Korea and the Czech Republic agreed to amend their income tax treaty during a recent meeting held in Seoul. The agreement was finally reached after three years since both governments started negotiations in 2013 on amending the existing treaty which took effect in 1995. This amended treaty will become effective only after both governments sign an official agreement and the national assemblies of both countries ratify the agreement.
Provided below are key points of the latest agreement.
• The tax rate for dividends under the treaty will be lowered from 10% to 5%.
• The tax rate for interest under the treaty will be lowered from 10% to 5%.
• The gains derived by a resident of a contracting state from the transfer of shares issued by a company being a resident of the other contracting state may be taxed in that other contracting state if more than 50% of the assets of the company in the other contracting state comprises of immovable property.
According to the Ministry of Strategy and Finance (MOSF), the latest agreement addresses Korea’s commitment to comply with the minimum standards under the OECD BEPS (Base Erosion & Profit Shifting) project. The Korea-Czech income tax treaty will be the first of its kind that is amended to serve such commitment.
• The preamble of the treaty will make it clear that the purpose of the treaty is not only to avoid double taxation, but also to prevent double non-taxation.
• An anti-treaty shopping clause will be inserted to enable Korea or the Czech Republic to deny tax treaty benefits if obtaining the tax treaty benefits is the main purpose of a transaction or activity.
• A taxpayer will be allowed to apply for mutual agreement procedures with the competent authorities of both countries.
The latest agreement is expected to reduce the tax burden of Korean companies in the Czech Republic and vice versa. Also, the MOSF expects the revised tax treaty to contribute to reducing concern about tax treaty abuses.