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Czech Republic deposits MLI with OECD depositary

On 13 May 2020, the Czech Republic deposited its instruments of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) in Paris. So far, the MLI has been signed by 94 and ratified by 47 jurisdictions. The convention will enter into effect for the Czech Republic on 1 September 2020.

The above multilateral convention, also referred to as a multilateral instrument (MLI), is an outcome of the BEPS initiative and aims to implement, collectively and swiftly, new measures to prevent the shifting of profits to countries with low or zero taxation. Adoption of the MLI automatically amends the wording of the relevant tax treaties.

The Czech Republic will only join the convention to the extent of the minimum standard: the rule to prevent treaty abuse (principal purpose test, PPT) and the rule to allow for effective resolution of disputes by mutual agreement (dispute resolution). The substance of the principal purpose test is to prevent the application of tax treaties in situations that originated primarily for the purpose of obtaining a treaty benefit and that have no other substance. The dispute resolution rule should speed up the process of resolving tax disputes by mutual agreement between competent authorities of the individual contracting states. Cases must be presented within three years from the first notification of an action resulting in taxation not in accordance with the provisions of a tax treaty. The time limit for resolving the case by mutual agreement procedure is two years from a case’s initial date, unless the jurisdictions have agreed otherwise. The possibility to resolve disputes by mutual agreement procedure under the MLI should apply to cases submitted to the competent authorities of a contracting state after the MLI has entered into effect for both states.

The convention covers 52 of the total 88 valid double tax treaties entered into by the Czech Republic. The 52 states include those that, like the Czech Republic, have signed the MLI or are negotiating joining the convention and incorporating the changes ensuing therefrom: e.g., Slovakia, Austria, Germany, Belgium, Poland and Switzerland. Except for Germany, all our neighbouring states have already ratified the MLI. A list of signatories and parties to the MLI is available on the OECD’s website.

The moment from which the measures adopted by the MLI shall be applied within specific treaties will depend on the date when the MLI enters into effect for such treaties. As regards treaties with states for whom the MLI entered into effect at the same time as for the Czech Republic or before, the new measures concerning withholding tax shall apply from 1 January 2021, i.e. from the calendar year following the date the MLI entered into effect for both states; for other taxes, after six calendar months (or less, if mutually agreed) from the last of the dates on which the convention entered into effect for each of the contracting jurisdictions covered by the treaty, i.e. for taxable periods beginning after 28 February 2021.