In June 2011, the Czech Supreme Administrative Court issued a judicial decision on the application of withholding tax in the case of dividends paid to a parent company abroad.
In the case at hand, a UK company, the sole owner of a Czech joint stock company, founded a company in the Netherlands, to which the shares of the Czech company were transferred. The Dutch company thus became the majority owner. Subsequently, the Czech company paid out dividends to the Dutch company on the basis that the taxation of the dividends was subject to the Double Taxation Treaty with the Netherlands.
The subject matter of the dispute between the tax authorities and the Czech company was the question as to whether a 0% withholding tax pursuant to the Double Taxation Treaty between the Czech Republic and the Netherlands or whether the rate pursuant to the Double Taxation Treaty with the UK (5%) should apply.
Reasoning of the Czech tax authorities.
The Czech tax authorities reasoned in favor of the UK treaty, stating that the British owner transferred the shares to the Dutch company only in order to ensure a subsequent tax-free payment of dividends, and that the British company is also the beneficial owner because the dividends were paid directly from the Czech Republic to the UK.
Decision of the Czech Supreme Administrative Court.
The Czech Supreme Administrative Court decided in favor of the Czech company and agreed that in the case at hand the Double Taxation Treaty with the Netherlands should apply. The fact that the funds were effectively paid to another entity does not mean that the Dutch company did not benefit from them by using them to settle other current payables to the UK company. The Double Taxation Treaty with the Netherlands would, however, not apply in cases where the tax proceedings proved unanimously that the Dutch company did not exercise rights related to owning the shares, and that the dividends only “passed through it” for the purpose of avoiding taxation.
A significant aspect of the decision is that it also confirms the fact that during court proceedings, tax authorities cannot support their conclusions by referring to the content of documents they received after issuing their decision (in this case statements received from foreign tax authorities).
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