Although business activities between the Czech Republic and Taiwan gain significance every year, from a tax point of view, related transactions are not covered by the standard international double tax treaty, as is the case with most other countries. The main reason for the absence of a treaty of that type is that the Czech Republic does not recognise the Taiwan’s sovereignty. In practice, this may have resulted in Taiwan’s disadvantage as a business partner, as some types of income of Czech companies and individuals originating from this country had to be taxed in the Czech Republic regardless of whether the same transaction was already taxed in the territory of Taiwan, and vice versa. For example, it could have been the case of revenue from construction, assembly and research activities, provision of technical advisory, use of patents, interest, equity investments, etc. Furthermore, this applies to, for example, income from employment, income of artists or athletes and income from the use of copyright.

This led to several years of discussions between the representatives of both countries, resulting in a specific bill on the double taxation avoidance. Currently, the act passed the approval legislative process and was published in the Collection of Laws on 26 February 2020. After 15 days of publication in the Collection of Laws, the act will come into effect. This unilateral measure will be reciprocally supported by the introduction of a very similar act by Taiwan in relation to the Czech Republic; according to informal information, the Taiwan act is supposed to be prepared. Otherwise, the implementation of this act by the Czech Republic would be suspended or terminated.

Based on the approved wording, double taxation is to be avoided in the Czech Republic using the “ordinary credit” method. In practice, it means that for Czech residents with income from Taiwan, the tax calculated in the Czech Republic from their total income will be reduced by the tax paid in Taiwan. However, the maximum deductible amount equals the proportionate sub-tax base in Taiwan. Personal income from employment in Taiwan may be subject to the exemption method, i.e. the income is exempt from tax in the Czech Republic if it has already been taxed in Taiwan.

 The basic principles of double taxation avoidance should be as follows: 

• Personal and corporate income is primarily taxed in the country of tax residence, in the other jurisdiction it may only be taxed under the conditions expressly defined in the act.
• Profits from activities of an entity in one jurisdiction directly carried out in the other jurisdiction through a permanent establishment can be taxed in the latter jurisdiction. The bill also takes into consideration the so-called services permanent establishment (if the activities carried out in the territory of the jurisdiction exceed 9 months within a 12-month period).
• Income from real estate and the use or lease thereof may be taxed in the jurisdiction in which the property is located.
• In case of proceeds from the sale of shares or other equity investments, the value of which arises directly or indirectly from immovable property situated in the other territory by more than 50%, the taxation will occur in the source state (so-called real estate clause).
• In essence, taxation of dividends, interest and royalties is possible in both jurisdictions. If the beneficiary is the beneficial owner residing in the other country, then in the jurisdiction of the source of income, the tax shall not exceed the following limits under the rules applicable in that country:– Dividends – 10% of the gross amount of dividends;– Interest – 10% of the gross amount of interest; this rule does not apply to certain types of interest rates, e.g. interest on loans for the acquisition of goods or equipment and loans guaranteed by government institutions (these are only taxed in the country of the interest beneficiary’s residence); and– Royalties – 5% of the gross amount of royalties for industrial, commercial or scientific equipment and 10% of the gross amount of other royalties.