The Czech Republic has not concluded the standard international double tax treaty with Taiwan, as it has with the majority of other countries (as the Czech Republic does not acknowledge the territory of Taiwan as a state, it cannot conclude the contract).
In practice, this may have so far been to the detriment of Taiwan as a business partner as certain types of income generated by Czech firms and individuals coming from Taiwan had to be taxed in the Czech Republic regardless of whether the same transaction has already been taxed in Taiwan, and vice versa. As a result, several years of discussions have been held between the representatives of the two countries and, to prevent double taxation, the draft of a special act has been prepared, unilaterally introducing measures that typically form the content of international treaties. It is expected that Taiwan will introduce similar measures in respect of the Czech Republic.
The draft ensures the objective division of the right to collect income tax between the countries in situations where the source of the income is in one country and the recipient has residence in the other country. In practice, this includes, for example, income generated from construction, assembly and research activities, provision of technical advisory, use of patents, interest, equity investments etc. Furthermore, this also includes, for example, income from dependent activities, income of artists or athletes, and income from the use of copyright.
Based on the proposed legislation, double taxation will be eliminated in the Czech Republic through “simple credit”. In practice, this means that Czech residents generating income in Taiwan will have tax calculated in the Czech Republic from total income reduced by tax paid in Taiwan; however, the maximum amount that may be deducted must be proportional to the Taiwanese partial tax base. Exemption may be applied to personal income from dependent activities performed in Taiwan, with the income exempt from taxation in the Czech Republic if it has already been taxed in Taiwan.
The basic principles of eliminating double taxation are set to be as follows:
- Personal and corporate income will be primarily taxed in the country of the person’s tax residence. It will only be taxed in the other jurisdiction under the conditions expressly defined by the provisions of the act.
- Profit from the business activities based in one jurisdiction directly performed in the other jurisdiction through a permanent establishment may be subject to taxation in the other jurisdiction, with the draft act also taking into account “service permanent establishments” (if the activities performed in the territory of the given jurisdiction exceed 9 months in any 12-month period).
- Income from real estate and its use or rental may be taxed in the jurisdiction where the assets are located.
- Profit from the sale of shares or other equity investments whose value is directly or indirectly derived from more than 50% of real estate located in the other territory will be taxed by the source country (the “real estate clause”).
- In essence, it will be possible to tax dividends, interest and licence fees in both jurisdictions. If the recipient is a beneficial owner residing in the other country, the tax in the jurisdiction of the income’s source must not, under the rules of the given territory, exceed the following thresholds:
- Dividends – 10% of the gross amount of dividends.
- Interest – 10% of the gross amount of interest. The rule does not apply to certain types of interest – eg, on loans for the acquisition of goods or equipment, and on loans guaranteed by governmental institutions (these are only taxed in the country of the interest recipient’s residence).
- Licence fees – 5% of the gross amount of licence fees for industrial, commercial or scientific equipment and 10% of the gross amount of other licence fees.
The article is part of dReport – December 2018, Tax news; Grants and investment Incentives.