MLI is an international convention modifying a substantial portion of tax treaties and may result in the establishment of a new tax obligations. In the Czech Republic, the ratification process has yet to be completed; however, no revolution in the interpretation of tax treaties is expected as a result of the adoption of so called minimum standards. In other countries, the situation may be different. For example, Slovakia has already ratified the MLI and since 1 January 2020, the instrument has been applied to tax treaties with states where the ratification process has also been completed.
As we have already informed you in previous months, the Czech Republic joined the MLI in 2017 in Paris. However, as part of the convention, the Czech Republic selected to apply minimum standards, i.e. the mildest alternative. The Czech Republic has reserved the right not to apply most of the articles that should amend relevant provisions relating to the affected tax treaties. Moreover, the MLI application depends on the principle purpose test (PPT), which is one of the minimum standards guiding determination of whether a transaction or an organisational structure had a principle purpose other than tax (such as economic). The test corresponds to the institutes of abuse of law (GAAR/general anti-avoidance rules) as adopted through the amendment to the Tax Code as part of the tax package for 2019, or 2020 if the taxation period corresponds to the calendar year. The minimum standard also includes rules for more effective dispute resolution.
By the end of 2019, the MLI has not been ratified, which means that in 2020, it will have no practical impacts on the existing tax treaties that are binding for the Czech Republic.
It should be taken into consideration that the level of accession to the MLI is not identical in all states and as such, it may have a more significant practical impact on the interpretation of treaties and tax administration in other countries. In some cases, the MLI will substantially change the wording of bilateral tax treaties. In many states, the MLI is already effective (e.g. in Slovakia, Poland, Austria, France, Netherlands, Switzerland, Luxembourg and other countries; for an updated list, please refer to the OECD website). We thus recommend verifying possible impacts of the MLI on the wording of treaties concluded with these states if your responsibilities include countries other than the Czech Republic.
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