In a recent judgment, the Supreme Administrative Court (SAC) expressed its opinion on the question whether income from the rental of an unmanned aircraft can be considered income from the operation of aircraft in international transport within the meaning of Art. 8 of the relevant double taxation treaty (in that case, such income would be taxed only in the country of residence of the recipient and would not be subject to withholding tax in the Czech Republic), or whether it is, on the contrary, the rental of movable equipment located in the Czech Republic, which would meet the definition of licence fees under Article 12 of the treaty (which, on the other hand, is subject to withholding tax in the Czech Republic).

Our firm acted for the taxpayer in this case and we argued in favour of subsuming this income under Article 8, particularly in view of the fact that:

• the wording of the double taxation treaty itself did not provide a clear interpretation (the same ambiguity is therefore resolved both by the OECD Commentary to the treaty and the Commentary to the UN Model Treaty) and
• the reservation to Article 12 with the aim of taxing leases under Article 12 in the Czech Republic was made by the Czech Republic only several years after the treaty in question was entered into and
• the later version of the Commentary to the OECD Model Treaty explicitly admits the inclusion of such income under the regime of Article 8, if these are ancillary activities of an enterprise engaged in the international operation of aircraft, and at the same time
• the new Double Taxation Treaty with the Republic of Korea of 2020 explicitly brings such income under Article 8, which from our point of view can be considered a confirmation of the conformity with the situation already applied in practice.

Although the SAC accepted in principle that the scope of income covered by Article 8 of the treaty had changed as a result of the evolution of the wording of the commentary to the model treaty, it also stated that if the double taxation treaty itself does not provide a clear interpretation, in which case it is appropriate to use the commentary as an aid to interpretation, the wording of the commentary in force at the time the treaty was entered into should be applied, regardless of how the commentary has evolved over time. The SAC thus confirmed the static approach to the interpretation of double taxation treaties and, taking into account the wording of the Commentary in 1995, concluded that the income from the rental of an unmanned aircraft was income from licence fees under Article 12 of the treaty because it was not merely incidental income (although it was supplementary income, which in the terminology of the newer version of the Commentary would be sufficient to classify the income under Article 8) and therefore withholding tax at the rate of 10% should have been paid on this income in the Czech Republic.

In addition to the dispute itself, this judgment is also significant because the SAC dealt with the rules of interpretation of double taxation treaties in it, in particular the significance of the OECD Commentary on the Model Double Taxation Treaty, including the significance of any subsequent changes to this Commentary for the application of treaties already in force. In this context, the SAC expressed the following conclusions:

• Neither the OECD Model Treaty nor the Commentary to the Model Treaty is a formal source of law and is therefore not binding but only a supplementary means of interpretation in the application of double taxation treaties. Although the commentary is highly persuasive, it cannot be relied upon mechanically.
• Even a possible change in the content of the commentary does not necessarily establish a later practice that a court or tax authorities would have to take into account. In the event of the application of a later commentary derogating from the text of the treaty being interpreted, the text of the treaty itself would in fact be impermissibly altered.
• When interpreting a double taxation treaty, it is preferable to rely on the version of the commentary that existed at the time of the making of the treaty, not on later commentaries.
• Later versions of the commentary may also be taken into account when interpreting a treaty, provided that they provide a reasoned interpretation of a concept and do not contradict the text of the contract or the commentary that was current at the time the treaty was made. A later commentary is thus a useful explanatory supplement insofar as it clarifies and elaborates the views in the earlier commentary.

The above-mentioned judgment has thus provided further guidance for the interpretation of the provisions of double taxation treaties and commentaries to them, which are scarce for the time being. It can therefore be expected that some of the above conclusions will be applied by administrative courts in the future when resolving other disputes on the interpretation of double taxation treaties.