The MLI was developed in the OECD as part of Action 15 of the BEPS Action Plan. The BEPS (Base Erosion and Profit Shifting) project is an OECD Action Plan completed in November 2015 at the invitation and with the political and with the political support of the G20, aimed at tackling tax planning strategies that allow cross-border tax optimization by exploiting gaps and mismatches in tax rules.

The purpose of the Convention is to accelerate the implementation of measures against aggressive tax planning in tax treaties. Aggressive tax planning includes, among other things, deliberately created situations where a taxpayer shifts income or property from one country to another in order to reduce his tax liability. The MLI allows countries to bring their tax treaties into line with the minimum standard agreed in the OECD at once, without having bilateral negotiations. 

The minimum standards relate to the prevention of treaty abuse (BEPS Action 6) and the improvement of dispute resolution (BEPS Action 14). Where a MLI provision reflects an agreed BEPS minimum standard, a jurisdiction must meet the minimum standard when signing the MLI. Certain elements of these minimum standards can, however, be met in different ways provided in the MLI. 

Estonia deposited its instrument of ratification of the MLI and submitted its final list of reservations and notifications (the MLI position) with the OECD Depositary on 15 January 2021.  The MLI entered into force for Estonia on 1 May 2021.

More information on the measures against BEPS and the list of signatories and parties to the MLI can be found on the OECD webpage. 

How does the MLI affect Estonian tax treaties?

Each Contracting Party can, through reservations and notifications, choose which tax treaties and which provisions it wishes to apply through the MLI. The MLI applies to a tax treaty once the convention has entered into force for both countries and the necessary procedures have been completed. 

The MLI contains 24 Articles that enable to modify various provisions of tax treaties. Estonia has chosen six of these articles for application. Three of the selected articles contain a new minimum standard and one OECD’s good tax practice. The other two articles are necessary to clarify Estonian tax law. In total, MLI modifies 58 Estonian tax treaties.

Estonian position to modify tax treaties by the MLI: 

• a new text will be added to the preamble of tax treaties, emphasizing that, in addition to avoiding double taxation, tax treaties also aim to prevent situations in which taxpayers' income is not taxed at all due to tax evasion or fraud 
• a general anti avoidance rule, the principal purpose test (PPT), will be added to the tax treaties 

• the taxpayer's access to the mutual agreement procedure will be improved

• the provision of the tax treaty that regulates the taxation of capital gains that a non-resident receives from alienation of shares deriving more than 50 per cent its value from immovabale property located in Estonia will become more precise

• the exemption method used in Estonian tax treaties will only apply if the other state has taxed the income (the change concerns three treaties)
• obligation to avoid economic double taxation, which arises when one country adjusts the taxable profits of one company and the other country does not take the adjustment into account when taxing the related company, will be added. The amendment concerns four agreements where such a provision does not exist or does not comply with Article 9 (2) of the OECD Model Convention.

How the MLI will modify a particular tax treaty and the timing of the entry into force of those provisions will depend on the choices made by the treaty partners by notifications and reservations. If the choices of the two treaty partners coincide, the tax treaty will be modified in accordance with the procedure prescribed in the MLI.

 Useful links:

• Multilateral Convention (MLI) published at the State Gazette
• Estonian notifications and reservations (in Estonian, in English)
• Explanatory Statement to the MLI at the OECD website 
• Toolkit for application of the MLI at the OECD website 

Once the MLI has entered into force for a Contracting Party, a so-called 'synthesized text' will be drawn up in cooperation with the other Contracting Party, indicating how the MLI will modify the tax treaty. As a general rule, the MLI can be applied to a specific tax treaty as of 1 January of the following year, after Estonia has submitted a separate notification to the OECD on this treaty. 

Estonia submitted its first notification under Article 35 (7) (b) of the MLI confirming the completion of its internal procedures on 25 November 2021 and the provisions of the MLI enter into effect to the 7 tax treaties listed in the notification from 1 January 2022. The next notification was submitted by Estonia on 1 June 2022, and the latest one also covers 7 tax treaties. The provisions of the MLI will generally apply to these tax treaties from 1 January 2023. Please note, that in certain cases new provisions of the mutual agreement procedure (MAP) article enter into force on a different date compared to other MLI provisions depending on the choices made in the MLI by treaty partners.

NB! The synthesized text has no legal force and for the application of the treaty provision amended by the MLI, reference must be made to the relevant provision of both the bilateral tax treaty and the MLI.