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Analysis on the Application of Articles 7(6) and 7(7) of the Multilateral Instrument to the Covered Tax Agreements

1. Introduction

Article 7 – Prevention of Treaty Abuse – of the Multilateral Instrument (the MLI) contains three opt-in provisions. Two of them, Article 7(6) and 7(7), relate to the adoption of the simplified limitation of benefit rules by the contracting jurisdictions when granting tax benefits to the taxpayer, in addition to the default principal purpose test provision. The texts of paragraphs 6 and 7 of Article 7 are reproduced below:

  • 6. A Party may also choose to apply the provisions contained in paragraphs 8 through 13 (hereinafter referred to as the “Simplified Limitation on Benefits Provision”) to its Covered Tax Agreements by making the notification described in subparagraph c) of paragraph 17 (Article 7(17)(c)). The Simplified Limitation on Benefits Provision shall apply with respect to a Covered Tax Agreement only where all Contracting Jurisdictions have chosen to apply it.

  • 7. In cases where some but not all of the Contracting Jurisdictions to a Covered Tax Agreement choose to apply the Simplified Limitation on Benefits Provision pursuant to paragraph 6, then, notwithstanding the provisions of that paragraph, the Simplified Limitation on Benefits Provision shall apply with respect to the granting of benefits under the Covered Tax Agreement:

    • a) by all Contracting Jurisdictions, if all of the Contracting Jurisdictions that do not choose pursuant to paragraph 6 to apply the Simplified Limitation on Benefits Provision agree to such application by choosing to apply this subparagraph and notifying the Depositary accordingly; or

    • b) only by the Contracting Jurisdictions that choose to apply the Simplified Limitation on Benefits Provision, if all of the Contracting Jurisdictions that do not choose pursuant to paragraph 6 to apply the Simplified Limitation on Benefits Provision agree to such application by choosing to apply this subparagraph and notifying the Depositary accordingly.

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Content provided by China Tax & Investment Consultants Ltd
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