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29 May 2017

OECD Multilateral Convention and its proposed adoption by Slovakia

The Slovak Government approved the proposal for the adoption of the OECD Multilateral Convention (further only the “Multilateral Instrument” or the “MLI”) on 10 May 2017.

Zuzana Blažejová

The MLI will thus be signed in June 2017 in Paris also by Slovakia. The Slovak Republic intends to adopt the MLI such that it will apply to 64 double taxation avoidance treaties (“tax treaties”) entered into with the following countries (covered tax treaties):

 Great Britain

 Czech Republic 

 South Korea 

 South Africa
 Sri Lanka 
 Bosnia and Herzegovina 

In general, the Slovak plan is to apply nearly all provisions of the MLI on the covered tax treaties.

For example, in terms of the double taxation avoidance methods outlined by the MLI, Slovakia intends to apply the method defined by the MLI as the Option C, and has also chosen to apply the simplified limitation of benefits clause to selected tax treaties.

With respect to the real estate clause, Article 9.4 of the MLI will be adopted by Slovakia defining that gains derived by a resident of a contracting state from the alienation (disposal) of shares or comparable interests, such as interest in a partnership or trust, may be taxed in the other contracting state if, at any time during 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property situated in that other contracting state.

In addition, Slovakia aims to apply Article 14.1 of the MLI in connection to splitting up of contracts which is aimed to avoid a construction permanent establishment. In summary, where activities of an enterprise on a construction, installation or other project as defined by the covered tax treaty in the other contracting state will be carried on during one or more periods of time that, in aggregate, exceed 30 days without exceeding the period/s referred to in the relevant tax treaty, and where connected activities are carried on at the same building site, construction or installation project, or other place during different periods of time, each exceeding 30 days, by one or more enterprises closely related to the first mentioned enterprise, these different periods of time shall be added to the aggregate period of time during which the first mentioned enterprise has carried on activities on that same project.

At the same time, Slovakia has chosen not to apply part VI of the MLI – Arbitration.

The question is which treaty countries will adopt the MLI to the same extent and where the provisions selected by Slovakia will match the selection of the other countries. 

The so far communicated understanding of the final provisions of the MLI is that the relevant provisions will only apply in the case of a matching position with the provisions selected by the other treaty country. However, at the same time we understand that many countries contemplate to adopt only the minimum required standard, i.e. the provisions governing the misuse of double taxation avoidance treaties and the mutual agreement procedure.

We will further monitor the developments in this area.

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