15 June 2017

MLI: Czech Republic choses minimum standard approach

Mid May this year, the government approved a proposal to enter into the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. Less than a month before the official signing, the Czech Republic now joins the convention only in the scope of the minimum standard.

Tomáš Prchal
Klára Nesvadbová

The multilateral convention or multilateral instrument (MLI) is an OECD tool aiming to prevent tax treaty abuse through the shifting of profits to countries with zero or low taxation.

The MLI consists of two types of provisions: minimum standard provisions and optional provisions. The minimum standard provisions have to be implemented in all tax treaties. The optional provisions depend on the agreement of the contractual parties and do not have to be implemented at all, if the parties concur. Until now, it was not clear what approach to MLI the Czech Republic would take. The governmental proposal now indicates that the Czech Republic will only adopt the minimum standard, i.e. the rule to prevent treaty abuse ( the principal purpose test) and the rule allowing for the effective resolution of disputes by mutual agreement (dispute resolution).

The Czech Republic intends to subject all its valid tax treaties to the multilateral convention, except for the treaty with South Korea, as it already includes the required provisions. Modifications to the individual bilateral treaties will only be made if the other contractual state also subjects the treaty to the regime of the convention and if both parties agree on the identical wording of the provision. How the convention will affect concrete bilateral treaties will thus depend on further bilateral negotiations. This means that the implementation may eventually take place in a wider scope than the minimum standard presently proposed by the Czech Republic. 

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