What Is the MLI and Why Was It Created?
The MLI, officially known as the "Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting," is commonly referred to as the MLI, which is an abbreviation for Multilateral Instrument.
The most significant feature of the MLI is that it allows for the introduction of tax treaty-related measures agreed upon in the BEPS project for numerous existing tax treaties, rather than creating new bilateral tax treaties. Previously, it was necessary to amend treaties with each country one by one, but the MLI enables the simultaneous and efficient modification of multiple treaties.
The OECD-G20 BEPS project examined how multinational corporations exploit differences in tax systems and tax treaties among countries, leading to situations where income is not adequately taxed in any country, or profits are shifted away from the countries where actual economic activities occur. As a result, it was deemed necessary to address issues such as hybrid mismatches, preventing tax treaty abuse, addressing artificial avoidance of PE status, and improving mutual agreement procedures. However, amending bilateral treaties one by one around the world would take an extremely long time, which is why the MLI was created as a mechanism to collectively amend existing treaties. The Ministry of Finance explains that the MLI introduces tax treaty measures related to BEPS Actions 2, 6, 7, and 14 into existing treaties.
How Does the MLI Modify Existing Tax Treaties?
The most important aspect of the MLI's mechanism is that simply joining the MLI does not automatically change all tax treaties of a country. First, both countries must be parties to the MLI, and both must choose their bilateral tax treaty as a Covered Tax Agreement subject to the MLI. Furthermore, the MLI contains provisions that countries can choose and reservations that can be made, and in principle, the provisions of the MLI apply to existing treaties only to the extent that both countries' choices correspond.
Therefore, in practice, it is not sufficient to simply confirm whether "both countries are MLI members, "but it is necessary to check whether both have designated that tax treaty as a covered treaty, which MLI provisions both countries have agreed upon, whether there are any reservations, and when those provisions will take effect..
Additionally, the MLI does not typically rewrite the text of existing tax treaties to create a new treaty text. The provisions of the MLI apply in place of corresponding provisions in existing treaties or in addition to them. Therefore, legally, it is necessary to read the "original tax treaty" and the "MLI" in conjunction.
For practical convenience, the Ministry of Finance publishes Synthesised Texts for many countries. This is a very useful document that allows for the verification of the relationships between existing treaties, amended protocols, and the application of the MLI in one document; however, as the Ministry of Finance itself makes clear, the Synthesised Text itself has no legal effect. The final legal basis is the original treaty, the Protocol, the MLI, and the reservations and notifications of both countries.
Which MLI Provisions Has Japan Chosen?
Japan signed the MLI on June 7, 2017, and deposited its instrument of acceptance on September 26, 2018, so the MLI came into effect for Japan on January 1, 2019. As of May 6, 2026, Japan has selected tax treaties with 43 jurisdictions as subjects of the MLI, of which 39 jurisdictions have also deposited their ratifications, acceptances, or approvals.
The main provisions selected by Japan include Article 3 regarding income obtained through transparent entities, Article 4 concerning dual residents, Article 6 related to the preamble clarifying the purpose of the treaty, Article 7 on preventing treaty abuse through the Principal Purpose Test (PPT), Article 9 regarding the transfer of real estate shares, Article 10 concerning third country PE, Article 12 on PE avoidance using commissionaire contracts, Article 13 on PE avoidance using specific activity exemptions, Article 16 on mutual agreement procedures, Article 17 on corresponding adjustments for transfer pricing taxation, and Part VI establishing mandatory and binding arbitration in certain cases.
On the other hand, Japan has chosen not to apply Article 5, which limits the exemption method for eliminating double taxation, the simplified Limitation on Benefits provision, Article 8 which sets certain holding period rules for dividends, Article 11 which restricts taxing rights on residents of its own country, and Article 14 concerning PE avoidance through contract splitting. Therefore, the understanding that "since the MLI applies to the treaty, all provisions of the MLI apply" is also incorrect.
The PPT, Permanent Establishments and Other Major Changes
Particularly important for Japanese companies is the Principal Purpose Test of Article 7 of the MLI, commonly referred to as PPT. Under the PPT, if it can be reasonably concluded that one of the main purposes of a transaction or arrangement was to obtain benefits under a tax treaty, the treaty benefits can be denied unless it is proven that granting those benefits aligns with the purpose and intent of the relevant provisions of the treaty.
This means that it is not only a matter of formally meeting the residency or holding requirements of the treaty, but also questioning the purpose of why that corporation, transaction, or investment structure was used. Therefore, for holding companies, funds, financial transactions, intellectual property holding companies, group reorganizations, etc., it has become important to confirm commercial and economic reasons from the perspective of PPT, rather than just looking at the withholding tax rates under the treaty.
