Double Taxation Treaty Between Hong Kong and the Czech Republic

With effect from 24 January 2012, Hong Kong, as an administrative region of China, concluded a treaty with the Czech Republic that prevents double taxation in dealings with Hong Kong entities.

The treaty changed the taxation of several types of income, such as dividends, interest and licence fees. The table below this article sets out the maximum withholding tax rates for each of these types of income.

Under this treaty, the new provisions contain no transitional rules, and whether the old or new rate applies is determined by domestic legislation (in tax practice, usually by the date on which the liability is booked).

How Double Taxation Treaties Work in Practice

When a business earns income in one country and is based in another, the same income can easily be taxed twice. Double taxation treaties are designed to prevent this by dividing taxing rights between the two states and setting limits on withholding taxes. The agreement between Hong Kong and the Czech Republic is one example that is relevant to Czech companies and individuals dealing with Hong Kong partners.

Which Income Is Affected

Treaties typically deal with the main types of cross-border income. The most common are dividends paid by a subsidiary to its parent, interest on loans and royalties for the use of intellectual property, such as trademarks, patents or software. For each of these, the treaty may cap the rate of tax that the paying country can withhold at source. Other provisions deal with business profits, employment income and capital gains.

Claiming Treaty Benefits

Treaty rates are not always applied automatically. The recipient of the income usually has to show that they are resident in the other country and are entitled to the benefit. In practice, this often involves:

• Obtaining a certificate of tax residence from the relevant tax authority
• Confirming that the recipient is the beneficial owner of the income
• Keeping documentation that supports the commercial purpose of the arrangement
• Checking the timing rules that determine which rate applies to a particular payment

Avoiding Common Pitfalls

Modern treaties increasingly include anti-abuse provisions, which can deny benefits where the main purpose of an arrangement is to obtain a tax advantage. Structures with little real substance may therefore not qualify. It is also important to consider how the income will be taxed in the country of residence and whether credit for foreign tax is available there.

Planning Ahead

Reviewing the treaty position before payments are made is usually much easier than trying to reclaim excess tax afterwards.

If you are planning payments between the Czech Republic and Hong Kong, or setting up a structure involving both, contact eTuls. We can help you understand how the treaty may apply to your situation.