• Wed. Sep 21st, 2022

The impact of the multilateral instrument on real estate investments

ByWillie M. Evans

Aug 3, 2022

The OECD, together with 141 countries that are part of the OECD/G20 Inclusive Framework on BEPS, has developed the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and profit shifting (the Multilateral Instrument or MLI) under the BEPS Project aimed at rapidly changing the tax treaty network of MLI parties.

Unsurprisingly, the current status of tax treaties (treaties) in real estate (RE) investments may be affected by MI. Deloitte’s Austrian, German, French, Luxembourg and Polish RE tax experts explored the impact of MLI on a common investment structure where investors pool money into a fund which in turn invests in a holding company (HoldCo) which will invest in local real estate companies (PropCos) or directly in renewable assets, depending on business needs.

This article is one of a trio of articles that will analyze the impact of MI on RE investments in these jurisdictions, focusing on provisions essential to the application of tax treaties in a RE investment context. RE; namely Article 3 (transparent entities), Article 5 (toggle clause) and Article 9 (land clause), without forgetting Articles 6 (object of the treaty) and 7 (prevention of abuse of the treaty ).

All five countries covered by the study have signed and ratified the MI. However, not all of their agreements should be considered Covered Tax Agreements (CTAs) for MLI purposes. France has decided to cover all of its bilateral tax treaties, while Luxembourg and Poland have chosen to cover almost all of theirs, and Austria has decided to cover around a third.

Surprisingly, Germany decided to cover only 14 of its 98 treaties in force and opted for a reservation under Article 35(7) of the MI. For the MLI to enter into force for a particular CTA, Germany must inform the OECD when it has completed its internal procedures, instead of the date of entry into force being automatically set after a specified period after the entry into force of the MI for each of the contracting jurisdictions of the agreement .

In Germany, anti-treaty shopping rules take precedence over tax treaties because they are implemented by common law. Thus, in addition to specific internal procedures, this legal hierarchy may also explain Germany’s limited appetite for MI. Therefore, most treaties entered into by Germany will not be affected by the MI. In particular, the MLI will not apply to the treaty between Germany and Poland.

Also, the MI does not necessarily apply to the most recent tax treaties. In particular, France and Luxembourg have decided not to cover their treaty in force because it is considered BEPS compatible. However, the MI applies to previous treaties between France and Luxembourg. Thus, these countries show their willingness to make their entire network of treaties BEPS compatible.

The IM provides minimum standard provisions that apply to the corresponding CTAs. Accordingly, the preamble to the treaty will state that the purpose of the treaty is “to eliminate double taxation in respect of taxes covered by this agreement without creating possibilities of non-taxation or reduction of taxation by fraud or tax evasion” (Article 6). The prevention of treaty abuse is also part of the minimum standards (Article 7) that Contracting States to the MI must implement. Article 7 provides a choice of method to combat treaty abuse, including:

  • A primary objective test (PPT);

  • A PPT with a simplified limitation of benefits (S-LOB); and

  • A LOB with an anti-conduit layout.

Austria, France, Germany, Luxembourg and Poland (provisionally) have chosen the TPP as the most flexible provision to combat treaty abuse. Therefore, this provision will apply between these countries.

A flexible reservation mechanism is defined for each article of the IM, but it is less flexible for the minimum standards. It introduces the possibility of withdrawing totally or partially from a provision. Additionally, countries that have not opted in to certain MLI provisions can include them bilaterally (like Luxembourg and the UK did with the rich land provision in their recently signed treaty). The impact of the MLI on the inventory of renewable energy investments must therefore be analyzed provision by provision.

Deloitte’s detailed analysis in the September and November editions of RTI will cover transparent entities, the toggle clause and the fundamentally rich clause.

The authors would like to thank several Deloitte colleagues for their contributions to this article: Sarvi Keyhani (France), Daniel Blum (Austria), Dr Alexander Linn (Germany), Benedikt Pignot (Germany), Piotr Maculewicz (Poland), Michal Siekierzynski ( Poland) and Rafael Lourenço (Luxembourg).