4 Dec 2018
Analysis on the Capital Gains Article under the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS
Overview of MLI structure
Articles 3 to 17 under Part II to V of the MLI provisions are substantive provisions addressing the BEPS issues. The substantive provisions have the following common structure: operative clauses, compatibility clauses, reservation clauses and notification clauses. In respect of the compatibility clause, the phrases “shall apply in place of; “shall apply to”, “shall apply in the absence of” or “shall apply in place of or in the absence of” are specified to modify the application of the provisions of the CTAs nominated under Article 2(1) of the MLI (the specified phrases). An understanding of the structure of the MLI provisions is important as the phrase “shall apply”, “shall not apply”, and “shall apply with respect to” appear in different parts of the MLI, with different implications which we shall deal with next.
Article 9 of the Multilateral Instrument (the MLI) addresses Capital Gains from Alienation of Share Deriving their Value Principally from Immovable Property. Paragraph 9(1) reads that;
“Provisions of a CTA providing that gains derived by a resident of a contracting jurisdiction from the alienation of shares or other rights of participation in an entity may be taxed in the other contracting jurisdiction provided that these shares derived more than a certain part of their value from immovable property situated in that other contracting jurisdiction (or provided that more than a certain part of the property of the entity consists of such immovable property (real property)):
a) shall apply if the relevant value threshold is met at any time during the 365 days preceding the alienation; and
b) shall apply to shares or comparable interests,…”.
“Shall apply” is not related to the specified phrases under the compatibility clause. Here it means that article 9(1) directly modifies - or is directly read into - the relevant texts of the CTAs of a contracting jurisdiction. The modified texts become part of the operative clause, of which its application will be modified under the compatibility clause. In contrast, the compatibility clause will not directly modify the CTA contexts. Instead, it modifies the application of the MLI provisions to the CTAs by using the 4 phrases specified in the above-mentioned paragraph.
“Shall not apply” and “shall apply” are also used in the notification clauses (paragraph 7, Article 9), which provides:
Paragraph 9(7) provides that “Each Party that has not made the reservation described in subparagraph a) of paragraph 6 shall notify the Depositary of whether each of its CTAs contains a provision described in paragraph 1, and if so, the article and paragraph number of each such provision. Paragraph 1 shall apply with respect to a provision of a CTA only where all Contracting Jurisdictions have made a notification with respect to that provision.”
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