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Czech Republic and Canada implemented MLI - what is the impact on their Tax Treaty?

Contributed by Parker & Hill
September 24, 2020

Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (henceforth MLI) is a multilateral instrument developed by initiative of OECD and G20. The MLI modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation. It also implements agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies.

In the beginning of September, MLI came in force in the Czech Republic. Since this multilateral instrument allows parties to claim various exceptions, many questions regarding the exact impact of MLI on certain tax treaties have emerged. Czech Ministry of Finance issued an official statement in order to answer these questions regarding the Czech-Canadian tax relations.

We could quarrel whether the Czech-Canadian tax treaty is so outstandingly fit to modern legal standards, or the scope is just so much wider than the MLI. Nevertheless, both scenarios have led to same result there are just a few minor changes to the original agreement in order to make it MLI-compliant.

Quite laconic preamble, initially setting a goal of preventing double taxation and income tax evasion, has now grown in both volume and descriptiveness. It expands the plain term tax evasion, while specifically aiming on „treaty-shopping", in other words, abusing the double taxation prevention. The preamble, however being more of a rhetorical feature, shall be a crucial instrument for interpretation of the Treaty.

Article 24 section 1 sentence 2 provides a deadline extension. The person being subject to measures eventually leading to taxation non-compliant with the Treaty, is now entitled to submit the case (and claim the revision) to relevant financial authority (either the state of residence, or in case of discrimination, state of citizenship). The person can do so in up to 3 years after the moment such person found out aforesaid measures being taken.

Furthermore, the Treaty has been amended by a brand new provision which provides as follows. In case there is a reasonable suspicion that any transaction, measure or other conduct has been performed mainly in order to gain a tax benefit emerging from the Treaty, both directly or indirectly; such benefit, regardless from other provisions of the Treaty, shall not be granted, unless it would have been proven that granting such benefit would have had been compliant with the aim of relevant provisions of the Treaty ( the preamble, as has been said, will serve to interpret this provision).

At last, the statement contains the schedule of implementing the amendments in both countries.

Regarding the source withholding tax collected from the sums payed to non-residents, the amendments shall apply if the taxable event happened on 1st of January 2021 or later. In case of any other taxes, the amendments shall apply on the tax period starting on 1st of March 2021. The Article 24 section 1 sentence 2 change (the deadline extension) shall apply to any proceeding initiated on 1st of September 2020 or later, except cases that would not have been capable of submission on that date before the implementation of MLI, regardless of the tax period relevant for the case.


Tags: Czech Republic | Canada | double tax agreement (DTA) | agreements | Tax Treaties



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