Following the Communication of the Ministry of Finance of the Czech Republic dated 20 September 2023 on the suspension of the implementation of Articles 5 to 22 and Article 24 of the Double Taxation Treaty between the Czech Republic and Russia (the Treaty), the General Financial Directorate (GFD) issued information on 30 April 2024 explaining the impact of this suspension.
In today's global world, double taxation treaties are crucial for international trade or the movement of people and capital. Thanks to their application, a situation in which one person is fully taxed on his income in two countries at the same time is virtually eliminated. However, the elimination of double taxation is conditional on the relevant income being taxed in accordance with the treaty being implemented. Such a situation can no longer arise in relation to Russia since the second half of last year. Indeed, as of 11 August 2023, the implementation of all substantive provisions of the Treaty by the Russian Federation was suspended, and as of 29 September 2023 by the Czech Republic.
The GFD explains in the newly issued information how payers of income from the Czech Republic to Russia or tax residents of the Czech Republic who realize income from Russia should proceed.
Example 1
A Czech company pays a dividend to a company in Russia. The tax withholding date is 25 September 2023. The Czech company has obtained a tax domicile certificate and an affidavit of beneficial ownership from the Russian company. According to the Treaty, the company applies a rate of 10% on gross dividend income.
Example 2
A Czech company pays a dividend to a company in Russia. The tax withholding date is 30 September 2023. The Czech company has obtained a tax domicile certificate and an affidavit of beneficial ownership from the Russian parent company. It applies a tax rate of 15% on gross dividend income in accordance with the ITA. The 35% tax rate does not apply because Russia has not withdrawn from the Convention on Mutual Administrative Assistance in Tax Matters.
Method of excluding or mentioning double taxation depending on the period of realisation of income
In the period until 10 August 2023, the same procedure as in previous years is followed, i.e. Russia is considered a contracting state and all the benefits of the Treaty, including the exclusion of double taxation, are applied.
In the period from 11 August 2023, Russia no longer applies the Treaty, but the Czech Republic does. In this "transitional" period, the GFD allows two approaches to the exclusion or mitigation of double taxation, whereby a person chooses one option at his/her discretion and applies it to all types of income:
In the period from 29 September 2023, only the rules under the ITA apply (point 2 above).
In particular, the following variations of the determination of the decisive moment or decisive period may occur:
In the case of one-off income (e.g. profit share, royalty) under the above rules, the determination of the time of realisation results in the application of the double taxation exclusion or mitigation regime to the entire income, depending on the period to which it falls.
In the case of income accruing gradually (e.g. profit from a permanent establishment), the income must be spread over the two (or three) periods mentioned above.
The GFD information provides some guidance on how to deal with cross-border income from or flowing to Russia, with an apparent attempt to simplify the administrative burden accordingly. In practice, however, it can be quite complicated to determine the decisive moment or period, especially for income accruing gradually.
Autor: Monika Lodrová
monika.lodrova@bdo.cz
In today's global world, double taxation treaties are crucial for international trade or the movement of people and capital. Thanks to their application, a situation in which one person is fully taxed on his income in two countries at the same time is virtually eliminated. However, the elimination of double taxation is conditional on the relevant income being taxed in accordance with the treaty being implemented. Such a situation can no longer arise in relation to Russia since the second half of last year. Indeed, as of 11 August 2023, the implementation of all substantive provisions of the Treaty by the Russian Federation was suspended, and as of 29 September 2023 by the Czech Republic.
The GFD explains in the newly issued information how payers of income from the Czech Republic to Russia or tax residents of the Czech Republic who realize income from Russia should proceed.
Czech income payers (taxpayers) paying income to a Russian tax resident.
Until 28 September 2023, Czech taxpayers shall apply the provisions of the Treaty for withholding tax, subject to the Treaty conditions. As of 29 September 2023, they will exclusively apply the Czech Income Tax Act (ITA). The decisive moment for the inclusion of income in one of the periods above is then the moment of tax withholding.Example 1
A Czech company pays a dividend to a company in Russia. The tax withholding date is 25 September 2023. The Czech company has obtained a tax domicile certificate and an affidavit of beneficial ownership from the Russian company. According to the Treaty, the company applies a rate of 10% on gross dividend income.
Example 2
A Czech company pays a dividend to a company in Russia. The tax withholding date is 30 September 2023. The Czech company has obtained a tax domicile certificate and an affidavit of beneficial ownership from the Russian parent company. It applies a tax rate of 15% on gross dividend income in accordance with the ITA. The 35% tax rate does not apply because Russia has not withdrawn from the Convention on Mutual Administrative Assistance in Tax Matters.
Czech tax residents with income from sources in Russia
Czech tax residents are required to declare their worldwide income in the Czech Republic. Thus, a situation may arise in which they declare in their Czech tax return income that was taxed in Russia.Method of excluding or mentioning double taxation depending on the period of realisation of income
In the period until 10 August 2023, the same procedure as in previous years is followed, i.e. Russia is considered a contracting state and all the benefits of the Treaty, including the exclusion of double taxation, are applied.
In the period from 11 August 2023, Russia no longer applies the Treaty, but the Czech Republic does. In this "transitional" period, the GFD allows two approaches to the exclusion or mitigation of double taxation, whereby a person chooses one option at his/her discretion and applies it to all types of income:
- The person proceeds against Russia as a Contracting State, thus applying the double taxation exclusion in accordance with the Treaty. The part of the tax that cannot be set off, although paid in accordance with the Treaty, can be claimed as an expense (if the nature of the income allows it).
- The person treats Russia as a non-contracting state and claims the full amount of tax paid in Russia as an expense (if the nature of the income allows).
In the period from 29 September 2023, only the rules under the ITA apply (point 2 above).
Time of income generation
For the purpose of including income in the above periods, the key point is the moment of realisation of the income. This may depend on various circumstances such as the type of income (lump sum or gradually accruing), the way the income is taxed in Russia, etc.In particular, the following variations of the determination of the decisive moment or decisive period may occur:
- Income subject to withholding tax in Russia - the moment of realisation is the moment of withholding tax in Russia. If this cannot be determined, the moment of realisation of income according to the ITA is used.
- Income subject to taxation in the tax return in Russia - the moment of realisation is the moment of realisation according to the tax regulations of Russia. If it cannot be determined, the moment of realisation of income according to the ITA is used.
In the case of one-off income (e.g. profit share, royalty) under the above rules, the determination of the time of realisation results in the application of the double taxation exclusion or mitigation regime to the entire income, depending on the period to which it falls.
In the case of income accruing gradually (e.g. profit from a permanent establishment), the income must be spread over the two (or three) periods mentioned above.
The GFD information provides some guidance on how to deal with cross-border income from or flowing to Russia, with an apparent attempt to simplify the administrative burden accordingly. In practice, however, it can be quite complicated to determine the decisive moment or period, especially for income accruing gradually.
Autor: Monika Lodrová
monika.lodrova@bdo.cz