RWANDA has double taxation treaties (DTTs) with eleven (11) countries (including the two DDTs recently entered into with the Democratic Republic of Congo (DRC) and Qatar). The DTT with Qatar was ratified by Rwanda in May 2021 while the one with DRC was approved for ratification by the Rwandan parliament in July 2021 and is awaiting ratification by the President of the Republic. 

The DTTs with DRC and Qatar, unlike other DDTs entered into by Rwanda without general anti-avoidance provisions, have a "principal purpose test” (PPT) based general anti-avoidance provision. 

The PPT provision seeks to prevent the granting of DTT benefits under "inappropriate circumstances”, and is contained under article 27 and 28 of the DTTs with Qatar and DRC respectively which states as follows: 

Notwithstanding the other provisions of this [DTT], a benefit under this [DTT] shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances  that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this [DTT].

The above provision of the DTTs with Qatar and DRC indicates that benefits under such DTTs (such as withholding tax relief, taxation of a specific item of income exclusively in the state of residence or source, etc.) may be denied, if the obtaining of those benefits was one of the principal purposes of an arrangement or transaction (for example, ownership and internal restructurings, licensing and financing structures, choice of jurisdiction for an intra-group counterparty, choice of form of agreement, etc.).

Obviously, the PPT provision leaves an number of issues unattended to such as the issue as to what is the principal purpose of a transaction or an arrangement and how it should be assessed, but at a minimum, to pass the PPT, it is critically important for taxpayers to be able to demonstrate the prevalence of  the business/commercial purposes behind an arrangement or transaction in relation to which treaty benefits are sought. 

It is also unclear whether treaty shopping (a situation in which a person who is not entitled to the benefits of a DTT makes use of another (normally legal) person to obtain those treaty benefits that are not available to him directly) is caught by the PPT. However, looking at the preamble of the two DTTs where the contracting states made it clear that their intention is to eliminate double taxation but without creating opportunities for tax avoidance including treaty shopping arrangements, the chances are that treaty shopping will be caught by the PPT. 

Wrapping up, the introduction by Rwanda of the PPT under its new DTTs makes it clear that it (like many other countries) is committed to ending the granting of treaty benefits in inappropriate circumstances including tax arbitrage and arguably treaty shopping arrangements. 

Further, and while the PPT provision is only contained in the DTTs with DRC and Qatar, considering that it (alongside the limitation of benefits provision) has also been included in the latest version of the UN Model Tax Convention (on which most of Rwanda’s DTTs are based), future DTTs are likely to include the same anti-avoidance provision.

Equally important, and much as the introduction of the PPT in the DTTs with DRC and Qatar (and very likely in other future DTTs) does not affect the existing DTTs, Rwanda may amend its existing DTTs by signing and ratifying the multilateral convention/instrument (MLI) which also contains the PPT provision, something that is likely considering the current international tax order. Taxpayers must prepare for changes in the existing DTTs should Rwanda sign and ratify the MLI.

It should also be noted that the PPT is subject to several interpretational issues, and accordingly, the Rwandan tax administration and courts are expected to interpret it (the PPT provision) in way that ensures that no taxpayer would be denied benefits under a DTT in a manner that contravenes the purpose and object of the DTT at issue. 

The views contained herein are those of the author.

The writer is a corporate commercial and tax lawyer, and senior associate at ENSafrica Rwanda.

Email: dnzafashwanayo@ensafrica.com