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Czech Republic: Income tax treaty with South Korea, entry into force

Czech Republic: Income tax treaty with South Korea

A new income tax treaty between the Czech Republic and South Korea entered into force at the end of 2019, thus replacing the prior treaty (1992).


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Regarding income taxes, the new treaty generally is effective with regard to tax periods beginning on or after 1 January 2020.

Concerning tax withheld at source, the new income tax treaty is effective with respect to income paid or credited as of 1 January 2020—hence, requiring changes to the systems of withholding agents. The new withholding tax measures under the tax treaty include rules for:

  • Dividends—Dividends are subject to withholding tax at source of up to 5% of the gross amount of dividends, whether payments to corporations or individuals. The 1992 version of the treaty included a 5% rate but only with regard to corporate recipients of dividends when such corporate recipients owned at least 25% of the capital; in all other cases, the withholding tax rate was 10%.
  • Interest—Under the new treaty, interest is subject to tax withheld at source of 5% (instead of 10% under the prior rate).
  • Royalties—The new treaty does not make changes to the withholding tax on royalties, The use of or the right to use a copyright relating to works of art, literature, and science continues to be exempt from tax at source. A maximum withholding tax rate of 10% continues to apply on patents, trademarks, and industrial equipment.
  • Permanent establishment—The new treaty extends the definition of a services permanent establishment—one that arises as a result of the provision of services in the territory of the other treaty partner country over one or more periods exceeding in aggregate nine months in any 12-month period. Thus, the period for determining a permanent establishment, for instance, a building site, is extended from nine to 12 months.
  • Proceeds from the alienation of property—A new measure concerns the right to tax at source the amount of proceeds from the sale of securities or interests in a company that is a resident in the “source country” if more than 50% of the company’s assets consist of real property located in that country.
  • Elimination of double taxation—Effective 2020, when taxing dividends received from a Czech resident, a Korean company may offset not only the amount of the withholding tax, but also the Czech tax imposed on profits of the company paying dividends, as long as the Korean company owns at least 25% of the Czech resident company’s capital or voting rights.
  • Limitation on benefits—The treaty explicitly includes a rule providing that the treaty’s benefits will not apply if one of the main objectives of a transaction or cross-border arrangement is to obtain the tax benefits under the treaty. Thus, it is incumbent on taxpayers to document the economic purpose of any cross-border arrangement.

Read a January 2020 report prepared by the KPMG member firm in the Czech Republic

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