It has been over a year since we last wrote about the development in the area of treaties for the avoidance of double taxation. In the article, besides the new things coming in regards to this area you can also read about the Multilateral Convention to Implement Tax Treaty Related Measure to Prevent Base Erosion and Profit Shifting (MLI) which affects treaties for the avoidance of double taxation.

Similarly to our previous articles concerned with this topic, there will be quite a few tables illustrating the most commonly used parameters in the treaties. We would like to point out that it is a very simplified tool not containing detailed information, which might be necessary for assessing individual cases.

Turkmenistan

In the previous article concerned with this topic, we have informed you about the legislative preparation of a treaty for the avoidance of double taxation between the Czech Republic and Turkmenistan. The treaty has already been signed March 18, 2016 in Ashgabat. Then it was passed by the Czech parliament and ratified by the president of the Czech Republic. 

The treaty came into force March 27, 2018 and was published as 23/2018 Coll. I.A. However, some of the provisions will be implemented on January 1, 2019, and these include taxes collected by deduction at source, remuneration paid or assigned on January 1,2019, as well as other income taxes and property taxes.

Republic of Korea (in legislative procedure)

On January 12, 2018 in Seoul, the treaty for the avoidance of double taxation between the Czech Republic and the Republic of Korea has been signed. It is currently in the legislative procedure, right now going through the first reading in the Chamber of Deputies; the following debate has been scheduled for the end of October 2018. The Senate has already agreed on ratification in October 2018. There is another agreement between these two republics that exists already. However, according to the legislators it is outdated and does not respond to the current conditions as it has been signed in the year 1992. The new treaty has been drafted with regard to the models provided by the OECD and the UN.

The new provisions include for example a regulation given by Article 9 which allows the tax administration to modify the tax base in case of tax evasion conducted through the means of a concealed transfer of profit between companies of the two states, in the means of capital or personnel connected at a level corresponding to the objective conditions. Article 9 also provides for the so called post-treatment of profit. But only for cases that are not fraudulent.

Republic of Ghana (in legislative procedure)

A treaty for the avoidance of double taxation between the Czech Republic and the Republic of Ghana has been signed in Accra on April 11, 2017. Currently, no treaty to prevent double taxation is being applied between these to countries. The government has agreed to draw up a treaty for the avoidance of double taxation already on November 2, 2011. Thus, Ghana is among the other African countries with which the Czech Republic has signed a treaty for the avoidance of double taxation. The others are Egypt, Ethiopia, the Republic of South Africa, Morocco, Nigeria, and Tunisia. The treaty has been drafted with regard to the models given by the OECD and the UN, same as the previous case. It is currently in the legislative procedure. The Senate has agreed on ratification in May 2018 already. And now the treaty must undergo the second reading in the Chamber of Deputies.

The treaty includes nonstandard treatment of income from different kinds of services. Article 12 includes a regulation regarding withholding tax not only with royalties but also payments for services (payments received as remuneration for provision of technical, advisory, or management services). This exception has gotten a reaction in the form of the Protocol relating to Article 12 “Royalties and payments for services”. The Protocol includes a supplementary clause on the biggest advantages for the Czech Republic. Without the clause, Ghana did not want to accept this treaty. Currently, this clause is found in all tax treaties which Ghana has signed. The Protocol makes sure that if, in the future, Ghana should change its tax policies towards another state, the more advantageous mode would be applicable also for the residents of the Czech Republic.

Kosovo (in legislative procedure)

The treaty for the avoidance of double taxation between the Czech Republic and Kosovo is undergoing its second reading in the Chamber of Deputies, the debate has been scheduled for October 23, 2018. We have previously informed you about this treaty. It was signed November 26, 2013 in Pristina, and it has been in the legislative procedure since then. In April 2018, the Senate agreed to ratification. The Chamber of Deputies had only the first reading of the treaty so far.

MLI (in legislative procedure)

As we have already mentioned, the MLI entered into force July 1, 2018. It is one of the items included in the OECD BEPS project. (Base Erosion and Profit Shifting) This convention is supposed to enable quick modifications of the already existing bilateral tax treaties that are supposed to prevent abuse of the advantages following from these treaties.

The scope of changes done to individual tax treaties is completely up to the signatory states. The Czech Republic has decided to only accept minimum standards relating to abuse of treaties for the avoidance of double taxation, and to more effective solutions to multinational tax disputes. For the new rules to come into force, the convention must be ratified by the Czech Republic and the other countries. In other words, for the changes to become effective, both contractual states must have ratified the MLI.  

It is not yet known when it will be ratified by the Czech Republic, but we recommend that you take these regulations into account now already. In the Czech Republic, the MLI is currently in the legislative procedure and must go through readings in the Senate and the Chamber of Deputies. We will keep you informed about any further developments in our newsletter. 

Veronika Džalavjan, Daniela Riegel