MLI enters into force

On 1 July 2018, the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent BEPS (‘Multilateral Instrument’ or ‘MLI’) entered into force. On that date, three months have elapsed from the end of the calendar month in which the MLI was ratified by the fifth contractual state; this condition was met in March 2018, when the MLI was ratified by Slovenia.

The Multilateral Convention, or Multilateral Instrument, is one of the actions within the OECD BEPS (Base Erosion and Profit Shifting) initiative. Its main objective is to implement, swiftly and with a multiple effect, new provisions into international tax treaties to prevent their abuse for shifting profits to jurisdictions with zero or very low taxation.

The Czech Republic signed the MLI on 7 June 2017 in Paris, and it was approved by the government in February of this year. The Czech Republic has only adopted the MLI in 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). As the MLI is by its nature a ‘presidential treaty’, it has to be ratified by the president with consent of both chambers of parliament.

The MLI shall have an effect on concrete treaties starting from the calendar year following the ratification by both states with respect to withholding taxes, and starting from taxable periods beginning on or after the elapse of six months following its entry into force with respect to all other taxes. The timing of the ratification process in the CR is not yet known. Although the MLI has so far been only approved by the government and is yet to be ratified, we recommend already taking into consideration the provisions that it is to implement in tax area. Some of them (namely the anti-abuse rule) may, once in force, affect cross-border arrangements being implemented now.

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