SAC on interpretation of double tax treaties
When interpreting the text of an international treaty, it is necessary to follow primarily the general rules of interpretation, i.e., use linguistic, systematic, and teleological methods. The commentaries on the OECD Model Tax Convention can only be used in a complementary manner to remove ambiguities.
In December judgment 10 Afs 27/2023, the Supreme Administrative Court (SAC) dealt with the principles of interpretation of double tax treaties.
The subject of the dispute between the taxpayer and the tax administrator was whether a Korean company's income from the lease of an unmanned aircraft to a Czech company fell under Article 8 (profits from air and sea transport) or under Article 12 (royalties) of the treaty between the Czech Republic and South Korea. Should the former apply, the income would be taxed only in South Korea; should the latter apply, it might also be taxed in the Czech Republic by applying withholding tax on rental income.
The taxpayer believed that the income in question fell under Article 8, referring to an interpretation using the updated commentaries on the OECD Model Tax Convention on Income and on Capital. The tax administrator took a different view under which the text of the treaty at issue was sufficiently clear to apply Article 12, and there was no need to take into account the Model Tax Convention and its commentaries.
The SAC agreed with the tax administrator, stating in particular the following:
- When interpreting an international treaty, it is primarily necessary to take as a basis the general interpretation rules (i.e., use the linguistic, systematic, and teleological methods) and the text of the international treaty.
- Complementary means of interpretation (such as the commentaries on the OECD Model Tax Convention) can only be used to remove ambiguities.
- When using the commentaries on the OECD Model Tax Convention as an interpretation tool, the wording of the commentaries as applicable at the time of entering into the respective double tax treaty shall be given preference.
- Later commentaries may be applied as long as they do not contradict the original commentaries and merely clarify or elaborate on the original commentaries.
- Notably, the SAC in its argumentation referred to foreign judgments and the standpoints of foreign courts on the issue.
The judgment thus provides further guidance on the interpretation of double tax treaties and the application of the commentaries on the OECD Model Tax Convention.