Global Tax Alert | 22 January 2014

Czech Republic expands treaty network as of 1 January 2014

  • Share

Executive summary

The Czech Republic now has arrangements in place preventing double taxation with more than 80 countries, and other treaties are being negotiated or ratified.

As of 1 January 2014, there are treaties to avoid the withholding tax of 35% (and double taxation in general) with Panama and Saudi Arabia. In addition, protocols with the Netherlands and Switzerland are effective as of 1 January 2014.

Key provisions of the treaties and protocols are summarized below.

Detailed discussion

Panama

The treaty basically corresponds to the OECD model tax convention. However, as opposed to the convention it contains the concept of a services permanent establishment (when services are provided for six months during any 12-month period). The treaty allows an additional 5% tax to be applied on the profits of a company with a permanent establishment in the state of said establishment. In the case of the Czech Republic, in order to prevent double taxation, the credit system is being used (for tax paid in Panama). In the case of Panama, the exemption method has been chosen. The treaty also contains a long article on the exchange of information with an attached protocol that clarifies the article (e.g., it specifies which information will be exchanged and makes it clear that the exchange of information includes information relating to tax periods beginning after 1 January 2014).

Saudi Arabia

Like most recent treaties this one includes the concept of a services permanent establishment. It also allows profits from the sale of a share in any company to be taxed in the state where the company being sold is a tax resident. Use of the treaty may be complicated by the anticipated approach of the Saudi authorities, since in practice tax is deducted in accordance with local regulations and only later is it possible to request the “refund of an overpayment.” The simple credit method will be used to prevent double taxation.

The Netherlands

The protocol to the treaty with the Netherlands does not involve any fundamental changes. The article on the prevention of double taxation has been amended and the credit system will now apply to Czech residents without exception. The article on the exchange of information has been expanded.

Switzerland

The protocol to the double taxation treaty with Switzerland involves relatively significant changes. An installation project and supervision are specified in the case of a “construction” permanent establishment. As far as permanent establishment exceptions (in the event of the activities in question being preparatory or auxiliary), what used to be “advertising, the provision of information, scientific research” now reads “any other activity that has a preparatory or auxiliary character”, i.e., it can be expected that the assessment of a permanent establishment will be stricter in these cases. The treaty contains more favorable taxation of dividends. The prevention of double taxation contains, inter alia, a declaration that an exemption can be unilaterally carried out if local regulations so permit. The article on the exchange of information has been replaced by a longer article that quite didactically obliges Switzerland to search for and share information upon a request from the Czech tax authorities. In addition the protocol deals explicitly with a breach of banking secrecy. The question remains as to how the exchange of information will operate in practice. Another change is the addition of a “limitation on benefits” (LoB) clause.

Withholding tax rates

Withholding tax on dividends, interest and royalties from the countries mentioned above will be as follows in the Czech Republic:

 

The Netherlands

Panama

Saudi Arabia

Switzerland

Dividends

0%1 / 10%

10%

5%

15% / 0%2

Interest

0%

10% / 5%3

0%

0%

Royalties

5%

10%

10%

5% / 10%4

Other treaty developments

It is anticipated that new agreements will be executed with Colombia and Kosovo. In addition, the treaty with Luxembourg will be replaced. Protocols to treaties are also being drafted with Belgium and Ukraine. These developments are anticipated to take place in 2015 at the earliest.

Endnotes

1. Based on ownership of at least a 25% share in the subsidiary.

2. Based on ownership of at least a 10% share in the subsidiary continuously for a period of at least one year, or if the recipient of the dividends is a pension fund.

3. If the beneficial owner of the interest is a bank that is a resident of the second contractual country.

4. The lower rate is applied under a protocol dated 4 December 1995 as long as Switzerland does not start to tax royalties in accordance with its internal regulations.

For additional information with respect to this Alert, please contact the following:
Ernst & Young s.r.o., Prague
  • Libor Fryzek
    +420 225 335 310
    libor.fryzek@cz.ey.com
Ernst & Young LLP, Eastern European Business Group, New York
  • Miklos Santa
    +1 212 773 1395
    miklos.santa@ey.com
  • Vladimir Sopkuliak
    +1 212 773 4144
    vladimir.sopkuliak@ey.com

EYG no. CM4124