The Multilateral Instrument (MLI)
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting — known as the Multilateral Instrument or MLI — entered into force on July 1, 2019. It is the most significant structural change to the international tax treaty network in decades.
The Problem the MLI Solves
Before the MLI, every change to the bilateral treaty network required renegotiating individual treaties. With over 3,000 bilateral treaties in force worldwide, implementing a single policy change — like adding an anti-abuse provision — would require thousands of separate bilateral negotiations, each taking years.
The MLI allows signatory countries to modify their existing bilateral treaties simultaneously by overlaying agreed-upon provisions. When both treaty partners have signed and ratified the MLI and listed the treaty as a Covered Tax Agreement (CTA), the MLI's provisions apply alongside the bilateral treaty text.
Who Signed
104 jurisdictions have signed the MLI as of 2026. Notable signatories include the United Kingdom, France, Germany, Japan, Australia, India, Canada, the Netherlands, and Singapore.Who Did Not Sign
The most significant non-signatory is the United States. The US has not signed the MLI and has no current plans to do so. The US prefers its own bilateral LOB (Limitation on Benefits) provisions over the MLI's Principal Purpose Test, arguing that LOB provides greater legal certainty.
Other notable non-signatories include Brazil (which has historically maintained a separate treaty approach), and several countries that have no or very few treaty networks.
Because the US has not signed, none of the 66 US bilateral tax treaties are modified by the MLI. This means US treaty rates and provisions shown on TaxInPangea are governed exclusively by the bilateral treaty text and any bilateral protocols.
What the MLI Changed
Principal Purpose Test (PPT)
The most impactful MLI provision. The PPT denies treaty benefits if one of the principal purposes of an arrangement was to obtain the benefit. This is a subjective, general anti-avoidance rule.
Under the PPT, a tax authority can deny treaty benefits by showing that obtaining the benefit was one of the principal purposes of the arrangement — even if the arrangement is otherwise legitimate. The burden falls on the taxpayer to demonstrate reasonable commercial purposes beyond the tax benefit.
Most MLI signatories adopted the PPT. It now overlays thousands of bilateral treaties.
Example: A Luxembourg holding company with minimal substance receives dividends from Germany and claims the Luxembourg-Germany treaty rate of 5%. Under the PPT, Germany could deny the treaty rate if the holding company was set up primarily to access this favorable rate, with no genuine business purpose in Luxembourg.Permanent Establishment Changes
The MLI implemented several BEPS Action 7 recommendations to tighten PE definitions:
Commissionnaire arrangements: Before the MLI, companies could avoid PE status by using a local commissionnaire (an agent who contracts in their own name on behalf of a foreign principal). The MLI closes this by expanding the dependent agent PE definition to include persons who "habitually play the principal role leading to the conclusion of contracts." Specific activity exemptions: The MLI requires that activities like storage, display, and purchasing must be genuinely preparatory or auxiliary to qualify for the PE exemption. Under the old rules, these exemptions were automatic regardless of the activity's significance to the business. Splitting of contracts: The MLI includes anti-fragmentation rules to prevent companies from splitting a 14-month construction project into two 7-month contracts to stay below the 12-month PE threshold.Dual-Resident Entities
Under many existing treaties, a company resident in both countries was deemed resident where its place of effective management was located. The MLI replaces this with a Mutual Agreement Procedure — the two countries must negotiate to determine residence. If they cannot agree, treaty benefits may be denied entirely.
Transparent Entities
The MLI includes provisions for partnerships and other transparent entities, ensuring that treaty benefits are determined based on the residence of the partners rather than the entity itself.
How MLI Modifications Work
The MLI does not replace bilateral treaty text. Instead, it operates as a parallel layer. When reading a treaty, you must check:
1. Does the bilateral treaty text contain the relevant provision?
2. Have both countries signed and ratified the MLI?
3. Have both countries listed this treaty as a Covered Tax Agreement?
4. Have both countries adopted the specific MLI article for this treaty?
Both countries must have adopted a given MLI provision and listed the bilateral treaty for that provision to apply. Countries choose which MLI provisions to adopt through a system of reservations and notifications filed at the time of ratification.
This creates complexity. The MLI modification to the France-India treaty may differ from the MLI modification to the France-Japan treaty, because India and Japan may have adopted different MLI provisions.
Countries and Coverage
As of 2026, the MLI covers approximately 1,850 bilateral treaties — more than half of all treaties in force. The number grows as more countries complete ratification.
| Metric | Count |
|---|---|
| Signatories | 104 |
| Ratifications completed | 83 |
| Covered Tax Agreements (CTAs) listed | ~1,850 |
| US treaties covered | 0 |
The MLI does not directly change withholding rates. Dividend, interest, and royalty rates in the bilateral treaty text remain unchanged. What the MLI changes is access to those rates — the PPT gives tax authorities a new tool to deny treaty rates when the arrangement lacks genuine purpose.
For TaxInPangea users, this means the withholding rates displayed are the treaty rates as published, but actual entitlement to those rates may be subject to PPT analysis for treaties modified by the MLI.