The new version of the double tax treaty between the Czech Republic and the Korean Republic is currently under discussion . The new double tax treaty shall replace the initial version of the treaty dating back to 1992 and substantially changes some areas. The new version provides a wider definition of a permanent establishment and changes the withholding tax rates on interest and dividends.
Service permanent establishment
The amended double tax treaty contains the definition of a service permanent establishment, which arises when services are performed on the territory of another contracting state for a period longer than nine months in any twelve-month period.
Taxation of passive income
Newly, the maximum tax rate of withholding tax on dividends shall be 5 percent for both legal and natural persons. According to existing rules, the dividends may be taxed at a 5 percent tax rate provided the recipient of the dividends holds at least a 25 percent capital share in the company distributing the dividends. The maximum tax rate of withholding tax on interest will be settled at 5 percent.
The withholding tax rate on royalties will stay unchanged, ie 10 percent. Zero percent withholding tax rate applies to any payments received as consideration for the use of, or the right to use, any copyright on literary, artistic or scientific work, including cinematograph films, films or tapes for television or radio broadcasting.
New rules for taxation of Capital Gains
A new paragraph (no. 4) of Article 13 Capital Gains introduces a provision for the taxation of gains derived by a resident of a contracting state from the alienation of shares or comparable interests. If more than 50 percent of their value is derived directly or indirectly from immovable property situated in the other contracting state, the gains may be taxed in that state.
Replacement of articles
Certain articles of the double tax treaty from 1992 were cancelled without replacement, ie Article 14 concerning the taxation of independent personal service or Article 21 concerning the taxation of the income of professors. The corresponding renumbering of articles was performed.
Additional option for elimination of double taxation
Another amendment concerns the elimination of double taxation. According to the new provisions, a Korean company shall be authorised to apply the offsetting method to the tax on dividends withheld by the Czech Republic. This benefit shall be available only if the recipient company holds a share of at least 25 percent in the share capital or voting rights.
New article in the treaty
A new Article 26 Entitlement to Benefits sets the rules for the revocation of benefits provided pursuant to the provisions of the double tax treaty if the relevant transaction was performed without any economic substance and with the only objective to obtain benefits.
The amended version of the Czech and Korean double tax treaty was concluded on 12 January 2018. The Senate of Parliament of the Czech Republic approved the ratification of the treaty on 17 October 2018. The negotiation about the treaty is on the schedule of the Chamber of Deputies of Parliament of the Czech Republic starting on 4 December 2018.
The article is part of dReport – December 2018, Tax news; Grants and investment Incentives.
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