New double taxation treaty with Korea introducing substantial changes

In Seoul in January 2018, the Czech Republic and Korea signed a double taxation treaty, replacing a document from 1992 no longer meeting current tax and economic requirements. Among other things, the new treaty changes the taxation of paid dividends and interest and expands the definition of a permanent establishment. In early August, the government submitted the treaty to the Chamber of Deputies for ratification. The treaty may enter into force from the beginning of 2019.

The major changes arising from the new treaty are as follows:


Under the new treaty, dividends paid to residents of the other state will be taxed in the first state at a maximum of 5% of the gross amount of dividends, both with respect to legal entities and individuals. The existing treaty determines a 5% limit only where the dividend recipient owns at least 25% of the registered capital of the company distributing the dividends. In other situations, a 10% limit applies.


The treaty reduces the limit for taxing paid interest from 10% to 5%.


No changes apply to royalties. The use or the right to use the copyrights to works of art, literature and science remains exempt from tax in the source state. A maximum 10% tax rate still applies to patents, trademarks and industrial equipment.

Permanent establishment

The new treaty to some extent amends the conditions under which a permanent establishment arises. It also provides a new definition of a service-based permanent establishment, which arises when services are provided in the territory of the other state over a period or periods exceeding nine months in the aggregate in any twelve-month period. Another novelty is the change of a time test relating to permanent establishments as construction sites. The existing limit of nine months has been extended to twelve months.

Elimination of double taxation

Under the new treaty, a Korean company receiving dividends from a Czech resident is entitled to offset not only the withholding tax but also the Czech tax on the profits of the company paying the dividends. This advantage applies to companies owning 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 where more than 50% of the company’s assets comprise real property located in the territory of such a state.

Considering the current developments and new international legislation, advantages arising from the treaty will not be acknowledged if obtaining such advantages is one of the principal purposes of a measure or a transaction.

The treaty will enter into force after its ratification in both countries, becoming effective no earlier than on 1 January of the following year. If the ratification process is completed by the end of 2018, the new treaty will apply from the beginning of 2019. Otherwise, its effectiveness will be postponed by one year.


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