Pakistan, Czech Republic implement convention to avoid double taxation

Pakistan and Czech Republic have implemented a convention to avoid double taxation and prevent tax evasion, the Federal Board of Revenue notified on Monday.

An official said the convention on avoidance of double taxation will come into force on July 1. “This is an epoch-making event in the consolidation of economic relations between the two countries,” the official added.

The official said the convention will help businesses and investors of Pakistan and Czech business benefit from many facilities and services.

“Income derived by a resident of State-A from immovable property (including income from agriculture or forestry) situated in State-B may be taxed in State-B,” read the convention.

“The profits of an enterprise of State-A will be taxable only in that state unless the enterprise carries on business in State-B through a permanent establishment situated therein. However, the profits of the enterprise may be taxed in the State-B but only so much of them as is attributable to the permanent establishment or sales in State-B of goods or merchandise of the same or similar kind as those sold through that permanent establishment.”

Under the agreement, profits from the operation of ships or aircraft in international traffic will be taxable only in the state in which the place of effective management of the enterprise is situated.

“If the place of effective management of a shipping enterprise is aboard a ship, then it shall be deemed to be situated in the state in which the home harbour of the ship is situated, or in the state of which the operator of the ship is a resident,” it said. “Dividends paid by a company of State-A to a resident of the State-B may be taxed in State-B.”

However, such dividends may also be taxed in state-A, but if the beneficial owner of the dividends is a resident of state-B, the tax so charged will not exceed five percent of the gross amount of the dividends if the beneficial owner is a company, which holds directly at least 25 percent of the capital of the company paying the dividends; 15 percent of the gross amount of the dividends in all other cases.

However, this would not affect the taxation of the company in respect of the profits out of which the dividends are paid.

According to the convention, interest earnings, royalties and service fees, arising in state-A and paid to a resident of state-B may be taxed in state-B. “However, such interest may also be taxed in State-A according to the laws, but if the beneficial owner of the interest is a resident of State-B, the tax so charged shall not exceed 10 percent of the gross amount of the interest,” it said.

Further, capital gains derived by the resident of state-A from ventures in state-B may be taxed in state-B.