interest payments under the conditions stipulated by the ITA. 4.5 Avoidance of double taxation To date the Czech Republic has concluded approximatively 90 Double Taxation Treaties which closely follow the wording of the OECD Model Tax Convention. Double Taxation Treaties, among other things, can reduce the withholding tax rate applicable to Czech tax non- residents’ income from Czech sources and stipulate the method for the avoidance of double taxation to be used with respect to particular types of income. The Double Taxation Treaties usually stipulate the application of either the exemption (exemption with progression) or simple credit methods. If no Double Taxation Treaty has been concluded between the Czech Republic and the respective country, the Czech sourced income of foreign tax residents will be subject to Czech taxation under Czech tax law. 4.6 Harmonization with EU tax legislation In relation to the accession of the Czech Republic to the EU on 1 May 2004, EU Directives concerning direct taxation (income taxation) were incorporated into the ITA. Based on the Parent Subsidiary Directive (and related amending Directives), dividends and other profit share distributions between Czech and EU companies which meet the definition of a parent company, and its subsidiary are not subject to corporate income tax. To qualify as parent and subsidiary companies, companies must fulfil the following conditions: • the companies must take a legal form listed in the respective EU Directives, • the minimum capital holding in the subsidiary is 10 percent and is held by the

parent company for an uninterrupted period of at least 12 months (can be fulfilled subsequently), • the companies must be EU member state tax residents, • the companies must be subject to corporate income tax as stated in the respective EU Directives. Similar conditions also apply if dividends are paid by a Czech subsidiary to its parent company if it is a tax resident of Switzerland, Norway, Iceland or Lichtenstein. 4.7 Further corporate tax exemptions Tax exemptions for dividends and other profit share distributions have been extended to profit share distributions paid to a Czech tax resident (and to a Czech permanent establishment of a tax resident of another EU member state) by a subsidiary which is a tax resident of a state which has concluded a Double Taxation Treaty with the Czech Republic. Besides conditions like those already stipulated for the tax exemption of share distributions paid between companies within the EU, subsidiaries from third states must also meet further conditions, such as being subject to a minimum 12 percent tax rate in their home country. Under similar conditions as for shares in profit, the tax exemption further applies to the income of a parent company, being a beneficial owner, which is a tax resident of the Czech Republic or a Czech permanent establishment of a Czech tax non-resident from another EU member state, from the sale of a share in the subsidiary (which is a tax resident of the EU or a third state which has concluded a Double Taxation Treaty with the Czech Republic).

ILN Corporate Group – Establishing a Business Entity Series

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