The Multilateral Instrument (MLI) Treaty amending most of Israel’s tax treaties with countries around the world will come into effect on January 1, 2019. This will affect both Israeli and international corporations operating in Israel and overseas.
As part of the Base Erosion and Profit Shifting Project (BEPS), the OECD (of which Israel is a member) published a final report in October 2015. Action 15 of this report is dealing with the development of a multilateral instrument to amend bilateral tax agreements (Action 15)and recommends the introduction of a multinational tax treaty.
The OECD published the text of the Multilateral Convention to Implement Tax-Treaty-Related Measures to Prevent BEPS (“the MLI Treaty”) in November 2016.
In simple terms, one can say that the MLI Treaty is a sweeping instrument to amend bilateral tax treaties (affecting upwards of 50 tax treaties that Israel has signed to date). More than 80 countries have signed the MLI Treaty, including Israel. However, in order to activate the treaty, each of the countries is required to ratify the treaty and decide which of the rules will apply to its treaties.
Among the spearhead countries to ratify the MLI Treaty was our tiny state, which submitted the MLI Treaty Instrument of Ratification to the OECD on September 13, 2018. The MLI Treaty will come into effect on January 1, 2019 (subject to the ratification of the MLI Treaty by other treaty countries).
The MLI Treaty is expected to significantly change most of Israel’s tax treaties by adding rules and amending provisions that exist in the current tax treaties. These relate to such issues as tie-breakers for dual-resident entities, methods to prevent double taxation, disallowance of treaty benefits in instances of treaty abuse, transparent entities, holders of equitable rights to dividends, capital gains from the sale of an entity’s shares deriving their value principally from immovable property, transfer prices in transactions between related parties, permanent establishments, mutual agreement procedures for issues relating to the tax treaty, and more.
The MLI Treaty will come into force only after both parties have deposited their instrument of ratification and the defined period has elapsed. (The defined period differs depending upon various provisions in the treaty.) To date, only a few countries with a tax treaty with Israel have ratified the MLI Treaty: Britain, France, Japan, Poland, Latvia, Serbia, Slovenia, and Sweden.
In light of the material changes that are expected to apply to Israel’s various tax treaties, it is important and recommended to prepare for the upcoming changes. Our firm’s Tax Department is at the ready to be of service to you in this regard.