House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer,the Hon Ralph Willis, MP)Note: References to paragraph numbers contained in the explanation of the DTA relate to the relevant paragraph of the Article under discussion.

Main features of the DTA

Under the terms of the DTA with the Czech Republic:

Income from real (immovable) property may be taxed in full by the country in which the property is situated. Income from real property includes natural resource royalties.

Business profits are to be generally taxed only in the country of residence of the recipient unless they are derived by a resident of one country through a branch or other prescribed 'permanent establishment' in the other country, in which case that other country may tax the profits.

Profits from international operations of ships and aircraft may be taxed only in the country of residence of the operator.

Dividends, interest and royalties may generally be taxed in both countries, but there are limits on the tax that the source country may charge on dividends, interest and royalties flowing to residents of the other country. These limits are, in Australia, 5 per cent in respect of franked dividends where the Australian domestic withholding tax on franked dividends is 5 per cent or less and 15 per cent in all other cases and in the Czech Republic, 5 per cent for dividends which have been paid by a company which holds at least 20 per cent of the capital of the company paying the dividends and 15 per cent for all other dividends; 10 per cent for interest and 10 per cent for royalties.

Income, profits or gains from the alienation of property may be taxed in full by the country in which the property is situated. Subject to that rule and other specific rules in relation to business assets and some shares, capital gains are to be taxed in accordance with the domestic law of each country.

Income from professional services and other similar activities will generally be taxed only in the country of residence of the recipient. However, remuneration derived by a resident of one country in respect of professional services rendered in the other country may, where derived through a fixed base of the person concerned in that country, be taxed in the latter country.

Income from dependent personal services , that is, employee's remuneration, will generally be taxable in the country where the services are performed. However, where the services are performed during certain short visits to one country by a resident of the other country, the income will be exempt in the country visited.

Government service remuneration paid by one country will generally be taxed only in that country. However, the remuneration may be taxed in the other country in certain circumstances where the government services are rendered in that other country.

Directors' fees and similar payments may be taxed in the country of residence of the paying company.

Income derived by artistes and sportspersons (other than income derived from activities which are performed within the framework of a cultural exchange agreed between Australia and the Czech Republic) may generally be taxed by the country in which the activities are performed.

Pensions and annuities (including government service pensions) may be taxed only in the country of residence of the recipient.

Income of visiting students and trainees will be exempt from tax in the country visited so far as concerns payments made from abroad for the purposes of their maintenance or education.

Profits of associated enterprises may be taxed on the basis of dealings at arm's length.

Exchange of information and consultation between the two taxation authorities is authorised by the DTA.

Dual residents (i.e., persons, including companies, who are residents of both Australia and the Czech Republic according to the domestic law of both countries) are, in accordance with specified criteria, to be treated for the purposes of the DTA as being residents of only one country.

Source rules are prescribed in the DTA to the effect that income, profits or gains derived by a resident of Australia which, under provisions of the DTA may be taxed in the Czech Republic, shall be treated as being sourced in the Czech Republic.

Double taxation relief for income which under the DTA may be taxed by both countries is required to be provided by the country of residence under the DTA as follows:-

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in Australia , by allowing a credit for the Czech tax against Australian tax payable on income derived by a resident of Australia from sources in the Czech Republic. In the case of certain dividend payments from a company resident in the Czech Republic to a related Australian resident company, the Czech tax to be credited by Australia includes the 'underlying' tax paid in respect of the profits out of which the dividend is paid.

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in the Czech Republic by allowing a deduction against Czech tax for the Australian tax paid on income, profits or gains derived by residents of the Czech Republic from sources in Australia.