax its own residents, preventing the use of tax treaties to restrict this right.
(e) A general anti-abuse clause, the Principal Purpose Test (“PPT”). If it is reasonable to conclude that obtaining the treaty benefit was one of the principal purposes of any arrangement or transaction, Tax Authorities may deny the application of such benefits.
Moreover, this anti-abuse rule also constitutes one of the minimum standards. Signatory states may elect to complement this test with the “limitation of benefits” clause (“LOB“), which establishes the conditions under which an individual or a company resident in a tax-treaty country may qualify for treaty benefits.
Spain has elected to apply the PPT, as a provision to combat abusive tax behaviour from taxpayers. This option confirms that Spanish Tax Authorities intend to prevent treaty abuse and deny the application of tax benefits to company decisions solely or mainly motivated by tax reasons.
As previously mentioned, the MLI has not yet entered into force. Therefore it is important to carry out a comprehensive case by case analysis of all the circumstances relating to multinational structures, whether pre-existing or newly created. Hence determining the extent to which all the anti-abuse rules above may affect these structures, thereby preventing the application of treaty benefits and creating undesired effects.