Mandatory Binding Arbitration under the MLI: The Effects of Reservations with Respect to Anti-Abuse Rules

Symmetrical Application of Reservations

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the Multilateral Instrument or MLI) allows its Parties to opt in for mandatory binding arbitration. In order to encourage the Parties to do so even if a Party has concerns about the application of mandatory binding arbitration to certain types of cases, Article 28(2)(a) of the MLI allows a Party to formulate one or more reservations with respect to the scope of cases that shall be eligible for arbitration. As a result, many Parties that have decided to apply Part VI (Arbitration) have made use of this possibility. 

Article 28(3) of the MLI provides that reservations apply symmetrically. This means that they modify for the reserving Party (State A) in its relations with another Party (State B) the provisions of the MLI to which the reservation relates to the extent of the reservation and modify those provisions to the same extent for the other Party (State B) in its relations with the reserving Party (State A). Thus, if State A makes a reservation with respect to the scope of cases that shall be eligible for arbitration, those cases are excluded from the scope of the arbitration under the MLI for both State A and State B under the tax treaty (Covered Tax Agreement) between State A and State B.

In the following, I will take a closer look at the reservations regarding anti-abuse provisions formulated by Austria, Malta, Slovenia and Germany to determine their scope and what “symmetrical application” means in the case of reservations that refer to domestic law.

Austria: Only Austrian GAARs

Austria reserved “the right to exclude from the scope of Part VI (Arbitration) cases involving the application of its domestic general anti-avoidance rules contained in the Federal Fiscal Code […]”. This reservation refers only to Austrian domestic rules. More specifically, it refers to general anti-avoidance rules (GAARs) in the Federal Fiscal Code, not to specific anti-avoidance rules (SAARs) in other tax codes. As a result, the Austrian reservation excludes symmetrically, that is, for both Contracting Jurisdictions, cases involving the application of Austrian general anti-avoidance rules. Despite its symmetrical application, it does not cover anti-avoidance rules of the other Contracting Jurisdiction.

It is not precisely clear why Austria made this reservation. Perhaps domestic anti-abuse rules are considered a sensible area and there is a certain reluctance to subject their scope and assumed prevalence over tax treaty rules to a decision of an arbitration panel. At the same time, the PPT rule of the MLI may also apply to “abusive cases” and deny tax treaty benefits. Based on the Austrian reservation, however, cases involving the PPT rule are not excluded from arbitration. This leads to the unsatisfactory result that the access to arbitration might depend on whether treaty benefits are denied through the Austrian general anti-avoidance rule or through the PPT rule of the MLI.

Malta: Mirroring Domestic Reservations

Since several Parties to the MLI have made reservations that refer only to their own domestic law, Malta has made a reservation that mirrors this type of reservations. “Where a reservation made by the other Contracting Jurisdiction to a Covered Tax Agreement pursuant to Article 28(2)(a) refers exclusively to its domestic law (including legislative provisions, case law, judicial doctrines and penalties), Malta reserves the right to exclude from the scope of Part VI those cases that would be excluded from the scope of Part VI if the other Contracting Jurisdiction’s reservation were formulated with reference to any analogous provisions of Malta’s domestic law […]”. This reservation allows Malta, first, to subject cases involving the application of domestic anti-abuse rules to mandatory binding arbitration under the MLI if the other Contracting Jurisdiction has made no reservation; and, second, to limit the scope of arbitration also with regard to its own domestic anti-abuse rules if the other Contracting Jurisdiction has made a corresponding reservation (instead of objecting the reservation and denying access to arbitration altogether). Under the tax treaty between Austria and Malta, situations involving both the Austrian and the Maltese general anti-avoidance rules are therefore excluded from mandatory binding arbitration, whereas arbitration remains open for other cases.

Slovenia: All Domestic GAARs and SAARs?

Slovenia reserved “the right to exclude from the scope of Part VI cases involving the application of domestic anti-avoidance provisions. For this purpose, the Republic of Slovenia’s domestic anti-avoidance provisions shall include such provisions contained in the tax laws.” This reservation is not limited to Slovenian provisions or to GAARs. The first sentence refers to “cases involving the application of domestic anti-avoidance provisions” without specifying the Contracting Jurisdiction or the type of anti-avoidance rules. The second sentence defines domestic anti-avoidance provisions from a Slovenian perspective in very general terms. Under the tax treaty between Austria and Slovenia, cases involving both Austrian and Slovenian domestic anti-avoidance provisions are therefore excluded from the scope of mandatory binding arbitration. This raises uncertainty: What is meant by “domestic anti-avoidance provisions”? Are Austrian SAARs such as the Austrian CFC rule or the Austrian switch-over provision for dividends also covered by the reservation?

Germany: All Domestic and Tax Treaty GAARs and SAARs

Germany has made a (not yet final) reservation that excludes “from the scope of Part VI any case in which a domestic law or tax treaty anti-abuse rule (e.g. […]) has been applied”. This reservation mentions certain Germany anti-abuse rules as examples. Thus, other German anti-abuse rules that are not specifically mentioned as well as anti-abuse rules of other Parties to the MLI are also covered by the reservation.

It is noteworthy that the reservation excludes from arbitration any case in which a tax treaty anti-abuse rule has been applied. Apparently, a taxpayer who has done something considered to be abusive should have no access to a beneficial arbitration procedure regardless of whether abuse is deemed to exist under domestic or tax treaty law. This raises the question of which provisions of a tax treaty might be considered to constitute anti-abuse rules. For sure, the PPT rule of the MLI fulfills this criterion. Other rules of Part III (Articles 6 to 11: Treaty Abuse) most probably do so as well. However, is, for instance, Option A of Article 13 (Artificial Avoidance of Permanent Establishment Status through the Specific Activity Exemptions) an anti-abuse rule that is not eligible for arbitration?


The MLI provides for open reservations with respect to the scope of cases that shall be eligible for arbitration. This is aimed at encouraging the Parties to the MLI to opt in for arbitration and thus to improve the effectiveness of the mutual agreement procedure for the benefit of taxpayers. However, the flexibility provided in the MLI has led the Parties to formulate very different and sometimes vague reservations with respect to cases of abuse. As reservations apply symmetrically, it is important to analyze their meaning and scope. If one Party to the MLI has not excluded a case from arbitration, the other Party’s reservation might still limit the eligibility for arbitration.

Article 17 – Racing Days, Training Days, and the Weighting of Each Race

Last month, I participated in the Tax Treaty Case Law around the Globe 2020 conference organized by the European Tax College of the Fiscal Institute Tilburg, in joint venture with the Institute for Austrian and International Tax Law. Due to the Corona crisis, it was held online for the first time, and it was a great success.

I presented on a case of the Austrian Supreme Administrative Court about the allocation of income under Article 17 of the OECD Model Tax Convention. It provides that “income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsperson, from that resident’s personal activities as such exercised in the other Contracting State, may be taxed in that other State.”

Facts of the Case

The taxpayer, a resident of Austria, worked as a professional racing cyclist for a German cycling team in an employment relationship. As remuneration, he received monthly a conto payments, a final payment at the end of the year, and prize money. Under Article 17, the remuneration in respect of the personal activities as such was allocated to the different states of performance.

In the decision Ra 2017/15/0043 of 27 June 2018, the Austrian Supreme Administrative Court dealt with several questions related to the computation of the income under Austrian domestic tax law. As the Supreme Administrative Court overturned the Federal Fiscal Court’s first decision for several reasons, the Federal Fiscal Court rendered a second decision in which it allocated the income on the basis of the racing days. Moreover, the Federal Fiscal Court weighted the racing days based on the points for the winner as determined by the world governing body of cycling, Union Cycliste Internationale (UCI). The tax authority appealed this second decision and argued that the allocation must be based on the racing days alone without consideration of the points for the winner of each race. This led to a new decision of the Supreme Administrative Court.

