U.S. income tax treaty with Czech Republic

The U.S. income tax convention with the Czech Republic limits source-country tax on dividends, interest and royalties for treaty residents of either country.

Treaty documents and protocols

The convention was signed at Prague on September 16, 1993. It is the first income tax treaty between the two countries, and no protocol has been added to it.

IRS Table 3 lists January 1, 1994 as the general effective date, while the heading of the IRS-linked treaty PDF says January 1, 1993. Article 29 sets separate dates for taxes withheld at source and for other taxes, so the date that applies depends on the tax and the year.^[5]^[2]

Convention structure

The convention contains 30 articles and no protocol.

Articles 1 to 5: General Scope; Taxes Covered; General Definitions; Resident; Permanent Establishment.^[2]
Articles 6 to 10: Income from Real Property (Immovable Property); Business Profits; Shipping and Air Transport; Associated Enterprises; Dividends.^[2]
Articles 11 to 15: Interest; Royalties; Gains; Independent Personal Services; Dependent Personal Services.^[2]
Articles 16 to 20: Directors' Fees; Limitation on Benefits; Athletes and Sportsmen; Pensions, Annuities, Alimony and Child Support; Government Service.^[2]
Articles 21 to 25: Students, Trainees, Teachers, and Researchers; Other Income; Capital; Relief from Double Taxation; Non-discrimination.^[2]
Articles 26 to 30: Mutual Agreement Procedure; Exchange of Information and Administrative Assistance; Diplomatic Agents and Consular Officers; Entry into Force; Termination.^[2]

Dividends, interest, and royalties

Article 10 allows dividends paid by a company resident in one country to a resident of the other country to be taxed in the recipient's country. The source country may also tax them, subject to a ceiling of 5 percent of the gross dividend when the beneficial owner is a company holding at least 10 percent of voting shares in the payer. In other cases, the ceiling is 15 percent.^[2]

The 5 percent category does not apply to dividends paid by a U.S. Regulated Investment Company or a Real Estate Investment Trust. For a Regulated Investment Company, the 15 percent category applies. For a Real Estate Investment Trust, it applies when the beneficial owner is an individual with a holding below 10 percent; otherwise, domestic-law withholding applies. The dividend ceilings do not apply when the dividends are attributable to a permanent establishment or fixed base in the source country. The business profits or independent personal services article applies instead.^[2]

Article 11 generally assigns tax on interest arising in one country and beneficially owned by a resident of the other country only to that other country. A stated exception lets the United States tax an excess inclusion tied to a residual interest in a Real Estate Mortgage Investment Conduit under its domestic law.

For interest, the treaty identifies the source country by the residence of the payer, with a rule for interest borne by a permanent establishment or fixed base. If a special relationship causes interest to exceed the amount that would have been agreed without that relationship, the article applies only to that arm's-length amount; the excess remains taxable under each country's laws, subject to the convention.^[2]

Article 12 treats royalties differently according to the category defined in paragraph 3. Copyright royalties described in subparagraph 3(a), when beneficially owned by a resident of either country, may be taxed only in that resident's country. Royalties in subparagraph 3(b) may also be taxed where they arise, with a 10 percent ceiling on the gross amount when the beneficial owner resides in the other country.^[2]

The second royalty category covers patents, trademarks, designs, plans, formulas or processes, industrial, commercial or scientific equipment, and information about experience in those fields.

Residence and dual residence

Article 4 defines a resident as a person liable to tax in a country because of domicile, residence, place of management, place of incorporation, or a similar criterion. A person taxable there only on local-source income or locally situated capital is excluded from that definition. For partnership, estate, or trust income, residence applies only to the extent the income is taxed as a resident's income, in the entity's hands or among its partners or beneficiaries.^[2]

The convention also includes governments and certain qualifying pension or purpose-based organizations within its resident definition.^[2]

If an individual is resident in both countries under the general definition, Article 4 resolves status in sequence. A permanent home determines residence if available in only one country. If a home exists in both, closer personal and economic relations control; if that cannot be determined, or there is no permanent home in either, habitual abode applies. If habitual abode is in both or neither, nationality decides, and the competent authorities settle the question by mutual agreement when the person is a national of both or neither.^[2]

Information exchange

Article 27 requires the countries' competent authorities to exchange information needed to administer the convention or domestic tax laws covered by it, so long as the taxation is consistent with the convention. The exchange is not limited by Article 1, the general-scope provision. Received information is subject to confidentiality and use restrictions stated in the article.^[2]

Limits apply to the obligation to provide information. A country is not required to take administrative measures contrary to its own or the other country's laws and practices, supply information unavailable under those laws or ordinary administration, or provide specified protected business information or material contrary to public policy. A requested country obtains information in the same manner and extent as if the requesting country's tax were its own. On specific request, it can provide witness depositions and authenticated copies of unedited original documents to the extent its own laws and practices allow.^[2]

Limitation on benefits

Article 17 is titled Limitation on Benefits and sets conditions for a resident of one country deriving income from the other to receive treaty relief there. The listed qualifying categories include individuals, either contracting government and qualifying entities or businesses meeting specified ownership, trading, activity, or payment conditions. The competent authority in the country where income arises may also grant benefits to a person who does not meet the paragraph 1 categories. The article defines a recognized securities exchange and gross income for parts of these tests.^[2]

Questions and answers

Which treaty documents does the IRS list?

The IRS lists the Income Tax Treaty and the Technical Explanation, each identified as 1993.

What rate does the convention state for qualifying corporate dividends?

The source country ceiling is 5 percent of the gross dividend when the beneficial owner is a company holding at least 10 percent of the payer's voting shares. The 15 percent ceiling applies in other cases, subject to the article's special rules for investment companies and real estate investment trusts.^[2]

How does the convention treat interest?

Interest arising in one country and beneficially owned by a resident of the other is generally taxable only in that other country.

What royalty rates and categories appear in Article 12?

Copyright royalties in paragraph 3(a) may be taxed only in the beneficial owner's country of residence. Certain other royalties may also be taxed at source, where the rate is capped at 10 percent of the gross amount for a beneficial owner resident in the other country.^[2]

How does Article 4 resolve individual dual residence?

It applies a sequence based on permanent home, closer personal and economic relations, habitual abode, and nationality. If nationality is shared or neither country's nationality applies, the competent authorities settle the question by mutual agreement.^[2]

What does the saving clause say about U.S. citizens?

The convention says a country may tax its residents and citizens, including former citizens, under its laws as if the convention had not come into effect. It also identifies treaty benefits that the clause does not affect.^[2]

Related glossary terms

Limitation on benefits: A limitation on benefits article sets conditions for entities in a treaty country to qualify for certain treaty benefits under the applicable U.S. tax treaty.
Treaty rate table: A treaty rate table summarizes income categories and tax rates or exemptions under U.S. income tax treaties. The IRS explains the tables' scope and limits.
Recognition of a trust: The Hague Convention describes recognition of a trust, its minimum legal effects, and limits tied to applicable law. Jersey law also addresses recognition.