The MLI also introduces significant changes regarding PE. For example, Article 12 aims to address so-called commissionaire-type structures that avoid PE recognition by not formally granting contract conclusion authority to local corporations through the traditional agent PE provisions. Additionally, Article 13 introduces a mechanism that places greater emphasis on whether activities such as warehousing, inventory storage, and information gathering have a preparatory or auxiliary character, even if they were previously excluded from PE under the treaty. However, these PE-related provisions will only apply if the choices of both Japan and the counterpart country align, so individual confirmation for each treaty is necessary.
In addition, adjustments when corporations become residents of both countries, improvements to mutual agreement procedures, corresponding adjustments for transfer pricing taxation, and arbitration in certain cases may also be introduced into existing treaties through the MLI. Therefore, the MLI is not merely a provision for preventing tax avoidance, but a broad framework that also affects the predictability of treaty application and the procedures for eliminating double taxation.
How Does the MLI Apply to Japan’s Treaties? China, Germany and the United States
One clear example of the effect of the MLI is the Japan-China tax treaty. The current Japan-China tax treaty is a relatively old treaty signed in 1983 and effective in 1984, but some provisions have been amended to align with the current BEPS standards due to the MLI.
Regarding the Japan-China tax treaty, provisions such as Article 4 on dual residents, Article 6 on the preamble of the treaty, Article 7 on the PPT, and Article 17 on corresponding adjustments for transfer pricing will apply. The MLI came into effect for Japan on January 1, 2019, and for China on September 1, 2022, and for the Japan-China treaty, it applies to withholding taxes from January 1, 2023, and for other taxes, in principle, from the tax periods starting after March 1, 2023. In other words, simply reading the text of the Japan-China tax treaty from 1983 does not fully capture the current treaty rules between Japan and China, and provisions like the PPT that are not mentioned in the original treaty have been incorporated into the current treaty relationship through the MLI.
On the one hand, the current tax treaty between Japan and Germany is a relatively new treaty signed in 2015 and came into effect in 2016, but it is subject to the MLI. Following the necessary notifications from the German side, the provisions of the MLI for the Japan-Germany tax treaty began to apply to withholding taxes and other relevant taxes from January 1, 2026. The MLI provisions applicable to the Japan-Germany treaty include Article 9 regarding the transfer of real estate-related shares, Article 10 concerning certain treaty benefit limitations using a PE located in a third country, and Article 13 which modifies the PE provisions related to specific activities. This example shows that one cannot simply look at the date of the treaty's conclusion and conclude, "It’s a new treaty, so MLI verification is unnecessary."
Moreover, the MLI does not apply to tax treaties with all major countries. As of May 6, 2026, 105 jurisdictions have signed the MLI, but the United States is not included in the list of signatory countries. Therefore, the Japan-U.S. tax treaty is not a treaty modified by the MLI, and when confirming the current rules, it is necessary to check the original treaty, the amended protocol, exchange of notes, and other related documents between Japan and the U.S. This is an important example that shows one should not think, "Because there is an MLI, all current Japanese tax treaties are modified by the MLI."
Entry into Force, Entry into Effect and Practical Review
It is important to distinguish between "Entry into Force" and "Entry into Effect" in the MLI. For example, the MLI itself came into effect in Japan on January 1, 2019, but the actual start date of application of the MLI for each bilateral tax treaty varies by counterparty country. Furthermore, for a single treaty, the start date of application may differ between withholding taxes and other taxes.
Therefore, when considering the MLI for a particular transaction, it is necessary to check not just whether "the MLI is in effect for this country," but also whether the relevant MLI provisions for the applicable bilateral treaty have already started to apply for that income/tax period. You need to confirm this.
In practice, it is efficient to first check the MLI page of the Ministry of Finance or the "List of Our Country's Tax Treaties" to confirm the relevant country and whether that tax treaty has become a Covered Tax Agreement under the MLI. Next, by checking the "Overview of Application Relationships" or Synthesised Text published by the Ministry of Finance by country, you can understand which MLI provisions apply to that treaty and when they started to apply. However, for important matters, it is necessary to verify not only the integrated text but also the original treaty, Protocol, MLI text, and the reservations and notifications of both countries.
Summary
The MLI is not intended to create new tax treaties but is a multilateral treaty designed to efficiently introduce BEPS measures into many existing bilateral tax treaties.
As a result, in current tax treaty practice, simply reading the text of the treaty may not provide an understanding of the rules currently in effect. In addition to the Treaty, Protocol, and Exchange of Notes, confirming whether the MLI applies has become important in current international taxation.
*This article explains the general mechanism of the MLI. For actual application, it is necessary to individually confirm the relevant country, relevant treaty, applicable MLI provisions, reservations and notifications of both countries, and the start date of application.
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