Romania joined on 7 June the multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting (“MLI”).
The MLI brings a lot of changes that affect double tax treaties provisions. This alert seeks to clarify the future applicability of the MLI.
The MLI completes some of the double tax treaties with provisions regarding the prevention of the base erosion and profit shifting from the BEPS plan.
These changes can significantly affect how cross-border transactions are taxed.
Among the measures proposed by the MLI for which Romania opted, we mention:
(i) new provisions regarding dependent agent (e.g. with direct impact on commissionaire arrangements);
(ii) assessing preparatory / auxiliary activities considering substance of transactions (i.e. we no longer rely on a specific list of activities provided by the double tax treaty);
(iii) in assessing the existence of a permanent establishment, all activities performed by the same company or a closely related enterprise in a contracting state are considered (anti-fragmentation rule);
(iv) new rules regarding the existence of a permanent establishment in the case of construction works.
A list can be found on the OECD website containing the Romania double tax treaties covered by the MLI and the proposed changes (Romania included in this list all its double tax treaties in force).
1. When reciprocated (i.e. both jurisdictions opt for the same changes), the adopted provisions of the MLI prevail over the text of the double tax treaty.
2. Where there is no reciprocity regarding the amendments ratified by the two states, the MLI does not produce any effect (with some exceptions). Those jurisdictions have the opportunity to engage in bilateral negotiations, however, in order to reach a consensus or to make amendments to the MLI, even after ratification.
The MLI is an instrument that allows coordinated and effective amendment of double tax treaties, thereby eliminating bilateral negotiations. The changes are many and they impact on a wide range of provisions in the double tax treaties. Companies should analyse these changes in detail in order to assess the impact on their transactions and business models.
For a more detailed discussion of the impact that these provisions can play in your specific case, you can contact the following persons: