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Czech Republic: New income tax treaty with Korea

Czech Republic: New income tax treaty with Korea

A new income tax treaty between the Czech Republic and South Korea is pending ratification.

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The government in the Czech Republic in August 2018 submitted the treaty to the Chamber of Deputies for ratification. It is possible the treaty could enter into force at the beginning of 2019.The new income tax treaty provides for revised rates of withholding tax on:

  • Dividends at a maximum rate of 5% with respect to dividends paid to residents whether legal entities or individuals of the other country (revised from the existing treaty measure that requires a 25% ownership of the registered capital for a 5% rate of withholding tax; otherwise a 10% withholding tax rate applies)
  • Interest at a 5% rate (reduced from the 10% rate under the existing treaty)
  • Royalties at a rate of 10% (no change from existing treaty provisions)

The new treaty also amends the rules for permanent establishments with a new definition of a service-based permanent establishment for services provided over a period exceeding nine months, in the aggregate, in any 12-month period, and by revising the testing period for permanent establishments as construction sites to 12 months (from a nine-month period under the existing treaty).

Under the new treaty, a Korean company receiving dividends from a Czech resident would be entitled to offset not only the withholding tax but also the Czech tax on the profits of the company paying the dividends, provided that the company owns at least 25% of the registered capital or voting rights.

The new treaty allows the source state to tax gains from the sale of securities or ownership interests in a company residing in the state concerned when more than 50% of the company’s assets comprise real property located in the territory of that country.

 

Read a September 2018 report prepared by the KPMG member firm in the Czech Republic

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