The Court Decision

In the decision Ra 2019/15/0038 of 30 April 2019, the Austrian Supreme Administrative Court held with regard to the tax authority’s appeal that the relevant provision for the allocation of income is Article 17 (entertainers and sportspersons) and not Article 15 (income from employment) of the relevant tax treaty. Thus, the literature on Article 15 relied on by the tax authority according to which the allocation of income should be based on the agreed working days per year and the actual working days spent abroad is not material in the present case. If the Federal Fiscal Court, in its second decision, allocated the income to the different states of performance as part of an estimation by weighting the racing days based on the points for the winner as determined by the world governing body of cycling, Union Cycliste Internationale (UCI), this does not constitute an incorrect assessment in this case-by-case decision.

Upcoming Book

At the beginning of 2021, the IBFD will publish a conference book summarizing all presented cases. Therein, you will also find my comments about the Austrian case and the allocation of income based on racing and/or training days under Article 17.

Taxation of Directors’ Fees under Tax Treaty Law

In 2019, I presented at the “Wiener Bilanzrechtstage 2019” in Vienna about the taxation of directors’ fees under tax treaty law. Now the conference book “Organe von Unternehmen in Recht und Rechnungswesen” including my contribution “Geschäftsführer im Internationalen Steuerrecht” has been published.

Who is the economic employer under a tax treaty when a director works for serveral group companies?

From an Austrian and German perspective, only directors’ fees received by members of a supervisory board (non-executive directors) are covered by the special rule for directors’ fees of Article 16 of the OECD Model. Thus, directors’ fees received by managers (executive directors) normally constitute income from employment and fall under Article 15 of the OECD Model.

This means that the taxation of the remuneration depends on the place of work principle and the meaning of the undefined treaty term “employer”, which is now interpreted in an economic manner. In MNEs, managers are often employed by one company (e.g. the group parent) and also work as executive director for another group company. Under the transfer pricing rules, at least some part of the manager’s remuneration has to be charged to the other group company. While this group company economically bear the remuneration, it is unclear whether it is the economic employer and bears the remuneration of the manager as such (contract of service) or whether it is only a recipient of a group service and bears the remuneration only as part of an arm’s length service fee (contract for services).

I argue that group charges alone should not lead to the conclusion that the company that economically bears the cost of the remuneration is the employer of the manager for tax treaty purposes. Instead, various employer functions need to be considered. It has to be determined which company mainly exercises the relevant employer functions. For instance, if the parent company exercises substancial influence over the daily business of another group company to which the manager has been assigned, this is an indication that the parent company remained the economic employer of the manager and is therefore able to provide a group service.

Special domestic allocation rule addressing interposted management corporations

In my contribution, I also address the special anti-avoidance rule in § 2 para. 4a of the Austrian Income Tax Act. In certain circumstances, this rule disregards a management corporation owned by a manager that provides manager’s services to another (unrelated) company. Thus, the remuneration is allocated directly to the executive director. If the interposted company later pays a dividend, this further has no tax consequences in Austria since the remuneration has already been taxed at the level of the individual.

In order to avoid international juridical double taxation when the remuneration is taxed both abroad (corporate income tax: CIT) and in Austria (individual income tax: IIT), the Austrian tax administration is prepared to apply the principles of the Partnership Report and to grant an exemption or credit in Austria. If the remuneration paid to the interposed management corporation is subject to CIT abroad (because the other country does not have a similar look-through rule), the Austrian tax administration is able to grant an exemption for the IIT otherwise payable in Austria.

This interaction of the special anti-avoidance rule in § 2 para. 4a of the Austrian Income Tax Act and the principles of the Partnership Report might theoretically also result in a tax saving. Instead of paying up to 55% Austrian IIT (or first 25% Austrian CIT and later 27,5% Austrian withholding tax on dividends if the look-through rule was not applicable), the manager’s remuneration could be subject to foreign CIT only. According to the Austrian tax administration, there would also be no Austrian tax on dividend distributions. Most probably, however, the tax administration would abstain from applying the principles of the Partnership Report in such cases.

Overall, the special anti-avoidance rule is a good example for a rule that was designed having domestic cases in mind. Thus, cross-border cases might become quite complex and lead to unintended situations of double taxation, and to new loopholes.