Transfer Pricing and the Arbitration Convention
The EU Arbitration Convention establishes a procedure to resolve disputes where double taxation occurs between enterprises of different Member States as a result of an upward adjustment of profits of an enterprise of one Member State. Whilst most bilateral double taxation treaties include a provision for a corresponding downward adjustment of profits of the associated enterprise concerned, they do not generally impose a binding obligation on the Contracting States to eliminate the double taxation.
The Convention provides for the elimination of double taxation by agreement between the contracting states including, if necessary, by reference to the opinion of an independent advisory body. The Convention thus improves the conditions for cross-border activities in the Internal Market.
For clarifications concerning some practical aspects of the Convention, see also the Revised Code of Conduct for the effective implementation of the Arbitration Convention.
The origin of the Arbitration Convention was the Commission's 1976 proposal for a directive to eliminate double taxation in the case of transfers of profits between associated enterprises in different Member States (Official Journal C 301 of 21 December 1976) and the White Paper of 1985 on the completion of the Internal Market.
After long negotiations in the Council, the Commission proposal was transformed from a Directive into an inter-governmental Convention and it was signed on 23 July 1990 (Convention 90/436/EEC on the elimination of double taxation in connection with the adjustment of profits of associated enterprises).
Entry into force and subsequent prolongation
The Arbitration Convention was initially in force from 1 January 1995 until 31 December 1999 for a period of five years. Several months before the expiration of the first five-year application period of the Arbitration Convention, the Council adopted a Protocol to the Arbitration Convention that provides for an automatic extension of the Convention by periods of five years unless a Contracting State opposes. This Protocol of 25 May 1999 amends the Convention of 23 July 1990 on the elimination of double taxation in connection with the adjustment of profits of associated enterprises. This Protocol was, in spite of its timely signature, only ratified by all 15 Member States in 2004 and the Arbitration Convention re-entered into force , with retroactive effect from 1 January 2000, on 1 November 2004.
Extension to new EU Member States
With the enlargement of the EU the Arbitration Convention was successively extended through the following legal instruments:
- Convention on the accession of the Republic of Austria, the Republic of Finland and the Kingdom of Sweden to the Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises.
- Convention on the accession of the Czech Republic, the Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia and the Slovak Republic to the Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises
- Act of accession of Bulgaria and Romania to the European Union through which the two new Member States acceded to the AC and the Protocol.
Council Decision of 23 June 2008 concerning the accession of Bulgaria and Romania to the Arbitration Convention then determined the date of entry into force of the AC for Bulgaria and Romania and made the necessary adjustments to the text of the Convention resulting from the accession of the two countries.
- Act of accession of Croatia to the European Union through which the country acceded to the AC and the Protocol. Council Decision of 9 December 2014 determined the date of entry into force of the AC for Croatia and made the necessary adjustments to the text of the Convention resulting from the accession of Croatia.
The Arbitration Convention applies in all EU Member States. Further information on the Arbitration Convention, including a list of independent persons of standing, eligible to become a Member of the advisory commission as referred to in Article 7 (1) of the Arbitration Convention is available on the Council website.
Information specific to a certain Member State with respect to the Arbitration Convention can be provided by the respective Competent Authorities.