The Czech Republic has concluded new double taxation treaties with Azerbaijan and Mongolia. From January 1, 2025, Belarus will increase the withholding tax on dividends and other similar income paid to non-residents to 25%. US President Donald Trump announced the termination of commitments made by President Biden’s administration on behalf of the USA in relation to the Global Agreement on Base Erosion and Profit Shifting (BEPS). You can find more news about international taxation in our article.
Effective from January 1, 2025, Azerbaijan and Mongolia have acceded to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (“MLI”). Thus, the minimum standard will be applied to their double taxation treaties with the Czech Republic. The minimum standard will also be applied to treaties with Barbados and Bosnia and Herzegovina concerning withholding tax related to facts occurring from January 1, 2025, and for other taxes for tax periods starting on or after June 13, 2025.
On January 22, 2025, the Czech Republic and Kenya agreed on the text of the double taxation treaty. The treaty now needs to go through the legislative approval process and ratification in both countries.
From January 1, 2025, Belarus increases the withholding tax on dividends and other related income paid to non-residents to 25% (from the previous 15%). Liquidation proceeds paid by Belarusian companies to their non-resident shareholders will be subject to a 15% withholding tax.
In this context, we remind you that Belarus has suspended the operation of articles related to dividends, interest, and capital gains according to international double taxation avoidance agreements with “hostile states.” For the Czech Republic, these selected articles has been suspended until December 31, 2026. Thus, the reduced withholding tax rate based on the double taxation treaty cannot currently be utilized.
President Donald Trump issued a memorandum instructing the Treasury Secretary and the US Ambassador to the OECD to inform the OECD that any commitments made by the previous President Biden’s administration on behalf of the USA relating to the Global Agreement against BEPS, including but not limited to Pillar 1 and Pillar 2, have no legal force or effect in the United States unless Congress enacts a law approving the relevant provisions of the global tax agreement. The impact of these actions is currently unclear. The United States has not yet taken action to implement Pillar 1 and Pillar 2.
President Trump’s decision does not immediately affect the continuation of the Pillar 2 project outside the USA. In the EU, this project is coordinated through the Council Directive (EU) 2022/2523 on ensuring a global minimum level of taxation for large multinational groups and large domestic groups in the Union, which is binding on all Member States, including the Czech Republic.
In September 2023, the European Commission proposed to harmonize the adjustment of transfer pricing and incorporate basic principles of this area into European law in the form of a separate directive. The legislation was also to clarify the influence of the OECD on the adjustment of transfer pricing and allow for further unification within EU Member States. The adjustment was to be incorporated into national legal systems by January 1, 2026, but this deadline was later moved to January 1, 2025. Developments at the end of 2024, however, suggest that there is currently insufficient support among Member States for harmonizing transfer pricing as proposed by the Commission; only a few states support further discussions on this topic. The development of the directive dealing with transfer pricing is thus postponed indefinitely.
On January 16, 2025, the European Parliament’s Committee on Economic and Monetary Affairs adopted a report on the proposal to amend Directive DAC 9, which is intended to facilitate administrative obligations arising from Pillar 2 and implement a system for the exchange of information in this area. Due to the technical nature of the proposal and the urgency of adopting measures, the report recommends that the European Parliament approves the proposal without changes under the simplified procedure.
The European Parliament’s opinion is not binding but is mandatory in the consultation procedure. A vote on this report in the European Parliament’s plenary session is scheduled for the session between February 10 and 13, 2025.
Indian court’s interpretation of general anti-avoidance rule (PPT) in bilateral tax treaties
An Indian court in its December 2024 decision interpreted the general anti-abuse rule (also referred to as “Principal Purpose Test” or “PPT”) contained in the double taxation avoidance agreement between India and Luxembourg after its modification by the implementation of the MLI.
The Indian tax authority denied a Luxembourg holding company, whose sole shareholder was a Cayman Islands firm, the benefits of the double taxation treaty for the calendar years 2021 and 2022, reasoning that the Luxembourg company (i) was merely a “conduit” company established without any apparent commercial reason, (ii) was not the beneficial owner of the income flowing from India. This approach was taken by the tax authority despite the fact that the Luxembourg tax authorities issued a tax residency certificate for the holding company.
The Indian court rejected the tax authority’s approach, ruling that there was no evidence that the establishment of the company in Luxembourg was primarily for the purpose of obtaining benefits from the double taxation treaty, justifying it by the following facts: (i) the Luxembourg holding company was established and had been operating since 2015 (before the implementation of the PPT), (ii) it had and still has a geographically diversified investment portfolio in a number of jurisdictions (investments in India accounted for only 14% of the entire portfolio), (iii) the holding company incurred substantial operational expenses in Luxembourg related to investment management (legal and economic services, office rental) and (iv) filed tax returns for income tax and other taxes for which the holding was registered as a Luxembourg tax resident.
Creation of a permanent establishment through a dependent agent as seen by the Portuguese court
A Portuguese administrative court confirmed the creation of a permanent establishment for a Swiss company represented by a dependent agent. In the case at hand, the Swiss company, part of a group engaged in the development and distribution of innovative therapies for neurodegenerative diseases, hemophilia, and autoimmune diseases, owned marketing and distribution rights for selected therapeutic programs. It entered into a commission agreement with a Portuguese company, which was part of the same group. The Portuguese company thus acted as a distributor for the Swiss company for the Portuguese market. The Portuguese tax authority argued that the Portuguese company was economically dependent on the Swiss company, and on this basis inferred the creation of a permanent establishment for the Swiss company, including assessing the tax to be achieved through this Portuguese permanent establishment.
The court agreed with the tax authority’s approach, based on the substance over form principle, which it favored over procedures arising from the OECD transfer pricing guidelines. The conclusion in this dispute can still be reviewed by the highest judicial authority in Portugal or potentially resolved within the framework of the Mutual Agreement Procedure (“MAP”) between Switzerland and Portugal.
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