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Spain deposits ratification instrument for the MLI

On 28 September, Spain deposited with the OECD its instrument to ratify the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”). The MLI is expected to enter into force in Spain on 1 January 2022. When the changes to the Spanish tax treaty network will enter into effect is, however, more uncertain. Spain has made a reservation in respect of article 35 of the MLI (entry into effect) and opted to apply a procedure whereby the MLI provisions will apply to the treaties in question once the other signatories are notified that Spain has completed the ratification procedure.

This deposit followed the parliamentary debate for the authorisation required under article 94.1 d) of the Spanish Constitution. This authorisation was key for the Government to be able to make the Kingdom of Spain bound by an international treaty that imposes financial obligations on the Treasury, as the MLI does.

The Kingdom of Spain’s final position deviates slightly from the tentative reservations and notifications made public in November 2019 on the Spanish Ministry of Finance’s website. Given that Spain’s position under the MLI may affect 88 of its tax treaties (assuming it is finally adopted and matches that of the other signatory states), its options and reservations upon depositing the MLI are worth examining. This analysis is ever more important because, for the time being, it is uncertain whether the Spanish tax authorities will draft legally binding consolidated versions of the treaties (as modified by the MLI).

Spain’s position in this regard may have the following consequences:

Covered Tax Agreement purpose

As a minimum standard, Article 6 of the MLI encourages parties to include a preamble in covered tax treaties to emphasise their purpose to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. Of the three alternatives given to implement this provision, Spain has opted to apply the extended version of the preamble text that expresses the parties’ desire to strengthen their economic relations and cooperate in tax matters, but has reserved its right not to include the preamble text in its treaties with Mexico and Romania.

This wording will undoubtedly give rise to ample interpretative debate when the tax treaties are applied.

Transparent entities

Article 3 of the MLI addresses applying tax treaties to the income earned through transparent entities. To this end, income derived from or through an entity or arrangement deemed transparent under the tax law of either signatory state, will be considered income of a resident of a signatory state, but only to the extent that, for tax purposes, the income is treated by that signatory state as its resident’s income. This provision, which is not considered a minimum standard, will apply to all the treaties Spain has signed if the other party has also decided to apply it, except for treaties that already contain a similar provision, i.e. those with the US (which has not signed up to the MLI), the UK, and Finland.

Briefly, from a Spanish law perspective alone, this provision will affect both Spanish residents channelling their investment abroad through transparent entities established in a third state (in which case, the tax treaty Spain has signed with the state in which the investment is made should apply), and residents abroad who channel their investment into Spain through transparent entities (in which case, which treaty applies would depend on the entity and its investors and whether they are subject to taxation in a given state).

Prevention of Treaty abuse

Article 7 of the MLI introduces the principal purpose test (the well-known PPT) as a minimum standard that allows the contracting states to deny tax treaty benefits in abusive situations.

In this regard, Spain has opted to apply the PPT to all its tax treaties, but has reserved its right to include it in its treaties with Andorra, Mexico and Romania (which the Spanish tax authorities believe already contain a similar clause). As to tax treaties with similar – less far-reaching – general anti-abuse rules, the outcome will be to replace those rules by the PPT (this applies, for example, to Spain’s treaties with Greece, Finland, Malta and the UK).

Permanent establishment status

Of the four provisions of the MLI that introduce changes to prevent the artificial avoidance of a permanent establishment, Spain has only opted to reserve the right not to apply Article 14, which addresses abusive splitting-up of contracts. This provision will therefore not be included in Spain’s treaties.

In relation to artificial avoidance through commissionaire arrangements and similar strategies (Article 12), Spain has not made a reservation and has specifically identified the provisions of its 88 covered treaties that would need to be modified; if this matches the position of the other signatory states, the tax authorities will be provided with additional tools to combat these schemes. And, with respect to specific activity exemptions (Article 13), Spain has opted to apply option (A) of Article 13.1 which allows it to preserve the exceptions for activities described in the existing provisions, but will require that those activities be preparatory or auxiliary. For the tax treaties concerned, this means in practice that the activities that do not qualify as a permanent establishment will be limited significantly. Also, Spain has not made a reservation to Article 15 of the MLI setting out the conditions – based on the concept of “control” which will in certain cases be presumed – under which a person is considered “closely related” to an entity for the purposes of Articles 12, 13 and 14.

The time has now come to forge ahead and contend with the practical questions and challenges that applying the MLI will undoubtedly raise.


uriamenendez, spain, ratificationinstrument, mli